Westminster Business Forum 4th July 2018
Next steps for prudential regulation and financial stability – structural reform, the capital regime and Brexit
Sheri is a guest speaker at Westminster Business Forum
Sam Woods Deputy Governor of the Bank of England is the Guest of Honour
This seminar will discuss the next steps for prudential regulation and financial stability – looking in particular at risk, structural reform and future priorities for the capital regime. It is timed as financial institutions prepare for the introduction of the banking ring-fence and the final Basel III regulatory framework, with delegates considering the likely effectiveness of these significant changes, as well as their implications for the sector’s competiveness and credit exposure. Further sessions will consider the latest priorities for strengthening financial stability and mitigating risks – including the potential risks posed by household debt, P2P lending, digital currencies and Brexit; the future for Solvency II and CRD IV post-Brexit; and the next steps for the counter-cyclical capital buffer and stress testing. For this conference we expect speakers and other delegates to be an informed group including Members of both Houses of Parliament, senior government officials from HM Treasury, Bank of England, PRA and FCA, and other relevant departments involved in this area of policy and regulation, together with representatives from across the financial services sector – including, banks, building societies, insurers, investors, fund managers and FinTechs – as well as academics, trade associations, consultancies, lawyers, consumer groups, think tanks and members of the national and trade media.
Sheri Markose highlights that as UK financial investments are mostly in emerging markets, there is limited direct exposure to the Eurozone. The financial threats come from the fact that the UK clears over 90% of Euro-denominated assets. Italy is the weakest link in the Eurozone with rising bond spreads and threats to their banks from exposures to emerging markets. This could trigger weakness that could also affect French banks, all of which can have negative impacts on the clearing and settlement activities of London banks and institutions like LCH. Would the repo markets that take care of day to day liquidity bear up? She gives conditions of a perfect storm that could result in repo markets to misfire. There is currently shortage of high quality liquid assets (HQLA) in Western financial centres due to QE placing a lot of HQLA in central bank balance sheets and a lot of what is out there is needed by broker dealers as collateral for their clearing and settlement activities. Recent work done by Sheri Markose, Mark Manning et al has shown that the G20 reforms especially of derivatives clearing has made this a highly collateral hungry process.
Joe Cassidy (Senior Partner, KPMG) said that this was one of the best analyses of potential financial risks to the UK economy from Brexit type negative shocks.
The transcript can be downloaded from here. In order to view the transcript, you will need the following password: wfp0894. Sheri Markose’s talk is from page 33.