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