Hello everyone and welcome to the latest edition of the Norton Rose financial services updater.
Like last week there have been a number of papers published by the regulators but the theme this week appears to be regulatory reform in the banking sector.
Both highlights this week relate to this theme. The first highlight is the European Commission appointed High-Level Expert Group publishing its final report on reforming the structure of the EU banking sector.
The Expert Group recommends five measures for banks which are intended to complement the regulatory reforms already enacted or proposed by the Commission.
The five measures include the mandatory separation of proprietary trading and other high-risk trading activities and the build up of a sufficiently large layer of bail-inable debt that should be clearly defined.
The Commission has now opened a consultation on the final report. The deadline for comments is 13 November 2012.
Generally speaking, perhaps one of the key issues with the measures is the trade off between improving financial stability and facilitating economic growth.
From a regulatory perspective consideration will have to be given to how these measures are aligned with the current EU regulatory reform agenda particularly the Commission’s proposals to create a banking union in the Eurozone.
From a UK perspective perhaps one of the questions which will have to be asked is how the measures align themselves with the Government’s own proposals to implement the recommendations of the Vickers’ report on banking reform.
The second highlight this week concerns the Wheatley Review which has just published its final report on the London Inter-Bank Offered Rate (otherwise known as LIBOR).
The Economist calls LIBOR the most important figure in finance. It is used as a reference price for well over $300 trillion worth of loans and transactions around the world. In simple terms LIBOR represents the cost of borrowing to banks. How much a bank has to pay to borrow money is a key determinant of the interest it will charge to lend money.
The Wheatley Review’s final report contains three fundamental conclusions that underpin its recommendations. First, there is a clear case in favour of comprehensively reforming LIBOR, rather than replacing the benchmark. Second, transaction data should be explicitly used to support LIBOR submissions. And third, market participants should continue to play a significant role in the production and oversight of LIBOR.
The final report then sets out a 10 point plan for comprehensive reform. ;In particular it states that a key step for credibly reforming LIBOR is to ensure that there is a clear, consistent and effective regulatory regime that underpins all activity. The Review recommends three specific regulatory changes to achieve these goals.
First, submission and administration of LIBOR should become regulated by the FSA. Second, the key individuals in these processes should be FSA approved persons. And third, the government should amend the Financial Services and Markets Act 2000 to allow the FSA to prosecute manipulation or attempted manipulation of LIBOR.
However, there is also worth remembering that there is an international dimension to the Review’s proposals in that it calls on the UK authorities to work closely with international counterparts in order to develop a set of overarching principles that can be applied to all major benchmarks to promote robustness and credibility across the markets.
There is an online briefing note on the Wheatley Review final report. The link to it can be found in the updater.
I hope that you find this week’s updater helpful.
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