European Union: EU Banking & Finance Regulatory Newsletter - June 2018

Last Updated: 26 June 2018
Article by Michael Huertas

A round-up and outlook on recent regulatory, supervisory and monetary policy events

The run-up to mid-June 2018's and the end of the second quarter 2018 has been eventful... and that's before one looks at the US monetary policy increases and the ECB, which celebrated its 20th birthday as an institution, laying the groundwork for "normalization" on monetary policy. Those measures focus firstly on balance sheet rightsizing and future paths on interest rates. In terms of immediate impact, the ECB announced at its Riga 14 June Governing Council meeting that it will halve its net asset purchases under its Asset Purchase Programme from €30 billion to €15 billion per month as of September before ending the programme in/at the end of December 2018. The ECB only shed a small spotlight at its Sintra Forum on 18 June on how it would keep the door open for other monetary policy measures regardless on the announcements to end net asset purchases of sovereign bonds. In short, other purchases may continue lower for longer. The road to interest rate normalization was indicated to start somewhere between the third and fourth quarter 2019. All of this is, as the ECB puts it, subject to incoming data. In any event, this will have quite some impact both for wholesale and retail markets, including in terms of funding channels, structuring options and collateral asset mobilization even if the ECB's objectives and its policy options have been pre-communicated in rough terms prior to the Riga meeting and in the margins of the Sintra Forum. Eurozone monetary policy is planned to remain "patient, prudent and persistent".

That being said, one could expect some further measures might emerge so that these could be added to the monetary policy but more importantly the financial stability toolkit if the need to act should arise. These would be in addition to current plans steering how quickly or cautiously the ECB's balance sheet will be shrunk and/or inventory returned to market. A number of new ideas and bolt-ons to existing measures have been mooted during the course of 2018. Otherwise, the Outright Monetary Transactions (OMT) programme still remains available if need be in order to deliver the "whatever it takes" safeguard for the Euro. Meanwhile, at the national level, Spanish politics turned to the left, Slovenia to the right and Italy lurched sideways in domestic politics and Euro membership before finding some stable ground. Forward guidance on rates, even if the plug is being pulled on ECB-led sovereign bond stimulus, may provide some support for some of the new governments to find their feet. With a political move at the EU level to now (re-)allocate more growth funding support to initiatives in southern Europe further channels of support for governments but also opportunity for market participants might open up.

Whilst a number of sporting events mark the start of the summer season, the pipeline of wider-reaching EU regulatory and supervisory reforms are not slowing down. The stream that is continuing to come in from policymakers continues to translate into a number of preparatory steps that market participants will want to take now rather than postpone. This will likely intensify in the near term as the EU prepares for its landmark summit on EU, Eurozone and Banking Union reform and publishes a range of other ideas presented by the Macron-Merkel motor, ranging from industrial and "real economy deliverables" to greater clarity on a third pillar to Banking Union, in the form of the European Deposit Insurance Scheme (EDIS). Importantly, over the longer term, the pipeline has had more technical content on big ticket items added to it since May. The proposal on Eurozone Safe Assets in the form of Sovereign Bond Backed Securities is just one of many items that policymakers are pushing but market participants may not have yet fully spotted all of the opportunities on how to monetize effectively. Importantly, June also marks the end a very successful Bulgarian presidency of the EU Consilium hands over the policymaking reins to Austria. This handover of the the legislative  body that represents the executive governments of the EU Member States is important not only for future EU membership of the Western Balkan jurisdictions but also for existing EU members, such as Bulgaria and Romania, in joining the Eurozone and/or its Banking Union.

All of these EU developments are very much in addition to Theresa May's government still looking to present technical details that are acceptable both to the EU and UK stakeholders on what BREXIT really means.  With the only real certainty on a transition period being that it is only put in place if the divorce deal is agreed and settled in full, market participants, on both sides of the divide, have been reminded by regulatory and supervisory policymakers that there is a need to accelerate their preparatory measures to deal with BREXIT and what that means for their own capabilities but their ability to continue to engage with clients and counterparties. Market participants are also reminded that the timeline on submitting applications to supervisors and that applications need to be full, complete and reflective of the EU and Eurozone authorities specific "Supervisory Principles on Relocations" (SPoRs) and/or other specific supervisory expectations, priorities or approaches on how EU-wide rules are applied within the Banking Union.

We launched our Eurozone Hub with an aim to assist clients in navigating the maze of requirements and seize opportunities in how they operate and engage with clients and counterparties.  For further details on what we do and how we can help please visit: www.dentons.com/en/EurozoneHub

We hope you enjoy this month's addition of our Newsletter. We would be delighted to continue the conversation so please get in touch to subscribe to our thought leadership coverage or for a discussion on how any of these developments may affect your business or that of your clients and/or counterparties.

Read the full newsletter here.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

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