Is the real economy the mouthpiece of the banks?

March 21, 2012

As followers of the EACT will know we have been very engaged with Brussels on the post-crisis financial regulatory agenda for nearly three years now. It has been a hugely fascinating and I believe productive time for us. We can claim a direct role in winning support for the exemption of corporates from the most controversial impact of the derivatives regulation; this outcome is immensely significant for the ability of the ‘real economy’ to allocate funds to working capital and productive investment, rather than to holding those funds to meet possible future margin calls as a result of having to use central clearing houses for derivative positions.

The battle has now moved on to the EU’s implementation of Basel III through the capital requirements directive and regulation (CRD IV and CRR). As I write this is a very live issue and will continue to be so for many months if not well into 2013 – but I can say that there are indications that in the European Parliament, Council and increasingly amongst Member States there is an acceptance that there is a real question over the way Basel III (and CRR) imposes ‘punitive’ CVA charges on uncleared derivatives. Our objective is to ensure that EMIR and CRR work consistently, thereby preserving the economic importance of EMIR’s exemption of the legitimate risk-mitigating use of derivatives by the real economy to offset financial risk arising in the business.

The harder we (and treasury associations and companies) work to present the position of the end users in debate about the financial regulatory impact, the greater seems to be the risk that we are malignly alleged to be the mouthpieces of the banks. I find this dispiriting, as it suggests that educating the authorities in Brussels and elsewhere on how financial regulation impacts the real economy remains work in progress and is certainly not complete.

To underline the EACT’s independence from the banks this is a good opportunity to point out areas where we undoubtedly find ourselves on the side of the Brussels authorities and certainly not in the camp of the banks. When investment banks and market intermediaries abuse the market and/or infringe competition law, non-financial companies are among the first victims.

The Commission’s Competition Directorate is currently investigating wholesale financial markets through various means, including the now much publicised LIBOR case. These cases get all the EACT’s attention, and DG COMP’s cartel busters have our full support. If at some point banks are found guilty of any wrongdoing I am absolutely convinced that many EACT members’ companies will seek damages in court – that is their fiduciary duty; but in the short term we will also focus a lot of attention on how banks and market intermediaries have treated and charged the real economy, and on how they will do so going forward.

The Commission’s new Market Abuse directive and regulation proposals are also likely to get our open support. These provide for effective and reinforced administrative sanctions and for the harmonization of EU-wide rules to ensure that Member States adopt minimum criminal sanctions – extending to inciting, aiding and abetting insider-dealing and market manipulation, as well as attempts at these forms of market abuse. We are also likely to endorse the adoption of a horizontal regime for sanctions, as well as consistent application across the 27 Member States of the definitions of what constitutes market abuse and insider-dealing; we will not want to see any intra-EU legal loopholes.

So it should be clear to the Brussels authorities that it is unhelpful and dangerously misleading to portray the EACT and others as the agents of the banks. Those of us who have spent careers in and around corporate treasury will treat the suggestion as barely meriting mention and will be concerned that it should be given any credence in Brussels, at a time when it is so important that the financial regulatory agenda moves forward effectively.

One Response to “Is the real economy the mouthpiece of the banks?”

  1. Frank wendt Says:

    Dear Richard,

    I commend you and the EACT on your successful efforts to represent corporate interests at this very important juncture of financial regulation. Still there is work to be done in Brussels as well as within corporations. There seems to be a need for deeper education on financial regulation and its impact on board, CFO and treasurer level.

    Many thanks

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