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This is the second part of a piece of complimentary advice to European Commissioner-designate for Financial Stability, Financial Services, and Capital Markets Union, Jonathan Hill, in anticipation of his second hearing by members of the European Parliament's Committee on Economic and Monetary Affairs next week. The questions are copied from a letter sent to Mr. Hill by European Parliament President Martin Schulz on October 2.1 The answers are the author's suggestions for Mr. Hill's responses.
10. Can you make a clear commitment that when legislating for the EU28 you will guarantee the integrity of the single market and neither propose nor support nor introduce double majority voting applicable to euro area and non–euro area member states such as in the European Banking Authority (EBA)?
I do commit to the integrity of the single market. Now, as you know, I inherit some tricky issues as the single supervisory mechanism (SSM) regulation and single resolution mechanism (SRM) regulation do not treat all member states equally. This was a necessary consequence of the political conditions under which they were adopted, not least the sometimes irrational unwillingness of my country of citizenship to participate in common-interest EU initiatives. (May I quote from the February 2014 report of the UK House of Lords here, paragraph 187: "It would be wise not to close the door on the possibility of some level of [UK] participation in Banking Union in the future, in particular as a means of further promoting and shaping the Single Market in Financial Services and the United Kingdom's position within it.")
As for double majority voting, it was found appropriate for the EBA last year. But in his mission letter, President Juncker asked me to "review the governance and the financing" of the European Supervisory Authorities, including the European Banking Authority. I will do this with an open mind, and you will of course be closely associated with such review.
11. How do you intend to deal with discrepancies between the European Union and other important jurisdictions, notably the United States? Which approach do you intend to take on third-country equivalence decisions? How do you plan to involve the European Parliament in third-country related matters?
This is a very complex area, and I cannot have a one-size-fits-all approach. The current discussion on financial services in the Transatlantic Trade and Investment Partnership does not look promising. I will need to give a serious second look at our objectives and proposals in this respect. The European Parliament will of course be involved in policy decisions that correspond to a legislative level, but not in individual supervisory decisions, as is common practice in finance.
12. Will you keep the European Parliament fully informed about the work being done in international bodies such as the Financial Stability Board (FSB), Basel Committee, the International Accounting Standards Board (IASB), and guarantee that unnecessary and unadapted rules for the EU financial sector are being avoided?
I will inform the European Parliament in these areas in line with what I will identify as best practices in other advanced democratic jurisdictions that are members of these bodies. These organizations being global, I cannot commit on their decisions. That said, I will do my best to favor decisions that are aligned with the European interest, and can be implemented in Europe in a fully compliant manner. I will also take a second look at areas in which the European Union is currently not fully compliant with the global standard, such as the IAS 39 accounting standard and some aspects of Basel III.
13. What do you think of the proposals on eurobonds made by the Commission in the Green Paper on the feasibility of introducing stability bonds?
I now have a particularly informed view on the subject. I believe that eurobonds are part of a broader debate about what could be a sustainable fiscal framework for the euro area. I also believe that the sustainability of the current euro area fiscal framework is open to question, even though this will not be in my area of primary responsibility as a Commissioner. Frankly, we know that more debate and evolution of the national consensus is needed in Germany before this issue can move significantly, so I'll stop there and let Chancellor Angela Merkel take the lead.
14. What do you think about payment regulation and the fact that payments in the member states to suppliers should be done within 60 or 90 days at most?
I like the idea, but need to check whether this falls within my responsibility or is on a colleague's turf.
15. You agreed that the problem of "too-big-to-fail" banks is important and persists. Can you outline how you intend to address it through legislation currently on the table and, potentially, new initiatives? Can you outline what a healthy European banking system looks like?
As for the January proposal of the European Commission on banking structural reform, I will consult extensively before taking a stance. I am sure you will also soon undertake hearings of your own. I have two clear objectives for this legislation. First, it should be a genuine single rulebook, at least inside the banking union area and I believe also for the European Union as a whole: Some recently adopted national legislation may need to be modified as a consequence. Second, it should facilitate not impede the resolvability of banks, even though I know full well this is easier said than done. Having some convergence with the so-called Volcker Rule in the United States would be nice as well, though not a must-have. For the rest, I have an open mind.
Beyond this text, I am following with particular attention the FSB work on bank resolution and still believe a globally consistent framework can be agreed upon there, in which case I will work at its compliant adoption in the European Union. A healthy European banking system should be diverse, well-capitalized, well-managed, and well-supervised.
16. The International Monetary Fund is warning about an uncontrolled rise of shadow banking activities. You stated a need to be vigilant of the risks such activities entail but also to distinguish economically useful activities of this kind from others. Can you outline how you propose to detect these activities, assess their utility, and ensure the application of the principle of "same risks, same rules"? In this regard, what is your opinion about the key provisions regarding the Commission legislative proposal on money market funds?
There is no such thing as a typical shadow banking activity. The generally accepted (though arguably incorrect) use of the term refers to all nonbank finance. This encompasses myriads of market segments, defined by what they are not (namely banks) not by what they are. We need to be humble as regards assessing what you call their economic usefulness: Economists have not yet come up with a working macroeconomic model of the financial sector and are unlikely to do so for a while yet. That said, I will do my best. Money market funds are one of these segments, and I believe the Commission proposal's key provisions are reasonable.
17. You made several references in your written and oral answers to ECON about the possibility that we "may have got it wrong" in certain aspects of financial markets regulation and their interactions to the detriment of the real economy. Can you provide some examples of areas where this could be the case? Can you outline how you propose to detect such cases?
I believe the third regulation of credit rating agencies (CRA III) is a good example of politically motivated regulatory overkill. Some aspects of the European Market Infrastructure Regulation (EMIR) also appear to require review in light of the experience of their early implementation so far.2
I will ask an independent task force of highly respected luminaries to do an in-depth review of overlaps, underlaps, inconsistencies, unintended consequences, and mere bad drafting of currently applicable legislation and rules, with the aim of having a comprehensive report by early 2016. Without wanting to boast about UK experiences, I believe the Independent Commission on Banking (also known as the Vickers Commission) provides a good benchmark in methodological terms. It had a temporary secretariat for a period of up to a year, formed of very capable technocrats seconded by various public authorities, and gave an extensive look at the academic and other analytical literature not just at the legal or political context. Such features could inspire me for the review task force.
18. You mentioned in your written responses that one of the key features of this parliamentary term will be the renegotiation of the relationship between the United Kingdom and European Union. As a senior member of the UK government, you will be fully aware of any contentious areas in the financial services portfolio. Could you outline what they are and what strategy you would suggest to deal with potential conflicts between UK and EU objectives?
Put simply, the City of London serves the entire European Union (and to an extent as well, the global economy) but is primarily supervised, and largely regulated, by the UK government and its agencies. There is a tension there. The EU interest, the UK interest, and indeed the interest of the City (though I won't pay any attention to the latter) are aligned on many topics, but not all. Systemic risk management is a good example of misalignment, as sadly illustrated by the ongoing lawsuit by the United Kingdom against the ECB on its so-called location policy for central counterparties (CCPs). My strategy is simple. I will work entirely for the EU interest, within the framework of EU institutions that give a significant voice to the UK government and citizens. I believe that a strong, internationally competitive and properly supervised City of London is absolutely in the EU interest.
19. You committed yourself to the principle of proportionality. Can you outline measures and proposals you want to put forward in order to ensure that small and low complexity financial actors will not be pushed out of the market because of regulatory burden?
This is a case-by-case question. For example, the Alternative Investment Fund Managers Directive (AIFMD) has size thresholds under which some provisions do not apply. If I decide to propose a revision of AIFMD, I will certainly keep the principle of such thresholds.
20. Could you provide the committee with a complete list of the financial services clients you personally, or the companies in which you held directorships or shares, worked for?
See Appendix A. [Appendix A still to be drafted.]
21. Do you agree that financing of the three European Supervisory Authorities wholly by the sectors they supervise, as indicated in the mission letter by President-elect Juncker, is simply taxation through the back door?
Well, financing them out of the EU budget is also taxation through the back door, or maybe the front door depending on your perspective. These are public institutions, and their funding cannot be based on voluntary donations. My understanding of my mission letter is that the funding should be changed to make it more predictable, more sustainable, and less prone to frequent political negotiation. Such change would be appropriate and indeed needed for independent supervisory authorities. As I said before, their governance needs to change as well, supporting their independence and mandate to serve the European public interest.
22. Could you provide us with a specific figure/estimate on the size of the implicit funding subsidy for Too Big to Fail Banks by taxpayers in the European Union and how you envisage removing that subsidy by means of banking regulation?
Economic studies suggest this implicit subsidy is evolving over time and generally decreasing of late. I do not have a more specific quantitative snapshot at this point, but will work at reducing it further. See also Question 15.
23. In relation to the Commission proposal on benchmarks, there is significant pressure to extend or increase the number of definitions of benchmarks. Do you take the view that it is appropriate to have different supervisory rules for different benchmarks, depending on their importance, which could give rise to regulatory arbitrage, or do you think it is better to have a simple supervisory rule that applies to all benchmarks?
I am instinctively wary of one-size-fits-all solutions to complex challenges, but your point on the risk of regulatory arbitrage strikes me as well-taken as well. I will also look at having a framework on benchmarks, which is compatible with evolving requirements and practices outside the European Union.
See Part I for questions 1–9.
Notes
1. It is again emphasized that unlike Mr. Hill, the author has no political affiliations or commitments. Therefore, these prepared answers for Mr. Hill do not necessarily reflect the personal opinions of the author.
2. N.B. The author is an independent board member of the global trade repository arm of DTCC. More disclosures are on www.bruegel.org.
