EU Aims for Renewed Stability in 2017

The European Union is half way through a defining year with significant events already passed and more major milestones ahead. The United Kingdom’s Brexit referendum last year has challenged economic and political stability, but the bloc’s remaining members appear largely committed to strengthening their alliance and shared interests.  The EU’s political and regulatory agenda is focused on carefully managing Brexit negotiations and major elections, while implementing key regulatory initiatives to sure up the resilience of financial markets. Regulators are coalescing around supervisory and regulatory harmonization, with a continued emphasis on conduct in the financial sector.

The European Commission acknowledged the election of President Donald Trump in the United States and Brexit present added political risks for the EU in 2017.  The recent UK snap elections are expected to add further complexity to Brexit negotiations.  Accordingly, the EU is unlikely to embark on any dramatic changes to its monetary policy or regulatory regime this year. Instead, regulators will continue to work on capital holding and resolvability requirements while politicians focus on revising the trading relationship with the UK.

Implementation is underway for the European Banking Authority’s minimum requirement for own funds and eligible liabilities and total loss-absorbing capacity standards. The European Central Bank is likely to ramp up supervision of financial institutions with larger portfolios of non-performing loans to better monitor credit risk. Last autumn, the central bank launched a public consultation, advising financial institutions to cultivate risk management strategies and reduce nonperforming loans through workouts. The European Commission is implementing critical Basel standards across EU financial institutions through the Capital Requirements Directive V and Capital Requirements Regulation II. The EC is also working with the European Insurance and Occupational Pensions Authority on resolution practices. Last year, the EC submitted its Recovery and Resolution of Counterparties Proposal to the European Parliament and it is likely to be approved this year.

The 2017 EBA Work Programme calls for the further convergence of supervisory methodologies and practices. Accordingly, several initiatives to harmonize regulatory activities are underway this year. The development of the Single Rulebook for banking is one of the EBA’s top priorities for the near term. The harmonized regulatory framework is intended to facilitate the uniform implementation of Basel III and eliminate regulatory loopholes among EU members. The European Securities and Markets Authority is also focused on supervisory convergence.  It is examining enforcement decisions on financial statements, aiming to ensure appropriate application of reporting requirements, through peer reviews, the results of which will be published this year.

Encouraging a responsible culture in financial markets has been a running theme for EU regulators in recent years and 2017 continues the trend. In preparation for the 2018 effective date, ESMA finalized its Benchmarks Regulation this year, which introduces a code of conduct to limit benchmark manipulation. The ECB’s Banking Supervision’s supervisory priorities suggest it will work to identify and enforce new cases of misconduct this year. In March, the European Parliament published a study of misconduct in the financial sector. The review found that half of EU member countries excluded conduct risk from their supervisory programs. The EP encouraged domestic regulators to adopt preventative measures to better combat misconduct.

Despite a challenging a year, the EU is working to reposition itself for renewed strength in 2018 with a thoughtful regulatory agenda. Political elections are likely to reinforce remaining members’ commitment to the bloc and supervisory convergence could better align domestic regulators. Implementation of key capital and resolution requirements will add further stability to the EU’s financial markets, while conduct oversight continues to promote better culture among financial institutions.

 

Download Clutch’s 2017 Financial Services Regulatory Highlights Report now to learn more. In this insightful and informative report, Clutch Group tracks 2017’s  key global regulatory developments across the financial services industry to identify major rulemakings, legislative and regulatory implementations, supervisory priorities and enforcement trends.