uk financial reforms - milken institute · uk financial reforms: bank of england 2.0 claude lopez...
TRANSCRIPT
Claude Lopez and Elham Saeidinezhad
Decem
ber 2016
UK FINANCIAL REFORMS:Bank of England 2.0
ACKNOWLEDGMENTSThe authors would like to thank Jonathon Adams-Kane, Keith Savard and Jakob Wilhelmus for helpful discussions related to this paper.
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UK Financial Reforms: Bank of England 2.0
ClaudeLopezandElhamSaeidinezhadAfewmonthsago,weproducedatimetablefortheimplementationofU.S.financialreformundertheDodd-FrankAct.1Oneofthemainobservationswasthatthelegislationdidlittletoconsolidateregulationoutsideofbanking.Incontrast,theanalogousUKreformlegislation,theFinancialServicesAct,madetheBankofEngland(BoE)thecenterofUKfinancialandmonetarystability.A2016amendmentconfirmedandstrengthenedthebank’srole.However,asignificantnumberofUKfinancialrulesarebasedonEuropeanUnionregulations,andcurrently,asamemberofthesinglemarket,theUKissubjecttothem.ThatmembershipalsohasgivenBritainavoiceinEUrulemakingthroughrepresentationinboththeEuropeanParliamentandtheCouncilofMinisters.TheUKimplementsEUruleseitherbytransposingEUdirectivesintoBritishlaworbydirectlyenforcingEUregulations.Thesedifferencesareimportant,especiallyasBritainandtheEUpreparefortheapproachingBrexit:Tomaintainthecurrentregulatoryframework,theUKwillhavetotransposealltheEUregulationsintoitsnationallaw.ThisisevenmoreimportantnowwiththeEU’sincreasedusageofregulationsasthefinalstageoftheBaselIIIaccord’simplementationapproaches.Furthermore,theEU’sregulatoryframeworkitselfisaworkinprogress,withkeydeadlinesin2018and2019.ForsakingEUmembershipwilllimittheUK’sabilitytoinfluencethisprocess,althoughitmaybeobligatedtofollowtherulesthatresult,becausetheyaremostlydrivenbyinternationalregulatoryeffortsthatincludenon-EUcountriessuchastheU.S.Beforeassessingthesechallenges,thispaperestablishesatimelinesummarizingthestatusoffinancialregulatoryreformintheUK.Itthenidentifiessomeoftheforthcomingdifficulties,includingBrexitandtherecentevolutionofmacroprudentialpoliciesamongdevelopedcountries.
Milestone Timeline InresponsetotheglobalfinancialandEuropeansovereigndebtcrises,aswellastheLiborscandal,theUKfundamentallyreformeditsregulationoffinancialservices.Thisnewframework,presentedintheFinancialServicesAct2012,makestheBankofEnglandresponsibleforfinancialstabilityandplacesastrongemphasisonmacroprudentialpolicy.Monitoringsystemicallyimportantinstitutions,markets,
1LopezandSaeidinezhad(2016).
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andactivitiesisatthecoreoftheact,theUKimplementationoftheBaselIIIaccord.2Theactfocusesonfourmainissues:strengtheningfinancialstabilityviaenhancedprudentialrules;identifyingandmonitoringsystemicallyimportantfinancialinstitutions(SIFIs)andprovidingorderlyresolutionwhennecessary;increasingconsumerprotectionandpromotingcompetition;andenhancingtheintegrityofmarkets,includingderivativesdealingandpensionfundactivities.
Table1,onpage10,showsthegoalsandimplementationdatesofthemainregulatorychangesintheUKWediscussthesechangeschronologicallybelow.2012Asnoted,2012wasaturningpointfortheUKregulatoryarchitecture.TheFinancialServicesActcompletedtheregulatorystructuralreformbyabolishingtheUKFinancialServiceAuthorityandcreatingthreenewfinancialregulators:theFinancialConductAuthority(FCA),thePrudentialRegulationAuthority(PRA),andtheFinancialPolicyCommittee(FPC).AsshowninFigure1,theBoEhousesthePRAandtheFPC.Thenewregulators’missionistoidentify,prevent,and,ifnecessary,respondquicklytofinancialstabilityissues.
Figure1.RegulatoryArchitectureofUK
2http://www.bankofengland.co.uk/financialstability/Pages/default.aspx.
FinancialPolicyCommittee
Policyrecommendation
PrudentialRegulationAuthority
FinancialConductAuthority
InvestmentfirmsandotherfinancialservicesthatarenotdesignatedbythePRA,suchasinvestmentexchanges,insurancebrokers,andfundmanagers
Banks,buildingsocieties,creditunions,insurers,andmajorinvestmentfirms
Financialmarket
infrastructures
BankofEngland
Conductregulation
Prudentialandconductregulation
Prudentialregulation
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2013UndertheauthorityoftheFinancialServices(BankingReform)Act,thegovernmentimplementsseveralnewbankingregulations,manydrivenbyBaselIII.Asaresult,theBoE/PRAusessize,interconnectedness,complexity,andbusinesstypeascriteriatosortallnationaldeposit-takers,investmentfirms,andinsurersintofivecategoriesreflectingtheirpotentialimpactonthefinancialsystem.Regulatorystringencyisbasedonthedegreeofriskposedbyeachcategory,withthefirstcategoryconsistingofinstitutionswhosefailurewouldsignificantlydisrupttheUKfinancialsystem.3Theconceptof“ringfencing”isintroducedthisyear.Largedeposit-takersshouldring-fence,orinsulate,theirinvestmentbankingactivitiesfromtheirretailoperations.IncontrastwiththeVolckerRuleintheU.S.,theUKapproachdoesnotrequirering-fencedbodiestobeaseparatelegalentityfromthegroupthatengagesinexcludedactivities.Instead,theymustbesufficientlyindependentofthisgroup.However,itisonlyin2016thattheBoE/FPCprovidesomeguidanceregardingringfencing’simplementation,with2019beingthetargetimplementationdate.
Furthermore,keyEUdirectivesandregulationsstartbeingtransposed,orconvertedintoBritishlaw,andimplementedtoimprovemarketintegrityandsecuritydealing.TheseincludetheEuropeanMarketInfrastructureRegulation(EMIR),whichregulatesthederivativesmarket,inparticularOTCderivatives,centralcounterparties(CCPs),andtraderepositories;theAlternativeInvestmentFundManagersDirective(AIFMD),whichregulateshedgefunds,privateequity,andrealestatefunds;andtheFinancialConglomeratesDirective,whichfocusesonlargefinancialgroupsactiveindifferentfinancialsectors,oftenacrossborders,andpromotesconvergenceinnationalsupervisoryapproachesandbetweensectors.TheBoE,inchargeofthesupervisionoffinancialmarketinfrastructure(FMI),reliesondirectlyapplicableEUregulations,accompaniedbybindingtechnicalstandardsforthesupervisionofCCPandsecuritiessettlementsystems.4
Finally,twoothernotablereformsfocusonconsumerprotection.TheMortgageMarketRulegivestheFCApowertoregulatemortgageactivityandtoactuponpoorpracticeswheretheyemerge;theTemporaryProductInterventionRuleempowerstheFCAtointervenetemporarilyinthefinancialmarketifconsumerprotectionisneededurgently,withoutseekingpubliccomment.2014In2014,theBoE/FPCimplementsthesecondphaseoftheSIFIsframeworkandpublishesthefirstresultofstresstestingfortheUKbankingsystem.5
Furthermore,financialgovernancewithintheEUisstrengthenedandharmonizedbythecreationofa“singlerulebook,”whichappliestothefinancialsectoracrosstheentireEuropeanUnion,withtheaim
3TheBoE/PRAprudentiallysupervisebanks,insurersandsystemicallyimportantinvestmentfirms.TheFCAisprudentiallysupervisorofallotherfinancialfirms.4TheseUKandEUregulationsandstandardsinturnfollowglobalstandardsdrawnupbycentralbanksandsecuritiesmarketregulatorsworkingtogetherthroughtheCommitteeonPaymentandSettlementSystems(CPSS)andtheInternationalOrganizationofSecuritiesCommissions(IOSCO).5TheCommitteeofEuropeanBankingSupervisorsranEU-widestresstestsin2009and2010.Startingin2011,theEuropeanBankingAuthorityhasbeenrunningEU-widestresstestseverytwoyears.
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ofenhancingfinancialmarkettransparencyandintegrity.Theprovisionsofthesinglerulebookaresetoutinthreemainlegislativeacts:
! CapitalRequirementsRegulationandDirective(CRDIV),whichimplementstheBaselIIIcapitalrequirementsforbanks.TheCRDmustbeimplementedthroughnationallaw,whereastheCapitalRequirementsRegulation(CRR)isdirectlyapplicabletofirmsacrosstheEU.6
! BankRecoveryandResolutionDirective(BRRD),whichestablishesaharmonizedframeworkfortherecoveryandresolutionofcreditinstitutionsandinvestmentfirmsfoundtobeindangeroffailing.
! DepositGuaranteeSchemeDirective(DGSD),whichregulatesdepositinsuranceincaseofabank’sinabilitytomeetitsliabilities.
CRDIVwasimplementedintheUKin2014andDGSDandBRRDwereimplementedin2015.TheFinancialStabilityInformationPoweralsoenablestheBoE/PRA“torequireapersontoprovideinformationordocumentsrelevanttothestabilityofoneormoreaspectsoftheUKfinancialsystem."7Atthesametime,theFCAexpandeditssupervisoryauthoritytoallfirms,financialornonfinancial,thatprovideconsumercredit.Italsopusheslegislation,suchastheClientAssetsRegimeforInvestmentBusiness(CASS),toimprovecompetitionandregulatorytransparencywhileprotectinginvestors.82015In2015,theBoE/PRAandFCApublishtheirfinalrulesregardingthelaststepoftheSIFIsframework:recoveryandresolutionplanning.TheSIFIssupervisionisextendedtotheinsuranceindustryattheEuropeanlevel,withtheimplementationoftheSolvencyIIDirectivescheduledfor2016.Inanticipation,theBoE/PRAperformsthefirstgeneralinsurancestresstesting.9
SeveralmajorEUrules,mostlyrelatedtoconductinanefforttoincreasetransparencyandinvestorandconsumerprotection,aretransposedintoUKlaw.TheseincludetheMarketsinFinancialInstrumentsDirectiveII(MiFID),which,withtheaccompanyingRegulationMarketsinFinancialInstrumentsRegulation(MiFIR)andtechnicalstandards—collectivelyMiFIDII—buildonandextendthescopeofMiFIDIthatcreatedasinglemarketforinvestmentservicesandactivities.10However,itsimplementationdateislaterdelayedto2018.6MostcapitalrequirementaspectsofCRDIV,suchasminimumcapitalrequirementsandcapitalbufferrequirements,havealreadybecomebindinglegislation.Liquidityrequirements,i.e.,theliquiditycoverageratio(LCR)andthenetstablefundingratio(NSFR),arestillaworkinprogress,withfullimplementationplannedby2018.Leverageratiosareexpectedtobereportedbytheendof2016,withlegislationtomakeitabindingmeasure—ifnecessary—asof2018.7PrudentialRegulationAuthority(2014,p.3).8TheUKTreasurytransferredcreditconsumerregulatoryauthoritytotheFCA.Whilemostoftherulestookeffectin2014,thetransitionalperiodforcertainprudentialrequirementsondebtmanagementendsin2017.9TheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)starteditsfirstsetsofEU-widestresstestsin2011.ItgrewtobepartoftheimplementationofSolvencyII,in2015,andincluded50%ofinsurancecompaniespercountry.Startingin2015,PRAconductsageneralinsurancestresstestexerciseforallCategory1and2UK-regulatedgeneralinsurersaspartoftheact.Additional,majorUKinsurersgothroughEU-wideEIOPAstresstests.10https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir.11UCITSValsoharmonizestheadministrativeregimesformutualfundsacrosstheEU.
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2016Manyofthe2016changesfocusonimprovingmarketintegrityandincreasingconsumerandinvestorprotection.Theimplementationofpensionreformsforcessignificantchangesinthepensionsandretirementincomemarket.ThereformsreflecttheFCA’sgoalofensuringthatconsumershaveaccesstoproductsandservicesthatarewellgovernedanddelivervaluewithinopen,competitive,andinnovativemarkets.Thereformsrequirefirmstomakesignificantoperationalandtechnicalchanges.Thisperiodofchangewillcontinuein2017withtheintroductionofasecondaryannuitymarket.
OtherchangessuchastheSeniorManagersRegime,SeniorInsuranceManagersRegime,andUndertakingsforCollectiveInvestmentinTransferableSecuritiesDirective(UCITSV)focusonstrengtheningpersonalaccountabilityforthemanagementofdesignatedfirms.11TheBankofEnglandandFinancialServicesActexpandsthenotionofenhancedaccountabilitytoallfirms.ThislastpieceoflegislationconfirmsandreinforcesthecentralplaceoftheBankofEnglandintermsofmonetaryandfinancialstability.
The Road Ahead Nearlyadecadeaftertheglobalfinancialcrisis,theimplementationofUKfinancialreformremainsaworkinprogress.Furthermore,recentinternationaldevelopments,fromBrexittothepotentialofdivergingmacroprudentialandmonetarypolicyamongleadingeconomies,suchastheU.S.andEurope,threatentoweakenresolvetoimplementworldwidecoordinatedfinancialpolicy.
Asnotedabove,implementationdatesareapproachingformanyoftheregulations.Forbankingreform,thelaststepoftheSIFIsapproach,recoveryandresolution,requirestheBoEtoestablishtheMinimumRequirementforOwnFundsandEligibleLiabilities(MREL)regimetoensurethatfirmshavesufficientcapacitytoabsorblosses,sothattheirfailurewouldnotdisruptthelargereconomy.InNovember2016,theBoEsetMREL’stechnicalstandardsandextendedfullimplementationto2022,withtheexceptionof“globalsystemicallyimportantbanks,”whichmustmeettheFSB’stotalloss-absorbingcapacityby2019.Implementationofthering-fencingrulealsoisplannedfor2019.
Similarly,forthenonbankingsector,majorreformseitherhaveaforthcomingimplementationdateorarestillatanegotiation/designstage.TheEuropeanmoneymarketfundreformhasyettobecomelaw,whilesignificantreformstostabilizeactivitiesinthecapitalmarkets,suchasEMIRandMiFIDII,areaworkinprogress;althoughEMIRhasalreadycomeintoforce,technicalrequirementsthatarekeytoitsimplementationaren’tcomplete.Furthermore,theimplementationdateforMiFIDIIhasbeendelayeduntilJanuary2018.Thesetworegulations,combinedwiththeCentralSecuritiesDepositoriesRegulation(CSDR),arethethreepillarsofaframeworktoregulatesystemicallyimportantsecuritiesinfrastructures.CSDRcameintoforcein2014;however,manyoftherequirementswillnotapplyuntiltechnicalstandardsbecomeUKlaw.Finally,whilecentralcounterparties(CCPs)aretheformoffinancialmarketinfrastructure(FMI)thathaveattractedthemostattentionfromregulators,securitiessettlement
11UCITSValsoharmonizestheadministrativeregimesformutualfundsacrosstheEU.
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systemsarekeytoreducingcreditandliquidityrisk,especiallyduringmarketdistress,andverylittlehasbeendonetoaddresstheproblem.12
ThetimingoftheseimplementationscoincideswiththetimelineforBrexit.Asnotedabove,theUKregulatorysystemreliesheavilyonEUrulesthat,asanEUmember,theUKhelpeddesign.BeyondremovingtheUK’svoiceandexpertiseininfluencingfuturepolicies,Brexitwillhaveadirectimpactonexistingprocesses.Theseinclude“passporting”andclearingeuro-denominatedderivatives.ChangestoeithercouldcausesignificantdisruptionforboththeUKandEU.
Passporting:Thisreferstotheabilityofanyfinancialfirmregisteredinoneof28EUstates,plusIceland,Liechtenstein,andNorway,tooperatethroughouttheentireregionwithoutanyadditionalauthorization.Furthermore,itmakestheprocessmoreefficientthankstofeaturessuchashomestatesupervision,whichreducesregulatoryburdens.Italsoallowsexemptionsfromlocalregulatorydepositrequirements,whichdecreasecostsbyenablingBritishfirmstorunrelativelylargeinternationalbusinessesasbranchesratherthanasseparatelycapitalizedsubsidiaries.PassportingisessentialtosomeofthecurrentregulationssuchasMiFIDandCRDIV.Itsdemisewouldhaveasignificantimpact,especiallyforbanking,sinceaboutafifthoftheUKbankingsector’sannualrevenuedependsonit.13Ascurrentlydefined,passportingrightsarelinkeddirectlytoEUsingle-marketmembership,againwiththeexceptionsofNorway,Iceland,andLiechtenstein.
Euro-denominatedderivativesclearing:About75percentofEuropeantradingineuro-denominatedinterest-rateswaps,amajortypeofderivative,takesplaceintheUK,comparedwith13percentinFranceand2percentinGermany.14In2015,theEuropeanCourtofJusticestrengthenedLondon’sroleinderivativesclearingbyrulingagainsttheEuropeanCentralBank(ECB)requirementforCCPsinvolvedinsecuritiesclearingtobewithintheeurozone.Thecourtspecifiedthat“theECBdoesnothavethecompetencenecessarytoimposesucharequirement”andthatlocationwasnotarequirementoftheTreatyonFunctioningoftheEuropeanUnion.15BesidestheexpertiseofclearinghousessuchasLCH,akeycomponentforthisrulingwastheUK’smembershipintheEU.
Finally,thesuccessoffinancialregulationinmitigatingsystemicriskultimatelyreliesoninternationalcoordination.Suchcoordination,andsubordinationofnationalspecificities,cameeasilyamidtheurgencyofthefinancialcrisisanditsimmediateaftermath.Sincethen,differingratesofrecoveryandtheexpectationofdivergingmonetarypolicieshaverefocusedregulators’attentionontheircountries’individualneeds.
Divergenceinmacroprudentialpolicyandinternationalcoordination:Theerosionofinternationalpolicycoordinationisparticularlynotableinbanking.InthedaysfollowingtheBrexitvote,theBoE/FPC
12Thesystemhelpsensurethatpaymentsaccompanydeliveriesofsecurities.Ittherebyreducesliquidityriskandcreditriskbydecreasingthechancethatdeliveriesorpaymentswouldbewithheldduringperiodsoffinancialstress.13ScarpettaandBooth(2016)estimatethataroundafifthoftheUKbankingsector’sannualrevenuedependsonpassporting,comparedwitharound11%oftheinsurancemarketgrosswrittenpremiumand7%oftheassetmanagedintheUKTheyalsodiscussthelimitationofexistingalternativestopassporting,suchasequivalenceandnegotiatingbespokedealsandlocalarrangements.14BankforInternationalSettlementsstatistics(April2016).15GeneralCourtoftheEuropeanUnion(2015).
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announcedthelooseningofsomeofthenewestmacroprudentialrequirementsinordertostrengthentheresilienceofUKbanksinanticipationofheightenedeconomicuncertainty.16InSeptember,theEuropeanCommissionhintedthatitmightnotacceptthefinalstageofBaselIIIreforms,saying,“[We]needanintelligentsolutionwhichtakesaccountoftheindividualbanks’situationsandmaintainsarisk-sensitiveapproachtosettingcapitalrequirements.Differentbankshavedifferentbusinessmodelswhichinvolvedifferentlevelsofrisk.”17Atthesametime,theU.S.FederalReserveissupportiveofmorestringentmeasuresinthelaststage.18
DifficultnegotiationsbetweentheEUandtheU.S.arenotnew.Reachinganagreementtoacceptoneanother’sderivativesrulestookthreeyears,alengthynegotiationconsideringthatalackofconvergencewouldhavebeenquitedisruptivetothederivativesmarket.Yet,whenitcomestobankingregulation,thedifferencesmaybeevenmoredeeplyingrainedinregionalspecificities.TheEUandtheUKrelyheavilyonbanks.Morethan90percentofcorporatedebtinEuropeconsistsofbankloans,withlessthan10percentcomingfromthecorporatebondmarkets.LendingintheU.S.ismorebalanced.19Furthermore,largeEuropeanbankshistoricallyhavebeengloballeadersincross-borderlending.Asaresult,theirbusinessmodel,whichoftenincludesarelativelystronginternationalexposure,mayappearlessthreateningtoEuropeanregulatorsthantotheirU.S.counterparts.TheEuropeancommissionerinchargeoftheFinancialStability,FinancialServicesandCapitalMarketsUnion,inlinewithmanyEuropeanregulators,hasrecentlyemphasizedaconceptualdifferenceinthecontextoffinalizingBaselIII:“Itisperfectlynormalforabankfocusedonlendinginasectorandregionwithlowriskstohaveloweraverageriskweightsthanabankoperatingelsewhere.”
Whenitcomestofinancialregulations,itmattersverylittlewhethertheUKispartoftheEU,asthenewregulatoryframeworkisaninternationalinitiative.BaselIIIanditsattempttostandardizeinformationsharingandassessmentmethodsenabledmorerigorousmonitoringofthebankingsector.Ultimately,theBaselreformsshouldalsoavoiddivergenceofrequirementsandminimizethecomplianceburdenacrossjurisdictions,geographicorotherwise(domesticSIFIsversusglobalSIFIs).
However,thisharmonizedregulatoryframeworkappliestocountriesthathavedifferenteconomicperformances,monetarypolicy,andfinancialmarkets.Asaresult,whileitmakesmonitoringmoreefficient,itdoesnotimplythattheappropriatepolicyresponseshouldbethesameacrosscountries.Inotherwords,differentbusinessmodelsbetweenlargeU.S.andEuropeanbanksorbetweenindustries,suchasassetmanagersandbanks,requiredifferentpolicychoices,evenintermsofmacroprudentialpolicy.
16FPClooseneditsmacroprudentialstandardsbyexcludingcentralbankreservesfromtheexposuremeasureinthecurrentUKleverageratioframework.ItalsoreducedtheUKcountercyclicalcapitalbufferrateforthelargestbanksandallowedinsurancecompaniessomeflexibilityinSolvencyIIregulationswhenrecalculatingtransitionalmeasures.SeerecordsofFPCmeetingsforJune25,July12andSeptember20.17Dombrovskis(2016).18Tarullo(2016).19BasedonBISdata,thecompositionofEU,UKandU.S.bankloan(debtissuance)canbeapproximate;90(10),71(29)and56(44)percent,respectively,Wright(2015).
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Table1.Goalsandimplementations20
Financialstability Targetedoutcome Target ImplementationFinancialServicesAct Implementanewregulatory
frameworkFinancialsystemandfinancialservices
2012,2013,and2017
Prudentialrules,suchasRequirementsDirectiveIV(CRDIV)
ImplementationofBaselIII’sprudentialregulation
Banks,buildingsocieties,andinvestmentfirms21
January2014,withfullimplementationinJanuary2019
SolvencyIIDirective HarmonizeEUinsuranceregulation
Insurers ImplementedinJanuary2016
Standardsforfinancialmarketinfrastructure
Harmonizewithinternationalstandards
Recognizedpaymentsystem,securitiessettlementsystems,andrecognizedclearinghouse(RCH)
April2013,withfullimplementationby2018-19
DepositGuaranteeSchemeDirective(DGSD)
Preventdepositorsfrommakingpanicwithdrawalsfrombanks
Banks,buildingsocieties,andcreditunion
July2015
CentralSecuritiesDepositoriesRegulation(CSDR)
HarmonizetheauthorizationandsupervisionofEUCSDsandcertainsettlementaspects,suchastimingandconductofsecuritiessettlement
Aninstitutionthatholdsfinancialinstruments,includingequities,bonds,moneymarketinstruments,andmutualfunds
September2014,withfullimplementationby2017
Financialstabilityinformationpower
ImprovingfinancialstabilitybyrequiringfirmstoprovideinformationordocumentsthatthePRAconsidersare,ormightbe,relevanttothestabilityofoneormoreaspectsoftheUKfinancialsystem.
PRAregulatedfirms June2014
SIFIs Targetedoutcome Target ImplementationDesignation/categorization Identifythedifferentdegreeof
riskaninstitutioncangenerateforthefinancialsystem
Banks,buildingsocieties,creditunions,insurers,andmajorinvestmentfirms
April201322
Stresstesting(UK&EU-widestresstest)
Assessthesystem’scapitaladequacyinordertoenhanceitsresilienceunderstress
Banks,insurancecompanies,investmentfirms,andCCPs
AttheEuropeanlevel,bankstresstestingstartedin2011,insurancein2016,CCPs
20AsofOctober2016.21Abuildingsocietyisafinancialinstitutionownedbyitsmembersasamutualorganization.Itoffersbankingandrelatedfinancialservices,especiallysavingsandmortgagelending(source:Wikipedia).22ThefirstsetofcategorizationoccurredinApril2013anddesignationoccurredinDecember2013.
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in2016.23BoEviaPRAstartedbankstresstestingin2014;forinsurance,in2016
BankandInvestmentFirmRecoveryandResolutionDirective(BRRD)
Plantoorderlymanagethefailureofafirm
Allfinancialinstitutionswithinthescopeoftheresolutionregime24
Tobeimplementedby2018.HoweverBoEonNovember2016settheMinimumRequirementforownfundsandEligibleLiabilities(MREL)tobeimplementedby202225.
Consumer/investorprotection
Targetedoutcome Target Implementation
MarketsinFinancialInstrumentsDirectiveII(MiFIDII)andtheMarketsinFinancialInstrumentsRegulation(MiFIR)
ImprovethecompetitivenessofEUfinancialmarketsbycreatingasinglemarketforinvestmentservicesandactivitiesandbyharmonizingprotectionforinvestorsinfinancialinstruments
Investmentservicesandtradingvenues
MiFIR:July2014,buttechnicalstandardsneedtobeapproved;MiFIDII:by2018
Clientassetsprotectionregime(CASS)
Protectcustomers’moneyandassetsasfundamentaltoconsumers’rights
Banks,brokers,assetmanagers,investmentfirms
June2014
Pensionreform Secureanappropriatedegreeofprotectionforconsumers,promoteeffectivecompetitionintheinterestofconsumers
Everyindividualorfirmprovidingpensionsandretirementservicesorinformationandconsumerrepresentativebodies
April2016
MortgageMarketRule Allowregulatorstodealwithfirmsthatadopthigh-riskstrategiesandintervenewherebusinessmodelsandstrategiescreateunduerisksforfirms,consumers,andthefinancialsystemgenerally
Mortgagelendersandadministrators
April2014
23ByEBA,EIOPA,andESMA,respectively.24Thebankhastheresponsibilityfortheresolutionofafailingbank,buildingsociety,orinvestmentfirmanditsgroupcompanies.CCPsarealsoseekingaresolutionplanthroughthe2012CPMI-IOSCOPrinciplesforFinancialMarketInfrastructure,asimplementedwithintheEUbyEMIR.25MRELisarequirementundertheEUBankRecoveryandResolutionDirective.Thenewruleswillbeintroducedintwophases.Bankswillbeobligedtocomplywithinterimrequirementsby2020.From1January2022,thelargestUKbankswillholdsufficientresourcestoallowtheBankofEnglandtoresolvetheminanorderlyway.
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TemporaryProductInterventionRule
ProtectconsumersintheshorttermwhileallowingeithertheFCAorindustrytodevelopamorepermanentsolution
FCA’sauthorizedfirms April2013
Marketintegrityandderivativesdealing Targetedoutcome Target Implementation
Ringfencing Separatecertainretailbankingactivitiesintoseparateentitieswithinthecorporategroup.Thesering-fencedbodiesarethenprohibitedfromcarryingoutcertainactivities,includingdealingininvestmentsasprincipal
Institutionsthathavemorethan£25billionof“coredeposit”—broadly,thosefromindividualsandsmallbusinesses—onaverage,overaperiodofthreeyears
January2019
EuropeanMarketInfrastructureRegulationonderivatives,centralcounterparties,andtraderepositories(EMIR)
Reducecounterpartyriskthatcanbecomesystemic,implementingnewriskmanagementstandards,includingreportingrequirement,andoperationalprocesses,forallbilateralover-the-counterderivatives
OTCderivatives,centralcounterparties,andtraderepositories
April2014,withfullimplementationby2019
AlternativeInvestmentFundManagersDirective(AIFMD)
IncreasetransparencybyAIFMsanddatasharingwithrelevantregulatorstoefficientlymonitorfinancialsystemsintheEU;alsoisintendedtoprotectinvestors
Hedgefundsandprivateequity
June2013,withfullimplementationby2018
SeniorManagersRegime(SMR)andSeniorInsuranceManagersRegime(SIMR)
Ensurepersonalaccountabilityofseniormanagementincaseofprofessionalmisconducts
Banks,buildingsocieties,creditunions,andPRA-designatedinvestmentfirmsandinsurancecompanies
March2016,tobeappliedto“all”registeredfinancialfirmsby2018
UndertakingsforCollectiveInvestmentinTransferableSecuritiesDirective(UCITSV)
StrengthenthelevelofprotectionforinvestorsinUCITSandharmonizethelevelofsupervisionbyEUregulators
Mutualfundsandalternativeinvestmentfunds
March2016
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About the Authors Dr.ClaudeLopezisdirectorofresearchattheMilkenInstitute,leadingtheinternationalfinanceandmacroeconomicteam.Sheinvestigatesthelinkagesbetweenthefinancialsectorandtherealeconomy,focusingonsystemicrisk,capitalflows,andinvestment.Shebringsexpertiseandexperienceontopicsincludingexchangerates,capitalflows,commodities,inflation,andtime-serieseconometrics.Herresearchhasbeenpublishedinhighlyregardedacademicjournalsandpolicyreportsandisregularlypresentedatinternationalconferences.BeforejoiningtheInstitute,LopezheldmanagementrolesandwasseniorresearcheconomistattheBanquedeFrance,thenation’scentralbank.ShewasalsoaprofessorofeconomicsattheUniversityofCincinnati.Dr.ElhamSaeidinezhadisaresearcheconomistininternationalfinanceandmacroeconomicsattheMilkenInstitute,withanemphasisonsystemicrisk,macroprudentialpolicy,andfinancialstability.Saeidinezhadisanempiricalmacroeconomistbytraining,specializinginfiscalpolicy,monetarypolicy,andproductivitygrowth.Shealsobringsexpertiseineconometricsandtime-seriesapproach.PriortojoiningtheInstitute,SaeidinezhadwasapostdoctoralresearchfellowintheFinancialStabilityResearchGroupattheInstituteforNewEconomicThinking.ShealsoheldteachingpositionsattheUniversityofSheffieldintheUKandatColumbiaUniversityinNewYork.
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