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Highlights of my week: Commission President von der Leyen is expected to announce her candidacy for a second term in February but the second term’s inbox will be very full – led by the geo-politics of Ukraine, but hampered by the political problems of both Germany and France. In another `first’, the European Parliament is holding public hearings on the suitability of nine candidate cities to host the new AML Agency. Another `first’ (perhaps) – Italy is praised for its banking system: the FSB praised its progress on NPLs due to its legislative progress on insolvency regimes and its secondary NPL market while S&P praised the sector’s EU-leading profitability. (How closely are the two items linked?? Should other states learn the lessons?) After a decade of astonishingly low interest rates, SUERF raised a warning flag about the potential impact on insurers` liquidity from higher surrender payouts. Just as global standard setters get ESG standards in place, the UN’s Net-Zero Insurance Alliance struggles to respond to the anti-ESG backlash in the US. The UK’s Corporate Governance Code is weakened on ESG matters. The City of London Corporation found that the City is just ahead of New York due to post-Brexit reforms. However, the British public may be about to experience adverse Brexit impacts from new, five-times postponed border controls – particularly on fruit and flowers.
Graham Bishop
Articles from 19 - 25 January 2024
Policy impacting Finance
POLITICO: Von der Leyen expected to announce candidacy for second term on February 19 : European Commission president to make announcement at CDU meeting in Berlin, according to two people familiar with her plans. View Article
PubAffairsBrussels/Bruegel: to become a geopolitical player the European Union needs Treaty change : The EU’s goal of being more ‘geopolitical’, first declared by then European Commission President-elect Ursula von der Leyen in November 2019 and repeated several times since, remains far from being fulfilled. EU support for Ukraine is the best, though not the only, example of this failure. View Article
Carnegies's Dempsey: Germany’s Paralysis Holds Back Europe : Past German governments have relied on Russian gas and the U.S. security umbrella. With Putin’s war in Ukraine and the prospects of a Trump presidency, Berlin needs a strategic mindset to lead Europe. View Article
Delors Centre: Doomed to succeed: Woll/Wernert discuss the new French government in joint Handelsblatt and Tagesspiegel op-ed : “If Emmanuel Macron does not want to become a lame duck, it must be clear where he wants to go,” the Hertie School President and the Policy Fellow at the Jacques Delors Centre write. View Article
Bloomberg: Switzerland Knows It Was Wrong to Quit EU Talks, Diplomat Says : EU ambassador comments on new negotiations on Swiss-EU ties; Talks should start in March and finish this year, he says View Article
EFR - Paper on Financial Health of European households : The EFR believes that National and European policymakers should : (1) acknowledge the role banks and insurers play in contributing to financial health and inclusion, (2) leverage digitalisation and technology while paying attention to digital exclusion and (3) foster financial education. View Article
FSB sets out 2024 work programme : One focus of FSB work in 2024 will be to promote the full implementation of the Key Attributes of Effective Resolution Regimes for Financial Institutions across all sectors work on resolution, including addressing the lessons learned from the March 2023 banking turmoil. View Article
Banking Union
Parliament: Anti-Money Laundering Agency: host city candidates to present their bids : This will be the first time that public hearings are part of the process to select the seat of a new EU agency, following the EU Court judgment that gave Parliament an equal say with Council in determining the host cities of future agencies. View Article
The EBA publishes its heatmap following scrutiny of the interest rate risk in the banking book : The heatmap incorporates three sections, which describe: i) the regulatory framework for IRRBB in the EU; ii) the EBA scrutiny plans and the work undertaken to date; and iii) the main areas of scrutiny identified with the corresponding actions/timelines. View Article
Reuters: ECB asks some lenders to monitor social media for early signs of bank runs -sources : ECB keeps close eye on liquidity after bank runs in 2023; Regulators also looking at individual deposit bases - executive; Social media can amplify shocks to liquidity View Article
SSM's Elderson: “Failing to plan is planning to fail’’ – why transition planning is essential for banks : The misalignment with the EU climate transition pathway can lead to material financial, legal and reputational risks for banks. It is therefore crucial for banks to identify, measure and - most importantly - manage transition risks, just as they do for any other material risk writes Frank Elderson. View Article
EBA consults on amending the data collection for the benchmarking exercise in 2025 : The most significant change is in the market risk framework, where the EBA is proposing brand new templates for the collection of the internal model approach (IMA) risk measures under the fundamental review of the trading book (FRTB). View Article
FSB examines Italy’s progress in reducing non-performing loans in its banking sector : Peer review reports success by the Italian authorities in reducing non-performing loans (NPLs) on bank balance sheets, developing the secondary NPL market and improving the domestic legal and institutional framework. View Article
S&P: Italian bank profits set to outperform European rivals in 2024 : The weighted average return on average common equity (ROACE) for rated Italian banks is expected to hit roughly 14% for the year, versus about 12% for UK rivals and 11% for Spanish lenders, according to Mirko Sanna, lead analyst for financial institutions at S&P Global Ratings. View Article
Capital Markets Union
EFAMA: Households continue to keep a disproportionate amount of money in bank deposits in most European countries : EFAMA published a report analysing the progress by European households in recent years in allocating more of their financial wealth to capital market instruments (pension plans, life insurance, investment funds, debt securities and listed shares) and less in cash and bank deposits. View Article
EIOPA study on diversification between risks in internal models underlines the importance of continued supervisory attention : The study overviews the current modelling approaches and equips National Competent Authorities with elements of a European sector-wide comparison ... diversification indicators to support and complement the work of national supervisors when monitoring the on-going compliance of internal models. View Article
SUERF: Surging interest rates: Higher surrender payouts affect life insurers’ liquidity risk : Kubitza, Grochola, Gründl: Life insurers sell savings contracts with surrender options, which allow policyholders to prematurely receive guaranteed surrender values. These surrender options move toward the money when interest rates rise. View Article
SUERF: Money market funds and the convenience yield of safe assets : Doerr, Eren, Malamud : we provide novel evidence that MMFs’ portfolio allocations affect the pricing of near-money assets. We show that when MMFs invest more funds in T-bills, their price impact in the T-bill market leads to lower T-bill rates, especially when the T-bill market is illiquid. View Article
Environmental, Social, Governance (ESG)
Keynote speech by Commissioner McGuinness at the EU Sustainable Investment Summit 2024 : "...by 2050, our energy should be based on renewables using advanced technology – hydropower, bioenergy, wind and solar. A consistent supply of energy because that will be down to storage, energy storage and hi-tech batteries...." View Article
FT's Hancock: EU must invest about €1.5tn a year to meet net zero targets, says Brussels : Spending plans and target of 90% emissions reduction by 2040 appear in draft document View Article
The EBA consults on Guidelines on the management of ESG risks : The draft Guidelines set out requirements for institutions for the identification, measurement, management and monitoring of ESG risks, including through plans aimed at addressing the risks arising from the transition towards an EU climate-neutral economy. View Article
ECON staff's Chaillet, Strnad : SFDR: Draft delegated act (RTS) amending the Delegated Regulation (EU) 2022/1288 : In November 2023, ECON coordinators decided to hold a scrutiny session on the matter, to allow the European Parliament to scrutinise the developments concerning the SFDR delegated act. View Article
IPE's Robinson-Tillet: What the EU’s new due diligence law means for investors : The legislation, provisionally agreed last month, will be a game-changer for companies around the world when it comes to how they are held accountable for the human rights and environmental harms associated with their business activities. View Article
IFRS: New resource on emissions reporting using GRI and ISSB Standards : The publication illustrates the areas of interoperability a company should consider when measuring and disclosing Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions in accordance with both GRI 305: Emissions and IFRS S2 Climate-related Disclosures. View Article
CEPR: The models used to inform policy are lacking natural capital : Croitorov, Döhring, Maier, Mc Morrow, Thum-Thysen: Classical economic models routinely included land as a production factor, a practice economists later abandoned. This column argues that adding natural capital in economic models is necessary for achieving environmental sustainability. View Article
FT: Insurers in talks to overhaul net-zero group after member exodus : Net-Zero Insurance Alliance was one of highest-profile victims of US backlash against ESG policies View Article
Investment Week: UK regulator ditches ESG proposals for company boards in updated governance code : Britain's financial auditing regulator has dropped plans to add ESG requirements in the UK Corporate Governance Code in a bid to limit administrative burdens on businesses "to the minimum necessary", it announced. View Article
IoD welcomes targeted changes to the UK Corporate Governance Code : Only a limited number of changes to the code have been made. Most of the changes will be effective from 1 January 2025, although the new provision relating to internal controls takes effect in 2026. View Article
Protecting Customers
EIOPA report probes consumer treatment and financial well-being amid the cost-of-living crisis : EIOPA’s analysis reveals that the ongoing cost-of-living crisis is affecting insurance and pension consumers and their relationship with financial products and services. View Article
Fin Tech Regulation
CEPR's Danielsson/Uthemann: How AI can undermine financial stability : This column identifies several channels, malicious and misinformed use, misalignment, evasion of control, risk monoculture and oligopolies. All arise when AI vulnerabilities interact with economic fragilities like strategic complementarities, problems of incentives, and incomplete contracts. View Article
Brexit and the City
City of London: London top global financial centre as new regulations send positive signals to businesses, research finds : London’s regulatory quality and openness to businesses through the newly introduced Financial Services and Markets Act and the Edinburgh Reforms landed it in the top position with an overall competitiveness score of 59, down from 60 in 2023, while New York decreased its score by 3 points to 57. View Article
TheCityUK: Key facts about the UK as an international financial centre 2023 : The UK remains the world’s second-largest exporter of financial services (after the US) and is the largest financial services net exporter (that is, measuring industry exports minus imports). View Article
City AM: City chiefs: We must embrace risk to stay competitive : Postings cited the example of how changing regulation of defined-benefit pension funds had incentivised funds to abandon equities and invest in bonds, which provide a more reliable stream of income. View Article
Brexit
Guardian: New Brexit checks ‘pose existential threat’ to UK fruit and flower growers : NFU warns blanket import checks from April could fuel long delays and damage future crops View Article
Reuters: UK industry fears disruption from new post-Brexit border checks : British businesses are warning of a new wave of post-Brexit trade disruption because EU exporters are not ready for UK customs changes which start this month, and Britain's port infrastructure might be unprepared too. View Article
UK-EU Relations Tracker Q4 2023 : This edition of the UK in a Changing Europe UK-EU Relations Tracker covers developments from October to December 2023, and looks forward to 2024. View Article
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