Featured Product

    Agustín Carstens of BIS Examines Global and EU Financial Integration

    September 12, 2019

    While speaking at the Eurofi Financial Forum, the BIS General Manager Agustín Carstens examined the status of financial integration at the global and EU levels. He highlighted that regulatory divergences are often mentioned as a major source of fragmentation and examined the policy characteristics that lead to such divergences. Mr. Carstens discussed cross-country cooperation as a desirable development to enable regulation to achieve a better return by promoting more financial integration. "In the future, what now looks desirable may become essential," he added.

    Adapting financial regulation to national specificities may help strengthen domestic financial systems, thus enhancing global financial stability. A case in point is the ring-fencing measures of internationally active firms. For instance, the TLAC standard aims to appropriately distribute loss-absorbing and recapitalization capacity within a group and provide for pre-positioning in material subsidiaries or subgroups. It has recently been proposed that consideration be given to replacing pre-positioning requirements with cross-border guarantees, under which parent companies commit to support subsidiaries in case of need, both in normal times and in resolution. That would, of course, weaken the rationale for ring-fencing and allow international groups to centrally manage a larger amount of resources, thereby supporting their efficiency and promoting market integration. However, work remains to be done to determine whether and how those guarantees could offer sufficient comfort to host authorities and, more broadly, to financial markets.

    Moreover, enhanced information exchange among authorities and better functioning of supervisory colleges and crisis management groups could reduce the need for extraterritorial and other unilateral actions to ensure financial stability and market integrity in all jurisdictions. Recent reports on market fragmentation by FSB and IOSCO have spelled out those ideas, together with a concrete action plan. Even in the sensitive area of ring-fencing, international cooperation may facilitate a better outcome. A fully cooperative solution that would remove any need for ring-fencing is not achievable. However, progress could undoubtedly be made within crisis management groups toward deciding on an allocation of resources within international groups that would strike a good balance between the need to protect stability in each host jurisdiction and the need to preserve sufficient flexibility for the management of the group as a whole.

    Mr. Carstens highlighted that within the European banking union, the existence of single supervisory and resolution authorities provides for consistent policy approaches for both crisis prevention and crisis management. Yet it seems that regulatory harmonization and the creation of the banking union have not yet delivered substantive results in terms of banking integration. One explanation for this could be the insufficient incentives for banking integration. Authorities within the euro area can still impose specific capital, loss absorption, and liquidity requirements on subsidiaries of pan-European firms beyond the obligations imposed at the group consolidated level. Ring-fencing of local subsidiaries could be seen as fundamentally inconsistent with a fully functioning banking union. Though it could also be a natural consequence of the still limited degree of financial integration within the euro area and the insufficiency of the existing risk-sharing mechanisms.

    Logically, progress in deepening the economic and monetary union and completing the banking union would strengthen the case for a full transfer of financial stability responsibilities to EU authorities. The availability of a common deposit guarantee scheme would provide arguments for reducing the current ring-fencing possibilities for the local subsidiaries of pan-European groups. In the European banking union, achieving such integration and removing ring-fencing is even more relevant than at the global level and it also looks more feasible. For instance, together with local authorities, both ECB and SRB are already involved in defining the requirements for banks' liquidity, capital, and loss-absorbing capacity at both the consolidated and the subsidiary level. That could reduce the need to pre-position large amounts of resources with the subsidiaries and help to achieve a balanced allocation of resources within pan-European groups, which would mitigate the potential impact of ring-fencing practices on the integration of the European banking industry. Regardless, he concluded that close international cooperation will become an essential element of any regulatory framework aiming to protect the integrity and stability of the financial system.

     

    Related Link: Speech

     

    Keywords: International, Europe, Banking, Financial Integration, Financial Stability, Market Fragmentation, Financial Stability, Ring Fencing, TLAC, Crisis Management, Banking Union, BIS, EU

    Featured Experts
    Related Articles
    News

    EBA Guide to Monitor Threshold for Intermediate Parent Undertakings

    The European Banking Authority (EBA) published the final guidelines on the monitoring of the threshold and other procedural aspects on the establishment of intermediate parent undertakings in European Union (EU), as laid down in the Capital Requirements Directive (CRD).

    July 28, 2021 WebPage Regulatory News
    News

    PRA Finalizes Approach to Supervision of International Banks

    In a recent Market Notice, the Bank of England (BoE) confirmed that green gilts will have equivalent eligibility to existing gilts in its market operations.

    July 26, 2021 WebPage Regulatory News
    News

    FCA Issues PS21/9 on Implementation of Investment Firms Regime

    The Financial Conduct Authority (FCA) published the policy statement PS21/9 on implementation of the Investment Firms Prudential Regime.

    July 26, 2021 WebPage Regulatory News
    News

    EBA Proposes Regulatory Standards to Identify Shadow Banking Entities

    The European Banking Authority (EBA) proposed regulatory technical standards that set out criteria for identifying shadow banking entities for the purpose of reporting large exposures.

    July 26, 2021 WebPage Regulatory News
    News

    IOSCO Proposes Recommendations on ESG Ratings and Data Providers

    The Board of the International Organization of Securities Commissions (IOSCO) proposed a set of recommendations on the environmental, social, and governance (ESG) ratings and data providers.

    July 26, 2021 WebPage Regulatory News
    News

    ESMA Group Issues Recommendations on RFR Switch in Interdealer Market

    The European Securities and Markets Authority (ESMA) published recommendations from the Working Group on Euro Risk-Free Rates (RFR) on the switch to risk-free rates in the interdealer market.

    July 26, 2021 WebPage Regulatory News
    News

    EC to Defer Application of SFDR Standards Till July 2022

    The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.

    July 23, 2021 WebPage Regulatory News
    News

    EIOPA Consults on Reporting and Disclosures Under Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) proposed to amend the supervisory statement on supervision of run-off undertakings that are subject to Solvency II regulation.

    July 23, 2021 WebPage Regulatory News
    News

    BoE Consults on Approach to Setting MREL, Publishes Bail-In Guidance

    The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.

    July 22, 2021 WebPage Regulatory News
    News

    EBA Seeks Views on Proportionality Assessment Methodology

    The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.

    July 22, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7295