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European Parliament Economic Affairs Committee: Call For Laws On Financial Service Sector Pay And bank Crisis Management
June 22, 2010--Two resolutions, calling for legislation on remuneration in the financial service sector and on the management of cross-border banking crises, were passed by the Economic Affairs Committee on Tuesday. These resolutions lend further weight to Parliament's calls to transfer more powers to EU level, as the only way to deal effectively with the EU's highly-interdependent economy and prevent further financial meltdowns and taxpayer bailouts.
Both resolutions call on the Commission to draw up legislative proposals that go beyond the current model of recommendations and loose co-ordination, which had only a limited impact in controlling the build-up of risk.
The first resolution calls for binding rules to regulate remuneration in the financial services sector and obligatory disclosure of directors' pay in all companies traded on stock exchanges.
The second, on cross-border crisis management in the banking sector, advocates establishing an EU crisis management framework characterised by harmonisation, very tight co-ordination, and ultimately the development of an EU banking company law with a harmonised EU insolvency regime.
Real rules and transparency for pay
The resolution on remuneration policies in the financial sector and remuneration of directors of listed companies argues that tougher measures are needed to reduce incentives to take risks significantly and avoid the need for taxpayers to pick up the costs.
To achieve this, the resolution asks the Commission to adopt strong binding principles on remuneration policies in the financial sector, which would go further than what can be provided for through the capital requirements directives. Listed companies whose directors' remuneration policy does not comply with these principles would be required to explain their reasons.
The resolution goes into the corporate governance systems needed to develop sound remuneration policies, including stronger shareholder control of salaries of directors in listed companies. It also advocates an effective alignment of compensation with prudent risk-taking, remuneration oversight powers for supervisors, and bonus limits, to ensure a balance between the fixed and variable parts of a pay packet.
Avoiding another Fortis... only through tighter co-ordination and planning
The key aim of the resolution on banking crisis management is to set up a structure to ensure that crises are resolved earlier and avoid rushed, weekend bank bailouts costing the taxpayer hundreds of billions of Euros. The growing size, complexity and interconnectedness of banks means that such a system must be established at European level, says the resolution.
The crisis management framework proposed by the resolution would, in the event of a crisis, preserve financial stability, minimise the cost to taxpayers, preserve basic banking services and protect depositors. It would also encourage banking sector players to act more responsibly.
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Source: European Parliment
Britain scraps euro preparation plans
June 22, 2010-- Finance Minister George Osborne scrapped a government unit tasked with preparing for Britain's hypothetical entry to the eurozone Tuesday, as he unveiled the new coalition government's first budget.
Finance Minister George Osborne scrapped a government unit tasked with preparing for Britain's hypothetical entry to the eurozone Tuesday, as he unveiled the new coalition government's first budget
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Source: EUbusiness
Budget 22 June 2010: British Bankers' Association statement
June 22, 2010--The BBA said:
"The banking industry fully understands the part it must play in helping the UKs economic recovery. We know this is a difficult Budget for everyone and the banking industry will work to meet its obligations in helping bring the economy back to strength.
"The banks are committed to working with the Government to ensure new bank levies balance tax raising objectives with the need to keep the recovery moving, and for banks to contribute to economic growth through continued support for the wider economy by lending to businesses and individuals.
"The UK is a trading nation and we must ensure bank taxes do not hurt our national interests or provide an unfair advantage for other businesses operating here. This levy is to apply to all major banks and building societies operating in the UK regardless of nationality. We are a large financial centre and a great many jobs are created here as a result. The industry does business globally but pays its taxes in Britain. The UK is not the only country creating some form of bank levy. So bank levies need to be co-ordinated internationally: they must not prevent the industry in the UK from being able to compete. It is essential that the international banks do not find themselves taxed multiple times for the same thing"
Source: BBA
Europe falls behind, as alternative investments grow worldwide
June 22, 2010-- Institutional investment in alternative assets is set to grow by more than a third, according to a recent survey by Russell Investment
Responses to the group's 2010 Global Survey on Alternative Investing showed institutional investors worldwide planned to increase their stakes in assets such as real estate and hedge funds by 5 percentage points by 2012.
In Europe, private equity was expected to make up just 3.7% of all assets, far from the nearly 7% share predicted for North America, while hedge funds were not expected to return to pre-crisis levels until after 2012.
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Source: IP&E
New online forum Eurex Innovate launched -Ideas and discussion platform for all market participants went live in mid-June
June 21, 2010--The international derivatives exchange Eurex has been launched Eurex Innovate recently, its new ideas and discussion forum for customers and people interested in financial markets and derivatives. The aim of the online forum – https://innovate.eurexchange.com – is to initiate and promote a web-based network to exchange information about product innovations on Eurex and to discuss events of financial and derivatives markets.
“We want to the use the internet as a means of further increasing the exchange of information with our customers and people interested in our company. Eurex Innovate will allow us to involve these people more closely in the product development process," said Peter Reitz, member of the Eurex Executive Board. “The experience and ideas of our participants are key factors driving the expansion of our product and service range.”
Eurex Innovate consists of two areas: the “Ideas Board” and the “Discussion Board”. Via the Ideas Board, participants can simply submit suggestions, which are then evaluated by Eurex product specialists and further analyzed together with the contributors. The status of the idea can be traced online. The Discussion Board serves as a means of exchanging information about products, trading strategies and financial market trends. At present, the product-specific forums “Fixed Income”, “Equities”, “Equity Index Derivatives” and “Other Asset Classes” have been set up for this purpose. A simple and one-time registration process is all that is required to use Eurex Innovate.
Source: Eurex
Ireland reforms as it rebuilds
June 21, 2010--One of the most striking signs of the scale of Ireland’s banking crash was a graph that Jonathan McMahon, head of banking supervision at the Irish financial regulator, deployed in a presentation at a conference organised by Mazars, the accountancy group.
It showed the cumulative profits of the Irish banks from 2000-08 were wiped out in just one year of losses in 2009. It is almost as if, in Ireland at least, the noughties never happened.
Restoring banks to profitability is the ultimate goal of the reforms now under way. But regulators acknowledge in the short run that profits may be under renewed pressure as banks look at more conservative sources of funding, higher capital requirements and thus, lower returns.
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Source: FT.com
New EDHEC study calls into question the suitability of the calibration of private equity in the Solvency II standard formula
June 21, 2010--In the study, entitled “On the Suitability of the Calibration of Private Equity Risk in the Solvency II Standard Formula,” EDHEC calls into question the method and the data used by the European regulator to measure the risk of private equity investments, in particular the correlation coefficient of performance of private equity and that of listed equities.
The drawing-up of Solvency II prudential rules has become a matter of major concern for the private equity sector since the current measure for private equity risk, used by the European regulator, is likely to dissuade insurers from investing in this asset class. As an example, in the French market, in 2007, the total investments in private equity represented €22bn in the balance sheet of insurance companies (FFSA 2008). They finance 21% of the funds raised (AFIC); thus becoming the leading national investors in unlisted stocks.
In addition to casting doubt over the use of VaR (Value at Risk), which requires the implementation of correlation matrices that have been very controversial to date, the EDHEC Financial Analysis and Accounting Research Centre study questions the representativeness of the LPX50 index selected by the regulator to measure the capital required for private equity investment risk. This index, which is defined on the basis of the stock prices of the fifty largest listed private equity firms in the world (i) is not representative of investments of European insurance companies, either on a geographical level or as a representation of the weight of investments in venture and buy-out, (ii) does not reflect the non-liquid contractual nature of investments in private equity, and (iii) as a result of the underlying investments, the LPX50 poses an idiosyncratic risk that is added to the risk of investment in private equity.
To correct the identified drawbacks of the CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) approach, EDHEC’s proposal involves replacing the LPX50 index with a benchmark that is more representative of insurance portfolios invested in private equity. The analysis is based on the performance of private equity funds for various investment classes and geographical zones, taken from the Thomson One database. In accordance with the practices of the private equity industry and academic approaches, the EDHEC Financial Analysis and Accounting Research Centre calculated the internal rates of return (IRR) of private equity funds by vintage year, and then measured the return of an equivalent investment in the MSCI indices, with the same portfolio structure as the private equity benchmark (vintage year, incoming and outgoing cash flows, geographic zone). This index is known as the Public Market Equivalent Plus (PME +).
The correlation between private equity and listed market performance is measured using four families of private equity investments (two geographical zones combined with two types of investment: buy-out and venture). In order to provide an optimal reflection of European insurance companies’ investments, these four families were then aggregated into a single portfolio. The results (both by family and for the aggregated portfolio) show that private equity performance is significantly less correlated to that of listed equity markets than assumed in the 0.75 correlation coefficient selected by the CEIOPS.
Finally, the study shows through simulations the impact of the level of the correlation coefficient (representing diversification in investments) not only on the capital requirement for equity risk but also on the marginal cost of the capital requirement as a consequence of asset reallocation between listed equities and private equity.
This study was sponsored by the Association Française des Investisseurs en Capital (AFIC).
Source: EDHEC
GDP per inhabitant in the Member States varied between 41% and 268% of the EU27 average
June 21, 2010--Based on first preliminary estimates for 2009, Gross Domestic Product (GDP) per inhabitant expressed in Purchasing Power Standards2 (PPS) varied from 41% to 268% of the EU27 average across the Member States.
In Finland, France, Spain, Italy, Cyprus and Greece, GDP per inhabitant was within 10% of the EU27 average. Ireland, the Netherlands, Austria, Sweden, Denmark, the United Kingdom, Germany and Belgium were between 15% and 35% above the average, while the highest level of GDP per inhabitant in the EU27 was recorded in Luxembourg3.
average. Hungary, Estonia, Poland and Lithuania were between 30% and 50% lower, while Latvia, Romania and Bulgaria were between 50% and 60% below the EU27 average.
These figures for GDP per inhabitant, expressed in PPS, are published by Eurostat, the statistical Office of the European Union. They cover the 27 EU Member States, the three candidate countries, three EFTA Member States and four Western Balkan countries.
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Source: Eurostat
Banks granted another year over derivatives
june 18, 2010--Banks engaged in trading some of the complex derivatives that were at the heart of the financial crisis were on Friday given almost a year of extra time to adjust to new capital charges that are expected to make it more expensive to use them.
Banks have been waiting to see how much capital they will be required to hold on their balance sheets to guard against losses on their trading book since the Basel Committee on Banking Supervision, the standard-setter for banking regulation, came out with initial proposals last July
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Source: FT.com
CESR publishes the 2009 Annual Report
June 18, 2010--As reflected by CESR’s 2009 Annual Report, the regulatory follow-up of the financial crisis has greatly dominated our agenda, in particular, evidenced by CESR’s work on financial reporting in times of crises, follow-up work on Lehman’s default and on short selling.
Elements of learning from the financial crisis have also greatly influenced other work streams in CESR’s Work Programme, such as the review of MiFID, and these work streams lead to work on a significant number of advisory statements addressed to the European Commission, covering all pillars of the EU financial regulatory framework in the field of securities. In addition, new fields of regulation are now at the core of our work, for example, the implementation of the new Regulation on Credit Rating Agencies.
CESR’s 2009 Annual Report
Source: CESR
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