Key Regulations Impacting
The European Banking
Industry
April 2015
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requires the prior written approval of Standard & Poor’s. Copyright © 2015
by Standard & Poor’s Financial Services LLC. All rights reserved.
Table of Contents
Summarization of Key Regulations
3
EU Basel III Capital Requirements
4
EU Basel III Leverage Ratio
8
EU Basel III Liquidity Coverage Ratio (LCR)
11
EU Basel III Net Stable Funding Ratio (NSFR)
14
Banking Union (Single rulebook, Single Supervisory Mechanism, Single Resolution Mechanism)
16
Total Loss Absorbing Capital (TLAC)
18
Minimum requirement for own funds and eligible liabilities (MREL)
20
Ring-Fencing / Structural Reform
22
Capital Markets Union (CMU)
24
OTC Derivatives Reforms
25
EU Money Market Fund Reform
27
Alternative Investment Fund Manager's Directive (AIFMD)
29
Shadow Banking
30
2
Summarization Of Key Regulations
Status
Estimated Extent of Impact
Already Reflected in Bank
Earnings
Final / being reopened
75%
Final/Proposed
50%
Final
75%
EU Basel III Net Stable Funding Ratio (NSFR)
Proposed
75%
Banking Union (Single rulebook, SSM, SRM)
Final
75%
Proposed
25%
Final
25%
Ring-Fencing / Structural Reform
Being debated
25%
Capital Markets Union (CMU)
Being debated
0%
Final
25%
Being debated
0%
Final
0%
(no significant impact expected)
Being debated
0%
Rule
EU Basel III Capital Requirements
EU Basel III Leverage Ratio
EU Basel III Liquidity Coverage Ratio (LCR)
Total Loss Absorbing Capital (TLAC)
Minimum Requirement For Own Funds and Eligible Liabilities
(MREL)
OTC Derivatives Reforms
EU Money Market Fund Reform
Alternative Investment Fund Manager's Directive (AIFMD)
Shadow Banking
3
EU Basel III Capital Requirements (CRD IV and CRR)
Impact
• Rating: Should improve safety of the EU banking system, which is incorporated in each country’s BICRA
industry risk assessment.
• S&P uses a proprietary capital framework – RACF – to measure bank capital. If banks exceed S&P’s
capital thresholds while attempting to meet regulatory minimums, ratings could be positively impacted.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• Implementation commenced Jan. 1, 2014, and the required capital deductions will be fully phased in by
Jan. 1, 2019. Some jurisdictions (e.g. UK) require full capital deductions from 2014 (i.e. no phase-in).
S&P Publications
• “The Proposed Revised Basel Standardized Approach For Credit Risk May Add Complexity Without
Improving Standards,” Mar 27, 2015.
• “The Basel Committee Proposal For Standardized Regulatory Capital Floors Is A Useful Concept, But
Calibration Will Be Key,” Mar 27, 2015.
• “Strengthening Capital Is Unlikely To Boost Ratings On Western Europe's Top 50 Banks,” Oct 2, 2014.
4
EU Basel III Capital Requirements (CRD IV and CRR)
Description
•
Framework that requires banks to hold a higher minimum capital ratio, with a stricter definition of qualifying capital. Limited
changes (from Basel II) for risk weights include the introduction of charges for (a) credit valuation adjustment (CVA) risks
and (b) exposures to qualifying central counterparties (CCPs).
Key Points of Impact
5
•
Deleveraging of banks that cannot grow capital base through retained earnings or raising capital, which could impact
ability of a bank to generate loans.
•
Additional market risk charges putting profitability pressure on the capital market businesses.
•
The gradual removal of the AFS filter will ultimately make the capital ratio more volatile, and will likely result in higher
capital buffers.
•
Complexity of application may lead to inconsistencies for banks with significant trading activities.
•
Due to national discretions in setting risk weights and banks’ internal methods, significant variations in risk weighted
assets will likely continue.
•
National discretions on transitional deductions over the phase-in period to 2019 also impede comparability.
•
In December 2014 the Basel Committee assessed the EU implementation of Basel III as “materially non-compliant,” citing
differences in the application of IRB credit risk rules and the counterparty credit risk framework. The EU is addressing
some of the issues identified but has disagreed with others.
•
SSM could remove national discretions (e.g. Danish compromise on treatment of insurance subsidiaries).
•
A December 2014 Basel consultation could lead to material changes in the Standardised Approach and the introduction of
standardised floors for banks using internal model-based approaches.
EU Basel III Capital Requirements (CRD IV and CRR) – Capital
Buffers
Requirements
Common Equity Tier 1 capital buffers
2015
2016
2017
2018
2019 onwards
Capital conservation buffer (a)
−
0.625%
1.25%
1.875%
2.5%
Countercyclical buffer (if deployed) (b)
−
Up to 0.625%
Up to 1.25%
Up to 1.875%
Up to 2.5%
Systemic risk buffer (if deployed) (c)
-------------------------------------- 1% to 5% --------------------------------------
O-SIB buffer (for nationally systemically
important banks)
−
---------------------------------- Up to 2% ----------------------------------
G-SIB buffer (for globally systemically
important banks)
−
-------------------------------- 1% to 3.5% --------------------------------
a) Member states may apply a higher buffer, but only (i) if there is evidence changes in the intensity of macro-prudential or
systemic risk in the financial system with potential to have serious negative consequences to the financial system and the real
economy; and (ii) The Council of the European Union (with input from the European Commission) approves the higher buffer.
b) Member states may apply a higher buffer where they see conditions that justify this. No approval is needed.
c) Member states will be able to apply systemic risk buffers of 1% to 3% for all exposures and up to 5% for domestic and third
country exposures. Higher buffers require approval from the European Commission.
6
EU Basel III Capital Requirements (CRD IV and CRR) – Minimum
Capital Requirements
New minimum risk-based capital ratios
2015
2016
2017
2018
2019
4.5%
4.5%
4.5%
4.5%
4.5%
Capital conservation buffer
−
0.625%
1.25%
1.875%
2.5%
Countercyclical buffer (assumed deployed)
−
0.625%
1.25%
1.875%
2.5%
Total CET 1
4.5%
5.75%
7.0%
8.25%
9.5%
Additional Tier 1
1.5%
1.5%
1.5%
1.5%
1.5%
Tier 2
2.0%
2.0%
2.0%
2.0%
2.0%
Total capital
8.0%
9.25%
10.5%
11.75%
13.0%
Minimum CET 1
7
EU Basel III Leverage Ratio
Impact
• Ratings: For individual bank ratings, should be relatively neutral (most banks already comply with the
proposed 3% regulatory level), but could lead to negative ratings action if the need to build the ratio
impairs a bank’s business model (e.g. if the minimum is set higher than 3%).
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• From Jan. 2015 banks must disclose their leverage ratio; A decision on whether or not to introduce a
binding leverage ratio, and its calibration, is expected to be made in 2016-2017, with full implementation
from Jan. 2018.
S&P Publications
• “The Basel III Leverage Ratio Is A Welcome Addition, But Not A Substitute For Risk-Weighted Capital
Metrics,” Sep. 20, 2013.
• “The Basel Committee's Revised Leverage Ratio Relaxes Its Calibration Requirements, But Preserves Its
Value,” Jan. 31, 2014.
8
EU Basel III Leverage Ratio
Description
• Supplementary measure to risk based capital requirements.
Requirements
Leverage Ratios
Minimum
9
Calculation
EU leverage ratio
Indicative 3%
In line with the Basel framework. Tier 1 capital divided by
“total exposure”, which takes into account both on- and offbalance sheet exposures.
Basel III leverage
ratio
Indicative 3%
Tier 1 capital divided by “total leverage exposure”, which
takes into account both on- and off- balance sheet exposures.
EU Basel III Leverage Ratio
Key points
• Excessive reliance on the measure may lead to failure to identify risks on the balance sheet.
• High capital, low margin business could become more expensive due to capital requirements.
• Market activity may decline and impair liquidity, which may result in the reduction of repo and derivative
availability with less ability to hedge risk.
• S&P believes leverage ratio should be considered in conjunction with risk-sensitive capital measures, and
not in isolation, as a backstop measure to identify outliers.
• Ratio doesn’t fully guarantee consistent comparison between various financial institutions, although the
use of a standardised template for disclosure will be helpful.
• Some EU members, such as the UK, have already introduced binding leverage ratio requirements.
• The Bank of England plans to formalize its existing requirement for all banks to have a minimum 3%
leverage ratio during 2015. A supplementary leverage ratio buffer (SLRB) will apply from 2016 for
U.K. G-SIBs and from 2019 for ring-fenced banks and large building societies, with the SLRB's
calibration to be decided in 2015.
• Some countries are pushing for higher minimums than the currently proposed 3% (e.g. Netherlands,
4%).
• With proposals for TLAC at 16%-20% and 2x the leverage ratio, this could make the leverage ratio,
rather than risk-based capital ratios, the binding constraint on banks capital.
10
EU Basel III Liquidity Coverage Requirement (LCR)
Impact
• Ratings: Should improve safety of the EU member states’ banking systems, which are incorporated in
each country’s BICRA industry risk assessment.
• Unlike a one-year view of liquidity, LCR is a very short term measure and has potential for manipulation
(e.g. window-dressing).
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• LCR rules have been finalized and the LCR requirement is being phased in over the period to 2018, as
shown below. Member states can opt for earlier transition if they wish.
S&P Publications
• “The Basel Committee's Revised Liquidity Ratio: A Necessary Recalibration--And A Concession To
Banks,” Jan. 17, 2013.
• “Western Europe's Top 50 Banks' Refinancing Risks Are Reducing But Gaps Remain,” Sep. 16, 2014.
11
EU Basel III LCR
Description
• Requires banks to hold a reserve of high quality liquid assets (HQLA) to meet net cash outflows over a 30
day stress scenario.
EU differences with Basel Committee regarding LCR
• Transition: Initial implementation 10 months later, full transition one year earlier.
• The LCR implementation date is Oct. 2015, 10 months later than the Basel standard. However the
transition to the full LCR requirement is one year earlier, at Jan. 2018.
• Scope of Application: Consolidated and solo level for all banks.
• The EU will apply the LCR to all EU banks (around 8,000 banks), at both the consolidated and solo level.
• Definition of HQLAs:
• EU HQLAs includes some covered bonds and asset-backed securitisations (ABS) including auto-loan
ABS, subject to haircuts.
EU Liquidity Coverage Ratio Requirements
Minimum LCR
12
Oct 2015
Jan 2016
Jan 2017
Jan 2018
60%
70%
80%
100%
EU Basel III LCR
Key points
• HQLA includes:
• Level 1: cash, central bank reserves, sovereign bonds, etc, with no haircut required. Level 1 HQLA can
also include certain covered bonds rated at least ECAI 1 (AA-) - up to a limit of 70% of total HQLAs which must meet additional criteria including a minimum issue size of €500m, a 2% overcollateralization
and 7% minimum haircut.
• Level 2A: third country government bonds and bonds issued by public entities with a 20% risk weight,
non-EU covered bonds rated ECAI 1 (AA-), corporate bonds rated ECAI 1, and EU covered bonds with
an ECAI2 2 (A-) rating (which must also meet additional criteria: a minimum issue size of €250m, a 7%
overcollateralization). All Level 2A HQLAs are subject to a minimum 15% haircut.
• Level 2B: Includes high quality RMBS, high quality auto, SME and consumer loan ABS, corporate bonds
rated at least ECAI3, shares that are part of a major stock index and other high quality covered bonds.
Level 2B HQLAs are subject to a minimum 25%-50% haircut.
• Level 2A and 2B assets in aggregate cannot comprise more than 40% of a bank’s total HQLAs, with an
individual limit of 15% for level 2B assets.
• May discourage banks from providing credit and liquidity facilities to companies for instruments like
commercial paper which may lead to a supply issue with less short-term credit available.
• The inclusion of certain RMBS contrasts with their illiquidity during the financial crisis.
• Banks are able to hold lower LCR during actual stress periods but there would be heightened monitoring.
13
EU Basel III Net Stable Funding Ratio (NSFR)
Impact
• Ratings: Should improve safety of the EU member states’ banking systems as incorporated in each
country’s BICRA industry risk assessment.
• Current ratings assessments on a number of European banks are based off expectation that banks would
continue to improve their funding profiles.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• Not yet in place. By the end-2015 the EBA must submit to the European Commission a report on stable
funding sources and assess the impact on business and the risk profile of banks. Subsequently, by end2016 the Commission will submit a legislative proposal to the Parliament and the Council.
S&P Publications
• “Western Europe's Top 50 Banks' Refinancing Risks Are Reducing But Gaps Remain,” Sep. 16, 2014.
• “The Basel Funding Ratio: Good Things Come To Those Who Wait,” Apr. 14, 2014.
14
EU Basel III NSFR
Description
• Requires banks to better match their assets with their liabilities over time.
• Must hold minimum of 100% available stable funding against required stable funding over 1 year period.
• In conjunction with LCR, offers a long-term outlook of liquidity.
Key points
• Attempts to reduce liquidity mismatch.
• Wholesale banks without strong deposit bases may need to term out funding or change trading
composition
• Risk that NSFR may not fully cover one year since partial credit is given to funding that matures between
six months and one year.
•
By allowing banks to fund short-term loans up to one year with short-term wholesale funding with a remaining maturity
of six months or more a cliff effect is pushed closer to the maturity date of the debt
•
Cliff effect inevitable due to asymmetric risks on the asset and liability side; new proposal may incentivize banks to wait
longer before they establish appropriate funding arrangements, leading to refinancing risks
• Does not address refinancing risk for periods between 30 days and 12 months or time bands beyond one
year.
• New Basel proposal would lower a bank’s stable funding needs for loans to nonbanks with a remaining
maturity above one year to 40%-85% from 65%-100% in the previous proposal
•
Loans with a remaining maturity of less than one year down to 50% from 50%-85%
• S&P views the implementation timeline as too long.
15
EU Banking Union - Single Rulebook, Single Supervisory
Mechanism And Single Resolution Mechanism
Impact
• Banking union could address weaknesses in supervision, regulation, and legislation that came to light
during the financial crisis and thus help reduce the likelihood or severity of future crisis.
• Application of the BRRD (for example through the Single Resolution Mechanism) may change our view of
systemic support in bank ratings.
• No immediate rating implications for eurozone banks from the move to a Single Supervisory Mechanism.
Est. Extent of Impact Already Reflected in Bank Earnings
Description
EU Banking Union Building Blocks
Single
Rulebook
(SR)
Single
Supervisory
Mechanism
(SSM)
Single
Resolution
Mechanism
(SRM)
• The aim of Banking Union is for all large eurozone
banks under a single supervisor (the ECB), a single
resolution scheme and a common deposit protection
scheme.
• Banking union applies to all 19 eurozone countries.
• Single rulebook applies across the EU (28 countries).
16
EU Banking Union – SR, SSM, SRM
Status
• Single rulebook (SR):
• Implementation of the Capital Requirements Regulation (CRR) and Capital Requirements Directive
(CRD IV) - which togherther form the foundation of the single rulebook - commenced Jan. 1, 2014.
EBA continues to develop detailed rules (ITS’ and BTS’)
• Single Supervisory Mechanism (SSM):
• ECB took over as the single supervisor for largest eurozone banks from Nov. 4, 2014, supervising
120 banks representing c85% of eurozone banking assets.
• Single Resolution Mechanism (SRM):
• Bank Recovery and Resolution Directive (BRRD) came into force Jan. 1, 2015, with the
implementation of mandatory bail-in requirements required by Jan 1, 2016 - Austria, Germany,
and the U.K. have implemented bail-in powers early, from Jan 1, 2015.
S&P Publications
• “While Banking Union Proceeds, Sovereign And Bank Risks In The Eurozone Remain Intertwined,” Mar.
10, 2014.
• “Credit FAQ: What Are The Potential Rating Implications Of The Proposed Eurozone Banking Union?” May
14, 2013.
• “Why The Move To A Single Supervisor Isn't Likely To Affect Eurozone Bank Ratings, At Least For Now,”
Nov. 4, 2014.
• “Austria, Germany, And The U.K. Are Set To Fast Track EU Bank Bail-In Rules,” Sep. 29, 2014.
17
Total Loss Absorbing Capacity (TLAC)
Impact
• Ratings: The proposed TLAC rules mean that some debt instruments could reduce the default risk of a
bank's senior unsecured creditors beyond what is currently reflected in our stand-alone assessments.
• TLAC, combined with other regulatory initiatives, will likely increase the credibility of bail-in strategies in
the recovery and resolution of failing institutions.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• TLAC not yet implemented. FSB will propose final rules to the G20 Summit in late 2015, and
implementation will not be before 2019.
S&P Publications
• “When It Rains It Pours: Study Of State Aid For Failing EU Banks Informs The Debate On Future Capacity
Needs To Absorb Losses,” Mar. 9, 2015.
• “All In On Bailing In? The FSB Weighs In, With A Proposal On Global Banks' Total Loss-Absorbing
Capacity,” Feb. 2, 2015.
• “Request For Comment: Incorporating Additional Loss-Absorbing Capacity Into Bank Rating
Methodology,” Nov. 24, 2014.
18
TLAC
Description
• A new minimum standard for total loss-absorbing capacity (TLAC) for G-SIBs that aims to contribute to the
credibility of authorities’ commitments to resolve G-SIBs without exposing taxpayers to loss and thus:
• Remove implicit public subsidies for G-SIBs and
• Incentivise creditors to better monitor G-SIBs’ risk-taking.
Key points
• TLAC must represent 16%-20% of regulatory risk-weighted assets (RWAs), plus other buffers such as the
2.5% capital conservation and G-SIB buffers.
• As a backstop, TLAC must be twice the Basel III leverage ratio (3% proposed, therefore 6% TLAC).
• G-SIBs would potentially need to issue >$500 billion in TLAC instruments in the next 4-5 years, if
requirement is set at 16% of RWAs - or around $1 trillion if the requirement is set at 20% of RWAs.
• The 16 European G-SIBs account for around three-quarters of the above figures.
• G-SIBs in emerging markets are proposed to be exempt from TLAC requirements.
19
Minimum Requirement For Own Funds and Eligible Liabilities
(MREL)
Impact
• Ratings: The proposed MREL requirements mean that some subordinated debt instruments could reduce
the default risk of a EU bank's senior unsecured creditors beyond what is currently reflected in our standalone assessments.
• MREL, combined with other regulatory initiatives, will likely increase the credibility of bail-in strategies in
the recovery and resolution of failing institutions.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• Detailed rules being developed. MREL requirements come into force in 2016 with long transition period
(likely to be 4 years).
S&P Publications
• “When It Rains It Pours: Study Of State Aid For Failing EU Banks Informs The Debate On Future Capacity
Needs To Absorb Losses,” Mar. 9, 2015.
• “Austria, Germany, And The U.K. Are Set To Fast Track EU Bank Bail-In Rules,” Sep. 29, 2014.
• “Under The New EU Resolution Accord, Governments Still Have Leeway To Bail Out Banks,” Jul. 2, 2013.
20
MREL
Description
• MREL is intended to ensure EU banks have sufficient loss-absorbing capacity in order to have credible resolution
options without exposing taxpayers to loss.
• The MREL concept is included within the BRRD but this does not include specifics about the level of MREL;
consultation by EBA on the topic.
• MRELs will be be based on each institution's size, risk, and business model, expressed as a percentage of
adjusted liabilities and own funds.
• Resolution authorities will set the minimum requirements for each institution, depending on the preferred
resolution strategy.
Key points
•
MREL and TLAC have some common goals (avoid need for taxpayer support, facilitate resolution).
•
But TLAC is for G-SIBs only (i.e. banks for which bail-in is likely to be the preferred resolution strategy).
•
MREL is for all EU banks (i.e. banks for which the preferred resolution strategies will vary between bail-in, bridge
bank or liquidation)
•
Will MREL mean that investors will know the preferred resolution strategy for each institution?
•
MREL rules come into force in 2016, with long transition period (likely to be 4 years). This gives an opportunity to
ensure the compatibility of TLAC and MREL concepts.
•
Systemic banks would have to fulfill two related but separate requirements:
21
•
TLAC, which would likely include only a limited amount of senior debt and otherwise requires strict
subordination vs. operational liabilities; and
•
MREL, which can include senior debt.
Ring-fencing / Structural Reform
Impact
• Ratings: Ring-fencing could lead to greater diversity across individual entities within a banking group,
depending on both on the strength of separation across a banking group and the scope of activities
subject to ring-fencing.
• Ring-fencing may restrict the availability of investment banking services and lead to an increase in
"shadow banking” - entities outside the regulated banking providing more banking-type services.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• Not implemented at the EU level.
• In the UK, ring-fencing rules are being developed to apply from 2019.
• France, Germany and Belgium have implemented structural reforms which require large banking groups
to place certain trading activities (e.g. proprietary trading) in an entity separate from the deposit-taking
entity, if those activities exceed a defined threshold.
S&P Publications
• “What The Coming Ring-Fencing Rules Could Mean For U.K. Banks' Credit Quality,” Dec. 9, 2014.
• “Europe's Ring-Fencing Proposals Could Make Big Banks Safer To Fail, But Also Have Broader
Consequences,” Jul. 11, 2013.
22
Ring-fencing / Structural Reform
Description
• Ring-fencing is intended to promote financial stability through the separation of ‘riskier’ banking activities,
such as proprietary trading, from traditional banking activities, such as deposit-taking from individuals
and SMEs.
• Ring-fencing is also aimed at making banking groups more resolvable in the event of failure, reducing the
implicit government guarantee to too-big-to-fail (TBTF) banks.
Key points
• There is a reduced political appetite for EU ring-fencing, with some taking a view that the reforms under
EU capital requirements (CRD IV / CRR), banking union (the single rulebook, single supervisory
mechanism and single resolution mechanism) will achieve much to reduce risks, such that ring-fencing is
less important.
• However in the UK, ring-fencing is expected to be in place from 2019, with the rules expected to be
finalised this year. It will apply to the largest banks - those with UK retail and SME deposits of at least £25
billion.
• In Switzerland, while there are no UK-style ring-fencing rules, the Swiss regulator is motivating major
Swiss banks to improve their resolvability by establishing a separate entity to house domestic retail and
commercial banking operations, separate from overseas and financial markets operations.
23
Capital Markets Union (CMU)
Impact
• Greater diversification of funding sources in EU economies could reduce profitability of SME / corporate
lending for banks.
• Such diversification is at an early stage of a possible long-term structural trend which at best will
complement bank funding rather than replace it.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• Not yet implemented. The EU plans to issue a green paper in Q1 2015 and an action plan in Q3 2015.
Creation of a full CMU is likely to be a longer-term project.
Description
• CMU aims to create a single market for capital across the EU and reduce dependence on bank funding,
removing barriers to cross-border investment and lowering funding costs for business.
• CMU measures may include initiatives to:
• increase the availability of credit information of SMEs for investors;
• Encourage high-quality securitizations by banks; and
• Simplify prospectus rules for SMEs to encourage them to raise funds in capital markets.
24
OTC Derivatives Reforms
Impact
• Ratings: Supports ratings on clearinghouses that are able to risk-manage these complex products. We see
some pressure on banks’ margins from derivative trading. This may be offset for some through expanded
offerings of derivative clearing services or a rise in traded volume.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• Ongoing. The European Market Infrastructure Regulation (EMIR) includes the general obligation to
centrally clear certain classes of OTC derivative contracts through CCPs or apply risk mitigation
techniques when they are not centrally cleared. Basel III / CRD IV also incentivizes banks to use qualifying
clearinghouses. However, the EU continues to lag the US in specifying exactly which contracts must be
centrally cleared and in mandating trading on electronic markets.
S&P Publications
• “2015 Global Financial Market Infrastructure Companies Outlook: Continuing To Adapt To A Challenging
Operating Environment,” Jan. 26, 2015.
• “Clearinghouses Are Raising Their Game--But They Are Not Risk-Free,” Jun. 5, 2014.
• “My Bonds Are My Bond: The Risks And Rewards For Clearinghouses And Depositories Amid The
Scramble For Collateral,” Dec. 18, 2012.
25
OTC Derivatives Reforms
Description
• Trading of more liquid OTC contracts will be forced onto electronic markets, such as swap execution
facilities
• Mandatory clearing obligation to apply to EU firms (financial and non-financial counterparties) that are
counterparties to certain OTC derivative contracts. Likely to include various interest rate, foreign
exchange, equity, credit and commodity derivatives.
•
Financial counterparties include banks, insurers, asset managers, etc.
•
Non-financial counterparties include any EU firm with OTC derivative positions (ex hedging) above EMIR thresholds.
Key points
• Revenues for derivative-trading banks will weaken if they cannot offset narrower margins with increased
volume and ancillary services.
• Trading entities will need to post higher margin than under bilateral arrangements. Taken with the
clearinghouse focus on high quality collateral, this requires more efficient collateral management.
•
Collateral transformation businesses should benefit.
• Rather than eradicating risk in the financial system, risk is concentrated.
26
•
Banks must maintain capital against their exposures to clearinghouses, particularly their default fund contributions.
•
Clearinghouses are potentially more resilient than banks but are not risk-free.
•
They will be subject to emerging recovery & resolution rules, but this may lead to tail risks being passed back to their
members (banks), for example through margin haircuts.
EU Money Market Fund Reform
Impact
• Ratings: changes unlikely; depends on fund flows and whether it impairs ability of funds to maintain
principal value, and the shape of final rules which are not yet clear.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
•
Not yet implemented and likely to have a long implementation period (c18–24 months).
S&P Publications
• “Euro Money Market Funds Are Well-Positioned To Retain Assets Despite Negative Yields,” Oct. 16, 2014.
• “Challenging Times Are Testing The Resilience Of Sterling Money Market Funds,” Sep. 17, 2014.
• “Euro Money Market Funds Are Likely To Remain Resilient, Despite The ECB's Subzero Deposit Rate,”
Jun. 27, 2014.
• “EC Regulation For Money Market Funds May Have Unintended Consequences,” Nov. 29, 2013.
27
EU Money Market Fund Reform
Description
• In September 2013 the EU proposed sweeping changes for the regulation of money market funds (MMFs)
in Europe designed to prevent and mitigate risk of runs on MMFs while reducing their systemic risk to the
financial system.
• As of Feb. 2015, no agreement has yet been reached on these proposals.
Key Points
• Key tenets of the proposed regulations include:
• Enhancement of risk management and transparency by increasing portfolio diversification and
liquidity requirements, MMFs conducting stress testing of their funds, and having a better
Key points
understanding of their shareholders.
• Reduction of eligible assets for all European MMFs, including restrictions on:
• investments in shares of other MMFs;
• limitations on eligible asset-backed commercial paper backed by auto loans and leases,
residential mortgage loans, and credit card receivables;
• the collateral type of reverse repurchase agreements (repo) combined with a maximum
permitted exposure to repo counterparties.
• The adoption of internal credit assessment , prohibitions on use of external credit ratings.
• A prohibition on MMF ratings provided by credit rating agencies.
• Conversion to variable net asset value (VNAV) structure for all European MMFs or the enforcement
of a 3% capital buffer for constant net asset value (CNAV) MMFs.
28
Alternative Investment Fund Manager's Directive (AIFMD)
Impact
•
AIFMD applies to managers of hedge funds, private equity funds, real estate funds and a wide range of other types of
collective investment undertakings. Many of these managers are unrated by Standard & Poor’s in Europe.
•
For rated managers, AIFMD will result in some incremental cost of compliance but unlikely to materially affect their
business models or operations.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
•
AIFMD came into force 21 July 2011 and was transposed into national law and applied by EU member states from 22 July
2013. Upcoming dates
•
22 July 2015: ESMA opinion on whether to ‘turn on’ EU passport for 3rd country AIFMs / AIFs
•
22 October 2015: Dependent on ESMA's opinion, EU decision to ‘turn on’ the EU passport.
Description
•
The AIFMD’s main aims are threefold: to safeguard against systemic risk, to provide investor protection and to increase
transparency and disclosure.
•
Key provisions of AIFMD include: (a) AIFM’s need to be authorised to serve as managers. It also introduces a ‘single market
framework’ for the sector, which will allow AIFMs to ‘passport’ their services throughout the EU on the basis of a single
authorization. (b) Restrictions on marketing for non-EU AIFMs. (c) AIFMs need to appoint a depository. (d) Increased
transparency and disclosure requirements.
29
EU Shadow Banking Reform
Impact
• Ratings: Impact is uncertain at present, given the relatively early stage of shadow banking reform
initiatives
• Finance companies and others in shadow banking often have business models that target riskier assets
than banks typically hold.
Est. Extent of Impact Already Reflected in Bank Earnings
Status
• Other than AIFMD, rules not yet agreed.
S&P Publications
• “Underwriting The Recovery: Growth In European Shadow Banking Is Unlikely To Offset Bank
Deleveraging,” Feb. 10, 2014.
30
EU Shadow Banking Reform
Description
• Reforms are at an early stage - broad aim is to implement new framework to increase transparency of
shadow banking while also monitoring excessive leverage build up and unstable maturity transformations.
• Definition of shadow banking is somewhat nebulous.
• Generally, it refers to credit intermediation activities outside of the regulated bank sector.
• Shadow banking entities include ad hoc entities such as securitisation vehicles or conduits, money
market funds, investment funds that provide credit or are leveraged, such as certain hedge funds or
private equity funds and financial entities that provide credit or credit guarantees, which are not
regulated like banks.
• Shadow banking includes activities such as securitisation, securities lending and repurchase
transactions.
Key points
• Regulation of shadow banking is currently more lenient than traditional banking--most entities in shadow
banking are not prudentially regulated at all--but will likely increase over time.
• Shadow banking entities comprise approximately 30% of eurozone financial assets compared to more
than 40% in the U.S., indicating the relative underdevelopment of the sector.
• While some banking activity is moving from traditional banking system to shadow banking due to more
stringent banking regulation, shadow banking still faces barriers to growth, including anemic growth in
credit demand.
31
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