David probes Andria Enria on systemic risk and EU regulation.
Q66 Mr Ruffley: Good afternoon, and thank you for speaking to this Committee. I would like to ask you a question about the European Systemic Risk Board and the Capital Requirements Directive, and I would like to quote our own Mervyn King, wearing his hat as Vice-Chair of the ESRB. Mervyn King said, 'Under the current proposed capital requirements regulation, maximum harmonisation would not only limit the counter-cyclical buffers that could be imposed, but would also limit the number of instruments at the ESRB's disposal. In certain situations such a toolkit could be too weak or too restricted to prevent a build-up of excessive risk and leverage. It would be peculiar if one European body inadvertently prevented another from carrying out its remit.' That is what our Governor said, wearing his Vice-Chair hat. What is your response to that, and do you agree with that assessment?
Mr Enria: I also have the honour of serving as second Vice-Chair of the ESRB, so we engage in quite intensive discussions at the ESRB table on these topics. I would say, on the first point raised by Governor King, that I agree with him that having a ceiling on the possibility of raising the counter-cyclical buffers, as he mentioned, would have been a mistake, and I am glad that the Commission removed this from the proposal that they put on the table at the end of July. There was a specific letter that the ESRB wrote on this point and the Commission reacted, in my view, very positively to that. On a more general note, I would like to make a point which I hope I am able to get across because it is not always easy. I think there is a little bit of a misconception about maximum harmonisation and maximum requirements. As a regulator, I would not favour in any way the rules imposing a ceiling on the requirements that I could put in place. Let us put aside the issue of European legislation versus national rules. For instance, you have the socalled Pillar 2 under the Basel Standards, which allows supervisors to raise the capital requirements for each single bank in such a way that the requirement is in line with the specific risks that this bank has in its portfolio. So you can have a single rule that is applied fairly across all the institutions and which allows the supervisors the flexibility to raise the capital level of a specific institution because of its specific situation. If you move to the macro-prudential area or to the structural issues that you might have within Europe, there needs to be an acknowledgement that you need this flexibility at the national level. You might have a real estate bubble in one country while you have a depressed real estate market in another country. So it is important that you have the flexibility to manoeuvre the capital requirements, or any other requirements, with respect to real estate exposures, for instance, in such a way as to tailor the specific risks in this jurisdiction. My point is that with maximum harmonisation, in my view, this measure should occur within a single framework, so you should have a sort of European process for doing that in order to ensure that there is a level playing field across jurisdictions. This, in my view, is very important, irrespective of whether breaching common rules is downward or upward, because it is very much in terms of how the rules work in the single market. In a nutshell, I am very much in agreement with Governor King that you do need flexibility as supervisors to raise capital requirements, or any other requirements, to fit the specific needs of a jurisdiction. I would argue, maybe in addition to what Governor King says, that it is important that this process occurs under strict European co-operation. The European Systemic Risk Board, in my view, is the most appropriate body to make sure that these type of policy interventions at the national level are discussed and shared with fellow regulators in other jurisdictions.
Q67 Mr Ruffley: That is a helpful answer. Your view is that maximum harmonisation is not such a big problem.
Mr Enria: Yes, absolutely. Actually, my view is stronger than that. Maximum harmonisation is a big step forward, in my view, in the functioning of the European markets
Q68 Mr Ruffley: Some of the briefing we are getting from the UK Treasury is along the lines that there might be a difficulty with the most recent draft of the Capital Requirements Directive, as I understand it, in that the current draft will say there is a 7% ratio and that this might prevent, in UK law, our implementing a 10% figure, pursuant to our Vickers inquiry. Do you recognise that argument-that maximum harmonisation will not give the UK the flexibility to go up to 10% and impose a 10% requirement, rather than the 7% in the directive, the directive, of course, implementing Basel III?
Mr Enria: First of all, let me make a disclaimer. I am not in a position to give the original interpretation of the Commission's proposal. I will give you my reading of the Commission's proposal and my reading of how it should work at the European level. As it is now, the minimum requirement is actually 4.5%, but with the additional buffer it goes to 7%. There will probably be, after the implementation of the systemically important banks, standards agreed in Basel as an additional part of legislation. This is the minimum requirement. There are several tools that are laid down in the Commission's proposal which allow flexibility to raise the capital levels above this threshold. One, as I said, was Pillar 2, referring to individual institutions, which was in place before and needs to remain in place after the reform. Then there is an interesting proposal and there is discussion also at the regulatory table whether this proposal is the right way forward, but it is an interesting proposal, in my view, to use Pillar 2 also for classes of banks. You can identify that a class of bank engaging in a particular line of business faces a particular risk, so you might wish to have additional requirements for that class of banks. Then there is another provision, which, again, has been debated and probably will be debated at the table of the Council in the European Parliament, which is to use the flexibility given by the counter-cyclical buffer also for structural reasons, so that, if you have in your national banking sector specific structural features that raise the level of risks in that jurisdiction, you would be allowed to have additional capital set aside. In principle, in my view, the two things are not in contradiction. At the moment I do not yet see a process for having these sorts of decisions at the national level discussed within the European framework, and I hope that this process is set in place and in motion.
Q69 Mr Ruffley: A final question on this, Chairman, if I may. When an emergency situation is declared by the Council, the ESAs will have enhanced powers to co-ordinate member states' reactions and policy responses, and, as I understand it, make binding decisions on national supervisory authorities. Could you identify what classifies as an emergency situation, because I know that when Mr Barnier visited a parallel Committee to this-the Treasury Select Committee-he was not entirely clear, and I know the English parliamentarians were rather concerned that he was not able to outline what might constitute an emergency such that an ESA like your own could issue a binding instruction to the FPC in this country.
Mr Enria: I must confess I have some sympathy for Commissioner Barnier because it is very difficult, and probably it would also be, in my view, too restrictive to have a precise identification of exactly what could be a crisis.
Q70 Mr Ruffley: I am not asking for a precise definition. We need to understand, I think, in this Parliament, what the circumstances are in which your body, or one of the two other ESAs, could impose a binding instruction on a UK national supervisory authority. The list I am asking you for is not an exhaustive list; it is not a definitive list. It is merely a set of possibilities when our supervisory authority in the UK would be overridden by a European entity.
Mr Enria: First of all, let me say that I do not read the article of the regulation as an overriding article. It is an article according to which you can take joint decisions quickly. First of all, it is a joint decision that you take at the table of the Board of Supervisors of the Authority.
Q71 Mr Ruffley: I am assuming this is in a situation where there is a difference of view between the UK supervisory authority and one of the EBAs.
Mr Enria: Completely, but it is important to stress the fact that we view these as a sort of extreme case that should not happen.
Mr Ruffley: Of course.
Mr Enria: To me what is important is to find, in this situation, a common view at the European table. I have seen several cases at our table, even in the short lifespan that we have had as an authority, in which we have discussed very tense and sensitive issues, having different views, voting in different ways, and then complying and applying the decision in a very co-ordinated manner. So we know that this is the rule.
Q72 Mr Ruffley: I understand that. We do not need to be worried about that. What I am worried about is situations where there is a clear disagreement that cannot be resolved in the way you have just described between the UK supervisory authority and one of the EBAs.
Mr Enria: For instance, let us look backwards. In the weeks after the Lehman crisis, in my view, it would have been very likely that an emergency situation, were the current regulation in place, would have been declared, and I think it would have been very useful to co-ordinate supervisory reaction better. If I had been the Chairman of the EBA at that time, I think we should have conducted some joint work to assess the relevance of structured finance products, for instance, in the balance sheets of banks, or in issuing transparency requirements for the banks at that time, and if a jurisdiction was not in line with these, yes, probably we would have tried to activate this overriding provision which is in the regulation. Let me also record that there are, however, safeguards to the use of these. One of these is that, of course, first we have to address these recommendations to the national authority. The national authority could react and explain why they think it is not appropriate to apply this recommendation in the jurisdiction. Eventually, if it is in any case overruled, there is, especially for the emergency situations override, the so-called fiscal safeguard provision, so that, if the member state thinks that by acting in this way the European authority is impinging on the fiscal responsibilities of a member state, they can activate a process within the Council to overturn this decision. Let me also say that another important safeguard is the fact that the emergency situation is declared for one month, and if it is not renewed every month by the Council all the provisions are not in place any more. So, if the Council is unhappy with the way in which the European Banking Authority is exercising its powers in an emergency situation, the Council can basically call off the game.
Read the full transcript here:
- Tweet