The Bank of England (BoE) has published a new page on its website stating that it has responded to the European Commission’s Call for Evidence on the EU regulatory framework for financial services. The web page contains:
- cover note to BoE response;
- high-level overview of the BoE response; and
- detailed answers from BoE response.
The points raised by the BoE include:
- the BoE supports the introduction of the leverage ratio for EU banks as a complement to existing risk-weighted capital requirements. However, it adds that the industry needs to be aware of the potential for unintended consequences, including for market liquidity. The BoE supports the current review by the Basel Committee on Banking Supervision of the treatment of derivatives exposures for centrally cleared client transactions within the leverage ratio exposure measure. The BoE supports allowing client initial margin to offset potential future exposure on centrally cleared client transactions when calculating the leverage exposure measure;
- the BoE supports a review of the inclusion of central bank reserves in the leverage exposure measure;
- MiFID II will bring greater pre- and post-trade transparency to bond and derivative markets. The BoE supports the principle of greater transparency in financial markets but warns that where there is sub optimal liquidity, transparency pursued in the wrong direction can be damaging to liquidity. In particular, the BoE states that the pre-trade reporting requirements, as they stand, could have a harmful effect on the liquidity of derivative and corporate bond markets. It states that by requiring quotes to be published immediately, the dealers may be subject to predatory trading risk and therefore increase bid-ask spreads to compensate for this;
- that a more differentiated approach to banking regulation according to the size of firms could facilitate competition, growth and stability. For example: (i) consideration could be given whether small firms need to be subject to all elements of the regulatory framework – firms below a certain threshold might be exempt from the Net Stable Funding Ratio; and (ii) small financial counterparties could be exempted from the clearing obligation under the European Market Infrastructure Regulation. The BoE notes that some UK firms are finding it difficult to gain access to central clearing on cost-effective terms. It is concerned that some may decide to cease hedging interest rate risk – for example on fixed rate mortgage lending; and
- that Article 55 of the Bank Recovery and Resolution Directive needs re-assessment. The BoE states that the requirement is very broad in scope which could lead to legal uncertainty in some situations, while in others, it poses a burden that is disproportionate to the additional loss-absorption capacity achieved. It adds that particular challenges are posed by liabilities to non-EU financial market infrastructures, trade finance liabilities and operational liabilities.
The BoE notes that the Commission’s deadline for responses to the Call for Evidence was 30 January 2016. It expects the Commission to publish its main findings by mid 2016.