How EU Financial Regulation Impacts the

Real Economy

Richard Raeburn

Budapest

18 May 2012

Overview

• The EACT – an introduction

• Scope of the EU’s post-crisis regulatory agenda – and the impact on the ‘real economy’

• Are we victims of ‘regulatory capture’?

Recurring themes

Do regulators fully consider the (unintended) consequences

….and has ‘regulatory capture’ taken place?

Overview

EACT introduction

• EACT: European Association of Corporate Treasurers

• 20 ‘national associations’ – 17 Member States plus Croatia and Switzerland

• Associations range from largest (UK) to smallest – the ‘treasury club’ in Finland?

….EACT introduction

• Origins: sharing issues and experience in preparation for Eurozone

• Membership later widened to all EU Member State associations

• …and then to ‘European’ associations

….EACT introduction

• Two objectives:

– Influence regulation and standards development

– Share experience – particularly between older associations and the younger ones

• Before the 2008 crisis: major involvement in Payments Directive and international accounting standards

Overview

Starting point – G20 Sept 2009

• Determination to clean-up the financial system – an understandable ‘crusade’:

– Failure to price risk correctly

– Asymmetric rewards (bonus culture)

– ‘Too big to fail’

– Sector should pay

The regulatory objective

Global initiatives are focusing on:– Systemic risk

– Activities without added-value

– Transparency

– Oversight

– …..and payback for taxpayer costs

The EU regulatory agenda

Derivatives (EMIR)- outcomes

Bank capital(CRD IV and CRR)

Should welcome Basel III – stronger banking system – foundation for stronger EU and global economies and reduced taxpayer risk

….but CRD IV /CRR

• Could threaten the EMIR exemption by excessive credit charges (CVA) on uncleared derivatives

• Orthodox view (UK and elsewhere) – no dilution of Basel III

• EP has adopted EACT ‘EMIR read across’ amendment

• Debate moves to trialogue

MiFID II and MiFIR

• Part of the regulatory push for greater transparency and reduced risks

• Exchanges rather than OTC

• Intention not to cut across EMIR exemption

• …but concerns remain

Credit rating agencies(CRR)

• Highly politicised within the EU – perception of poor behaviour by CRAs

• Confusion between CRAs role in structured products etc and work for corporate issuers

• Issues: rotation; methodology oversight; civil liability; suspension of sovereign ratings; issuer and investor pays models

Real economy impact- what we have learnt

• Vital role of European Commission (EC) – early thinking and Green Papers

• EC inadequately resourced and lacking relevant experience

….what we have learnt

• EC seems insensitive to real economy impact –proposals seen as for financial sector only

• Impact assessments rigid, theoretical – eg overall review model cannot allow for bank disintermediation

Overview

Regulatory capture

• Financial sector lobbies hard and has huge resources – but ‘over-lobbied’

• Banks – especially investment banks – viewed as ‘toxic’ – no value in corporates associating with them

• …but great need for analytical support eg on CVA impact

….regulatory capture

• Real economy poorly represented in EU but generally ‘picks up the tab’

• ‘Regulatory capture’ may be taking place – regulation agenda insensitive to real economy

.…regulatory capture

• The EACT has responded:– Monitor and mobilise early on regulatory initiatives– Prepared to work with large corporates when

appropriate– Strengthen Brussels presence