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Trends in International Banking

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  • 1. Trends in international banking andregulatory challengesSantiago Fernández de LisChief Economist for Financial Systems and RegulationOECD Experts Meeting on Financial ServicesParis, November 30th
  • 2. OECD, Paris 2012Index1. Regulation and global banking2. The trend towards fragmentation3. Macroprudential policies and capital controls4. Banking resolution: a key concern in cross-border banking activities Page 2
  • 3. OECD, Paris 2012Section 1Regulation and global bankingThe strengthening of regulation is necessary, but its wide scope creates uncertaintyon the overall impact . Challenging environment for global banks Minimize Increase banks Mitigate system’s taxpayers’ fiscal solvency complexity/risks burdenBasel IIISIFIsCrisis ManagementStructural reformsOTC derivativesEffective supervisionMacroprudentialOTC derivativesShadow bankingRating AgenciesFinancial taxation
  • 4. OECD, Paris 2012Section 1Regulation and global banking • Basel harmonization based on minimum levels … Core capital ratio (%) Source: BBVA Research based on BIS 14% • … only works in the good times, 12% when there is a race to the bottom 10% in regulation… 8% Basel III 2019 6% Basel III • … but not in the bad times, when 2015 4% there is a race to the top 2% • Risk of exacerbating pro-cyclicality 0% New Zealand 2013 Greece 2012 Brazil India 2017 Austria Switzerland 2019 EBA 2012 México 2012 Spain 2011 Investment UK 2019 RetailUK 2019 Sweden • Asymmetric market discipline and gold-plating Page 4
  • 5. OECD, Paris 2012 Section 1 Regulation and global banking: Impact on EMEs • EMEs affected by reform in home and host countries- • Retrenchment of global banks → risks for financial inclusion in EMEsCapital • Could worsen deleveraging and increase the costs of global banks that operate in EMEsRequirements • Trade finance is penalized by Basel IIILiquidity • Liquidity ratios particularly difficult to implement in EMEsRequirements • Credit rating could penalize sovereign debt of EMEs in consolidated requirementsSIBsRegulation • Could penalize the subsidiary model vs. branch model(domestic and • Coherence between global and local frameworks is not ensuredglobal)Volker Rule • Extraterritoriality(US) • Effects on liquidity of non-US sovereign debt, Page 5
  • 6. OECD, Paris 2012Index1. Regulation and global banking2. The trend towards fragmentation3. Macroprudential policies and capital controls4. Banking resolution: a key concern in cross-border banking activities Page 6
  • 7. OECD, Paris 2012 Section 2 The trend towards fragmentation • Last decade: increase of globalization. Internationally active foreign banks gained importance, especially in LATAM and Eastern Europe … • … but recent signs of a reversal of this trend, partly as a result of the perception of public support and the cost of banking crises: temporary or structural? Regional differences Market share of foreign banks Asset share of foreign banks * Source: IMF Source: IMF 1400 0,40 45 0,35 40 1200 35 0,30 1000 30 0,25 800Number 25 Share 0,20 600 20 0,15 15 400 0,10 10 200 0,05 5 0 0,00 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 Number Share East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa OECD * Claessens, S. and van Horen, N. (2012), “Foreign Banks: Trends, Impact and Financial Stability”, IMF Working Paper No.12/10 Page 7
  • 8. OECD, Paris 2012 Section 2 The trend towards fragmentationThe fragmentation is more worrying in the Eurozone: re-nationalization of financial marketsputs at risk the euro European Banks: Average exposures to EU members (dollars) Collateral used in credit operations (Euro system) (%) Source: BIS Source: ECB 800.000 100% 700.000 Core a Core 90% 600.000 Core a Periféricos 80% 70% 500.000 60% 400.000 50% -41% 300.000 40% 30% 200.000 20% 100.000 -52% 10% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Doméstico Extranjero3 Triggers 1 Market-driven segmentation After LTRO, rise in domestic 2 Rating agencies interbank transactions but drop in cross-border 3 Regulation (mostly moral suasion) Page 8
  • 9. OECD, Paris 2012Section 2The trend towards fragmentation Two tings need to be fixed for global banks to recover their role: 1. Macro prudential policies available to protect EMEs from bubbles originated from excess capital inflows 2. Cross border resolution mechanisms that permit to deal with the failure of global SIBs Page 9
  • 10. OECD, Paris 2012Index1. Regulation and global banking2. The trend towards fragmentation3. Macroprudential policies and capital controls4. Banking resolution: a key concern in cross-border banking activities Page 10
  • 11. OECD, Paris 2012Section 3Macroprudential policies and capital controls• Recent focus of regulatory debates, but more solid analytical framework is needed to design adequate policies• More interesting experience in EMEs • Asia: successful (but intrusive) macroprudential policies • Eastern Europe: mixed results. Late response by the authorities in some cases • Latam: more recent experience, results to be seenEastern Europe: vast increase in credit growth Asia: successful macoprudential policies:• Massive foreign lending through banking system • LTV and DTI limits used to limit housing booms• Mostly channeled to the real estate sector. • Countercyclical buffers• Increasing external indebtedness • Dynamic provisions• Foreign banks relying on centralized funding by • Consistency of the overall policy setting parent institution played a key role (monetary, fiscal and macroprudential• FX mortgages particularly risky. Several • No reliance on foreign indetedness measures adopted, but in some countries too • Lessons from Asian crisis.were learned late Page11
  • 12. OECD, Paris 2012Section 3Macroprudential policies and capital controls Latam: very active use of macroprudential policies in recent years. Results to be seen Time-varying or dynamic Foreign exchange policy foreign currency lending Countercyclical capital Other (including moral Reserve requirements Caps on loan-to-value Caps on debt/loan to Restrictions on profit Caps and taxes on Ceiling on credit or Limits on net open currency positions Limits on maturity TOTAL Score income ratios credit growth provisioning requirement distribution measures* mismatch suasion) ratios BRA 1 0 3 2 2 2 3 3 0 0 3 2 3 BRA CHI 0 0 0 0 0 0 0 0 0 0 1 0 2 CHI COL 0 0 0 0 0 0 0 1 1 0 2 0 3 COL MEX 0 0 0 0 0 0 0 0 2 0 0 0 1 MEX PER 0 0 0 1 0 0 3 1 0 0 2 1 3 PER URU 0 0 0 0 0 0 1 1 2 0 0 0 3 URU 0 has not been used 1 has been rarely used 2 has been used sometimes 3 has been used intensively * Includes, f or example, FX intervention, limits to f oreign investment by pension f unds, limits to f oreign currency purchase by pension f unds, etc. • Macroprudential policies are necessary to deal with credit bubbles • Important (but difficult) to distinguish some macroprudential policies from capital controls • Right calibration and early adoption are key Page 12
  • 13. OECD, Paris 2012Index1. Regulation and global banking2. The trend towards fragmentation3. Macroprudential policies and capital controls4. Banking resolution: a key concern in cross-border banking Page 13
  • 14. OECD, Paris 2012Section 4Resolution is key • Recent cases of cross-border banking crises raise concerns and provide a justification for cross-border barriers … • … especially when huge public funds are injected • Highly complex structure and interconnectedness. Lehman Difficulties is disentangling trades Disorderly bankruptcies must be avoided Brothers • No substitutability. Loss of access to key services, because they can trigger systemic crises such as payment and settlement services Need for international clarification & Icelandic • Problems in foreign branches exceed their home coordination on creditors preference, bail in Banks country’s capacity to offer support and the limits of DGS • No rules for coordination and burden sharing in Specific mechanisms to deal with cross Fortis big cross-border banks (not even in the EU) border resolution in the EU
  • 15. OECD, Paris 2012Section 4Resolution is key • Cross- border resolution seen as too complicated. No agreed burden- sharing mechanisms • Need to clarify rules for resolution of SIBs • Coordination between home-host supervisors and burden sharing agreements • Supervisory Colleges and Crisis Managements Groups • Recent progress: • Towards a resolution framework. Bail in instead of taxpayers money • Recovery and resolution plans (RRPs) • Recent FSB paper: significant progress towards an operational resolution framework. Two models: • Single Point of Entry (SPE) • Multiple Point of Entry (MPE) • Decentralized model of stand-alone subsidiaries more resilient and less prone to contagion (Latam vs CEE). Page 15
  • 16. OECD, Paris 2012Key Messages• The ongoing regulatory reform is necessary to avoid a repeat of the international financial crisis. The proliferation of reforms and the decreasing harmonization in implementation creates, however, uncertainty over the overall impact.• Although designed as a gradual process, the market pressure is introducing a bias towards frontloading adoption. This can have unintended procyclical effects in a context of vulnerability in significant segments of the global financial system.• Emerging markets are subject to the combined impact of reforms in home and host countries which implies a risk for the progress in financial inclusion.• The crisis and the reform are leading to a fragmentation of global financial systems, although with different regional impact. This fragmentation is particularly worrying for the Eurozone.• This environment is challenging for global banks. For them to continue playing a role, progress is necessary in two areas: • Sound macroprudential policies should protect national financial systems from bubbles, in particular those resulting from huge capital inflows. It is important to distinguish these policies from others unduly limiting international capital flows. • Progress in cross-border resolution of international banks is key to limit contagion and for a fair burden sharing of international crises. The decentralized model of stand alone subsidiaries has proven more resilient from the point of view of global financial stability. Page 16
  • 17. Thanks!Santiago Fernández de LisChief Economist for Financial Systems and Regulationsfernandezdelis@bbva.comOECD Experts Meeting on Financial ServicesParis, November 30th