Capco_Cass-Regulatory-Risk-panel3 by Helen Merrills

Regulatory Risk

Graham Bishop Cass – Capco Seminar on Risk Cass Business School 19 April 2012 © copyright Graham Bishop 2012 © copyright Graham Bishop 2012

What to regulate? • Washington, November 2008 G20 Leaders agree on action plan and intensified co‐operation: In a common declaration G20 Leaders agreed on a set of five common principles for reforming financial markets and launched an action plan of 50 measures to be implemented in the short and medium term.

• London, April 2009 We published today a full progress report against each of the 47 actions set out in the Washington Action Plan. In particular, we have agreed the following major reforms: Financial Stability Board, International cooperation, Prudential regulation, The scope of regulation, Compensation, Tax havens and non‐ cooperative jurisdictions, Accounting standards , Credit Rating Agencies.

Looking for Risks from Unintended Consequences 1. 2. 3. 4. 5. 6.

Shadow banks OFIs Cross‐border bank resolution Liikanen Group EMIR/CCPs Political leaders © copyright Graham Bishop 2012

Possible shadow banking entities and activities • Entities: ‐ Special purpose entities which perform liquidity and/or maturity transformation; for example, securitization vehicles such as ABCP conduits, Special Investment Vehicles (SIV) and other Special Purpose Vehicles (SPV); ‐ Money Market Funds (MMFs) and other types of investment funds or products with deposit‐like characteristics, which make them vulnerable to massive redemptions ("runs"); ‐ Investment funds, including Exchange Traded Funds (ETFs), that provide credit or are leveraged; ‐ Finance companies and securities entities providing credit or credit guarantees, or performing liquidity and/or maturity transformation without being regulated like a bank; and ‐ Insurance and reinsurance undertakings which issue or guarantee credit products.

• Activities: ‐ Securitisation; and ‐ Securities lending and repo. © copyright Graham Bishop 2012

EU27 – Financial Sector by total assets, 2009 (Source Eurostat, London Economics)

SIFIs: EU vs US Source: Goldman Sachs, Nicolas Veron 110% 100% 90%

P D G o t st e ss A 9 0 0 2

80% 70% 60% 50% 40% 30% 20% 10% 0% sa ib ra P P N B

C B S H

S B R

el o icr g A t i d er C

p u o r G g n ik n a B s d y o lL

sy al cr a B

A sse ts to Home Country GDP (Europe )

r e d n at n aS

k n a B e h cs t u e D

it d er C i n U

el ar e n e G et ei c o S

A V B B

A sse ts to EU GDP (Europe ) © copyright Graham Bishop 2012

o l o a p n aS a s et n I

ac ir e m A f o k n a B

es a h C n ag r o M P J

tii C

o gr aF s ll e W

s h ca S n a m ld o G

y le n at S n ag r o M

A sse ts to US GDP (US)

Cross‐border Bank Resolution • The problems of bailing‐in bank bondholders • Who will buy “bail‐in”able bonds? – Not insurance companies under Solvency II – UCITS: but in an equity fund or bond fund?

• Can we really avoid calling on tax‐payers? • Is a “banking union” inevitable? • (where would that leave the UK?)

Liikanen Group • Reporting timetable • Possible legislative timetable – and implications • Form‐line from other High Level Expert groups • A mouse or monster? © copyright Graham Bishop 2012 © copyright Graham Bishop 2012

EMIR/CCPS •What information on the economic nature of non‐cleared OTC derivatives to trade repositories? •Speed of the 3xESAs consultations •Central or commercial bank money? •Concentration of G16 + say 6 CCPs •What do we know of CCP risk management? © copyright Graham Bishop 2012 © copyright Graham Bishop 2012

Political Leaders 1. 2. 3. 4.

Known cost pressures from ageing and interest rates The enduring fragility of public debt No more PSI???? The fiction of zero risk public debt

If HOSGs persist with 3 & 4, then the next fiscal crisis WILL result in a complete debt mutualisation in the euro area. Are electors ready for this? Launch the ELEC euro T‐Bill Fund quickly (read via www.GrahamBishop.com) © copyright Graham Bishop 2012 © copyright Graham Bishop 2012