The many tasks facing Barnier

Reforming capital requirements/The Basel Committee

The Basel Committee on Banking Supervision (which brings together central bank governors from 27 major economies, including eight EU member states) presented a package of reforms to bank capital requirements in December.

The reforms would overhaul the current Basel II framework (enshrined in EU law through the capital requirements directive). Its proposals include introducing a leverage ratio, and increasing capital requirements for counterparty credit risk exposures. It is also proposing that banks should build up capital buffers in good times, which can be drawn down in bad times. The committee is also proposing to refine the types of assets that can be counted as core (Tier 1) capital. The committee is going to present detailed texts by the end of the year.

The committee's member countries gave broad approval to the proposed changes this month. Aspects of the committee's proposals have, however, been strongly attacked by the banking industry.

Guido Ravoet, the secretary-general of the European Banking Federation, says that the proposed leverage ratio is a “problem for us” because it is “completely incoherent” with the existing Basel II framework. “It is there because the US pushed it; we are really unhappy about it,” he says.

Ravoet says that this does not mean that the EBF is anti-reform. “We accept the Basel framework had some gaps and that the work must be completed,” he says.

The Basel proposals, once finalised, will be converted into EU law through amendments to the capital requirements directive. The Basel countries agreed this month that they should aim for implementation of the reforms by the end of 2012.

Derivatives

The Commission in October 2009 published a policy plan for regulating the derivatives market.
The Commission says that by mid-2010 it will present proposals to regulate central counterparty clearers and trade repositories. By the end of 2010, it plans to amend the capital requirements directive so that higher capital charges are placed on firms which do not use central clearing.
Barnier has been strong on the need to regulate the derivatives market comprehensively. The European Association of Corporate Treasurers, however, has criticised aspects of the Commission's policy as unworkable.

Other Issues

Securities: the Commission is going to bring together a group of national experts to discuss possible reforms to securities regulation. The reforms would focus on protection of investors when a firm goes bankrupt.
Short selling: mentioned by Barnier during his hearing as a possible area for the action (see main article). If Barnier does decide to act, he is likely to do so as part of the review of the market abuse directive.
Bonuses: Barnier mentioned during his hearing that no one should be “shocked” if he decides to take further action against irresponsible pay in the banking sector. The Commission presented a recommendation on financial sector pay in April. It followed this up in July with a proposal to apply capital sanctions against banks with irresponsible remuneration policies. Ministers approved the legislation in November. It is still under discussion in the European Parliament.

The Reviews

Mandatory reviews of existing legislation will provide the Commission with opportunities to strengthen regulation.
Market abuse directive. The legislation, dating from 2003, harmonises member states' approaches to tackling insider dealing and market manipulation. It is due to be reviewed during 2010. The Commission will propose strengthening the sanctions applied against those guilty of market abuse.
Markets in financial instruments directive (MiFID). The legislation, dating from 2004, regulates investment activities in the EU, and guarantees investment firms and stock exchanges the right to offer their services cross-border. A review of the directive is foreseen for this year. Barnier plans to use the review to tackle ‘dark pools' of liquidity (ie, investment networks where neither the price nor the identity of the trading company is displayed).