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Basel 3

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Basel iii Compliance Professionals Association (BiiiCPA) …

Basel iii Compliance Professionals Association (BiiiCPA)
http://www.basel-iii-association.com

The Basel iii Compliance Professionals Association (BiiiCPA) is the largest association of Basel iii Professionals in the world. It is a business unit of the Basel ii Compliance Professionals Association (BCPA), which is also the largest association of Basel ii Professionals in the world.

Receive (at no cost) the New Member Orientation newsletters:
http://www.basel-iii-association.com/New_Member_Orientation_Newsletters.html

Subscribe to Receive (at no cost) Basel II / Basel III Related News, Alerts, Opportunities, Updates, our Monthly Newsletter and Limited Time Offers for our Basel II / Basel III Training and Certification Programs:
http://forms.aweber.com/form/42/1586130642.htm

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  • 1. 1Basel iii Compliance ProfessionalsAssociation (BiiiCPA)1200G Street NW Suite800Washington, DC 20005-6705USA Tel:202-449-9750Web: www.basel-iii-association.comDear Member,Todaywewill start from the disclosurerequirementson thecompositionof banks capital.Composition of capital disclosure requirements- RulestextJune2012TheBasel Committeeon BankingSupervisionhaspublisheda set ofdisclosurerequirementson thecomposition of banks capital.During the financial crisis, marketparticipantsand supervisorswerehampered in their effortsto undertakedetailed assessmentsof banks capitalpositionsand make cross-jurisdictionalcomparisons.Thesource of this difficultywasinsufficientlydetailed disclosurebybanksand a lack of consistencyinreporting betweenbanksand acrossjurisdictions.Thislackofclaritymayhavecontributedtouncertaintyduring the financial crisis.Thedisclosurerequirementsaim toimprove market disciplinethroughenhancingboth transparencyand comparability.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 2. 2Composition of capital disclosure requirementsIntroductionDuring the financial crisis, many market participantsand supervisorsattempted to undertake detailed assessmentsof thecapital positionsofbanksand comparisonsof their capital positionson a crossjurisdictionalbasis.Thelevel of detail of thedisclosureandthelack of consistencyin thewaythat it wasreported typically madethis taskdifficult and oftenmade itimpossibletodo withanyaccuracy.It is often suggestedthat lack of clarity on thequalityof capitalcontributedtouncertaintyduring thefinancial crisis.Furthermore, the interventionscarried out by the authoritiesmay havebeen more effectiveif capital positionsof the banksweremoretransparent.Toensurethat banksback their risk exposureswithahigh qualitycapitalbase,Basel III introduceda set of detailed requirementsto raise thequalityand consistencyof capital in thebankingsector.In addition, Basel III establishedcertainhigh level disclosurerequirementstoimprove transparencyof regulatory capital and enhancemarket disciplineand noted that more detailed Pillar 3 disclosurerequirementswouldbe forthcoming.This document setsout thesedetailed requirements.Toenablemarket participantsto compare thecapital adequacyof banksacrossjurisdictionsit is essential that banks disclosethefull list ofregulatorycapital itemsand regulatory adjustments.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 3. 3In addition, toimproveconsistencyandeaseofuseofdisclosuresrelatingtothe composition of regulatory capital, and tomitigatethe risk ofinconsistent formatsunderminingtheobjectiveof enhanced disclosure,theBasel Committeehas agreed that internationally-activebanksacrossBasel member jurisdictionswill be required to publish their capitalpositionsaccordingtocommon templates.Therequirementsare set out in thefollowing5sections:Section 1:Post 1January 2018disclosure templateAcommon templateisestablishedthat banksmust usetoreport thebreakdown of their regulatory capital whenthe transitionperiod for thephasing-in of deductionsendson 1January 2018.It is designed tomeet the Basel III requirement todiscloseall regulatoryadjustments,includingamountsfallingbelow thresholdsfor deduction,andthusenhanceconsistencyand comparability in thedisclosureof theelementsof capital betweenbanksand acrossjurisdictions.This template may beused in advanceof 1January 2018in certaincircumstances, whichare set out in Section 1.Section 2: reconciliation requirementsA3 step approachfor bankstofollowis establishedtoensurethat theBasel III requirement toprovidea full reconciliation of all regulatorycapital elementsback tothepublishedfinancial statementsismet in aconsistent manner.This approach is not based on a common template becausethe startingpoint for reconciliation, the bank‟sreportedbalancesheet, will varybetweenjurisdictionsdue to the application of different accountingstandards.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 4. 4Section 3: main features templateA common template is established that banks must use to meet the BaselIII requirement to provide a description of the main features of regulatorycapital instrumentsissued.Section 4: other disclosure requirementsThis section setsout what banks must doto meet theBasel IIIrequirement to provide the full termsand conditionsof regulatorycapitalinstrumentson their websitesand the requirement toreport thecalculationof any ratiosinvolving componentsof regulatorycapital.Section 5: template during the transitional periodThis section requiresbanks to usea modified version of the post 1January 2018templatein Section 1duringthetransitional phase.This template isestablishedtomeet theBasel III requirement for bankstodisclosethecomponentsof capital that arebenefiting from thetransitional arrangements.Implementation date and frequency of reportingNational authoritieswill giveeffect tothedisclosurerequirementsset outin this document by nolater than 30June2013.Banks will be required to comply withthe disclosurerequirementsfromthedateofpublicationoftheirfirstset offinancialstatementsrelatingtoabalancesheet date on or after30June2013(with theexceptionof thePost1January2018template set out in Section 1).Furthermore, except asrequired in paragraph 7, banksmust publish thisdisclosurewith the same frequencyas,and concurrent with, thepublication of their financial statements,irrespectiveof whetherthefinancial statementsare audited(ie disclosurewill typically be quarterlyor half yearly).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 5. 5In the caseof themain featurestemplate(Section 3) and provision of thefull terms and conditionsof capital instruments(Section 4), banksarerequiredtoupdatethesedisclosureswheneveranewcapitalinstrument isissuedand includedin capital and wheneverthere is a redemption,conversion/ write-downor other material changein thenature of anexistingcapital instrument.Under Pillar 3, large banksare required tomake certain minimumdisclosureswithrespect tocertaindefinedkeycapitalratiosandelementson a quarterlybasis,regardless of the frequencyof financial statementpublication.Thedisclosureof key capital ratios/elementsfor thesebankswillcontinueto be required under Basel III.Banks‟ disclosures required by this document must either be included inbanks‟published financial statementsor, at a minimum, these statementsmust provide a direct link tothe completed disclosure on their websitesoron publicly availableregulatory reports.Banks must alsomake availableon their websites, or through publiclyavailableregulatoryreports, an archive (for a suitableretention perioddetermined bytherelevant national authority) of all templatesrelatingtoprior reportingperiods.Irrespectiveof thelocation of thedisclosure (published financial reports,bank websitesor publicly available regulatory reports), all disclosuresmust be in the format required bythis document.Section 1:Post 1January 2018disclosure templateThecommon template that theBasel Committeehasdevelopedisset outin Annex 1, alongwith an explanationof itsdesign.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 6. 6Thetemplateis designedto capture thecapital positionsof banksafterthetransition period for the phasing-inof deductionsendson 1January2018andmust beusedbybanksforreportingperiodsonorafterthisdate.If a jurisdictionpermitsor requires itsbankstoapplythe full Basel IIIdeductionsin advanceof 1January 2018(ie doesnot phase-inthedeductionsor acceleratesthephase-in period of deductions),it canpermitorrequire itsbankstousethetemplateinAnnex 1asanalternativetothetransitional templatedescribed in Section 5 from the date of applicationofat least the full Basel III deductions.In such casesthe relevant banksmust clearlydisclosethat theyare usingthistemplatebecausetheyarefullyapplying the Basel III deductions.Section 2: Reconciliation requirementsThis section setsout a common approach that banksmust followtocomplywiththerequirement of paragraph 91of theBasel III rulestext, which statesthat banks should disclose“a full reconciliationof allregulatorycapital elementsback tothebalancesheet in theauditedfinancial statements.”This requirement aimsto addressthe problem that at present there is adisconnect in manybanks‟disclosurebetweenthenumbersused for thecalculationof regulatory capital and thenumbersusedin thepublishedfinancial statements.Banks are required totake a 3 step approach toshowthe link betweentheir balancesheet in their publishedfinancial statementsand thenumbersthat are used in the compositionof capital disclosuretemplateset out in Section1.The3 stepsrequire banks to:Step 1: Disclosethereported balancesheet under the regulatoryscope ofconsolidation.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 7. 7Step 2: Expand thelinesof thebalancesheet under the regulatoryscopeof consolidation to displayall of thecomponentsthat areused in thecomposition of capital disclosure template.Step 3: Map eachof the componentsthat aredisclosedin Step 2 tothecomposition of capital disclosure templateset out in Section 1.The3 step approach outlinedbelow is designed to offer the followingbenefits:Thelevel of disclosureis proportionate, varying withthecomplexityof thebalancesheetofthereportingbank (iebanksarenot subjecttoafixedtemplate that is designedtofit themost complex banks.Abank can skip a step if there is nofurther information addedby thatstep).Market participants and supervisors can trace the origin of the elementsof the regulatory capital back to their exact location on the balance sheetunder the regulatory scopeof consolidation.Theapproach is flexibleenough to be used under anyaccountingstandard: firms are required tomap all the componentsof theregulatorycapital disclosure templatesback to the balance sheet under theregulatoryscope of consolidation, regardlessof whether the accountingstandardsrequire the sourceto be reportedon the balancesheet.Step 1:Disclose the reported balance sheet under the regulatoryscope of consolidationThescope of consolidationfor accountingpurposesand for regulatorypurposesare oftendifferent.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 8. 8This factor often explains much of the difference between the numbersused in the calculation of regulatory capital and the numbers used in abank‟spublished financial statements.Therefore,akeyelement in anyreconciliationinvolvesdisclosinghowthebalancesheet in thepublishedfinancial statementschangeswhen theregulatoryscope of consolidation is applied.Step 1is illustrated inAnnex 2.If the scope of regulatory consolidation and accounting consolidation isidentical for a particular banking group, it would not need to undertakeStep 1.The banking group could simply state that there is no difference betweenthe regulatory consolidation and the accounting consolidation and movetoStep 2.In additiontoStep 1, banks are required to disclosethe list the legalentitiesthat are included within accountingscope of consolidationbutexcludedfrom the regulatoryscope of consolidation.This will better enablesupervisorsand market participantstoinvestigatetherisksposedby unconsolidatedsubsidiaries.Similarly, banks arerequiredtolist thelegal entities included in theregulatoryconsolidationthat are not included in the accountingscope ofconsolidation.Finally, if some entitiesare included in both the regulatoryscope ofconsolidationand accounting scope of consolidation, but themethod ofconsolidationdiffersbetweenthese twoscopes, banks are required to listtheselegal entitiesseparatelyand explain thedifferencesin theconsolidationmethods.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 9. 9Regardingeach legal entitythat isrequired to bedisclosedbythisparagraph, banksmust alsodiscloseitstotal balancesheet assetsandtotal balancesheet equity (asstated on the accountingbalancesheet ofthelegal entity) and a description of the principleactivitiesof the entity.Step 2: Expand the linesof the regulatory balance sheet todisplay all of the components used in the definition of capitaldisclosure templateMany of the elementsused in the calculationof regulatory capital cannotbereadily identifiedfrom theface of thebalancesheet.Therefore,banksshould expand therowsof theregulatory-scope balancesheet such that all of the componentsused in thecompositionof capitaldisclosuretemplate(described in Section 1) are displayed separately.For example, paid-inshare capital maybe reported asone lineon thebalancesheet.However,someelementsof thismay meet therequirementsfor inclusionin Common EquityTier 1(CET1) and other elementsmay onlymeet therequirementsforAdditional Tier 1(AT1) or Tier 2 (T2), or may not meettherequirementsfor inclusionin regulatorycapital at all.Therefore, if the bank hassome paid-in capital that feedsintothecalculationof CET1 and some that feedsintothe calculationofAT1, itshould expand the„paid-in sharecapital‟lineof thebalancesheet in thefollowingway(alsoillustrated inAnnex 2(step 2)):In addition, asillustratedabove, each element of theexpanded balancesheet must be given a referencenumber/letter for usein Step 3.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 10. 10Asanotherexample,oneoftheregulatoryadjustmentsisthedeductionofintangibleassets.While at first it mayseem asif thiscan be taken straight off the face of thebalance sheet, there are a number of reasonswhy this is unlikely to be thecase.Firstly, the amount on the balancesheet may combine goodwill, otherintangiblesand mortgage servicesrights.MSRsare not to bededucted in full (theyare instead subject to thethreshold deduction treatment).Secondly, the amount tobe deducted is net of any relateddeferred taxliability.This deferred tax liability will be reported on the liabilitysideof thebalancesheet and is likely tobe reportedin combination withotherdeferred tax liabilitiesthat havenorelationto goodwill or intangibles.Therefore, thebank should expand thebalancesheet in the followingway:Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 11. 11It is important to note that banks will only need to expand elementsof thebalance sheet to the extent that thisis necessary to reach the componentsthat are usedin thecomposition of capital disclosure template.So, for example, if all of the paid-incapital of thebank met therequirementstobeincludedin CET1,thebank wouldnot needtoexpandthisline.Thelevel of disclosureis proportionate, varying withthe complexityofthebank‟sbalancesheet and itscapital structure.Step 2 is illustratedinAnnex 2.Step 3: Map each of the componentsthat are disclosed in Step 2to the composition of capital disclosure templatesWhen reportingthedisclosuretemplate, describedin Section1andSection 5, the bank isrequired to usethereference numbers/ lettersfromStep 2 toshow the source of every input.For example, thecomposition of capital disclosure templateincludestheline“goodwill net of relateddeferred tax liability”.Next to thedisclosureof this item in thedefinitionof capital disclosuretemplatethebank shouldput “a–d” toillustratehowthesecomponentsofthebalancesheet under theregulatory scope of consolidation have beenused to calculatethisitem in the disclosuretemplate.Additional comments on the 3 step approachTheBasel Committeeconsidered requiringbanks touse a commontemplatetodisclosethereconciliationbetweenbanks‟balancesheetsandtheir regulatorycapital.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 12. 12However,it doesnot feel that this wouldbe possibleat thisstage giventhat banksbalancesheetsare not reported in a common wayacrossjurisdictionsdue to the application of different accountingstandards.Withina singlejurisdiction, theuse of a common templatemay bepossible.Therefore,therelevant authoritiesmaydesignacommon templatethat isconsistent withthe 3step approach set out above and require banksusethisin order toachievegreaterconsistencyin thewaythe3stepapproachis implementedwithin their jurisdiction.Section 3: Main features templateBasel III requiresbanks todisclosea descriptionof the mainfeaturesofregulatorycapital instrumentsissued.While bankswill alsobe required tomake availablethe full termsandconditionsof their regulatory capital instruments(see section 4), thelength of thesedocumentsmakes the extractionof the key featuresaburdensome task.Theissuingbank is better placedtoundertake thistask than marketparticipantsandsupervisorsthat want anoverviewof thecapital structureof the bank.Basel II Pillar 3 guidancealreadyincludesa requirement that banksprovidequalitativedisclosure that setsout “Summary information on thetermsand conditionsof themain featuresof all capital instruments,especiallyin thecaseof innovative, complex or hybrid capitalinstruments.”However,the BaselCommitteehasfound that thisBasel II requirementis not met in a consistent waybybanks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 13. 13Thelackof consistencyinboth thelevelof detail providedandtheformatof the disclosuremakes the analysisand monitoringof this informationdifficult.To ensure that banksmeet the Basel III requirement to disclose the mainfeatures of regulatory capital instruments in a consistent and comparableway, banks are required tocompletea „main featurestemplate‟.This template representsthe minimum level of summarydisclosurethatbanksare required toreport in respect of each regulatory capitalinstrument issued.Thetemplateis set out inAnnex 3of thisreport, along witha descriptionof each of the itemstobe reported.Somekey pointstonote about thetemplate are:- It hasbeen designed to be completed by banksfrom when theBaselIII frameworkcomesintoeffect on 1January 2013.It thereforealsoincludesdisclosurerelatingto instrumentsthat aresubjecttothetransitional arrangements.- Banks are required toreport each regulatorycapitalinstrument, includingcommon shares, in a separatecolumnof thetemplate, such that the completed templatewouldprovide a „mainfeaturesreport‟that summarisesall of theregulatorycapitalinstrumentsof thebankinggroup.- Thelist of main featuresrepresentsa minimum level of requiredsummarydisclosure.In implementingthisminimum requirement, each BaselCommitteemember authorityisencouraged toadd tothis list if therearefeaturesthat it isimportant todisclosein the context of thebanks theysupervise.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 14. 14- Banks are required tokeepthecompleted main featuresreportup-to-date, such that the report isupdated and made publiclyavailablewhenevera bank issuesor repaysa capital instrument andwheneverthere isa redemption, conversion/ write-downor othermaterial changein thenature of an existingcapital instrument.- Given that thetemplate includesinformation on theamountrecognisedin regulatory capital at the latest reporting date, themainfeaturesreport should either be included in the bank‟spublishedfinancial reportsor, at a minimum, thesefinancial reportsmustprovidea direct link towherethe report can be found on the bank‟swebsiteor publicly availableregulatoryreporting.Section 4: Other disclosure requirementsIn additiontothedisclosurerequirementsset out in Sections1to 3, andaside from thetransitional disclosurerequirementsset out in Section 5,theBaselIII rulestext makesthefollowingrequirementsinrespectof thecomposition of capital:Non-regulatory ratiosBanks whichdiscloseratiosinvolvingcomponentsof regulatory capital(eg“Equity Tier 1”, “Core Tier 1” or “TangibleCommon Equity” ratios)must accompanysuch disclosureswitha comprehensive explanationofhowtheseratiosarecalculated.Full termsand conditionsBanks are required tomake availableon their websitesthe full terms andconditionsof all instrumentsincludedin regulatory capital.Therequirement for banksto make available the full termsandconditionsof regulatorycapital instrumentson their websiteswill allowmarket participantsand supervisorstoinvestigatethe specificfeaturesofindividual capital instruments.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 15. 15An additional related requirement isthat all banksmust maintain aRegulatoryDisclosuressection of their websites, whereall of theinformation relatingto disclosureof regulatory capital is made availabletomarket participants.In caseswheredisclosurerequirementsset out in this document are metvia publicationthrough publicly availableregulatory reports, theregulatorydisclosuressection of thebank‟swebsiteshould providespecific linksto therelevant regulatoryreportsthat relateto thebank.This requirement stemsfrom the supervisory experiencethat, in manycases,thebenefit of Pillar 3 disclosuresisseverely diminished by thechallengeof findingthedisclosurein the first place.Ideallymuch of the information that wouldbe reported in theRegulatoryDisclosuressectionof the websitewouldalsoincluded in thepublishedfinancial reportsof thebank.TheBasel Committeehasagreed that, at minimum, thepublishedfinancialreportsmust direct userstotherelevant sectionof their websiteswherethe full set of required regulatorydisclosureisprovided.Section 5: Template during the transitional periodTheBaselIII rulestext statesthat: “During the transition phasebanksare required todisclosethespecific componentsof capital, includingcapital instrumentsand regulatoryadjustmentsthat are benefitingfromthetransitional provisions.”Thetransitional arrangementsfor Basel III phasein the regulatoryadjustmentsbetween1January 2014and 1January 2018.Theyrequire20% of theadjustmentstobemadeaccordingtoBaselIII in2014,withthe residual subject to existingnational treatment.In 2015thisincreasesto40%, and soon, until thefull amountof theBaselIII adjustmentsare applied from 1January 2018.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 16. 16Thesetransitionalarrangementscreatean additional layer of complexityin thedefinitionof capital in theperiod between1January 2013and 1January2018,especiallyduetothefactthat existingnationaltreatmentsoftheresidual regulatory adjustmentsvary considerably.This complexitysuggeststhat there wouldbe particular benefits insettingout detaileddisclosurerequirementsduring thisperiod to ensurethat banksdonot adopt different approachesthat make comparisonsbetweenthem difficult.This section of thecomposition of capital disclosure rules text aimstoensure that disclosure during the transitional periodisconsistent andcomparable acrossbanksin different jurisdictions.Banks will be required tousea modified version of the Post 1January 2018Disclosure Template, set out in Section 1, in a way that captures existingnational treatmentsfor the regulatory adjustments.Theuse of a modified version of the Post 1January 2018DisclosureTemplate, rather than thedevelopment of a completelyseparate set ofreporting requirements, should help to reducesystemscostsfor banks.Thetemplateis modified in justtwoways:(1)An additional column indicatesthe amountsof the regulatoryadjustmentsthat will be subjectto theexistingnational treatment;and(2)Each jurisdictionwill insert additional rowsin four separate placestoindicatewherethe adjustment amountsreported in the added columnactuallyaffect capital during thetransition period.Themodificationstothetemplateareset out inAnnex 4,alongwithsomeexamplesof how thetemplate will workin practice.Banksarerequiredtousethetemplate for all reportingperiodsonor aftertheimplementationdate set out inparagraph5, and banksarerequiredtoBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 17. 17report thetemplatewith the same frequencyasthepublicationof theirfinancial statements(typically quarterly or half yearly).Annex 1Post 1January 2018 Disclosure TemplateKey pointsto note about the template set out in thisAnnex are:- Thetemplateis designedtocapture thecapital positionsof banksafter the transition period for the phasing-in of deductionsendson 1January 2018(thetemplatefor banks to usetoreport their capitalpositionsduring this transitional phase is set out in Section 5).- Certainrowsarein italics. Theserowswill be deletedafter all theineligiblecapital instrumentshave beenfully phased out (ie from 1January 2022onwards).- Thereconciliationrequirementsincluded in Section 2result in thedecompositionof certain regulatoryadjustments.For example, thedisclosuretemplatebelowincludestheadjustment„Goodwill net of relatedtax liability‟.Therequirementsin Section 2 will lead tothedisclosureof both thegoodwill component and the relatedtax liabilitycomponent of thisregulatoryadjustment.- Regardingthe shading: Each dark grey row introducesa new sectiondetailing a certain component of regulatorycapital.Thelight greyrowswithnothickborderrepresent thesum cellsin therelevant section.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 18. 18Thelight grey rowswithathick border showthemain componentsofregulatorycapital and the capital ratios.- Also providedbelowisatablethat setsout anexplanationof eachlineof the template, withreferencesto the appropriateparagraphsof theBasel III text.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 19. 19Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 20. 20Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 21. 21Set out inthefollowingtableisanexplanationofeachrowof thetemplateabove.Regardingthe regulatoryadjustmentsbanksare required toreportdeductionsfrom capital aspositive numbersand additionsto capital asnegativenumbers.Forexample,goodwill (row8) shouldbereportedasapositivenumber, asshouldgainsduetothechangeintheowncredit riskofthebank (row14).However,lossesdue to the changein theowncredit risk of thebankshould be reported asa negativenumber astheseareaddedback in thecalculationof Common Equity Tier 1.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 22. 22Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 23. 23Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 24. 2441. In general, to ensure that the common templates remain comparableacross jurisdictions there should be no adjustments to the version banksusetodisclosetheir regulatory capital position.However,the followingexceptionsapplyto take account of languagedifferencesand toreduce the reportingof unnecessaryinformation:Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 25. 25- Thecommon template and explanatorytableabove can be translatedbythe relevant national authoritiesintothe relevant nationallanguage(s) that implement the Basel standards.Thetranslated version of the template will retain all of the rowsincludedthe templateabove.- Regardingthe explanatorytable, thenational version can referencethenational rulesthat implement therelevant sectionsof Basel III.- Banks arenot permitted to add, deleteor changethedefinitionsofanyrowsfrom thecommon reportingtemplateimplementedin theirjurisdiction.This will prevent adivergence of templatesthat could underminetheobjectivesof consistencyand comparability.- This national version of the templatewill retain thesame rownumberingused in the first column of thetemplateabove, such thatmarket participantscan easily map thenational templatestothecommon version above.However,the common template includescertainrowsthat referencenational specific regulatory adjustments(row 26, 41, and 56).Therelevant national authorityshould insert rowsafter each of thesetoproviderowsfor bankstodiscloseeach of the relevant nationalspecific adjustments(withthetotalsreported in rows26, 41and 56).Theinsertion of anyrowsmust leavethe numberingof the remainingrowsunchanged, eg rowsdetailingnational specific regulatoryadjustmentstocommon equityTier 1couldbelabelledRow26a,Row26b etc, toensure that the subsequent row numbers arenot affected.- In caseswherethenational implementation of Basel III applies amore conservativedefinition of an element listedin thetemplateBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 26. 26above, national authoritiesmay choosebetweenone of twoapproaches:Approach 1: in thenational version of thetemplatemaintain thesamedefinitionsof all rowsasset out in the templateabove, and requirebanksto report the impact of the more conservativenational definitionin thedesignatedrowsfor national specific adjustments(ie row 26,row 41,row 56).Approach 2: in thenational version of the templateusethedefinitionsof elementsasimplementedinthat jurisdiction, clearlylabellingthemasbeing different from the Basel III minimum definition, and requirebanksto separatelydisclosethe impact of each of thesedifferentdefinitionsin thenotestothe template.Theaim ofbothapproachesistoprovideall theinformationnecessarytoenablemarket participantstocalculate thecapital of bankson acommon basis.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 27. 27Annex 2Illustration of the 3 step approachto reconciliationStep 1Under Step 1banksare requiredto taketheir balancesheet in theirpublishedfinancial statements(numbersreported themiddlecolumnbelow, in a balancesheet that isprovidedfor illustrative purposes) andreport thenumberswhenthe regulatory scopeof consolidationis applied(numbersreported in the right hand column below of the illustrativebalancesheet).If there are rowsin the balancesheet under theregulatory scope ofconsolidationthat are not present in thepublishedfinancialstatements,banksare required toadd theseand givea value of zero inthemiddlecolumn.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 28. 28Step 2Under Step 2banksare required toexpandthe balancesheet under theregulatoryscope of consolidation (revealedin Step 1) to identify all theelementsthat are used in the definitionof capital disclosuretemplate setout inAnnex 1.Set out below are some examplesof elementsthat may need to beexpanded for a particular banking group.Themore complex the balancesheet of thebank, themore itemswouldneed to be disclosed.Each element must be given a referencenumber / letter that can be usedin Step3.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 29. 29Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 30. 30Step 3UnderStep 3banksarerequiredtocompleteacolumnaddedtothepost 1January 2018disclosure templatetoshow the source of everyinput.For example, thePost 1January 2018DisclosureTemplateincludestheline“goodwill net of related deferred tax liability”.Next to thedisclosureof this item in thetemplate thebank wouldberequiredto put “a–d” toshow that row 7 of the template hasbeencalculatedasthedifferencebetweencomponent “a” of thebalancesheetunder the regulatory scopeof consolidation, illustratedin step 2, andcomponent “d”.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 31. 31Annex 3Main featurestemplateSet out below isthetemplate that banksmust usetoensure that the keyfeaturesof all regulatory capital instrumentsare disclosed.Banks will be required to completeall of theshaded cellsfor eachoutstandingregulatory capital instrument (banks should insert “NA” ifthequestion is not applicable).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 32. 32Thistemplate wasdeveloped in a spreadsheetthat will be made availabletobanks on theBasel Committee‟swebsite.Tocompletemost of thecellsbankssimplyneed toselect an option froma drop down menu.Usingthe referencenumbersin theleft column of the tableabove, thefollowingtable providesa more detailedexplanation of what banksarerequiredto report in each of the grey cells,including, whererelevant, thelist of optionscontainedin thespreadsheet‟sdrop down menu.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 33. 33Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 34. 34Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 35. 35Annex 4Disclosuretemplate during the transition phaseThetemplatethat banksmust useduringthetransitionphaseisthesameasthe Post 1January 2018disclosure template set out in Section 1exceptfor the followingadditions(all of whichare highlighted in the templatebelowusing cellswithdotted borders and capitalisedtext):- Anew column hasbeen added for banksto report the amount of eachregulatoryadjustment that is subject totheexistingnational treatmentduring thetransitionphase(labelledasthe “pre-BaselIII treatment”).Example1: In 2014bankswill be required to make 20% of theregulatoryadjustmentsin accordancewith BaselIII.Considera bank with“Goodwill, net of related tax liability” of $100mnand assume that thebank isin a jurisdiction that doesnot currentlyrequirethis tobe deducted from common equity.Thebank willreport$20mnin thefirst ofthetwoemptycellsinrow8andreport $80 mn in thesecond of thetwocells.Thesum of thetwocellswill thereforeequal thetotal BaselIII regulatoryadjustment.- While thenew column showsthe amount of each regulatoryadjustment that issubject to the existingnational treatment, it isnecessarytoshowhow this amount isincludedunder existingnational treatment in the calculationof regulatory capital.Therefore,new rowshave been added in each of thethree sectionsonregulatoryadjustmentstoalloweach jurisdictionto set out theirexistingnational treatment.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 36. 36Example2:Assume that thebank describedinthebullet point aboveisina jurisdictionthat currentlyrequiresgoodwill to be deductedfrom Tier 1.This jurisdictionwill insert a new row in betweenrows41and 42, toindicatethat duringthe transition phasesome goodwill will continuetobedeductedfrom Tier 1(in effectAdditional Tier 1).The$80mn that thebank had reportedin the last cell of row 8, will thenneed to be reported in this new row insertedbetweenrows41and 42.In additiontothe phasing-inof some regulatoryadjustmentsdescribedabove, the transitionperiod of Basel III will in some casesresult in thephasing-out of previousprudential adjustments.In thesecasesthe new rowsadded in eachof thethree sectionsonregulatoryadjustmentswill be used by jurisdictionsto set out theimpactof thephase-out.Example3: Consider a jurisdictionthat currentlyfilters out unrealisedgainsand losseson holdingsofAFSdebt securities and consider a bankin that jurisdictionthat hasan unrealised lossof $50mn.Thetransitional arrangementsrequire this bank torecognise20% of thisloss(ie $10mn) in 2014.This meansthat 80% of this loss(ie$40mn) is not recognised. Thejurisdictionwill thereforeincludea row betweenrows26and 27thatallowsbanks to add back thisunrealisedloss.Thebank will then report $40mn in this row asan additiontoCommonEquityTier 1.- Totake account of the fact that the existingnational treatment of aBaselIII regulatory adjustment may be toapplya risk weighting,jurisdictionswill alsobeabletoaddnewrowsimmediatelypriortotherow on risk weightedassets(row 60).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 37. 37Theserowswill need to be defined by each jurisdictiontolist theBaselIII regulatory adjustmentsthat are currentlyrisk weighted.Example4: Consider a jurisdictionthat currentlyrisk weightsdefinedbenefit pension fund net assetsat 200% and in 2014a bank has$50mn oftheseassets.Thetransitional arrangementsrequire this bank todeduct 20% of theassetsin 2014.This meansthat the bank will report $10 mn in the first empty cell in row15and $40 mn in the second emptycell (the total of the two cellsthereforeequalsthe total Basel III regulatory adjustment).The jurisdiction will disclose in one of the inserted rows between row 59and 60 that such assetsare risk weighted at 200% during the transitionalphase.Thebank will thenbe required to report a figure of $80mn ($40mn *200%) in that row.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 38. 38Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 39. 39Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 40. 40Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 41. 41MAS Consults on Proposed Review of Risk-based CapitalFramework for Insurance BusinessSingapore, 22June 2012TheMonetaryAuthority of Singapore (MAS) today releasedaconsultationpaper on the review of theRisk-BasedCapital (RBC)frameworkfor insurancebusiness.TheRBC frameworkwasfirstintroducedin Singaporein 2004.It adoptsarisk-focusedapproachtoassessingcapital adequacy and seeksto reflecttherelevant risksthat insurancecompaniesface.MAS is reviewingthe framework, given evolving market practicesin theinsuranceindustry and in international accountingand regulatorystandards.Thereview aimstoimprove the comprehensivenessof the riskcoverageand risk sensitivityof the framework, and is not expected to result in asignificant overhaul to the current framework.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 42. 421.TheRBC frameworkfor insurancecompanieswasfirst introducedinSingapore in 2004.It adoptsarisk-focusedapproachtoassessingcapitaladequacyandseekstoreflect the relevant risks that insurancecompanies face.Theminimum capital prescribed under theframeworkservesasa buffertoabsorblosses.TheRBC framework alsoprovidesclearerinformation on the financialstrengthofinsurersandfacilitatesearlyandeffectiveinterventionbyMAS,if necessary.2.Whilst theRBC frameworkhasserveduswell, MAS is embarkingonareview (“RBC 2”) of theframework in light of evolving market practicesand global regulatory developments.Thereview will takeintoaccount therevisedInsuranceCore PrinciplesandStandards issued by the InternationalAssociation of InsuranceSupervisorslast year.3.Arisk-focusedapproach to capital adequacycontinuesto beappropriateand relevant in the supervisionof insurers.As such, theRBC 2 review is not expected to result in a significantoverhaul to thecurrent framework.Rather, the review aimsto improve the comprehensivenessof the riskcoverageand the risk sensitivityof the framework, aswell asdefiningmore specifically, MAS supervisoryapproach withrespect tothesolvencyintervention levels.4.Section2 of thepaper detailsthe proposed review in the areasofrequiredcapital.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 43. 43This toucheson theexpansion of the current framework toaddressmorerisk types, the introduction of target criteria for risk calibration, thediversificationbenefits from correlationsbetweenrisk types, and theusageof internal models.5.Section3 elaborateson the componentsof availablecapital. Theseincludethe treatment for negative reservesand aggregateprovisionsfornon-guaranteedbenefits.In addition, it isenvisaged that there will be some degreeof convergencewith Basel III global capital standards, asMAS seeksto improve thealignment of capital standardsbetweenthebanking and insuranceindustries.6.Section4 setsout thetwoexplicit solvencyintervention levels,thePrescribed Capital Requirement aswell asthe Minimum CapitalRequirement.Having clear and transparent solvencyintervention levelsisuseful forinsurers.MAS expectationson the type of correctivecapital actionstobe takenbyinsurers,and theurgencywhichtheseactionsshouldbe taken, will bereferencedagainst thesesolvencylevels.7.Section5 setsout theproposed approach withregardstorisk-freediscount rate, and consultson an alternativeapproachtothederivationoftheprovision for adverse deviation (or risk margin).8.TheRBC 2review will not just focussolelyonthequantitativeaspectsof capital requirements.It alsoseeksto enhanceinsurers‟risk management practices.Assuch, the scopeof the review includesqualitativeaspectsonEnterpriseRisk Management, asoutlinedin Section 6.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 44. 441.9MAS hopestowork closelywiththeindustryon thereview, aswasthecasewhenthe RBC framework wasfirst developed.We anticipatethat the industry will be involvedthrough workgroupparticipation, quantitativeimpact studiesand consultation feedback.COMPONENTSOF REQUIRED CAPITAL1.TheRBC frameworkrequiresinsurerstohold capital againsttheir riskexposuresknown asthe Total Risk Requirements(“TRR”).Risksarisingfrom an insurer‟sassetsand liabilitiesare groupedin tothreedistinct components:- Component 1(C1) requirement relatestoinsurancerisksundertakenbyinsurers.C1requirement for general insurancebusinessis determined byapplying specificrisk chargeson an insurer’spremium and claimsliabilities.Riskchargesapplicableto different businesslinesvary withthevolatilityof theunderlying business.The requirement for life insurance business is calculated by applyingspecific risk margin to key parameters affecting policy liabilities suchasmortality, morbidity, expensesand policy termination rates.- Component 2(C2) requirement relatestorisksinherent inaninsurer‟sasset portfolio, such asmarket risk and credit risk.It is calculatedbased on an insurers exposure tovariousmarketsincludingequity, debt, property and foreign exchange.TheC2 requirement alsocapturesthe extent of asset-liabilitymismatchpresent in an insurer’sportfolio.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 45. 45- Component 3(C3) requirement relatestoasset concentrationrisks incertain typesof assets,counterpartiesor groupsof counterparties.C3 chargesare computed based on an insurer‟sexposure in excessoftheconcentrationlimitsasprescribed under theInsurance(Valuationand Capital) Regulations2004.2.Thefollowingparagraphsset out whereenhancementsare expected.Inclusion of New Risk Types3.Thecurrent RBC framework alreadycapturesmost of thematerial riskssuchasmarket risk, credit risk, underwritingrisk and concentration risk.For riskswhicharenot specificallyquantified under RBC, theyareconsideredqualitativelyunder MAS riskbased supervision and MAShasthepowersunder theInsuranceAct to imposeadditional capitalrequirementsif necessary.For theRBC 2 review, MAS is reviewingthe risk coveragein linewithevolvingglobal regulatoryand market developments.Spread risk4.Thecurrent RBC framework takesintoaccount thecredit risk ofcorporatebondsbut doesnot capture credit spread risk.In MASannual stresstesting exercise, insurerswerefound to besusceptibleto credit spread shocks.This is not surprisinggiven that insurershold a high proportion ofcorporatebonds.MAS proposestoexplicitlycapture credit spread risk under the RBC 2framework.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 46. 46This is similar tothe credit spread shocksappliedduring stresstesting.Spreadrisk resultsfrom thesensitivityof thevalueof assetsandliabilitiestochangesin the level or in the volatility of credit spreadsover therisk-freeinterestrate.Proposal 1MAS proposestoincorporate an explicit risk chargetocapture spreadrisk within the RBC 2 framework.Liquidity risk5.Liquidityrisk is the exposureto lossin theevent that insufficient liquidassetsareavailablefrom theassetssupportingthepolicyliabilities,tomeet thecash flow requirementsof policyholder obligations,or assetsmay be available,but can onlybeliquidatedtomeet policyholderobligationsat excessivecost.6.However, wedonot proposeto imposean explicit riskchargeforliquidityrisk asthereis nowell-establishedmethodology toquantifycapital requirementsfor liquidityrisk. MAS will continueto assesstherobustnessof insurers‟liquidityrisk management through supervision.Proposal 2MAS proposesnot toimposean explicit risk chargefor liquidityrisk.MAS will workwiththe industry toconduct liquiditystress-testing, andassessthesoundnessof theinsurer’sliquidityriskmanagement practicesaspart of MASrisk-basedsupervision.Operational risk7.Operational risk refersto the risk of lossarisingfrom complexoperations,inadequate internal controls,processesand informationBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 47. 47systems, organisationchanges,fraud or human errors, (or unforeseencatastrophesincludingterrorist attacks).Operationalriskisrecognisedasarelevant andmaterialriskthat needstobe addressed in a supervisory framework.Currentlythere is noexplicit risk chargefor operational risk under theRBC framework,though operational risk is assessed aspart of MASongoing supervisionof insurers.However,both Basel II and a number of major jurisdictionshaveexplicitlyintroduced capital requirementsfor operational risk in theircapital framework.8.Methodologiestoquantify operational risk continuetoevolveglobally.Theinsuranceindustry alsodoesnot presently collect sufficientoperational risk data.Assuch, MAS intendstostart off withasimplified andpragmaticmethodtoquantify the operational risk charge, and refineitsmethodology infutureasmore databecomesavailableand practicesaremoreestablishedinternationally.Theproposed method is broadly similar to some of the approachesusedin other jurisdictionssuch asthe European EconomicArea (under thestandardisedformula approachof SolvencyII) andAustralia.9.MAS proposestoput a cap on the amount of operational risk chargesuch that it will not be larger than 10% of an insurer’stotal riskrequirements.This is based on our observation on banks‟operational risk charge asapercentageof the total capital requirements.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 48. 48There is noevidenceto suggest that an insurer’soperational risk wouldbevastlydifferent from that experiencedby a bank.Proposal 3MAS proposestoincorporate an explicit risk chargetocaptureoperational risk within the RBC 2 framework, calculated as:x% of the higher of the past 3 years‟ averagesof (a) earnedpremiumincome;and (b) grosspolicyliabilities,subject to a maximum of 10%ofthetotal risk requirements.Where x = 4% (except for investment-linkedbusiness, wherex = 0.25%giventhat most of themanagement of investment-linkedfund isoutsourced)Consultation Question 1Is thisformula or baseschosen appropriate?Should webe usingwrittenpremium or net policyliabilitiesinstead?Should there be differencesintheformula for different types of insurers,for example, direct life, directgeneral and reinsurers?Consultation Question 2What type of data can theinsuranceindustrystart tocollect in order tobuild up sufficient data tobetter quantifyor model operational risks?Insurancecatastropherisk2.10While concentration risk is coveredunder the existingframework(asC3 risk requirements), it is onlyconfined to asset concentration risk.TheRBC framework doesnot capture insurancecatastropherisk, whichistheriskthat acatastrophecausesaone-timespikein claims experience,with a corresponding impact on claims and/ orliabilities.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 49. 49Such claimsexperiencecan havea significant impact on an insurer’ssolvency, particularlyif the insurer hasa concentration of riskswrittenina particular area or businessline.Recent natural catastrophesin the region have shown that insurancecatastropheriskis a real and relevant risk toinsurershere whichwriterisksin theregion.11.ThereareafewoptionstoexplicitlyaddressthisriskundertheRBC 2framework.Oneoption wouldbe to require insurersto construct a catastrophescenario that ismost relevant to them and hasthe greatestimpact, benchmarked to some target criteria (e.g. 1in 200yearevent), and work out thecapital that hasto be set asidetomeet thatevent net of reinsurancearrangements.This is similar totheapproach of allowingthe useof internal models (Asadoptedunder SwissSolvency Test in Switzerland).The second option (As adopted in Bermuda and in European EconomicArea under Solvency II) would be for the regulator to prescribe a numberof man-madeand natural catastrophescenarios.An explicit risk chargeis then computedaccordinglyfrom a combinationof thesescenarios.Thethird option wouldbetoget theinsurerstostresstest on anumber ofstandardisedcatastrophescenarios, and additional capital requirementswouldonly beimposed for the insurersthat are more vulnerable.This would, however, be lesstransparent.12.As a target, MASis of the view that it wouldbe appropriate to adoptthefirst option, whichis similar to allowingthe use of internal models.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 50. 50This option wouldensure that the catastrophescenario constructed byeach insurer is relevant toitsown businessand circumstances.However,werecognisethat insurerswouldneed time to build their owncatastrophicrisk modeling capabilities.As such, for a start, MAS proposestoadopt the second option to beginimposingspecific risk chargesfor catastropherisks.Under this option, MAS intendsto work with theindustryassociations,reinsurancebrokers and the other risk institutes/ academiain Singaporetodesign relevant standardisedcatastrophicscenariosto derive explicitrisk chargesfor insurance catastropherisk.2.13For the life business, theexplicit insurancecatastropherisk chargecan be derived based on a pandemicevent.It is noted that a few major jurisdictionshave used 1.5deathsper 1,000inderivingtheinsurancecatastropherisk charge for itslife business.We propose to adopt a similar approach.Proposal 4MAS proposestoincorporate an explicit insurancecatastropheriskchargein the RBC 2 framework.This would be done through prescribing a number of man-made andnatural catastrophe scenarios, with an explicit risk charge computedaccordinglyfrom a combination of thesescenarios.MAS intendsto work with the industryassociations,reinsurancebrokersandtheother risk institutes/ academiain Singapore to design relevantstandardisedcatastrophic scenarios.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 51. 51For life business, theexplicit insurancecatastrophicrisk charge can bederivedbased on a pandemicevent.14.Currently, the offshoreinsurancefund of reinsurersis subjecttoeither a simplified solvencyregime (in thecaseof locallyincorporatedreinsurers)or exemptedfrom anycapital or solvencyrequirementsaltogether(in the caseof reinsurancebranches).MAS will, in consultation withtheaffectedplayers, be reviewingthecapitaltreatment oftheoffshoreinsurancefundforall reinsurers,whetherlocallyor foreign incorporated, under RBC 2.There will be a separate consultation paper on this.Target Criteria for Calibration of Risk Requirements15.TheRBC frameworkrelies on the Fund SolvencyRatio(“FSR) andtheCapitalAdequacy Ratio (“CAR”) asindicatorsof solvencyat thefundand company level respectively.Theseratiosprovidea snapshot of theinsurer‟sfinancial condition at apoint in time, without any considerationof theconfidencelevel and timehorizon.Under RBC 2, MASintendstorecalibratethe riskrequirementsbasedona specified risk measure, confidencelevel and timehorizon.16. There are 2 common risk measuresused internationally:- Valueat Risk(“VaR”) – this is the expectedvalue of lossat apredefined confidencelevel (e.g. 99.5%).Thus, if the insurer holds capital equivalent toVaR, it will havesufficient assetstomeet its regulatory liabilitieswith probability of aconfidencelevel of 99.5% over a one year timehorizon; andBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 52. 52- Tail Valueat Risk(“tVaR”) – thisis theexpectedvalueof theaveragelosswhereit exceedsthe predefinedconfidence level (eg 99.5%).It isalsoknownastheconditionaltail expectation(“CTE”), expectedshortfall or expected tail loss.If an insurer holdscapital equivalent totVAR, it will have sufficientassetsto meet the averagelossesthat exceed thepredefinedconfidencelevel (of say99.5%).17.TheVaR approach, whileit hasitslimitations,isagenerallyacceptedrisk measure for financial risk management.It iseasiertocalibratetherisksunder aVaR approach comparedtousingtVaR. However, VaR, unlike tVaR, tendsto underestimate the exposuretotail events.18.On balance,MASproposestoadopt theVaR measureasit iseasiertocalibrate.Tail VaR can be consideredunder the internal model approach(seeparagraphs2.25 and 2.26), if insurersdeem it tobe more appropriate fortheir businessor risks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 53. 53Tail event analysis can alsobe doneduring the annual industry widestresstestingexerciseor the insurer’sown risk and solvencyassessment(seeSection 6).19.MASalsoproposesto adopt atime horizon of one year, and aconfidencelevel of 99.5%.This correspondsto an investment grade credit ratingand is usedcommonlyby mostof the other major jurisdictions.20.There will be a changein the approach in derivingmost of theasset-relatedrisk requirementsunder RBC 2.Instead of applying a fixedfactor on themarket value (e.g. 16%on theequitymarket valuefor equityrisk requirement) asper currentapproach, wewill now applya shocktotheNet Asset (AssetslessLiabilities)and measure the impact of the shock.Theshockiscalibratedat aVaR of99.5%confidencelevelover aoneyearperiod.Thenew risk requirement will be equivalent tothe amount of changeinNet Asset for each respectiverisk.21. For insurance riskrequirements,theapproach will be similar.For life business, thecurrent insurancerisk requirement is computed byapplying prescribed loadingson best estimateassumptionssuch asmortality, lapseand expense.Underthenewapproach, thebestestimateassumptionswillbeloadedupbysome prescribed factorswhich will be calibratedat a VaR of 99.5%confidencelevel over a one year period whichis theproposed targetcriteria.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 54. 54For general business, prescribedfactorswill still be applied tothepremium and claimsliabilities,though the factorswill now be calibratedat the new target criteria.22.MASwill consult separatelyon thedata and methodology to beusedfor calibration, aswell ason the recommended calibrationfactorsorshockscenariosto be used to achievetheproposed new target criteria.Proposal 5MAS proposestorecalibrate riskrequirementsusing the Valueat Risk(“VaR”) measure of 99.5% confidencelevel over a one year period.MAS will be engagingthe industry on the calibrationexercise,and targettofinalisethe calibrationfactors/shock scenariosby 1Q 2013.Data would need tobe collectedfor thispurpose. Therecommendedcalibration factorsor scenarioswill be consulted prior toitsfinalisation.Diversification Benefits23.UnderRBC, thetotalriskrequirementsareobtainedbysummingtheC1, C2 and C3 risk requirements.Withinthe C1or C2 risk requirements, theunderlying risk requirementsare alsoadded together, without allowingfor anydiversification effectswiththehelp of correlationmatrices.Some major jurisdictions such as the European Economic Area (underSolvency II), Australia and Bermuda have moved towards allowing fordiversification effects when combining various risk modules, and evenwithinsub-modules,using prescribedcorrelationmatrices.Thishastheeffectofreducingtheoverall regulatorycapitalrequirements.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 55. 55Thelevel of sophistication of the correlation matricesvaries,and isbasedtosome degree, on judgment.24.MASlooked intothepossibility of recognisingdiversificationbenefitswhenaggregatingthe risk requirementsunder RBC 2.However,dependenciesbetween different riskswill vary asmarketconditionschangeand correlation hasbeen shown toincreasesignificantlyduringperiodsof stressor whenextreme eventsoccur.In the absenceof any conclusivestudiestoshowotherwise,MASproposesnot totake intoaccount diversificationeffectsfor theaggregation of risk requirementsunder RBC 2.This approach is consistent with the capital framework for banks, wherewedonot allowfor any diversificationbenefitswhenrisksare combined.Proposal 6MAS proposesnot toallowfor diversificationbenefitswhenaggregatingthecapital risk requirements.MASis, however, prepared toconsiderdiversification benefits if theindustry is be able tosubstantiate, withrobust studiesand research conducted on thelocalinsuranceindustry,that there are applicablecorrelationswhichcan relied on during normaland stressed times.Use of Internal Model25.MAS intendstoallowinsurerstousepartial or full internal modelstodeterminetheregulatory capital requirementsin thelonger run, in linewith international best practices.Theinternal modelswill have tobe calibratedat the same target criteriaasthe standardised approach, and be subject toMASapproval.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 56. 562.26 The useof internal model will be looked at under thenext phaseofthereview, after thestandardised approachhasbeen rolledout.This will allowthe larger and more complex insurerstime to preparethemselvesfor a more sophisticated and tailoredapproach.MAS wouldalsobeabletocheckthereasonablenessoftheinternalmodelassumptionsand resultsagainst the experienceof the standardisedapproach.Proposal 7MAS proposestoallowtheuseof partial or internal model in thenextphaseof the RBC 2 review, after the implementationof the standardisedapproach.Theinternal model, whichwill be subject to approval by MAS, will havetobe calibratedat thesame level asthestandardised approach.COMPONENTSOF AVAILABLE CAPITAL3.1The amount of capital available tomeet the TRR is referred to as“financial resources” (“FR”) under the RBC framework.FR comprisesthreecomponents, namely Tier 1resources,Tier 2resourcesand the provision for non-guaranteedbenefits.- Tier 1resourcesarecapital resources of thehighest quality.Thesecapital instrumentsare ableto absorblosseson an on-goingbasis.Theyhavenomaturitydateand, if redeemable,can onlyberedeemedat the option of the insurer.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 57. 57Theyshouldbeissuedandfullypaid-upandnon-cumulativein nature.Theyshould be ranked junior to policyholders, general creditors,andsubordinateddebt holdersof theinsurer.Tier 1resourcesshould neither besecurednor coveredby aguaranteeof the issuer or relatedentityor other arrangement that may legallyoreconomicallyenhancethe seniority of theclaimsvis-à-visthepolicyholders.Tier 1resourcesaregenerallyrepresentedby the aggregateof thesurplusesof an insurer’sinsurancefunds.Alocallyincorporatedinsurer may add toits Tier 1resources itspaid-upordinaryshare capital, its surplusesoutside of insurancefundsand irredeemableand noncumulativepreferenceshares.- Tier 2 resourcesare onlyapplicableto locallyincorporatedinsurersand consist of capital instrumentsthat are of a lowerqualitythanthatof Tier 1resourcesbut may be availabletoserveasa buffer againstlossesincurredby theinsurer.Examplesof theseinstrumentsincluderedeemableor cumulativepreferencesharesand certain subordinateddebt.Tier 2 resourcesin excessof 50% of Tier 1resourceswill not berecognisedasFR.- Theallowancefor provision for non-guaranteedbenefitsis applicableonlyto insurerswhomaintain a participatingfund.As the allowancefor provision for non-guaranteedbenefitsis onlyavailabletoabsorblossesof the participatingfund, theallowanceisadjustedto ensure that theunadjustedcapital ratio10of the insurer isnot greater than itsadjusted ratio.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 58. 58Alignment with Basel III2.Asanintegratedsupervisoroverseeingbankingand insuranceentitiesinSingapore, MASseekstoensure a level playing field acrossthefinancialsectorsby havinga consistent regulatory and supervisoryframeworkfortheregulatedfinancial institutions.TheTier 1and Tier 2 capital componentsare largely aligned betweentheexistingRBC frameworkforinsurersandthecapitaladequacyframeworkforbanksunderBaselIII, withtheexceptionofsurplusesintheinsurancefundsor balancein the surplusaccount, whichare insurance-specific innature.However,Basel III hasstrengthened the“equity-like” characteristicsneeded for a hybrid capital instrument tobe included in Tier 1regulatorycapital (i.e. capital of the highest quality).Besides having to showgreater capacitytoabsorb losses,these hybridcapital instrumentsalsoneed to have featuresthat clearlyenabletheinstrument toundergoa principlewritedown or toconvert intocommonequityin the event of a bank stress.3.Toalign withthecapital adequacyframeworkfor banks, MAS proposestoincorporatethesameBaselIII features(i.e. equityconversion orwrite-downonbreachof regulatorycapitalrequirements)asconditionsfor acapital instrument tobe approved by MASasa Tier 1resource(“Approved Tier 1Resource”).Proposal 8MAS proposestoincorporate the same Basel III features(i.e. equityconversion or write-downon breach of regulatory capital requirements)for theApproved Tier 1resource.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 59. 59This meansthat instrumentsthat qualifiesasApproved Tier 1resourcemust:(a)Automaticallyconvert toordinaryshare capital, asand whentheinsurerneedstoabsorblosses, andinanycase,whentheinsurer breachesitsregulatorycapital requirement;(b)Be subjecttowritedown aslong aslossespersist, asand whentheinsurer needstoabsorb losses,and in anycasewhentheinsurer breachesitsregulatorycapital requirement.Thelimitson the amount ofApproved Tier 1resource that can berecognised, asset out in the existingInsurance(Valuation and Capital)Regulations2004, will remain unchanged.Treatment of Negative Reserves4.For life business, policy liability isderived policy-by-policy bydiscountingthebest estimatecash flowsof future benefit payments,expensepaymentsand receipts,withallowancefor provision for adversedeviation.It is possiblefor the discountedvaluetobe negativewhen theexpectedpresent valueof thefuture receipts(like premium and charges) exceedtheexpected presentvalue of thefuture outgo(such asbenefit paymentsand expensepayments), resultingin a negative reserve.5.However, regulation 20(4) of the Insurance(Valuation and Capital)Regulations2004statesthat “Aregisteredinsurer shall not value theliability in respect of any liabilitytobe lessthan zero, unlessthere aremoneysduetotheinsurerwhenthepolicyisterminatedonvaluationdate,in whicheventhevalueof the liabilityin respect of that policymay benegativeto the extent of the amount due to the insurer.”Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 60. 60Thismeansthat negativereservesarenotrecognisedunlessoneexpectsarecoveryof monies (for example, surrender penaltyin thecaseofinvestment-linkedpolicies).6.Practiceswithregards totreatment of negative reservesdifferinternationally.Under SolvencyII, theEuropean EconomicArea is consideringrecognisingnegative reservesasTier 1capital, whileCanadarecognisespart of thenegative reservesasTier 2capital.7.MAS current positionof not recognisingnegativereservesasaform ofcapital is a conservativeone becauseit isakin to assuminga 100%lapseon all thepolicies,such that future premium receiptsand chargesare notrecognised.In practice, thelapserate wouldnot be 100%. Therefore, there is scopetoreconsider the current position given that under RBC 2, an insurer’snetasset valuewill be shocked for insurancerisk, and specifically, lapserisk, at a 1-in-200year level.8.Hence, MAS wouldlike to consult on recognisinga part of thenegative reservesasfinancial resources.We propose for thistobe in the form of a positivefinancial resourceadjustment, rather than asTier 1or Tier 2capital.As the amount of negative reservesare currentlysizeablein some lifeinsurers,MASwill need tocarefullyreview and establish a frameworkforcalibratingthe level of negative reservesthat may be recognised.Proposal 9MAS proposestoallowa part of thenegativereservesto be recognisedasa form of positivefinancial resourceadjustment under FinancialResources.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 61. 61MAS will consult further on the amount tobe recognised.Treatment of Aggregate of Allowancesfor Provision for Non-Guaranteed Benefits9.When assessingthe qualityof capital resources,insuranceregulatorsarerequiredunder international standardsto give consideration toitscharacteristics,including“theextent towhichtheresourceis availabletoabsorb losses,theextent of the permanent and/ or perpetual nature of thecapital and theexistenceof anymandatory servicingcostsin relationtothecapital”.10.Under the current RBC framework,ashighlightedin Paragraph3.1,an insurer maintainingany participatingfund isallowedto count asfinancial resources,the aggregate of allowancesfor provision fornon-guaranteedbenefits (“APNGB”), subject tothe unadjustedcapitalratio of the insurer remainingbelowtheadjusted ratio.However,astheseallowancesdo not meet the qualities requiredof acapital instrument, MAS will be reclassifyingAPNGB asa form ofpositivefinancial resource adjustment (“FRA”), instead of a capital item.Proposal 10MAS proposestoclassifyAggregate ofAllowancesfor Provision forNon-GuaranteedBenefits,whereapplicable, asa form of positivefinancial resource adjustment, rather than asa capital item.Thisappliestoaninsurermaintaininganyparticipatingfund, andsubjecttothe conditionthat theunadjusted capital ratioremainsbelow theadjustedcapital ratio, where:Adjusted capital ratio, in relation to theinsurer, meanstheratio of thefinancialresourcesof theinsurer (excludingthefinancialresourcesofanyparticipatingfund) tothetotal risk requirement (calibrated at 99.5% VaRBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 62. 62overaone-yearperiod) oftheinsurer(excludingsuchrequirement arisingfrom anyparticipatingfund); andUnadjusted capital ratio, in relation to theinsurer, meansthe ratioof thefinancialresourcesof theinsurer(includingthefinancial resourcesof anyparticipatingfund) tothetotal risk requirement (calibrated at 99.5% VaRoveraone-year period) of theinsurer(includingsuchrequirement arisingfrom anyparticipatingfund).SOLVENCY INTERVENTION LEVELS1.Currently, under the Insurance(Valuation and Capital) Regulations2004, insurershave tomaintaina minimum CapitalAdequacy Ratio(“CAR”) of 100%.Registered insurersare alsorequired to notify MASabout theoccurrenceor potential occurrenceof any event that wouldresult in thefinancialresourcesof the insurer beinglessthan 120%, alsoknown asthe financialresourceswarningevent.In practice, wewouldexpect insurersto have capital management plansin placeand hold a target CAR of more than 120%. In fact, all insurersgenerallyhold at leasta CAR of 150%.2.InternationalstandardsoncapitaladequacyprescribedbytheIAIS setout twotransparent triggersfor supervisoryintervention whenassessingthecapital adequacyof an insurer:a) Prescribed Capital Requirement (“PCR”), which is the higher solvencycontrol level above which the insurance regulator would not intervene oncapital adequacygrounds.ThePCR iscalibratedsuch that the assetsof the insurer will exceed thepolicy liabilitiesand other liabilitieswitha specifiedlevel of safetyover adefinedtime horizon; andBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 63. 63b) Minimum Capital Requirement (“MCR”), whichis thelowersolvencycontrol level at which, if breached, the insuranceregulator wouldinvokeitsstrongest actions,in the absenceof appropriatecorrectiveaction bytheinsurer.3.Globally, major jurisdictionsare moving towardsmeetingtheinternationalstandardsof having a PCR and a MCR.MAS believesthat havingsuch transparent and clearsolvencyintervention levelswouldbe most useful for insurersto better understandMAS expectationson the type of correctivecapital actionsrequired, andthe urgencywhichtheyshould be taken.Prescribed Capital Requirement4.Many insuranceregulatorsof major jurisdictionshavetargeted aconfidencelevel of 99.5% in settingregulatorycapital requirements.This correspondsto an implied credit ratingof at least an investmentgrade.MAS intendsto calibratethe PCR of a soloinsurer16tothe VaR of theinsurer’sfundstoa confidencelevel of 99.5% over a one year period.If an insurer’scapital fallsbelow its PCR, it will need to submit a plantorestore itscapital position within 3 months.As a countercyclical measure, MASwill havethe flexibilityand discretiontoallowinsurersmore timetorestore itscapital position, for example,during periodsof market stresses.For avoidanceof doubt, PCR needsto bemaintained at both thecompany level, aswell asat an insurancefund level.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 64. 64Proposal 11PCR is thehigher supervisoryintervention level at whichthe insurer isrequiredto hold sufficient financial resourcestomeet the total riskrequirementswhichcorrespondstoa VaR of 99.5% confidencelevel overa one-year period.An insurer whichbreachesitsPCR will need to submit a plan on howtorestore itscapital position within 3 months.If the PCR ismet, MASwill not normally interveneon capital adequacygrounds.This doesnot precludeMASfrom requiring an insurer to maintainfinancialresourcesabovethePCR if thereare othersupervisoryconcerns.As a countercyclical measure, MASwill havetheflexibilityand discretiontoallowinsurersmore timetorestore itscapital position, forexample,during periodsof market stresses.PCR needstobe maintainedat both the company level, aswell asat aninsurancefund level.Minimum Capital Requirement4.5As for MCR, MASplansto calibratea soloentity MCR tothe VaR oftheinsurer’sfundstoa confidencelevel of 90% over a one year period.Thiscorrespondstoan implied credit ratingof B- and representsa 1in 10year event.During the calibration stage, the MCR may be expressed as a percentageof the total risk requirementsrequired under PCR for ease of computationand future monitoring.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 65. 65For avoidanceof doubt, MCR needsto be maintainedat both thecompany level, aswell asat an insurancefund level.4.6 MAS intendsto take its strongest enforcement actionsif the MCR isbreached.Suchactionswouldincludestoppingnewbusiness,withdrawaloflicence,or directing a transfer of portfolio toanother insurer.Proposal 12MCR is the lowersupervisoryintervention level at whichthe insurer isrequiredto hold sufficient financial resourcestomeet the total riskrequirementswhichcorrespondstoa VaR of 90% confidencelevel over aone-year period.If an insurer breachesitsMCR, MAS may choose to invoke the strongestsupervisory action (such as stopping new business, withdrawal of licenceetc).MCR willbecalibratedasafixedpercentageof thePCR. Thispercentagewill be determinedafter quantitativeimpact studiesare done.MCR needsto be maintainedat both thecompanylevel, aswell asat aninsurancefund level.VALUATION OF ASSETSAND LIABILITIES5.1An insurerneedstodeterminethevalue of itsassetsand liabilitiesbeforecomputingitssolvencyrequirements.ValuationrulesfortheRBC frameworkarespecifiedwithintheInsurance(Valuation and Capital) Regulation 2004and the relevant Notices.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 66. 662.Under current valuation rules,assetsare to bevaluedat themarketvalue, or the net realisablevalue, in the absenceof market value. Policyliabilitiesare tobe valuedbased on best estimateassumptions,withprovision for adverse deviation (“PAD”).Policy liabilitiesfor life insurance are computed using a prospectivediscountedcashflow method while that for general insurance consist ofthepremium liabilitiesand the claimsliabilities.3. We have identifiedtwoareasthat will be reviewedunder RBC 2.Risk Free Discount RateSingapore dollar-denominated liabilities4.Lifeinsurersare currentlyrequired tocalculatetheir policyliabilitiesusinga prospectivediscountedcash-flowmethod, with MASNotice 319prescribingtheuseof therisk-freediscount rate todeterminethevalueofpolicy liabilitiesfor non-participatingpolicies,non-unit reservesofinvestment-linkedpolicies,and theminimum condition liabilityofparticipatingfunds.5.For Singaporedollar (“SGD”)-denominatedliabilities, therisk freediscount rateis:(a)Where the duration of a liability is X years or less, the market yield ofthe Singapore Government Securities (“SGS”) of a matching duration asat valuation date;(b)Where the duration of a liabilityismore than X yearsbut lessthanYyears, a yield that isinterpolated from the market yield of theX year SGSand a stablelongterm risk free discount rate (“LTRFDR”); and(c) Where theduration of a liability isY years or more, a stableLTRFDR.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 67. 67ThestableLTRFDR is to be calculatedaccordingtothe following:(a)Computetheaveragedailyclosingyield of the X-year SGSsinceitsinception;(b)Compute the averagedailyyield differential between theX-year andYyear SGSsincetheinceptionof theY-year SGS;(c)Derivean estimatelong-term yield bysumming the valuesobtainedunder subparagraphs(a) and (b);(d)Compute the prevailing averagedaily closingyield of theY-year SGSover thepast 6-month period;(e)Allocate 90% weight to theestimatedlong-term yield obtained insubparagraph(c), and 10% to the prevailingaverage yield undersubparagraph (d).(f)TheLTRFDR is then obtained by summingthetwovaluesin (e).Currently, X and Y are 10and 15 respectively.With effect from 1Jan2013,X andY will be 15and 2018.5.6 When RBC wasfirst introducedin 2005, the longest datedSGSavailablethen wasthe 15-year SGS(whichwasincepted in 2001).Recognisingthat the15-year SGSmight not be liquid enough and couldcauseunduevolatilityin therisk-freediscount rate aswell aspolicyliabilitiesat the longer end, the LTRFDR formula wasintroduced.Theuse of a weightedaverageformula haskept the LTRFDR “sticky”andvalue of policy liabilitiessteady.Whilst this isreflectiveof the underlying nature of long-term lifeinsuranceliabilities,it makesliabilityvalueslesssensitiveto marketBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 68. 68movement in yields, resulting in short-term earningsvolatilityduetodifferencesin discountingof the assetsand liabilities.5.7 We now have 20-year (inceptedin 2007) and 30-year SGS(inceptedin2012) availablein themarket.With effect from 1January 2013, the 20-year SGS yield will be used in thederivation of the risk-free discount rate, that is, X and Y will be 15 and 20years respectivelyin the formula set out in Section5.5. MASintendsto further enhancethemarket consistencyof thediscount rateby incorporatingtheuseof 30-year SGSyield.Proposal 13MAS proposesthe followingtwoapproacheswithregardsto the risk-freediscount rate for SGD-denominated liabilities.(a) TokeeptothesameLTRFDR formulaassetout in paragraph5.5,butX and Y will now be20and 30respectively.This is on the expectationthat the 30-year SGSwill have adequateliquiditywhenRBC 2 is implemented. This means:-Durations0toyear 20: Use prevailingyields of SGS-Durations30 year and above:90% of historical averageyields (sinceinception) and 10% of latest6-month averageyield of 30-year SGS- Durations20 to year 30: Interpolated yields(b)Toremovethe LTRFDR formula altogether,ie.,- Durationsup to30Years:Use prevailing yieldsof SGS- Durations30year and above:Keep theyield flat at theprevailingyieldof 30-year SGSBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 69. 69Consultation Question 3Whichof theaboveapproachesis more appropriate?Consultation Question 4Should MASallowfor some illiquiditypremium adjustment in therisk-freediscount rate for valuing certain portfoliossuch asannuitybusiness?8.We alsoconsideredthe feasibilityof using swaprates, instead of SGS,for discountingpurposes.Somejurisdictionshavemoved to usingswapratesfor valuing policyliabilities,and a few insurershaveasked MAS toconsider similarapproachesin Singapore.Theseinsurershave fed back that theswapcurve, extendingtolongerdurationswithratesdetermined by market forces,wouldprovidea moreaccuraterepresentation of risk-freemarket yields, withappropriateadjustmentsfor credit risk.9.MAS notesthat the useof swap ratesis typicallyallowedin certainjurisdictionsbecauseof insufficient supplyof sovereign governmentbonds.In some countries, the bond market maynot be asdeveloped or liquid astheswapmarket.In fact, it is noted that whereswapsdonot exist or are not sufficientlyliquidand reliable, the risk-freediscount rate used for valuation shouldhavereferencetothegovernment yield curve in that currency.In Singapore, giventhat the government securitiesmarket is still moreliquidand deep than theswapmarket.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 70. 70MAS proposestoretain theuseof SGSyields.10.It is currentlyprovidedin MAS319that wherean insurer implementsan effectivecash flow hedge or fair valuehedge asdefinedunder FRS39of theAccounting Standard, the insurermay elect to usethe market yieldoftheSGSofamatchingdurationasat thevaluationdateforvaluingsuchhedgedSingaporedollar policy liabilities.For thehedged policyliabilitiesthat have a duration exceedingthemaximum duration availableon theSGSyield curve, themarket yield forthemaximum duration SGSavailableshall be used.Where an insurer haselected touse themarket yield of theSGSof amatchingduration, it shall continueto dosoaslong asthedesignatedliabilitiesremain a hedged liabilityasdefined under FRS39.MAS may at any timerequire theinsurer to produceall necessarydocumentary evidenceon the hedgingof such policyliabilitieswithinsuch time asmay be specified by MAS.For theavoidance of doubt, MASwill be retainingthisflexibilityunderRBC 2.Non-SGD denominated liabilities11.For liabilitiesdenominated in a currency other thanSGD, MAS319statesthat the risk-freediscount rate tobe used is the market yield of theforeign government securitiesof similar duration at thevaluation date.Unlike for SGD-denominated liabilities,thereis nosimilar concept of aLTRFDR here.12.In thecaseof non-SGD denominated liabilities, MASproposestorequireinsurersto followtheregulatoryrequirementspertainingtodiscountingasprescribed by the insurancesupervisoryauthority in thejurisdictionissuingthecurrency.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 71. 71For example, for US-dollar denominatedliabilities,the insurer willdiscount itsliabilitiesaccordingtothe discountingrequirementsset bytheNationalAssociation of InsuranceSupervisors(“NAIC”) in US.For liabilitiesdenominated in currenciesof European EconomicAreamember states,theinsurer will discount itsliabilitiesaccordingto thediscountingrequirementsset by the European Commission underSolvencyII.This proposal is premised on the fact that the insuranceregulator in thejurisdictionissuingthecurrency will be best placed toset thediscountrate for itshome currency.Proposal 14MAS proposesthat insurersfollowtheregulatoryrequirementspertainingtodiscountingasprescribedbytheinsurancesupervisoryauthorityin thejurisdictionissuingthe currency, for valuingnon-Singaporedollardenominatedliabilitiesfor both life and general business.Consultation Question 5If the relevant foreign supervisoryauthorityhasnot prescribed any basisfor discountingtheliabilitiesdenominatedin that home currency, whatshould be the approach taken?Should the risk-freediscount ratebe themarket yield of theforeigngovernment securitiesof similar duration, and the yield kept flat forliabilitiesextendingbeyond the longest availablegovernment securities?General insurance policy liabilities5.13MAS319 is currentlyapplicabletoinsurerswritinglife businessonly.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 72. 72For general business, it is stated in guidelinesID 01/04that discountingofliabilitiesshouldbecarriedout wheretheimpact ofsuchdiscountingismaterial.Where discountingof liabilitiesis used, thediscount rate adoptedshouldbethegrossredemption yield asat thevaluation date of a portfolio ofgovernment bonds(where applicable) withitscurrencyand expectedpayment profile (or duration) similar to the insuranceliabilitiesbeingvalued.14.MASproposestoextend thediscountingrequirementsfor lifebusiness(asset out in thepreviousproposals)to general business.However,thiswouldapply onlyto liabilitieswithdurationsabove 1year.Proposal 15MAS proposestoextend the discount rate requirementsfor life businesstogeneral businessaswell, for liability durationsabove1year.For liabilitydurationof 1year and less, nodiscountingwouldberequired.Provision for Adverse Deviation15.Under the current RBC framework,policy liabilitiesfor both life andgeneralinsurancebusinessaretobedeterminedusingbest estimatesanda provision for adversedeviation (“PAD”) (commonlyknownasa riskmargin).- For general business, the PAD for both claims liability and unexpiredrisk reserves are to be calculated at the 75% level of sufficiency, as setout in the Insurance(Valuation and Capital) Regulations2004.- For life business, MAS319 requires thePAD to be determinedusingmore conservativeassumptionssoasto buffer against fluctuationsofthebest estimateexperience.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 73. 73Thedetermination of the level of PAD is left tothe professionaljudgment of the appointedactuaries,whoare bound by theguidancenoteissued by the SingaporeActuarial Society(“SAS”).Acommon methodadoptedbytheappointedactuariesisfortheloadingsfor policy liabilitieswith PAD tobe calculatedashalf of theprescribedloadingsfor modified policyliabilitiesand modified minimum conditionliabilitiesfor the participatingpolicies.Put simply, the PAD is roughlyhalf of the C1risk requirements.16.Internationally, there are a number of methodsbeingused forderivingPAD or risk margin.Onemethod whichisgainingprominence(asprescribedin SolvencyIIandtheSwissSolvencyTest) is thecost-of-capitalmethod.This method reflectsthereturn on the capital a buyer wouldneed tosupport the liabilitiesacquired from theholder over thewholerun-offperiod.This method involvesapplying a cost-of-capital rate toprojectedriskchargesandthendiscountingthecalculatedcost ofcapitalat therisk-freerate of interest, to obtain theapplicablerisk margin.Both SolvencyII and the SwissSolvencyTest adopt a cost-of-capital rateof 6% per annum.This rate correspondsto the spread above the risk-freeinterest rate thatan investment gradeinsurer wouldbe charged to raisecapital for theportfolio, and is alsoconsistent withwhat is assumed in theVaRassumptionsunder risk calibration.17.Althoughit ishardertocompute,thecost-of-capitalmethodhasbeenassessed asthemost market consistent in practiceby some studies.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 74. 74As such, MASwouldlike toseektheindustry’sviewson using thecost-of-capital method in determiningPAD.Consultation Question 6Do you agree that the cost-of-capital approach, for computing theprovision for adverse deviation for both life and general insuranceliabilities,is appropriate?If so, do you agreethat it is appropriatetoadopt a cost-of-capital rateof6% per annum?Asthereisnoevidencetosuggestthat thecost ofprovidingtheamount ofavailablecapital to support the policyliabilitieswouldbe substantiallydifferent for life and general insurers,a uniform ratehasbeenproposedfor all types of insurers.ENTERPRISE RISK MANAGEMENT1.TheRBC 2 review is not solely limitedto thequantitativeelementsoftheRBC framework;it alsofocusesonMAScontinuingeffortstoimproveindustrystandardson governance, controlsand in particular, riskmanagement practices.2.MAS hasalreadyissued a set of comprehensiveguidelineson riskmanagement practicesthat appliesboth toa financial institution ingeneral, aswell asto an insurer specifically.Theguidelinescover board and senior management, internalcontrol, credit risk, market risk, technology risk, operational risk(businesscontinuitymanagement and outsourcing), insurancecoreactivitiesand insurancefraud.MAS is lookingat further enhancingtherisk management guidelinestoadopt a more holisticand enterprise-wide risk management framework,Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 75. 75in linewith evolving international standardson EnterpriseRiskManagement (“ERM”) and best practices.3.The ERM requirements, which we will consult on and expect to issueby the end of this year, will go beyond addressing risks in each activity orfunction.Thenew requirementswill set out MASexpectationson how insurersidentify and manage the interdependenciesbetweenkeyrisks, and howthiswill be translatedintostrategic management actionsand capitalplanning.4.Theinternational standardon ERM advocatesERM systemstohavecloselinkagesbetweenongoingoperational management of risk,longer-term businessgoalsand strategy, and economiccapitalmanagement soastoensure optimal financial efficiency, and sufficientlevelsof solvencyto ensure adequateprotection of policyholders.An insurer will be expected to carryout itsownrisk and solvencyassessment (“ORSA”).TheORSAis a self-drivenprocessby the insurer to assessthe adequacyof itsrisk management practices,and both current and future solvencypositions.TheBoard and senior management of the insurer are expectedtotakeownership of theprocess, whichshould be well-documented.In assessingitsoverall solvencyneeds,all identifiedrelevant andmaterialrisksare to be subjectedto rigorousstressand scenariotesting.5.We expect insurersto undertake itsORSAregularly and effectively,givingdue consideration to thedynamic interactionsbetweenrisks, andthelink betweenrisk management, businessstrategyand capitalmanagement.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 76. 76Thesophistication of an insurer’sERM frameworkshould becommensuratewiththenature, scaleand complexityof the risksthat itbears.Proposal 16MAS proposestointroduceEnterpriseRisk Managementrequirements,includingthoserelatingto Own Risk and SolvencyAssessment, to insurers.Wewill consult industryontheERMrequirementsandtarget toissuea final document by end of 2012.PROPOSED TIMELINE1.MAS‟ proposedtimelinefor thevariousreviewsoutlined in Sections2to5 of thispaper are asfollows:- Finalisethe calibrationfactorsby 1Q 2013. During thecalibrationstage, insurerswouldbe involved in a few roundsof quantitativeimpact studies;- Finalisethe changestothe Insurance(Valuation and Capital)Regulations2004and Insurance(Accountsand Statements)Regulations2005by2Q 2013;- Implement the RBC 2 requirements(with the exceptionof theinsurancecatastropherisk chargeswhichmay need more time) foraccountingyear ending31Dec 2013.There will be at least 2years of parallel run withthe existingRBCframework,wherethetotal risk requirementsunderRBC 2frameworkwouldbe subject toa floorof a specified percentage of the total riskrequirementsunder the existingRBC framework.This is toprevent anysudden releasein capital requirements;Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 77. 77- Commenceworkon the internal model approachwiththe industryafter the implementationof RBC 2.Proposal 17MAS proposestoimplement the RBC 2 requirementsfor theaccountingyear ending 31December 2013.There will be at least 2years of parallel run withthe existingRBCframeworkand appropriate floorsimposed to prevent sudden release incapital requirements.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 78. 78Basel III – CRD 4: Impact and stakesIntroductoryspeechbyMr ChristianNoyer,Governorof the Bank of France andChairmanof theBoard of Directorsof theBank for International Settlements,at theAutoritéde contrôleprudentiel (ACP)conference, Paris, 27June 2012.Ladies and gentlemen,I am delightedtowelcomeyou todaytothisnew conferenceorganisedby theAutorité decontrôleprudentiel (ACP).This morning, the conference will be dedicated to the impact and stakesof the Basel III reform and, this afternoon, to the supervision of businesspracticesin bankingand insurance.I wouldlike tothank all theparticipantsfor the interesttheyhave shownin thesecrucial exchangesbetweenregulators,supervisorsand marketparticipants.This conferenceisbeingheld against thebackdrop of an economicandfinancial environment that remainsvery difficult, characterisedinparticular in Europe by the ongoingsovereigndebt crisis.Many questionssurround thefuture of the European banking system,whichhasalreadyundergonemajor transformationsin the recent periodwhile significant changesin itsprudential frameworkand theorganisationof its supervision are currentlybeingreviewed.Far from puttingon theback burner questionsconcerningBasel III anditsapplicationin Europe, that is tosay CRD IV and itsproject to createa“singlerulebook” for European banks, I believe, on the contrary, thesedevelopmentsunderscore the importanceof better understandingtheBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 79. 79current reform and takingtime toreflect, in order toensurethat thenewframeworkfor banking regulationand thedistributionof supervisoryresponsibilitiesin Europe will deliver all their expected benefits.Beforeleavingyou todiscussingreaterdetail theimpactandstakesoftheBasel III reform, I wouldlike tomake a few remarkson thistopic inrelationtothecurrent environment.1. Basel III and CRD IV represent a quantitative and qualitativeleap aimed at addressing the shortcomingshighlighted by thecurrent financial crisisFirst, I believethat it wouldbeuseful torapidlyplacetheBasel III reformin itscontext, in order tofullyunderstand its scope.BaselIII isfirstandforemost aresponsetothefinancialcrisisthat startedin 2007.Thiscrisisandthesubsequent waveofshockstothebankingsystem havenot merely resulted in a temporary lossof output for themajor advancedeconomies.Theyhave alsohad a lastingimpact on employment, industrialproduction, the confidenceof investorsand households, and needlesstosayon public finances,whichmake crisisexit evenmore difficult.In responsetothesedevelopments, the international communityadoptedin 2009, under the impetusof theG20, an ambitiousreform programmeincludingBasel III, whichis a keyelement for the banking sector.Indeed, a banking system that ismore robust asa wholeand capableofabsorbingmajor shocksis vital to avoid therepetition of such chainreactionsin the future.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 80. 80In thisrespect,despitethedelayinthereform agendaintheUnitedStates,Europe must clearlypressforward: the credibilityof our banksand oureconomiesis at stake.Basel III is naturallybased on BaselII which establishesthecurrentcapital adequacyrules.However,Basel III goesfurther than merelychangingand updatingtheexistingrules.–Basel III indeed considerablystrengthensthe capital requirementsthatbanksmust meet, but this reform ismore extensivein that it significantlyenhancestheprudential framework:in additiontocapital requirements,itestablishesliquidityrequirements, and a leverageratiois set tobeintroduced in the medium term.From this point of view, Basel III is a far-reachingreform of bankingregulation.–Furthermore, and most importantly, I believethat Basel III is a majorstepforwardinthat it leadstoamuchcloserinteractionthanhasbeenthecasetodatebetweenthe individual supervisionof banks, known asmicroprudential supervision, and the overall supervision of thebankingand financial system, or macroprudential supervision.Thisbroader view of banking supervision, takingaccount of all its facets,translatesintoa number of provisionsand notablyintroducesadditionalcapital buffers(a capital conservation buffer, a countercyclical buffer anda buffer for systemically important financial institutions) in excessof theregulatoryminimum.Basel III thereforerepresentsa quantitativeand alsoa qualitativeleap.Given the magnitudeof the changestobe made, Basel III hasmajorrepercussionson market participants,whomust adapt to thisnewenvironment.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 81. 81Theserepercussionsareboth anticipatedand desirable, but thepotentiallynegativeconsequencesof thisreform must be kept toaminimum.In thisrespect, manyassociatedriskswerehighlightedduringitsdraftingand even more sorecently, due to the current economicand financialdifficulties.Theseincludedtherisk of arise in thecost of credit or of a credit crunch.Hence, the impact and stakesof Basel III must be carefullyanalysed andaddressed.2. The difficult economic environment stressesthe importanceof implementing Basel III in an appropriate manner but doesnot call into question the rationale of the reformWithout playing down thepotential risksassociatedwith theimplementationof BaselIII, to whichtheACP pays close attention, Ibelievethat this reform can be successfullyimplemented.Allow me to mention some reasonsfor this conviction and offer someavenuesfor actions:– First, French banks, whichhave complied withBasel 2.5 rulessinceDecember 2011, are in a strongpositiontomeet thenewcapital adequacyrequirementswhen theycome intoforce.Moreover,French banksare ahead of the Basel III schedule.CurrentlywithCore Tier 1capital ratiosof over 9%, the main Frenchgroupsdemonstratetheir abilitytomeet theEuropeanBankingAuthoritydeadlineof 30 June 2012.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 82. 82Theyshould alsofullycomplywith thenew Basel III requirementsby2013.–TheACP iscloselymonitoringcredit institutions‟preparationsforBaselIII. By doingso, anyproblemscan be identified at anearlystage andissuesrelatingto itsimplementation can be addressed, whichI believe isessential for a smooth transition.Moregenerally, in addition to theindividual monitoring of banks‟preparation, coordinationbetweensupervisorsand theplayersconcernedis alsoimportant toensure a clearunderstandingof the rulesand identifyanyquestionsrelatingto the reform and their potential consequences.TheACP liaiseson a regular basiswiththeprofession on all prudentialmatters.Indeed, today‟sconferenceis a prime illustrationof this.–It isalsoessentialtocloselymonitorandtakeintoaccount theimpact ofthenew regulationson the financial system and theeconomy and toassessthe different interactionsin order, if necessary, to deal with theunforeseen consequencesof Basel III.In this respect, theACP, whichmaintainsclose linksto theBanque deFrance and operatesunder itsaegis, is naturallyparticularlyattentivetoand involved in all these matters.This is whyweare accompanying the prudential reform withmoregeneral and macroeconomic reflectionson thefinancingof theeconomy, and in particular on credit developmentsand the relationshipbetweenbankingregulation and monetary policy.Thenew liquidityratiosthereforecannot be applied astheystand astheydonot takeintoaccount all their consequencesand interactionsbeyondtheprudential objectivesthemselves,whichincludein particular theBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 83. 83functioningof theinterbank market, thelevel of intermediationor theconditionsof monetary policy implementation.I therefore believe that the work underway on the calibration of theseratios isof the utmost importance in order to properly manage all theconsequencesof thesenew rules.Before handing the floortoDanièle Nouy, SecretaryGeneral of theAutoritédecontrôleprudentiel, I wouldlike toconcludewithafew wordson recent developmentsin Europe.You are awareof mycommitment to full harmonisation in Europe: this“singlerulebook” is theonlywaytoachievea truly efficient singlemarket.You are alsoawarethat thenegotiationsbetweentheEuropean Counciland Parliament might reintroducethenational optionsthat theCommissionhad removed.Theymay also, under a compromisetext, render partly redundant andineffectivetheresponsibilitiesof supervisorsof home and hostcountries,aswell asthoseof micro-prudential and macro-prudentialsupervisors.In this context, I believethat the creation of a bankingunion is tobesupported.It wouldbe a major development for bankingsupervision inEurope, whichwouldbring numerousbenefitsand wouldenableustoefficientlyaddressthe current difficulties.Suchadevelopment wouldmost likelyhaveverypositiveconsequencesinthat it wouldbe a step towardsgreater European harmonisation.Naturally, thebenefitsof such a reform wouldbemore far-reachingbutsuch questionsgobeyond the scope of today‟s conference.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 84. 84Questionsregardingthe impact and stakesof Basel III will alreadygiveamplefood for thought in the rich debatesand discussionsthis morning.I wishyou all a fruitful conference.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 85. 85Anand Sinha: IT and governance in banks – some thoughtsAddress by Mr.Anand Sinha, DeputyGovernor, Reserve Bank of India attheProgram for Independent Directorsof Banks organizedbyIDRBT, HyderabadShri Sambamurthy, Director, IDRBT; Shri Prabhakar, Chairman andManagingDirector,Andhra Bank, Shri Rao, ManagingDirector,SBH, Shri Siva Kumar, member offaculty, IDRBT, distinguishedfellowsof IDRBT; other membersof thefaculty; and directorson theBoardsof banks.Wish you all a very goodmorning.Independent directorsarelookedupon by both thestakeholdersandregulatorsasimportant contributorstothevalue additiveand ethicallypositiveoversight of executivemanagement activities.Theorganizationof thisprogramme, by IDRBT and itsDirector, Mr.Sambamurthy, whichfocuseson IT governance, Information Securityandtheroleof Board therein, isvery timelyasthesefactorshaveassumedcritical importancein the sphere of corporate governancein general andbank governancein particular.While talkingabout thisprogramme organizedby IDRBT, it wouldbeappropriateto recall, in brief, that thisinstitution, conceptualizedin 1994andestablishedin 1996bytheRBI tofunctionasacentreforresearchanddevelopment in bankingtechnology, hasbeen commendablystrivingtomeet its objectives.It hastoitscredit several achievementslike launchof StructuredFinancial MessagingSystem (SFMS) and National Financial Switch(NFS) management; besidespublicationof guidanceon best practicesand a number of researchpapers on topicsof contemporary relevancetotheIndianbankingindustry.Now, withthereviewedand redefined goals,the Instituteisall set tosupport the bankingIndustry, by workingat the intersectionof bankingBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 86. 86andtechnology, mainlyin the areasof financial networksandapplications,electronicpaymentsand settlement systems, securitytechnologiesfor thefinancial sector, financial information systems andbusinessintelligence.I am suretheinstitutewill continuetoenrich thebankingIndustry in thetimestocome through its good work.Corporate governanceComingtothethemeof thisprogramme, I woulddwell, first of all, on theconcept of governance.At the coreof corporate governance istheprincipleof fiduciaryduty, centeredon oversight of management functioningin order tooptimizestakeholder interests, withinthe limitsof legal and regulatorycompliance.This had itsorigin and basisin theneed to balancethepowersofexecutivemanagement and the interestsof diffused owners,i.e.shareholders,through an oversight process.This dominant view of governancecomesfromAgency theory, whichemphasizesmonitoringand control functions.In this perspective, directors‟responsibilitiestake twoforms: ensuringaccountabilitytominimize downsiderisksand enablingmanagerialentrepreneurship toreap upsidepotential.Over a period of time, the optimizationof shareholders‟interestobjectivehasbroadenedtoincludestrategic efficiencyand social responsibility.Connotation of oversighthaschanged and expanded, to mean effectiveleadershipin guidingthemanagement in strategic decisions, creation ofsuitablestructuresand processesfor effectiveimplementationandBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 87. 87monitoringof managerial performance; and ensuring compliancewithlawsand regulations.Thescope of oversight hasundergone further changewithimpliedinclusionof an ethicthat transcendsstrict responsetoregulations.This interpretation of the meaningof governance and role of theBoardhasgained greater currencyin the wakeof some big ticket eventslikecollapseof Enron, WorldCom, H IH insurance, and, in the aftermath oftherecent crisis, wherea largepart of theblame wasattributed, interalia, tounethical conduct by banks and market participants.Over all, theconcept of governancehascome tosignify strategicleadershipsupport and objectiveoversight by the Board to ensureoptimized resourceutilization, effectivecomplianceand robustmanagement.It is in thisoverall context of governance that IT governance hasevolvedasan area of great contemporaryinterest.Information technologyhas grownfrom a mere enabler toan essentialcomponent of businessprocessesin thebankingindustry whereinformation and data are consideredmost valuedresources.IT is a critical asset, not simplyin enablingorganizational successbutalsoin providingopportunitiesfor competitiveadvantage.IT and Indian bankingBankingin India, asall of us know, hastraversed a long wayfrom thedays of manual workprocessesto mechanization, followedby wordprocessingon standalonePCs and ontoIT based applicationsand soon.As thingsstand today, it wouldbe difficult to imaginea bank of anysignificancewhichdoesnot havesomeormost ofthekeyprocessesbeingrun on IT based applications.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 88. 88Most of thecustomer related functionsin banks, be it account opening,transactionprocessingoraccount anddatamaintenance,areall run onITenabledsystems.It is thereach and capacityof information technologythat hasfacilitatedbanksto transcendthe limitationsof, geographicalspread, burgeoningtransactionvolumesand, to an extent, human resources.Banks are expandingtheir size and servicesto cater tofast increasingcustomer needsthrough technologyenabledpayment systems, internetbased accessand innovativeservicedelivery modes.Other important businessactivitiesof banks such asparticipationinsecurities,currencyand money markets, besidescompliancefunctionslike reservemaintenance,regulatoryreportingetc. are all havingprocessesheavily dependent on information technology.Even in caseof internal workprocesseshavinglargecomponent ofmanual processing, dependenceon computersand IT basedcommunicationmechanism isincreasinglyfelt.Overall, banksare dependent on IT based systems for almost all of theiractivities, although the level of sophisticationand refinement in suchsystemsmay vary from bank tobank or acrossactivitiesor bankingIndustrysegments(commercial banks, cooperativebanks etc.).Reasonsfor thisarenot far toseek.Technologyhasbecome essential component for customer related andmarket relatedactivities and participant bankscannot meet therequirementsimposed by timelinesor volumeswithout leveragingontechnology.Even for backend and internal workprocesses,cost and time constraintsare pushingbankstolean upon technology.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 89. 89It may not be possibleto store and retrieve hugeamountsof customerdata, transactiondata and businessinformation, but for thepoweroftechnologybasedsystems.Moreso, the globalization, competition and compliancerequirementsmake it imperativefor banksto increasinglyuse IT basedplatforms andapplicationsfor most of their activities.It hasbecome necessaryfor banksto usemodern marketingaswell ascustomer service toolsto survive in a competitiveenvironment; whichinvolvelargescaledata collection, analysis and efficient communicationwhicharenot possiblewithout thehelp of IT.IT and financial inclusionIT has a great role to play in furthering the financial inclusion drive,involving expansion of banking access to remote locations in a costeffectiveway.Reachingbanking totheexcludedsegmentshasbeen the focusofregulatoryagenda and manyinitiativeshave been taken in this regard.Of the 74,414villageswitha populationof more than 2000identified asunbanked, 74,199(99.7 per cent) villageshave alreadybeen provided withbankingservices,on theback of concertedeffortsof thebankingfraternityencouraged by the Government and Reserve Bank of India.In the next stage, it hasbeen proposed tocover unbanked villageswith population lessthan 2000.Consideringthevast geographicalexpanseofthecountry, suchagigantictaskwouldnot bepossibleat all without thehelp of technology.Technologyhasthe potential tocut down the costs,bring down thebarriers and make thefinancial inclusiona viablebusinessproposition.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 90. 90Financial inclusion, apart from itssocial welfareenhancingrole, shouldmake a lot of businesssensefor banksin asmuch astheycan get a largestablepoolof retail depositswhichwill contributeverysignificantlytotherobustnessof the individual banks and tofinancial stabilityat thesystemic level.Additionally, there wouldbe small valuebut large volume of lendingandother business.What is constrainingthe full realization of this businesspotential is thecomparatively largetransactioncosts.Several technological effortsand innovationshave been made forincreasingthereach whichhasreduced the transaction costs.However,much moreneedstobedonetomake thefinancialinclusionanattractiveand profitablebusinessfor banks.IT in banking – concernsWhile the increaseddeployment of IT certainlyhasitsown benefitsintermsof enablingbankstomeet thebusinessrequirementsand enhancetheir service deliverycapacity, such IT usage anddependence, however,bring in some new challengesand concerns.Thesechallengeskeep on gettingmore complex and qualitativelydifferent, astechnologykeepson evolving rapidly.For instance, technologies like cloud computing bringin advantagesandefficienciesalongwithnew riskswhichhave to bemanaged.Anydelayin adoptionof newtechnologieswouldonlyletthecompetitionpassby the laggard institutions.Cloud computingisan innovative concept whichenablesparticipantstoleverageon collaborativesharing of resources,whichnot onlybringsBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 91. 91downcostsbut alsofacilitates theparticipantstoconcentratemore ontheir core activities,leavingthemanagement of IT resourcesto theserviceproviders.Thisfacility, bymakingthesophisticatedapplicationsaffordable,hasthepotential to enableeven the marginal players to make useof thetechnologyand develop their businesses.However,thisbeinga new technologydata integrityand confidentialityseem tobe a major concern at thisstage.Further, if too many participants rely on a single service provider, it maylead to a risk of over-concentration inasmuch as the failure of the serviceprovider will be catastrophic.Banks will have toassesstheprosand consof new technologiesand putin placeadequate safe guards while adopting them.As regulator and supervisor of the banking system in India, inter alia, itsmany other roles, RBI is concerned about the soundness of the financialsystem in general and banking system in particular.While IT usagecontributes toefficiency, it brings,along withit, certainissuessuchas,issuesof technologyselectionwithstrategic, financial andcomplianceconsiderations;processmanagement toensure cost effectiveandtimely service delivery; securityof customer and businessdata ataccess,storageand retrieval level, asalsothe accuracyof data andinformation for internal and external reporting.Important issuesand concernsin this context have been flaggedby RBIin theIT vision document 2011–17and the recent MonetaryPolicystatement (April 2012).Theseconcernsmainlyrevolve around the areasof governance,information securityand MIS/ reportingand bankshave toaddresstheseissues,on priority.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 92. 92Technology and information securityInformation securityis an area that needsconstant and continuingattention, considering, particularly, theoperational risksassociatedwiththeuseof technology.Security and integrityof data, communication and storagehasacquiredchallengingdimensionsasall of theseactivitiesare carriedout overtechnologyenabledsystems.Internet and remoteaccessare necessitiestoday, while threatsthroughthesemodescome in newerforms each day.Privacyand confidentialityof customer aswellasbusinessdata are atstake.Denial of service, disruption, permanent data lossand evendatamanipulationare risksthat cannot be ignored.TheIT management systems and processesin banks, therefore, have toberobust enough to meet thesechallengeseffectively, on continuingbasis.Any lapsein this regard can lead to several kindsof risksto the bank, itscustomersaswellasothermarket participants,dependingonthesizeandsignificanceof the institutionaswell asmagnitude of risk event.Regulatory reporting and MISAnother area of significant importancetothetopmanagements,regulatorsandshareholdersisthequalityandefficiencyofdatareporting. Indian banking, even today, hashousekeeping, M ISandreportingprocesseswhich are largely interspersedwith manualintervention.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 93. 93This hasimplicationsfor thequality, consistencyand timelinessof data,with the risk of subjectiveinterpretation, manipulation and delays,leadingtopotential adverse consequencesin many forms.Even wherethe informationcollectionand submission processis largelyIT based, processdesignitselfhasto be in sync withinformation andreporting requirements.Thetop management, Board, regulators, the shareholdersand customersmay not get correct or timely information and disclosuresdue toinadvertent or deliberate action on thepart of thosecompilingorsubmittinginformation.There havebeen instancesof processdesign facilitatingmanipulation ofdata, withseriousimplications.So, it isimperativethatinformationsystemsaredesignedandmanagedina waythat data and information are efficientlyand accuratelycompiledand reported.Automated data flow (ADF) initiativeby RBI is a step in thisdirection.Banks are beingexhorted toensureADF implementationat theearliest,not onlyasa matter of regulatory comfort but alsoin their owninterest.Benefitsfor banks in such implementation are many.One, reduction in thenumber of proceduresand sub-processesinprocuring information, leadingto enhanced efficiency on cost and timeparameters.Two,more efficient internal monitoring, review and managerial decisionmaking, reducingthescope for misreporting.Three, accurateandtimelyregulatoryreportingleadingtoreducedriskofBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 94. 94adverseregulatoryaction and timelysupport for coursecorrection, whererequired.I wouldurge the Independent Directorstoprovidean oversight in theirbanksto thisproject sothat thecompleteswitchovertoADF is achievedin a timelyand efficient manner.Regulatory compliance and single view of informationAs weall know, bankingregulation acrossthe globeis beingtightenedinthewakeof recent financial crisis.Both Basel II, which, for largebanks, focusseson internal processesformeasuringandmanagingrisksand, BaselIII, haveenhancedtheneedforcontinuousmonitoring of data on several parametersto ensurecontinuing, rather than “point in time” compliance.Therearenewregulatoryprovisioningrequirementsaswell,whichcanbecomplied with, onlyby proper data collection, compilation, and analysisand reporting.It is mandated that businessdecisionmaking and regulatoryreportingprocessesuse the same data and information.Any lapsein this regard is increasinglybeingviewedadverselyby themarkets,customers,shareholdersand regulators.It may, in fact, become highlytime and cost intensivepropositionforbanksto collect, compile and report on the basisof voluminousdata ondiverseparametersthrough processeshavingmanual interventions.Thetime criticality, even for internal reporting, is further amplified, bythefact that in a severelycompetitivemarket environment, quickinformation disseminationand decisionmakingisan absoluterequirement for growthand, may be for survival itself.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 95. 95Risksand opportunitieshave to be recognizedquickly, followedby swiftactionto avoid being swampedby events.So, it is in the interestof all stakeholdersto ensure that there is a singleview of information and data in thebankswithautomated/ straightthrough processingfor internal and external reporting.As recent eventshave shown, ability toidentify the risksin time andmanagethem effectivelydifferentiatessuccessfulinstitutionsfrom theunsuccessful ones.To survive in the fast changing environment, institutions are required tohave complete handle on the risks they face which helps them in takingcorrective action.For thistheyneed to have robust IT systemswhichcan collect riskinformation from acrossdifferent businesssegmentsand differentgeographicallocationsin a timelyand comprehensivemanner.Thesystemsshouldbeabletoprocessdataandprovidenecessaryreportstothe management toenablequick actionwherenecessary.Buildingof suchsystemsinvolvessignificant investmentsand, therefore,requires,a dedicated focusfrom the Board and the top managements.Weak and ineffectivegovernancehasbeen a very important contributoryfactortothecurrent crisisand clearlythisis an areawhich needsconsiderable improvement.In this context, maintainingrobust risk information technology(IT)systemsthat can generatetimely, comprehensive, cross-geography, andcross-product informationon exposure is of vital importanceand,therefore, needscloser attention of the Board.Let me quote from a recent G-30document “TowardEffectiveGovernanceof Financial Institutions”whichsuccinctlyemphasisestheBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 96. 96roleof risk information technologyin financial Institutionsand thecritical roleBoardscan play in implementingthem.Ultimately, the qualityof risk information that FI boardsandmanagement teamsreceivedependslargely on thequalityof theorganization‟sIT systems.Ideally, FIs need risk IT systems that can gather risk information quicklyand comprehensively, producing global, cross-product, cross-legal entityestimatesof their exposurespromptly.Unfortunately, few global FIsare capableof this.Theyare hampered by legacysystemsthat are inefficient, costly, andburdensome.Boardsare well advisedtopressmanagement to maintain – and wherenecessaryincrease– investment in risk IT systems, both asa short-termpriorityand aspart of a long-term strategic initiative.RiskIT investmentsmust not be sidelinedby necessaryupgradestofinanceand customer data systems.Instead, theymust be integratedand prioritized.Given that for many largefirms, necessary investmentswill run to severalbillion dollarsover thecoming years, boards may need torethink theirapproachto evaluating management‟sinvestment in core IT spending.While some firms still have the audit or risk committee review ITinvestments, others have established committees dedicated to IToversight.That is an interestingtrend, and worth further consideration.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 97. 97IT governanceComingto IT governance, there are twoways tolook at it.Oneistoviewit asasub-set ofoverall corporategovernanceandtheotheris toseeit asa distinct concept/ disciplineby itself.There areargumentson both sides, but the former looksmoreappropriate.Corporategovernance, with itsholistic definitioncoveringfiduciary,strategic leadership/ guidanceand ethicsrelated roles,is inclusiveof ITstrategyand IT management oversight asIT systemsandinformationareasvaluable asany other resource for a bank, and may be more.Dependenceon theseresourcesand systemsmake it imperativethattheseare managed and governed through an appropriateIT governanceframework(ITG).There areseveral alternativeITG frameworks(over 14asper a 2009research), withmanymore evolving, suitabilityof whichdependson theoverall ecosystem in whicha bank operates.In an earlyresearchon governance, IT governancemechanismswerecategorizedintothree: decision making, alignment processesandcommunicationapproaches.SomeITGframeworkslike Cobit (ControlObjectivesforInformationandRelatedTechnologies), COSO (Committeeof Sponsoring Organisationsof the TreadwayCommission) and ITIL (Information TechnologyInfrastructureLibrary) provide guidancefrom microlevel onwards.AS 8015,theAustralianstandard for ICT governance, is targetedatstrategic level.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 98. 98However,there is nosingledominant approach for ITG. Some recentresearch hasconceived ITG ashaving:(i)Defensiveor(ii)Strategicapproach wheredefensiveapproachrefers to preventingormitigatingdisasterswhile strategic approach aimstocreatesustainableshareholder valueby either reducingcostsor creatinga sustainablecompetitiveadvantage.In practice, holistic understanding of legal, regulatory, businessandinternalethic environment contextsshould determinethe suitability oftheframework for a particular bank.What is important is that ITG achievesitsapplicableobjectives,bothdefensiveand strategic,andenhancestheoverall corporategovernanceinabank, byfacilitatingmaximizationof benefitsandminimizationof risksemanatingfrom IT deployment.It focusesspecificallyon information technology systems, theirperformanceand risk management.Role of board and independent directorsWhilewehavediscussedabout governancein generaland, IT governancein particular, one aspect whichremainstobe mentioned is theimportanceof the rolethat independent directorson theBoards of banksare expectedto play.Banks, basically, are organizationswhichmainlyhave rolesofintermediariesaswell asfinancial market participants.Their soundnessand stabilityhaspotential impact much beyond theirown well being.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 99. 99So, the roleof Board in banks ismore focusedon compliance,organizational ethic and strategic guidance.In theIndianbankingcontext, Boardshavealot tocontributetostrategicITG asthe IT implementationis still evolvingand structuresfor robustoversight onacquisition, deployment andmanagement ofIT systemsandinformation securitymechanismsneed closer attention andstrengthening.Investmentsrequired in acquisition, maintenanceand regularupgradation of technologysystems in banks, alongwiththeneed to haveappropriatehuman resource, are significant, and, therefore,requireappropriatemanagement controlsand accountabilityframeworkunder awatchful Board.Regulationsand lawsdocontribute, but donot constitutethewholestoryabout governance, asrecent global eventshave shown.Governancelandscape, includingIT governance, hasmuch more to becoveredby qualityof Board oversight than mere compliancewiththewrittenword.Goodgovernanceshouldbe,andisoften, theresult ofendogenousfactorsthosethat emerge from within, not without.Governanceisnot about what decisionsget made– that ismanagement –but it isabout whomakes thedecisionsand how theyare made.Independent directors,withan assumption of higher level of objectivityandprofessionalism,areexpectedtoguidethebanksinamannerthat ourbanksaswell ascustomersreap the fruitsof IT deployment while therisksare containedthrough appropriateassessment and mitigationmeasures.Aristotle said “it is betterfor a citytobe governed by a good man thangood laws”.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 100. 100Board and itsDirectorscan contributetowardsgovernance, includingITgovernance, more than thelaw under which it is constituted, and that iswhat is expectedof them.In conclusion, I wouldexhort the independent directorsto perform theirroleat a level expectedof them, soasto benefit the Industry, economyand society and once again convey my thanksto IDRBT for organizingtheprogram.I wishtheprogram great success.Thank you.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 101. 101Monitoring indicators for intradayliquidity management -consultative documentJuly2012Intraday liquidity can be defined asfunds that are accessible during thebusinessday, usuallyto enablefinancialinstitutionstomakepaymentsin real time.TheBasel CommitteesproposedMonitoring indicatorsforintradayliquiditymanagement are intended toallowbanking supervisorsto monitor abanks intradayliquidityriskmanagement.Over time, theindicatorswill alsohelpsupervisorstogain a betterunderstandingof banks payment and settlement behaviour and theirmanagement of intradayliquidityrisk.TheBasel Committeewelcomescommentson thisconsultativedocument. Commentsshould be submittedby Friday14September 2012bye-mail to: baselcommittee@bis.org.Alternatively, commentsmay be sent by post to theSecretariat of theBasel Committeeon BankingSupervision, Bank for InternationalSettlements,CH-4002Basel, Switzerland.All commentsmay bepublishedon thewebsiteof the Bank forInternational Settlementsunlessa comment contributor specificallyrequestsconfidential treatment.Issuedfor comment by 14 September 2012Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 102. 102A. Background1.Themanagement of intradayliquidityrisk forms a keyelement of abank‟soverall liquidityrisk management framework.In September2008,theBaselCommitteeonBankingSupervision(BCBS)publisheditsPrinciplesfor Sound LiquidityRisk Management andSupervision(Sound Principles), whichset guidelinesfor bankson theirmanagement of liquidityrisk and collateral.Principle8 of theSound Principlesfocusesspecificallyon intradayliquidityrisk and statesthat:“A bank should actively manage itsintradayliquiditypositionsand riskstomeet payment and settlement obligationson a timelybasisunder bothnormal and stressedconditionsand thuscontributeto thesmoothfunctioningof payment and settlement systems.”2.Principle8 identifiessix operational elementsthat should be included ina bank‟sstrategyfor managing intradayliquidityrisk and indicatethat abank should:(i)havethecapacitytomeasureexpecteddailygrossliquidityinflowsandoutflows,anticipatetheintradaytimingof theseflowswherepossible,andforecastthe range of potential net funding shortfallsthat might ariseatdifferent pointsduring theday;(ii)havethecapacityto monitor intradayliquiditypositionsagainstexpectedactivities and availableresources(balances, remainingintradaycredit capacity, availablecollateral);(iii)arrangeto acquiresufficient intradayfunding tomeet itsintradayobjectives;(iv)havethe ability tomanage and mobilise collateral asnecessarytoobtain intraday funds;Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 103. 103(v)have a robust capability tomanage thetiming of itsliquidityoutflowsin linewith itsintradayobjectives;and(vi)beprepared to deal with unexpecteddisruptionstoits intradayliquidityflows.3.In December 2010, the BCBSpublished BaselIII: Internationalframeworkfor liquidityrisk measurements,standards and monitoring(BaselIII liquidityrules),whichset out theBaselCommittee‟sreforms tostrengthenliquidityregulations.Theframeworkis centred upon twonew minimum liquiditystandards:theLiquidityCoverageRatio (LCR) and theNet StableFundingRatio.Although the LCR is designed to promotetheshort term resilienceof abank‟sliquidityprofile, it doesnot currently includeintradayliquiditywithinits calibration.TheBasel III liquidityrulesstate:“BanksandregulatorsshouldbeawarethattheLCR stressdoesnot coverexpectedorunexpectedintradayliquidityneedsthat occurduring thedayanddisappearby the end of the day... The Committee is currentlyreviewingif and how intraday liquidityrisk should be addressed.”Theliquidityrulesalsostatethat:“Onearea in particular wheremore workon monitoring toolswill beconducted relatesto intradayliquidityrisk.”4.Tocomplement the guidancein the Sound Principlesand totakeforwarditsfurther work on monitoring toolsfor intradayliquidity, theBCBS, in consultationwiththe Committeeon Payment and SettlementSystems(CPSS), hasdeveloped a proposed set of indicatorstomonitorbanks‟intraday liquidityrisk.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 104. 104Theaim of theproposed indicatorsisto enablebanking supervisorstomonitor a bank‟sintradayliquidityrisk management and itsability tomeet payment and settlement obligationson a timelybasis,both innormal timesand in stressed scenarios.Over time, theindicatorswill alsoenablesupervisorsto gain a betterunderstandingof payment and settlement behaviour and themanagement of intradayliquidityrisk by banks.5.Given the close relationship between the management of banks‟intraday liquidity risk and the smooth functioning of payment andsettlement systems, the indicators are also likely to be of benefit tooverseersof payment and settlement systems.Closecooperation betweenbankingsupervisorsand the overseersisenvisaged.6.It should be noted that the proposed indicatorsare for monitoringpurposesonlyand donot represent the introductionof new standardsaround intradayliquiditymanagement.B. Consultative document7.This consultativedocument seekscommentson the design of theproposedindicatorsand on the supporting regulatory reportingregime.Although the indicatorswill applyspecificallyto internationallyactivebanks,theyhavebeen designedequallyto applyto all banks, includingthosethat accesspayment and settlement systemsindirectlyvia theservicesof a correspondent bank.8.This document setsout:- Thedefinition of intradayliquidityand theelementsthat constituteabank‟sintraday liquiditysourcesand needs;Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 105. 105- Thedetaileddesignof theproposed monitoringindicatorsof abank‟sintradayliquidityrisk in normal times;- Proposed stressscenarios;- Key applicationissues;and- Theproposed reportingregime.9. Commentsare welcomedon theproposedmonitoring frameworkgenerally, but specificallyon the followingquestions:(i)Dotheproposedindicatorsadequatelycapture the intradayliquidityrisk run by banks?(ii) Are thestressscenariosidentifiedin the paper comprehensive?(iii)Istheproposed scopeof application of the indicatorsclear?(iv)What, if any, implementationchallengeswouldtheproposedreporting requirementspresent to banks?(v)Are thedifferent monitoringand reportingrequirementsfordirectandindirect payment and settlement system participantsclear?10.Further guidanceonthedetailedimplementationoftheindicatorswillbeissuedby theBCBS whentheproposalsare finalised.C. Definition and constituent elements of intraday liquidity11. Intradayliquidityis defined by the CPSSas“Fundswhichcan beaccessedduring thebusinessday, usuallyto enablefinancial institutionstomake paymentsin real time”.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 106. 106For thepurposeof this document, „businessday‟isdefined astheopeninghoursof thepayment and settlement system (or group ofsystems) during whichit ispossiblefor a bank toreceiveand makepayments.12.Thefollowingaretheconstituent elementsof a bank‟sintradayliquiditysourcesand needs.Intraday Liquidity SourcesOwnsources- Reservebalancesat the central bank;- Eligiblecollateral pledged withthecentral bank;- Unencumbered liquid assetson a bank‟sbalancesheet that can befreely transferred tothecentral bank and converted intocentral bankmoney;- Secured or unsecured, committed or uncommittedcredit linesavailableintraday;- Balanceswithotherbanksthatcanbeusedforsettlement onthesameday.Other sources- Paymentsreceived from other payment system participants,9includingoperationscarried out in intraday, and/ or overnight moneymarkets;- Paymentsreceived from ancillarysystems.-Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 107. 107Intraday Liquidity NeedsThesearisefrom:- Paymentsthat need tobe made, directlyor indirectly, toother systemparticipants,includingoperationscarriedout in intraday, and/ orovernight moneymarkets;- Paymentsto be made to ancillarysystems;- Contingent payments(egasan emergencyliquidityprovider) relatingtoa payment system‟s failure to settleprocedures;- Contingent intradayliquidityliabilitiesto customers.- Paymentsarisingfrom providingcorrespondent banking servicesIn practice,somecustomerbanks‟paymentsaremadetoothercustomersof the same correspondent bank.Thesepaymentsdonot give rise tointradayliquidityneedsfor thecorrespondent bank asthey aremade acrossitsown booksand do notenter thepayment system.However,these„internalisedpayments‟dohave intraday liquidityimplicationsfor both the sending and receivingcustomer banks.II. The intraday liquidity monitoring indicators13.Anumber of factorsinfluencea bank‟s usageof intradayliquidityinpayment and settlement systems and thevulnerability to intradayliquidityshocks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 108. 108As such, nosingleindicator can providesupervisorswithsufficientinformation on intradayliquidityrisksor on how well risksare managed.For thisreason a set of indicatorsis proposed.Theseaim tomonitor:- Abank‟susageof, and requirement for, intradayliquidityboth innormal timesand in timesof stress;- Theintradayliquidityavailable toeach bank on adaily basis, both innormal timesand timesof stress;and- Changesin banks‟behaviour over time withinthe payment andsettlement systems.A. The set of monitoring indicators14.Thedetaileddescriptionof each indicatorisset out below and stylisedexamplesof theindicatorsaregiven in Annex 1.Thereportingrequirementsof each indicator are set out in Section D.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 109. 109(i) Daily maximum liquidity requirement15.This indicator will show a bank‟sdaily maximum requirement forintradayliquidityin normal timesby establishingitsnet cumulativeintradayliquiditypositionover a period of time.The net cumulative intraday liquidity position of a bank is the differencebetween the value of its payments received and the value of its paymentsmadeat any point in theday.Thebank‟slargestnegative net cumulativeposition during the day willdetermineitsmaximum intradayliquidityrequirement on that day.16.The indicator is shown in figure 1. A positive net cumulative positionsignifiesthat the bank hasreceived more paymentsthan it has made at apoint in time during theday.Conversely, anegativenet cumulativepositionsignifiesthat thebank hasmademore paymentsthan it hasreceived.For direct participants,the net position representsthe changein itsopeningbalancewiththe central bank.For indirect participants,thenet position representsthechangein theopeningbalanceon itsaccount(s) withitscorrespondent bank(s).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 110. 11017.For the purpose of thisindicator, intraday liquidity positionsshould becalculated on actual settlement times, rather than on submission times ofpaymentstothesystem or to a correspondent bank, asappropriate.18.Assuming that abank runsanegativenet cumulativepositionat somepoint intraday, it will need accessto intradayliquidityto fund thisbalance.Theminimum amount of intradayliquiditythat a bank wouldneed tohaveavailableonanygivendaywouldbeequivalent toitslargestnegativenet cumulativeposition. (In the illustrationabove, the intradayliquidityrequirement wouldbe 10units.)19.Conversely, whena bank runsa positivenet cumulativeposition atsomepoint intraday, it hassurplusliquidityavailabletomeet itsintradayliquidityobligations.Thispositionmayarisebecausethebank isrelying on paymentsreceivedfrom other system participantsto fund itsoutgoingpayments.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 111. 111Thelargerthepositivenetcumulativeposition, thegreaterabank‟susageof incomingpaymentsto fund itsown payment obligations.(In theillustrationabove, the largest positivenet cumulativepositionwouldbe 8.6units.)20. For an indirect participant, paymentsare made acrossthebank‟saccount(s)held with its correspondent bank(s).Thetiming of receipts to, and paymentsmade from, the account(s) willdeterminethebank‟sintradayliquidityusage/requirement.(ii) Available intraday liquidity21.Thisindicatorwill showtheamount of intradayliquidityavailabletoabank on a daily basisin normal times.Bankswill berequiredtoreport theamount of intradayliquidityavailabletothem at the start of each businessday and thelowest amount ofavailableintradayliquidityby valueon a daily basisthroughout thereporting period.This will require banks tomonitor changestotheir availableintradayliquidity.Theindicator will enablesupervisorstoassesswhethera bank hassufficient intradayliquidityavailableon a daily basisto meet its normalintradayliquidityrequirement.The„OwnSources‟of liquidityset out in Section I C aboveare availablefor inclusion in thecalculationof this indicator.22. Wherebanks managecollateral on a cross-currencyand/ orcross-system basis, liquiditysourcesnot denominatedin thecurrencyoftheintraday liquidityrequirement and/ or which arelocatedin a differentjurisdiction, may be included in the calculationof the indicatorBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 112. 112if thebank candemonstrate tothe satisfactionof itssupervisor that thecollateral can be transferred intradayfreelyto the system whereit isneeded.(iii) Total payments23.Thisindicatorwill require bankstoreport thetotal valueof their grossdaily paymentsmade and received in payment and settlement systems.Thiswill enablesupervisorstoestablishtheoverall scaleof their paymentand settlement activity.(iv) Time-specific and other critical obligations24.TheSound Principlesstatethat a bank “should adopt intradayliquiditymanagement objectivesthat allowit toidentify and prioritisetime-specificand other critical obligationsin order tomeet them whenexpected”.Theseareobligationswhichmust be settledat a specifictime within thedayor have an expected intradaysettlement deadline.Failure tosettlesuchobligationsontimecould result in financialpenalty, reputational damage or lossof future business.25.This indicatorhastwocomponents.Banks will be required to report the volume and value of theirtime-specificand other critical obligationsand thetotal number andvalueof timecriticalobligationsthat weremissedduring thereportingperiod.This will enablesupervisorsto gain a better understandingof banks‟time-specificobligationsand to monitor that thoseobligationsare beingmanaged appropriately.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 113. 113Thefollowingtwoindicatorsapplytobankswhichprovidecorrespondentbankingservicesor extend intraday credit aspart of providingpaymentservicestoother customers.(v) Value of customer payments made on behalf of financialinstitution customers26. This indicatorwill require correspondent banks to report the grossvalueof their daily paymentsmade on behalf of all of their financialinstitution customers.This will enablesupervisorsto gain a better understandingof thedriversof a correspondent bank‟spayment flows.The bank will also be required to report the value of payments settled onbehalf of each of itsfive largest financial institution customers (by value),including“internalisedpayments” that are settledacrossitsbooks.This will enablesupervisorsto assessthe degreeof paymentconcentration in thebank‟sprovision of correspondent banking services(vi) Intraday credit linesextended to financial institutioncustomers27.Thisindicatorwillrequire correspondent bankstoreportthetotal sumof intradaycredit linesextendedby them to all of their financialinstitution customers.Thecorrespondent bank will alsobe required to report thevalue of thecredit linesextended to eachof itslargest five financial institutioncustomers(byvalue), distinguishingbetweensecured and unsecuredcredit and committedand uncommittedlines.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 114. 114Forthosesamefivecustomers,thebank willalsoberequiredtoreportthemaximum daily usageof credit linesgranted, again distinguishingbetweensecured and unsecured and committedand uncommitted lines.This indicatorwill enablesupervisorstogain a better understandingof abank‟scorrespondent bankingbusinessand theextent of anyconcentration in itsprovision of intradaycredit.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 115. 115Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 116. 116Synthesisof the Commentsfrom theCall for Evidenceof the InternalMarket and ServicesDirectorate–General on the fundamental reviewof the FINANCIALCONGLOMERATES DIRECTIVEEXECUTIVE SUMMARYTheCall for Evidencefor theFundamental Review of theFinancial ConglomeratesDirective(hereafter"FICOD"), whichwasannounced in February2012,aimed at engaginginterestedstakeholderswith the debateon thesupervision of largecomplex financial groupsinEurope in the context of theFinancial ConglomeratesDirectivereview.TheEuropean Commission asked interestedstakeholderstoreply tothreesetsof questions,relatingto:a)Thegeneralconcept ofsupplementarysupervisionongroupsthat meetcertainthresholds;b)An invitationfor commentson the European specific perspectiveonJoint Forum principlesof supervisionin their five areas(Supervisorypowers,SupervisoryResponsibilities, Governance, Capital adequacyandliquidityand Risk management),c)Certain specific elementsof the Financial ConglomeratesDirective.TheCommission received13responsestothe Call for Evidence. Morethan half of respondentsrepresent bankingand insuranceindustryviews.Other respondentsconsist of privatestakeholdersand one supervisoryauthority.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 117. 117Fiveresponseswerereceivedfrom the United Kingdom, and one fromFrance, Portugal, the Netherlands, Germany and Belgium each. Fourresponseswerereceivedfrom European level organizations.Many respondentswelcomethe ideaof revisitingthe current supervisoryframeworkfor financial conglomerates.However,onlya few are advocating for a strengtheningof the currentsupervisoryregime for conglomerates.Theoverall impression is that most respondentsare satisfiedwiththecurrent regulatory frameworkon financial conglomeratesand find itadequatelyensuresefficient supervision in the EU.Someagree that potential gapsarisingfrom cross-sectoralrisksandunregulated entitiesneed to be captured in order toensure effectivesupervision, however most respondentsbelievethat upcomingimprovementsin thesectoralsupervisoryregimes alreadyguaranteecomprehensivegroup-widesupervision.While manyof the respondentsacknowledgethat coherencebetweensectoralrulescould be improved, most claim that current sectoral rulesare sufficient and adequate.Takingintoaccount the fact that prudential frameworks(CRD, SolvencyII, shadowbanking) are currentlyundergoinga review,theyexpresstheneed for the new prudential rulesto settleand for thegaps, wheresupplementaryregulation is necessary, tocrystallise.Onlya few respondentsexpressmore ambitiousviewstowardsstrengtheningsupplementarysupervisionof financial conglomerates.Theyadvocate for powersfor supervisorsto imposeall grouprequirementson theparent entity whether regulated or unregulated andfor capturing special purposevehicles (SPVs) withinthescope of groupsupervision.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 118. 118First set of questions - viewson the general concept ofsupplementary supervision on groupsthat meet certainthresholdsIn the light of theobjectiveof this kind of supervision, thedetection andcorrection of group risks in groupswithmany different licenses(i.e.contagion, concentration of risks, conflictsof interest, managementcomplexity, multipleuse of capital), is theconcept of supplementinggroup risk relatedsupervisionto the sector-specific supervisionofindividuallyauthorized entitiesin a financial conglomerate still effective?Themajorityof respondentssharethe opinion that the current regulatoryframeworkon financial conglomeratesisadequateand ensuresefficientsupervision.Thoserespondentsthink that existingsectoral rulesare sufficient andthat proposed changestocurrent legislation should be allowedto settlebeforefurther reform.According to the some industrystakeholders,the upcomingSolvencyIIregimeprovidesfor an extensive set of rulesfor insurancegroupssupervision.Enhancedcooperationand informationsharingwill enablesupervisorstomaintaina sufficient level of oversight at the group level. Intragrouptransactionsand risk concentrationswill be continuouslymonitored andreported tothesupervisors.Afew respondentsthink that financial conglomeratesshould be subjecttoa supplementarysupervisory framework.This is necessaryfor addressingcross-sectoralrisks whichmay not beadequatelyaddressed in sectoralgroup supervision toensure that allavenuesfor contagion betweenthetwosectorsare captured.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 119. 119Is the applicationof thissupplementarysupervision onlytogroupsthatmeet the cross-sector thresholdseffectivein thelight of the objectiveofthiskindofsupervision, orshouldit beappliedtoadifferentlydefinedsetof groupsactivein the financial sector?As regardsthresholdsfor identifying conglomerates,opinionsdiverge:i)There is noneed for specific thresholds,provided that thedefinitionofa group in CRD is alignedwith SolvencyII,ii)The10% threshold should be removed, replacingit withan alternativethreshold,iii)There is no need for anymodification to current rules.Themajorityof the respondentssupport thethird option.Theyaresatisfiedwiththecurrent provisionsand findtheapplicationstilleffective.Theysharetheview that addingsupplementarylayersof supervisionontofinancial conglomerateswouldoverburdenthefinancial industry andwouldnot be effective.TheSolvencyII regime is sufficientlyrisk-basedand assuch, additionalrequirementsat thefinancial conglomerateslevel should not result induplicateor contradictoryrequirements.Somerespondentsacknowledgethe need to revisethecurrent frameworkand some question current waiverprovisions.Few respondentssuggest that entitiesthat are not subsidiaries(particularlyholdingsof 10%-20%) should not be part of thegroup.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 120. 120In view of the objectiveof this framework, is stresstestingatsector-specificlevel onlysufficient totakeaccount of unexpectedscenarios in financial conglomerates?While most respondents agree on the usefulness of stress tests forfinancial institutions, they are sceptical towards stress tests at theconglomerate level.Someindustrystakeholdersargue that Solvency II is a risk-basedregimewhichin itselfacts asa stresstest of (re)insurers.Theyfeel that stresstestsat thefinancialconglomerate level wouldbecounterproductive.Most respondentsunderlinethepriorityof the implementationof thesectorallegislationand find the implementationof the stresstestinganalysisdeveloped at the level of theindividual sector more efficient.Existingrules,issued at national, EU and Basellevels, are sufficient tocheckthe resilienceof firms and enablecorrective action.Thoserespondentsthat think that stresstesting at the level of financialconglomerateswouldbe useful recognisethat it could enableconglomeratesto better evaluateand manage group-widerisksand toassessinter-sectorialeffects.In that casestresstestsshouldberobust andconsidersufficientlyadversecircumstances.Respondents, however, list possible practical limits to such exercises(company law restrictions, the heterogeneity of the business models,different techniquesof measuring risksetc.)Second set of questionsrelated to the Joint Forum principles1. Supervisory powers(Joint Forum principles1-4)Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 121. 121Thequestion is, whether, in the context of group widesupervision, supervisorsin Europe should at all timesbe empoweredtoaccessthis head of the financial conglomeratein itsleadingrole andimposecorrectivemeasureson this entity, if it is not an authorizedentityitself.With regard tothis question, there are twodivergingviews.Half of respondentsstronglyadvocate for providing the supervisorswiththeabilityto imposegroup requirementsdirectlyon theparent entitywhetherregulatedorunregulated, theotherhalf think thisquestionhastobeaddressed at thesectoral level.Respondentsthat argue for the need tostrengthen supervisory powerstowardsthehead of thefinancial conglomeratepoint out that sinceit istheparent entitythat generatescontrolsand managesgroup risk aswellasraisingand allocatingcapital, it is essential tobe able toapply grouprequirementson that parent entitydirectlyevenif it is unregulated.It providesan extra dimension for enforcement of requirementsand italsocreatesanincentivefor groupboardstotakesufficient account of thepossibleimpact of their actionson regulatedentities.There should be a singlepoint of contact for a financialconglomerate,regulated or not, on whichthegroup supervisorcouldenforceall group related supervisory requirements.Financial conglomeratesshould be subject to supervisionsupplementarytosupervision on a stand-alone, consolidatedor group basis,withoutduplicatingor affectingthe group supervisionand regardlessof the legalstructure of the group.This group of respondentssupport the reinforcement of powersof thecoordinatorsupervisor, and the strengtheningofcooperation, coordinationand information exchangebetweensupervisorswithin thecollege of supervisors.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 122. 122Theyadvocate for suitablesupervisorydiscretion tobe given to thecompetent authoritiestoapplyanyruleson FinancialConglomeratesin awaythat isproportionate tothenature of the conglomerate itself.Respondentsflagseveral related issues:i)Possibledistortionof competition intheform of lowerrequirementsforfinancial conglomerateswherethe headof the group is not a regulatedentity;ii)Existingconflict of supervisoryand corporate laws,asto whethertheultimate parent undertakingof thegroup hasthenecessarypowersundercorporatelaw to fulfil its obligations.Atransparent and consistent regime must allocateresponsibilitiestotheentitywhichhasthemeansto complywithit.Thoserespondentsthat seethat the question asneeding tobe addressedat the sectoral level claim that theexistingand proposed EU regulatoryframeworkfor the bankingsector dealswith this issuein an appropriatematter.They feel that proposed (capital) rules enable corrective measures whichshould be sufficient to address risks to financial stability, including fromunregulated partsof a group.2. Supervisory responsibilities (Joint Forum principles5-9)Thequestion is, whetherthe discretion toapplythe rulesin thesupervisoryapproach aschosen by the respectiveauthoritiesis effectivein thecontext of cross-border and cross-sectorgroups,or whetherotherenforceableprovisions(suchastransparency, or obligatory cooperation,(seethe Joint Forum document for moreprovisions) are necessary.Most respondentsare content withthe current regulatory framework.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 123. 123Theyfind it adequateand allowingfor sharing of supervisory approachesand information within a collegesetting.Respondentsemphasize the importanceof information-sharingandsupervisorycoordination in a secure and efficientlyorganisedmanner.Aconglomerate s lead supervisor should remain clearlyaccountable.It is essential tomonitor national implementationof thesemeasurestoensure equivalenceacrossjurisdictions.In a European context wherebanking, insuranceand securitiessectorsupervision is subject to theESAs mandate of preventing regulatoryarbitrageand promoting equal conditionsof competition, it wouldbeinconsistent nottoalsoincludefinancialconglomeratesinthesamelogic.Another opinion advocatesfor building more productiveworkingrelationshipsbetweensupervisorsthrough the collegesystem, whichwouldreducetheneed for additional detailed rules for financialconglomerates.It is thought that theeffectivenessof qualitativesupervision will varydependingupon legal systems and the experienceof supervisors,and theeffectivenessof cross-sectorand cross-bordersupervisory colleges.3. Governance (Joint Forum principles10-14)Thequestion is whether explicit new or amended legal provisionsarenecessarytoachievesoundgroup-widegovernancesystemsinEurope,orwhethersufficient legallyclearprovisionsalready exist to implement thesuggestedprinciples.Thegeneral view isthat explicit new or amendedlegal provisionsare notnecessaryasthecurrent regulatoryframeworkonfinancialconglomeratesensuressound governance of financial conglomeratesand providessupervisorswithsufficient toolsto interveneif needed.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 124. 124Financial conglomerates-specific regulationshould be limitedto theminimum necessaryenablingthe closureof any identified gapsratherthan establishinga full set of specific principles.Most respondentsthink that thepossibilityfor thecoordinator supervisortointervenein the governanceof a conglomerate, toinfluencethestructure of it, wouldbe toofar-reachinga power.Theyadvocatefor flexibleandprinciples-basedgovernancerequirementsfor conglomerates.Several respondentssuggest that unregulated and non-financial entitiesshouldbeexcludedfromthegovernancespecificrequirements,especiallywhencorrespondingrequirementsare applied at sectoral level.Theopponentstothis view would welcomemore explicit governancerequirements,suchasadding group-wideremuneration rules.Supervisorsshould ensure that the conglomerate‟scapital managementpolicy isrobust and takes intoaccount risksemanatingfrom unregulatedactivities.It should includein that exercisethe regulatedaswell asnon-regulatedentities.Onerespondent expressed an opinion that anyreferenceto thegovernanceframework should be sufficientlybroadtoencompassallpossiblelocalcompany law frameworks.It wasflaggedthat the element of public disclosure iscompletelyoverlooked.Supervisorsshould alsoencourage public disclosure in several areas(other than only riskconcentrations,intra-grouptransactionsandexposures) such asthe structure, remunerationelements,overall capitalsituationand stresstestingresults.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 125. 1254. Capital adequacy and liquidity (Joint Forum principles 15-20)Thequestion is, whetherthe Europeanprudential framework shouldremainconfinedto enforceablecapital- and liquidity-ratios, and leavediscretiontofirms toensure theyalwaysmeet thoseminimum ratios,orthat additionalprovisionsarenecessary, assuggestedbytheJointForum, toensurethat a conglomeratesinternal capital and liquiditypolicy issufficient to meet the required standardsat all timesin all of itsauthorizedentities.Themajorityof respondentsare of an opinion that additionalrequirementsare not needed and theysupport a Pillar II approach.Existingand proposed sectoral prudential frameworks,includingtheuseof Pillar II, allowor will enableregulatorstoensure that financialconglomerateshavesufficient capital and liquiditytocover group risks.Somerespondentsnote that it is important that unregulatedentitiesthatare part of a financial conglomeratearenot treated differentlytounregulated entitiesthat are part of other regulated financialgroups.Theinteraction betweenunregulatedentitiesand regulatedentitiesshould be taken intoaccount as"environmental" factorsaspart of thePillar II supervisoryreview and evaluation process.Therequirementsfor bankingand insuranceshould remain different inorder to ensure an efficient and relevant supervision at the sectoral level.Somerespondentssupport a global supervisoryoversight of financialconglomerates.It hasbeen pointed out that SolvencyII has twomandatorycapitalrequirementsat group level and supervisorscan impose capital add-onsbased on assessmentsof both Pillar I and II provisions.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 126. 1265. Risk management (Joint Forum principles21-29)Expertsareinvitedtogivetheir viewsontheEuropeanimplementationofmore specificregulation of group risksof this kind and introducingrelevant requirementsat thelevel of thehead of a financial conglomerate.Themajorityof respondentsseenoneed for anyfurther requirementsatthefinancial conglomeratelevel.According to them, all risks identifiedare adequately covered at thesector-specificlevel and current rulesallowfor correctivemeasuresto beimposedat any regulatedlevel.It is argued that existingtoolsalsoallowthe influencingof anyunregulated head of the group.In additiontothat, several respondentsstressthediversificationbenefitsderivingfrom thedifferent riskprofilesof thebankingsector andinsurancesector, asregards contagion and risk concentration.Given the widerangeof changestakingplacein thesedomains,allowingsometime to better assesstheir end resultsseemsappropriatebeforeembarkingon implementingadditionalminimum standard requirements.Somerespondentsacknowledgethat it wouldbebeneficial tohaveexplicit requirementsto addressrisk management cultureand tolerance.Somesupport wasexpressedtowardsmore detailed requirementsinFICOD Article 9 to ensure that thefull spectrum of risksis captured,particularlywithrespect to off balancesheet activitiesincludingspecialpurposeentities(SPEs).FICOD could haveexplicit requirementsto determine whethertoconsolidatean SPE and if so, what proportion.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 127. 127This could includerequirementsfor an assessment of the risk transferbetweenthe financial conglomerateobligationstowardstheSPE and arequirement to assessother factorssuchascontrol or economicinterconnectednesstodeterminewhethercontagionriskispresent (usingstressand scenariotestingwhereappropriate).Respondentsnotethat coherenceof thecore principlesof supervisionforbanksand insurancewouldbe beneficial.Theobjectiveshould be toachieveregulationwhichis aligned withtherisksposed by institutionsin their respectivesectorsbut whosedesigntakesintoaccount cross-sectoraleffects.Somesupport thedevelopment of cross-conglomerateconsolidatedreporting of risks.Third set of questions: essential elements of the FinancialConglomerate DirectiveThequestion is whetherthestructure of the Directive, of this set ofprovisionsthat must supplement sector-specificprovisions,is clearandwhetherlegal certaintyisoptimal. If not, how could legal clarity andcertaintybe improved?Most respondentsare satisfiedby the legal clarity and certaintyprovidedbytheDirective.Issuesflaggedby several respondentsare:i) PossibleconflictsbetweenFICOD and national companylawparticularlybetweenthe group-wide/centralizedcontrolling-obligationof the superordinateentityversusthepersistingresponsibilityof theboardsof the subordinatedentities,Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 128. 128ii)Thefailure of thepresent Directivetoaddresstheproblem of how toenforceconglomerate-relateddutiesand obligationsover anon-controlledminority-held (20-50%) conglomeratemember,iii)That the responsibilityof evaluatingthe systemic relevanceof therisksposed by any economic group - and not solely the financialconglomerate - could rest withintheEuropean Systemic Risk Board.How could the definition of the relevant "group" and thedetermination of responsible entities be improved?As regardsthe definitionof a group and the determinationof responsibleentities,therearetwoopposingviews.Some respondentsseetheneedforparent entityprovisionsensuring powersat both regulated entitylevel andat parent entitylevel.In that respect provisionsshould allowthe identification of the ultimateparent, takingintoaccountfactorssuchascontroland ability of theentitytoinfluencethegroup strategy and structure.New provisionsshould be introducedtoensure that theparent entityisresponsiblefor requirementson corporategovernance, risk managementincludingcapital adequacypolicy, risk concentrationsand intra grouptransactionmonitoring and reporting.Other respondentssupport thecurrent definitionof a group.Theystressthat theDirectiveshould not cover non-regulatedornon-financial entitiessincethese are not coveredby the sectoral rules.Thenotion of a group in the FICOD should be consistent withsectoralrules (if bankinggroupsare not required toconsolidatea SPV forexample,thefinancial conglomerateshouldnot beobligedtoconsolidateit either).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 129. 129Thequestion is whetherthe frameworkfor prudential supervisionoffinancial groupscould benefit from this "legal tandem" withcompanylaw,or whetherthe financial supervision frameworkshould be completeand clear in and of itself.Respondentsgenerallyagree on the fact that effectivesupervisionshouldbeachieved through a clear and completesupervisoryframework.As regardscompany law,the viewsexpressed are quiteheterogeneous:i)Certain rulesunder the supervisoryframeworkare impossibleto beappliedunder thenational company laws,ii)Theprudential supervisionframeworkfor groupsshould beconstructed in sucha waythat it can accommodatethedifferent nationalcompany laws,iii)Companylaw should act aslex generalistobe complemented byparticular sectoral rulescateringfor sector specificitiesiv)Aconflict betweensupervisorylaw and corporate law could be solvedbyprovidingthe obliged entitywiththenecessarypowersundercorporatelaw to fulfil its obligations,v)It is important to wait for thefinal versionsof CRD IV/ CRR andSolvencyII, to analysetheconflictswith company law and makesuggestionson how to fit theseregulatory frameworkstogether.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 130. 13002July2012Statement by the Chancellor of theExchequer, Rt Hon George Osborne MP, onLIBORCheck against delivery[Note: The London Interbank OfferedRate(LIBOR) is theaverageinterest rate estimated byleadingbanksin London that theywouldbechargedif borrowingfrom other banks]Mr Speaker, on Thursday I updated the House on the Financial ServicesAuthority‟s investigation into Barclays and the attempted manipulation oftheLIBOR market in the yearsrunning up toand during the crisis.TheHousehasjust heard from the PM and I wouldlike togive moredetails of the stepsweare taking.This morning, I spoke to MarcusAgius, whoconfirmedthat he wasresigningasChairmanof Barclaysbecauseof theunacceptablestandardsof behavior withinthe bank.TheTreasurySelect Committeeis callingtheChief Executiveof Barclaystoaccount for himself and for his bank on Wednesday.I look forwardto hearing hisanswers.As I alsosaid last week, every avenue of possiblecriminal investigationsfor individualsinvolved in attempted manipulationof LIBOR is beingexplored.However,in theview of its Chairman, Lord Turner, thepowersthat weregiventotheAuthority do not allowit topursue criminal sanctions.Peoplein thecountry ask whytheydidn‟t have thenecessarypowers.[Politicalcontent removed]Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 131. 131And people askwhetherthesegapingholesin the existinglaw mean thatnoaction at all is possible.After all, fraud is a crime in ordinary business;whyshouldn‟t it be soinbanking?I agree withthat sentiment, and I welcomethe SeriousFraud Office‟sconfirmation theyare actively and urgentlyconsideringthe evidencetoseewhethercriminal chargescan be brought - particularlyin relationtothecurrent FraudAct and in relationto falseaccounting.Theyexpect tocome to a conclusion by the end of this month.We wouldencourage them touse every legal option availableto them.I‟d like to addressthree further issuestoday.First, what happensto themoney weget from the fines.Second, what urgent changesare neededtothe regulation of LIBOR andother marketsto prevent such abuseoccurringagain, and toensure theUK authoritieshavethepowerstheyneed to hold thoseresponsibletoaccount.Third, the widerissue of what went sobadlywrongin the culture of ourbankingsystem and the wayit wasregulated, which allowedsuchfundamental failures of basicstandardsof conduct to go uncheckedandunchallenged.Last week,I saidthat wewantedtoensurethat finespaid bythefinancialservicesindustry in future goto theExchequer.Today, I can confirm wewill propose amendmentstothe FinancialServicesBill in theautumn to make thishappen.This will remove a long-standinganomalyand bring theregulator intolinewithregulatorsin other sectorsof theeconomy.Thenewarrangement willapplytofinesreceivedfrom 1April 2012sothatit includesthe Barclays penalty.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 132. 132From now on, themulti-millionpound finespaid by banksand otherswhobreak theruleswill gotothebenefit of thepublic not toother banks.Mr Speaker, that bringsme tothe second question of the urgent changesweneedto make to the regulation of LIBOR toprevent thiseverhappening again, and to ensure that in future authoritieshavetheappropriatepowerstoprosecutethosewhoengagein market abuse andmanipulation.I havetodayaskedMartin Wheatley, theChief Executivedesignateof theFinancial Conduct Authority toreview what reformsare required to thecurrent frameworkfor settingand governing LIBOR.This will includelookingat:-Whether participationin the setting of LIBOR should become aregulated activity;- Thefeasibilityof using of actual tradedata toset the benchmark; and-Thetransparencyof the processessurroundingthe settingandgovernanceof LIBOR.The review will also look at the adequacy of the UK‟s current civil andcriminal sanctioning powers with respect to financial misconduct, andmarket abusewithregardsto LIBOR.And it will assesswhethertheseconsiderationsapplyto otherprice-settingmechanismsinfinancialmarkets- toensurethat thesekindsof abusescannot occur elsewherein our financial system.We needto get on withthis– not spend years on navel gazingwhenweknow what hasgonewrong.I am pleased totell the Housethat Mr Wheatleyhasagreedtoreport thissummer so that theFinancial ServicesBill currentlybeforeParliament orthefuture legislationon Banking Reform can be amendedtogive ourregulatorsthepowersthey clearlyneed.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 133. 133Mr Speaker, the review is essential to ensuringwemend thebrokenregulatorysystem introducedby thelast Government, whichallowedtheseabusestohappen.But themanipulation of the most used benchmark interest rate revealsthat there is a broader issueof the professional standardsand cultureinsomepartsof the financial servicesindustrythat wasallowedto grow upin theyears beforethe crisis and whichmay still need change.I don‟t think a longcostlypublic inquiry is the right answer.It wouldtake monthsto set up and yearsto report.We know what went wrong.We can‟t wait until 2015or 2016to fix it.In just six monthstime wewill be bringingforwardtheBanking ReformBill that will implement therecommendationsof Sir John Vickers‟Independent Commission on Banking.This will bring far reaching lastingchangeto thestructure of Britishbanksring fencingretail banks from their investment bankingarms.Let‟s see if wecan usethis Banking Bill tomake any furtherchangesneeded to thestandards of thebanking industry, and the criminal andcivil powersneeded toregulateit and hold people toaccount for theirbehaviour.As the PM said, weproposethat Parliament establishan inquiryintoprofessional standardsin the banking industry.TheGovernment will in thecoming days laybeforeboth HousesaMotiontoestablishaJoint Committee,drawnfromtheCommonsandtheLords.It should be chaired by the Chair of theTreasurySelect Committee, theHonourable Member for Chichester.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 134. 134He and his Committeehave alreadybeen quick off the mark ininvestigatingthe issue, and wecertainlywant their hearingsthis weektoproceed.I proposethat the Terms of Referenceshould be this: buildingontheTreasury Select Committee‟sworkanddrawingontheconclusionsofUKand international regulatory and competition investigationsintotheLIBOR rate-setting process, consider what lessonsaretobelearnt fromthem in relation to transparency, conflictsof interest, cultureand theprofessional standardsof thebankingindustry.I proposethat it should be able to call witnessesunder oath, includingcurrent Membersof Parliament and Lords.And I can confirm that wewill providethe Committee withtheresourcesit needsto do thejob.I wouldsuggest to the Housethat weask the Joint Committeetoreportbythe end of thisyear, 2012.That is enough timeto do thejob – and doit well – but not solong thatthisissuedragson for years.And it means,in verypracticalterms,that wecanamendour BankingBilltotake on board itsrecommendations.I hope all Partieswill support the Motionweput forward.Thefailure to regulatethebanks in theboom yearscost thiscountrybillions.Thebehaviour of some in the financial serviceshasdamaged thereputation of an industrythat employshundredsof thousandsof peopleand isvital tothe economicprosperityof the country.We‟re changingthe failed regulation;reformingthebanks; nowit‟stimetodeal withthe culture that flourishedin the ageof irresponsibilityandhold thosewhoallowedit to do sotoaccount.I commend this statement totheHouse.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 135. 135Report on Risksand Vulnerabilities of the European bankingsector11July2012Theannual report on Risksand Vulnerabilitiesof the European bankingsectorby theEuropean BankingAuthority (EBA) describesthemaindevelopmentsand trendsthat affectedtheEU banking sector in 2011.The current conjunctureEU bankshave undergone significant changessince2007, with anacceleratedpace in 2011and 2012.Fundingstructureshave shiftedconsiderably, towardsthepredominanceof official and retail sourcesof funding.Capital levelshave strengthenedwhilst profitshave reduced, leadingtosignificantlylower returnson equity.Businessmodels are adaptingasbanks retreat from some areasofbusiness– such asinvestment bankingor global finance–particularlywhereeconomicallyaffordablefunding is no longer availableand regulatory changesrequire more risk protection.Further adjustmentsarelikely.There-segmentationof bankingmarketswithinnational boundaries,Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 136. 136particularlyinterbank funding, will significantlyimpact businessmodelsgoingforward.During 2011and 2012significant effortshavebeenmadetostrengthentheEU banking sector in termsof both capital and funding/ liquidity.TheEBA‟s2011EU widestresstest reviewedcredit soundness,sovereignholdingsand fundingcosts.However,asthesituationdeterioratedadditionalmeasureswererequired, leadingamong other stepsto the EBA‟s December 2011RecapitalisationRecommendation.TheRecapitalisationentailed a system widestrengtheningofparticipatingbanks‟capital basesto9% coretier 1andthustheirabilitytoabsorb losses.It wasnot a stresstest, but wasa necessarystep in theprogresstorestorebanksbalancesheet.National authoritieswill continuetopursue the processof balancesheetrepair by assessingindividual banks‟asset valuations,especiallyforspecific credit segmentswith a focuson geographiesand sectorssuch asproperty loans.Market participants and rating agencies continue to see banks andsovereigns as inextricably interlinked, leading to acute pressure onfundingcosts.TheECB‟s LTRO hasmeant that fundingpressureshave easedsomewhat followingtheECB‟saction but further measureswill berequiredto return tosustainablefunding.Policy announcementsasof June2012topotentiallyinjectcapital directlyintobanks and undertake EU wide supervision appeared toimprovemarket sentiment in this regard.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 137. 137Nonetheless, asof mid-2012thesituationremainsextremelyfragile withincreasinguncertaintyon asset quality, fundingcapacityand concernsover thepossibilityof extreme events.Banks and supervisorsare considering, and putting in place,relevantemergencyactionsasa rapid deteriorationof eventscould lead to furthersignificant changein the banking landscape.Beyond 2012 – medium term supervisory risksAreturn to sustainablefunding, beyond thetemporarysolution broughtbythe LTRO, will require(i)Restoring market confidencein EU banks,(ii)Arecalibration of banksstrategies, businessmodels, asset-liabilitymixesand risk-tolerancelevels, and(iii)Forward-lookingand closemonitoring by supervisorsin 2012andbeyond.Lengtheningmaturityprofiles,diversifying funding sourcesand meetingthenew liquidityrequirementsmust all be balanced with thechallengesof increasingusageof collateral, risingasset encumbranceand changingmarket viewson banks‟unsecured liabilities.Thefocuson secured and retail fundingall createpotential challengesontheprudential and consumer protection front.Theseissueswill absorbthe effortsof both bank management teamsandsupervisorsin the years to come.For thelarger EU banking groupswith material cross-border activitiestheseeffortswill have to continueto expandwell beyond nationalborders.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 138. 138As banks adjust to thechangingenvironment, further restructuringoftheir activitiesand businessmodels isexpected.Moreover,theneedtoaddressmore vigorouslyasset qualitydeterioration– particularly(i)Where economiesare in recessionand(ii)For higher-riskcredit sectorslike real estate– will come tothefore.Anumber of toolsare being usedby banksand supervisorstoaddressdeterioratingassetquality.For example, higher provisioninglevelsare being demanded and somesupervisorsand banks are strengtheningtheir loan-modification andarrearsmanagement monitoring capacityto help identify inflectionpointswhereforbearanceon potentiallyproblematic loansmovesfrombeinga risk mitigant to beinga risk in itsownright.Lower returnson equity, tougher funding conditions,and thesegmentation of thesinglemarket, are all keydrivers for changein banksbusinessmodels.Heightenedsupervisoryattention will be paid to thesedevelopmentstounderstand changesboth within thebanking system and to monitoraspectsof traditional bankswhichmove to other areasof the financialsystem.Table1summarisestheEBA‟s viewsregardingthemain risksandvulnerabilitiesin theEU banking sector in the short and medium terms.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 139. 139Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 140. 140Important parts of the documentStructure of EU banks‟fundingEU banks aremore dependent on wholesalefundsthan banksin otherregionsdue to the specificdynamics of each market.As examples, the Asian markets are characterised by a high savings ratioaswell asbya more reduced share of economic growth generated bybanklending.In the US about three-quartersof outstandingresidential mortgagesarenot in originatingbanks‟balancesheets,being securitised and held byGSEs and toa lesser extent via private securitisation.In contrast, a very largemajorityof mortgagesin theEU – especiallyoutsidethe UK and the Netherlands– are held in the originating banks‟balancesheets,beinglargely funded with covered bondsraised inwholesalemarkets.Also, toa greater extent than in the EU, theUSbusinesscredit market ishighly bank-disintermediatedaspracticallyall largecorporatesand asignificant number of larger SMEs issuedirectlyin themarket.Equally, largemarkets in the EU sawsignificant savingsdisintermediationin earlier years (savingsshiftingfrom bank depositstomutual fundsand life insuranceplans), on a far broader scalethan anycorrespondingcredit disintermediation.As a consequence, EU banks havehad torely increasinglyon wholesalefunds(market issuancebut alsocorporatedeposits) to underpin theirlendinggrowth.That being said, wenote that a degreeof savingsreintermediation backtobank depositsis now takingplace in parts of theEU.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 141. 141Theratioof customer deposit to total liabilitiesdropped from about 50%to46% between2009and 2011(chart 1).Thestructure of fundingexplainswhyEU banks havebeen particularlyaffected by thecrisis.In fact, the last fiveyears have seen a significant change in the dynamicsof bank funding.Before the crisis,EU banks werepursuingmostly asset-drivenstrategies.Specifically, asfunding wasreadily availableat affordablepricepoints,especiallyin thewholesalemarkets,bankswereaiming primarilytoincreasetheir assets,leadingtoexcessiveleveragewhichgeneratedunsustainablyhigh earningsfor several years.Thecrisisand itsimplicationson the availability of liquidityforcedanabrupt strategic turnaround for banks, whichhavebeen sinceadoptingBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 142. 142liability-driven strategies, aiming to obtain the funding at price pointswhichcould justify generatingassetsat economicallyviablecosts.Credit risk and asset qualityThesovereigncrisisand, more generally, themacroeconomicconditionshaveobviouslyaffectedbanks‟risk and solvencyprofiles.TheEBA‟s KRIs provide mixed indicationsabout banks‟exposuretocredit risk.Theratioof impaired loanstototal loansincreasedfrom 4.5% to 5.6%between2009and 20111.Thevariabilityacrossthe sampleis explained, among other things,bysize:thedifferencebetweenthetop 15 and other bankshasbeen stableover the last 2 years at around 2 percentagepoints,with the former groupof banksdemonstratingmore resiliencetocredit risk than theothers(Chart 5).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 143. 143Looking at the stocks,accumulatedimpaired financial assetstototalgrossassetsremained stableat about 1.6%, withhowever a significantincreaseof the dispersion(Chart 6).As far asthelevel of provisionsisconcerned, the coverageratio(i.e. ratioof specific provisionson loansto total loans) increaseduntil March2011andthen slightlydeclined to 42% in December 2011.Thereduction wasmore pronounced for banksdifferent from the top 15andthe gap betweenthesetwocategoriesincreasedat 5percentagepoints(Chart 7).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 144. 144Overall, the time series of credit risk indicatorsover thelast 9quarterssignal that asset qualityisbeingaffectedbytheincreasinglydeterioratingmacroeconomicenvironment.However,thisis happening at a different pace acrosscountriesand typeof banks, asmirrored by increased variability.Thiscouldbeduetothefact that thecrisishasbeenaffectingcountriesatdifferent timesand theimpact of the second macroeconomic contractionmay be delayed for some countriesand not yet visiblein 2011-enddatastill.Furthermore, there are indicationsthat several bankshave adoptedvariousformsofforbearancewhichallowedbothborrowerstomore easilyhonourtheir obligationand bankstopostponetherecognitionof possiblelosses.In fact, the more forward-lookingpicturefrom theRAQ showsthat therespondentsmostlyexpect that theimpairment levelswill not decreaseinthenear term.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 145. 145Exposurestowardssmall andmedium enterprisesarethemost frequentlymentioned driver for theexpectedincreasein problem loans.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 146. 146Speech by Financial Secretary to theTreasury, Mark Hoban MP; Banking union inthe eurozone, BrusselsThank you for invitingme here today. Sincethefinancial crisisstarted in 2008-9, therehasbeen adriveto reform theregulation, cultureand structureof banking to strengthen the stabilityand resilienceof the sector.Thedeepening crisisin theEurozone and scandals,whetherthe manipulation of LIBOR or rogue tradersat SocieteGeneraleand UBS, demonstrate the need to continuethosereforms.I want totalk todayabout how weworktogether toreturn stabilityandintegrityto thebanking sector.There is international consensusthat tougher financial regulationisessential to safeguard stabilityand end the problem of too bigto fail.TheUK hasbeen at the forefront of theseefforts.But aswehave seen, theimplicationsfor theEurozone are even moreprofound.Theinterdependenceof states and banksneedstotackledif weare tostabilisethe Eurozone.Banking Union isthe natural corollary of fiscal and monetary Union, andsothe decision to proceed with this isa great step in addressing the crisisweface.Urgentlyturningthisplan intoaction, finding answersto thedifficultquestionsthat will accompanydoing sowill benoeasytask,but it isvital.At the same time, wemust work together tomaintain thebenefits tooureconomiesthat a well functioning sector can deliver –Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 147. 147Throughpreserving and deepeningthe singlemarketWith a common coreof minimum standards that neither allowsforprotectionism, nor invitesa racetothe bottom.Fear of the destabilisingeffectsof a banking crisishaslinked banks andgovernmentstogether.TaxpayersacrossEuropeprovidedaroundfourandahalf trillionEurosincapital support and guaranteesbeforeLTRO to staveoff catastrophiccollapse.And the soberingexamplesof Spain and Irelandshow that there cancomeapoint at whichbanksbecomesolargethat evenGovernmentslackthecapacityto stand behindthem.Astable, responsiblesectorwill never exist in an environment in whichbanksenjoygainswhenthingsgowell, and taxpayers take thepain whentheydon‟t.Soweneed regulation whichdoesnot allowfor banksto privatisegainand socialiseloss.And it isnot just thestructureof the sector that needsto change. Theeventswehaveseen –in the recent scandalsthat have rightlyattractedsomuch scrutiny– show that theculture of the industryneedstochange,andneedstochangenow.Thecynical attemptsto manipulatefinancial benchmarksare sadlynottheonly example.We have alsoseen revelationsof rogue tradersat SocieteGeneraleandUBS; pervasivefailuresin riskmanagement, andanumberof accusationsof mis-sellingof complex financial products.Thisbehaviour isnot, andcannot beallowedtobecome, representativeofthewaybusinessisdone in London or in any other financial hub.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 148. 148Toaddressboth thestructural and thecultural failures in thesector, wemust takeaction. And theUK isleadingthewayin puttingright what hasgonesowrong.TheUK Government hastakenatough approachtoboth supervisionandregulation, reflectingthesheerscaleofthesectorrelativetooureconomy.Tobringlong-term stability tothesector, weare combiningmicroandmacro prudential supervisionwithin theBank of England.Sothat themonitoringand responsetothe threatsto financial stabilityposed either by thesectorasa wholeor by individual institutionsare theresponsibilityof a singleorganisation.Toensure that taxpayers are no longer perceivedasliablefor the riskstaken by banks,weare implementingtheVickers report.Ringfencingretail operationsof investment banks to protectdepositors; makingcreditors– not taxpayers – bear losses;and ensuringcritical functionscontinue in any future crisis.We are balancingtougher regulation and supervisionwiththe need tomaintaina competitive, efficient sector.And to ensure appropriate standards of conduct, weare creatingaseparate,independent, market and conduct of businessregulator withtougher powersto uphold integrityin marketsand give appropriateprotectiontoconsumers.From the moment wecame intooffice, wedemonstrated acommitmenttoreform the financial sector.And wearetaking a further action torespond tothe attemptedmanipulationof LIBOR tostamp out and punishbad behaviour.Therewillbeafull Parliamentaryinquiryintothelessonstobelearnedontransparency, conflictsof interest, and the professional standard of thebankingindustry.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 149. 149There will alsoneedtobe changessothat in futureLibor isproperlyregulatedand attemptstomanipulateit thwarted.We will act quicklytorestoreany lossof confidencein itsintegrity, transparencyand utility.We have alreadyestablisheda review intowhat reformsare required tothecurrent framework for settingand governing Libor, headed by theincomingCEO of our new Financial Conduct Authority.And that inquiry will identifynew criminal sanctionswecan put intolaw.Indeed, wewill need to gofurther now and work with theCommission toextendthe market abuseregime to cover attempted manipulation ofbenchmarks.Regulatorsneed full accessto telephonerecords, includingthosewithretail clients.Retail customerscan be responsiblefor market abuse,aswell asvictimsof it.And asthe investigationof the fixingof LIBOR and other ratesdemonstratedin the21stCentury, writtenrecordssimplywont suffice.This will complement essential provisionsin the commission‟sMiFidproposalto ensure benchmarksare transparent and operatedfairly–helpingto enhancesurveillanceand the ability of supervisorstodetectmanipulation.But the scandal over financial benchmarksalsoshowsushowinternationalisedthemarket hasbecome - allegedmanipulationof Liborset in London, Euribor set in Brussels, and other leadingbenchmarkrates, being investigatedby competitionauthorities and regulatorsinAmerica, Japan, and acrossEurope.Indeed, Japan hasalready settled with Citi for allegedmanipulation ofTIBOR.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 150. 150Together, wewill deal withtheculture that flourished in the ageofirresponsibilityand hold thosewhoallowedit to do soto account.But it is not just here that weneed to work together. Our work is acombinationof programmesof national reforms and collectiveeffortsat aEuropean and global level.MemberstatesbuildingasetofEuropeanUnionwidereformsbut havingtheflexibility togofurther tobe tougher toreflect their nationalcircumstances.Sothe UK hasledthe debate here aswell.Higher capital and liquiditystandardsin Basel.Movingall standardisedderivativetradesintocentral clearing.Creatinga comprehensive set of toolsfor recovery and resolution offinancial firms.Ending theperceived implicit taxpayer guarantee.Onceimplemented, our global and localbankswill bestrongerin life andeasiertodeal within death.I am encouraged by the progress that we have made through workingtogether on this with other European nations, and nations beyond theEU‟s borders.And thereisstill work todo– on derivativesregulationin particular, thereis a major loopholein the EU regime that allowsderivativestradedelectronicallynot tobe clearedcentrally, impedingour goal of reducingsystemic risk.Whilst that isa matter that must be tackledtogether, there is anotherwhichrequiresonegroup of member statestogofurthertoreflect aset ofcircumstancesthat iscommon to them – the interdependenceof banksand sovereignsin theEurozone.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 151. 151We welcomethe decisionsalreadytakenby theEurogroup and theEuropean council toestablishbankingunion.Thecrisishasshownuswhya bankingunion isa necessarypartof monetaryand fiscal union.Oneof the largest fiscalrisksfaced by a government isthe contingentliability for itsbankingsector.When countriesneed to deliver core financial stabilitytasks, likeprotectingdepositors, and areunableto, it may benecessaryfor otherMemberStatesin the currencyunion toworktogether to protect thecurrencyasa whole.As well asthe mutual dependenceof stateand bank, wehavealsoseentheenhanced interdependenciesbetweenbanking systemswithinasinglecurrency– ascontagion hasspread from Greeceto Spain ratherthan to countriesoutsidetheeuro area.And we have seen how the single interest rate of the countriesin the EuroArea can feed bubbles in one country whilst delivering excess liquidity inothers. The impact of this on economic performance is of course a strongdriver of risk in thebankingsector.Forall thesereasons, I seebankingunionasanecessarypartof monetaryand fiscal union.Amutualised deposit insuranceschemefor insureddeposits– toensureconsumer confidencewherestatescannot stand behind failedbanks.Acommon fiscal backstop for crisismanagement.And a Eurozone-level prudential supervisoryauthority – toalign fiscaland supervisory responsibility.SoI stronglysupport the euro areas decisionto pool sovereigntyandexpresssolidaritythrough a bankingunion.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 152. 152TheUK hasa vital interest in a fair, competitiveand vibrant market. Andwewelcomethedecisionsthat have sofar been taken:We welcomeensuringa key rolefor theECB assupervisor – with thecredibilityand legal mandate it carries.We welcomethe identificationof the ESM asa tool for bankinginterventions,with the capacitytorecapitalisebanksdirectly.And wewelcometheEuropean Council‟sstatement that shouldMemberStateswitha common currencywishtogo furthertocoordinateandintegratetheir policies,theymust respect fullytheintegrityof the singlemarket and the EU asa whole.There arenow a number of design issuesthat need urgent attention:- What will need tobe done to directiveson the Deposit GuaranteeSchemesand Resolution and Recovery?- What more needstobe done in CRD 4, particularlyasflexibility inmacroprudential supervisionbecomeseven more important?- What will be thescope of thebanking union – howmanybanks willbesupervisedby theECB ?This cannot be limited to thebiggestbanksonly, sincesystemic risk comesfrom smaller institutionstoo.- How will weensure the EBA remains focussedon the internalmarket?- Dowestill need resolution funds, now that an ESM can beused?- Whoisin charge in a crisis?The euro area will need a credibleresolution regime.- What are the liabilitiesand risks alreadyin the system?Thesearejust afewof thequestionsthat springtomind – I am sure thereare more. We will work closelywithour European colleaguesto ensurethat a strong solution can be found that benefitsall.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 153. 153In completing the design, wewill need a system withstrongsupervisoryfoundationsand practice, that maximisesthe benefitsof thebankingunion, while mitigatingthe risks.Maximisingthebenefitsfrom commonsupervisionand themutualisationof risk - breakingthe link betweensovereign and bank.What President Hollandecalls„integrationsolidaire‟.While minimisingthe risksof fragmentingthesinglemarket. Whilstsupervision and resolution will be a matter for the17, thesinglemarketandthesinglerulebook will be a matter for all 27member states.TheEBA will need tocontinueto set coreminimum standardsfor allmember states,and thesystem will need checksand balances.This is a standard concept – included in theLisbon Treaty, andreinforcedbythe European Council statement.Bankingunion must be put in context. It is not a replacement for thesinglemarket in financial services– rather a specificset arrangement tosupport the singlecurrency.And so,beforeI end, I wouldlike toaskonefinal question– oftheutmostimportance- how weare goingto protect the singlemarket?TheUK supportsthetreatyfreedomstonon-discriminatoryaccessandfair competition – freedomsthat must be upheld, and whichwewill fighttomaintain.Abankingunionthat erectsbarriersand looksinwardswouldnot be inanyone‟s long-term interests.Toallowtheprotectionismtotakeholdandthesinglemarket tofragmentwill do nothing but shrink the global economyat a timewhenitdesperately needshelp to grow.All EU member statesrequire open capital marketsto support ourcorporations.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 154. 154And ultimately, a global reserve currencylike the Euro or Dollar can onlymaintainitsinternational standingif it can freelybe traded and clearedbeyond the 17 Eurozone members, acrossthe world.TheEU islucky enough to enjoysomany world-leadingfinancial hubs–in Luxembourg, in Frankfurt, in Dublin, in Paris, and, of course,inLondon.London, and itspartner hubsacrossEurope, mean that businessescangainaccesstocapital andsaverscaninvestin productsfrom outsidetheirhomecountry, without theneed to imposeproductsand serviceson alllocalmarkets.And I stronglybelievethat thosehubsshould continueto serve the widereconomy, channellingthe fundsof saversto investmentopportunities, transformingour bank deposits intoloansto ourbusinessesand helpingbusinessesand individualsmanage risk.HelpingEuropean Governmentsraisealmost €1trillion in bond marketsin 2010;HelpingEuropean companiesraisealmost €3 trillionin fundssince2006;And helpingEU citizenssave over €6trillion in current and savingsaccounts.But for usall to continueto enjoythesebenefits– not just the banksandthemember statesin whichthey locate– wemust haveproportionateregulationthat supports free choicethrough promoting avibrant singlemarket.The scale and complexity of the challenges faced by the financial servicessector, and the global nature of the industry, mean we must work togethertosolve them.And aswedoso,wemust ensurewepreservetherewardsfrom allowingawell functioningglobal financial servicessectortoflourish, sothatBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 155. 155organisationsin onepart of theworldcan help theeconomyof another togrow.Throughworkingtogether – through international agreements,andthrough defending and advancing theSingleMarket asstronglyaswecan, wecan meet the dual challenge– enjoying the greatest benefitsof athrivingglobalisedfinancial servicessector, whilecurbingits worstexcesses.Thank you.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 156. 156FINMA publishescircularson implementing Basel III andTBTF requirementsFINMA will put a new circular on eligiblecapital into effectstarting1January 2013aswellasrevisedcircularson capital planning, credit andmarket risk, disclosure and risk diversification.In doing so, the supervisory authoritypresentsitsimplementingprovisionson the recentlyrevised CapitalAdequacy Ordinance(CAO)regardingthe implementationof the Basel III requirementsand the "toobig tofail" (TBTF) legislation.Followingthefinancial market crisisin 2008/ 2009, thenew Basel IIIregulationsweredrawnup under the leadership of the Group ofGovernorsand Headsof Supervision (GHOS) and the Basel Committeeon BankingSupervision (BCBS).In linewiththeseregulations,banksmust hold more and qualitativelybetter capital.At thesametime, theTBTF regimewasdraftedwhichsetsout additionalregulatoryrequirementsfor systemically important institutions.In order toimplement the BaselIII requirementsand the new TBTFregimein Switzerland, FINMA ispublishingtodayupdated circularsasimplementingprovisionsfor the revised CAO whichwasadopted by theFederal Council in June 2012.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 157. 157Thenew circular and the aforementioned amended circularswill enterintoforce along withtheCAO on 1January 2013.Theimplementingprovisionsset out in the FINMAcircularsdonot, nevertheless,put all theelementsoftheBaselIII frameworkintopractice.Still to be implementedare the detaileddisclosureobligationsfor eligiblecapital decidedrecentlyby theBasel Committee, and the precisehandlingof credit risk exposuretocentralcounterpartieswhichhasyet tobepublished.FINMA intendspublishingitsimplementingprovisionson thesemattersassoon aspossiblesothat thoseBaselIII elementscan alsocome intoforceasof 1January 2013.Minimum changescompared with the consultation draftsIntegration of the Basel III international standardsintotheSwissregulatoryframework wasconductedbyan existingnational workinggroup whoserepresentativesare from official bodies and the industry. Thereviseddraftsofthecircularswerethereforenot unexpectedformanymarket participantsand have been broadlysupported.Any adjustmentshave mostly involved editorial changes.Mostreactionwastriggered by the new circular on eligiblecapital (FINMA-RS 13/ 01).As this circularhasabsorbed thekey content of FINMA-Circ. 08/34"Core Capital – Banks", thelatter hasbecome redundant and will berepealedasof 1January 2013.Changesto other circularsThenewlydefined capital categoriesin the CAO have resulted inamending thequalityof capital specified in FINMACirc. 11/2 "Capitalbuffer and capital planning– banks".Theobjectionsbrought forwardin the consultation claimingthat theadjustmentsinvolved gobeyond theordinancein termsof tighteningBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 158. 158capital requirementswerepartlyin FINMAs interests. ChangestoFINMA Circ. 11/2 will alsoenter intoforceon 1January 2013.Moreover,FINMAisrepealingFINMA Circular 08/ 9"Supervisionoflargebanks" asof 31July2012.It will not be replaced, sinceestablishedsupervisorypractice and other regulationsadequately cover itscontent.Its repeal doesnot in any waychangethe current supervisory practicewith respect to thetwolargebanks:noadditional obligationswill ariseandthosethat exist will neither be amendednor abolished.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 159. 159FI proposeshigher requirements for the banks‟ liquidity buffersSwedenshall act aheadof the EU and introducequantitativerequirementsregarding the banks‟liquiditybuffers.Theaim isto ensure that largebanksand credit institutionsholdsufficient liquid assetsto be ableto manageshort periodswithout accesstomarket funding.This is proposed by Finansinspektionenin a new regulation.***Finansinspektionenproposesquantitativerequirementsregarding theliquiditybuffersheld by largebanks and credit institutions.Tofurther contributeto a stableand smoothly-functioningfinancialsystem Finansinspektionenalsowantsthelevelsof theliquiditybufferstobemade public.Therequirement for a liquiditycoverageratio meansthat a bank‟sliquidassetsmust manageoutflowsover a period of 30days of market stress.Therequirement is based on guidelinesfrom theinternational BaselCommitteeonBankingSupervisionregardingaLiquidityCoverageRatio(LCR), whichare plannedtobe introduced within the EU during 2015.Therequirement tohold a liquiditybuffer includesrules regardingwhenthebuffer can be used.It is proposedthat banksunder stressthat affectsliquidityare notrequiredto meet theliquiditycoverageratio.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 160. 160Thecompaniesaffected are thosewith a balance-sheet total asof 30September of thepreviousyear that is higher than SEK 100billion.Theproposalappliestofinancialgroupsongroup-levelandisnot appliedtoindividual companies that are part of a group.At present, eight companiesin Swedenwouldbe coveredby thisregulation.Theproposal will come intoforce on 1January2013.About FinansinspektionenTheSwedishFinancial SupervisoryAuthority, Finansinspektionen, is apublic authority.Our roleis topromote stabilityand efficiencyin the financial system aswell asto ensureaneffectiveconsumer protection.We authorise, superviseand monitor all companies operatingin Swedishfinancial markets.Finansinspektionenis accountableto theMinistryof Finance.We supervise3,900companies- Banks and other credit institutions- Securitiescompaniesand fund management companies- Stock exchanges,authorised marketplacesand clearinghouses- Insurancecompanies,insurancebrokersand mutual benefitsocietiesBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 161. 161Islamic Finance: Not such an alien world at allJörgRieger, BaFin“Couldthefinancial crisishavebeen prevented if thefinancial worldhadfollowedtherulesof Islamic – orSharia – law?”This wasthe question asked by BaFin President Dr ElkeKönig in heropeningremarks at BaFin‟ssecond Islamic FinanceConferenceinFrankfurt.Dr König‟sprofessional career had alsoledher intothe worldofinsurance.There she had come intocontact with aparticular branch of Islamicfinance– the form of Sharia-compliant insuranceknown as“takaful”.“At that time I found myself faced with a world that at first seemed aliento me, but which on closer inspection wasn‟t so very different at all fromwhat I had knownup until then,” Dr König said.Somefundamental principles– governingsuchthingsasrigorousriskmanagement or good corporate governance– held good for both theIslamicfinancialsystem anditswesterncounterpart, the BaFin Presidentcontinued.Theyhelped to ensure a safeand properlyfunctioning internationalfinancial system.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 162. 162Takaful: TheIslamic insurance modelThere areother rulesand regulationsthat are a specialityof Islamicfinance,though.For instance, gambling, speculationand receivinginterest are strictlyforbidden for Muslims.In addition, a real transactionmust underlie every financial transaction.“Theprincipleof insuranceis, however,based fundamentallyonuncertainty, whichin Sharia-compliant contractsispermitted only to acertain, unavoidabledegree.Today, the majorityof juriststhink that this degreeof uncertaintyisexceededin conventional insurance,” said Dr Ludwig Stiftl of MunichRe.For that reason, a special construction, similar tomutual insurancecompanies in Germany, wasprescribedfor takaful.For instance, policyholdershad to sharein profitsand lossesand, inaddition, their fundshad tobe invested in accordancewithSharia law.In reality, takaful insurerswere, of course, alsocompeting withconventional insuranceundertakings,Dr Stiftl continued.“The total sum insured worldwide hasincreased three-fold since 2005; thenumber of takaful companies has increased by a factor of around 30 overthesameperiod.This is inevitablyleadingtointensecompetition,” said Dr Stiftl, whowasdiscussingtakaful at the ConferencewithDrPhilipp Wakkerbeck (BoozBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 163. 163& Co.) and Volker Henke of the German InsuranceAssociation(Gesamtverband derDeutschen Versicherungswirtschaft).Islamic banking ahead of sukuks, mutual fundsandparticipationsWhile insurancepremiumssofar account for onlyavery small proportionof all Sharia-compliant assetsinvested, thelion‟sshare of capital passesthrough Islamic banking.“That is followedby sukuks,Islamic mutual fundsandparticipations,”saidUfuk Uyan,CEO of Kuveyt Türk ParticipationBank.“Despitethe financial crisis,over the past decadethe market has grownbyan averageof 20per cent a year.”Thecentreof theIslamicfinancialservicesmarket wasMalaysia, hesaid;thesourcewasthe Gulf States– and westernnationsofferedattractivemarketingopportunities.For example, there are more than four million MuslimslivinginGermany.“TheGerman banking system iswell suitedtoIslamicideasofinvestment, sinceit isat heart risk-averse,” Uyan declaredduring hisintroductoryspeech.BaFin President König had earlier made it clear that the fact that aproduct had been developed in accordancewith religiousprincipleswasnoproblem in Germany:“Germanfinancial supervision legislationis neutral regardingphilosophiesand religions.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 164. 164Everyfinancialservicesproviderandeveryproductmust, however,satisfytherequirementsof the relevant laws– insofarasthey are covered bythem.Samebusiness, same risk, samerules.”However,the Islamic financeindustry is still livinga shadowexistencehere in Germany.No Islamicbank is based here. Sharia-compliant financial servicesaremostlynicheproductsof the bigbanks.“Although there is a market, for Islam-compliant investment funds, forexample, the potential is still limited at present,” said Dr Kilian Bälz ofAmereller Legal Consultants.Tradingin Islamic productson international exchangesdoesnot alwaysrun smoothly, either, asDr Jochen Biedermann of DeutscheBörsereported:“Generally, Sharia-compliant index productsand sukukstradeonlyin small volumes,whichtendstomakemarketsratherilliquid.”Islamic financial products go through a screening processThecost factor alsoplays a roll in investment decisions.Themajorityof Islamic mutual fundshave lessthan a hundredmillion US dollarsinvested in them.Transaction costsare correspondinglydisproportionatelyhigh.Chargesare alsoincurredby the screening processthat all productshavetogothrough.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 165. 165In this processthe financial productsare, among other things,examinedbya committeeof experts, theso-calledSharia Board, to establishwhethertheyare Islam-compliant.In additiontoindicatorssuch asa company‟s debt ratio, ethical andsocial exclusion criteria are alsoscrutinised.“Islamic banking can make avaluablecontribution for westernfinancialsupervision.It has, after all, come through the financial crisiswithno notabledamage,” saidPeterBaier, head of BaFin‟stechnical cooperation section.Most derivativesare just asSharia non-compliant asshort-selling, subprime lendingand futures.Thesefinancial instrumentsare regarded aspotential crisis intensifiers.Thepricelossessufferedby the bankshave not been reflectedinIslam-compliant investmentseither, sincetheir businessmodels arebased first and foremost on interest and theymay not, therefore,be heldin theportfolios of Muslims.For Zaid el-Mogaddedi, of theInstituteforIslamicBankingandFinance,the fact that the Islamic financial worldbrings with it somanyunusual features– from participationconstructionsto tax matters – is noreasonfor pre-judgingit without hearingall theevidence:“Essentially, Islamic bankingis justbanking.It is opento anyone interestedin ethical and faith-basedfinancialproducts,” el-Mogaddedi said:“Alongside service-orientedmarketingand competitiveproducts,continuouseducational work to raisepublic awarenessis oneof thekeyfactorsin establishingIslamic banking in Europe.”Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 166. 166Prof. Dr MatthiasCasper of Münster Universityalsoconcurred: “Wemust understand Islamic financial products.Ablack box is notacceptable.”BaFin‟ssecond Islamic FinanceConferencegavethe28speakersand theaudiencean opportunityto discussmany interesting matters.As expected, though, the question of whetherthe financial crisiscouldhavebeen preventedby therulesof Islamic financeremainedunanswered.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 167. 167Updated list of identified Financial ConglomeratesEBA hasjointlypublishedwithEIOPAand ESMAthe list of identifiedFinancialConglomerates, asat 1stJuly2012,asrequiredunderArticle4(3)of the Financial ConglomeratesDirective.Joint CommitteeTheJoint Committeeis a forum for cooperationthat wasestablished on1stJanuary 2011, withthe goal of strengtheningcooperationbetweentheEuropean BankingAuthority (EBA), European Securitiesand MarketsAuthority (ESMA) and European Insuranceand Occupational PensionsAuthority(EIOPA), collectivelyknownasthethreeEuropeanSupervisoryAuthorities(ESAs).Throughthe Joint Committee, the three ESAs cooperateregularly andcloselyand ensure consistencyin their practices.In particular, theJoint Committeeworksin theareasof supervisionoffinancial conglomerates,accounting and auditing, micro-prudentialanalysesof cross-sectoraldevelopments, risksand vulnerabilitiesforfinancial stability, retail investment productsand measurescombatingmoneylaundering.In additiontobeinga forum for cooperation, the Joint Committeealsoplaysanimportant rolein theexchangeofinformationwiththeEuropeanSystemic Risk Board (ESRB) and in developingthe relationship betweentheESRB and theESAs.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
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  • 174. 174SAMA Governor‟sStatementOn theOccasion of theIssuanceof the Council of Ministers‟ResolutionApproving the FinanceLawsSAMA Governor Dr. FahadAl-Mubarak expressedhis thanksandappreciationto theCustodian of theTwoHoly Mosquesand HRH theCrownPrincefor theissuanceof thesesignificant and essential lawsinrespect of the financingsector of the Saudi economy.Al-Mubarak alsoexpressedhis prideover thehigh trust withwhichSAMA ishonored withthe privilegeto supervise the real estatefinancingsectorand non-bankingfinancial companies.Thegovernor pointed out that, accordingto thenew laws,there will betwoprimary financesectors.Thefirst isthe real estatefinancingsector;theother is thenon-bankingfinancial sector whichwill complement thebankingsector and support competitivenessin the credit market.SAMA isworkingondevelopingtheimplementationregulationsforthesetwosectors, in pursuanceof thepowersassignedtoit under theselaws.In regard to the real estatefinance,he addedthat SAMA hasdeveloped adetailed visionthrough a number of regulations,most notablytheImplementation Regulation of the Real Estate FinanceLaw, whichestablishesdetailedprovisionsfor the law including, for example, workmechanisms,consumer rights, and mechanismsto support beneficiariesof real estatefinance, in additiontothe refinanceregulation throughmortgagebacked securities, which givesthe real estatefinanciersdirectaccessto capital marketsfor refinancing, therebyreducingthe cost offinancefor the consumer.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 175. 175Thesesecuritieswill providea new investment tool on the Saudi CapitalMarket.As for thesupervision of non-bank financial companies, thegovernorstatedthat SAMA is embarkingon preparing regulationscommensuratewith the statusof thenon-banking financial sector toachievethecherishedobjectivesof theFinanceCompanies Control Lawin termsofcreatinga new competitivesector for credit provision takingintoaccounttheprinciplesof transparency, disciplineand consumer protection.In respect totheImplementingRegulationof theFinancial LeasingLaw, the governor confirmed that it will includesubstantial additionstothistype of servicein thedomestic market toaddresstheexistingweaknessesincluding, in particular, the provisionsgoverningtherightsofthelesseeand the lessorin a fair manner ensuring stabilityandsustainability, therebyreducingrisk and thiswill be reflectedon pricingand the servicefor beneficiaries.Finally,Al-Mubarak said that SAMAwill post on itswebsitethe entirecontentsof theseregulationstoreceivetheviewsof stakeholdersandbeneficiariesthereof in preparation for their issuanceafter coordinatingwith relevant government agencies.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 176. 176Basel III in the Kingdom of Saudi ArabiaWorking Group (WG) to Implement Basel III1.Working Group on Capital ReformsBanks should be representedby a seniorofficer (Chief Financial Officer,Chief Risk Officer, Strategic Planning, etc).This WG wouldstudy Capital Reformsand examinethecurrent positionof Banks and assesswhat remainstobe done for its full implementation.2. Working Group on Global Liquidity StandardsThis WG will examinetheunder-mentionednew Global liquidityStandardsformonitoring,observingandimplementationinSaudi Arabia.- LiquidityCoverageRatio(LCR)- Net StableFundingRatio(NSFR)TheWG will particularlyfocuson BaselIII proposals. Banksshould berepresentedbysenior staff membersfrom RiskManagement, TreasuryorFinanceDepartment.3. Working Group on Enhanced Risk CoverageTheWG will examinetheproposalsfor enhanced risk coverageforimplementationin Saudi Arabia includingthe following:- Securitization- TradingBook- Counterparty Credit RiskTheWG will particularlyfocuson BaselIII proposalsin relation totheaboveitems.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 177. 177Banks should be representedby a seniorstaff membersfrom RiskManagement, Treasury or Finance Department.4. Working Group on Enhanced Pillar 2 ReformsThis WorkingGroup will focuson Basel III proposalson Pillar 2 relatedreform, and their impact on ICAAP, Supervisory Review process.5. Pillar 3 ReformsAs in the past, SAMAwill continuetodevelop any refinementsinPrudential Templatesand Guidancenotesthrough the Chief FinancialOfficers CommitteeMajor Refinements and ReferencesComponentsof Basel III: MajorRegulatoryOverhaul of Regulatory andPrudential FrameworkSummaryof BaselCommitteeReforms:1) Capital- Qualityand level of capital- Capital conservation buffer- Countercyclical buffer- Capital RatiosPhased in- Regulatorydeduction phased in- Non compliant instrument phased out2) RiskCoverage- Securitizations/ Re-securitizations- Tradingbook- Counterparty Credit Risk3) ContainingLeverage- Leverage ratio4) Pillar2Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 178. 178- Riskconcentration- Off balance-sheet items- Reputational risk- Sound compensation practices- Valuationand liquidityrisk- Sound stresstesting practices5) Pillar 3- Enhanced exposure on securitizedassets, CDOsMBS,LeverageFinance- Thematic Review in progress6) Global LiquidityStandard and Supervisory Monitoring- LiquidityCoverageRatio- Net StableFundingRatio- SupervisoryMonitoring- Principlesfor Sound LiquidityRisk- Management and Supervision7) Systemic Risk and Interconnectedness- "GoneConcern" Contingent capital- Riskcoverage- Cross-border bank resolution- Significant Financial Institutions(SIFIs)Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 179. 179From : Saudi Arabian MonetaryAgencyTo:All BanksAttention : ManagingDirectors, Chief ExecutiveOfficersand GeneralManagersSubject: QuarterlyMonitoring of Capital Leverage Ratio in2011and 2012Amajor initiativeannouncedbytheBasleCommittee(theCommittee)initsBaselII reform packageissuedinDecember2010relatestotheCapitalLeverage Ratiotobe maintained by banksin addition to the risk basedcapital ratio.In this regard, excessive leverage in banks and the banking system was amajor cause of the global financial crisis notwithstanding that such bankswerecarrying strongBasel II related risk based capital ratios.Consequently, the Committee agreed to introduce a non risk basedcapital leverage ratio in addition to the risk based capital ratio in itsoverall Basel III CapitalAdequacy regime.TheCapital LeverageRatiois designed tobe simple, assistsinconstrainingthebuildup of Leverage andaccordinglyactsasaback stopmeasure.This Circular is intended toprovidefor the definitionand calculationoftheLeverageRatiowhich will serveasa basisfor testingduring theparallelrun period.In this regard, the Committee intends to have a monitoring period to testa minimum leverage ratio of 3%, as well as the underlying componentsoftheagreed definitionsover January 2011to January 2012.Thetesting will be carried out prior to theparallel run period (January2013to January 2017).Therefore,theAgency requiresthecompletion of the attachedPrudentialReturn tobe submittedon a quarterlybasisstarting January 2011.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 180. 180Thefirstquarterlyreturnwillbeduein SAMA on 30April 2011concerningdata asof 31March2011.Accordingly, tofacilitatethe quarterlysubmissionand testing of thecapital leverageratio, theguidancenotesare attached.All Banksmust review and providetheir comment by 28 February, 2011.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 181. 181LEVERAGE RATIOGuidance Notes1.Background and Objectives- This is a simplenon-riskedbasedCapital Ratio designedto measureleveragebased on Grossexposureswiththe exception of creditexposureswhicharenet ofspecificprovisionsandTier 1capitalunderBaselIII.- It providesa breaker from buildingexcessiveleveragein theBanksand the Banking systems.- Thebasis of calculation is theaverageof the monthly leverageratioover thequarter.2. Reporting to SAMA on a quarterly basiseffective January 2011- Monitoring Period:January 2011– January 2012Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 182. 182- Parallel Runs:January 2013– end 2017- Migration toPillar 1:January20183. GrossExposures– Schedule B, C and DExposuresincludeOn andOff-balancesheetitemsincludesexposuresrelatingtoderivatives3.1On-BalanceSheetAll exposuresOn-balancesheet, non-derivativesaremeasuredat net ofspecific provisionsand credit valuationadjustments Netting of loansand depositsnot allowed Grossexposuresmeasured through- No nettingthrough collaterals- All measurementsin accordancewithAccounting IFRSRules- No nettingof offsettingdebitsand credit balancethrough nettingschemesItemsdeductedfrom capital donot contributetoleverageand shouldalsobe deducted from the measuresof on-balancesheet exposures All on balancesheetsassetsitem toagree withbalanceswithM-1.3.2 Off-BalanceSheet includingderivativesTheseincludeliquidityfacilities, unconditional and cancellablecommitments,direct credit substitutes,acceptances,standbyletterscredit, trade lettersof credits,guarantees, etc. and derivativesoutstanding.All of balancesheet itemsincludingderivativearetobe converted totheircashequivalentsutilizingcredit conversion factor used for in the BasleIIBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 183. 183frameworkutilizingstandardized approach. Consequently, thefollowingelementsmust agree.All notional valueto agree with M.1All cashequivalent valuetoagree withQ17.5.2for off-balancesheetitemsand Q17.5.3for derivativesoutstanding.4. Capital – Schedule EThecapital is tobe measured on the Tier 1capital based on Basel IIImethodologyAccordingly, it should agreewithQ17.3(Tier 1) figure.It should be noted that under Basel III, Tier I will be amended to reflectthenew definition.5. Computation of Capital Leverage RatioCompute theCapital leverageratioon a quarterly basisthrough capital(D) dividedby grossexposures(B+C) asa simplecalculation.6. Reporting and Monitoring PeriodThemonitoring period will be from 31March2011to December 2012.Banks are expectedto report to SAMAon a quarterlybasistheirleverageinformation asper the attachedPrudential Return to track in aconsistent manner theunderlying componentsof the agreeddefinitionand resultingratio.Thecalculationshould be asof quarter end 31March, 30June, 30September, 31December of each year.Thereturnsshould be submitted within30days followingthequarterend.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 184. 1847. Parallel RunsSAMAexpectstheJanuary parallel runsto commence effective1stJanuary 2013and tolast until end of 2017.Based on theparallel run period any final adjustment will be done inthefirst half of 2017with a view tomigrateto Pillar – 1 Additional guidancewill be issued in this regard in due course.8. Bank Level DisclosureBank level disclosureof the capital leverageratioand itscomponent willstart on 1January 2015.9.Implementation asa regulatory measuresTheactual implementation asa regulatory ratio and asa component ofPillar 1is likelyto commencefrom 1stJanuary2018.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 185. 185Mario Draghi: Interviewwith LeMondeInterview with Mr MarioDraghi, President of theEuropean Central Bank, in LeMonde,conductedbyMr ErikIzraelewicz, MsClaireGatinoisand Mr PhilippeRicard* * *TheInternational MonetaryFund (IM F) has revised downwardsitsglobal growth forecastsbecause of Europe. Is there a risk of recession?No. Sincethestart of the year, therisksof a deteriorationin the economythat wehad feared havecertainlymaterialisedin part.Thesituationhasgraduallyworsened,but nottothepoint ofplungingthewholeof the MonetaryUnion into recession.We still expect a very gradual improvement in the situationby theend ofthisyear or thebeginning of next year.ThankstotheECB?Thecutsin interestratesat the end of 2011and in July should producetheir effects,asshould theunprecedentedLTROs, three-year loanstobanks,whichwecarried out todeal withtheriskof a “credit crunch”, arestriction or an increasein the costsfor loans.Should theECB not domore to easetheeconomy, asthe IMF hasrequested?We are very open. We do not have anytaboos.We decided toreduceinterest ratestobelow 1%in Julybecauseweforecast that inflationwouldbecloseto or below 2% at the start of 2013.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 186. 186It now seemslikely that it will fall soonerthan expected, at theend of2012.Our mandate istomaintain pricestabilityin order toprevent both higherinflationand a generalised, broadlybased fall in prices.If weseesuch risksof deflation, wewill act.TheEuropean Council of 28and 29 Junewaspositively receivedby themarketswhichsincethen have expressed doubts.TheSummit wasa success. For the first time, it seemstome, a clearmessagewasgiven: exit the crisis withmore Europe.Byputtingin placearoadmaptocreateaUnionwithfour buildingblocks– financial, fiscal, economicand political – and deliveringtangibleresults:a financial union, onebankingsupervisor, allowingtherescuefundsto recapitalisebanksonce this supervisionisin place.And a calendar for implementation.Thesearelong-term solutions. Doesn‟t something needtobedone abouttheurgency of the situation?Let me tell you about my experience. In 1988the DelorsCommitteesetout the routetowardsMonetaryUnion, witha goal, a timetableandcommitmentstoberespected.This prospect resultedin the Maastricht Treaty in 1992. Italy‟sborrowingrateswerevery high at the time.But asa result of itsinvolvement in theproject of MonetaryUnion, Italysawan abrupt fall in itsrates, beforethere waseven a decreasein thedeficit, which stood at 11% of GDP!Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 187. 187This leadsme tobelievethat if countriesmake firm commitments,evenof a long-term nature, this hasan impact in theshort term.TheECB hasbeen criticisedfor not doing more for the governments. IstheECB waitingfor government effortstobe made beforeacting?This ideathat there isbargainingbetweenthe governmentsand theECBis a “quiproquo”.Our mandate is not toresolve thefinancial problemsof countries,but toensure pricestabilityand tocontributetothestabilityof the financialsystem in full independence.What do you think of the growthpact held dear by FrançoisHollande?It will certainlyhelp, but weneed to gofurther. Each country must alsomake efforts.Are you thinkingmoreofstructuralreformsthanofaKeynesianstimulus?Yes,although, in myview, the focusistoooften on labour market reforms,whichdonot alwaystranslateinto increased competitivenessbecausecompaniessometimesbenefit from monopoliesor situationrent.Sowealsoneed to look at the marketsfor productsand servicesandliberalisewherenecessarytoincreasecompetitiveness.Politically, theseare difficult decisionsto take.AEuropean agenda of the reformsto beundertaken wouldhelp hugely.We alsoneed tostrengthenjoint decision-makingin theseareasat theEuropean level.Soit isa victory for liberalarguments?Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 188. 188No. Putting an end tocertain situation rentsisa question of fairness,foremployeesand entrepreneurs,and for all citizens.What do you think of the policiesfollowedin France?I welcomethe continuation of fiscal consolidation, whichremainsindispensable,and I alsowelcometheemphasison growthpotential thatwill pave thewayfor recovery.Debt reductionisvital.And the country must respect its commitment to bring its deficit backdown to 3% of GDP in 2013 so that it can continue to benefit from lowinterest rates.You are one of themost influential men in Europe, yet you are notelected. Doesthisnot posea problem for democraticlegitimacy?I am cognisant of the importanceof beingaccountablefor our actions.Istandbeforethe European Parliament about tentimesa year, and wearevery activein termsof communication.We stand ready to domore, if our powersweretobe strengthened.In theextraordinaryconditionsthat weareexperiencing,it isnecessarytoseetheECB take a stand beyond monetary policy for mattersthat cannotbeaddressed by monetary policy, such ashigh public deficits,a lack ofcompetitivenessor unsustainableimbalances,especiallywherefinancialstability may be at risk. Safeguardingtheeuro is part of our mandate.When you arrived at thehead of the ECB, you were consideredthe mostGerman of the Italians.Is this still thecase?That‟s up to you to judge! We have to maintain price stability in bothdirections, face problems as they present themselves, and act withoutprejudice.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 189. 189In some waysyou are very German whenyou support the callsforpoliticalunion made byAngela MerkelAny move towardsa financial, budgetaryand politicalunion is,tomymind, inevitable.This will lead tothecreation of new supranational entities.In somecountriesthetransfer of sovereignty– I prefer tosaysharing– that thisimpliesis a major stake, in othersit is noproblem.But one must remember that with globalisation, it ispreciselyby sharingsovereigntythat countriescan better preserve it.In the long term, theeuro must be based on a greater degreeofintegration.Is a Greek exit from the euro area still a leadingconcern?Our unequivocalpreferenceisfor Greeceto remain in the euroarea.But that is a matter for the Greek government. It hasstated itscommitment, now it must deliver results.Regardingthe renegotiationof the memorandum [toeasethe austeritymeasuresand reformsimposed on thecountry], I will not take anystancebeforeseeing the Troika‟sreport.On Friday, 20July, thefinanceministersof theeuro area should havecompleted the aid plan for banks. Have theydone so?Will it suffice toprevent the country from defaulting?Oneimportant point is the involvement of senior creditorsof banks:theECB believesthat suchinvolvement should be possiblein the caseof theliquidationof a bank.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 190. 190Saversmust beprotected, but creditorsshould be part of the solution ofthecrisis.It is a matter of limitingthe involvement of taxpayers. Theyhavealreadypaid a great deal!Doyou think you can goon holidaythis summer in peace?I never plan my holidaysahead and I onlyever goawayfor a few days.Onethingis certain:I will not be going toPolynesia. It‟s toofar.Sois the euro still in danger?No, absolutelynot. From the outside, analystsare seen tobe imaginingscenarios in whichthere is an explosion of theeuro area.That underestimatesthepolitical capitalthat our leadershaveinvestedinthisunion, aswell asthesupport of European citizens.The euro isirrevocable!Having formerly workedfor Goldman Sachs, what doyou think of theLibor scandal?It underminestrust in one of the cornerstonesof theworldfinancialsystem.Just think that hundredsof trillionsof euroof financial operationsarebased on the Libor and that in many countriesall over the worldpeoplebuytheir homeswithmortgagesindexed to the Libor.Theunspeakablepersonal behaviour and design flawshaveshownonceagain a faultygovernanceof the process.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 191. 191Twoinquiriesareunder wayin theUnited Kingdom and in the UnitedStates,aswellasaninquiry about theEuribor. Theymust shinealight onthesematters.Doesyour time at Goldman Sachsmake you uncomfortable?No, indeed, I value this experienceof theworldof financeand of theprivate sector.Obviously, there is much todo torebuild thefinancial servicesindustryafter the crisis.Much hasbeen done by thegovernments, by theregulatorsand by theindustryitself, but much still remainstobe done.Heads of State and Government want to place the ECB at theheart ofbank supervision.Are you in favour of this?TheEuropean Commission isresponsiblefor preparingproposalsonthisin consultation with theECB and the European Parliament.Thefact that the central bank plays a rolein banking supervision hasworkedwell at national level, particularlyin Franceand Italy.If this rolefell to theECB, it wouldworkwithnational supervisors,counting on their considerableexperienceand abilities.Doyou not fear a conflict of interestbetweenmonetary policyand thissupervisoryrole?Monetarypolicymust be kept separatefrom banking supervisionsothattheformer is not contaminated by the latter.You can build anindependent structure, and at the same time benefit usefullyfrominformation provided by supervision.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 192. 192Would sucha system have enabled thebankingcrisis in Spain to beavoided?Acentralisedsystem ispreferableto take account of thevery high degreeof financial integrationthat a monetary union entails.On thesubjectof Spain, theECB haswarnedthe country on severaloccasionsnot to let thecurrent account deficit get out of control and hasalsowarned of the excessivegrowth of credit.But in a monetary union, thefight against property bubblesstemsfrommacro-prudential policiescarried out at national level.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 193. 193ElizabethADuke: Central bank cooperation intimes of crisisSpeechby Ms ElizabethADuke, Memberof theBoard of Governorsof the Federal Reserve System, attheCenter for LatinAmerican MonetaryStudies60thAnniversary Conference, MexicoCity, 20July2012.* * *It is a pleasuretoparticipatein thiscommemorativeconferenceon theoccasionof the60th anniversaryof the Center for LatinAmericanMonetaryStudies(CEMLA).Since itsestablishment in 1952, CEMLAhasachieved a great deal on boththe policy and research fronts to promote our understanding of monetaryandbankingissuesin LatinAmerica and theCaribbean.Thetopic I havebeen asked to speak about today, “Central BankCooperation in Timesof Crisis,”is very important.As weknow, central bankstypicallywork individuallyto achieveobjectivesfor their domestic economies.In the caseof theFederal Reserve, monetary policyis conductedtoachieveour statutoryobjectivesof maximum employment and pricestability.And, of course,fostering astablefinancial system iskeytoattainingthesegoals.But the experienceof the past few yearshasillustrated– first withtheglobal financial crisisand more recentlywith thestrainsin Europe – thatcooperationandcoordinationamongcentralbanksaroundtheworldmaybenecessaryat criticaljuncturesto achieve thesedomesticobjectives.In my remarkstoday, I will describetheevolution of the FederalReserve‟spoliciesduring and after the global recessionand showhowmanyof thosepolicieswereundertaken in coordination with, or inparallelto, similaractionsby other central banks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 194. 194I will start with themonetary policy responsesof theFederal Reserveandother central banksduring thefinancial crisis.I will thendiscusstheeffortsthat the Federal Reserve hasmade, often incooperation withother central banksand international partners,to helpenhancefinancial stability.Finally, I will focuson thechallengesfacingLatinAmerican centralbanks,whoseeconomiesandfinancial systemswereaffectedbythecrisisitself, and by the responsesof other central banks tothecrisis.Federal Reserve policiesand coordination with other centralbanksAlthough the financial crisisthat emerged in thesummer of 2007initiallymanifesteditselfasa sharpdeteriorationin U.S. mortgage markets, theroots of theproblem ran deeper.Indeed, the consequencesof a credit boom combined with excessiveleverage,mispricingof risk,anddeficienciesinriskmanagement becameincreasinglyapparent.And given theinternational extent of thesevulnerabilitiesandinterconnections,the crisisquickly became global.Central banksaround theworldrespondedforcefully.From the outset, theFederal Reserve vigorouslyused itstraditionaltoolkit for managing short-term interestrates.TheFederal Reserve reducedthe target federal fundsrate from 5-1/4percent inAugust 2007toa rangeof 0 to 1/4 percent by theend of 2008.Internationalcoordinationon policyratedecisionsis rare, but in October2008,the Federal Reserve announced a reductionin itspolicyrate jointlywith five other major central banks:the Bank of Canada, theBank ofEngland, the European Central Bank, theSwedishRiksbank, and theSwissNational Bank.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 195. 195With clear signsof simultaneouseconomicslowingin manycountries,thiscoordinatedaction sent a strong positivesignal tofinancial marketsabout policymakers‟collectiveintent tomitigatetheeffectsof the crisison their economies.Although not through directlycoordinated actions,other centralbanks, includingthosein LatinAmerica, werealsoreducing policyrates.Thestressesin financial marketsand liquidityshortagesweresevere.So, in addition to cuttingpolicyrates,the Federal Reserve took measuresdesignedto provideliquidityfirst tobanksand later toother financialinstitutions.Athird set of measuresinvolved theprovision of liquiditytoaddresspressuresin commercial paper marketsand at moneymarket funds.Theseliquidityprograms werelargely unwoundwhenfinancial marketsimproved.As the Federal Reserve and other central banksworked to addressliquidityshortagesin their own markets,it becameclear that, asa resultof globalization, firms wereexperiencingfunding shortagesnot onlyindomesticcurrencies,but in foreign currenciesaswell.In particular, dollar fundingshortagesappeared not just in the UnitedStatesbut in countriesaround the world, which, in turn, exacerbatedpressuresin U.S.fundingmarkets.TheFederal Reserve already wasproviding liquiditytoforeign financialfirmsoperatingin theUnited Statesthrough itsdiscount windowandother facilities.Tofurther addresspressuresin dollar funding marketsand support theflowof credit toU.S.families and businesses,the Federal Reserveultimatelyapprovedbilateralcurrencyswaparrangementswith14foreigncentral banks, includingtwoLatin American central banks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 196. 196Under theseswaparrangements, in exchangefor their own currencies,foreign central banksobtaineddollarsfrom theFederalReserve tolendtofinancial institutionsin their jurisdictions.TheseswaparrangementsposeessentiallynorisktotheFederalReserve:Theyare unwound (with a fee paid by thecentral bank drawingon theswaparrangement tothe Federal Reserve) at theexact same exchangerate that appliedtothe original transaction, they are conductedwithmajor central bankswith track recordsof prudent decision making, andtheyare secured by theforeign currencyprovided by thosecentral banks.The success of these swap lines in alleviating funding pressures andreducing interbank borrowing rates is a testament to the benefits ofcentral bank cooperation.Moreover,in addition to easingfundingshortages,theseswapsalsohelped toallaymarket fears– theyhad a preventiveaswell asa curativerole.For example, four of thecentral banksthat participatedin thesearrangements– Brazil, Canada, New Zealand, and Singapore– did notend up drawingon the facilities, but it is generallybelieved that theexistenceof the lineshelpedprevent stressesthat could haveotherwisedeveloped.As the financial crisisreceded, theswaplineswereclosed in February2010.However,swaplineswithseveral foreign central bankswerereopened inresponseto financial strainsthat developed in Europe.2F3In many countries,policy ratesfell to nearlyzero. With substantialeconomicslack remaining, thesecentral banksfaced the challengeoffindingwaysto further easemonetary policy.TheFederal Reserve expanded its balancesheet through thepurchaseoflonger-term Treasurysecurities,agencydebt, and agencymortgage-backedsecurities.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 197. 197Theideawastoput downwardpressure on longer-term yieldsto spurdemand and alsotoencourage some portfolio rebalancingtoward riskierassetsand loansto the privatesector.Morerecently, theFederal Open Market Committeedecidedtoextendtheaveragematurityof its holdingsof securitiesby sellingshorter-maturityTreasurysecuritiesandbuyinglonger-maturityTreasurysecurities.This maturityextension program createdadditional downwardpressureon long-term rateswithout expanding thesize of the FederalReserve‟sbalancesheet.In additiontousingconventional monetarypolicyandbalancesheet toolstoprovidemonetary accommodation, communication isan importanttool usedby central banksto enhancetheeffectivenessof policy.At the conclusion of each meeting, theFederal Open Market Committeeissuesa statement of policy actionstaken and the rationalefor thoseactions.Detailed minutesare publishedthree weekslater, and lightlyeditedtranscriptsare madepublic witha five-year lag.In 2011, the Chairman began holdingpressconferenceson a roughlyquarterlybasistodiscusseconomicprojectionssubmittedbyparticipantsand actionstaken at themeeting.In August 2011, theCommitteestatement includedforwardguidancethateconomicconditionsare likely to warrant exceptionallylow levelsof thefederal fundsrateat least through mid-2013– a datethat waslaterextendedto late2014– whichput further downwardpressureonlonger-term interestrates.In January 2012, the Committeereleaseda statement of its longer-rungoalsand policy strategy.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 198. 198At that same meeting, the Committeealsobegan includingparticipantprojectionsof theappropriatepath of thefederal fundsratein theSummaryof Economic Projections.TheCommitteecontinuesto discusswaysin whichcommunicationcanbeused to enhancepolicy.While thesepolicy movesof theFederal Reserve werenot coordinatedwith other central banks, other central bankssharedthesechallengesandresponded in broadlysimilar waystoexpand their balancesheets.For example, the Bank of England and the Bank of Japan alsousedlarge-scalepurchasesofmedium- andlong-termgovernment securitiestoprovidestimulus.In addition, severalother foreign central banks, includingthe Bank ofCanada and the Bank of Japan, alsomore activelyused forwardguidanceabout thepath of policy rates.Finally, the common challengesand problemsof the past few yearsreinforcedthe importanceof open discussionamong the world‟scentralbanks.Central bank leadersdraw on collectiveexperiencethrough discussioninsuch diverseinternational forumsastheBank for InternationalSettlements(BIS), Group of Twenty(G-20), and CEMLA.CEMLAis an excellent exampleof what can beachieved bycentral bankcooperation through such meansascoursesand seminars, internationalmeetings,technicalassistance,publicationof research studies,andexchangeprograms.Cooperation in areasof supervision and regulationCentral banksaround theglobehave focused not just on responding tothecrisis,but alsoon workingto minimize the risk of future crises byimprovingthe soundnessand stabilityof the financial sector.Indeed, the global financial crisishasunderscoredthe importanceof thefinancial stabilityobjectiveof central banks.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 199. 199Given the global nature of financial marketsand largefinancialinstitutions,coordinationandcooperationamongcentralbanksandbanksupervisorsandregulatorsmoregenerallyiscrucialinachievingthisgoal.Let me provide a few examplesof suchefforts.First, the crisishighlighted shortcomingsin capital and liquidityrequirements.Central banks with bank supervisory responsibilitieshavebeen heavily involved in designing and promotinginternationalframeworkstoaddressthese shortcomings.TheFederal Reservehas supportedthe BaselCommittee‟sadoption ofimproved capital requirementsthat includeraisingrisk-weightingsfortraded assets,improving thequalityof loss-absorbingcapital through anew minimum common equityratiostandard, creatinga capitalconservation buffer, and introducingan international leverageratiorequirement.TheFederal Reserve hasalsosupportedthe BaselCommittee‟sworkonquantitativeliquidityrequirementsand itsworkon capital surchargesforbanksof global systemic importance.Another exampleof international cooperation on the regulatoryfront istheFinancial StabilityBoard (FSB), whichconsistsof key financialregulatorsaround theworld, includingtheFederal Reserve.TheFSB hasidentifieda number of challengesthat internationalcooperation amongcentral banksand financial regulatorsare helpingtoaddress.Onesuch challengeregards over-the-counter(OTC) derivatives.Toreducethe systemic risk of OTC derivatives,the G-20leadershaveagreedtorequire that standardizedOTC derivativesbeclearedthrough acentral counterparty.Another challengeis that of cross-borderresolutions,and theFSB hasundertaken analytic work on howtoimprove the resolvability of financialfirmsthat have a substantial international presence.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 200. 200TheFSB hasalsoidentified and spurred cooperativeworkon gapsinfinancial data and on the so-calledshadow bankingsystem.As a bank supervisor, theFederal Reserve hascooperated withforeignbank supervisors(includingother central banks) through participation insupervisorycolleges,whichare multilateral standing workinggroupsofsupervisorsformed for the purpose of enhancingeffectiveconsolidatedsupervision of an internationalbankingorganization.Supervisorycollegesenhancethe information exchangeand cooperationof home and host supervisorstohelp them develop a betterunderstandingof the risk profile of a banking organization.Lastly, at the Federal Reserve wehave alsobeen working closelywithother U.S. agenciesin therecentlyestablishedFinancial StabilityOversight Council on the implementationof the financial stabilityreforms laid out in the Dodd-Frank Act.Onekeyaspect of this act isthefocuson a “macroprudential approach”that paysattention tothe financial system asa whole, in additiontoindividual financial institutionsand markets.Thegreater emphasison macroprudential toolshasbeen widespread.Indeed, the Federal Reservehasparticipatedin analysesofmacroprudential toolsand policiesundertaken with other G-20centralbanksat theBISand withbank supervisorson the Basel Committee.Oneof the reasonsthat coordination is required for supervisionandregulation is thesubstantial cross-borderoperationsof many financialfirms.Thedeleveragingof some global financial institutionswith a significantpresencein LatinAmerica and the potential effect on economicperformanceservesasa stark reminder of the interlinkagesof financialinstitutionsand economies.Thedeleveragingof theseinstitutionsalsohighlightstheneed tocoordinateacrossregulatorsand actsasa catalyst to spur greater actionand information sharing.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 201. 201Latin American central banks: crisisresponse and challengesEarlier I mentioned how central banks around the world, including thosein Latin America, lowered policy rates in response to the global financialcrisis.Although the crisisdeveloped in advancedeconomies,Latin Americancentral banks, suchasthose in Brazil, Chile, Colombia, and Mexico, cutpolicy ratesin 2009astheir economieswerebeing hit hard throughtradeand financial linkageswithadvanced economiesaswell asthroughcommodity price channels.Their capacity to follow countercyclical policies was in striking contrastto many previoustimes of stress, when policy rates could not be loweredfor fear of frighteningoff international investors.Thefact that theseLatin American economies wereable torespond byloweringpolicy ratesand alsoby boostingfiscal support is a testament tothedecisivestepstaken to strengthen macroeconomic policiesandfinancial systems, includingimprovementsin themonetary frameworksunder which their central banks operate.Many Latin American economiesstaged quick and strong recoveriesfromtheglobal recessionand subsequentlystarted toraisepolicy ratestotry towardoff overheatingpressures.Conversely, many advancedeconomies, with their prolongedsoftrecoveries, neededtocontinueto followexpansionary monetary policies.Accordingly, aswasalsothe casein emergingAsia, themonetary policystanceof severalcentralbanksin LatinAmerica, suchasBrazil andChile, diverged from thoseof advanced economies.Theresultingrisein interestrate differentials, on top of thegenerallystrongergrowthin LatinAmerica, helpedtofuel capitalinflows,which, attimes,have proved challengingfor thepolicymakers of theseeconomiestomanage.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 202. 202Of course, more recently, withintensificationof the crisisin Europe,some LatinAmerican countries, mostnotablyBrazil, have again loweredtheir policyratesin responseto concernsabout slowinggrowth.Even within LatinAmerica, however, theexperienceof economieshasnot been uniform.In particular, Mexico, withitsstronger tiestothe United States,washitearlier and harder than many other economiesin the region.Even though Mexico‟srecovery in the secondhalf of 2009wasstrong, ithad lessmomentum and considerableeconomicslack remainedin thecountry.As such, the Bank of Mexicodid not consider it necessarytoraisepolicyratesduring its recovery period, unlike many other LatinAmericancentral banks.These developments underscore an important point – that while centralbanks may benefit from coordination and cooperation, taking the samepolicy stance at the same time typically will not be the best choice for allcentral banks.Accordingly, it is imperativefor each central bank tohavemonetarypolicy toolstoappropriately addressdomestic objectivesindependent oftheactionsof other central banks.ConclusionIn this ageof global financial integration, theFederal Reserve and othercentral banksoften must cooperatetoachievetheir individual mandates.This need for coordinationhasbeen especiallytrue during therecentcrisis, when the actionsof central banksworking together proved veryhelpful in easingfinancialstrainsandboostingconfidence.Indeed, closerties and more-open linesof communicationacrosscentral banks aresomepositiveoutcomesof thesedifficult times.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 203. 203Thisspirit of cooperationshouldcontinueasour respectivecentral banksworktopursuemonetary policiesappropriate for our own economieswhile supporting stablefinancial systemsaround theworld.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 204. 204Preliminary international bankingstatistics at end-March 2012July2012Statisticsat end-March2012arepreliminaryand subject tochange.Largemovementsin the latestdata arehighlighted in the Statistical release.Data are available via the BISWebStatsinteractivequery tool, in PDF format andCSVfilesontheBISwebsite(locationalandconsolidatedbanking statistics),and asasinglePDF file in detailed annextables.Final statistics,withan analysis of recent trends, will be releasedinconjunction withtheforthcoming BIS QuarterlyReview, to be publishedon 17September 2012.Data at end-June2012will be released nolater than 18 October 2012.Thelocational bankingstatisticsat end-March2012includefor the firsttimethe positionsof banksresident in Indonesia, ie the Indonesianofficesof domesticallyowned and foreign-ownedbanks.Theaddition of Indonesia bringsto44the number of countries reportingthelocational banking statistics.Indonesiandata are availablefromend-2010.At end-March2012,banksin Indonesia reportedinternational claims of$69billion(of whichcross-border claims were$13billion) andinternational liabilitiesof $72billion (of whichcross-borderliabilitieswere$23billion).International claimsand liabilitiesrepresent the sum of cross-borderBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 205. 205positionsand positionsvis-à-visresidentsdenominatedin foreigncurrencies.Any queries regardingthe locational or consolidated bankingstatisticsmay be directedtoibfs.locational@bis.orgoribfs.consolidated@bis.org, respectively.BIS locational and consolidated international banking statisticsPreliminary data at end-March 2012Data at end-March2012are preliminaryand subject tochange.Final data, with adetailed analysis of recent trends, will be releasedinconjunction withtheforthcoming BIS QuarterlyReview, to bepublishedon 17September 2012.Data at end-June2012will be released nolater than 18 October 2012.Asummary of the latest data is presented in Tables1and 2, and detailedbreakdownsand time series data areavailableatwww.bis.org/ statistics/bankstats.htm.Largemovementsin the latestdata are highlightedin the commentarybelow.Breaksin series and major data revisionsare detailed in theAnnex. Thelocational bankingstatisticsat end-March2012includefor the firsttimethe positionsof banksresident in Indonesia, ie the Indonesianofficesof domesticallyowned and foreign owned banks.Theaddition of Indonesia bringsto44the number of countries reportingthelocational statistics. Indonesiandata are availablefrom end-2010.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 206. 206At end-March2012,banksin Indonesia reportedinternational claimsof$69billion(of whichcross-border claims were$13billion) andinternational liabilitiesof $72billion (of whichcross-border liabilitieswere$23billion).Locational banking statisticsCross-borderclaimsofbanksin theBISreportingareawerelittlechangedbetweenend-December 2011and end-March2012,increasingby only$59billion (0.2%) after adjustingfor breaks in seriesand exchangeratemovements(Table1A).Outstandingcross-border claimsstood at $30.7 trillionat end-March2012.Credit tonon-banksincreasedby $112billion (1.0%) betweenend-December and end-March2012.Bankscontinuedtounwindtheirinterbank (includinginter-office)claims, albeit at a much slowerpacethan in thepreviousquarter: thedeclineamountedto$53 billion (–0.3%) in Q1 2012comparedtoa fall of$638billion (–3.1%) in Q4 2011.- Currency: US dollar-denominatedcross-borderclaims fell by $171billion. Euro denominatedclaimsincreasedby $174billion, driven byan increasein thecrossborder interbank positionsof banksresidentin theUnited Kingdom.Euro denominatedclaimson non-bankswerealmost unchanged.- Claimson developed economies:Cross-border claims on residentsofdeveloped economiesdropped by $12billion.Thedrop wasdriven by claimson banks, which fell by $18billion inthefirst quarter followinga $513billion declinein interbank positionsin thelast quarter of 2011.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 207. 207Thelargest reductionswererecordedagainst banks in the UnitedStates,Franceand Switzerland.Thesewerelargely offset by increasedclaimson banks in Germanyand Japan.Cross-border claimson nonbanksin developedeconomies increasedmarginally(+$6 billion).Claimsincreasedmainlyagainstnon-banksin Luxembourg ($39billion) and France($30billion).In contrast, claimson non-banksdecreasedin Germany(–$32billion),Greece(–$24billion) and Ireland (–$20billion).Cross-border claimson residentsof Greecetotalled $101billion atend-March2012,compared totheir peak of $251billion atend-September2009.- Claims on emergingmarkets: Cross-border claimson emergingmarketsincreasedby $84billion, after a $77billion declinein thepreviousquarter.Credit toborrowersinAsia, mainlyresidentsof China ($54billion),accountedfor most of the increase.- Holdingsof securities:Banks‟holdingsof securitiesissuedbynon-residentsincreasedby$135billion, after a cumulative$617billiondeclineover thepreviousfivequarters.Holdingsof non-bank securities accountedfor most of the increase($117billion), issuedmainlyby residentsof the UnitedStates($55billion), the Netherlands($16billion), France($23billion) andLuxembourg ($22billion).Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 208. 208Holdingsof debt securities issuedbynon-banksin Greece,includinggovernment bonds, dropped by $22billion.Banks alsoincreased their holdingsof securitiesissued by non-bankresidentsof emergingeconomies($10billion), mainlyin Brazil andMexico.- Nationalityof banks: The locational statisticsbynationalityof theparent bank indicatethat the increasein international claims, whichsum cross-borderclaims and banks‟foreign currencyclaims onresidents(Table1B), wasdrivenbyBritish($193billion) andJapanesebanks($63billion).By contrast, international claimsreported for theUS and euroareabankingsystems fell (–$198billionand –$103billionrespectively).- Cross-border funding: Cross-border liabilities to other banks and ownoffices increased by $57 billion and those to non-banks by $117 billion(Table1A).While banksin developed countriesand offshore centrestendedtodraw down their deposits,banksin Asia (especiallyChina, India andIndonesia) andAfrica and the MiddleEast (mainlySaudi Arabia andNigeria) continuedtoplace fundswithbanks in theBISreportingarea.Consolidated bank claims on an immediate borrower basisThe consolidated international claims of banks in the BIS reporting areatotalled $19.8 trillion at end-March 2012, representing an increase duringQ1 2012 of $748 billion including the impact of exchange rate movements(Table2A).Quarterlychangesfor international claims in theconsolidatedbankingstatistics arenot adjustedfor exchangerate movementsbecauseacurrencybreakdownis not reported.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 209. 209Exchangerate movementsexaggerated thequarterlyincreasein reportedstocksduring the first quarter.In particular, the appreciationof the euro, pound sterlingand Swissfrancagainst the US dollar betweenend-December and end-March2012contributedtoan increasein theUSdollar value of outstandingnon-dollar claims.- Sectoral structure:The share of international claimson thepublicsectorof euro area countriesasa wholeroseby 1percentage point to18%.Theexception wasGreece, wherethe share on the public sectordeclined by 11percentagepointsto 44%, reflectingsalesandwrite-downsof publicsector debt duringthe quarter.Theshare of interbank businessin worldwideinternational claimswasunchangedat 40%.- Maturity structure: The share of short-term claimswas unchanged at51% of outstanding international claims at end-March 2012, but thereweredifferencesacrossborrowingregions.Short-term claimson a number of oil-producingcountriesin theMiddleEast andAfrica increasednoticeably.Short-term claims on Cyprus, which had represented about 60% ofinternational claims on that country in the latter half of 2011, fell to48% at end-March2012.- Local office positionsin localcurrency: Local currencyclaimsofbanks‟foreign officeswereup 2% after adjustingfor currencymovements.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 210. 210Thelargest increaseswerereported vis-à-visGermany, Japan and theUnited Kingdom.Banks‟local fundingin local currencyincreasedby almost 4%, drivenbypositionsin theUnited States,Japan and Spain.Consolidated claims and other exposureson an ultimate riskbasisOn an ultimate risk basis, which takes account of net risk transfers acrossborrowing countries and sectors, other potential exposures stood at $16.6trillion at end-March2012.While in unadjusted termstheywerelargely unchangedcomparedtoend-2011, exchangerate movementsmasked a decline.Theshare of guaranteesextended (includingcredit default swapssold),which account for 55% of other potential exposures, wasunchanged, comparedwith thepositionsat end-2011overall.Theshare of derivativescontracts(24% of the total) wasdown by 1percentagepoint.As a counterpart tothesemoves,the share of credit commitments(whichaccount for 21%of other potential exposures) wasup by 1percentagepoint overall.Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 211. 211Basel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
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  • 217. 217TheBaseliii ComplianceProfessionalsAssociation (BiiiCPA) is thelargest associationof Basel iii Professionalsin theworld. It is a businessunit of theBasel ii ComplianceProfessionalsAssociation (BCPA), whichis alsothe largest associationof Baselii Professionalsin theworld.Basel III SpeakersBureauTheBasel iii ComplianceProfessionalsAssociation (BiiiCPA) hasestablished the Basel III Speakers Bureau for firmsand organizationsthat want toaccessthe Basel iii expertise of Certified BaseliiiProfessionals(CBiiiPros).TheBiiiCPAwill be the liaisonbetweenour certified professionalsandtheseorganizations,at nocost. We stronglybelievethat this can be agreat opportunityfor both, our certified professionalsand theorganizers.Tolearnmore:www.basel-iii-association.com /Basel_iii_Speakers_Bureau.htmlCertified Basel iii Professional (CBiiiPro)Distance Learning and Online Certification Program.Theall-inclusivecost is $297What is included in this price:A. The official presentationsweuse in our instructor-led classes(1426 slides)You can find the coursesynopsis at:www.basel-iii-association.com/ Course_Synopsis_Certified_Basel_III_Professional.htmlBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com
  • 218. 218B. Up to 3 Online ExamsThere is onlyone exam you need topass, in order tobecomea CertifiedBasel iii Professional (CBiiiPro).If you fail, you must studyagain theofficial presentations,but you donotneedtospendmoneytotryagain. Upto3examsareincludedintheprice.Tolearnmore you may visit:www.basel-iii-association.com/ Questions_About_The_Certification_And_The_Exams_1.pdfwww.basel-iii-association.com/ Certification_Steps_CBiiiPro.pdfC. Personalized Certificate printed in full color.Processing, printingand posting toyour office or home.Tobecome a CertifiedBaseliii Professional (CBiiiPro) you must followthestepsdescribedat:www.basel-iii-association.com/ Basel_III_Distance_Learning_Online_Certification.htmlBasel iii ComplianceProfessionalsAssociation (BiiiCPA)www.basel-iii-association.com

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