Once again, the global financial system has come under the spotlight, with the UK’s wealth management trade lobby group highlighting weaknesses in the EU Financial Regulatory Framework, created in response to the financial crisis. Meanwhile, German-headquartered private bank Berenberg has criticised the European Central Bank ahead of a review on the health status of Europe’s banks to be published next week.

Once again, the global financial system has come under the spotlight, with the UK’s wealth management trade lobby group highlighting weaknesses in the EU Financial Regulatory Framework, created in response to the financial crisis. Meanwhile, German-headquartered private bank Berenberg has criticised the European Central Bank ahead of a review on the health status of Europe’s banks to be published next week.

The Wealth Management Association said the EU Financial Regulatory Framework had not been set up to deal with or forecast any future crises and was built primarily as a reaction to the most recent financial crisis.

In response to the House of Lords EU Economic and Financial Affairs Sub Committee inquiry into the EU Financial Regulatory Framework, the WMA said European institutions tended to be inflexible in their approach to issues and lacked "sufficient coordination procedures to ensure a fully coherent view of outcomes to be achieved and how to get there”.

Liz Field, the WMA's newly-installed chief executive, said that while the current legislative proposals reflected the lessons learnt from the financial crisis, they failed to predict or deal with the causes of the next.

“The EU plays a very significant part in the regulation of the UK’s financial services sector. It is therefore vital we are able to provide constructive feedback on how its output affects our industry and the challenges in the future. Given the number of reforms introduced since the financial crisis, it is imperative we allow these reforms time to work,” said Field.

“We cannot continue to have a conveyor belt of new legislative proposals imposed, especially if the answer to a problem lies in better implementation of those already in place,” she added

The House of Lords EU Sub-Committee on Economic and Financial launched its inquiry into the EU financial regulatory framework in July, with a view to assessing whether it is sufficiently robust to prevent future financial crises.

The WMA also highlighted how many of the reforms implemented since the financial crisis had failed to differentiate between different financial sectors, therefore affecting business areas that did not need reforming.

Other criticisms included the increasing use by EU legislators to use EU-wide regulations rather than directives, which can adversely impact local retail markets and the lack of balance between member states and the EU in regulating and supervising parts of the financial sector.

“While access to wider European markets creates opportunities for retail investors, we need to ensure we have a regulatory system that compliments and encourages such investment, not one that stifles it,” said John Barrass, deputy chief executive of the WMA.

“When legislating on retail markets, we would like to see EU legislators use Directives, which are more appropriate to local markets, not Regulations which may turn out to be inappropriate and a method of applying an unsuitable ‘one-size-fits-all’ approach,” he added.

Stress test

Ahead of the results of Europe’s most comprehensive review on the health status of its banks on Sunday, Berenberg said the stress tests should be judged not by the number of banks that fail or the capital deficit, but by the reaction of key stakeholders and the European Central Bank’s next steps.

“In short, will the ECB’s authority be enhanced or diminished? The market appears relaxed (the bad news is already out there, eg BES; it is just another “stress test”), yet banks may rally further on a benign outcome (the market just wants to buy them),” Berenberg analysts James Chappell and Nick Anderson said in a note.

“We expect such a rally to be short-lived. There is evidence that the ECB has compromised to meet political, bank and market expectations. Thus, the real issues remain unaddressed; as economic weakness drags on, the system’s hidden loan losses (and capital deficit) must crystallise, capping return on equity,” the note continued.

Stress tests assess the resilience of financial institutions to adverse market developments and their ability to withstand a future crisis.

The tests come as the ECB takes over as banking supervisor on 4 November as part of the Single Supervisory Mechanism.

The ECB will publish the results of its stress tests of 130 Eurozone banks on 26 October along with the EBA, which will release its stress test results of 123 EU banks.

The note also questioned the effectiveness of stress tests, arguing they were flawed by design.

“Stress tests are static by design, yet the world they seek to describe is dynamic in nature (as 2008 showed). Moreover, the definition of stress is hugely subjective and thus all tests have to solve backwards from what is deemed an acceptable outcome. We also note inconsistent scenarios,” the note said.

Berenberg believes that a benign comprehensive assessment will likely favour Italian, German and CEE exposed banks, which have underperformed in recent months, while the relative losers will be French, Spanish, Nordic and UK banks.