Nicolas Véron

Financial Statements: Does China Still Want to Attract Global Investors?

In today's episode, I hosted Wang Tao of UBS Investment Bank and PIIE's Nick Lardy to discuss China's policy orientation following the summer's market turmoil.

Tailoring Prudential Policy to Bank Size: analysis for the European Parliament

Together with my Bruegel colleague Alexander Lehmann, we prepared an in-depth analysis on size-based differentiation or "tailoring" of prudential requirements for banks, comparing the structures and policy regimes in the euro area and the United States. Among other findings, we highlight the much greater number of stand-alone smaller banks in the US than in Europe, and advise against further tailoring in the near term in the euro area. 

Download the paper here in case the link above is broken. 

Financial Statements: Setting the Standards for Sustainability-related Reporting

In yesterday's episode of Financial Statements, I hosted Lucrezia Reichlin, Trustee of the International Financial Reporting Standards (IFRS) Foundation, and AssuranceMark founder Samantha Ross, to discuss the IFRS Foundation's ongoing project of establishing an International Sustainability Standards Board.

Brexit and European Finance: Prolonged Limbo

In this article published today by CESifo, I present a summary assessment of the current state of evolution of the European financial system in the wake of Brexit.

Download the article here if the link above is broken. 

Financial Statements: Shoring Up Anti-Money Laundering Supervision in Europe

In the latest Financial Statements session on Wednesday, September 1, I hosted John Berrigan of the European Commission and Joshua Kirschenbaum of the German Marshall Fund to debate the Commission's legislative proposal published in July, which aims at a significant upgrade of the European Union's Anti-Money Laundering (AML) framework. 

Financial Statements: Switzerland's Future as an International Financial Center

In today's session, I discussed ongoing developments affecting Switzerland with Daniela Stoffel of the Swiss Finance Ministry and Daniel Heller of Fnality (and a former PIIE visiting fellow). Themes included the failure of EU-Swiss institutional framework negotiations in May, deleveraging of the two major Swiss banks over recent years, and Swiss leadership in fintech-friendly legislation.

Financial Statements: Africa's Evolving Banking Landscape

This is a belated post on the Financial Statements session I hosted on July 28, with Elsie Addo Awadzi of the Bank of Ghana and Amadou Sy of the International Monetary Fund. 

Financial Statements: Challenges of the Low Interest Rate Era

This is a belated post on the Financial Statements session I hosted on July 14, with Isabel Schnabel of the European Central Bank and Maury Obstfeld of the Peterson Institute and the University of California at Berkeley. 

Financial Statements: Supervising International Clearing Houses

This is a belated post on the Financial Statements session I hosted on June 23, with Klaus Löber of the European Securities and Markets Authority (ESMA) and Tracey Wingate of the Investment Company Institute (ICI). 

Financial Statements: Looking at the Right Capital Flow Numbers

Today's session of Financial Statements was dedicated to the analysis of cross-border capital flows, particularly in the context of China-US financial (de)coupling. The guest speakers were Brent Neiman of Chicago Booth and Joe Gagnon from PIIE. 

Financial Statements: Sustainable Finance Policy Coordination

In today's episode of the Financial Statements series, I hosted Jörg Kukies of the German Federal Finance Ministry and John Morton of the U.S. Treasury Department, to discuss international policy coordination to promote sustainable finance. 

Financial Statements: Hong Kong as an International Financial Center

In yesterday's episode of Financial Statements, I hosted Douglas Arner of Hong Kong University and investor Lorin Gu, to discuss the status and prospects of Hong Kong as an international financial center. 

Financial Statements: The post-Brexit UK financial sector

In yesterday's session, I hosted Katharine Braddick of the UK Treasury and Douglas Rediker of Brookings and International Capital Strategies, to discuss the prospects for the financial industry in the United Kingdom. 

After Orderly Brexit, A New European Financial Landscape Starts to Emerge

This blog post was published on March 11 by Bruegel, and in a slightly modified version (below) on March 19 by the Peterson Institute. 

The United Kingdom’s exit from the European single market on January 1 has sent trade in goods plummeting amid much confusion. By contrast, Brexit was carried out in an orderly manner in the financial sector, despite significant movement of trading in shares and derivatives away from the City of London. After five years of radical uncertainty, it has become clear that the European Union and the United Kingdom will be taking separate paths on financial regulations, a financial “decoupling” that means significant loss of business for the City. Whether the EU financial sector can gain much of what London loses will depend on the European Union’s willingness to embrace further financial market integration.

Smart sequencing ensured orderly Brexit for the financial sector

Like the Y2K problem, the Brexit transition could have gone worse. It took more than luck to avoid financial instability along the way. First, financial firms on both sides of the Channel (and of the Irish Sea) worked hard and were able to pre-empt most of the operational challenges. Second, despite all the recurring high-stakes drama between the UK government and the European Commission, the technical cooperation between the authorities actually in charge of financial stability, primarily the Bank of England and the European Central Bank (ECB), appears to have run smoothly.

Third, the negotiators phased the process in a smart way. The Brexit Withdrawal Agreement of January 2020 helped reduce uncertainty by ensuring that the UK government would meet its financial obligations to the European Union, avoiding what would have been akin to selective default. That agreement kept the United Kingdom in the single market during the transition period beyond the country’s formal exit from the European Union on January 31, 2020. It also set a late-June deadline for the British government to extend the transition period beyond December 31, 2020. As London decided not to do so, that left six months of effective preparation. To be sure, whether an EU-UK Trade and Cooperation Agreement (TCA) would be concluded remained unknown until late December. But that mattered comparatively little for financial services, since trade agreements typically do not cover them much. By one count, the 1,259-page TCA (which is still unratified by the European Union) contains only six pages relevant for the financial sector.

The resulting legal environment for financial services between the European Union and the United Kingdom is unlikely to change much any time soon. Contrary to occasional portrayals in the United Kingdom, no bilateral negotiations on financial services are going on, except for a memorandum of understanding expected this month that is not expected to bind the parties on substance. From the EU perspective, the United Kingdom is now a “third country,” in other words an offshore financial center, following decades of onshore status. UK-registered financial firms have lost the right, or “passport,” to offer their services seamlessly anywhere in the EU single market. From a regulatory standpoint, they have no better access to that market than their peers in other third countries such as Japan, Singapore, or the United States.

The European Commission is unlikely to grant equivalence status to most UK financial market segments any time soon

Some segments of the financial sector in these other third countries actually have better single market access than British ones, because they are covered by a category in EU law allowing direct service provision by firms under a regulatory framework deemed “equivalent” to that in the European Union. The equivalence decision is at the European Commission’s discretion, even though it is based on a technical assessment. As a privilege and not a right, equivalence can be revoked on short notice.

So far the Commission has not granted the United Kingdom any such segment-specific equivalence, except in a time-limited manner for securities depositories until mid-2021 and clearing services until mid-2022. For the moment the Commission appears to be leaning against making the latter permanent. In most other market segments, the Commission will not likely grant equivalence to the United Kingdom in the foreseeable future. This may appear inconsistent with the fact that almost all current UK regulations stem from the existing EU body of law. But the UK authorities (including the Bank of England) have declined to commit to keeping that alignment intact.

The Commission’s inclination to reduce EU dependence on the City of London is understandable. No comparable dependence on an offshore financial center has existed anywhere in recent financial history. Such dependence entails financial stability risk. In a crisis, UK authorities would not necessarily respond in a way that preserves vital EU interests. Think of the Icelandic crisis of 2008, when Reykjavik protected the failing banks’ domestic depositors but not foreign ones. It is hardly absurd for the European Union to try to reduce such a risk, even if—as appears to happen with derivatives—some of the activity migrates from the United Kingdom to the United States or other third countries as a consequence, and not to the European Union.

At the same time, the argument that keeping EU liquidity pooled in London is more efficient than any alternative is unpersuasive given the European Union’s own vast size. In addition, the Commission also follows mercantilist impulses to lure activity away from London, even though these generally do not make economic sense. Added up, these factors provide little incentive for the European Commission to grant equivalence status to more UK financial market segments, unless some other high-level political motives come into play. None are apparent right now.

The UK is unlikely to regain lost advantage in the EU through financial regulatory competition

How the European Union and the United Kingdom will decouple will not be uniform across all parts of the financial system. Regulatory competition between them may become a “race to the bottom” or “to the top,” depending on market segments and the circumstances of the moment, without a uniform pattern. In any case, such labels are more a matter of judgment in financial regulation than in, say, tax competition. In some areas the European Union will be laxer, in others it will be the United Kingdom, as is presently the case between the European Union and the United States. For example, the European Union is more demanding than the United States on curbing bankers’ compensation but easier when it comes to enforcing securities laws or setting capital requirements for banks. At least some forthcoming UK financial regulatory decisions may be aimed at keeping or attracting financial institutions in London, but they are still not likely to offset the loss of passport to the EU single market.

All these permutations suggest that the medium-term outlook for the City of London is unpromising, although the COVID-19 situation makes all quantitative observations more difficult to interpret. Once an onshore financial center for the entire EU single market, and a competitive offshore center for the rest of the world, the City has been reduced to an onshore center for the United Kingdom only and has become offshore for the European Union. That implies a different, in all likelihood less powerful, set of synergies across the City of London’s financial activities.

The few relevant quantitative data points available reinforce this bleak view. Job offerings in British finance, as tracked by consultancy Morgan McKinley, have declined alarmingly since the 2016 Brexit referendum. The ECB (as bank supervisor) and national securities regulators coordinated by the European Securities and Markets Authority are tightening requirements for key personnel to reside mainly on EU territory rather than in the United Kingdom. As noted by Financial Times columnist Simon Kuper, many financial firms’ Brexit policy until this year had been to “sit tight and do nothing until post-Brexit arrangements for finance forced [their] hand.” That phase has ended. Firms that drag their feet face regulatory disruption, as happened to broker TP ICAP in late January. Tussles between regulators and regulated entities, rather than between the European Commission and the UK government, are where most of the financial-sector Brexit action is likely to be in 2021. These disputes typically happen behind closed doors, and the regulators typically hold most of the cards.

For all the optimistic talk in London of “Big Bang 2.0 or whatever,” the United Kingdom’s comparative advantage as the best location for financial business in the European time zone is unlikely to recover to its pre-Brexit level. The macroeconomic losses could be moderated or offset by cheaper currency and less expensive real estate in London, making the city a more attractive place to do nonfinancial business. Even so, a gap will likely remain for the UK government, which has for years depended heavily on financial-sector-related tax revenue.

The European Union stands to gain financial activity as a consequence of Brexit. How much and where is not clear yet. As some analysts had predicted, Amsterdam, Dublin, Frankfurt, Luxembourg, and Paris are the leaders for the relocation of international (non-EU) firms. Dublin and Luxembourg specialize in asset management, Frankfurt in investment banking, and Amsterdam in trading. But EU success in terms of financial services competitiveness and stability will depend on further market integration, the pace of which remains hard to predict. The European banking union is still only half built, because it lacks a consistent framework for bank crisis management and deposit insurance. The grand EU rhetoric on “capital markets union” has yielded little actual reform since its start in 2014. Events like the still-unfolding Wirecard saga may force additional steps toward market integration, even though a proactive approach would be preferable. The one near certainty is that London’s position in the European financial sector will be less than it used to be.

Financial Statements: Will the Euro Area Ever Complete its Banking Union?

In today's session of Financial Statements, I hosted Luis Garicano, Member of the European Parliament, and Jeromin Zettlemeyer, Deputy Director at the International Monetary Fund on leave from the Peterson Institute. We discussed the current state of the banking union project, and prospects for its further reform. 

Financial Statements: Regulating Financial Activities versus Regulating Entities

During today's session I hosted Fernando Restoy, Chairman of the Financial Stability Institute at the Bank for International Settlements in Basel, and Anna Gelpern of Georgetown Law and PIIE. Starting from Mr Restoy's recent paper, we discussed the longstanding debate on activity-based vs entity-based financial regulation, which has been given fresh relevance by the emergence of large tech platform companies as participants in the financial system. 

COVID-19 Credit Support Programmes in Europe’s Five Largest Economies

This week Bruegel published this working paper I co-authored with Julia Anderson and Francesco Papadia, in which we describe and analyze national programs of credit support, mainly via loan guarantees, in France, Germany, Italy, Spain and the UK. This paper presents in much more depth the research that underlies our blog posts on the same theme, in July and September last year. 

Download the paper here in case the above link is broken. 

Financial Statements: Should We Worry about Central Banks Becoming Activist Capital Allocators?

In today's episode of Financial Statements, we revisited the age-old question of how far central banks may venture into discretionary capital allocation, be it for credit support or the fight against global warming. I hosted Stephen Cecchetti, Rosen Family Chair in International Finance at the Brandeis International Business School, and Signe Krogstrup, member of the Board of Governors of the Danish National Bank and a former Visiting Fellow at PIIE. 

Financial Statements: A Holistic Look at Big Tech Regulation

Today in Financial Statements I hosted Hyun Shin (BIS) and Rory MacFarquhar (now at MasterCard and a former PIIE fellow) to discuss the regulation of big tech firms, not least as they enter the financial services space.  

Financial Statements: Post-Brexit Observations on the City of London

In today's episode I hosted William Wright and Nathan Sheets to take stock on the City of London, following the orderly exit of the United Kingdom from the European single market on January 1.