Implementation of post-crisis reforms and remaining challenges in 2019

Fri 29 Mar 2019

At the last G20 summit in Buenos Aires, leaders called for the full implementation of all major international financial reforms intended to improve the financial system, in particular, those drawn up by the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS), the last being the review of market risk framework published in January 2019.

The FSB is now focusing on the impact of the reforms on the financial system. This assessment is fundamental for ensuring that regulatory deliverables do not have undesired impacts or will at least have the intended effects. To that respect, the FSB published two reports in 2018, the first one on the impact of the reforms on infrastructure financing, the second one on incentives for centralized clearing. The FSB conclusions do not report any negative consequences, although, from the perspective of the industry, this observation is incomplete as it leaves aside the impact of the prudential reforms adopted in December 2017 by the Basel Committee which have yet to be applied. The FSB’s evaluation will continue in 2019 with the conclusions on the financing of small and medium enterprises, which are currently under consultation. The FSB further intends to continue monitoring “non-bank financial intermediation^[1]” and all the emerging risks, including cyber risks and those relating to crypto-assets, the latter could expose banks, among others, to reputation risk where they, for example, facilitate customer access to this particular class of asset, offer brokerage accounts, or set up trading platforms for them.

About the Basel Committee, it considers its work on strengthening banks’ capital requirements to be complete, following the publication in December 2017 of the package intended to finalize the Basel III prudential framework^[2] and in January 2019 of the targeted revision of the 2016 standard on market risk^[3]. From now, the Committee will ensure that member jurisdictions apply the whole Basel III package in a complete and appropriate manner and will focus more on supervisory practices with the strengthening of pillars II and III. In particular, the revision of disclosure requirements for leverage ratio is intended to respond to allegations of “window dressing” from many banks. In addition, the Committee intends to issue new prudential policies in the areas of cyber risks, operational resilience, potential risks connected to the benchmark reform^[4], and has issued expectations on banks exposures to crypto-assets.

However, Brexit, scheduled for 29 March 2019, continues to be a particularly worrying event. The authorities are concerned about the risk of “no deal” and of adverse consequences for the banking and financial system.

One concern is the preparedness of those involved: while the major financial players are setting up strategic plans, the authorities however highlight lack of preparation of smaller firms. The issue is important since the ACPR has confirmed in November that the European passport currently benefits more than 2700 British entities operating in Paris and, conversely, around 130 French businesses operating from London. The ECB has however showed itself open to transition plans that enable effective relocation. As far as it is concerned, the European Banking Authority (EBA) has called for more communication by banks to their customers on the implications of Brexit.

Besides, there is the treatment of liabilities resulting from the issuance of financial instruments under UK law. Indeed, at a time where the banks have to be ready to comply with the new minimum requirement for own funds and eligible liabilities (MREL), the Single Resolution Board (SRB) is concerned about the potential non-recognition of 100 billion British-issued euro. The SRB is ready to show flexibility and will give time to banks for replacing these liabilities with instruments under European law^[5].

The third major issue is the ongoing access to the three London clearing houses, very widely used for derivatives clearing denominated in euro by European banks. To this end, Brussels should adopt a decision giving temporary equivalence for 12 months to UK CCPs in order to avoid a brutal fragmentation of the markets.

With the full impact of such concerns yet to be experienced and potential obstacles posed by cyber risks and dealing with cryptoassets, challenges remain in implementing post crisis rules.

^[1] As “shadow banking” is now officially labelled.

^[2] BCBS d424: “Basel III: Finalising post-crisis reforms”.

^[3] BCBS d457: “minimum capital requirements for market risk”.

^[4] The FSB interest rate benchmark reform may generate some prudential risks for banks: risks relating to asset valuation, basis risk, operational issues relating to the banking and liquidity models of instruments referring to the new rates.

^[5] In 2019 the SRB will make its first binding decisions on respect for the minimum requirement for own funds and eligible liabilities (MREL).