Barclays 2012 Annual Report Download - page 195

The strategic report Governance Risk review Financial review Financial statements Risk management Shareholder information
The BCBS issued the final guidelines on Basel 3 capital and liquidity
standards in December 2010, with revisions to counterparty credit risk
in July and November 2011. It has continued to refine elements of this
package, notably in relation to regulatory liquidity where revisions were
agreed in January 2013 to the definitions of high quality liquid assets
and net cash outflows for the purpose of calculating the Liquidity
Coverage Ratio, as well as establishing a timetable for phasing-in the
standard from January 2016. The requirements of Basel 3 as a whole
are subject to a number of transitional provisions that run to the end of
2018. An assessment of the likely impact of the Basel 3 capital, leverage
and liquidity requirements and the Group response can be found in the
Finance Director’s review, and in the analysis of funding risk in relation
to capital and to liquidity (pages 166-170 and page 174 respectively).
The Group is, however, primarily subject to the EU’s implementation
of the Basel 3 standard through the Capital Requirements Directive
(see below).
The BCBS also maintains a number of active work streams that will
affect the Group. These include a fundamental review of the trading
book where a consultation on enhanced capital standards was issued
in May 2012. Consultations on enhanced standards were also held in
relation to margin requirements for non-centrally cleared derivatives,
capital requirements for exposures to central counterparties, the
management of risks associated with the settlement of foreign
exchange transactions and on the securitisation framework. The results
of this work are expected in 2013. The BCBS is also understood to be
examining a regime for large exposures. These developments may
further increase the capital required by the Group to transact affected
business and/or affect the ability of the Group to undertake
certain transactions.
European Union
The EU continues to develop its regulatory structure in response to
the financial and Eurozone crises. At the December 2012 meeting of
EU Finance Ministers, following the Euro Area Summit of 29 June, it
was agreed to establish a single supervisory mechanism within the
Eurozone. The European Central Bank (ECB) will have responsibility for
the supervision of the most significant Eurozone credit institutions,
financial holding companies or mixed financial holding companies. The
ECB may extend its supervision to institutions of significant relevance
that have established subsidiaries in more than one participating
member state and with significant cross-border assets or liabilities.
It is expected that the single supervisory mechanism will become
operational in 2014.
The European Banking Authority which came into being on 1 January
2011, along with the other European Supervisory Authorities, remains
charged with the development of a single rulebook for the EU as a
whole and with enhancing co-operation between national supervisory
authorities. The European Securities Markets Authority has a similar
role in relation to the capital markets and to banks and other firms
doing investment and capital markets business. The progressive
reduction of national discretion on the part of national regulatory
authorities within the EU may lead to the elimination of prudential
arrangements that have been agreed with those authorities. This may
serve to increase or decrease the amount of capital and other resources
that Barclays is required to hold. The overall effect is not clear and may
only become evident over a number of years. The European Banking
Authority and the European Securities Markets Authority each have the
power to mediate between and override national authorities under
certain circumstances. Responsibility for day-to-day supervision
remains with national authorities and for banks, like the Group, that are
incorporated in countries that will not participate in the single
supervisory mechanism, is expected to remain so.
Basel 3 will be implemented in the EU by amendment to the Capital
Requirements Directive (CRD IV). Formal proposals to amend CRD IV
were adopted by the European Commission in July 2011. These take the
form of a regulation and a directive which are currently going through
the EU legislative process. It had been expected that CRD IV would
enter into force on 1 January 2013. However, delays in the legislative
process mean that this date has been missed and no further
implementation date has been specified. Much of the detailed
implementation is expected to be done through binding technical
standards to be developed by the European Banking Authority, that are
intended to ensure a harmonised application of rules through the EU
but which have yet to be developed. While there may be some
differences between CRD IV and Basel 3, the current expectation is that
the overall impact will be broadly similar.
A significant addition to the EU legislative framework for financial
institutions is the proposal for a Directive establishing a framework for
the recovery and resolution of credit institutions and investment firms.
This proposal is intended to implement many of the requirements of
the FSB’s ‘Key Attributes of Effective Resolution Regimes for Financial
Institutions.’ The proposal would give resolution authorities extensive
powers to ‘bail-in’ liabilities (i.e. write down liabilities or convert them
to equity) and firms would need a minimum percentage of liabilities in
a form that allows them to be subject to ‘bail-in’. The proposal also
requires the development of recovery and resolution plans at group and
firm-level. The proposal sets out a harmonised set of resolution tools
across the EU, including the power to impose a temporary stay on the
rights of creditors to terminate, accelerate or close out contracts. There
are also significant funding implications for financial institutions: the
proposal envisages the establishment of pre-funded resolution funds
of 1% of covered deposits to be built up over 10 years, although the
proposal also envisages that national deposit guarantee schemes may
be able to fulfil this function. The proposal is currently going through
the legislative process and the financial impact on the Group is not
yet clear.
An unrelated proposal to amend the Directive on Deposit Guarantee
Schemes is also being considered, and the linkage that has emerged
with the Recovery and Resolution Directive remains to be clarified. The
proposal on Deposit Guarantee schemes also envisages that national
schemes should be pre-funded, with a fund to be raised over a number
of years. This would be a significant change for UK banks where levies
are currently raised as needed after failure. The proposals remain under
debate and the financial impact on the Group is not yet clear.
In October 2012, a group of experts set up by the European
Commission to consider possible reform of the structure of the EU
banking sector presented its report. Among other things, the group
recommended the mandatory separation of proprietary trading and
other high-risk trading activities from other banking activities. The
European Commission has consulted on the proposals put forward by
this group, but has yet to determine whether it will take these forward
and, if so, how. It is expected that the European Commission will clarify
its intentions later this year.
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