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Basel iii Compliance ProfessionalsAssociation (BiiiCPA)
1200G Street NW Suite800Washington, DC 20005-6705USA Tel:
202-449-9750Web: www.basel-iii-association.com
Dear Member,
Todaywewill start from someamazingBasel
III jobs.
Amazing: The average salaryand the demand for Basel III skills
in IT jobsadvertised acrossthe UK
Thefirst tablebelow looksat the demand for Basel III skillsin IT jobs
advertisedacrossthe UK.
Includedisa guide tothe averagesalariesoffered in IT jobsthat have
cited Basel III over the 3 monthsto 6 March2013witha comparison to
thesameperiod in the previous2years.
Thesecond tableis for comparison and provides aggregatesfor all of the
QualityAssurance & Compliancecategory.
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
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Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
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Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
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Source:IT JobsWatch, that providesa uniqueperspectiveon today's
information technologyjob market (noaffiliation).
Tolearnmore:
http:/ / www.itjobswatch.co.uk/ jobs/ uk/ basel%20iii.do
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Where to next?
Prioritiesand themes for the Basel
Committee
Keynote addressbyMr Stefan
Ingves,Governorof the Sveriges
Riksbank and Chairman of theBasel
Committeeon Banking Supervision to
theThird BCBS-FSI High-Level
Meetingfor
Central and Eastern Europe on ―StrengtheningFinancial Sector
Supervisionand Current RegulatoryPriorities‖
Good morning. It is my great pleasure tobe withyou again today.
I wouldlike tobegin by extendingmy appreciationto the Financial
StabilityInstituteand the Banking Supervisorsfrom Central and Eastern
Europe for their effortsin bringing ustogether again for another of these
High-Level Meetings.
Last year, I waspleasedtohavebeen ableto be a part of what wasa very
interestingand enjoyable meetingin Warsawhosted by our Polish
colleagues.
I hopewecan replicate thesuccessof that event this year here in Basel.
I wouldlike totake theopportunity todayto reflect a littleon what the
Basel Committeehasbeen doing sincewelast met.
Then I will outlineworkcurrentlyin train aswell asour longer term
strategic priorities.
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TheCommitteemeetsin thisbuildingtomorrow,and continuestohavea
very full agenda.
Indeed, the key messageI would like toleaveyou withisthat our work,
although changingin nature, showsnosigns of easingoff.
What have we done?
Before I discusswhat‘sleft to do, let me recap what hasbeendone over
thepast year.
Thekey initiativescompleted by theCommitteein thepast year include:
•reachingagreement on a package of revisionsto finalise Basel III‘s
LiquidityCoverageRatio(LCR);
• revisingthe Core Principlesfor EffectiveBanking Supervision;
•developing a policy framework for dealingwith domestic systemically
important banks;
•establishingdisclosure requirementsfor the new Basel III definition of
capital;and
•updatingthe supervisoryguidancefor assessingthe effectivenessof a
bank‘sinternal audit function.
In addition, theCommitteeestablisheda sound operatingframework
withinwhich toassessitsmembers‘implementationof Basel III.
As a result, the Committeeproduced:
•tworegular semiannual reports on Basel III implementationin all
member countries(along withtwospecial reportstothe G20on
implementation);
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•assessmentsof Basel III implementationin theEuropean Union, Japan
andthe United States;and
•a report analysing the variabilityof risk-weightedasset calculationsfor
market riskin individual banks.
Further down the agenda, my colleaguesfrom the Basel Committee
Secretariat will provide additional insightson our implementationwork.
I wouldlike tomakethepoint now,however,that theseeffortsarecritical
todeliveringonthe benefitsthat Basel III offers.
Ruleswrittenhave noeffect if not implemented:wecannot fail on this
front, and I will saymore about our effortsshortly.
What are wedoing?
There is still a great deal of workbeingdone tofinishthe Basel III
framework.
Thecapital standardsare now largely settled, withtheexception of some
technicalworkon issueslike exposurestocentral counterparties(CCPs).
As I notedearlier, the LCR has alsobeen finalised – albeit again with
some final technical details to be resolved.
But there are other parts of the Baselframeworkwhichweare currently
workingtofleshout and make operational.
Majorprojectscurrentlyunder wayinclude:
•finalisingthe specificationof the leverageratio, and associated
disclosurerequirements;
•reviewingthe Net StableFunding Ratio(NSFR), which addressesthe
longer-termstructureofbank debt andcomplementstheshort-termfocus
of the LCR;
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•completingthe review of the trading book capital requirements.
This entails an evaluation of the design of the market risk regulatory
regimeaswellasweaknessesinriskmeasurement under theframework‘s
internalmodels-basedand standardized approaches;
•enhancingthetreatment of securitisationstomake capital requirements
more prudent and risk-sensitive.
We are alsoreviewingways to reducemechanistic relianceon external
credit ratingsand toreduce current cliff effects in capital requirements;
•strengtheningstandardsto limit excessiveand opaque risk-taking
through over-the-counter(OTC) derivativesand toreducesystemic risk
posed by OTC derivativestransactions,marketsand practices.
Work on marginingrequirements, counterpartycredit risk and capital for
banks‘exposuresto central counterpartiesare examplesof our efforts
relatedtoderivatives;and
•revising the supervisory framework for large exposures to complement
the Committee‘s risk-based capital standard and to help improve banks‘
measurement and control of largeexposures.
All of theseprojectsarenecessarytoensurethat theregulatoryframework
adequatelyfactorsin thelessonsfrom thefinancial crisis.
Thechallenge,almost fiveyears on from the height of the crisis, is to
ensure that webringclosure totheseprojectsand that theyare in place
beforethenext stage of thefinancial cycle begins.
Underpinningthe Committee‘spolicy initiativesis an extensive
frameworkfor the collection and analysisof data tohelp usassessthe
quantitativeimpact of a particular policy.
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Quantitative impact studies (QIS) have become a central element of the
Committee‘s work, and we have a full slate of QIS exercises planned for
thisyear.
Alongside thesemiannual Basel III monitoring reports, almost all of the
policy initiativesI have just mentionedhave one or more data collections
or impact studiesplanned.
While thiscan be a burden for banksand supervisors,thishopefully
makes for well informedpolicymaking – sois well worth theeffort.
In additiontoall of thepolicyand analyticalwork,theCommitteeintends
to:
•continueto monitor members‘commitmentstothe timely
implementationof agreedreforms.
Todate, this hasfocused on capital, but will be expandedover thenext
year to encapsulate localimplementationof the LCR, aswell asthe
frameworksfor global and domesticsystemicallyimportant banks
(G-SIBs andD-SIBs), sincethesecome intoeffect over thenext coupleof
years;
•undertake a full set of implementationassessmentsfor 2013. We will
conduct reviewsof Singapore, Switzerland, China,Australia, Brazil and
Canada.
Follow-upreviewsof the European Union and the UnitedStatesare also
plannedonce their Basel III regulationsare finalised;and
•publisha report on the initial, detailed review of risk-weightedasset
calculationsfor thebankingbook; wehope topublish thefull resultsby
thesummer.
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Together withthe recentlypublished resultson thetrading book, this
analysisidentifiesthe specific driversthat lead to variationsin risk
weightsfor similar exposures.
TheCommittee‘snext step will thenbe toconsider policyresponsesto
reduceany unwarrantedvariabilityand tothereforeimprovethe
comparability of banks‘ratios.
Atheme I will be returning to isthe importanceof this implementation
monitoring workfor the Committee.
While it is a relatively new component of the Committee‘s mandate, it
should not be seen as an adjunct to the Committee‘s standard-setting
role.
Rather, it is absolutelycritical tosuccessfullydeliveringdesiredpolicy
outcomes.
Where to next?
As you can see,theCommitteeis engagedin a varietyof projectsthat
requireustocombinethe effortsand input of regulatorsand supervisors
acrossa largenumber of countries.
This is a challengingtask.
An even greater challenge, however, is prioritisingamong competing
projectsto achieveour most pressingobjectives.
TheCommittee‘sresponsetothe financial crisishasbeen strong, but
thereis still much to accomplish.
Sowehave recentlyspent some time identifying our key strategic
priorities, to make sure wehave a good meansof deciding what wereally
must do.
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Asyou may have seen, thesepriorities wereendorsedby the Group of
Governorsand Headsof Supervision (GHOS) at the same time they
endorsedand announced the revisionstothe LCR.
TheCommittee‘sprimary focusin the short and medium term is
completing and embeddingthefull suiteof responsesto issuesthat
emerged from the financial crisis.
With that in mind, foremost considerationwill be given to five priority
areas:
1.completingthecrisis-initiatedreformsof thepolicy framework;
2.monitoringand reinforcingtheimplementationof Baselregulatory
standards;
3.assessingthe impact of, and industry responseto, implementationof
theregulatory reforms;
4.examiningthe comparabilityof model-based internal risk weightings
and consideringtheappropriatebalancebetweenthe simplicity,
comparability and risksensitivityof theregulatory framework;and
5.enhancingthe effectivenessof both micro- and macroprudential
supervision.
Completion of the crisis-initiated reformsof the policy
framework
As I have alreadyhighlighted, the policyreformsinitiatedin response to
thefinancial crisis are not yet complete.
While thebasic frameworksfor risk-based capital and, more recently,
liquidityarenow largely settled, manyof theother reformsI noted earlier
remain verymuch a workin progress.
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Toensure that theweaknessesin the regulatory frameworkbrought to
light by thefinancial crisisdonot persist for any longer thannecessary,
theCommitteeisaimingtohavemuchof this workcompletedbytheend
of 2014.
This is an ambitioustarget, but giventhe importanceof thesereforms,
thereis nobasis for unnecessarydelay.
Our plan is for theleverageratiowork– whichis largely devoted to the
detailedspecificationoftheexposuremeasure(ie thedenominator) ofthe
ratio – tobe largely completed this year, while theNSFR, tradingbook,
securitisationand largeexposurespolicy workwill be finalizedin 2014.
TheCommitteealsohas twoother major policy initiativesthat it plansto
launchsoon.
While not obviouslythought of asimmediateand essential responsesto
thefinancialcrisis,theyareneverthelessquiteimportant for ensuring that
theoverall prudential frameworkremainsrobust, andexistingreforms are
effective.
Theseprojectsare:
•a review of the standardised (credit and operational risk) approachesto
capital adequacy, whichneed tobe re-examinedin light of callsfor
greater simplicityand comparabilityin the regulatoryframeworkaswell
asthe desire toreducethe relianceon credit ratingagenciesif possible;
and
•an examinationof theneed for a capital framework for interest raterisk
in thebankingbook, particularlygiven thedesiretolimit arbitrage
opportunitiesbetweenthe trading and banking books.
Theselasttwoprojectsarestill at an embryonic stage, soI cannot saytoo
much about what theymight entail at thispoint in time, but theywill be
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thelast piecesin what hasessentiallybeen a completeoverhaul of the
regulatoryframework sincethe financial crisis.
Monitoring and reinforcing implementation of Basel regulatory
standards
As I have alreadysaid, theestablishment of the implementation
monitoring programme hasbeen a high priorityfor the Committee; it is
critical tothesuccessful delivery of the benefitsof theagreedreforms.
Startingfrom scratch at thebeginningof 2012,a comprehensive
assessment framework hasbeen developed that isgrowingin its
acceptanceand credibility, and I am pleasedtoreport that theCommittee
nowhasdedicatedcapacityin the area of implementation work.
Theimplementationframeworkis beingcontinuously strengthened
through a lessonslearned process.
Our goal istotakeamore holisticviewon theimplementationprocessby
focusing not onlyon the existenceof a regulatory frameworkbut alsoon
itsfunctioning.
Theimplementationprocessis alsoenvisagedto be closely linked to the
ongoing policydevelopment process, creatingapositivefeedback loop
that can help strengthenthe regulatory regime.
There is no doubt that this newmonitoring and assessment initiativehas
already had a positiveimpact.
Asaresult of theregularmonitoring ofhowcountriesaretrackingagainst
agreeddeadlines,aswell asthe forthcomingcountry assessments,
member jurisdictionsregularlyapproach the Committeeabout specific
aspectsof the Baselframework,actively seeking to ensure that their local
adoptionof theBasel rules wouldnot beinadvertentlyout of linewith the
spirit of the agreement.
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Jurisdictionshavealsobrought forwardthereleaseof their rulestoensure
that their progresswascaptured in theperiodicupdatesthat the
Committeehasprovided to the G20 and made public.
Theself-assessment responsesundertakenfortheassessment processare
alsobenefitingthe implementationprocess.
In addition, theassessmentsof driversthat lead tovariationof banking
and tradingbook risk-weightedassetsare continuing and areto likely
lead to both more consistent implementationof existingrules, and the
development of policy optionstoaddressidentified areasof weakness.
Thepriorityfor theCommitteenow is tobuild on theseachievementsin
monitoring regulatory compliancewithBasel standardsand tocontinue
toenhancetherigour ofall aspectsoftheimplementationmonitoring and
assessment process.
There isa very full agenda planned for 2013 and beyond which will deliver
quite a number of new monitoring requirements(such asrulesrelating to
liquidity, the leverage ratio and G-SIBs), as well as country and thematic
assessment reports.
It is a credit tomember jurisdictions,and evidenceof their commitment
tothe process,that this workcan be undertaken:first, it requires the
willingnessof each member tobe subject to review by their peers,and
then a continuingstrong commitment, includingsubstantial resourcing
of expert staff, from all involved.
Nevertheless, the effort will be well worthit if weachieveour objectiveof
consistent implementation of the Baselstandards.
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Assessing the impact of, and industry responseto, the
implementation of the regulatory reforms
Themajor reformsthat have been developed by theCommittee, coupled
with thosebeingintroduced at thedomestic level, aredesignedto
fundamentallyreshapebanking.
Thereforms are intendedtogenerate amore resilient financial system, in
whichhigher levelsof capital and liquidityare held, and in whichrisk is
appropriatelymanaged and priced.
This will obviouslyhave consequencesfor the costsof financial
intermediation,althoughstudiesundertakensuggest thatthiscost isboth
relativelysmall, andconsiderablyoutweighedbythebenefitsof increased
financial stability.
Nevertheless, thisis not a caseof ―set and forget‖.
TheCommitteeismindful of two potential consequencesfrom the
programmeof reforms.
While a degreeof deleveragingand increasedrisk premia areintended
consequencesof thereforms, there is alwaysa danger that some
unintended consequencesmay arise.
TheCommitteeneedsto continueto undertakemonitoring exercisesto
ensure that it respondswhen truly unintended consequencesmaterialise;
weunderstand fullythat, if left unattended, theywill serve to undermine
support for thereform agenda.
However, we also need to avoid using thisasan excuseto delay necessary
reforms; to the extent there are unintended consequences, we need to see
howthey can be addressed without losingthe reform benefits.
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A second potential consequence relatesto the incentives that may arise as
the banking sector adaptsto the reforms by moving into those businesses
whererisk-adjusted(regulatory) returnsare greatest.
This reshapingof banking (either withinbank balance sheetsor outside
theregulated bankingsystem) needstobe monitoredon an ongoing
basisfor the Committeeto maintain a robust regulatory framework in
light of the evolving nature of thebanking industry.
That doesnot mean that theregulatoryframework shouldbe in aconstant
stateofflux, asthereareconsiderablebenefitsforfinancialfirmsbeing
able toplan in a stableenvironment.
But, equally, wecannot have a regulatoryregime that is set in stone, and
completelyunresponsivetochangesin the environment that it is tasked
with regulating.
Creating greater simplicity and comparability in the regulatory
framework
Avigorouspublic debate hasdeveloped recentlyastowhether the Basel
regulatoryframework strikes an appropriate balanceamong different
desirablecharacteristics:simplicity, comparability and risksensitivity.
Thepolicydevelopment processmusttaketheseandseveral other – often
competing – factorsintoaccount, and findingthe right balance often
involvesa difficult set of trade-offs.
Nevertheless, it is important to keep thisissueunder review,and sothe
Committeeestablished a high-leveltask force last year with a view to
lookingat thisconcern from a broader,strategic perspective.
The Committee has already had some discussions on the task force‘s
findings, and will have more in the coming months (including at our
meetingthat beginstomorrow).
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The way forward will also be guided by the findings of the reviewsof risk
weighted assetsthat I mentioned earlier, since at the heart of that work is
a concern about comparability.
It is too earlytosayhow wewill take thisworkforward.
Someissues,such asthosein relation tomarket risk modelling, can be
taken up via our existingtrading book review.
Others might require tweaksto the framework,or supervisoryguidance,
whichcan be implemented in the near term.
And othersmight necessitatea deeper, longer-term review before wecan
decideon anysolution.
We will publish a discussion paper in thecoming monthsthat dealswith
discussessome of the complex trade-offsthat need tobe made.
But one point I wouldstressis that whateverwedecideupon, it will be
designedtostrengthenthecurrent framework,andthereisnothingthat is
beingproposedthat shouldgivereasontoholdoffontheimplementation
of Basel III and other recently agreedreforms.
Enhancing the effectivenessof both micro- and
macroprudential supervision
Not surprisingly, the Committee‘sagendain thepast few years hasbeen
dominated by policymaking.
In 2012,implementationalsocame to thefore.
Butit isperhapsstatingtheobviousthateffectivesupervisionisthekeyto
ensuring that regulation, once implemented, continuestowork as
intended.
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Onlyif supervisorsaregiventhetoolstheyneedtoact can theyeffectively
perform their role.
As the policy reform agenda movestowardscompletion, and thenew
rules are rolledout bynational regulators, the Committee will
increasinglyturn itsattention toenhancingsupervisorypractices.
Enhancing microprudential supervision
TheCommitteehasa great deal of guidanceon supervisorymatters
already on issue.
However,much of this wasdeveloped beforethe financial crisisand will
benefit from beingupdated to reflect lessonslearnedin recent years.
Given the general applicability of much of this material, thebenefitsof
thisworkwill alsoextend well beyond Basel Committeemember
countries.
As withall multi-year projects,thiswill require prioritisation.
Near-term attention is likely tobe given tooperational risks (internal
controlsand informationtechnology), governance, supervisorycolleges,
stresstestingand dealingwithweak banks.
Enhancing the practical implementation of macroprudential
supervision
Thesystemically important bank – ―SIB‖ – regimeswill continueto be a
priorityareafor theCommittee over thecoming years.
Although the regimesfor global SIBsand domestic SIBs have now been
published, both will require a certain amount of ongoing maintenance
andmonitoring.
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Furthermore,asnotedin theG-SIB standard,themethodology, including
the indicator-basedmeasurement approach itselfand the cutoff /
threshold scores,will be subjectto periodic review and refinement every
threeyears.
Beyond this work,the Committee will now turn itsattentionto the
practical implementationof toolsand techniquesto deal with systemic
risks.
This will includetwocomplementaryareasof work:
•RegulatoryconsequencesofSIB classification:BeingaSIB meansmore
than just higher capital.
In light of the riskstheyimposeon thefinancial system, SIBs must be
heldtoa higher standard withrespect tosupervisoryexpectationsfor risk
management functions,data aggregation capabilities,risk governance
and internal controls, all of whichare topics that featureprominentlyin
theCommittee‘swork plan.
In addition, given theprinciples-basednature of the D-SIB framework,
the Committeewill monitor emergingpracticeasbanking supervisors
movetowardsimplementationsoastofacilitatecross-bordercooperation
andmutual understanding.
•Use of microprudential toolsfor macroprudential purposes:The
Committeewilloverseepreparationsforthecountercyclical buffer,aswell
asexchangeinformation on thewiderrangeof microprudential toolsthat
havebeen usedfor macroprudential purposes(eg sectoral adjustmentsto
risk weights,stresstestingrequirements, loan-to-valuelimitsor varying
margin requirements).
Concluding remarks
Sincethe financial crisis, theBasel Committeehasaccomplished a great
deal.
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But westill have work to dotocompletethe overhaul of the regulatory
frameworkand fullyfactor in all of thelessonslearned.
We alsoneed toseewhetherwehavethebalanceright whenit comes
tosimplicityand risk sensitivity.
That work isgoingtokeepthe Committeebusyfor at leastthe next two
years.
But that is far from the end of it, because, asI have noted a number of
timestoday, our policyworkwill not generate itsfull benefitsif not
implemented in a full, timely and consistent manner.
Soour implementationmonitoring workis equallyimportant.
And theneven whenthenew standardsare implemented, wewill need
effectivesupervisorsto ensure that theyare adheredto.
This is an area wheretheCommitteehasthepotential todomuch more,
particularlyonce thepolicy pipelinebeginsto slow.
In other words,theBasel Committeewill continue toprovideyou with
much totalk about – at this meetingand thosein the future!
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Financial Stability Board reportsto
G20 on progressof financial
regulatory reforms
TheChairman of the Financial StabilityBoard (FSB) reported to the G20
FinanceMinistersand Central Bank Governorson progressin the
financial regulatoryreform programme.
In connection withthis, the FSBis publishing:
•a letter bythe FSB Chair tothe G20, sent ahead of their
meeting, reporting on the good progressbeingmade in financial
reforms, includingin thefollowingpriorityareas:ocreating
continuouscore marketsby completingOTC derivativesand related
reforms;
ostrengtheningtheoversight and regulation of shadowbanking;
obuildingresilient financial institutions;and
oending ―toobig tofail‖.
TheletteralsosummarisestheFSB‘srecent workand planstomonitor
theimplementationof reforms.
•An assessment of the effect of the G20 financial reform programme on
theavailability of long-term finance.
This assessment hasbeen contributed by the FSBaspart of abroader
diagnosticreport preparedbyinternationalorganisationstoassessfactors
affectinglong-term financing.
TheFSB assessment concludesthat, while there may be short-term
adjustment effects, the most important contribution of thefinancial
reform programme tolong-term investment financeis to rebuild
confidenceand resiliencein theglobal financial system.
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•a joint update by the International Accounting Standards Board (IASB)
and the Financial Accounting StandardsBoard on the statusand timeline
of their remainingprojectson convergingtheir standards.
At today‘smeetingtheG20 FinanceMinistersand Central Bank
Governorsreaffirmed their commitment tothe full, timely and consistent
implementationof internationallyagreed financial sector reforms,and
lookedforwardto a comprehensive report on progressin implementing
all reformsat the St Petersburg G20Summit in September.
G20Ministersand Governorsalsowelcomedthe establishment of theFSB
in January asa legal entitywithgreater financial autonomy and enhanced
capacitytocoordinatethedevelopment and implementationof financial
regulatorypolicies,while maintainingstronglinkswith theBank for
International Settlements.
Progressof Financial Regulatory Reforms
Financial market conditionshave improved over recent months.
Nonetheless, medium-term downsiderisksremain, given weak growth
prospectsand high levelsof public and private sector debt in many
economies.
Therecent improvement in financial market conditionsowesmuch to
central bank actions, in particular, the accommodativemonetarypolicy
aimed at stimulatingthe economic recovery.
As a consequence, market participants‘appetitefor risk hasincreased,
but this hasnot yet translatedintoa robust recovery in real investment.
Thebeginningof thereturn of risk appetitetofinancial markets– while
intendedand welcome – raisesanumber of issues.
First, market participantsand authoritiesneed to be on guard against
mispricing of risk and valuationsof assets.
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Second, the importanceof timelycompletion of the reformsto
over-the-counter(OTC) derivativesmarketsand theshadow banking
system hasincreased.
Third, historicallylowinterest ratesinmanycountriesposechallengesfor
institutional investorswithlong-datedliabilitiesand may leavemarket
participantsmore vulnerable tounanticipatedmovementsin the yield
curve.
Financial institutionsand supervisorsshould continuetoassessthe
resilienceofthefinancialsystem throughregular stresstesting, notablyof
credit and interestrate risk, and completetheprocessof balance-sheet
repair.
1.Reportssubmitted for thismeeting
a.Regulatory factors affecting the availability of long-term
finance
As part of the diagnosticworkyou requestedof the international
organisations,the FSBhasprepared an assessment of the effect of the
G20financial reform programme on the availability of long-term
investment finance.
ThereformsincludeBaselIII, OTC derivativesmarket reforms, and
changesaffectingtheregulatory and accountingframework for
institutional investors.
Thegeneral conclusion is that, while there may be some short-term
adjustment effects, the most important contribution of thefinancial
reform programme tolong-term investment financeis to rebuild
confidenceand resiliencein theglobal financial system.
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As a result, thesereforms should substantiallyenhancethefinancial
system‘s capacityto intermediateinvestment flowsthrough the cycle at
all investment horizons.
Hence, the G20 regulatoryreforms are unambiguouslysupportive of
long-term investment and economic growth.
Thesubmissionsof FSB members found littleevidencethat the
regulatoryreformshavehad a notableimpact on long-term financingto
thispoint.
This is not surprisinggiven the fact that the reform processisstill at an
earlystage.
Several featuresof thereformsaredesignedto avoid major unintended
consequences:thelong phase-in period for reforms;the ongoing
implementationmonitoring; and, in certain cases,the flexibilityto adjust
rules during the observation period.
Thefinancial reform programme is not specificto theregulation of
long-term finance.
Nevertheless, the reforms will change the incentives of some financial
institutions and the costs of certain transactions, which may affect the
composition of long-term finance.
In particular, institutional and other long-horizoninvestorsare expected
toassume a greater rolein funding long-term assetsand more of this
investment may be intermediatedvia capital marketsrather than the
bankingsystem.
There arethree areasfor specific follow-upby the FSB.
First, there should be ongoing monitoring to identify any regulatory
factors that may disproportionately affect the provision of long-term
financesothat theycan be addressed.
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Second, the FSBcould workwith otherstoexaminewhetherregulatory
factorsmayconstraintheability ofnon-bankstoexpandtheirprovisionof
long-term finance.
Third, the FSB can contributeto thework of other international
organisationstohelp promote the development of longer-term domestic
savingsand thecapacityof domesticfinancial systemstointermediate
them, particularlyin emergingmarket and developing economies
(EMDEs).
b. Update on accounting convergence
TheChairsof the InternationalAccounting Standards Board and theUS
FinancialAccounting StandardsBoard havewrittenyou on their work on
convergenceof accountingstandards.
ThetwoBoardsexpect tomake progresson the twokey outstanding
issuesof impairment of loans,wheretheyexpect to completetheir
deliberationsin 2013, and insurancecontracts, whereboth Boards will be
holdingpublic consultationsthis year.
Of thesetwooutstandingissues,the need for convergence on a new
forward-lookingexpectedlossapproach to provisioningis of most
immediateconcern for end-usersand from a financial stability
perspective.
We note withconcern thedelaysin convergencetodate.
We thereforerecommendthat theG20asktheIASB and FASB toprepare
byend-2013a roadmapfor converging to a common approach for
impairment and for achievingthe G20objectiveof a singleset of high
qualityaccountingstandards.
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2. Priorities and work plans
a. Creating continuousmarkets
TheFSB remainsfullycommittedtotherapid completionof the G20‘s
agreedreformsto OTC derivativesmarkets.
As you are aware, thesecomplex reformsaretakingsomewhat longer
than originallyplanned.
TheFSB will submit for your April meetingits latestprogressreport on
implementation, includinga comprehensivestock-takeof reformsasof
end-2012,estimatesof theextent towhichtransactionsarebeingcentrally
clearedand reportedto trade repositories, and an overview of the
remainingissuestobe resolved.
It is important that all jurisdictionspromptlycompletethenecessary
changestolegislativeand regulatoryframeworksto put thesereforms
intopractice.
Tomaintain momentum, I have asked FSBmember jurisdictionsto
confirm beforetheSeptember Summit that the legislationand regulation
for reportingto traderepositoriesare in place,and alsothestepstheyare
takingtocompletetheimplementationof other OTC derivativesreforms.
Ministersmay wishtotake a particular interest in progressin their
jurisdictionsto ensure timely compliance withtheseimportant reforms.
TheFSB haspreviouslyidentified regulatoryuncertaintyasthemost
significant impediment tofull and timelyimplementationof the OTC
derivativesreforms.
Toreducethis uncertainty, regulatorsareworkingtogether toidentify
and addressconflicts,duplication and gapsin thecross-border
application of rules.
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Theywill provideanupdateinApril ontheir progressand next steps,and
a report totheSummit on how theidentified cross-border issueshave
been resolved.
Internationalpoliciesin remainingimportant areaswill alsobepublished
bytheSummit.
Theseincludecapital requirementsfor exposurestocentral
counterparties, marginingstandardsfor non-centrallycleared
transactionsand guidance on resolutionof central counterparties.
Standard settersareundertakingan assessment of the incentivesto
centrallyclear transactionsthat thesestandardscreateand will adjust
them asnecessarytoensure a robust system.
TheFSB will alsoreport at the Summit the findingsof a new
macroeconomicimpact assessment of theOTC derivativesregulatory
reforms.
Standard settersarealsodeveloping international guidanceon authorities‘
accesstotraderepositorydata, includingin suchawaythat it can be
aggregatedacrosstrade repositories.
This guidance, whichwill be issuedfor consultationshortly and finalised
bytheSummit, will be important for ensuring that authoritiescan use
information from traderepositoriesin their oversight of OTC derivatives
marketsand assessment of systemic risk.
MinistersandGovernorswillwishtoensurethereiseffectivecross-border
accessto thisinformation, whichisvital tothemonitoringof emerging
financial vulnerabilities.
The global Legal Entity Identifier (LEI) system will enhance the usability
of the data; the Regulatory Oversight Committee as the governance body
of the global LEI system wasestablishedin January 2013.
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EstablishingtheGlobalLEI Foundationisthekeynext steptolaunchthe
system in March2013.
TheFSB continuestooffer strong support to theLEI initiativeand the
FSB Secretariat will serve asROC LEI Secretariat for theinitial period.
b. Strengthening the oversight and regulation of shadow
banking
As you will recall, theFSB deliveredtoyou lastNovember an initial set of
recommendationstostrengthenthe oversight and regulationof shadow
banking.
We have receiveduseful feedback through a public consultationon the
initial recommendations.
TheFSB isrefiningthe recommendationsrelatingto securities lending
and repos, and thoserelatingto the policymeasuresfor shadowbanking
entitiesother than money market funds.
The recommendations will address bank-like risks to financial stability
emerging from outside the regular banking system while not inhibiting
sustainablenon-bank financingmodelsthat do not posesuch risks.
Theapproach is designed tobe proportionateto financial stabilityrisks
byfocusing on thoseactivitiesthat are material to the system, using asa
startingpoint thosethat werea sourceof systemic risk duringthe crisis.
We will deliver certain recommendationsto the St Petersburg Summit.
Thesemeasuresshould be viewed asthe start of a broader processsince
theyaddressthespecific risksthat aroseduring thecrisis and weall
recognisethe ability of the shadow bankingsector toinnovate.
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c. Building resilient financial institutions
In January, agreement wasreachedbytheGroupofGovernorsandHeads
of Supervision on theLiquidityCoverage Ratio(LCR) to beapplied to
banks.
Theagreement expandsthe rangeof high-qualityliquid assetsthat can
beincluded in theLCR and incorporatesevidence-basedassumptions
about liquidityoutflowsin timesof stress.
TheLCR will be introducedin 2015asplanned, withthe minimum
requirementsbeginningat 60% and reaching100%by 2019toallowthe
global banking system sufficient time toadjust.
d.Ending ―too-big-to-fail‖
Progressisbeing madeby the IAIS in developingand testing a
methodologyfor identificationof global systemically important insurers
(G-SIIs), and in developing appropriatepolicy measures.
This work should becompleted in the second quarter of 2013.
An identificationmethodology for non-bank G-SIFIs will be issuedfor
consultationin the secondhalf of 2013.
Although implementationof theG-SIFI frameworkhasmuch farther to
go, wewill deliver an assessment totheSt. Petersburg Summit of the
progressmade in developing crediblepoliciesfor ending too-big-to-fail
(TBTF).
3. Implementation of reforms
Basel III
Consistent implementationof Basel III is fundamental to strengthening
theresilienceof theglobal banking system, maintainingmarket
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confidencein theregulatory reformsand providinga level playing field
for internationallyactivebanks.
The27member jurisdictionsof the Basel Committeeon Banking
Supervision(BCBS) continuetomake progresstowardimplementation;
11had issued final regulationsby12 February 2013and theremaining 16
jurisdictionshave tableddraft regulations.
TheEuropeanUnion andtheUnitedStatespublisheddraft regulationsin
2012and intend tofinalisethem over thecourse of 2013.
TheFSB and BCBSwill prepare a full update on countries‘adoption of
Basel III in domesticregulationfor your April meeting.
Thecountriesthat havemissedtheJanuary 2013start date are workingto
finalisetheir regulationsand are expected to meet the2019timelinefor
full implementation.
Several more memberswill undergoa consistencyassessment of their
final regulationsby theBCBS in 2013.
By end-2013,all jurisdictionsthat are the home regulatortoglobal
systemicallyimportant banks(G-SIBs) will have been subject to an
assessment of their Basel III implementation.
Other jurisdictionswill be subject to regulatory consistencyassessments
shortlythereafter.
TheBCBS hasconcluded an initial examination of the international
consistencyin the application of theBasel III risk weightingschemefor
tradingbook assets.
Asimilar review is underwayregarding the banking book.
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Theanalysisforbanks‘tradingbooksindicatesthat supervisorydecisions
andvariationsin banks‘models contributetothe substantial differencesin
banks‘calculationsof market risk.
(Theaveragerisk weightingof tradingassetsfor most banksin thestudy
varied between15% and 45%.)
Thestudyalsoshowsthat banks‘public disclosuresare insufficient for
understandinghow much of thesevariationsin banks‘reportedrisk
weightingsof assetsare owingtodifferinglevelsof actual risk versusthat
owingtoother factors.
This situation is unacceptable, and the studyhighlightsthreepolicy
optionswhichare beingaddressed in the BaselCommittee‘songoing
work:
(i)Improving banks‘public disclosures, buildingon the
recommendationsof theEnhanced DisclosureTaskForce;
(ii) Narrowingdown modellingchoicesfor banks;and
(iii) Further harmonisingsupervisorypracticesover approval of models.
Resolution regimes and G-SIFI resolution plans
An effectiveand credibleresolution regime for SIFIs is a critical
component of the policy framework for ending TBTF.
Full implementationof theFSBKeyAttributesof EffectiveResolution
Regimeswill provideauthoritieswiththepowersand toolsnecessaryfor
thispurpose.
We will shortlyconcludethefirst peer review of FSB members‘
implementationof theKeyAttributes.
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Theworkunder thereview confirmsthat reformsare underwayin many
jurisdictionsto align national statutoryregimes withthe FSB Key
Attributes, but that significant work remains.
We are developingan assessment methodology to assist countrieswith
their implementation, and toprovidea basisfor future peer reviewsand
IM F and World Bank assessments.
Themethodology will be testedin pilot assessmentsbythe IMF and
World Bank later thisyear and publishedin the second half of 2013.
TheFSB and itsmemberswill alsothis year addressthe specific aspects
of resolutionof insurersand financial market infrastructuresand the
protectionof client assetsin resolution.
By June 2013, resolution strategiesand plansshould be in placefor all
G-SIFIs designated in November 2011.
Toassist this processthe FSB haspubliclyconsulted on specific aspects
of recovery and resolutionplanningand isnow finalisingitsguidance.
Progressin ending TBTF is contingent on the feasibilityand credibility
of putting theseresolutionplansintooperation.
We will launchin thesecond half of 2013a first round of assessments
under the G-SIFI ResolvabilityAssessment Processtoevaluatethe
progressmade.
Reducing the reliance on Credit Rating Agency (CRA) ratings
TheFSB hasrecentlylaunched a thematic peer review to assistits
membersto fulfil their commitmentsunder the roadmap for
implementingthe FSBprinciplesfor reducingreliance on CRA ratings.
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This will includea stock-take of referencestoCRA ratingsin national
authorities‘lawsand regulationsand of actionsbeing taken toremove or
replace thesereferences.
Thefindingswill feed intotheprogressreport on CRAs for theSummit,
while thepeer review will be completed by early2014.
Monitoring the impact of reformson EMDEs
TheFSB will organisea workshopfor EMDEs in the first half of 2013to
sharelessonsand experienceson implementingagreed financial reforms
and on undertakingex anteassessmentsof their impact.
FSB members withsignificant experiencein undertakingsuch
assessmentswill be asked topresent their methodologies.
TheFSB will report the findingsof theworkshopand other relevant
monitoring processesat theSt. Petersburg Summit.
4. FSB resources, capacity and governance
Finally, I am pleasedto report that theFSB hasnow been established
with a legal personality.
Alongside this,a rollingfive-year agreement under which theBISwill
host and provideresourcesfor theFSB hasbeen activated, and an
institutional mechanism for theFSB‘sfinancial and resourcegovernance
established.
TheFSB hasalsoadoptedProcedural Guidelinesfor itsoperational and
administrativeactivitiesand practices.
Theseareimportant stepstowardsimplementationof the G20
recommendationsat Cannesand Los Cabostoplace theFSB on an
enduringorganisational footing, withstrengthenedgovernance, greater
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autonomy in resource use and enhanced capacitytocoordinatethe
development and implementation of financial regulatorypolicies,while
maintainingstrong linkswiththe BIS.
TheFSB will next elect new chairs for three of its Standing Committees
andbegin a review of the composition of their memberships.
FollowingtheSt. Petersburg
Summit, the FSB will set in train a
review of the structure of its
representation, whichweenvisage to
becompleted under theAustralian
Presidencyof the G20.
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Dodd-Frank Act StressTest
2013
TheDodd-Frank Act requires all
financial companiesthat have
more than $10 billionin total
consolidatedassetsand are
regulated by a Federal financial
regulatoryagencytoconduct
capital stresstestsat least
annually.
TheFederalReservefinalizedthoserequirementsforBHCswithbetween
$10 billion and $50 billion in assetsand state member banks and savings
and loan holding companies with over $10 billion in assets on October
9, 2012.
TheFederal Reserve expectslarge, complex bank holding companies
(BHCs) to hold sufficient capital tocontinue lendingto support real
economicactivity, evenunder adverseeconomic conditions.
Stress testing is one tool that helps bank supervisors measure whether a
BHC has enough capital to support its operations throughout periods of
stress.
TheFederal Reserve previouslyhighlightedthe useof stresstestsasa
meansof assessingcapital sufficiencyunder stressduring the 2009
SupervisoryCapitalAssessment Program (SCAP) and the 2011and 2012
Comprehensive CapitalAnalysis and Review (CCAR) exercises.
In the wakeof thefinancial crisis,theCongressenacted theDodd -
FrankWall Street Reform and Consumer ProtectionAct (Dodd-Frank
Act), which requires the Federal Reserve to conduct an annual stresstest
of largeBHCs and all nonbank financial companies designatedby the
Financial Stability Oversight Council (FSOC) for Federal Reserve
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supervision to evaluate whetherthey have sufficient capital toabsorb
lossesresultingfrom adverseeconomic conditions.
TheDodd-Frank Act alsorequiresBHCs and other financial companies
supervised by the Federal Reserve to conduct their own stresstests.
TheFederal Reserve adopted rulesimplementingtheserequirementsin
October 2012.
Under the rules,18BHCs arepart of theDodd-FrankAct supervisory
stressteststhis year (DFAST 2013).
This report describesthe hypothetical, severelyadversescenario designed
bythe Federal Reserve;providesan overview of the analytical framework
and methodsusedtogeneratethe projectionsof revenues,expenses,
losses, andtheresultingpost-stresscapitalratiosforeachofthe18BHCs;
and disclosesthe resultsof the2013Dodd-Frank Act supervisorystress
test.
TheFederalReservebelievesthat disclosure ofstresstestresultsprovides
valuableinformationtomarket participantsand the public, enhances
transparency, and promotes market discipline.
Theprojectionsprovide a uniqueperspectiveon the robustnessof the
capital positionsof these firms becausetheyincorporatedetailed
information about therisk characteristicsand businessactivitiesof each
BHC and because theyare estimatedusinga consistent approachacross
all the BHCs, providingcomparable resultsacrossfirms.
TheFederal Reserve alsobelievesthat providinginformation about the
methodologyusedtoproducethe resultswill offer useful context to
interpret thoseresults.
Theprojectionswerecalculatedusing input data provided bythe 18
BHCsand a set of modelsdeveloped or selectedby theFederal Reserve,
based on a hypothetical, severelyadverse macroeconomic and financial
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market scenario developed by the Federal Reserve.
Theseverelyadversescenario featuresa deep recessionin theUnited
States,Europe, and Japan, significant declinesin asset pricesand
increasesinriskpremia, andamarkedeconomicslowdownindeveloping
Asia.
TheFederal Reserve alsoapplied a separate global market shock to six
BHCswithlargetrading, privateequity, andcounterpartyexposuresfrom
derivativesand financingtransactions.
Themodels project revenues, expenses,losses,and the resulting
post-stresscapital ratios for each BHC over a nine-quarter planning
horizon extendingthrough the end of 2014.
TheFederal Reserve‘s projectionsshould not be interpretedasexpected
or likelyoutcomesfor thesefirms, but rather aspossibleresultsunder
hypothetical, severelyadverseconditions.
Theseprojectionsincorporatea number of conservative modeling
assumptions, but donot make explicit behavioral assumptionsabout the
possibleactionsof a BHC‘s creditorsand counterpartiesin the scenario,
except through the severelyadversescenario‘s characterizationsof
financial asset pricesand economic activity.
Tomake theprojectionsof post-stresscapital ratiosmore comparable
acrossBHCs, theprojectionsreflect assumptionsabout capital
distributionsprescribedin the Dodd-Frank Act stresstest rule.
Over thenine-quarter planninghorizon, each BHC maintainsits
common stock dividend paymentsat thesame level asthe previousyear,
but repurchasesand issuanceof common stock is assumed tobe zero
except for common stock issuanceassociatedwith expensed employee
compensation.
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Theresultsof theseprojectionssuggest that, in the aggregate, the 18
BHCswouldexperiencesubstantial lossesunder the severelyadverse
scenario.
Over thenine quartersof theplanninghorizon, lossesat the 18 BHCs
under the severely adversescenarioareprojectedtobe $462
billion, includinglossesacrossloanportfolios,losseson securitiesheld in
theBHCs‘investment portfolios, tradingand counterpartycredit losses
from the global market shock, and other losses.
Projected net revenuebeforeprovisionsfor loanand leaselosses
(pre-provision net revenue, or PPNR) at the 18BHCsover the nine
quartersof theplanninghorizon under theseverelyadverse scenario
is$268billion, whichisnet of lossesrelatedtooperational-riskeventsand
mortgagerepurchases,aswellasexpensesrelatedtodispositionofowned
real estateof $101billion.
Taken together, thehigh projected lossesand lowprojectedPPNR at the
18BHCs resultsin projectednet income beforetaxesof -$194billion.
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Thesenet incomeprojectionsresult in substantial projected declinesin
regulatorycapital ratios for nearlyall of the BHCsunder theseverely
adversescenario.
As illustrated in figure 1,the aggregate tier 1common ratiowouldfall
fromanactual11.1percent in thethirdquarterof2012toapost-stresslevel
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of 7.7 percent in thefourth quarter of 2014, includingassumed capital
actionsfor the18 BHCs.
TheDodd-Frank Act requires the Federal Reserve to conduct an annual
supervisorystresstest of BHCs with$50billion or more in total
consolidatedassetsand nonbank financial companiesdesignatedby the
FSOC for Federal Reserve supervision(collectively, ―covered
companies‖).
TheDodd-Frank Act alsorequirescoveredcompaniestoconduct their
ownstresstests(company-run stresstests) semiannually.
Together, the Dodd-FrankAct supervisory stresstestsand the
company-run stresstestsare intended to provide BHC management and
boardsof directors, the public, and supervisorswithforward-looking
information tohelp identify downsiderisksand the potential effect of
adverseconditionson capital adequacyof these largebanking
organizations.
TheFederal Reserve adopted rulesimplementingthese requirementsin
October 2012.
Under the implementationphase-in provisionsof the Federal Reserve‘s
Dodd-Frank stresstest rules,only the 18BHCs that previously
participated in the SCAP are required to conduct company-run stress
testsduring the current stresstest cycle that began in October 2012.
Similarly, the Federal Reserve hasconducted supervisorystresstestson
onlythese18 BHCsfor DFAST 2013.
Both setsof stresstestsare alsointegrated intothe Federal Reserve‘s
assessment of capital adequacy under CCAR.
Important differencesbetweenthe Dodd-Frank Act supervisorystress
testsand the CCAR post-stresscapital analysisare outlinedin box 1.
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Toprovide context totheFederal Reserve‘sDodd-Frank Act supervisory
stresstest results,thefollowingsectionscontain an overview of the
FederalReserve‘s Dodd-FrankAct stresstest rules,focusing on the
processfor the supervisorystresstestsand the requirementsfor
company-run stresstestsfor covered companies.
Supervisory StressTests
UndertheDodd-Frank Act stresstest rules, theFederalReserveconducts
annual supervisorystressteststoevaluatewhethera coveredcompanyhas
thecapital, on a total consolidatedbasis, necessaryto absorblossesand
continueitsoperations bymaintainingready accessto funding, meeting
itsobligationsto creditorsand other counterparties, and continuing to
serveasa credit intermediaryunder adverseeconomicand financial
conditions.
As part of this supervisorystresstest for each covered company, the
Federal Reserve projectsrevenue, expenses,losses,and resulting
post-stresscapital levels, regulatorycapital ratios, and the tier 1common
ratio under three scenarios (baseline, adverse, and severelyadverse),
usingdata asof September 30.
TheFederal Reserve generallyusesa common set of scenariosfor all
coveredcompaniesin the supervisory stresstest.
However,the Federal Reserve may use additional scenariosor
componentsof scenarios for all or a subset of the covered companiesto
capture salient sourcesof risk, and thesescenariosmay usedata from
datesother than theend of thethird quarter.
In DFAST 2013, large, complex BHCswithsignificant tradingactivities
are subjecttoa global market shock that reflectsgeneral market stress
andheightened uncertainty, which affectstradingpositionsand elevates
counterpartycredit risk.
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TheDodd-FrankAct codified theFederal Reserve‘spracticeof disclosing
a summary of theresultsof itssupervisory stresstest.
In this paper, theFederal Reserve is disclosingthe resultsof the 2013
Dodd-FrankAct supervisorystresstestsconducted under theseverely
adversescenario, includingfirm-specificresultsbasedon theprojections
madeby the Federal Reserve of each BHC‘srevenues, expenses, losses,
andpost-stresscapital ratiosover the planning horizon.
Box 1. Dodd-Frank Act Supervisory StressTests and
the CCAR Post-StressCapital Analysis
While closelyrelated, there are some important differencesbetweenthe
Dodd-FrankAct supervisorystresstestsandtheCCAR post-stresscapital
analysis.
Theprojectionsof pre-tax net income from the Dodd-Frank Act
supervisorystresstestsaredirect inputstothe CCAR post-stresscapital
analysis.
Theprimary differencebetweenthe Dodd-FrankAct supervisorystress
testsand the CCAR post-stresscapital analysisis thecapital action
assumptionsthat arecombined with theseprojectionsto estimate
post-stresscapital levelsand ratios.
Capital ActionAssumptionsfor theDodd-Frank Act Supervisory Stress
Tests
Toproject post-stresscapital ratiosfor theDodd-FrankAct supervisory
stresstests, the Federal Reserve usesa standardizedset of capital action
assumptionsthat are specified in the Dodd-FrankAct stresstest rules.
Common stock dividend paymentsare assumed to continueat the same
level asthe previousyear.
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Scheduled dividend, interest, or principal payments on any other capital
instrument eligible for inclusion in the numerator of a regulatory capital
ratio are assumed to be paid.
Theassumptionsare that repurchasesof common stock are zero.
Thecapital action assumptionsdonot include issuanceof new common
stock, preferred stock, or other instrument that wouldbe includedin
regulatory capital, except for common stock issuanceassociatedwith
expensed employee compensation.
Capital ActionsforCCAR
In contrast, for theCCAR post-stresscapitalanalysis, theFederalReserve
usesBHCs‘planned capital actions,and assesseswhethera BHC would
be capableof meeting supervisoryexpectationsfor minimum capital
ratios even if stressful conditionsemergedand theBHC did not reduce
plannedcapital distributions.
As a result, post-stress capital ratios projected for the Dodd-Frank Act
supervisory stress tests should be expected to differ significantly from
thosefor the CCAR post-stresscapital analysis.
For example, if a BHC includesa dividendcut in itsplanned capital
actions,itspost-stresscapital ratiosprojected for the CCAR capital
analysiscould be higher than thoseprojected for the Dodd-FrankAct
supervisorystresstests.
Conversely, if a BHC includessignificant dividend increases,
repurchases, or other actionsthat depletecapital in itsplannedcapital
actions,thepost-stresscapital ratiosfor the CCAR could be lower.
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Company-Run StressTests
As required by the Dodd-Frank Act, the Federal Reserve‘s stresstest rules
require covered companies to conduct two company-run stress tests each
year.
In conducting the―annual‖ test, a coveredcompany usesdata asof
September 30 and reportsitsstresstest resultsto theFederal Reserve by
January 5.
In addition, a covered company must conduct a ―midcycle‖ test and
report the resultsto the Federal Reserveby July5.
TheDodd-Frank Act stresstest rulesalign the timingof annual
company-run stresstestswiththe annual supervisorystresstestsof
coveredcompanies.
In theirannualstresstests,coveredcompaniessubject totheDodd-Frank
Act stresstest rulesmust usethe scenariosprovidedby the Federal
Reserve.
Each year, theFederal Reserve will provide at least three scenarios—
baseline, adverse, and severelyadverse—that are identical tothe
scenariostheFederal Reserve usesin theannual supervisorystresstests
of covered companiesBy providinga common set of scenariosto all
firms, the resultsof company-run and supervisory stresstestsfor all 18
BHCswill be based on comparable underlying assumptions.
Tofurther enhancecomparability, the supervisory stresstestsand
company-run stresstestsconducted under the Dodd-Frank stresstest
rules usethe same set of capital action assumptions.
According to these assumptions,over thenine-quarterplanning
horizon, each BHC maintainsitscommon stock dividend paymentsat
thesamelevel asthe previousyear; scheduleddividend, interestor
principal paymentson any other capital instrument eligiblefor inclusion
in the
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numeratorof a regulatory capital ratioare assumed tobepaid; but
repurchasesof suchcapital instrumentsandissuanceof stock is assumed
tobe zero.
Finally, each covered company must publicly disclose a summary of the
results of its company-run stress test under the severely adverse scenario
provided by the Federal Reserve.
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GovernorDaniel K. Tarullo
At the Cornell International Law Journal
Symposium: The ChangingPoliticsof Central
Banks, New York, New York
International Cooperation in Financial
Regulation
Next month marks the fifth anniversary of the
failure of Bear Stearns--inretrospect, the
beginningof themost acutephaseof thefinancial
crisis.
Thecross-border
dimensionsof the crisis
itselfand theglobal
effectsof the Great
Recessionthat followed
provokeda major effort
tostrengthen
international cooperation
in financial regulation.
While a good deal has
already been
accomplished, this
eveningI will suggest the next stepsthat wouldbe mostuseful in
advancingglobal financial stability.
Of course, the fashioning of an international agenda requires a clear
understanding of the overall regulatory aims of participating national
authorities.
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Here is whereinternational regulatory cooperation linkstothesubject of
thisconference--if not quite thechangingpoliticsof central banks, thenat
leasttheir changingpolicy goalsin thewakeof thefinancial crisis.Almost
bydefinition, systemic crisesreveal failures acrossthefinancial system,
from breakdownsin risk management at many financial firms toserious
deficienciesingovernment regulationof financialinstitutionsand
markets.
While the recent crisiswasnoexception, it haspresented particular
challengestothepolicyfoundationsofcentralbanks,especiallythoselike
theFederal Reservethat carry out regulatory mandatesalongsidetheir
monetarypolicy missions.
SoI begin withsome remarkson thenature of thosechallenges,before
turningtoa discussionof how changesin approach should inform
international cooperationin financial regulation.
Central Banks and the Financial Crisis
In surveying the failings of financial authorities, both here and abroad,
onecan certainlyidentify some specific characteristicsof pre-crisis
regulation that look todayto have been significantlymisguided, rather
than the advancestheywereformerly thought tobe.
So, for example, regulatorsbecame prone to placetoo much confidence
in thecapacityof firms to measure and managetheir risks.
Indeed, thedecadeorsoprior tothecrisishad seen anaccelerationof the
shift from a dominantlyregulatory approach toachievingprudential aims-
-onethat restson activitiesand affiliationrestrictions,and other
reasonablytransparent rules--towardgreater emphasison a supervisory
approach, whichrelieson a more opaque, firm-specific processof
watchingover banks' ownrisk-management and compliancesystems.
Yet thebreadth and depth of the financial breakdownsuggest that it has
much deeper roots.
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In many respects,this crisiswasthe culminationof fundamental shiftsin
both theorganization and regulation of financial marketsthat began in
the1970s.
TheNew Deal reforms of financial regulation, themselvesspawnedby a
systemic crisis, had separated commercial banking from investment
banking, cured theproblem of commercial bank runsby providing
federal deposit insurance,and brought transparencyand investor
protectionsto tradingand other capital marketsactivities.
This regulatory approach fostered a commercial banking system that
was,for thebetter part of 40years, quitestableand reasonably
profitable,though not particularlyinnovativein meetingtheneedsof
depositorsand borrowers.
In the1970s, however, turbulent macroeconomicdevelopments
combinedwith technological and businessinnovationsto producean
increasinglytight squeezeon thetraditional commercial banking
businessmodel.
Thesqueezecamefrom boththeliabilitysideof banks' balancesheets,in
theform of more attractivesavingsvehiclessuchasmoneymarket
funds,and from the asset side, with thegrowthof public capital markets
and international competition.
Thelargecommercial banking industrythat saw both its fundingand its
customer basesunder attack sought removal or relaxation of the
regulationsthat confinedbank activities,affiliations, and geographic
reach.
While supervisors differed with banks on some important
particulars, they were sympathetic to this industry request, in part
because of the potential threat to the viability of the traditional
commercial bankingsystem.
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Theperiod of relativelegal and industry stabilitythat had followedthe
New Deal thusgavewayin the 1970stoa nearly 30-year period during
whichmanyprevailingrestrictionson bankswererelaxed.
Agood number wereloosenedthrough administrativeaction bythe
bankingagencies,but important statutory measuresheaded in the same
direction.
This legislativetrend culminated in the Gramm-Leach-BlileyAct of
1999, which consolidated and extended the administrativechangesthat
had allowedmore extensiveaffiliationsof commercial bankswith
investment banks, broker-dealers,private equity firms, and other financial
entities.
But in sweepingawaytheremnantsof one key element of theNew Deal
regulatorysystem, neither Gramm-Leach-Bliley nor financial regulators
substituted new regulatory mechanismstomatch the wholesalechanges
in thestructure of thefinancial servicesindustry and thedramaticgrowth
of novel financial instruments.
In fact, I wouldgeneralize this last observation tosaythat theneed to
addressthe consequencesof theprogressiveintegrationof traditional
lending, tradingactivities,and capital marketslies at theheart of three
post-crisischallengesto thepolicy foundationsof the Federal Reserve
and, to a greater or lesser degree, manyother central banks.
Microprudential Regulation
Thefirst challengeposed by the crisiswasto traditional, microprudential
regulation, whichfocuseson the safetyand soundnessof each
prudentiallyregulated firm.
Not all central bankshave microprudential regulatory authority, of
course, and--asin theUnited States--thosethat dosometimesshare it
with other agencies.
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But the shortcomingsof pre-crisisregulatory regimeshavebeen of
concern toall central banks.
Most notably, capital requirementsfor bankingorganizations,
particularlythe largeonesthat might be regarded astoo-big-to-fail,
simplywerenot strong enough.
Risk-weightsweretoolowfor certain traded assetsthat had proliferated
ascredit and capital marketsintegratedmore thoroughly.
In some cases,thearbitrageopportunitiespresented by existingcapital
requirementswerean incentivefor securitizationand other capital
marketsactivities.
Theexposurescreated by off-balance-sheetactivitiessuch asstructured
investment vehicles (SIVs) werebadly underweighted.
Minimum capitalratioswerenot high enoughand, in meetingeven those
inadequaterequirements,firmswereallowedtocount liabilitiesthat did
not reallyprovidetheabilityto absorb lossesand still maintain the firms
asviable, functioningintermediaries.
There hasalreadybeen a substantial responsetothis challenge.
With the support of the Federal Reserve and other U.S. bank regulators,
theBasel Committeeon Banking Supervisionhasstrengthenedcapital
requirementsby raisingrisk-weightingsfor traded assetsand improved
thequalityof loss-absorbingcapital through a new minimum common
equityratio.
Thecommittee alsohascreated a capital conservation buffer and
introduced an international leverageratio.
TheseBasel2.5and Basel III reforms either havebeen, or soon will be,
implementedintheUnitedStatesandmostother countriesthat arehome
tointernationallyactivebankingfirms.
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Also, theBasel Committeehasjust recentlyadoptedthe Liquidity
CoverageRatio(LCR), a first step in addressingliquidityproblems.
In theUnited States, some important additional stepshavebeen taken.
Beginningat thepeak of the crisis, theFederal Reserve hasconducted
stresstestsof largebankingorganizations, making capital requirements
more forward-lookingby estimatingthe effect of an adverseeconomic
scenario on firm capital levelsin a manner lessdependent on firms'
internalrisk-measurement infrastructure.
And the provision of theDodd-FrankAct popularly knownasthe Collins
Amendment ensuresthat banking organizationscannot use
models-basedapproachesto reducetheir minimum capital below
generallyapplicable, more standardized risk-based ratios.
Macroprudential Regulation
Asecond challengefor central banksis that the crisisrevealed the need
for a much more activeset of macroprudential monitoring and regulatory
policies--that is, a reorientationtowardsafeguarding financial stability
through thecontainment of systemic risk.
Thefailure to attendto, or even recognize, financial stabilityriskswas
perhapsthemost glaring public sector deficiencyin the pre-crisisperiod.
This wasa fault by nomeanslimitedto central banks.
On the contrary, systemic risk had alsocome toseem more theoretical
than real to manyacademicsand financial market participants.
Even most of thoseinsideand outsidetheofficial sector whoargued for
stronger capital or other prudential standardsdid not appreciatethe
degreetowhichthesecondary mortgage market had turned intoa house
of cards.
Still, regardlessof formal mandates, central banks arebetter positioned
than most other government agenciestoseeand evaluatetheemergence
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of asset bubbles,excessiveleverage,and other signsof potential systemic
vulnerability.
In some respectsthis second challengeisan extension of the first, since
thesafetyand soundnessof largeinstitutionsmust take account of the
relativecorrelationof their asset holdings,interconnectedness,common
liquidityconstraints,and other characteristicsof largebanking
organizationsasa group.
Similarly, systemic risks and too-big-to-fail problems can increaseif
large, highly leveragedfirms may operateoutsidethe perimeter of
statutorymicroprudential oversight, aswasthecasepriorto2008withthe
large, free-standinginvestment banksin theUnited States.
And market disciplinewill be badlycompromised if financial market
participantsbelievethat an insolvent counterparty cannot beresolved in
an orderly fashionand thusis likely toreceivegovernment assistance
under stress.
Here again, domestic and international efforts have already produced
significant reform programs, though implementation of some of these
programsislessadvanced than Basel2.5and Basel III.
Domestically, theFederal Reserve's annual stresstestsexaminethe
effectsof unexpectedmacroeconomicshockson asset classesheldwithin
all major regulated firms.
TheDodd-Frank Act gave theFinancial StabilityOversight Council
(FSOC) authority tobring systemically important firms that are not
already bank holding companieswithintheperimeter of Federal Reserve
regulation and supervision.
TheFSOC is activelyconsideringseveral firms for possibledesignation.
Finally, theDodd-Frank Act gavethe Federal Deposit Insurance
Corporation orderlyliquidationauthority for systemicallyimportant
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financial firms, therebycreatingan alternativeto the Hobson'schoiceof
bailout or bankruptcythat authoritiesfaced in 2008.
Internationally, the Basel Committeehasagreed toa regimeof capital
surchargesfor largebanksbasedon their systemic importance.
There is alsoan initiativeto parallel U.S. effortsto identifynon-bank
systemicallyimportant firms.
TheBasel Committee and the Financial Stability Board havedeveloped
internationalprinciplesforresolutionauthority, thoughmost oftherestof
theworldis behind the UnitedStatesin actuallyimplementingthose
principles.
But meetingthemacroprudential challengewillrequire measuresbeyond
a more comprehensive, cross-firm approach tomicroprudential
regulation.
Much academicand policy work of thepast several yearshasrevived and
elaborated thepreviouslysomewhat heterodox view that financial
instabilityisendogenousto the financial system, or at least thekind of
financial system wenowhave.
Consider,for example,how the intertwiningof traditional lendingand
capital marketsgaverise to what hasbecome knownasthe shadow
bankingsystem.
Shadowbanking, whichrefers tocredit intermediation partly or wholly
outsidethe limitsof thetraditional banking system, involvesnot only
sizeablecommercial and investment banks, but many firms of varying
sizesacrossa rangeof markets.
While some of themore notoriouspre-crisiscomponentsof theshadow
bankingsystem are probablygone forever, current examplesinclude
moneymarket funds, thetripartyrepomarket, and securities lending.
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From the perspectiveof financial stability, theparts of theshadow
bankingsystem ofmostconcernarethosethat createassetsthought tobe
safe,short-term, and liquid--ineffect, cash equivalents.
For a varietyof reasons, demand for such assetshasgrownsteadily in
recent years,andisnot likelytoreversedirectionintheforeseeablefuture.
Yet theseare the assetswhosefunding is most likelytorun in periodsof
stress,asinvestorsrealize that their resemblancetocash or insured
depositsin normal timeshasdisappearedin thefaceof uncertaintyabout
their underlying value.
And, as was graphically illustrated during the crisis, the resulting forced
sales of assetswhose valuesare already under pressure can accelerate an
adversefeedback loop, in whichall firmswithsimilar assetssuffer
mark-to-market losses,which, in turn, can lead tomore fire sales.
Thiskindof contagionlayat theheart ofthefinancialstressesof2007and
2008.
As alreadynoted, pre-crisisshortcomingsat the intersection of
microprudential andmacroprudential regulationhavemotivatedavariety
of reforms, many explicitlydirected at the problem of too-big-to-fail
institutions.
While some of thesereforms remain unfinished, and some additional
measuresareneeded, therehasbeen considerableprogress.
Unfortunately, thesame cannot be saidwith respect to shadowbanking
and, more generally, thevulnerabilitiesassociatedwithwholesale
short-term funding.
Thesevulnerabilitiesinvolveboth large, prudentiallyregulated
institutions,and thustoo-big-to-fail concerns, and thebroader financial
system.
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Except for the liquidityrequirementsagreedtoin theBasel Committee,
however, theliabilitysideof the balancesheetsof financial firmshas
barelybeen addressedin the reform agenda.
Yet here is wherethesystemic problemsof interconnectednessand
contagion are most apparent.
And, asevidencedby the funding stressesexperiencedby a number of
European banksprior tothe stabilizingmeasurestaken by the European
Central Bank, theseproblemsare still verymuch withus.
Within theUnited States, reform effortsare underwayin some discrete,
but important, areas.
Theprovisionsof Dodd-Frank requiringmore central clearingof
derivativesand minimum marginsfor thosethat remain uncleared are
designedtoprovidemore systemic stability.
As to shadowbanking itself, theFSOC recentlyproposed optionsto
addressthestructural vulnerabilitiesin moneymarket mutual funds,with
an eye towardrecommendingactionby the Securitiesand Exchange
Commission.
And the Federal Reserve hasbegun usingits supervisoryauthorityto
pressfor a reductionin intradaycredit risk in thetripartyrepomarket.
But thesemeasuresare incomplete, and donot extend to all forms of
short-term funding that can poserun risks, a universe that is likely to
expand asprudential constraintsbegin toapplytolargeexistingshadow
bankingchannels.
Monetary Policy
While the first twopolicy challengesare shared among regulatoryand
financial agencies, the third liessolely withcentral banks.
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In the wakeof thecrisis,weneed to consider carefullytheview that
central banksshould assessthe effect of monetary policy on financial
stability and, in someinstances, adjust their policy decisionsto take
account of theseeffects.
The dramatic rise in housing prices, and the associated high amounts of
leverage taken on by both households and investors, occurred during an
extendedperiod of lowinflation.
Somehave suggested that, by not raisingratesbecauseinflation
remainedsubdued, monetary policy in theUnitedStatesand elsewhere
may have contributed to themagnitudeof thehousing bubble.
Whatever the meritsof that much-contestedpoint, it seemswiseto
addressthisissueaswefacewhat could well be another extended period
of low inflationand lowinterestrates.
It is important tonote that incorporatingfinancial stabilityconsiderations
intomonetarypolicydecisionsneednot implythecreation of an additional
mandate for monetary policy.
Thepotentiallyhugeeffect on price stability and employment associated
with boutsof seriousfinancial instabilitygivesamplejustification.
Here I want tomention some commentsby my colleagueJeremy Stein a
coupleof weeksago.
After reviewingthe traditional argumentsagainst usingmonetary policy
in responsetofinancial stabilityconcernsand relying instead on
supervisorypolicies,Governor Stein offeredseveral reasonsfor keepinga
more open mind on thesubject.
First, regulation hasitsown limits,not theleast of which is the
opportunityfor arbitrageoutsidethe regulated sector.
Second, whateveritsbluntness, monetary policy hasthe advantageof
beingable to"get in all the cracks" of thefinancial system, an attribute
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that is especiallyuseful if imbalancesarebuildingacrossthefinancial
sectorand not just in a particular area.
Finally, by alteringthe composition of itsbalancesheet, central banks
mayhaveasecond policyinstrument inadditiontochangingthetargeted
interest rate.
So, for example, it ispossiblethat a central bank might under some
conditionswant tousea combination of thetwoinstrumentstorespond
toconcurrent concernsabout macroeconomicsluggishnessandexcessive
maturitytransformation by loweringthe target (short-term) interest rate
and simultaneouslyflatteningthe yield curve through swappingshorter
duration assetsfor longer-term ones.
Tobe clear, I donot think that weareat present confronted with a
situationthat wouldwarrant thesekindsof monetarypolicy action.
But for that very reason, it seemsthat now is a good timetodiscussthese
issuesmore actively, sothat if and whenwedo facefinancialstability
concernsassociatedwith asset bubblesbackedby excessiveleverage, we
will havea well-consideredview of therolemonetarypolicymight playin
mitigatingthoseconcerns.
Advancing the International Reform Agenda
Let me turn nowtothewayin whichour shiftsinpolicy approachshould
inform theagenda for international cooperation in financial regulation.
For obviousreasons,themonetarypolicy issuesarenot directlyrelatedto
thisagenda, though our understandingof these issuesmay profit from
discussionswithour central bank colleaguesfrom around the world.
It is equallyobviousthat the other twosetsof policy changesare quite
closelyrelated to theinternational agenda.
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Morethan in most other areas,thefinancial sphere suffers from a basic
lack of congruencebetweenthe authorityto regulateand theobject of
regulation.
Thuswehave a significantlyinternationalizedfinancial system, in which
shocksare quickly transmittedacrossborders, but a nationally-based
structure of regulation.
Withincountries, responsibilitiesmay be dividedbetweenprudential
regulatorsand market regulators,among regulatorswith similar
mandates,or both.
Central banksmayhaveexclusiveprudential authority, shareit withother
agencies,or have none at all.
International arrangementsboth reflect, and try tocompensatefor, this
webof divided and overlapping domesticauthority.
Thusthere are sectoral standardssetters like theBaselCommittee, the
International Organizationof SecuritiesCommissions(IOSCO), and the
InternationalAssociation of InsuranceSupervisors(IAIS) on theone
hand, but alsobroader groupingssuch asthe Group of Twenty, the
Financial Stability Board (FSB), and theInternational MonetaryFund on
theother.
In addition, under theumbrella of the international home of central
bankers,the Bank for International Settlements,numerousother
committeesworkacrossfieldsalsocoveredbyoneormoreofthegroupsI
havejustmentioned.
There are some obvious weaknesses with such an assortment of
international arrangements, notably the difficulty of coordinating
initiativeswheremore than one group is workingon an issue.
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This kind of coordination challengecan be further complicatedby the
participationin international discussionsof variousnational officials
without domesticauthority in a particular area.
The sheer proliferation of international arrangements, each with its own
staff, has at times also led to a proliferation of studies and initiatives that
become burdensome to the national regulators and supervisors who have
been overtaxed at home since the onset of the crisisand ensuing domestic
reform efforts.
Yet thereare alsosome strengthsderived from thecrowdedinternational
fieldof organizationsand committees.
Onesuchvirtue is that issuesnot fallingsquarely within theremit of a
particular kind of standardssetter can nonethelessbe dealt with
internationally.
This, in fact, hasbeen theexperiencewiththe ongoing international
effort to agree on minimum margin requirementsfor derivativesthat are
not centrallycleared.
Another is that different perspectivesarefrequentlybrought tobear on a
singleset of problems.
At some point, it likelywill be beneficial to rationalize somewhat the
overlapping, sometimescompetingeffortsof thesevariousinternational
arrangements.
For thenear tomedium term, though, it is important to havesome
principlesfor decidingupon the international agenda that should govern
theeffortsof these arrangementsasa whole.
First, initiativesshould be prioritized.
Onepoint of emphasisshould be completing, and ensuring
implementationof, the internationallyagreed-upon framework for
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containingthetoo-big-to-fail risksassociatedwithsystemicallyimportant
firms.
Another shouldbe distillingthevariousideasrelatingtoshort-term
fundingvulnerabilitiesintoa few that have promiseasdiscrete, relatively
near-term initiatives, whilecontinuingstudyof other, more
comprehensivemeasures.
Asecond, relatedprincipleis that initiativesshould be focused and
manageable,reflectingnot onlythe limitedcapacityof participating
national authorities, but alsothe desirabilityof reachingat least a
temporaryequilibrium at whichfirms can get on withthebusinessof
planningtheir strategiesin a clearerregulatory environment, and
regulatorscan begin to take stockof the cumulativeeffectsand
effectivenessof thechangesthat have takenplacein that environment.
Athird principleisthat,inmostinstancesat least, internationaleffortsto
develop new regulatorymechanismsor approachesshould build on
experiencederived from national practicein one or more jurisdictions.
Thechallengesencountered during the initial effort to devise an LCR in
theBasel Committee, withlittleor noprecedent of national quantitative
liquidityrequirementsfrom whichto learn, should counselcaution in
tryingtoconstruct new regulatorymechanismsfrom scratchat the
international level.
There will doubtlessbe exceptionstothisgeneral principle, such as
wherethe transnational arbitrageincentivesof a regulatory measure are
sostrong asto make national effortsdifficult toinitiateand sustain
without substantial lossof financial activitytoother countries.
And, in theimmediateaftermath of thecrisis, there wasaneedtoharness
thebroad-based demandsfor reform and move forwardon some priority
reforms without benefit of learningfrom national initiatives.
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On the other hand, there may alsobe areaswhere, notwithstandingthe
importanceof a particularregulatoryobjectivefor international financial
stability, it may be preferable to maintain a varietyof approachesto
achievingthat objective.
Bearing in mind both these principles and the key areas for policy
change at central banks and other financial regulators, let me now
suggest some specific subjectsfor near-term emphasis.
As to the frameworkfor systemically important financial institutions
(SIFIs), I wouldurge that twoongoing initiativesbe completedover the
next year and twoideasthat have been in the discussionstagebe
developed intoconcrete proposals.
First, the proposal for a capital surcharge for systemically important
bankingorganizationsis nearing completion.
TheBasel Committeecontinuestorefinethemethodology tobe used in
identifying the firmsand calibratingthesurchargeamount--perhapsa
byproduct of the fact that this methodology had tobe developedin the
Basel Committeewithout benefit of prior precedent.
But I have confidencethat thisworkwill be successfullycompleted.
Thesecond ongoinginitiative--workon designatingnon-bank
SIFIs--hastodatebeen pursued mostlyin theIAIS and thushas
concentrated on insurancecompanies.
It is important to take the time to evaluate carefully the actual systemic
risk associated with these companies, and to understand the amount of
such risk relative to other financial firms, before fixing on a list of firms
and surcharges.
But thisseemstome a realisticgoal over the next six months.
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Third, weshould build on the very good analytic work in theBasel
Committee, both on simplifying capital requirementsfor credit risk and
on fashioningstandardized capital requirementsfor market risk, toapply
standardizedcredit andmarket riskcapitalmeasurestoall internationally
activebanking firms.
As I mentioned earlier, the United Stateshas alreadyadoptedsuch a
requirement for capital requirementson credit risk.
Thesestandardizedmeasuresserve asa floor toguard against the
potential for models-based capital measurestounderstate capital needs
under some circumstances.
Theyare alsosubstantiallylessopaquethan, for example, theadvanced
internalratings-basedapproachof BaselII, and thuswouldprovide more
comparable measuresthat are alsomore amenabletointernational
monitoring.
Fourth, I wouldhope to see a requirement proposed for large
internationallyactivefinancial institutionsto have minimum amountsof
long-term unsecured debt, which wouldbe available toabsorb lossesin
theevent of insolvency.
As I mentioned earlier,workon resolution continues,albeit at different
pacesin different jurisdictions.
Given the complexitiesarisingfrom the independent, often differing
national bankruptcyand insolvencylaws,the goal of achievinga fully
integratedresolution regime for internationallyactivefinancial firms may
take a good deal of time.
But a minimum long-term debt requirement wouldat least provide
national authoritieswith sufficient equityand long-term debt in these
firmsto bear all lossesin theevent of insolvency, and therebycounteract
themoral hazard associatedwith taxpayer bailoutswithout risking
disorderlyfailure.
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This requirement wouldnot break brand new regulatoryground, sinceit
wouldreallybe a modification of existingTier 2gone-concern capital
concepts,and wouldcomplement the requirement for minimum equity
levelsincludedin BaselIII.
As implied in my identification of short-term fundingvulnerabilitiesasa
priorityarea, thebest wayforward here is considerablylesseasyto
specify.
Short-term initiativeson money market fundsand tripartyrepoareboth
possibleand desirable.
In truth, though, becausemoney market fundsare largelyAmerican and,
toa somewhat lesser extent, European, the UnitedStatesand the
European Union together have the abilityto addressthe global run risks
associated withthese products.
I think wealsohave the responsibilitytodo so, but not necessarilyin
identicalways.
Accordingly, I wouldhope that both theUnitedStatesand the European
Union wouldeachtake effectiveactiontocounter therun risk, tailoredas
appropriateto their regulatory environments,and then explain those
actionsat IOSCO and theFSB, wheretheir efficacy can be reviewed.
Similarly, sincethesettlement processfor tripartyrepothat remainsof
concern iscenteredat twoinstitutions,both of whichare regulated
American banks, theUnitedStatescan take effectiveaction without need
of an international agreement
As to broader initiatives, proposals to require minimum haircuts for all
securities financing transactions have been tentatively discussed in the
FSB.
This is certainlya ripe subject for discussion, insofarassecurities
financingtransactionsfacilitateleverage, enablematuritytransformation,
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andproduce the kind of interconnectednessthat can spawnrunsand
contagion.
At present, noset of generallyapplicableprudential standardsgoverns
theseactivities.
Even within regulatedfirms, microprudential risk-weightedcapital
standardshavelittleeffect, sincetheyarecalibrated against credit risk
andmost suchtransactionsareshort-term and fully(or over)
collateralized.
Thusrequirementsthat wouldattachtoinstrumentsand transactions,as
opposedto firms that happen tobe prudentiallyregulatedfor other
reasons, have considerable attraction.
On theother hand, universal haircut requirementsare thetype of
regulatoryinnovation that I suggestedearlier wasbest developed
internationallyfollowingsome experiencewithinfinanciallysignificant
countries.
Onemay, for example,have significant concern about some of the
unintended consequencesthat wouldensue.
My instinct, then, is that the analysisof this idea should continuewithin
theFSBand, one hopes, in other venuesboth in and out of theofficial
sector.
There should alsobe concerted effortsinternationallyto gather relevant
data, some of whichis at present uncollected.
But weare not goingto be in a positiontoestablishan international
securitiestransactionfinancingregime in thenear term.
However, oneproposal already on the international agendamight be
reconsidered, soastoaddressmore directlythe short-term funding
problem.
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FollowingcompletionoftheLCR earlierthisyear, theBaselCommitteeis
turningitsattentionback tothe Net Stable Funding Ratio (NSFR), a
proposalthat wasintended to complement the LCR by regulating
liquiditylevelsbeyond the 30-day LCR horizon.
Like theLCR, the NSFR proposal raisedmany questionseven among
thosefavoring robust measuresto deal withthe liabilitysideof firm
balancesheets.
There is some appeal to moving forwardwiththis complementary
measure fairlyquicklyby simplymakingsome incremental changesto
theNSFR while keepingitscurrent structure.
But I think wemaybebetteradvisedtotaketheopportunityofthisreview
toexaminewhetherthere are approachesthat might addressmore
directlythe vulnerabilitiesfor the financial system created by large
non-deposit, short-term funding dependence at major financial
institutions.
I donot mean to prejudgethe outcomeof suchan examination, or the
degreetowhichwemight build on measuresbeingconsidered in various
jurisdictionsto addressthesevulnerabilities. But I do think it worththe
effort.
Conclusion
Responsesto what I have describedasthe three challengestopre-crisis
central bank policieswill continueto evolve.
Sowill the reenergizedinternational agenda for cooperationin
international financial regulation.
My aim tonight hasnot been to layout a comprehensiveprogram for
either,but tosuggest that thesechangingagendasare neither completely
correlatednor completelyindependent.
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In suggestingsomeconcretenext steps,I havetriedtodefinesomeuseful
and important pointsof intersectionbetweenthe two.
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Contagiousnessand
Vulnerability in theAustrian
Interbank Market
ClausPuhr, Reinhardt Seliger,
MichaelSigmund, OesterreichischeNationalbank, Financial Markets
Analysis and SurveillanceDivision
Thepurposeof this paper is toanalyze (hypothetical) contagiousbank
defaults,i.e. defaultsnot causedby thefundamental weaknessof a given
bank but triggeredby failures in thebanking system.
As failing banksbecome unableto honor their commitmentson the
interbank market, theymay causeother banksto default, which may in
turn push even more banksover the edgein so-calleddefault cascades.
In our paper wedistinguishbetweencontagiousness(theshare of total
bankingassetsrepresented by thosebanksthat a specificbank brings
downby contagion) and vulnerability (thenumber of banks bywhicha
bank isbrought down by cascadingfailures).
Our analysisconsistsof three steps:first, weanalyze the structure of the
Austrian interbank market from end-2008toend-2011.
Second, werun (hypothetical) default simulationsbased onEisenberg
andNoe (2001)for the same set of banks.
Finally, weestimatea panel data model toexplain the(hypothetical)
defaultsgenerated by thesesimulationswith the underlying structure of
thenetworkusingnetworkindicatorsthat reflect
(i) thenetwork asa whole,
(ii) a subnetworkor cluster, and
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com
P a g e | 80
(iii) thenode level basedon banks‘interbank lendingrelationships.
As a result wefind strong correlationsbetweena bank‘spositionin the
Austrian interbank market and itslikelihoodof either causingcontagion
or being affected by contagion.
Although our analysis is based on a dataset constrained to theinterbank
market of unconsolidatedAustrian banks, webelieveour findingscould
beverified by analyzing other banking systems (albeit witha different
model calibration).
Given the importanceof identifying systemically important banksfor the
formulation of macroprudential policy, webelievethat our analysishas
thepotential toimprove our assessment with regard tosecond-round
effectsand default cascadesin theinterbank market.
1Introduction
1.1Motivation
The financial crisis has revealed the danger of systemic risk due to
contagion effects given the interconnectedness of modern banking
systems.
Identifyingsystemicallyimportant bankshassincebecomeoneofthekey
objectivesof systemic risk assessment and a necessaryprecondition for
theformulation of macroprudential policy.
Systemically important bankscan be identifiedin manydifferent ways.
We wouldlike tocontribute tothis important discussionby applying
techniquesfrom networkeconomics.
In general, networkanalysisrequirestwoinput arguments.
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
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P a g e | 81
First, it takesanetwork, whichcould either begiven or derivedthrough a
networkformation process.
Second, eachnetwork analysisneedsan objective.
In our paper weconsiderthe interbank lendingnetworkasgiven and
leavethetheoryon network formation aside, sincetheAustrian
interbank lendingrelationshipsare the very network wesupervise.
We view theinterbank lendingmarket asa networkwhere each
participatingbank is a node and each credit a link.
The objective of our paper is analyzing one important contagion
mechanism within this network, namely counterparty credit risk
associated withinterbank lending.
Ex ante it is unknown whetherdifficultiesat even a relatively small (but
interconnected) institutionmight trigger problemsat another bank.
In the context of macroprudential analysis such an institutioncould be
consideredasa systemically important bank (alsoknown asa key player
in network economics).
Specifically, weanalyze twovariantsof (hypothetical) contagiousdefault
for theAustrian networkof interbank lendingrelationships.
First, westudy a bank‘scontagiousnessin termsof the share of total
bankingassetsrepresentedby other banksthat it will causeto
default given itsowndefault.
Second westudy a bank‘svulnerabilityin termsof thenumber of banks
bywhichit isbrought down if defaultscascadethrough the banking
sector.
In the remainderof the paper wetry toidentify keynetworkproperties
that influenceour twovariantsof contagiousdefault.
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
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P a g e | 82
Our main motivation is finding out whethersimulatedcontagiousness
andvulnerability isdriven by
(i) banks‘idiosyncratic characteristics(i.e. a thin capital buffer) or
(ii) networkeffects/positions, or (iii) by both.
Tothisendweestimatepaneldatamodelsthat exploit networkindicators
topredict potential default cascadesfollowingindividual bank failures
while wecontrol for idiosyncraticvariables(i.e. the traditional measuresof
riskbearingcapacitylike capitalizationratiosetc.).
If supervisorsareabletoidentify networkindicatorsthat addsignificantly
tothe analysisof thesemodels, macroprudential policywill be ableto
(i)analyze the characteristics/ driversof individual indicatorsto get a
better understandingof default dynamicsand
(ii)potentiallytarget selectedvariablestoaddresscontagiousnessand
vulnerabilityin the interbank market ―indirectly.‖
Our resultsshould thereforeprovide potential novel meansfor
policymakers todesign and/ or complement macroprudential tools.
If you are good in mathematics, you can read it:
Financial Stability Report 24 at
http:/ / www.oenb.at/ en/ welcome_to_the_oenb.jsp
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com
P a g e | 83
The UK Prudential Regulation Authority (PRA)
On 1April 2013thePrudential RegulationAuthority (PRA) will become
responsiblefor the prudential regulationand supervision of
banks,buildingsocieties, credit unions,insurersand major investment
firms.
In total the PRA will regulate around 1,700financial firms.
ThePRA‘s roleis defined in termsof twostatutory objectivesto promote
thesafetyand soundnessof thesefirmsand, specificallyfor insurers, to
contributeto thesecuring of an appropriate degreeof protection for
policyholders.
In promoting safetyand soundness, thePRAwill focusprimarily on the
harm that firms can causeto the stabilityof the UK financial system.
Astablefinancialsystem isonein whichfirmscontinuetoprovidecritical
financial services– a precondition for a healthyand successful economy.
ThePRAwill make forward-lookingjudgementson the risksposed by
firmsto itsstatutoryobjectives.
Thoseinstitutionsand issueswhichpose the greatest risk tothestability
of the financial system will be the focusof itswork.
ThePRAwascreatedbytheFinancial ServicesAct (2012)and will bepart
of the Bank of England.
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com
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Basel 3 March 2013

  • 1. P a g e | 1 Basel iii Compliance ProfessionalsAssociation (BiiiCPA) 1200G Street NW Suite800Washington, DC 20005-6705USA Tel: 202-449-9750Web: www.basel-iii-association.com Dear Member, Todaywewill start from someamazingBasel III jobs. Amazing: The average salaryand the demand for Basel III skills in IT jobsadvertised acrossthe UK Thefirst tablebelow looksat the demand for Basel III skillsin IT jobs advertisedacrossthe UK. Includedisa guide tothe averagesalariesoffered in IT jobsthat have cited Basel III over the 3 monthsto 6 March2013witha comparison to thesameperiod in the previous2years. Thesecond tableis for comparison and provides aggregatesfor all of the QualityAssurance & Compliancecategory. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 2. P a g e | 2 Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 3. P a g e | 3 Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 4. P a g e | 4 Source:IT JobsWatch, that providesa uniqueperspectiveon today's information technologyjob market (noaffiliation). Tolearnmore: http:/ / www.itjobswatch.co.uk/ jobs/ uk/ basel%20iii.do Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 5. P a g e | 5 Where to next? Prioritiesand themes for the Basel Committee Keynote addressbyMr Stefan Ingves,Governorof the Sveriges Riksbank and Chairman of theBasel Committeeon Banking Supervision to theThird BCBS-FSI High-Level Meetingfor Central and Eastern Europe on ―StrengtheningFinancial Sector Supervisionand Current RegulatoryPriorities‖ Good morning. It is my great pleasure tobe withyou again today. I wouldlike tobegin by extendingmy appreciationto the Financial StabilityInstituteand the Banking Supervisorsfrom Central and Eastern Europe for their effortsin bringing ustogether again for another of these High-Level Meetings. Last year, I waspleasedtohavebeen ableto be a part of what wasa very interestingand enjoyable meetingin Warsawhosted by our Polish colleagues. I hopewecan replicate thesuccessof that event this year here in Basel. I wouldlike totake theopportunity todayto reflect a littleon what the Basel Committeehasbeen doing sincewelast met. Then I will outlineworkcurrentlyin train aswell asour longer term strategic priorities. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 6. P a g e | 6 TheCommitteemeetsin thisbuildingtomorrow,and continuestohavea very full agenda. Indeed, the key messageI would like toleaveyou withisthat our work, although changingin nature, showsnosigns of easingoff. What have we done? Before I discusswhat‘sleft to do, let me recap what hasbeendone over thepast year. Thekey initiativescompleted by theCommitteein thepast year include: •reachingagreement on a package of revisionsto finalise Basel III‘s LiquidityCoverageRatio(LCR); • revisingthe Core Principlesfor EffectiveBanking Supervision; •developing a policy framework for dealingwith domestic systemically important banks; •establishingdisclosure requirementsfor the new Basel III definition of capital;and •updatingthe supervisoryguidancefor assessingthe effectivenessof a bank‘sinternal audit function. In addition, theCommitteeestablisheda sound operatingframework withinwhich toassessitsmembers‘implementationof Basel III. As a result, the Committeeproduced: •tworegular semiannual reports on Basel III implementationin all member countries(along withtwospecial reportstothe G20on implementation); Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 7. P a g e | 7 •assessmentsof Basel III implementationin theEuropean Union, Japan andthe United States;and •a report analysing the variabilityof risk-weightedasset calculationsfor market riskin individual banks. Further down the agenda, my colleaguesfrom the Basel Committee Secretariat will provide additional insightson our implementationwork. I wouldlike tomakethepoint now,however,that theseeffortsarecritical todeliveringonthe benefitsthat Basel III offers. Ruleswrittenhave noeffect if not implemented:wecannot fail on this front, and I will saymore about our effortsshortly. What are wedoing? There is still a great deal of workbeingdone tofinishthe Basel III framework. Thecapital standardsare now largely settled, withtheexception of some technicalworkon issueslike exposurestocentral counterparties(CCPs). As I notedearlier, the LCR has alsobeen finalised – albeit again with some final technical details to be resolved. But there are other parts of the Baselframeworkwhichweare currently workingtofleshout and make operational. Majorprojectscurrentlyunder wayinclude: •finalisingthe specificationof the leverageratio, and associated disclosurerequirements; •reviewingthe Net StableFunding Ratio(NSFR), which addressesthe longer-termstructureofbank debt andcomplementstheshort-termfocus of the LCR; Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 8. P a g e | 8 •completingthe review of the trading book capital requirements. This entails an evaluation of the design of the market risk regulatory regimeaswellasweaknessesinriskmeasurement under theframework‘s internalmodels-basedand standardized approaches; •enhancingthetreatment of securitisationstomake capital requirements more prudent and risk-sensitive. We are alsoreviewingways to reducemechanistic relianceon external credit ratingsand toreduce current cliff effects in capital requirements; •strengtheningstandardsto limit excessiveand opaque risk-taking through over-the-counter(OTC) derivativesand toreducesystemic risk posed by OTC derivativestransactions,marketsand practices. Work on marginingrequirements, counterpartycredit risk and capital for banks‘exposuresto central counterpartiesare examplesof our efforts relatedtoderivatives;and •revising the supervisory framework for large exposures to complement the Committee‘s risk-based capital standard and to help improve banks‘ measurement and control of largeexposures. All of theseprojectsarenecessarytoensurethat theregulatoryframework adequatelyfactorsin thelessonsfrom thefinancial crisis. Thechallenge,almost fiveyears on from the height of the crisis, is to ensure that webringclosure totheseprojectsand that theyare in place beforethenext stage of thefinancial cycle begins. Underpinningthe Committee‘spolicy initiativesis an extensive frameworkfor the collection and analysisof data tohelp usassessthe quantitativeimpact of a particular policy. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 9. P a g e | 9 Quantitative impact studies (QIS) have become a central element of the Committee‘s work, and we have a full slate of QIS exercises planned for thisyear. Alongside thesemiannual Basel III monitoring reports, almost all of the policy initiativesI have just mentionedhave one or more data collections or impact studiesplanned. While thiscan be a burden for banksand supervisors,thishopefully makes for well informedpolicymaking – sois well worth theeffort. In additiontoall of thepolicyand analyticalwork,theCommitteeintends to: •continueto monitor members‘commitmentstothe timely implementationof agreedreforms. Todate, this hasfocused on capital, but will be expandedover thenext year to encapsulate localimplementationof the LCR, aswell asthe frameworksfor global and domesticsystemicallyimportant banks (G-SIBs andD-SIBs), sincethesecome intoeffect over thenext coupleof years; •undertake a full set of implementationassessmentsfor 2013. We will conduct reviewsof Singapore, Switzerland, China,Australia, Brazil and Canada. Follow-upreviewsof the European Union and the UnitedStatesare also plannedonce their Basel III regulationsare finalised;and •publisha report on the initial, detailed review of risk-weightedasset calculationsfor thebankingbook; wehope topublish thefull resultsby thesummer. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 10. P a g e | 10 Together withthe recentlypublished resultson thetrading book, this analysisidentifiesthe specific driversthat lead to variationsin risk weightsfor similar exposures. TheCommittee‘snext step will thenbe toconsider policyresponsesto reduceany unwarrantedvariabilityand tothereforeimprovethe comparability of banks‘ratios. Atheme I will be returning to isthe importanceof this implementation monitoring workfor the Committee. While it is a relatively new component of the Committee‘s mandate, it should not be seen as an adjunct to the Committee‘s standard-setting role. Rather, it is absolutelycritical tosuccessfullydeliveringdesiredpolicy outcomes. Where to next? As you can see,theCommitteeis engagedin a varietyof projectsthat requireustocombinethe effortsand input of regulatorsand supervisors acrossa largenumber of countries. This is a challengingtask. An even greater challenge, however, is prioritisingamong competing projectsto achieveour most pressingobjectives. TheCommittee‘sresponsetothe financial crisishasbeen strong, but thereis still much to accomplish. Sowehave recentlyspent some time identifying our key strategic priorities, to make sure wehave a good meansof deciding what wereally must do. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 11. P a g e | 11 Asyou may have seen, thesepriorities wereendorsedby the Group of Governorsand Headsof Supervision (GHOS) at the same time they endorsedand announced the revisionstothe LCR. TheCommittee‘sprimary focusin the short and medium term is completing and embeddingthefull suiteof responsesto issuesthat emerged from the financial crisis. With that in mind, foremost considerationwill be given to five priority areas: 1.completingthecrisis-initiatedreformsof thepolicy framework; 2.monitoringand reinforcingtheimplementationof Baselregulatory standards; 3.assessingthe impact of, and industry responseto, implementationof theregulatory reforms; 4.examiningthe comparabilityof model-based internal risk weightings and consideringtheappropriatebalancebetweenthe simplicity, comparability and risksensitivityof theregulatory framework;and 5.enhancingthe effectivenessof both micro- and macroprudential supervision. Completion of the crisis-initiated reformsof the policy framework As I have alreadyhighlighted, the policyreformsinitiatedin response to thefinancial crisis are not yet complete. While thebasic frameworksfor risk-based capital and, more recently, liquidityarenow largely settled, manyof theother reformsI noted earlier remain verymuch a workin progress. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 12. P a g e | 12 Toensure that theweaknessesin the regulatory frameworkbrought to light by thefinancial crisisdonot persist for any longer thannecessary, theCommitteeisaimingtohavemuchof this workcompletedbytheend of 2014. This is an ambitioustarget, but giventhe importanceof thesereforms, thereis nobasis for unnecessarydelay. Our plan is for theleverageratiowork– whichis largely devoted to the detailedspecificationoftheexposuremeasure(ie thedenominator) ofthe ratio – tobe largely completed this year, while theNSFR, tradingbook, securitisationand largeexposurespolicy workwill be finalizedin 2014. TheCommitteealsohas twoother major policy initiativesthat it plansto launchsoon. While not obviouslythought of asimmediateand essential responsesto thefinancialcrisis,theyareneverthelessquiteimportant for ensuring that theoverall prudential frameworkremainsrobust, andexistingreforms are effective. Theseprojectsare: •a review of the standardised (credit and operational risk) approachesto capital adequacy, whichneed tobe re-examinedin light of callsfor greater simplicityand comparabilityin the regulatoryframeworkaswell asthe desire toreducethe relianceon credit ratingagenciesif possible; and •an examinationof theneed for a capital framework for interest raterisk in thebankingbook, particularlygiven thedesiretolimit arbitrage opportunitiesbetweenthe trading and banking books. Theselasttwoprojectsarestill at an embryonic stage, soI cannot saytoo much about what theymight entail at thispoint in time, but theywill be Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 13. P a g e | 13 thelast piecesin what hasessentiallybeen a completeoverhaul of the regulatoryframework sincethe financial crisis. Monitoring and reinforcing implementation of Basel regulatory standards As I have alreadysaid, theestablishment of the implementation monitoring programme hasbeen a high priorityfor the Committee; it is critical tothesuccessful delivery of the benefitsof theagreedreforms. Startingfrom scratch at thebeginningof 2012,a comprehensive assessment framework hasbeen developed that isgrowingin its acceptanceand credibility, and I am pleasedtoreport that theCommittee nowhasdedicatedcapacityin the area of implementation work. Theimplementationframeworkis beingcontinuously strengthened through a lessonslearned process. Our goal istotakeamore holisticviewon theimplementationprocessby focusing not onlyon the existenceof a regulatory frameworkbut alsoon itsfunctioning. Theimplementationprocessis alsoenvisagedto be closely linked to the ongoing policydevelopment process, creatingapositivefeedback loop that can help strengthenthe regulatory regime. There is no doubt that this newmonitoring and assessment initiativehas already had a positiveimpact. Asaresult of theregularmonitoring ofhowcountriesaretrackingagainst agreeddeadlines,aswell asthe forthcomingcountry assessments, member jurisdictionsregularlyapproach the Committeeabout specific aspectsof the Baselframework,actively seeking to ensure that their local adoptionof theBasel rules wouldnot beinadvertentlyout of linewith the spirit of the agreement. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 14. P a g e | 14 Jurisdictionshavealsobrought forwardthereleaseof their rulestoensure that their progresswascaptured in theperiodicupdatesthat the Committeehasprovided to the G20 and made public. Theself-assessment responsesundertakenfortheassessment processare alsobenefitingthe implementationprocess. In addition, theassessmentsof driversthat lead tovariationof banking and tradingbook risk-weightedassetsare continuing and areto likely lead to both more consistent implementationof existingrules, and the development of policy optionstoaddressidentified areasof weakness. Thepriorityfor theCommitteenow is tobuild on theseachievementsin monitoring regulatory compliancewithBasel standardsand tocontinue toenhancetherigour ofall aspectsoftheimplementationmonitoring and assessment process. There isa very full agenda planned for 2013 and beyond which will deliver quite a number of new monitoring requirements(such asrulesrelating to liquidity, the leverage ratio and G-SIBs), as well as country and thematic assessment reports. It is a credit tomember jurisdictions,and evidenceof their commitment tothe process,that this workcan be undertaken:first, it requires the willingnessof each member tobe subject to review by their peers,and then a continuingstrong commitment, includingsubstantial resourcing of expert staff, from all involved. Nevertheless, the effort will be well worthit if weachieveour objectiveof consistent implementation of the Baselstandards. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 15. P a g e | 15 Assessing the impact of, and industry responseto, the implementation of the regulatory reforms Themajor reformsthat have been developed by theCommittee, coupled with thosebeingintroduced at thedomestic level, aredesignedto fundamentallyreshapebanking. Thereforms are intendedtogenerate amore resilient financial system, in whichhigher levelsof capital and liquidityare held, and in whichrisk is appropriatelymanaged and priced. This will obviouslyhave consequencesfor the costsof financial intermediation,althoughstudiesundertakensuggest thatthiscost isboth relativelysmall, andconsiderablyoutweighedbythebenefitsof increased financial stability. Nevertheless, thisis not a caseof ―set and forget‖. TheCommitteeismindful of two potential consequencesfrom the programmeof reforms. While a degreeof deleveragingand increasedrisk premia areintended consequencesof thereforms, there is alwaysa danger that some unintended consequencesmay arise. TheCommitteeneedsto continueto undertakemonitoring exercisesto ensure that it respondswhen truly unintended consequencesmaterialise; weunderstand fullythat, if left unattended, theywill serve to undermine support for thereform agenda. However, we also need to avoid using thisasan excuseto delay necessary reforms; to the extent there are unintended consequences, we need to see howthey can be addressed without losingthe reform benefits. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 16. P a g e | 16 A second potential consequence relatesto the incentives that may arise as the banking sector adaptsto the reforms by moving into those businesses whererisk-adjusted(regulatory) returnsare greatest. This reshapingof banking (either withinbank balance sheetsor outside theregulated bankingsystem) needstobe monitoredon an ongoing basisfor the Committeeto maintain a robust regulatory framework in light of the evolving nature of thebanking industry. That doesnot mean that theregulatoryframework shouldbe in aconstant stateofflux, asthereareconsiderablebenefitsforfinancialfirmsbeing able toplan in a stableenvironment. But, equally, wecannot have a regulatoryregime that is set in stone, and completelyunresponsivetochangesin the environment that it is tasked with regulating. Creating greater simplicity and comparability in the regulatory framework Avigorouspublic debate hasdeveloped recentlyastowhether the Basel regulatoryframework strikes an appropriate balanceamong different desirablecharacteristics:simplicity, comparability and risksensitivity. Thepolicydevelopment processmusttaketheseandseveral other – often competing – factorsintoaccount, and findingthe right balance often involvesa difficult set of trade-offs. Nevertheless, it is important to keep thisissueunder review,and sothe Committeeestablished a high-leveltask force last year with a view to lookingat thisconcern from a broader,strategic perspective. The Committee has already had some discussions on the task force‘s findings, and will have more in the coming months (including at our meetingthat beginstomorrow). Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 17. P a g e | 17 The way forward will also be guided by the findings of the reviewsof risk weighted assetsthat I mentioned earlier, since at the heart of that work is a concern about comparability. It is too earlytosayhow wewill take thisworkforward. Someissues,such asthosein relation tomarket risk modelling, can be taken up via our existingtrading book review. Others might require tweaksto the framework,or supervisoryguidance, whichcan be implemented in the near term. And othersmight necessitatea deeper, longer-term review before wecan decideon anysolution. We will publish a discussion paper in thecoming monthsthat dealswith discussessome of the complex trade-offsthat need tobe made. But one point I wouldstressis that whateverwedecideupon, it will be designedtostrengthenthecurrent framework,andthereisnothingthat is beingproposedthat shouldgivereasontoholdoffontheimplementation of Basel III and other recently agreedreforms. Enhancing the effectivenessof both micro- and macroprudential supervision Not surprisingly, the Committee‘sagendain thepast few years hasbeen dominated by policymaking. In 2012,implementationalsocame to thefore. Butit isperhapsstatingtheobviousthateffectivesupervisionisthekeyto ensuring that regulation, once implemented, continuestowork as intended. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 18. P a g e | 18 Onlyif supervisorsaregiventhetoolstheyneedtoact can theyeffectively perform their role. As the policy reform agenda movestowardscompletion, and thenew rules are rolledout bynational regulators, the Committee will increasinglyturn itsattention toenhancingsupervisorypractices. Enhancing microprudential supervision TheCommitteehasa great deal of guidanceon supervisorymatters already on issue. However,much of this wasdeveloped beforethe financial crisisand will benefit from beingupdated to reflect lessonslearnedin recent years. Given the general applicability of much of this material, thebenefitsof thisworkwill alsoextend well beyond Basel Committeemember countries. As withall multi-year projects,thiswill require prioritisation. Near-term attention is likely tobe given tooperational risks (internal controlsand informationtechnology), governance, supervisorycolleges, stresstestingand dealingwithweak banks. Enhancing the practical implementation of macroprudential supervision Thesystemically important bank – ―SIB‖ – regimeswill continueto be a priorityareafor theCommittee over thecoming years. Although the regimesfor global SIBsand domestic SIBs have now been published, both will require a certain amount of ongoing maintenance andmonitoring. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 19. P a g e | 19 Furthermore,asnotedin theG-SIB standard,themethodology, including the indicator-basedmeasurement approach itselfand the cutoff / threshold scores,will be subjectto periodic review and refinement every threeyears. Beyond this work,the Committee will now turn itsattentionto the practical implementationof toolsand techniquesto deal with systemic risks. This will includetwocomplementaryareasof work: •RegulatoryconsequencesofSIB classification:BeingaSIB meansmore than just higher capital. In light of the riskstheyimposeon thefinancial system, SIBs must be heldtoa higher standard withrespect tosupervisoryexpectationsfor risk management functions,data aggregation capabilities,risk governance and internal controls, all of whichare topics that featureprominentlyin theCommittee‘swork plan. In addition, given theprinciples-basednature of the D-SIB framework, the Committeewill monitor emergingpracticeasbanking supervisors movetowardsimplementationsoastofacilitatecross-bordercooperation andmutual understanding. •Use of microprudential toolsfor macroprudential purposes:The Committeewilloverseepreparationsforthecountercyclical buffer,aswell asexchangeinformation on thewiderrangeof microprudential toolsthat havebeen usedfor macroprudential purposes(eg sectoral adjustmentsto risk weights,stresstestingrequirements, loan-to-valuelimitsor varying margin requirements). Concluding remarks Sincethe financial crisis, theBasel Committeehasaccomplished a great deal. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 20. P a g e | 20 But westill have work to dotocompletethe overhaul of the regulatory frameworkand fullyfactor in all of thelessonslearned. We alsoneed toseewhetherwehavethebalanceright whenit comes tosimplicityand risk sensitivity. That work isgoingtokeepthe Committeebusyfor at leastthe next two years. But that is far from the end of it, because, asI have noted a number of timestoday, our policyworkwill not generate itsfull benefitsif not implemented in a full, timely and consistent manner. Soour implementationmonitoring workis equallyimportant. And theneven whenthenew standardsare implemented, wewill need effectivesupervisorsto ensure that theyare adheredto. This is an area wheretheCommitteehasthepotential todomuch more, particularlyonce thepolicy pipelinebeginsto slow. In other words,theBasel Committeewill continue toprovideyou with much totalk about – at this meetingand thosein the future! Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 21. P a g e | 21 Financial Stability Board reportsto G20 on progressof financial regulatory reforms TheChairman of the Financial StabilityBoard (FSB) reported to the G20 FinanceMinistersand Central Bank Governorson progressin the financial regulatoryreform programme. In connection withthis, the FSBis publishing: •a letter bythe FSB Chair tothe G20, sent ahead of their meeting, reporting on the good progressbeingmade in financial reforms, includingin thefollowingpriorityareas:ocreating continuouscore marketsby completingOTC derivativesand related reforms; ostrengtheningtheoversight and regulation of shadowbanking; obuildingresilient financial institutions;and oending ―toobig tofail‖. TheletteralsosummarisestheFSB‘srecent workand planstomonitor theimplementationof reforms. •An assessment of the effect of the G20 financial reform programme on theavailability of long-term finance. This assessment hasbeen contributed by the FSBaspart of abroader diagnosticreport preparedbyinternationalorganisationstoassessfactors affectinglong-term financing. TheFSB assessment concludesthat, while there may be short-term adjustment effects, the most important contribution of thefinancial reform programme tolong-term investment financeis to rebuild confidenceand resiliencein theglobal financial system. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 22. P a g e | 22 •a joint update by the International Accounting Standards Board (IASB) and the Financial Accounting StandardsBoard on the statusand timeline of their remainingprojectson convergingtheir standards. At today‘smeetingtheG20 FinanceMinistersand Central Bank Governorsreaffirmed their commitment tothe full, timely and consistent implementationof internationallyagreed financial sector reforms,and lookedforwardto a comprehensive report on progressin implementing all reformsat the St Petersburg G20Summit in September. G20Ministersand Governorsalsowelcomedthe establishment of theFSB in January asa legal entitywithgreater financial autonomy and enhanced capacitytocoordinatethedevelopment and implementationof financial regulatorypolicies,while maintainingstronglinkswith theBank for International Settlements. Progressof Financial Regulatory Reforms Financial market conditionshave improved over recent months. Nonetheless, medium-term downsiderisksremain, given weak growth prospectsand high levelsof public and private sector debt in many economies. Therecent improvement in financial market conditionsowesmuch to central bank actions, in particular, the accommodativemonetarypolicy aimed at stimulatingthe economic recovery. As a consequence, market participants‘appetitefor risk hasincreased, but this hasnot yet translatedintoa robust recovery in real investment. Thebeginningof thereturn of risk appetitetofinancial markets– while intendedand welcome – raisesanumber of issues. First, market participantsand authoritiesneed to be on guard against mispricing of risk and valuationsof assets. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 23. P a g e | 23 Second, the importanceof timelycompletion of the reformsto over-the-counter(OTC) derivativesmarketsand theshadow banking system hasincreased. Third, historicallylowinterest ratesinmanycountriesposechallengesfor institutional investorswithlong-datedliabilitiesand may leavemarket participantsmore vulnerable tounanticipatedmovementsin the yield curve. Financial institutionsand supervisorsshould continuetoassessthe resilienceofthefinancialsystem throughregular stresstesting, notablyof credit and interestrate risk, and completetheprocessof balance-sheet repair. 1.Reportssubmitted for thismeeting a.Regulatory factors affecting the availability of long-term finance As part of the diagnosticworkyou requestedof the international organisations,the FSBhasprepared an assessment of the effect of the G20financial reform programme on the availability of long-term investment finance. ThereformsincludeBaselIII, OTC derivativesmarket reforms, and changesaffectingtheregulatory and accountingframework for institutional investors. Thegeneral conclusion is that, while there may be some short-term adjustment effects, the most important contribution of thefinancial reform programme tolong-term investment financeis to rebuild confidenceand resiliencein theglobal financial system. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 24. P a g e | 24 As a result, thesereforms should substantiallyenhancethefinancial system‘s capacityto intermediateinvestment flowsthrough the cycle at all investment horizons. Hence, the G20 regulatoryreforms are unambiguouslysupportive of long-term investment and economic growth. Thesubmissionsof FSB members found littleevidencethat the regulatoryreformshavehad a notableimpact on long-term financingto thispoint. This is not surprisinggiven the fact that the reform processisstill at an earlystage. Several featuresof thereformsaredesignedto avoid major unintended consequences:thelong phase-in period for reforms;the ongoing implementationmonitoring; and, in certain cases,the flexibilityto adjust rules during the observation period. Thefinancial reform programme is not specificto theregulation of long-term finance. Nevertheless, the reforms will change the incentives of some financial institutions and the costs of certain transactions, which may affect the composition of long-term finance. In particular, institutional and other long-horizoninvestorsare expected toassume a greater rolein funding long-term assetsand more of this investment may be intermediatedvia capital marketsrather than the bankingsystem. There arethree areasfor specific follow-upby the FSB. First, there should be ongoing monitoring to identify any regulatory factors that may disproportionately affect the provision of long-term financesothat theycan be addressed. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 25. P a g e | 25 Second, the FSBcould workwith otherstoexaminewhetherregulatory factorsmayconstraintheability ofnon-bankstoexpandtheirprovisionof long-term finance. Third, the FSB can contributeto thework of other international organisationstohelp promote the development of longer-term domestic savingsand thecapacityof domesticfinancial systemstointermediate them, particularlyin emergingmarket and developing economies (EMDEs). b. Update on accounting convergence TheChairsof the InternationalAccounting Standards Board and theUS FinancialAccounting StandardsBoard havewrittenyou on their work on convergenceof accountingstandards. ThetwoBoardsexpect tomake progresson the twokey outstanding issuesof impairment of loans,wheretheyexpect to completetheir deliberationsin 2013, and insurancecontracts, whereboth Boards will be holdingpublic consultationsthis year. Of thesetwooutstandingissues,the need for convergence on a new forward-lookingexpectedlossapproach to provisioningis of most immediateconcern for end-usersand from a financial stability perspective. We note withconcern thedelaysin convergencetodate. We thereforerecommendthat theG20asktheIASB and FASB toprepare byend-2013a roadmapfor converging to a common approach for impairment and for achievingthe G20objectiveof a singleset of high qualityaccountingstandards. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 26. P a g e | 26 2. Priorities and work plans a. Creating continuousmarkets TheFSB remainsfullycommittedtotherapid completionof the G20‘s agreedreformsto OTC derivativesmarkets. As you are aware, thesecomplex reformsaretakingsomewhat longer than originallyplanned. TheFSB will submit for your April meetingits latestprogressreport on implementation, includinga comprehensivestock-takeof reformsasof end-2012,estimatesof theextent towhichtransactionsarebeingcentrally clearedand reportedto trade repositories, and an overview of the remainingissuestobe resolved. It is important that all jurisdictionspromptlycompletethenecessary changestolegislativeand regulatoryframeworksto put thesereforms intopractice. Tomaintain momentum, I have asked FSBmember jurisdictionsto confirm beforetheSeptember Summit that the legislationand regulation for reportingto traderepositoriesare in place,and alsothestepstheyare takingtocompletetheimplementationof other OTC derivativesreforms. Ministersmay wishtotake a particular interest in progressin their jurisdictionsto ensure timely compliance withtheseimportant reforms. TheFSB haspreviouslyidentified regulatoryuncertaintyasthemost significant impediment tofull and timelyimplementationof the OTC derivativesreforms. Toreducethis uncertainty, regulatorsareworkingtogether toidentify and addressconflicts,duplication and gapsin thecross-border application of rules. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 27. P a g e | 27 Theywill provideanupdateinApril ontheir progressand next steps,and a report totheSummit on how theidentified cross-border issueshave been resolved. Internationalpoliciesin remainingimportant areaswill alsobepublished bytheSummit. Theseincludecapital requirementsfor exposurestocentral counterparties, marginingstandardsfor non-centrallycleared transactionsand guidance on resolutionof central counterparties. Standard settersareundertakingan assessment of the incentivesto centrallyclear transactionsthat thesestandardscreateand will adjust them asnecessarytoensure a robust system. TheFSB will alsoreport at the Summit the findingsof a new macroeconomicimpact assessment of theOTC derivativesregulatory reforms. Standard settersarealsodeveloping international guidanceon authorities‘ accesstotraderepositorydata, includingin suchawaythat it can be aggregatedacrosstrade repositories. This guidance, whichwill be issuedfor consultationshortly and finalised bytheSummit, will be important for ensuring that authoritiescan use information from traderepositoriesin their oversight of OTC derivatives marketsand assessment of systemic risk. MinistersandGovernorswillwishtoensurethereiseffectivecross-border accessto thisinformation, whichisvital tothemonitoringof emerging financial vulnerabilities. The global Legal Entity Identifier (LEI) system will enhance the usability of the data; the Regulatory Oversight Committee as the governance body of the global LEI system wasestablishedin January 2013. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 28. P a g e | 28 EstablishingtheGlobalLEI Foundationisthekeynext steptolaunchthe system in March2013. TheFSB continuestooffer strong support to theLEI initiativeand the FSB Secretariat will serve asROC LEI Secretariat for theinitial period. b. Strengthening the oversight and regulation of shadow banking As you will recall, theFSB deliveredtoyou lastNovember an initial set of recommendationstostrengthenthe oversight and regulationof shadow banking. We have receiveduseful feedback through a public consultationon the initial recommendations. TheFSB isrefiningthe recommendationsrelatingto securities lending and repos, and thoserelatingto the policymeasuresfor shadowbanking entitiesother than money market funds. The recommendations will address bank-like risks to financial stability emerging from outside the regular banking system while not inhibiting sustainablenon-bank financingmodelsthat do not posesuch risks. Theapproach is designed tobe proportionateto financial stabilityrisks byfocusing on thoseactivitiesthat are material to the system, using asa startingpoint thosethat werea sourceof systemic risk duringthe crisis. We will deliver certain recommendationsto the St Petersburg Summit. Thesemeasuresshould be viewed asthe start of a broader processsince theyaddressthespecific risksthat aroseduring thecrisis and weall recognisethe ability of the shadow bankingsector toinnovate. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 29. P a g e | 29 c. Building resilient financial institutions In January, agreement wasreachedbytheGroupofGovernorsandHeads of Supervision on theLiquidityCoverage Ratio(LCR) to beapplied to banks. Theagreement expandsthe rangeof high-qualityliquid assetsthat can beincluded in theLCR and incorporatesevidence-basedassumptions about liquidityoutflowsin timesof stress. TheLCR will be introducedin 2015asplanned, withthe minimum requirementsbeginningat 60% and reaching100%by 2019toallowthe global banking system sufficient time toadjust. d.Ending ―too-big-to-fail‖ Progressisbeing madeby the IAIS in developingand testing a methodologyfor identificationof global systemically important insurers (G-SIIs), and in developing appropriatepolicy measures. This work should becompleted in the second quarter of 2013. An identificationmethodology for non-bank G-SIFIs will be issuedfor consultationin the secondhalf of 2013. Although implementationof theG-SIFI frameworkhasmuch farther to go, wewill deliver an assessment totheSt. Petersburg Summit of the progressmade in developing crediblepoliciesfor ending too-big-to-fail (TBTF). 3. Implementation of reforms Basel III Consistent implementationof Basel III is fundamental to strengthening theresilienceof theglobal banking system, maintainingmarket Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 30. P a g e | 30 confidencein theregulatory reformsand providinga level playing field for internationallyactivebanks. The27member jurisdictionsof the Basel Committeeon Banking Supervision(BCBS) continuetomake progresstowardimplementation; 11had issued final regulationsby12 February 2013and theremaining 16 jurisdictionshave tableddraft regulations. TheEuropeanUnion andtheUnitedStatespublisheddraft regulationsin 2012and intend tofinalisethem over thecourse of 2013. TheFSB and BCBSwill prepare a full update on countries‘adoption of Basel III in domesticregulationfor your April meeting. Thecountriesthat havemissedtheJanuary 2013start date are workingto finalisetheir regulationsand are expected to meet the2019timelinefor full implementation. Several more memberswill undergoa consistencyassessment of their final regulationsby theBCBS in 2013. By end-2013,all jurisdictionsthat are the home regulatortoglobal systemicallyimportant banks(G-SIBs) will have been subject to an assessment of their Basel III implementation. Other jurisdictionswill be subject to regulatory consistencyassessments shortlythereafter. TheBCBS hasconcluded an initial examination of the international consistencyin the application of theBasel III risk weightingschemefor tradingbook assets. Asimilar review is underwayregarding the banking book. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 31. P a g e | 31 Theanalysisforbanks‘tradingbooksindicatesthat supervisorydecisions andvariationsin banks‘models contributetothe substantial differencesin banks‘calculationsof market risk. (Theaveragerisk weightingof tradingassetsfor most banksin thestudy varied between15% and 45%.) Thestudyalsoshowsthat banks‘public disclosuresare insufficient for understandinghow much of thesevariationsin banks‘reportedrisk weightingsof assetsare owingtodifferinglevelsof actual risk versusthat owingtoother factors. This situation is unacceptable, and the studyhighlightsthreepolicy optionswhichare beingaddressed in the BaselCommittee‘songoing work: (i)Improving banks‘public disclosures, buildingon the recommendationsof theEnhanced DisclosureTaskForce; (ii) Narrowingdown modellingchoicesfor banks;and (iii) Further harmonisingsupervisorypracticesover approval of models. Resolution regimes and G-SIFI resolution plans An effectiveand credibleresolution regime for SIFIs is a critical component of the policy framework for ending TBTF. Full implementationof theFSBKeyAttributesof EffectiveResolution Regimeswill provideauthoritieswiththepowersand toolsnecessaryfor thispurpose. We will shortlyconcludethefirst peer review of FSB members‘ implementationof theKeyAttributes. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 32. P a g e | 32 Theworkunder thereview confirmsthat reformsare underwayin many jurisdictionsto align national statutoryregimes withthe FSB Key Attributes, but that significant work remains. We are developingan assessment methodology to assist countrieswith their implementation, and toprovidea basisfor future peer reviewsand IM F and World Bank assessments. Themethodology will be testedin pilot assessmentsbythe IMF and World Bank later thisyear and publishedin the second half of 2013. TheFSB and itsmemberswill alsothis year addressthe specific aspects of resolutionof insurersand financial market infrastructuresand the protectionof client assetsin resolution. By June 2013, resolution strategiesand plansshould be in placefor all G-SIFIs designated in November 2011. Toassist this processthe FSB haspubliclyconsulted on specific aspects of recovery and resolutionplanningand isnow finalisingitsguidance. Progressin ending TBTF is contingent on the feasibilityand credibility of putting theseresolutionplansintooperation. We will launchin thesecond half of 2013a first round of assessments under the G-SIFI ResolvabilityAssessment Processtoevaluatethe progressmade. Reducing the reliance on Credit Rating Agency (CRA) ratings TheFSB hasrecentlylaunched a thematic peer review to assistits membersto fulfil their commitmentsunder the roadmap for implementingthe FSBprinciplesfor reducingreliance on CRA ratings. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 33. P a g e | 33 This will includea stock-take of referencestoCRA ratingsin national authorities‘lawsand regulationsand of actionsbeing taken toremove or replace thesereferences. Thefindingswill feed intotheprogressreport on CRAs for theSummit, while thepeer review will be completed by early2014. Monitoring the impact of reformson EMDEs TheFSB will organisea workshopfor EMDEs in the first half of 2013to sharelessonsand experienceson implementingagreed financial reforms and on undertakingex anteassessmentsof their impact. FSB members withsignificant experiencein undertakingsuch assessmentswill be asked topresent their methodologies. TheFSB will report the findingsof theworkshopand other relevant monitoring processesat theSt. Petersburg Summit. 4. FSB resources, capacity and governance Finally, I am pleasedto report that theFSB hasnow been established with a legal personality. Alongside this,a rollingfive-year agreement under which theBISwill host and provideresourcesfor theFSB hasbeen activated, and an institutional mechanism for theFSB‘sfinancial and resourcegovernance established. TheFSB hasalsoadoptedProcedural Guidelinesfor itsoperational and administrativeactivitiesand practices. Theseareimportant stepstowardsimplementationof the G20 recommendationsat Cannesand Los Cabostoplace theFSB on an enduringorganisational footing, withstrengthenedgovernance, greater Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 34. P a g e | 34 autonomy in resource use and enhanced capacitytocoordinatethe development and implementation of financial regulatorypolicies,while maintainingstrong linkswiththe BIS. TheFSB will next elect new chairs for three of its Standing Committees andbegin a review of the composition of their memberships. FollowingtheSt. Petersburg Summit, the FSB will set in train a review of the structure of its representation, whichweenvisage to becompleted under theAustralian Presidencyof the G20. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 35. P a g e | 35 Dodd-Frank Act StressTest 2013 TheDodd-Frank Act requires all financial companiesthat have more than $10 billionin total consolidatedassetsand are regulated by a Federal financial regulatoryagencytoconduct capital stresstestsat least annually. TheFederalReservefinalizedthoserequirementsforBHCswithbetween $10 billion and $50 billion in assetsand state member banks and savings and loan holding companies with over $10 billion in assets on October 9, 2012. TheFederal Reserve expectslarge, complex bank holding companies (BHCs) to hold sufficient capital tocontinue lendingto support real economicactivity, evenunder adverseeconomic conditions. Stress testing is one tool that helps bank supervisors measure whether a BHC has enough capital to support its operations throughout periods of stress. TheFederal Reserve previouslyhighlightedthe useof stresstestsasa meansof assessingcapital sufficiencyunder stressduring the 2009 SupervisoryCapitalAssessment Program (SCAP) and the 2011and 2012 Comprehensive CapitalAnalysis and Review (CCAR) exercises. In the wakeof thefinancial crisis,theCongressenacted theDodd - FrankWall Street Reform and Consumer ProtectionAct (Dodd-Frank Act), which requires the Federal Reserve to conduct an annual stresstest of largeBHCs and all nonbank financial companies designatedby the Financial Stability Oversight Council (FSOC) for Federal Reserve Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 36. P a g e | 36 supervision to evaluate whetherthey have sufficient capital toabsorb lossesresultingfrom adverseeconomic conditions. TheDodd-Frank Act alsorequiresBHCs and other financial companies supervised by the Federal Reserve to conduct their own stresstests. TheFederal Reserve adopted rulesimplementingtheserequirementsin October 2012. Under the rules,18BHCs arepart of theDodd-FrankAct supervisory stressteststhis year (DFAST 2013). This report describesthe hypothetical, severelyadversescenario designed bythe Federal Reserve;providesan overview of the analytical framework and methodsusedtogeneratethe projectionsof revenues,expenses, losses, andtheresultingpost-stresscapitalratiosforeachofthe18BHCs; and disclosesthe resultsof the2013Dodd-Frank Act supervisorystress test. TheFederalReservebelievesthat disclosure ofstresstestresultsprovides valuableinformationtomarket participantsand the public, enhances transparency, and promotes market discipline. Theprojectionsprovide a uniqueperspectiveon the robustnessof the capital positionsof these firms becausetheyincorporatedetailed information about therisk characteristicsand businessactivitiesof each BHC and because theyare estimatedusinga consistent approachacross all the BHCs, providingcomparable resultsacrossfirms. TheFederal Reserve alsobelievesthat providinginformation about the methodologyusedtoproducethe resultswill offer useful context to interpret thoseresults. Theprojectionswerecalculatedusing input data provided bythe 18 BHCsand a set of modelsdeveloped or selectedby theFederal Reserve, based on a hypothetical, severelyadverse macroeconomic and financial Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 37. P a g e | 37 market scenario developed by the Federal Reserve. Theseverelyadversescenario featuresa deep recessionin theUnited States,Europe, and Japan, significant declinesin asset pricesand increasesinriskpremia, andamarkedeconomicslowdownindeveloping Asia. TheFederal Reserve alsoapplied a separate global market shock to six BHCswithlargetrading, privateequity, andcounterpartyexposuresfrom derivativesand financingtransactions. Themodels project revenues, expenses,losses,and the resulting post-stresscapital ratios for each BHC over a nine-quarter planning horizon extendingthrough the end of 2014. TheFederal Reserve‘s projectionsshould not be interpretedasexpected or likelyoutcomesfor thesefirms, but rather aspossibleresultsunder hypothetical, severelyadverseconditions. Theseprojectionsincorporatea number of conservative modeling assumptions, but donot make explicit behavioral assumptionsabout the possibleactionsof a BHC‘s creditorsand counterpartiesin the scenario, except through the severelyadversescenario‘s characterizationsof financial asset pricesand economic activity. Tomake theprojectionsof post-stresscapital ratiosmore comparable acrossBHCs, theprojectionsreflect assumptionsabout capital distributionsprescribedin the Dodd-Frank Act stresstest rule. Over thenine-quarter planninghorizon, each BHC maintainsits common stock dividend paymentsat thesame level asthe previousyear, but repurchasesand issuanceof common stock is assumed tobe zero except for common stock issuanceassociatedwith expensed employee compensation. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 38. P a g e | 38 Theresultsof theseprojectionssuggest that, in the aggregate, the 18 BHCswouldexperiencesubstantial lossesunder the severelyadverse scenario. Over thenine quartersof theplanninghorizon, lossesat the 18 BHCs under the severely adversescenarioareprojectedtobe $462 billion, includinglossesacrossloanportfolios,losseson securitiesheld in theBHCs‘investment portfolios, tradingand counterpartycredit losses from the global market shock, and other losses. Projected net revenuebeforeprovisionsfor loanand leaselosses (pre-provision net revenue, or PPNR) at the 18BHCsover the nine quartersof theplanninghorizon under theseverelyadverse scenario is$268billion, whichisnet of lossesrelatedtooperational-riskeventsand mortgagerepurchases,aswellasexpensesrelatedtodispositionofowned real estateof $101billion. Taken together, thehigh projected lossesand lowprojectedPPNR at the 18BHCs resultsin projectednet income beforetaxesof -$194billion. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 39. P a g e | 39 Thesenet incomeprojectionsresult in substantial projected declinesin regulatorycapital ratios for nearlyall of the BHCsunder theseverely adversescenario. As illustrated in figure 1,the aggregate tier 1common ratiowouldfall fromanactual11.1percent in thethirdquarterof2012toapost-stresslevel Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 40. P a g e | 40 of 7.7 percent in thefourth quarter of 2014, includingassumed capital actionsfor the18 BHCs. TheDodd-Frank Act requires the Federal Reserve to conduct an annual supervisorystresstest of BHCs with$50billion or more in total consolidatedassetsand nonbank financial companiesdesignatedby the FSOC for Federal Reserve supervision(collectively, ―covered companies‖). TheDodd-Frank Act alsorequirescoveredcompaniestoconduct their ownstresstests(company-run stresstests) semiannually. Together, the Dodd-FrankAct supervisory stresstestsand the company-run stresstestsare intended to provide BHC management and boardsof directors, the public, and supervisorswithforward-looking information tohelp identify downsiderisksand the potential effect of adverseconditionson capital adequacyof these largebanking organizations. TheFederal Reserve adopted rulesimplementingthese requirementsin October 2012. Under the implementationphase-in provisionsof the Federal Reserve‘s Dodd-Frank stresstest rules,only the 18BHCs that previously participated in the SCAP are required to conduct company-run stress testsduring the current stresstest cycle that began in October 2012. Similarly, the Federal Reserve hasconducted supervisorystresstestson onlythese18 BHCsfor DFAST 2013. Both setsof stresstestsare alsointegrated intothe Federal Reserve‘s assessment of capital adequacy under CCAR. Important differencesbetweenthe Dodd-Frank Act supervisorystress testsand the CCAR post-stresscapital analysisare outlinedin box 1. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 41. P a g e | 41 Toprovide context totheFederal Reserve‘sDodd-Frank Act supervisory stresstest results,thefollowingsectionscontain an overview of the FederalReserve‘s Dodd-FrankAct stresstest rules,focusing on the processfor the supervisorystresstestsand the requirementsfor company-run stresstestsfor covered companies. Supervisory StressTests UndertheDodd-Frank Act stresstest rules, theFederalReserveconducts annual supervisorystressteststoevaluatewhethera coveredcompanyhas thecapital, on a total consolidatedbasis, necessaryto absorblossesand continueitsoperations bymaintainingready accessto funding, meeting itsobligationsto creditorsand other counterparties, and continuing to serveasa credit intermediaryunder adverseeconomicand financial conditions. As part of this supervisorystresstest for each covered company, the Federal Reserve projectsrevenue, expenses,losses,and resulting post-stresscapital levels, regulatorycapital ratios, and the tier 1common ratio under three scenarios (baseline, adverse, and severelyadverse), usingdata asof September 30. TheFederal Reserve generallyusesa common set of scenariosfor all coveredcompaniesin the supervisory stresstest. However,the Federal Reserve may use additional scenariosor componentsof scenarios for all or a subset of the covered companiesto capture salient sourcesof risk, and thesescenariosmay usedata from datesother than theend of thethird quarter. In DFAST 2013, large, complex BHCswithsignificant tradingactivities are subjecttoa global market shock that reflectsgeneral market stress andheightened uncertainty, which affectstradingpositionsand elevates counterpartycredit risk. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 42. P a g e | 42 TheDodd-FrankAct codified theFederal Reserve‘spracticeof disclosing a summary of theresultsof itssupervisory stresstest. In this paper, theFederal Reserve is disclosingthe resultsof the 2013 Dodd-FrankAct supervisorystresstestsconducted under theseverely adversescenario, includingfirm-specificresultsbasedon theprojections madeby the Federal Reserve of each BHC‘srevenues, expenses, losses, andpost-stresscapital ratiosover the planning horizon. Box 1. Dodd-Frank Act Supervisory StressTests and the CCAR Post-StressCapital Analysis While closelyrelated, there are some important differencesbetweenthe Dodd-FrankAct supervisorystresstestsandtheCCAR post-stresscapital analysis. Theprojectionsof pre-tax net income from the Dodd-Frank Act supervisorystresstestsaredirect inputstothe CCAR post-stresscapital analysis. Theprimary differencebetweenthe Dodd-FrankAct supervisorystress testsand the CCAR post-stresscapital analysisis thecapital action assumptionsthat arecombined with theseprojectionsto estimate post-stresscapital levelsand ratios. Capital ActionAssumptionsfor theDodd-Frank Act Supervisory Stress Tests Toproject post-stresscapital ratiosfor theDodd-FrankAct supervisory stresstests, the Federal Reserve usesa standardizedset of capital action assumptionsthat are specified in the Dodd-FrankAct stresstest rules. Common stock dividend paymentsare assumed to continueat the same level asthe previousyear. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 43. P a g e | 43 Scheduled dividend, interest, or principal payments on any other capital instrument eligible for inclusion in the numerator of a regulatory capital ratio are assumed to be paid. Theassumptionsare that repurchasesof common stock are zero. Thecapital action assumptionsdonot include issuanceof new common stock, preferred stock, or other instrument that wouldbe includedin regulatory capital, except for common stock issuanceassociatedwith expensed employee compensation. Capital ActionsforCCAR In contrast, for theCCAR post-stresscapitalanalysis, theFederalReserve usesBHCs‘planned capital actions,and assesseswhethera BHC would be capableof meeting supervisoryexpectationsfor minimum capital ratios even if stressful conditionsemergedand theBHC did not reduce plannedcapital distributions. As a result, post-stress capital ratios projected for the Dodd-Frank Act supervisory stress tests should be expected to differ significantly from thosefor the CCAR post-stresscapital analysis. For example, if a BHC includesa dividendcut in itsplanned capital actions,itspost-stresscapital ratiosprojected for the CCAR capital analysiscould be higher than thoseprojected for the Dodd-FrankAct supervisorystresstests. Conversely, if a BHC includessignificant dividend increases, repurchases, or other actionsthat depletecapital in itsplannedcapital actions,thepost-stresscapital ratiosfor the CCAR could be lower. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 44. P a g e | 44 Company-Run StressTests As required by the Dodd-Frank Act, the Federal Reserve‘s stresstest rules require covered companies to conduct two company-run stress tests each year. In conducting the―annual‖ test, a coveredcompany usesdata asof September 30 and reportsitsstresstest resultsto theFederal Reserve by January 5. In addition, a covered company must conduct a ―midcycle‖ test and report the resultsto the Federal Reserveby July5. TheDodd-Frank Act stresstest rulesalign the timingof annual company-run stresstestswiththe annual supervisorystresstestsof coveredcompanies. In theirannualstresstests,coveredcompaniessubject totheDodd-Frank Act stresstest rulesmust usethe scenariosprovidedby the Federal Reserve. Each year, theFederal Reserve will provide at least three scenarios— baseline, adverse, and severelyadverse—that are identical tothe scenariostheFederal Reserve usesin theannual supervisorystresstests of covered companiesBy providinga common set of scenariosto all firms, the resultsof company-run and supervisory stresstestsfor all 18 BHCswill be based on comparable underlying assumptions. Tofurther enhancecomparability, the supervisory stresstestsand company-run stresstestsconducted under the Dodd-Frank stresstest rules usethe same set of capital action assumptions. According to these assumptions,over thenine-quarterplanning horizon, each BHC maintainsitscommon stock dividend paymentsat thesamelevel asthe previousyear; scheduleddividend, interestor principal paymentson any other capital instrument eligiblefor inclusion in the Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 45. P a g e | 45 numeratorof a regulatory capital ratioare assumed tobepaid; but repurchasesof suchcapital instrumentsandissuanceof stock is assumed tobe zero. Finally, each covered company must publicly disclose a summary of the results of its company-run stress test under the severely adverse scenario provided by the Federal Reserve. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 46. P a g e | 46 Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
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  • 58. P a g e | 58 GovernorDaniel K. Tarullo At the Cornell International Law Journal Symposium: The ChangingPoliticsof Central Banks, New York, New York International Cooperation in Financial Regulation Next month marks the fifth anniversary of the failure of Bear Stearns--inretrospect, the beginningof themost acutephaseof thefinancial crisis. Thecross-border dimensionsof the crisis itselfand theglobal effectsof the Great Recessionthat followed provokeda major effort tostrengthen international cooperation in financial regulation. While a good deal has already been accomplished, this eveningI will suggest the next stepsthat wouldbe mostuseful in advancingglobal financial stability. Of course, the fashioning of an international agenda requires a clear understanding of the overall regulatory aims of participating national authorities. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 59. P a g e | 59 Here is whereinternational regulatory cooperation linkstothesubject of thisconference--if not quite thechangingpoliticsof central banks, thenat leasttheir changingpolicy goalsin thewakeof thefinancial crisis.Almost bydefinition, systemic crisesreveal failures acrossthefinancial system, from breakdownsin risk management at many financial firms toserious deficienciesingovernment regulationof financialinstitutionsand markets. While the recent crisiswasnoexception, it haspresented particular challengestothepolicyfoundationsofcentralbanks,especiallythoselike theFederal Reservethat carry out regulatory mandatesalongsidetheir monetarypolicy missions. SoI begin withsome remarkson thenature of thosechallenges,before turningtoa discussionof how changesin approach should inform international cooperationin financial regulation. Central Banks and the Financial Crisis In surveying the failings of financial authorities, both here and abroad, onecan certainlyidentify some specific characteristicsof pre-crisis regulation that look todayto have been significantlymisguided, rather than the advancestheywereformerly thought tobe. So, for example, regulatorsbecame prone to placetoo much confidence in thecapacityof firms to measure and managetheir risks. Indeed, thedecadeorsoprior tothecrisishad seen anaccelerationof the shift from a dominantlyregulatory approach toachievingprudential aims- -onethat restson activitiesand affiliationrestrictions,and other reasonablytransparent rules--towardgreater emphasison a supervisory approach, whichrelieson a more opaque, firm-specific processof watchingover banks' ownrisk-management and compliancesystems. Yet thebreadth and depth of the financial breakdownsuggest that it has much deeper roots. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 60. P a g e | 60 In many respects,this crisiswasthe culminationof fundamental shiftsin both theorganization and regulation of financial marketsthat began in the1970s. TheNew Deal reforms of financial regulation, themselvesspawnedby a systemic crisis, had separated commercial banking from investment banking, cured theproblem of commercial bank runsby providing federal deposit insurance,and brought transparencyand investor protectionsto tradingand other capital marketsactivities. This regulatory approach fostered a commercial banking system that was,for thebetter part of 40years, quitestableand reasonably profitable,though not particularlyinnovativein meetingtheneedsof depositorsand borrowers. In the1970s, however, turbulent macroeconomicdevelopments combinedwith technological and businessinnovationsto producean increasinglytight squeezeon thetraditional commercial banking businessmodel. Thesqueezecamefrom boththeliabilitysideof banks' balancesheets,in theform of more attractivesavingsvehiclessuchasmoneymarket funds,and from the asset side, with thegrowthof public capital markets and international competition. Thelargecommercial banking industrythat saw both its fundingand its customer basesunder attack sought removal or relaxation of the regulationsthat confinedbank activities,affiliations, and geographic reach. While supervisors differed with banks on some important particulars, they were sympathetic to this industry request, in part because of the potential threat to the viability of the traditional commercial bankingsystem. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 61. P a g e | 61 Theperiod of relativelegal and industry stabilitythat had followedthe New Deal thusgavewayin the 1970stoa nearly 30-year period during whichmanyprevailingrestrictionson bankswererelaxed. Agood number wereloosenedthrough administrativeaction bythe bankingagencies,but important statutory measuresheaded in the same direction. This legislativetrend culminated in the Gramm-Leach-BlileyAct of 1999, which consolidated and extended the administrativechangesthat had allowedmore extensiveaffiliationsof commercial bankswith investment banks, broker-dealers,private equity firms, and other financial entities. But in sweepingawaytheremnantsof one key element of theNew Deal regulatorysystem, neither Gramm-Leach-Bliley nor financial regulators substituted new regulatory mechanismstomatch the wholesalechanges in thestructure of thefinancial servicesindustry and thedramaticgrowth of novel financial instruments. In fact, I wouldgeneralize this last observation tosaythat theneed to addressthe consequencesof theprogressiveintegrationof traditional lending, tradingactivities,and capital marketslies at theheart of three post-crisischallengesto thepolicy foundationsof the Federal Reserve and, to a greater or lesser degree, manyother central banks. Microprudential Regulation Thefirst challengeposed by the crisiswasto traditional, microprudential regulation, whichfocuseson the safetyand soundnessof each prudentiallyregulated firm. Not all central bankshave microprudential regulatory authority, of course, and--asin theUnited States--thosethat dosometimesshare it with other agencies. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 62. P a g e | 62 But the shortcomingsof pre-crisisregulatory regimeshavebeen of concern toall central banks. Most notably, capital requirementsfor bankingorganizations, particularlythe largeonesthat might be regarded astoo-big-to-fail, simplywerenot strong enough. Risk-weightsweretoolowfor certain traded assetsthat had proliferated ascredit and capital marketsintegratedmore thoroughly. In some cases,thearbitrageopportunitiespresented by existingcapital requirementswerean incentivefor securitizationand other capital marketsactivities. Theexposurescreated by off-balance-sheetactivitiessuch asstructured investment vehicles (SIVs) werebadly underweighted. Minimum capitalratioswerenot high enoughand, in meetingeven those inadequaterequirements,firmswereallowedtocount liabilitiesthat did not reallyprovidetheabilityto absorb lossesand still maintain the firms asviable, functioningintermediaries. There hasalreadybeen a substantial responsetothis challenge. With the support of the Federal Reserve and other U.S. bank regulators, theBasel Committeeon Banking Supervisionhasstrengthenedcapital requirementsby raisingrisk-weightingsfor traded assetsand improved thequalityof loss-absorbingcapital through a new minimum common equityratio. Thecommittee alsohascreated a capital conservation buffer and introduced an international leverageratio. TheseBasel2.5and Basel III reforms either havebeen, or soon will be, implementedintheUnitedStatesandmostother countriesthat arehome tointernationallyactivebankingfirms. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 63. P a g e | 63 Also, theBasel Committeehasjust recentlyadoptedthe Liquidity CoverageRatio(LCR), a first step in addressingliquidityproblems. In theUnited States, some important additional stepshavebeen taken. Beginningat thepeak of the crisis, theFederal Reserve hasconducted stresstestsof largebankingorganizations, making capital requirements more forward-lookingby estimatingthe effect of an adverseeconomic scenario on firm capital levelsin a manner lessdependent on firms' internalrisk-measurement infrastructure. And the provision of theDodd-FrankAct popularly knownasthe Collins Amendment ensuresthat banking organizationscannot use models-basedapproachesto reducetheir minimum capital below generallyapplicable, more standardized risk-based ratios. Macroprudential Regulation Asecond challengefor central banksis that the crisisrevealed the need for a much more activeset of macroprudential monitoring and regulatory policies--that is, a reorientationtowardsafeguarding financial stability through thecontainment of systemic risk. Thefailure to attendto, or even recognize, financial stabilityriskswas perhapsthemost glaring public sector deficiencyin the pre-crisisperiod. This wasa fault by nomeanslimitedto central banks. On the contrary, systemic risk had alsocome toseem more theoretical than real to manyacademicsand financial market participants. Even most of thoseinsideand outsidetheofficial sector whoargued for stronger capital or other prudential standardsdid not appreciatethe degreetowhichthesecondary mortgage market had turned intoa house of cards. Still, regardlessof formal mandates, central banks arebetter positioned than most other government agenciestoseeand evaluatetheemergence Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 64. P a g e | 64 of asset bubbles,excessiveleverage,and other signsof potential systemic vulnerability. In some respectsthis second challengeisan extension of the first, since thesafetyand soundnessof largeinstitutionsmust take account of the relativecorrelationof their asset holdings,interconnectedness,common liquidityconstraints,and other characteristicsof largebanking organizationsasa group. Similarly, systemic risks and too-big-to-fail problems can increaseif large, highly leveragedfirms may operateoutsidethe perimeter of statutorymicroprudential oversight, aswasthecasepriorto2008withthe large, free-standinginvestment banksin theUnited States. And market disciplinewill be badlycompromised if financial market participantsbelievethat an insolvent counterparty cannot beresolved in an orderly fashionand thusis likely toreceivegovernment assistance under stress. Here again, domestic and international efforts have already produced significant reform programs, though implementation of some of these programsislessadvanced than Basel2.5and Basel III. Domestically, theFederal Reserve's annual stresstestsexaminethe effectsof unexpectedmacroeconomicshockson asset classesheldwithin all major regulated firms. TheDodd-Frank Act gave theFinancial StabilityOversight Council (FSOC) authority tobring systemically important firms that are not already bank holding companieswithintheperimeter of Federal Reserve regulation and supervision. TheFSOC is activelyconsideringseveral firms for possibledesignation. Finally, theDodd-Frank Act gavethe Federal Deposit Insurance Corporation orderlyliquidationauthority for systemicallyimportant Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 65. P a g e | 65 financial firms, therebycreatingan alternativeto the Hobson'schoiceof bailout or bankruptcythat authoritiesfaced in 2008. Internationally, the Basel Committeehasagreed toa regimeof capital surchargesfor largebanksbasedon their systemic importance. There is alsoan initiativeto parallel U.S. effortsto identifynon-bank systemicallyimportant firms. TheBasel Committee and the Financial Stability Board havedeveloped internationalprinciplesforresolutionauthority, thoughmost oftherestof theworldis behind the UnitedStatesin actuallyimplementingthose principles. But meetingthemacroprudential challengewillrequire measuresbeyond a more comprehensive, cross-firm approach tomicroprudential regulation. Much academicand policy work of thepast several yearshasrevived and elaborated thepreviouslysomewhat heterodox view that financial instabilityisendogenousto the financial system, or at least thekind of financial system wenowhave. Consider,for example,how the intertwiningof traditional lendingand capital marketsgaverise to what hasbecome knownasthe shadow bankingsystem. Shadowbanking, whichrefers tocredit intermediation partly or wholly outsidethe limitsof thetraditional banking system, involvesnot only sizeablecommercial and investment banks, but many firms of varying sizesacrossa rangeof markets. While some of themore notoriouspre-crisiscomponentsof theshadow bankingsystem are probablygone forever, current examplesinclude moneymarket funds, thetripartyrepomarket, and securities lending. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 66. P a g e | 66 From the perspectiveof financial stability, theparts of theshadow bankingsystem ofmostconcernarethosethat createassetsthought tobe safe,short-term, and liquid--ineffect, cash equivalents. For a varietyof reasons, demand for such assetshasgrownsteadily in recent years,andisnot likelytoreversedirectionintheforeseeablefuture. Yet theseare the assetswhosefunding is most likelytorun in periodsof stress,asinvestorsrealize that their resemblancetocash or insured depositsin normal timeshasdisappearedin thefaceof uncertaintyabout their underlying value. And, as was graphically illustrated during the crisis, the resulting forced sales of assetswhose valuesare already under pressure can accelerate an adversefeedback loop, in whichall firmswithsimilar assetssuffer mark-to-market losses,which, in turn, can lead tomore fire sales. Thiskindof contagionlayat theheart ofthefinancialstressesof2007and 2008. As alreadynoted, pre-crisisshortcomingsat the intersection of microprudential andmacroprudential regulationhavemotivatedavariety of reforms, many explicitlydirected at the problem of too-big-to-fail institutions. While some of thesereforms remain unfinished, and some additional measuresareneeded, therehasbeen considerableprogress. Unfortunately, thesame cannot be saidwith respect to shadowbanking and, more generally, thevulnerabilitiesassociatedwithwholesale short-term funding. Thesevulnerabilitiesinvolveboth large, prudentiallyregulated institutions,and thustoo-big-to-fail concerns, and thebroader financial system. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 67. P a g e | 67 Except for the liquidityrequirementsagreedtoin theBasel Committee, however, theliabilitysideof the balancesheetsof financial firmshas barelybeen addressedin the reform agenda. Yet here is wherethesystemic problemsof interconnectednessand contagion are most apparent. And, asevidencedby the funding stressesexperiencedby a number of European banksprior tothe stabilizingmeasurestaken by the European Central Bank, theseproblemsare still verymuch withus. Within theUnited States, reform effortsare underwayin some discrete, but important, areas. Theprovisionsof Dodd-Frank requiringmore central clearingof derivativesand minimum marginsfor thosethat remain uncleared are designedtoprovidemore systemic stability. As to shadowbanking itself, theFSOC recentlyproposed optionsto addressthestructural vulnerabilitiesin moneymarket mutual funds,with an eye towardrecommendingactionby the Securitiesand Exchange Commission. And the Federal Reserve hasbegun usingits supervisoryauthorityto pressfor a reductionin intradaycredit risk in thetripartyrepomarket. But thesemeasuresare incomplete, and donot extend to all forms of short-term funding that can poserun risks, a universe that is likely to expand asprudential constraintsbegin toapplytolargeexistingshadow bankingchannels. Monetary Policy While the first twopolicy challengesare shared among regulatoryand financial agencies, the third liessolely withcentral banks. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 68. P a g e | 68 In the wakeof thecrisis,weneed to consider carefullytheview that central banksshould assessthe effect of monetary policy on financial stability and, in someinstances, adjust their policy decisionsto take account of theseeffects. The dramatic rise in housing prices, and the associated high amounts of leverage taken on by both households and investors, occurred during an extendedperiod of lowinflation. Somehave suggested that, by not raisingratesbecauseinflation remainedsubdued, monetary policy in theUnitedStatesand elsewhere may have contributed to themagnitudeof thehousing bubble. Whatever the meritsof that much-contestedpoint, it seemswiseto addressthisissueaswefacewhat could well be another extended period of low inflationand lowinterestrates. It is important tonote that incorporatingfinancial stabilityconsiderations intomonetarypolicydecisionsneednot implythecreation of an additional mandate for monetary policy. Thepotentiallyhugeeffect on price stability and employment associated with boutsof seriousfinancial instabilitygivesamplejustification. Here I want tomention some commentsby my colleagueJeremy Stein a coupleof weeksago. After reviewingthe traditional argumentsagainst usingmonetary policy in responsetofinancial stabilityconcernsand relying instead on supervisorypolicies,Governor Stein offeredseveral reasonsfor keepinga more open mind on thesubject. First, regulation hasitsown limits,not theleast of which is the opportunityfor arbitrageoutsidethe regulated sector. Second, whateveritsbluntness, monetary policy hasthe advantageof beingable to"get in all the cracks" of thefinancial system, an attribute Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 69. P a g e | 69 that is especiallyuseful if imbalancesarebuildingacrossthefinancial sectorand not just in a particular area. Finally, by alteringthe composition of itsbalancesheet, central banks mayhaveasecond policyinstrument inadditiontochangingthetargeted interest rate. So, for example, it ispossiblethat a central bank might under some conditionswant tousea combination of thetwoinstrumentstorespond toconcurrent concernsabout macroeconomicsluggishnessandexcessive maturitytransformation by loweringthe target (short-term) interest rate and simultaneouslyflatteningthe yield curve through swappingshorter duration assetsfor longer-term ones. Tobe clear, I donot think that weareat present confronted with a situationthat wouldwarrant thesekindsof monetarypolicy action. But for that very reason, it seemsthat now is a good timetodiscussthese issuesmore actively, sothat if and whenwedo facefinancialstability concernsassociatedwith asset bubblesbackedby excessiveleverage, we will havea well-consideredview of therolemonetarypolicymight playin mitigatingthoseconcerns. Advancing the International Reform Agenda Let me turn nowtothewayin whichour shiftsinpolicy approachshould inform theagenda for international cooperation in financial regulation. For obviousreasons,themonetarypolicy issuesarenot directlyrelatedto thisagenda, though our understandingof these issuesmay profit from discussionswithour central bank colleaguesfrom around the world. It is equallyobviousthat the other twosetsof policy changesare quite closelyrelated to theinternational agenda. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 70. P a g e | 70 Morethan in most other areas,thefinancial sphere suffers from a basic lack of congruencebetweenthe authorityto regulateand theobject of regulation. Thuswehave a significantlyinternationalizedfinancial system, in which shocksare quickly transmittedacrossborders, but a nationally-based structure of regulation. Withincountries, responsibilitiesmay be dividedbetweenprudential regulatorsand market regulators,among regulatorswith similar mandates,or both. Central banksmayhaveexclusiveprudential authority, shareit withother agencies,or have none at all. International arrangementsboth reflect, and try tocompensatefor, this webof divided and overlapping domesticauthority. Thusthere are sectoral standardssetters like theBaselCommittee, the International Organizationof SecuritiesCommissions(IOSCO), and the InternationalAssociation of InsuranceSupervisors(IAIS) on theone hand, but alsobroader groupingssuch asthe Group of Twenty, the Financial Stability Board (FSB), and theInternational MonetaryFund on theother. In addition, under theumbrella of the international home of central bankers,the Bank for International Settlements,numerousother committeesworkacrossfieldsalsocoveredbyoneormoreofthegroupsI havejustmentioned. There are some obvious weaknesses with such an assortment of international arrangements, notably the difficulty of coordinating initiativeswheremore than one group is workingon an issue. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 71. P a g e | 71 This kind of coordination challengecan be further complicatedby the participationin international discussionsof variousnational officials without domesticauthority in a particular area. The sheer proliferation of international arrangements, each with its own staff, has at times also led to a proliferation of studies and initiatives that become burdensome to the national regulators and supervisors who have been overtaxed at home since the onset of the crisisand ensuing domestic reform efforts. Yet thereare alsosome strengthsderived from thecrowdedinternational fieldof organizationsand committees. Onesuchvirtue is that issuesnot fallingsquarely within theremit of a particular kind of standardssetter can nonethelessbe dealt with internationally. This, in fact, hasbeen theexperiencewiththe ongoing international effort to agree on minimum margin requirementsfor derivativesthat are not centrallycleared. Another is that different perspectivesarefrequentlybrought tobear on a singleset of problems. At some point, it likelywill be beneficial to rationalize somewhat the overlapping, sometimescompetingeffortsof thesevariousinternational arrangements. For thenear tomedium term, though, it is important to havesome principlesfor decidingupon the international agenda that should govern theeffortsof these arrangementsasa whole. First, initiativesshould be prioritized. Onepoint of emphasisshould be completing, and ensuring implementationof, the internationallyagreed-upon framework for Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 72. P a g e | 72 containingthetoo-big-to-fail risksassociatedwithsystemicallyimportant firms. Another shouldbe distillingthevariousideasrelatingtoshort-term fundingvulnerabilitiesintoa few that have promiseasdiscrete, relatively near-term initiatives, whilecontinuingstudyof other, more comprehensivemeasures. Asecond, relatedprincipleis that initiativesshould be focused and manageable,reflectingnot onlythe limitedcapacityof participating national authorities, but alsothe desirabilityof reachingat least a temporaryequilibrium at whichfirms can get on withthebusinessof planningtheir strategiesin a clearerregulatory environment, and regulatorscan begin to take stockof the cumulativeeffectsand effectivenessof thechangesthat have takenplacein that environment. Athird principleisthat,inmostinstancesat least, internationaleffortsto develop new regulatorymechanismsor approachesshould build on experiencederived from national practicein one or more jurisdictions. Thechallengesencountered during the initial effort to devise an LCR in theBasel Committee, withlittleor noprecedent of national quantitative liquidityrequirementsfrom whichto learn, should counselcaution in tryingtoconstruct new regulatorymechanismsfrom scratchat the international level. There will doubtlessbe exceptionstothisgeneral principle, such as wherethe transnational arbitrageincentivesof a regulatory measure are sostrong asto make national effortsdifficult toinitiateand sustain without substantial lossof financial activitytoother countries. And, in theimmediateaftermath of thecrisis, there wasaneedtoharness thebroad-based demandsfor reform and move forwardon some priority reforms without benefit of learningfrom national initiatives. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 73. P a g e | 73 On the other hand, there may alsobe areaswhere, notwithstandingthe importanceof a particularregulatoryobjectivefor international financial stability, it may be preferable to maintain a varietyof approachesto achievingthat objective. Bearing in mind both these principles and the key areas for policy change at central banks and other financial regulators, let me now suggest some specific subjectsfor near-term emphasis. As to the frameworkfor systemically important financial institutions (SIFIs), I wouldurge that twoongoing initiativesbe completedover the next year and twoideasthat have been in the discussionstagebe developed intoconcrete proposals. First, the proposal for a capital surcharge for systemically important bankingorganizationsis nearing completion. TheBasel Committeecontinuestorefinethemethodology tobe used in identifying the firmsand calibratingthesurchargeamount--perhapsa byproduct of the fact that this methodology had tobe developedin the Basel Committeewithout benefit of prior precedent. But I have confidencethat thisworkwill be successfullycompleted. Thesecond ongoinginitiative--workon designatingnon-bank SIFIs--hastodatebeen pursued mostlyin theIAIS and thushas concentrated on insurancecompanies. It is important to take the time to evaluate carefully the actual systemic risk associated with these companies, and to understand the amount of such risk relative to other financial firms, before fixing on a list of firms and surcharges. But thisseemstome a realisticgoal over the next six months. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 74. P a g e | 74 Third, weshould build on the very good analytic work in theBasel Committee, both on simplifying capital requirementsfor credit risk and on fashioningstandardized capital requirementsfor market risk, toapply standardizedcredit andmarket riskcapitalmeasurestoall internationally activebanking firms. As I mentioned earlier, the United Stateshas alreadyadoptedsuch a requirement for capital requirementson credit risk. Thesestandardizedmeasuresserve asa floor toguard against the potential for models-based capital measurestounderstate capital needs under some circumstances. Theyare alsosubstantiallylessopaquethan, for example, theadvanced internalratings-basedapproachof BaselII, and thuswouldprovide more comparable measuresthat are alsomore amenabletointernational monitoring. Fourth, I wouldhope to see a requirement proposed for large internationallyactivefinancial institutionsto have minimum amountsof long-term unsecured debt, which wouldbe available toabsorb lossesin theevent of insolvency. As I mentioned earlier,workon resolution continues,albeit at different pacesin different jurisdictions. Given the complexitiesarisingfrom the independent, often differing national bankruptcyand insolvencylaws,the goal of achievinga fully integratedresolution regime for internationallyactivefinancial firms may take a good deal of time. But a minimum long-term debt requirement wouldat least provide national authoritieswith sufficient equityand long-term debt in these firmsto bear all lossesin theevent of insolvency, and therebycounteract themoral hazard associatedwith taxpayer bailoutswithout risking disorderlyfailure. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 75. P a g e | 75 This requirement wouldnot break brand new regulatoryground, sinceit wouldreallybe a modification of existingTier 2gone-concern capital concepts,and wouldcomplement the requirement for minimum equity levelsincludedin BaselIII. As implied in my identification of short-term fundingvulnerabilitiesasa priorityarea, thebest wayforward here is considerablylesseasyto specify. Short-term initiativeson money market fundsand tripartyrepoareboth possibleand desirable. In truth, though, becausemoney market fundsare largelyAmerican and, toa somewhat lesser extent, European, the UnitedStatesand the European Union together have the abilityto addressthe global run risks associated withthese products. I think wealsohave the responsibilitytodo so, but not necessarilyin identicalways. Accordingly, I wouldhope that both theUnitedStatesand the European Union wouldeachtake effectiveactiontocounter therun risk, tailoredas appropriateto their regulatory environments,and then explain those actionsat IOSCO and theFSB, wheretheir efficacy can be reviewed. Similarly, sincethesettlement processfor tripartyrepothat remainsof concern iscenteredat twoinstitutions,both of whichare regulated American banks, theUnitedStatescan take effectiveaction without need of an international agreement As to broader initiatives, proposals to require minimum haircuts for all securities financing transactions have been tentatively discussed in the FSB. This is certainlya ripe subject for discussion, insofarassecurities financingtransactionsfacilitateleverage, enablematuritytransformation, Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 76. P a g e | 76 andproduce the kind of interconnectednessthat can spawnrunsand contagion. At present, noset of generallyapplicableprudential standardsgoverns theseactivities. Even within regulatedfirms, microprudential risk-weightedcapital standardshavelittleeffect, sincetheyarecalibrated against credit risk andmost suchtransactionsareshort-term and fully(or over) collateralized. Thusrequirementsthat wouldattachtoinstrumentsand transactions,as opposedto firms that happen tobe prudentiallyregulatedfor other reasons, have considerable attraction. On theother hand, universal haircut requirementsare thetype of regulatoryinnovation that I suggestedearlier wasbest developed internationallyfollowingsome experiencewithinfinanciallysignificant countries. Onemay, for example,have significant concern about some of the unintended consequencesthat wouldensue. My instinct, then, is that the analysisof this idea should continuewithin theFSBand, one hopes, in other venuesboth in and out of theofficial sector. There should alsobe concerted effortsinternationallyto gather relevant data, some of whichis at present uncollected. But weare not goingto be in a positiontoestablishan international securitiestransactionfinancingregime in thenear term. However, oneproposal already on the international agendamight be reconsidered, soastoaddressmore directlythe short-term funding problem. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 77. P a g e | 77 FollowingcompletionoftheLCR earlierthisyear, theBaselCommitteeis turningitsattentionback tothe Net Stable Funding Ratio (NSFR), a proposalthat wasintended to complement the LCR by regulating liquiditylevelsbeyond the 30-day LCR horizon. Like theLCR, the NSFR proposal raisedmany questionseven among thosefavoring robust measuresto deal withthe liabilitysideof firm balancesheets. There is some appeal to moving forwardwiththis complementary measure fairlyquicklyby simplymakingsome incremental changesto theNSFR while keepingitscurrent structure. But I think wemaybebetteradvisedtotaketheopportunityofthisreview toexaminewhetherthere are approachesthat might addressmore directlythe vulnerabilitiesfor the financial system created by large non-deposit, short-term funding dependence at major financial institutions. I donot mean to prejudgethe outcomeof suchan examination, or the degreetowhichwemight build on measuresbeingconsidered in various jurisdictionsto addressthesevulnerabilities. But I do think it worththe effort. Conclusion Responsesto what I have describedasthe three challengestopre-crisis central bank policieswill continueto evolve. Sowill the reenergizedinternational agenda for cooperationin international financial regulation. My aim tonight hasnot been to layout a comprehensiveprogram for either,but tosuggest that thesechangingagendasare neither completely correlatednor completelyindependent. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 78. P a g e | 78 In suggestingsomeconcretenext steps,I havetriedtodefinesomeuseful and important pointsof intersectionbetweenthe two. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 79. P a g e | 79 Contagiousnessand Vulnerability in theAustrian Interbank Market ClausPuhr, Reinhardt Seliger, MichaelSigmund, OesterreichischeNationalbank, Financial Markets Analysis and SurveillanceDivision Thepurposeof this paper is toanalyze (hypothetical) contagiousbank defaults,i.e. defaultsnot causedby thefundamental weaknessof a given bank but triggeredby failures in thebanking system. As failing banksbecome unableto honor their commitmentson the interbank market, theymay causeother banksto default, which may in turn push even more banksover the edgein so-calleddefault cascades. In our paper wedistinguishbetweencontagiousness(theshare of total bankingassetsrepresented by thosebanksthat a specificbank brings downby contagion) and vulnerability (thenumber of banks bywhicha bank isbrought down by cascadingfailures). Our analysisconsistsof three steps:first, weanalyze the structure of the Austrian interbank market from end-2008toend-2011. Second, werun (hypothetical) default simulationsbased onEisenberg andNoe (2001)for the same set of banks. Finally, weestimatea panel data model toexplain the(hypothetical) defaultsgenerated by thesesimulationswith the underlying structure of thenetworkusingnetworkindicatorsthat reflect (i) thenetwork asa whole, (ii) a subnetworkor cluster, and Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 80. P a g e | 80 (iii) thenode level basedon banks‘interbank lendingrelationships. As a result wefind strong correlationsbetweena bank‘spositionin the Austrian interbank market and itslikelihoodof either causingcontagion or being affected by contagion. Although our analysis is based on a dataset constrained to theinterbank market of unconsolidatedAustrian banks, webelieveour findingscould beverified by analyzing other banking systems (albeit witha different model calibration). Given the importanceof identifying systemically important banksfor the formulation of macroprudential policy, webelievethat our analysishas thepotential toimprove our assessment with regard tosecond-round effectsand default cascadesin theinterbank market. 1Introduction 1.1Motivation The financial crisis has revealed the danger of systemic risk due to contagion effects given the interconnectedness of modern banking systems. Identifyingsystemicallyimportant bankshassincebecomeoneofthekey objectivesof systemic risk assessment and a necessaryprecondition for theformulation of macroprudential policy. Systemically important bankscan be identifiedin manydifferent ways. We wouldlike tocontribute tothis important discussionby applying techniquesfrom networkeconomics. In general, networkanalysisrequirestwoinput arguments. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 81. P a g e | 81 First, it takesanetwork, whichcould either begiven or derivedthrough a networkformation process. Second, eachnetwork analysisneedsan objective. In our paper weconsiderthe interbank lendingnetworkasgiven and leavethetheoryon network formation aside, sincetheAustrian interbank lendingrelationshipsare the very network wesupervise. We view theinterbank lendingmarket asa networkwhere each participatingbank is a node and each credit a link. The objective of our paper is analyzing one important contagion mechanism within this network, namely counterparty credit risk associated withinterbank lending. Ex ante it is unknown whetherdifficultiesat even a relatively small (but interconnected) institutionmight trigger problemsat another bank. In the context of macroprudential analysis such an institutioncould be consideredasa systemically important bank (alsoknown asa key player in network economics). Specifically, weanalyze twovariantsof (hypothetical) contagiousdefault for theAustrian networkof interbank lendingrelationships. First, westudy a bank‘scontagiousnessin termsof the share of total bankingassetsrepresentedby other banksthat it will causeto default given itsowndefault. Second westudy a bank‘svulnerabilityin termsof thenumber of banks bywhichit isbrought down if defaultscascadethrough the banking sector. In the remainderof the paper wetry toidentify keynetworkproperties that influenceour twovariantsof contagiousdefault. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 82. P a g e | 82 Our main motivation is finding out whethersimulatedcontagiousness andvulnerability isdriven by (i) banks‘idiosyncratic characteristics(i.e. a thin capital buffer) or (ii) networkeffects/positions, or (iii) by both. Tothisendweestimatepaneldatamodelsthat exploit networkindicators topredict potential default cascadesfollowingindividual bank failures while wecontrol for idiosyncraticvariables(i.e. the traditional measuresof riskbearingcapacitylike capitalizationratiosetc.). If supervisorsareabletoidentify networkindicatorsthat addsignificantly tothe analysisof thesemodels, macroprudential policywill be ableto (i)analyze the characteristics/ driversof individual indicatorsto get a better understandingof default dynamicsand (ii)potentiallytarget selectedvariablestoaddresscontagiousnessand vulnerabilityin the interbank market ―indirectly.‖ Our resultsshould thereforeprovide potential novel meansfor policymakers todesign and/ or complement macroprudential tools. If you are good in mathematics, you can read it: Financial Stability Report 24 at http:/ / www.oenb.at/ en/ welcome_to_the_oenb.jsp Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com
  • 83. P a g e | 83 The UK Prudential Regulation Authority (PRA) On 1April 2013thePrudential RegulationAuthority (PRA) will become responsiblefor the prudential regulationand supervision of banks,buildingsocieties, credit unions,insurersand major investment firms. In total the PRA will regulate around 1,700financial firms. ThePRA‘s roleis defined in termsof twostatutory objectivesto promote thesafetyand soundnessof thesefirmsand, specificallyfor insurers, to contributeto thesecuring of an appropriate degreeof protection for policyholders. In promoting safetyand soundness, thePRAwill focusprimarily on the harm that firms can causeto the stabilityof the UK financial system. Astablefinancialsystem isonein whichfirmscontinuetoprovidecritical financial services– a precondition for a healthyand successful economy. ThePRAwill make forward-lookingjudgementson the risksposed by firmsto itsstatutoryobjectives. Thoseinstitutionsand issueswhichpose the greatest risk tothestability of the financial system will be the focusof itswork. ThePRAwascreatedbytheFinancial ServicesAct (2012)and will bepart of the Bank of England. Basel iii ComplianceProfessionalsAssociation (BiiiCPA) www.basel-iii-association.com