Barclays 2015 Annual Report Download - page 213

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Also in November 2015, Barclays re-adhered to a protocol which was
developed by the International Swaps and Derivatives Association (ISDA)
in coordination with the FSB to support cross-border resolution and
reduce systemic risk. By re-adhering to this protocol Barclays is able, in
ISDA Master Agreements and related credit support agreements, as well
as certain repo and stock lending agreements, entered into with other
adherents, to opt in to different resolution regimes such that cross-
default and direct default rights that would otherwise arise under the
terms of such agreements would be stayed temporarily (and in some
circumstances overridden) on the resolution of one of the parties.
Influence of European legislation
Financial regulation in the UK is to a significant degree shaped and
influenced by EU legislation. This provides the structure of the European
Single Market, an important feature of which is the framework for the
regulation of authorised firms. This framework is designed to enable a
credit institution or investment firm authorised in one EU member state
to conduct banking or investment business through the establishment
of branches or by the provision of services on a cross-border basis in
other member states without the need for local authorisation. Barclays’
operations in Europe are authorised and regulated by a combination of
both home and host regulators.
EU developments
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 it was agreed to establish a single supervisory
mechanism within the Eurozone. The European Central Bank (ECB) has
had responsibility for the supervision of the most significant credit
institutions, financial holding companies or mixed financial holding
companies within the Eurozone since November 2014. The ECB can also
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.
Notwithstanding the new responsibilities of the ECB, the European
Banking Authority (EBA), 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 (ESMA) 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 the Group is required to hold. The overall effect is not
clear and may only become evident over a number of years. The EBA
and ESMA 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 Barclays Bank PLC, that are incorporated in
countries that will not participate in the single supervisory mechanism, is
expected to remain so. Barclays Bank PLC Italian and French branches
are, however, also subject to direct supervision by the ECB.
Basel III and the capital surcharge for G-SIBs have been, or will be,
implemented in the EU by CRD IV. The provisions of CRD IV either
entered into force automatically on, or had to be implemented in
member states by, 1 January 2014. Much of the ongoing and
outstanding implementation is expected to be done through binding
technical standards being developed by the EBA, that are intended to
ensure a harmonised application of rules through the EU, some of which
are still in the process of being developed and adopted.
A significant addition to the EU legislative framework for financial
institutions has been the Bank Recovery and Resolution Directive (BRRD)
which establishes a framework for the recovery and resolution of EU
credit institutions and investment firms. The BRRD is intended to
implement many of the requirements of the FSB’s ‘Key Attributes of
Effective Resolution Regimes for Financial Institutions’. The BRRD
entered into force in July 2014. All of the provisions of the BRRD had to
be implemented in the law of EU Member States by 1 January 2015
except for those relating to bail-in which had to be implemented in
Member States by 1 January 2016.
As implemented, the BRRD gives resolution authorities powers to
intervene in and resolve a financial institution that is no longer viable,
including through the transfers of business and, when implemented in
relevant member states, creditor financed recapitalisation (bail-in within
resolution) that allocates losses to shareholders and unsecured and
uninsured creditors in their order of seniority, at a regulator determined
point of non-viability that may precede insolvency. The concept of bail-in
will affect the rights of unsecured creditors subject to any bail-in in the
event of a resolution of a failing bank.
The BRRD also requires competent authorities to impose a ‘Minimum
Requirement for own funds and Eligible Liabilities’ (‘MREL’) on financial
institutions to facilitate the effective exercise of the bail-in tool referred
to above. This will have to be co-ordinated with the FSB’s TLAC
standards mentioned above and, as set out in more detail below, the
BoE has stated that MREL for UK G-SIBs will be set consistently with
those standards. The BRRD also requires the development of recovery
and resolution plans at group and firm level. The BRRD 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, which include the establishment of
pre-funded resolution funds of 1% of covered deposits to be built up
over 10 years, although the proposal envisages that national deposit
guarantee schemes may be able to fulfil this function (see directly
below). The UK Government uses the bank levy to meet the ex ante
funding requirements set out in the BRRD.
The Directive on Deposit Guarantee Schemes provides that national
deposit guarantee schemes should be pre-funded, with the funds to be
raised over a number of years. The funds of national deposit guarantee
scheme are to total 0.8% of the covered deposits of its members by the
date 10 years after the entry into force of the recast directive. In the UK,
the pre-funding requirements of the UK Financial Services
Compensation Scheme are met through the bank levy.
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
issued proposals to implement these recommendations in January 2014.
These proposals would apply to institutions that have been identified as
G-SIBs under CRD IV and envisage, among other things: (i) a ban on
proprietary trading in financial instruments and commodities; and (ii)
rules on the economic, legal, governance, and operational links between
the separated trading entity and the rest of the banking group.
Contemporaneously, the European Commission also adopted proposals
to enhance the transparency of shadow banking, especially in relation to
securities financing transactions. These proposals have still yet to be
considered formally by the European Parliament and by the Council.
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