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People and Markets

‘Blast these meddlesome member states!’: Juncker’s revenge – The Rulebook

Did Juncker just shut the Barnier door?

The phrase ‘to shut the barn door after the cow has bolted’ usually refers to taking a preventative action – after the event you wanted to prevent has already happened. This time, though, the EU has shut that door with an eye to making sure the cow stays outside.

At least, that seems to be the way everyone is seeing it. Thing is, the appointment of Michel Barnier to lead the Commission’s ‘Article 50 task force’ is more of a punchy statement by Juncker than a material signal of policy. And Barnier may have copped a worse rap than he deserves.

In the first decision the Commission has made since the UK referendum, President Juncker, who bizarrely called himself ‘the Mufti’ in an internal memo last month, appointed Barnier, a man known as the Commissioner who oversaw the dreaded bankers’ bonus cap, to the lead Brexit post for the Commission.

Barnier is a hardline federalist, and his appointment was perceived by many as Juncker brandishing the EU sword in front of UK negotiators hoping for a lenient deal.

That part is probably true. Juncker is getting increasingly pugilistic, and starting to come across as a Saturday morning cartoon villain. Barnier’s appointment may have been partially made to irk Britain, but it may also have been made to peeve the European parliament.

Member states also have their own Brexit negotiator, appointed only days before Barnier. Didier Seeuws, a 50 year old known for his skill at breaking political deadlocks and for his technical competence, will negotiate the future of the UK’s relationship with the EU.

Juncker’s appointment is seen by some as a means of avenging Parliament’s assertion of importance in appointing Seeuws as Brexit negotiator “on behalf of the European Union,” according to lobbying and consulting group PACT European Affairs. And, in that sense, Juncker may only be making more enemies on his side of the Channel, as well.

But Juncker’s ‘statement’ could well be short lived. Article 50 is light on details, only outlining procedural requirements for an exit from the Union, not substantive ones. And the Commission’s role in Article 50 negotiations is the most undefined and least significant of the three responsible groups — the Council and the Parliament being the other two.

In the words of the parliamentary briefing written in February: “The role of the European Commission in the withdrawal procedure is not entirely clear in the Treaties.” In fact, the Commission’s role is largely to provide recommendations to the Council. As for third countries, the Commission generally takes the lead in negotiations, but the Council can appoint a different negotiator and… is the UK a third country if it hasn’t left the Union yet?

It really comes down to the Council to obtain consent from Parliament to conclude talks via a ‘super qualified majority’ vote. As a side note, British members of the Council can’t be involved in the talks, but MEPs can, and they may also be able to vote on the final agreement, “given the role of MEPs as representing the Union's citizens as a whole and not only those of the Member State in which they were elected,” the briefing says.

So the contribution of Barnier’s task force to negotiations will rely primarily on their technical expertise, of which Barnier has much. And despite his reputation as the man who brought Bank Structural Reform onto the agenda (still lying comatose on parliament’s floor) and for imposing banker bonus caps, some in Brussels feel he’s been misrepresented. After all, the UK enforced ring-fencing on its own banks.

The initiative to cap banker bonuses came from the European Parliament. Indeed, the parliament’s negotiating team was reported to have made the bonus cap part of its conditions for agreeing to other aspects of CRD IV. And, as one Brussels aficionado put it: “Once it was there, no one really wanted to spend political capital on getting it thrown away.”

At the time it was adopted, Barnier was quoted as saying it was “difficult to imagine now that we would scrap this compromise”. Hardly the loaded words of a die-hard banker basher.

Meantime, remainers involved in the financial legislation process are sanguine. Kay Swinburne, who has helped shape MiFID II into something more comprehensible to the City, tweeted: “Barnier's knowledge of the different equivalence regimes in different legislations could be helpful — not going to be one size fits all,” and that the “importance of financial services to future EU-UK relationship made clear by appointment of former Commissioner Barnier.”

PACT European Affairs said of the appointment “the current mentality of the Commission [is] more and more becoming a centre of power for its own benefit,” calling Barnier “a respectable man admittedly, but in the circumstances a bad casting error”.

All in, Barnier’s appointment makes for good blazing headlines, but the City has bigger things to fear. EU laws on single market access are more intransigent than Barnier could possibly be.

Takin’ it ECB-easy

One of the most sensible things to come out of US post-crisis regulation has probably been the CCAR stress tests. Rather than impose strict, quantitative, binding measures on all banks equally and then being compelled to fail them, with serious consequences (even if it comes to light that the yardstick used to measure them is inappropriate) the Federal Reserve has reserved the right to handle tests pretty much how it likes.

The UK has taken a similar approach by having its Pillar 2 requirements split into ‘2A’ and ‘2B’, where the former is required and the second is ‘guidance’ — and when the BoE says ‘guidance’, they say it with the same look a mother of five gives to a wayward teenager.

The UK’s PRA has been a pretty good regulator since the crisis, offering clear guidance and, yes, strict rules, but ones tailored to the UK’s unusual situation of being a country with an outsized financial centre compared to the size of its economy.

So it’s nice to see Europe taking a cue from the two masters of rulemaking. This week, the ECB made official that it will split Pillar 2 capital under its supervisory review into ‘requirements’ and ‘guidance’.

In doing so, the regulator hasn’t only given banks more leeway, it has given more leeway to itself to tailor its conclusions to the assessment of each bank. Having that leeway is even more important than in the US, in some ways, since splitting Pillar 2 up means banks have more room to lose capital before they have to stop paying AT1 coupons and equity disbursements. Fear over that possibility nearly tanked the entire European financial sector in February.

No one hopped in the helicopter and headed toward their rural apocalypse bunkers when they heard the Fed had failed Deutsche Bank for qualitative reasons. But if they were to fail the EBA’s stress test, which is run in conjunction with SREP standards, there would be panic, indeed. Splitting up Pillar 2 has helped to reduce the likelihood of that disaster.

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