Risk management presentation June 17 2013

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Risk management presentation June 17 2013

  1. 1. P a g e | 1International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.risk-compliance-association.comTop 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped theweeks agenda, and what is nextDear Member,Did you know that ―Economicsis a highlysophisticated field of thought that is superb atexplainingtopolicymakers preciselywhythechoicesthey made in the past werewrong. Aboutthefuture, not somuch.‖Whosaid that?ChairmanBen S.Bernanke, at the BaccalaureateCeremony at PrincetonUniversity.Thetitleof his speech:The TenSuggestionsMr. Bernanke, are you jealousof thisTop 10list?Whydid you develop exactly 10suggestions?His speech is very interesting. We can even findmore about meritocracy:―Ameritocracyis a system in which thepeoplewhoare theluckiest intheir health and genetic endowment;luckiest in terms of family support,encouragement, and, probably, income; luckiest in their educational andcareer opportunities;and luckiest in somanyother waysdifficult toenumerate--these are the folkswhoreap the largest rewards.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  2. 2. P a g e | 2Theonly wayfor even a putative meritocracyto hope to passethicalmuster,tobeconsideredfair, isif thosewhoaretheluckiest in all of thoserespectsalsohave thegreatest responsibilitytowork hard, to contributetothebetterment of theworld, and to share their luck withothers.‖Well, I will spend the weekendthinkingabout it, especiallythemethodology, howtheycan ―sharetheir luck withothers‖.As a consultant, I must developa stepbystep luck-sharingmethodology.Well, I think it is better tomake it ―principles-based‖ instead of―rules-based‖.I already have some ideas.Theprocesswill have 3Pillars.Pillar 1:Luck Quantification.Pillar 2: Internal Luck AdequacyAssessment Process, and luckstress-testing.Pillar 3: Luck Transparency.It looksabit like Basel iii … I know...Accordingtothe―if all youhaveisahammer, everything lookslike anail‖principle, wecan use a Basel iii approach almost everywhere.WewilluseaMonteCarlosimulationtoquantify the―luckiest in somanyother waysdifficult toenumerate‖ part, asMr. Bernanke said.MonteCarlois a nicequantitativerisk analysistechnique.We will simplygenerate 20,000,000luck scenarios, wewill find the rangeof possibleoutcomesand their probabilities, then wewill find aprobabilityweightedluckaverage, and wewill calculate theLaR (Luck atRisk).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  3. 3. P a g e | 3Yes,you canusethe Basel III model. Youwill simplyreplace the―risks‖with ―opportunities‖.Inbanking, wehavepositiveand negative(forourprofitability) inputs.Inour luck-sharingmethodology wehave only profitableinputs.Instead of inflationweput inheritance– the passingon property, titlesetc. upon the death of relativeswehave never met. You get thepicture.Insteadofmarket risk (andtheCredit ValuationAdjustment amendment)weput opportunitytoinvest in Google-like firms whentheyare stillyoung.Thebest part:TheProbability ofDefaultfor anycounterpartyiszero– weare lucky, remember?And, I have onlystarted thinkingabout it. Read moreat Number 1below.Another very interestingstory, about banksand insurancefirms:―Thechangesin banking regulation make more important the roleofinsurersasprovidersof long-term bank funding‖This is the opinion or Gabriel Bernardino, Chairman of EIOPA (EIOPAis the European Insurance and Occupational Pensions Authority, one ofthreeEuropean SupervisoryAuthorities).He alsodiscussesa reallyimportant problem for insurers:The lowinterest rates, that …―On the liabilitiesside, theylead toan increasein firms‘obligationsintoday‘s termsand, consequently, toa deteriorationof their financialposition.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  4. 4. P a g e | 4On the assetsside, low interestrateshave an adverse impact oninvestment resultsand increasethe reinvestment risk of assets.‖Themorel of thestory: Many insurershave a real problem withthelowinterest rates.Read more at Number 3 below.Welcometo the Top 10list.BestRegards,GeorgeLekatisPresident of the IARCPGeneral Manager, ComplianceLLC1200G Street NW Suite800,Washington DC 20005,USATel: (202) 449-9750Email: lekatis@risk-compliance-association.comWeb: www.risk-compliance-association.comHQ:1220N. Market Street Suite804, Wilmington DE19801,USATel: (302) 342-8828International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  5. 5. P a g e | 5ChairmanBen S.BernankeAt the BaccalaureateCeremony at PrincetonUniversity, Princeton, New JerseyThe Ten Suggestions―I wrote recentlytoinquire about the statusof my leavefrom theuniversity, and the letter I got back began, "Regrettably, Princetonreceives many morequalified applicantsfor facultypositionsthan wecanaccommodate."‖Thematic Review on ResolutionRegimesPeer Review ReportFinancial Stability Board (FSB) member jurisdictionshave committed,under the FSBCharter and in the FSBFramework for StrengtheningAdherence toInternational Standards, toundergoperiodic peer reviews.Tofulfil this responsibility, theFSB hasestablisheda regular programmeof country and thematicpeer reviewsof itsmember jurisdictions.Interview with Gabriel Bernardino, Chairman ofEIOPAConductedby Dr. Matthias Schoder, WirtschaftsForum(Germany)International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  6. 6. P a g e | 6Global liquidity: where do westand?Speechby JaimeCaruana, General Managerof theBank for International Settlements,preparedfor theBank of Korea International Conference2013on"Assessing global liquidityin a globalframework", Seoul.Implicationsof the Single SupervisoryMechanism on the European System ofFinancial Supervision: the EBAperspectiveIntervention of Andrea Enria, Chairman of the EBAEuropean Commission - Public hearing on financialsupervision in the EU - BrusselsTheconstruction of theSingleSupervisory Mechanism (SSM) and thewholeproject of theBanking Union areusually justifiedon the basisoftheshortcomingsof the institutional framework for theSingleCurrency,whichhavebeen soclearlyexposed during thesovereign debt crisis.Internationalization of the RMB and therole of Macao asa financial platformAddress by MrAnselmo Teng, Chairman of theMonetaryAuthority of Macao, at the―2013Internationalizationof RMB Global Forum‖,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  7. 7. P a g e | 7jointlyorganised by theShanghai Instituteof the International FinancialCentre of the Shanghai Universityof Financeand Economicsand theCentre for International Financeand Regulation (Australia), Shanghai.The Digitisation of our EconomiesNeelie Kroes, Vice-President of the EuropeanCommission responsiblefor the DigitalAgenda, 11thEuropean BusinessSummit, Brussels―Our world isgoingonline‖.Digital "to-do" list: new digital priorities for2013-2014TheEuropean Commission hasadopted seven new prioritiesfor thedigital economy and society.Thedigital economyis growingat seventimesthe rateof the rest of theeconomy, but this potential is currentlyheld back by a patchypan-Europeanpolicyframework.Todays prioritiesfollowa comprehensivepolicy review and placenewemphasisonthemosttransformativeelementsof theoriginal2010DigitalAgenda for Europe.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  8. 8. P a g e | 8Understanding Supervisory CollegesVice Chair Janet L. YellenAt the InternationalMonetaryConference, Shanghai,ChinaRegulatory Landscapes: AU.S. Perspective―Ill summarizetheconsiderable progresssince2008tomake the global financial system more resilient,andthen offer my viewson what more should bedone‖.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  9. 9. P a g e | 9ChairmanBen S.BernankeAt the BaccalaureateCeremonyat PrincetonUniversity, Princeton, NewJerseyThe Ten SuggestionsIts nicetobe back atPrinceton.I find it difficult to believethat its been almost 11years sinceI departedthesehallsfor Washington.I wrote recentlytoinquireabout the statusof my leavefrom theuniversity, and the letter I got back began, "Regrettably, Princetonreceives many morequalified applicantsfor facultypositionsthan wecanaccommodate."Ill extend my best wishestothe seniorslater, but first I want tocongratulate theparentsand familieshere.As a parent myself, I know that puttingyour kid through college thesedays isnowalk in thepark.Someyears agoI had a colleaguewhosent three kidsthrough Princetoneven though neither he nor his wife attendedthis university.He and his spousewereveryproud of that accomplishment, astheyshould havebeen.But my colleague also used to say that, from a financial perspective, theexperience was like buying a new Cadillac every year and then driving itoff a cliff.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  10. 10. P a g e | 10I should saythat he alwaysadded that he woulddo it all over again in aminute.So, well done, moms, dads, and families.This is indeed an impressiveand appropriate settingfor acommencement.I am sure that, from thislectern, any number of distinguished spiritualleadershave ruminatedon thelessonsof the Ten Commandments.I dont have that kind of confidence,and, anyway, coveting yourneighborsox or donkey is not theproblem it used to be, soI thought Iwouldusemy few minutestodaytomakeTenSuggestions,ormaybe justTen Observations,about the worldand your livesafter Princeton.Pleasenote, thesepointshavenothingwhatsoever todowith interestrates.My qualificationfor making such suggestions, or observations,besideshavingkindlybeen invited to speak today by President Tilghman, is thesame asthe reasonthat your obnoxiousbrother or sister got togoto bedlater--I am older than you.All of what followshasbeen road-testedin real-life situations,but pastperformanceisnoguaranteeof future results.1.Thepoet Robert Burnsonce said somethingabout thebest-laidplansof miceand men gangingaft agley, whatever"agley" means.A more contemporary philosopher, Forrest Gump, said something similarabout life and boxesof chocolatesand not knowing what you are going toget.Theywereboth right.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  11. 11. P a g e | 11Lifeis amazinglyunpredictable;any 22-year-old whothinksheor sheknowswheretheywill be in 10 years, much lessin 30, is simplylackingimagination.Look what happened to me:Adozen years agoI wasmindingmy ownbusinessteachingEconomics101inAlexander Hall andtrying tothink ofgood excusesfor avoidingfacultymeetings.Then I got a phonecall . . . In caseyou are skeptical of Forrest Gumpsinsight, heres a concretesuggestion for each of thegraduating seniors.Take a few minutesthe first chanceyou get and talk to an alumparticipatingin his or her 25th, or 30th, or 40th reunion--you know,somebodywhowasnear the front of theP-rade.Ask them, back when theyweregraduating 25, 30, or 40years ago, wheretheyexpected to be today.If you can get them toopen up, theywill tell you that todaytheyare happyand satisfied in variousmeasures, or not, and their personal stories will befilledwithhighsand lowsand in-betweens.But, I am willingtobet, thoselife storieswill in almost all casesbe quitedifferent, in largeand small ways, from what theyexpectedwhen theystartedout.This is a good thing, not a bad thing; whowantstoknow the end of astorythats only in itsearlychapters?Dont be afraid to let the drama playout.2. Doesthe fact that our livesare soinfluencedby chanceand seeminglysmall decisionsand actionsmean that there is no point toplanning, tostriving?Not at all.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  12. 12. P a g e | 12Whatever life may havein storefor you, each of you hasa grand, lifelongproject, and that is the development of yourself asa human being.Your familyand friendsandyour timeat Princetonhavegivenyou agoodstart.What will you dowithit?Will you keep learningand thinkinghard and criticallyabout the mostimportant questions?Will you become an emotionallystronger person, more generous, moreloving, more ethical?Will you involve yourself actively and constructively in the world?Many things will happen in your lives, pleasant and not sopleasant, but, paraphrasing a Woodrow Wilson School adage from thetimeI washere, "Wherever you go, there you are."If you are not happywith yourself, even the loftiestachievementswontbring you much satisfaction.3. The concept of successleadsme to consider so-calledmeritocraciesandtheir implications.We havebeen taught that meritocraticinstitutionsand societies are fair.Puttingasidethe realitythat nosystem, includingour own, is reallyentirelymeritocratic, meritocraciesmay be fairer and more efficient thansome alternatives.But fair in an absolutesense?Think about it.Ameritocracyisasystem in whichthepeoplewhoaretheluckiestintheirhealth and geneticendowment;luckiestin termsof family support,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  13. 13. P a g e | 13encouragement, and, probably, income; luckiest in their educational andcareer opportunities;and luckiest in somanyother waysdifficult toenumerate--theseare thefolkswhoreap the largest rewards.Theonly wayfor even a putative meritocracy tohope to passethicalmuster,tobeconsideredfair, isif thosewhoaretheluckiest in all of thoserespectsalsohave thegreatest responsibilitytowork hard, to contributetothebetterment of theworld, and to share their luck withothers.As the Gospel of Luke says(and I am sure my rabbi will forgive me forquotingthe New Testament in a good cause):"From everyone to whommuch hasbeen given, much will be required;and from the one to whommuch hasbeen entrusted, even more will be demanded" (Luke12:48,New Revised Standard Version Bible).Kind of grading on thecurve, you might say.4. Whois worthyof admiration?Theadmonition from Luke--which is shared by most ethical andphilosophicaltraditions,bythe way--helpswiththis question aswell.Thosemostworthyofadmirationarethosewhohavemadethebest useoftheir advantagesor, alternatively, coped most courageouslywiththeiradversities.I think most of uswouldagreethat people whohave, say, littleformalschoolingbut laborhonestly and diligentlyto help feed, clothe, andeducatetheir familiesare deserving of greater respect--andhelp, ifnecessary--thanmany peoplewhoare superficiallymore successful.Theyre more fun to have a beer with, too. Thatsall that I know aboutsociology.5. Since I havecovered what I know about sociology, I might aswell saysomethingabout political scienceaswell.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  14. 14. P a g e | 14In regardtopolitics,I havealwayslikedLilyTomlinsline,inparaphrase:"I try tobe cynical, but I just cant keepup."We all feel that waysometime.Actually, havingbeen in Washingtonnow for almost 11years, asImentioned, I feel that wayquite a bit.Ultimately, though, cynicism is a poor substitutefor critical thought andconstructiveaction.Sure, interestsand money and ideologyall matter, asyou learned inpoliticalscience.But my experienceisthat most of our politiciansand policymakers aretryingtodotheright thing, accordingtotheirownviewsandconsciences,most of the time.If you think that thebad or indifferent resultsthat toooften come out ofWashington areduetobasemotivesand bad intentions,you are givingpoliticiansand policymakers waytoomuch credit for beingeffective.Honesterrorinthefaceofcomplex andpossiblyintractableproblemsisafar more important source of bad resultsthan are bad motives.Forthesereasons,thegreatest forcesin Washingtonareideas,andpeoplepreparedto act on thoseideas.Publicservice isnt easy.But, in theend, if you are inclined in that direction, it is a worthyandchallengingpursuit.6. Having taken a stab at sociology and politicalscience, let me wrapupeconomicswhile Im at it.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  15. 15. P a g e | 15Economicsis a highlysophisticated field of thought that is superb atexplainingto policymakers preciselywhythechoicesthey madein thepast werewrong.About the future, not somuch.However,careful economicanalysisdoeshave one important benefit,whichis that it can help kill ideasthat are completely logicallyinconsistent or wildlyat variancewiththedata.This insight coversat least90 percent of proposed economic policies.7.Im not going to tell you that money doesnt matter, becauseyouwouldnt believeme anyway.In fact, for toomany people around theworld, money isliterallyalife-or-deathproposition.But if you are part of the lucky minoritywith the ability tochoose,remember that moneyis a means, not an end.Acareer decision basedonlyon money and not on love of theworkor adesireto make a differenceis a recipe for unhappiness.8.Nobody likes tofail but failure is an essential part of life and oflearning.If your uniform isnt dirty, you havent been in the game.9.I spoke earlier about definitionsof personal successin anunpredictableworld.I hopethat asyou developyour owndefinitionof success,you willbeabletodo so, if you wish, witha closecompanion on your journey.In making that choice, remember that physical beautyis evolutions wayof assuring usthat the other person doesnt have toomany intestinalparasites.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  16. 16. P a g e | 16Dont get me wrong, I am all for beauty, romance, and sexualattraction--wherewouldHollywood and MadisonAvenue be withoutthem?But while important, thosearenot theonlythingstolookfor in a partner.Thetwoof you will have a long trip together, I hope, and you will needeach others support and sympathy more timesthan you can count.Speakingassomebodywhohasbeenhappily marriedfor 35years, I cantimagineany choicemore consequential for a lifelongjourneythan thechoiceof a traveling companion.10.Call your mom and dad once in a while.Atime will come whenyou will want your own grown-up, busy, hyper-successful children tocall you.Also, remember whopaid your tuition to Princeton.Thosearemy suggestions.Theyre probablyworth exactlywhat you paid for them.But theycome from someonewhosharesyour affection for this greatinstitution and whowishesyou thebest for thefuture.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  17. 17. P a g e | 17Thematic Review on ResolutionRegimesPeer Review ReportForewordFinancial Stability Board (FSB) member jurisdictionshave committed,under the FSBCharter and in the FSBFramework for StrengtheningAdherence toInternational Standards, toundergoperiodic peer reviews.Tofulfil this responsibility, theFSB hasestablisheda regular programmeof country and thematicpeer reviewsof itsmember jurisdictions.Thematic reviewsfocuson the implementation and effectivenessacrosstheFSBmembership of international financial standardsdeveloped bystandard-settingbodiesand policiesagreedwithintheFSB inaparticulararea important for global financial stability.Thematic reviewsmay alsoanalyseother areasimportant for globalfinancial stabilitywhereinternational standardsor policiesdo not yetexist.Theobjectivesof thereviewsare toencourageconsistent cross-countryand cross-sectorimplementation;to evaluate (wherepossible) the extenttowhichstandards and policieshavehad their intended results;and toidentify gapsand weaknessesin reviewedareasand tomakerecommendationsfor potential follow-up(includingvia the developmentof new standards) by FSB members.This report describesthe findingsof thefirst peer review on resolutionregimes,includingthekey elementsof the discussion in the FSBResolution SteeringGroup and theFSB StandingCommitteeonStandardsImplementation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  18. 18. P a g e | 18Thedraft report for discussion waspreparedby a team chairedby MartinJ.Gruenberg (US Federal Deposit InsuranceCorporation), comprisingAlessandra deAldisio (Bank of Italy), Bader T. Alsudairi (Saudi ArabianMonetaryAgency), Felton C. Booker (US Federal Reserve Board),ChristineHauner (BaFin Germany), KatharinaHartmann (GermanFederal Ministryof Finance), Junichi Kashiyama (Japan FinancialServicesAgency), Barry King (UK Financial ServicesAuthority), VincentLee (Hong Kong MonetaryAuthority), Mike Mercer (Canada DepositInsuranceCorporation), Geof Mortlock(Australian Prudential RegulatoryAuthority), Liu Qin (People‘sBank of China), RetoSchiltknecht (FINMASwitzerland), Virginia Rutledge (InternationalMonetaryFund), and David Scott (World Bank). David Hoelscher,CostasStephanou and Ruth Walters (FSB Secretariat) providedsupporttothe team and contributedto thepreparation of the peer review report.Definitions of key termsused in the report―Bail-in within resolution‖ – restructuringmechanismsto recapitaliseafirm in resolution or effectivelycapitalisea bridge institution, underspecifiedconditions,through thewrite-down, conversion or exchangeofdebt instrumentsand othersenior orsubordinatedunsecuredliabilitiesofthefirm in resolution into, or for, equityor other instrumentsin thatfirm, theparent company of that firm or a newlyformed bridgeinstitution, asappropriateto legal frameworksand market capacity.―Bail-out‖ – anytransferof fundsfrom public sourcestoa failed firm or acommitment by a public authoritytoprovidefundswith a view tosustainingafailedfirm (for example,bywayof guarantees)that resultsinbenefit tothe shareholdersor uninsured creditorsof that firm, or theassumptionof risksbythepublic authoritythat wouldotherwisebebornebythe firm and itsshareholders,wherethe value of thefundstransferredis not recoupedfrom the firm, itsshareholdersand unsecured creditorsor, if necessary, the financial system more widely, or wherethe publicauthorityis not compensatedfor the risksassumed.―Bank‖ – anyfirm that takesdepositsorrepayable fundsfrom thepublic,and that isdefinedbythe relevant national legislationasa bank.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  19. 19. P a g e | 19―Bridgeinstitution‖ – anentity, authorisedorlicensedinaccordancewithanyapplicablerequirementsunder national law,that is establishedtotemporarily take over and maintain certain assets,liabilitiesandoperationsof a failed firm aspart of theresolution process.―Earlytermination rights‖ – contractual acceleration, termination or otherclose-out rightsin financial contractsheld by counterparties of a firm thatmaybetriggeredontheoccurrenceof anevent orcircumstancesset out inthefinancial contract, such asan insolvencyevent or the entryintoresolutionof thefirm.―Entry intoresolution‖ – theformal determination by the relevantauthorityor authoritiesthat a firm meetsthe conditionsfor entry intoresolution and that it will be subject toresolution powers.―Financial contract‖ – anysecuritiescontract, commoditiescontract,forwardcontract, repurchaseagreement, optionscontract, swapagreement and any similar agreement that, in every case,is explicitlyidentifiedunder thelegal framework of the jurisdictionassubjecttodefinedtreatment inresolutionand insolvency(forexample,inrelationtoearlytermination rightsor topreserve theeffect of nettingagreements)that is distinct from other (non-financial) contracts.―Financial conglomerate‖– anygroup of companiesunder commoncontrol or dominant influence,includingany financial holdingcompany,that conductsmaterial financial activitiesin at least twoof theregulatedbanking, securitiesor insurancesectors.―Financial firm‖ or ―financial institution‖ – anyentitytheprincipalbusinessof whichis theprovision of financial servicesor theconduct offinancial activities,including, but not limitedto, deposit-taking, creditintermediation, insurance, investment or securitiesbusinessor operatingfinancial market infrastructure.―Financial group‖ – a group composed of entitieswhoseprimaryactivitiesare financial in nature.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  20. 20. P a g e | 20―Financial market infrastructure(FMI)‖ – a multilateral system amongparticipatingfinancial institutions,includingtheoperator of the system,used for the purposesof, clearing, settlingor recording payments,securities,derivativesor other financial transactions.It includespayment systems, central securitiesdepositories, securitiessettlement systems, Central Counterparties(CCPs), and traderepositories.―Firm in resolution‖ – a firm in relation towhichresolution powersarebeingexercised.Where resolution powershavebeen exercised in relation to a firm, thatfirm isconsideredtobe―in resolution‖ foraslongasit remainssubject tomeasurestaken or supervisedby a resolution authorityor toinsolvencyproceedingsinitiatedby the resolution authority.―Group‖ – a parent company (whichmay be a holding company) and itsdirect and indirect subsidiaries, both domestic and foreign.―Holdingcompany‖ or―financialholdingcompany‖ (ofafinancialgroupor conglomerate) – a companythat is formed tocontrol financial firms.This concept coversintermediateor ultimatecontrol.―Home jurisdiction‖ – the jurisdiction where the operationsof a financialfirm or, in the case of a G-SIFI, its global operations, are supervised on aconsolidatedbasis.―Investment firm‖ or ―Securitiesfirm‖ – anynon-deposit-takinginstitution that conductsinvestment or securitiesbusinesson a regularbasis,including:safeguarding and administeringinvestmentsorsecurities;dealingin investmentsorsecuritiesasprincipal;anddealingininvestmentsor securitiesasagent.For thesake of brevity, theterm ―investment firm‖ is used in thismethodology, and should be construedwidelytocover anyfirm that isclassified asan investment firm or a securitiesfirm, includingbroker-dealers,under the applicableregulatoryregime.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  21. 21. P a g e | 21―Intervention‖ or ―official intervention‖ – anyactions,includingformalcorrective action, taken by supervisoryor resolution authoritiesinresponseto weaknessesin a financial firm prior toentry intoresolution.―Legal framework‖ – the comprehensivelegal system for a jurisdictionestablished by anycombination of the following:a constitution;primarylegislationenacted by a legislativebody that hasauthorityin respect ofthat jurisdiction;subsidiarylegislationadoptedunder theprimary legislationof that jurisdiction;or legal precedent and legalproceduresof that jurisdiction.―Protectionscheme‖ – anyscheme or fund that protectsdepositors,insurancepolicy holders or investors, asthe casemay be, from specifiedlossesthat theymight otherwiseincur asa result of thefailure of afinancial firm.―Public ownership‖ – ownershipor control of an entityby a publicauthorityor other emanation of the State.―Resolution‖ – anyaction takenby a public authority in respect of a firmthat meetsthe conditionsfor entry intoresolution, includingin particulartheexerciseof a resolution powerspecified in KA3, with or withoutprivate sectorinvolvement, withthe aim of achievingone or more of thestatutoryobjectivesof resolution.Resolutionmay includethe application of proceduresunder insolvencylaw to partsof a firm in resolution, in conjunction withtheexerciseofresolutionpowers.―Resolution authority‖ – an authority that, either alone or together withother authorities, is responsible for the resolution of firms established initsjurisdiction(includingresolution planning functions).Referencesin thisdocument toa―resolutionauthority‖ shouldbereadas―resolutionauthorities‖ in appropriatecases.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  22. 22. P a g e | 22―Resolutionpowers‖ – powersavailable topublic authoritiesunder thelegal frameworkand resolutionregime for the purposesofresolution, includingin particular those set out in KA3.―Resolution regime‖ – the elements of the legal framework and thepolicies governing the application of resolution powers by nationalauthorities.This may consist of sector-specificstatutesand rules,or mayconsist of asingleregimecoveringall firms.TheKAs areneutral asto the form of theregime, providedthat all firmsthat could be systemically significant or criticalin the event of failure aresubjecttoan effectiveresolution regime.―Systemically important financial institution‖ – a financial institutionorgroup that, becauseof its size, complexityand systemicinterconnectedness,would, in the view of therelevant authorities, causesignificant disruption to thedomestic or broader financial system andeconomicactivityif it weretofail in a disorderlymanner.―Systemically significant or critical‖ – an activity or operation issystemicallysignificant or critical if itsinterruption, suspension ordiscontinuationcould lead toa disruption of servicesvital for thefunctioningof thefinancial system or real economyExecutive SummaryBackgroundTheglobal financialcrisisdemonstratedthe urgent need toimproveresolution regimessoasto enableauthoritiestoresolvefailingfinancialinstitutions(FIs) quickly without destabilisingthe financial system orexposingtaxpayers tolossfrom solvencysupport.Followingthecrisis, the FSBpublishedthe KeyAttributesof EffectiveResolutionRegimesfor Financial Institutionsaspart of the packageofpolicy measurestoaddressthemoral hazard risksposed bysystemicallyimportant financial institutions(SIFIs).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  23. 23. P a g e | 23TheKeyAttributes(KAs) set out the coreelementsof effectiveresolutionregimesthat applytoany financial institutionthat could be systemicallysignificant or criticalif it fails.Resolution regimeshave been identifiedasa priorityareabythe FSB.As a result, the implementation of the KAs by FSB member jurisdictionswill undergointensivemonitoring and detailed reporting.Toensure timelyand effectiveimplementation, the FSB will carry out aniterativeseriesof peer reviewson the implementation of theKAs.Theobjectiveof this first peer review is toevaluate FSBjurisdictions‘existingresolution regimes and any plannedchangesto thoseregimesusingthe KAs asa benchmark.Thereview comparesnational resolution regimes both acrossindividualKAs (focusingprimarilyon KAs that cover core provisionsof thoseregimes) and acrossdifferent financial sectors(banking, insurance,securities,and financial market infrastructure(FMIs)).It providesrecommendationsfor future work by the FSBand itsmembersin support of an effective and credible resolution regime for SIFIs, whichis a critical component of the policyframework for ending too-big-to-fail.Main findingsWhile major legislativereformshave alreadybeen undertaken by someFSB jurisdictions(particularlythosedirectlyaffectedby the financialcrisis) to develop new, or reviseexisting, resolutionregimes,it is clearthat implementationof theKAsis still at an earlystage.Thisisnot surprisingastheKAs areanew internationalstandard and thereforms neededtoimplement them may involve significant legislativechanges.Several FSB jurisdictionsare in theprocessof adoptingthose reformstofurther strengthen their resolution regimes.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  24. 24. P a g e | 24For example, theproposedEuropean Union (EU) Directiveon recoveryand resolution for banks and investment firms, onceapproved, willrepresent a major stepforwardin aligningthe resolution regimesof EUmember stateswiththe KAs.Resolution regimesacrossFSBmember jurisdictionsexhibit a broadrange of practicesin terms of scope, mandatesand powersof authorities.This is tobe expected.TheKAs do not prescribethespecific form of theresolutionregime orparticular type of resolution authorityaslong asthat regime isconsistentwith the KAs.However, jurisdictionssometimeshavedifferent interpretationsof whatconstitutesa ‗resolution regime‘ and itsrelationship toordinaryinsolvencyregimesand powersfor ordinarysupervisorypurposes.This divergencein interpretation can make it difficult to draw definitiveconclusionsabout the alignment of national powersacrossdifferentsectorswiththe KAs.Additional clarificationand guidance on the applicationof theKAs isthereforenecessarytoassist jurisdictionsin implementation, facilitatemonitoring, and ensure consistencyin assessmentsof compliancewiththeKAs.Anumber of featuresof resolution regimesin FSBjurisdictionsarebroadly consistent withthe KAs.In particular, all jurisdictions are able to use some of the resolutionpowersspecified in KA 3 in relation to banks, although they are notexercisedin all casesby administrativeresolution authorities.Nearlyall jurisdictionshaveavailableoneorbothoftheresolutionpowersspecifiedin KA3 for insurers(portfolio transferand run-off), although inseveral casesthosepowersare exercisedby a court-appointedadministratoror liquidatorin the context of a windup.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  25. 25. P a g e | 25Most jurisdictionsaccompanyresolution powerswithsome of thesafeguardsspecifiedin KA5, such asrespect for the hierarchyof claimsand a right for creditorsto judicial review of resolution actions.Finally, many jurisdictionsreport that theycan achieveat leastsome oftheobjectivesof theKAs through existingsupervisorypowers– forexample, powerstodevelop recovery and resolutionplans(RRPs) or torequireresolvabilityassessmentsfor certain FIs.Nevertheless, there aresignificant divergencesfrom, or inconsistencieswith, the KAs that need tobe addressed.Moreover,additional clarification and guidanceon the application of theKAs is needed in a number of areastofacilitateprogress.Themain areaswherefurther enhancement of resolution regimesbynational authorities, or additional guidancebytheFSB and relevantstandard-settingbodies (SSBs), may be necessaryare asfollows:Comprehensive resolution powersfor banks – KAs 1and 3 (seerecommendation 1a):Although resolution regimesare generallymoredeveloped for banksthan for other financial institutions,few jurisdictionshaveequippedadministrativeauthorities withthe full set of powerstoresolve banksset out in KA3.For example, very few authoritieshave the statutorypower both towritedownand to convert liabilitiesof a failinginstitution(bail-in withinresolution).Moreover,in some casesresolutionactionsmay require court approval orthecooperationof thefailing firm or itsshareholders,while inother casesresolution actions,such asthe transfersof assetsand liabilities,arecarried out by an administratorthat may neither be mandated to achievetheobjectivesin theKAs nor subject todirectionby theresolutionauthority.Resolutionregimesfor non-bank FIs – KA1(seerecommendations1band 2b): Resolution regimesaremost advanced for banksandInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  26. 26. P a g e | 26progressivelylesssofor insurers,securitiesor investment firmsandFMIs,whereboth mandatesandpowersfall wellshort of thestandardsintheKAs.Thisin part reflectsthelessadvancedstateofguidanceontheapplicationof the KAsto thosesectors.For example, in many FSB jurisdictionsthere is nodesignatedadministrativeresolutionauthorityfor securitiesor investment firmsandFMIs.Powersfor non-bank FIs are often supervisoryin nature and donotachievethe outcomesspecified in the KAsor are limitedtofirmliquidationor windup at theinstigationof the supervisoror, in somecases,through some form of speciallyadapted insolvencyregime.Powerstoresolvefinancial groups– KA1.1(seerecommendations1c, 1d,2c and 2d): Most FSB jurisdictionslack powersto take control oftheparent or affiliatesof a failed FI, problem for G-SIFIs that tend tohaveintegratedand highlycomplex structures.Further clarityas to the nature of powersneeded for FHCs, non-regulatedoperational entities and branchesof foreign FIs would also be desirable toensure a consistent approach.In addition, few jurisdictionshavein placeacoordinationframeworkthatdesignatesa lead authority wheretwoor more domesticresolutionauthoritiesare responsiblefor resolvingdifferent entitiesof a financialgroup within thesame jurisdiction.Cross-border effectivenessof resolution measures– KA7 (seerecommendations1eand 2e): The financial crisisdemonstrated theneedtostrengthen arrangementsfor cross-border cooperation in dealingwithfailing FIs.However,national legal frameworksfor cross-border cooperation inresolution are, overall, lesswell-developedacrossall sectorsthan otherareasof the KAs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  27. 27. P a g e | 27Onlya few jurisdictionscurrentlyempowerand encouragetheirresolution authoritiesthrough statutorymandatestocooperate andcoordinatewhereverpossiblewith foreign resolution authorities.Moreover,the abilityof existingmechanismsin many jurisdictionstogiveeffect to foreign resolutionactionsremainsunclear.Very few jurisdictionshave provisionsfor expedited(administrativeorcourt-based) proceduresforrecognitionandenforcement ofactionstakenbyforeign authorities.This is a major weaknesssinceit may undermine the legal certaintyofresolutionactionsin relationtoassetsand liabilitiesin other jurisdictionsandtherebyjeopardisethe effectiveimplementation of resolutionstrategiesfor cross-border groups.Information sharingfor thepurposesof resolution – KAs7.6, 7.7and 12(seerecommendation1f):Few FSB jurisdictionshaveclearanddedicatedstatutoryprovisionsfor domesticauthorities toshare confidentialinformation with foreign resolution authorities.While most jurisdictionsrely on existingpowersto disclosenon-publicinformation for supervisorypurposes,thesepowersmay not besufficientlybroad toallowsuch informationto be shared withalldomesticand foreign authoritiesthat are not supervisorsbut have aresponsibilityfor planningor carrying out resolution.Unlesshome and host authoritieshavethe capacitytoshare suchinformation, it is unrealisticto expect them tomeaningfullydiscusscross-border resolution strategiesand plansor tocooperateeffectivelyina crisis.Treatment of financial contractsin resolution – KA4 (seerecommendation 1g): Resolution authorities in most jurisdictionseitherlack powersto imposea temporary stayon the exerciseof contractualacceleration or earlytermination rightsinfinancialcontractsthat arisebyreason onlyof entry intoresolution or in connection withthe exerciseofInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  28. 28. P a g e | 28resolutionpowersor, wherethepowerexists,it is not subject tosuitablesafeguards.Funding– KA6 (seerecommendation2f):Funding arrangementsdiffergreatly acrosssectorsand jurisdictions.Most jurisdictionsrelyon privately funded protectionfundstofinanceresolution actions,but it is not clear whether such arrangementsareadequateor appropriatein scaleor scope.Publicfinancial support thereforeremainsan important component ofresolution fundingarrangementsfor SIFIs. Mechanismsfor the recoveryof public fundsare not well developed, while conditionson their use arelargelyabsent.Recovery and resolution planningand actionsto improve resolvability–KAs 10and 11(seerecommendations1h,1i and 2g):In most jurisdictions,thereis noexplicit requirement in statuteor rules for RRPs for domesticSIFIs.Moreover,most authorities lack thepowerto require firms tomakechangestotheir organisational and financial structuressolelyin order toimprovetheir resolvabilityand in advance of resolution.Operational capacityto resolvecomplex SIFIs– KA2 (seerecommendation 2h): Howevergood a resolutionregime might look instatute, it will not beeffectiveunlessthe national authoritiesresponsiblefor resolutionhave the operational capacity– including staff with theappropriatelevel and rangeof expertise, and adequate resources – toresolve complex financial groupsand SIFIs.This critical dimension cannot be verifiedin a desktop exercisesuchasthepeer review and will need to be assessedin on-siteIMF-WorldBankcountry assessmentsusing suitablecriteria in theassessmentmethodologyfor theKAs.Rigorousmonitoring of implementationprogressin aligningresolutionregimesin FSB jurisdictionswiththe KAs(seerecommendation3):International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  29. 29. P a g e | 29Several FSB jurisdictionsare implementingor consideringreformstotheir resolution regimes.Given the early stage of those reforms, a rigorous monitoring frameworkneeds to be developed to ensure comprehensive reporting of progress byjurisdictionsin aligningtheir resolutionregimes with the KAs.While future ―deep dive‖ peer reviewswill be useful in that regard, theyshould be complementedby regular reports using a standardisedtemplate to enhancethe reportingof implementation progressbyjurisdiction, sector and KA.RecommendationsBasedon theabovefindingsof thepeer review, there are three setsofrecommendationsfor implementation by theFSBitselfor relevantmember jurisdictions(seebelow).Work on some of therecommendationsaddressed tothe FSB is alreadyunderway.Most of therecommendationsthat involve actionsbynational authoritiescan – and should – beimplementednowwithout waitingfor additionalFSB guidance.Jurisdictionsmay consider establishing a phased reform program toaddressthe issuesidentified below.In some cases,earlyworkon resolution planningand resolvabilityassessments,includingthe introductionof resolutionplanningrequirementsto all firms that could havean impact on financial stabilityin theevent of failure, may reveal specificweaknessesor gapsin thepowersneededfor effectiveresolutionand therebyassist jurisdictionsinthedevelopment of such a program.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  30. 30. P a g e | 30Recommendation 1:Full implementation of the KeyAttributes(KAs)FSB member jurisdictionsshould undertake the followingactionstointroduce,or revisetheir existing, resolution regimesfor financialinstitutionsin order tofullyimplement the KAs:a.Reviewing, and revising asneeded, resolution regimesfor bankstoensure that all the powersset out in KA3, includingpowerstotransferassetsand liabilitiesand powersto write-downand convert debt withinresolution, areavailableto administrativeresolutionauthorities;b.Reviewingthe adequacyand effectivenessof resolution regimesfornon-bank FIs, and adopting any necessary reforms toensure thatadministrativeresolutionauthoritieswith adequate powersaredesignatedfor thoseinstitutions;c.Extendingthe scope of resolution regimestofinancial holdingcompanies, non-regulated operational entitiesthat are significant to thecritical functionscarried out within the group, and branchesof foreignfinancial firms;d.Wheremultipleresolutionauthoritiesexist, strengtheningcoordinationframeworksand designatinga lead authority for resolving domesticentitiesof thesame group;e.Enhancingthe mandatesand capacityof resolution authoritiestocooperateand coordinatemeasuresacrossborders;f.Reviewingthedomestic legal frameworkfor information sharing, andrevisingit asneededto ensure that domestic authoritiescan shareinformation with all relevant domesticand foreign authorities forplanningand carrying out resolution;g.Introducingpowersto impose a temporarystay on the exercise ofcontractual acceleration or earlytermination rightsin financialcontracts,subject tosuitablesafeguardsasdescribedin KA4 andAnnexIV to theKAs;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  31. 31. P a g e | 31h. Introducinga RRP requirement for all domesticallyincorporated firmsthat could be systemically significant or criticalif theyfail; andi. Empoweringsupervisoryor resolution authorities torequire financialinstitutionsto adopt changesto their structure, organisation or businesspracticeswhereit isnecessaryto improve their resolvability.Recommendation 2:Additional clarification and guidance onthe application of the KAsTheFSB should provideadditional clarificationand guidanceon theapplication of the KAs to assistjurisdictionsin implementation, facilitatemonitoring, and ensure consistencyin assessmentsof compliancewiththeKAs, by:a.Clarifying thenature of resolution powersascomparedwiththeordinarycorporateinsolvencyregimeandpowersfor ordinarysupervisorypurposes;b.WorkingwithSSBs to develop guidanceon the featuresand powersnecessaryfor resolution regimesin each non-bank financial sector tomeet the standardsof the KAs;c.Developing guidance on the nature of powersneeded for FHCs,significant non-regulatedoperational entities,and branchesof foreignfinancial firms;d.Developingguidanceand identifying good practicesfor coordinationwheretwoor more domestic resolution authorities are responsibleforresolving entitiesof the same financial group;e.Takingstock of mechanismsto giveeffect to foreign resolutionmeasures– such asadministrativeand judicialpowersof recognitionandcontractual mechanismsrequiringcounterpartiestorecognise theexerciseof powersbya foreign resolutionauthority– and evaluatingtheireffectiveness(e.g. in terms of timingand predictability) in theimplementationof cross-border resolution strategies;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  32. 32. P a g e | 32f.Takingstock of resolution fundingarrangementsacrossjurisdictionsandidentifying good practicessothat temporarypublic fundingdoesnotgiverisetomoral hazard andissubjecttoconditionsand mechanismsforrecoveryfrom privatesector sources;g.Clarifying thenature and scope of the powersthat authoritiesshouldhaveto require firms to take measurestoimprove their resolvability; andh.Ensuring that theassessment methodology for the KAscontainssuitablecriteria toassesstheoperational capacityof resolutionauthorities.Recommendation 3: On-going implementation monitoringTheFSB should undertake monitoring and reportingon theimplementationof theKAsby:a.Developing a standardised reporting templatetofacilitatethe analysisof implementationprogressby jurisdiction, sector and KA;b.Undertaking follow-up peer reviews focused on resolution powers,cross-border cooperation and information sharing, and recovery andresolutionplanning; andc.Carrying out, in coordination with relevant SSBs, peer reviewson theapplication of the KAs toindividual non-banking sectors(insurance,investment and securitiesfirms, FMIs) once relevant guidanceby thosebodies isissued.I. Introduction1.BackgroundTheglobal financialcrisisdemonstratedtheurgent need toimproveresolution regimessoasto enableauthoritiestoresolvefailingfinancialinstitutionsquicklywithout destabilisingthefinancialsystem orexposingtaxpayers to lossfrom solvencysupport.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  33. 33. P a g e | 33Followingthecrisis, a number of jurisdictionshave adopted, or arecurrentlypreparing, legislationto strengthentheir resolutionregimes,while some progresshas alsobeen madein establishingcrisismanagement groups(CMGs) for global systemicallyimportant financialinstitutions(G-SIFIs)and enhancingcross-bordercooperation.TheFSB adopted theKeyAttributesof EffectiveResolution RegimesforFinancial Institutionsin November 2011aspart of thepackageof policymeasuresto addressthemoral hazard risks posedby SIFIs.TheKeyAttributes(KAs) represent anew internationalstandard that setsout thecore elementsof effectiveresolutionregimesthat applyto anyfinancial institutionthat could be systemically significant or criticalif itfails (seeBox 1).Work is ongoingacrossa number of resolution-relatedwork streams.Theseincludethe development bythe FSBof an assessmentmethodologyfor theKAs whichcontainsexplanatorymaterial andadditional guidanceon variousaspectsof recovery and resolutionplanning;and workby the relevant standard-settingbodies(SSBs) –namely, the Committeeon Payment and Settlement Systems (CPSS) andtheInternational Organisationof Securities Commissions(IOSCO), andtheInternationalAssociation of InsuranceSupervisors(IAIS) – on,respectively, the applicationof the KAs tofinancial market infrastructure(FMI) and insurers.Resolution regimeshave been identifiedasa priorityareaunder the FSBCoordination Frameworkfor ImplementationMonitoring.As a result, the implementation of the KAs by FSB member jurisdictionswill undergointensivemonitoring and detailedreporting.Toensure timelyand effectiveimplementation, the FSB will carry out aniterativeseriesof peer reviewson the implementation of theKAs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  34. 34. P a g e | 34Box 1:KeyAttributes of Effective Resolution Regimes forFinancial InstitutionsTheKeyAttributesset out thecoreelementsthat theFSBconsiderstobenecessaryfor an effectiveresolution regime.Their implementationshould allowauthoritiesto resolve financialinstitutionsin an orderlymanner without taxpayer exposure tolossfromsolvencysupport, while maintainingcontinuityof their vital economicfunctions.Theyset out essential featuresin twelveareasthat should bepart of theresolution regimesof all jurisdictions,whichrelate to:1. Scope2. Resolutionauthority3. Resolution powers4. Set-off, netting, collateralisation, segregation of client assets5. Safeguards6. Funding of firms in resolution7. Legal framework conditionsfor cross-border cooperation8. CrisisManagement Groups(CMGs)9. Institution-specificcross-border cooperationagreements(COAGs)10. Resolvabilityassessments11.Recovery and resolution planning12. Accessto information and informationsharing.Not all resolution powersset out in the KeyAttributesare suitablefor allsectorsand all circumstances.Topromoteeffectiveand consistent implementationacrossjurisdictionstheFSBwill continueto workwithitsmembersto develop furtherguidance,takingintoaccount the need for implementation toaccommodatedifferent national legal systems and market environmentsand sector-specificconsiderations(e.g. insurance, FMIs).TheKeyAttributesalsocontain specific requirementsfor resolvabilityassessments,recovery and resolution planning, and the development ofInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  35. 35. P a g e | 35COAGs betweenhome and host authorities, whichmust be met forG-SIFIs.AnnexesI toIV of thedocument providemore specific guidancetoassistauthoritiesin implementingthe KeyAttributes with respect to:• COAGs (Annex I)• Resolvabilityassessments(Annex II)• Recovery and Resolution Plans(Annex III)• Temporarystays on earlyterminationrights(Annex IV).2. Objectives and scope of the reviewTheobjectiveof thepeer review isto evaluate FSB member jurisdictions‘existingresolution regimes and any plannedchangesto thoseregimesusingthe KAs asa benchmark.Thereview providesa comparativeanalysis of the overall legal,institutional and policy frameworkof existingresolution regimes, bothacrossindividual KAsand acrossdifferent financial sectors(banking,insurance,securities or investment firms, and FMIs).In doing so, the review hasmade useof the draft assessmentmethodologyfor theKAs that iscurrentlyunder preparation.Thebroadscopeof thereviewismotivatedbythefact that it isthefirst ina number of proposed thematic peer reviewsin this area.Sincethe KAswereonlyrecentlydevelopedasan international standard,their effectiveimplementationwill require substantial follow-upworkbynational authorities, SSBs and firms, includinglegislativechangesinmanyjurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  36. 36. P a g e | 36The review focuses primarily on those KAs that cover the core provisionsof national resolution regimes applicable to any financial institution thatcould be systemicallyimportant or critical if it fails.TheseareKA1(scope of resolution regime), KA2 (existence, mandateand governanceof resolution authorities), KA3 (resolutionpowers)andKA6 (fundingarrangementstosupport resolution).Thepeer review alsocoversother provisionsin national resolutionregimesin lessdepth soastoavoid unnecessaryoverlapswithworkundertaken by other FSB workstreams.TheseincludeKA4(legalframeworkgoverningset-offrights, contractualnetting, collateralisationarrangements,and segregation of client assets),KA5 (existenceof safeguards), KA7 (legal frameworkfor cross-bordercooperation), and KA12(accesstoinformationand information sharing).KA10 (resolvability assessments) and KA11(recovery and resolutionplanning) arecoveredonlyasregardstowhethernationalauthoritieshavedeveloped frameworksfor carrying out resolvabilityassessmentsandrecoveryand resolution planningfor financial institutions(FIs) in theirjurisdiction.Thereview doesnot examinethe implementationof thoseattributesforindividual G-SIFIs and doesnot includeKA8 (crisismanagementgroups) and KA9 (institution-specific cross-border agreements) thatapplyonlyto G-SIFIs.Thedepth of coverageacrosssectorsreflectsdifferencesin reformstoresolution regimesand progressin policyworkby relevant SSBsacrossthosesectors.Asignificant part of the review is dedicatedto banking, sincemost of theresolution-relatedreformsin recent yearshave been focusedon thatsector.Thereview givesdueconsiderationtosectoral specificitiesandrecognisesthat not all powersand characteristicsof resolution regimesInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  37. 37. P a g e | 37set out in the KAsare suitableor relevant for all sectorsand under allcircumstances.The primary source of information for the peer review is the responses toa questionnaire by FSB member jurisdictions, which was mostly based onessential criteria set out in thedraft assessment methodology.Thereview alsomadeuse of availablereportsor guidanceby SSBsrelatingtoresolution-relatedconsiderationsfor specificsectors.Thereport and itsAnnexesare structured asfollows:•SectionII andAnnexAreviewtheresolution-relatedactionsundertakenin responsetothe global financial crisis, includinglessonslearned andlegislativereformsinitiatedduring or in the aftermath of thecrisis;•Section III describesthe main featuresof existingresolution regimes,organisedby KeyAttribute, and issupplemented by further detail inAnnexesB and D;•Section IV andAnnex C summariseplannedresolution regimereformsbyFSB jurisdictions;and•SectionV summarisesthekey findingsand providesrecommendationstopromote thetimelyand consistent implementationof theKeyAttributes.II. Actionsundertaken in response to the financial crisisDuring the financial crisisthat began in 2007, most FSB memberjurisdictionstook policy measuresto support and enhanceconfidenceintheir domestic financial system.Anumber of thosejurisdictionsalsotook actions– often on an ad hocbasis– tointervenein, resolve, restructure or wind up financialinstitutions(FIs) deemed systemically significant.Most of theaffectedFIs werebanks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  38. 38. P a g e | 38In some cases,thebankswererelativelysmall and domesticallyoriented, but weredeemed to be systemic in theprevailingfinancialmarket environment.Most of thosejurisdictionstook action under existingsector-specificpowersto restructureand wind-up failingFIs.In a number of casesthosepowersand authoritiesprovedinadequate, leadingsome jurisdictionstoadopt emergencylegislationto enablethe necessaryresolution actions.In the United Kingdom (UK), emergencylegislationenabled theresolutionof several banksthrough nationalisation, thetransfer ofdepositsand assetstothird partiesand the establishment of bridge banks;thetime-limitedemergencylegislationwassubsequentlyreplaced with anew statutoryspecial resolution regime.In the United States(US), emergencylegislationenabled thepurchaseoftroubledassetsfrom FIs.Germanyrecapitalisedbankswith state fundsand restructuredthem, includingby transferringbad assetstoasset managementcompanies(AMCs) through a newlyestablishedagencythat providedthenecessaryfundingand acted asumbrella for theAMCs.TheNetherlandsadoptedlegislation for therecapitalisationor transfer ofassetsand liabilitiesof banksor insurerstoanother FI or a bridgeinstitution and the interventionin a parent or holding company.TheSwissauthoritiesreinforcedthe capital base of a systemic bank bysubscribingto mandatory convertiblenotesand financingthetransfer ofsomeof thebank‘silliquid assetsto a special purpose vehicle;theseactionswereimplementedthrough emergencylegislation.Franceadoptedlegislationallowingstatefinancial support tobeprovidedtoFIs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  39. 39. P a g e | 39Russia adopted a special resolution regime for systemically importantbanks empowering the deposit insurer to provide capital and liquiditysupport.Spainadopted legislationestablishinganewresolution authority withthepowertorecapitaliseand restructure banks;several smallerbanksweregranted capital and liquiditysupport, and weresold to other bankswithassistancefrom the resolutionauthorityin the form of asset guaranteesand capital and liquiditysupport.Financingfor the resolution and restructuring of failing FIs came frompublic sources– generallynational governmentsandcentral banks– withonlylimited recourseto the privatesector.France, Netherlandsand the UK reliedsolely on treasury financing.Russiarelied on contributionsbythe treasuryand loansby thecentralbank totheresolution authority.Somejurisdictions,includingFrance, Germanyand Spain, establishedspecial public entitiesto provide fundingand expertise.Afew jurisdictionsalsoreported theuseof private sector fundsforresolution actions,mainlyasa result of using industry-funded depositinsurancefunds.TheUS relied on a combination of treasury, central bank and depositinsurer funds.Most jurisdictionsintend to recoup financial assistanceby thesaleof FIsand assetsacquired in thecourseof resolution actionsand toreplenishdeposit insurancefundsthrough industrycontributions.Thefinancialcrisishighlightedtheneedtosignificantlyenhanceexistingresolution regimesin FSB jurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  40. 40. P a g e | 40Implicit relianceon public support wasshownto be a policy thatpenalisedtaxpayers, contributedtomoral hazard and wasnot viableinthelong term.Many jurisdictionsrecognisedthe need toenhanceresolution powers,undertake more formal recovery and resolution planning, strengthenarrangementsfor domestic and cross-border cooperationin dealing withfailing FIs, and develop mechanismstorecoupany publicfundsused inresolution.Somejurisdictions,particularlythosethat weredirectlyaffectedby thefinancial crisis,drew the lessonthat the general corporateinsolvencylawwasnot suitablefor resolving systemic FIs, and have alreadyundertakenmajor legislativereforms todevelop new, or revise their existing,resolution regimes.These reforms include measures to introduce new resolution tools and toexpand resolution authority to non-bank financial institutions (see AnnexA).Several other jurisdictionsare implementingor consideringreformstotheir regimes(seesection IV).III. Key featuresof resolution regimesThis section summarises the key featuresof resolution regimesof FSBmember jurisdictionsby individual KA.This summary iscomplemented byAnnexesB and D, whichrespectivelyset out selected and detailed featuresof resolution regimesin FSBjurisdictions.1. Scope of resolution regimes (KA 1)KA1requiresthat all financial institutionsthat could be systemicallysignificant or criticalin the event of failure, includingbanks, securitiesInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  41. 41. P a g e | 41and investment firms, insurersand FMIs, be subjecttoa resolutionregimethat hasthe featuresset out in theKAs.In order tobecapableof resolvingfinancialgroups,thoseregimesshouldextendto branchesof foreign FIs, financial holding companies (FHCs),and non-regulatedoperationalentitiesthat are significant to thebusinessof a financial group.All FSB jurisdictionsreport that theyhave specific powersto restructureand/ orwindup banksthat are distinct from ordinary corporateinsolvency(seeTable1Ain Annex D), although theextent towhichthesector-specificregimesdiffer from ordinary corporateinsolvencyis notalwaysclear.Eight jurisdictionsreport that theuseof certain powersisrestrictedtosystemicallyimportant banks.Most jurisdictionsalsohave speciallyadapted insolvencyregimesforinsurancefirmsthat typically rely on a combination of ordinaryinsolvencylaw supplemented by powersfor supervisoryauthorities(seeTable1B in Annex D).Resolution regimesfor securitiesor investment firms and FMIs are evenlesswell established.ThirteenFSBjurisdictionsindicatethat theyhave specific powerstorestructure and/ or wind up securitiesor investment firmsoutsideofordinarycorporateinsolvency(seeTable1CinAnnex D), whileonlyeightjurisdictionsreport having sector-specificpowersin placeforrestructuring and/ orwindingupall orsomeclassesofFMI (seeTable1Din Annex D).Three of thosejurisdictions18notethat, wherecertain FMIs (suchasCCPs) are authorised asbanks, theyarecurrentlywithinthescopeof thatjurisdiction‘sbank resolution regime.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  42. 42. P a g e | 42Work is ongoing by CPSS and IOSCO to clarify how the KAs should beapplied to FMIs, so as to provide a basis for jurisdictionsto design andimplement resolution regimesfor this sector.It should be emphasised, however, that sector-specific powerstorestructure and/ or wind up FIsare not necessarilyalignedwith theKAs.In many cases,the reportedpowersare supervisory in nature, require theconsent of shareholdersor are limitedtoliquidationor windingup of thefirm at the instigationof the supervisor or, in some cases, through someform of speciallyadapted insolvencyregime.Thiswasespeciallythecasein relationtotherangeof powersavailableinmanyjurisdictionsin respect of insurers, securitiesor investmentfirms, and FMIs.Thesetypes of powersare useful supplementstothe core resolutionpowersoutlinedin KA3 but do not constituteon their own a resolutionregimethat meetsthestandardsof theKeyAttributes.While manyjurisdictionsreport that theyhave specific powerstorestructureand windup holdingcompaniesthat areregulatedasbankingor insurancegroups,only eight of them havethe abilityto usethosepowersfor FHCsthat are not themselvesa bank or other regulatedinstitution.Such a restriction wouldlimit the resolution strategiesavailableto dealwith a financial group, and appropriateresolutionpowersshouldthereforeapply more broadlytonon-regulated FHCs.In most FSB jurisdictions,theresolutionframework cannot be appliedtonon-regulatedoperational entitieswithin a financial group.Authoritiesin only seven jurisdictionshave directpowersin relationtonon-regulatedoperational entitiesthat can be exercised in theresolutionof the wholeor a part of thefinancial group or conglomeratetowhichthoseentitiesbelong; the nature of thosepowersalsovariesacrossjurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  43. 43. P a g e | 43Non-regulatedoperational entitiesmayprovideservicesthat arenecessaryfor thecontinuityof systemically important functionscarriedout withinthe group, and a lack of appropriate powersin relationto suchentitiesmay result in an abrupt withdrawalof those servicesthatjeopardisesthe resolution objectiveof maintainingthosefunctions.In a majorityof cases,authoritiesreport that theyhave powersoverbranchesof foreign financial institutions.In some cases, thosepowersare limitedtoactionsunder theordinarycorporateinsolvencyregime (such asthepower toring-fencelocalassetsand realisethem tomeet the claimsof creditorsof thebranch) under thejurisdictionor supervision of domesticcourts.In many jurisdictions,powersin respect of branchesare much lesscomprehensivethanthose available for locallyincorporatedentities(seeKA7).2. Resolution authority (KA2)KA2requiresjurisdictionstohavea designated administrativeresolutionauthority(or authorities) that is (are) operationallyindependent andadequatelyresourced.Thestatutoryobjectivesand functionsof resolutionauthoritiesshouldrequirethem topursue financial stability, protect depositors,insurancepolicy holdersand investors(asappropriate); avoid unnecessarydestruction of value;and consider thepotential impact of their actionsonfinancial stabilityin other jurisdictions.Where there is more than one resolutionauthorityin a jurisdiction, theirrolesshould be clearlydefinedand coordinated, and theresolutionregimeshould identifya lead authority tocoordinateresolutionof amulti-sectorfinancial group withinthat jurisdiction.Responsibilityand powersfor the resolution of (at least some) FIsareconferred on one or more public authorities in all FSB memberjurisdictions(seeTable1).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  44. 44. P a g e | 44Thedivision of resolutionpowersand responsibilitiesbetweenthoseauthoritiesvariesconsiderably:theKAsarenot prescriptiveinthisregard.Many jurisdictionsconfer the primary responsibilityand powersfor theresolutionof bankson supervisory authoritieswithdifferent degreesoffunctional separation, whilethe resolutionauthority is separate from themain sectoral supervisor in onlya minority of cases.While all FSB jurisdictionsreport that their resolution authoritiesareoperationallyindependent, thishasnot been verified in the peer review.For theinsurancesector, almost all FSB jurisdictionscurrentlyhaveprudentialsupervisorsthat canintervenein troubledorfailinginstitutionsin a variety of ways(such aslicensewithdrawal, appointment ofadministrator,or court petition for windingup), although mostjurisdictionsrequire the courtsto appoint an administratoror liquidatortocarry out the resolution.In many FSB jurisdictions,there isno administrativeauthorityresponsiblefor restructuringand windingup securitiesor investmentfirmsand FMIs.This reflectsthelimitedscope and powersfor resolving systemicallyimportant non-bank SIFIs under theexistingregimes(seethe discussionin KAs 1and 3).Theinvolvement of public administrativebodies in thosesectorsrelatestotheir role asmarket conduct or oversight authorities,withmeasurestoaddressor managefailinginstitutionstypicallylimited to standardinsolvencyprocedures.Indeed, in many caseswherejurisdictionsreport theexistenceof aresolution authorityfor securitiesor investment firms and FM Is, thatauthorityis actuallya supervisorthat isonly able toexercisecertainpowersunder a sector-specific regime for restructuring or windingup, butdoesnot havetheadministrativeresolution powersspecified in KA3.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  45. 45. P a g e | 45As previouslynoted, there are a few exceptionswherethe responsibleauthorityhaspowersin relationto certain categoriesof FMI that aresimilar to thosefor other types of FI.TheKAs recognisethat not all attributesand resolution powersarerelevant for all financial sectors;howeverthedesignation of anadministrativeauthorityorauthoritieswiththeresponsibility, powersandmeansto resolvesystemically important firmsis an essential element ofan effectiveregime acrossall sectors.While resolution measuresmay be implementedby an administratorthatis appointed and supervised by a court (asis thecasein several FSBjurisdictions), the objectivesof that administrator should be aligned withKA2.3.In thosejurisdictionswithmultipleresolutionauthorities, nearlyallreport havingsome form of coordinationarrangementsin placebetweentheauthorities,although the adequacyof thosearrangementshasnotbeen analysed in the peer review.However,several jurisdictionsdonot appoint a ‗lead authority‘tocoordinatetheresolution of domesticentitiesof the samegroup.Theresponsesof somejurisdictionsindicatethat theboundariesbetweentherespectiverolesand responsibilitiesof those authoritieswithresolution functionsare not alwaysclear, whichmay hamper effectiveresolution.Very few jurisdictionshave statutory objectivesin placefor theirresolution authoritiesthat arefullyalignedwiththeKAs.However,many such authorities(includingprudential supervisors,market conduct authorities, central banks, financeministries,depositinsuranceand other protectionschemes) may havebroaderresponsibilitiesrelatedto financial stability, and the objectivesrelatingtotheir rolein resolution may not necessarily be reflectedin a separatestatuteor other public policydocument.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  46. 46. P a g e | 46Although nearlyall authoritieshave formal objectives(oftennot relatedspecificallyto their resolution functions) tomaintain financial stabilityandprotect depositorsor policyholders, most do not have mandatestoavoid destruction of value (beyond maximisingrecoveriesin liquidation)or toconsider theimpact of resolution actionson other jurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  47. 47. P a g e | 473. Resolution powers(KA 3)KA3 setsout therangeof resolutionpowersthat should be availableinresolution regimes.Theseincludepowersto transfer assets, rightsand liabilitiesof, or sharesin, failing institutionsto a purchaser, bridgeinstitutionor assetmanagement company(AMC);towritedownandconvert debt ofthefirminresolution(bail-in);toappoint anadministrator;andtooperatethefirmin resolution and takeactionsnecessarytorestructureor winddown itsoperations.Authoritiesresponsiblefor resolving insurersshould alsohavepowerstotransferportfoliosand ―run-off‖ theinsurance businessof a firm inresolution.All powersshould beexercisablewithout any requirement for creditorconsent or shareholderapproval.Regimesshould provide for resolution tobe triggered when a firm is, or islikely to be, no longer viable, and before it is balance-sheet insolvent andtheequityhasbeen fullywipedout.MostFSB jurisdictionsreport that theyareabletoprovidefortimelyentryintoresolution or theexerciseof resolution powersat or before thepointof non-viability, and before thefirm isbalance-sheetinsolvent. In mostcases,thereportednon-viability triggersfor insurers,securitiesorinvestment firmsand FMIs applylater than for banks,which may be duetothe fact that theyreflect triggersavailableunder corporateinsolvencyregimes.Jurisdictionsreport that resolution powersare considerably moredeveloped for banks(seeTable2) than for insuranceand, especially, forsecuritiesor investment firms and FMIs.While some of the resolution powersspecified in theKAsmay not benecessarytoresolvecertain typesof non-bank FIs,no special powersInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  48. 48. P a g e | 48(outsideordinary insolvency) are availablefor securitiesor investmentfirmsand FMIs in most jurisdictions.In all FSB jurisdictions,a supervisoryor resolution authorityhasthepowertoappoint anadministratoror toapplytothecourt for such anappointment (seeTable2 in Annex D).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  49. 49. P a g e | 49Thepowersof that administratorvary, but most jurisdictionsreport thattheadministratorhasa widerangeof powers,includingto operatethefirm and to manageor dispose of its assets.In some cases,thepowersof the administrator are restricted tothepowersof the firm‘s management, whichsuggests that the administratorcannot overrideshareholders‘rightsfor actionsthat require shareholderapproval under the constitution of theFI or applicablecorporate law.In other cases,the administratorhasthesamepowersastheappointingauthority, or the authorityis ableto confer such powerson theadministrator.Most jurisdictionsalsoprovidefor powerstotransferassetsand liabilitiesfrom a failed bank.However,in many casesthosepowersare exercisedby the appointedadministratorand it is not clear whetherthe administratorcan bemandatedtoachievetheobjectiveslaid out in theKAs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  50. 50. P a g e | 50It is also not clear in all caseswhether transfer powers can be exercised (ifnot sanctioned by the court) without the need for shareholder approval orcreditorconsent.Transferpowersaregenerallylesswell-establishedin thecaseof insurers,and even lesssoin the caseof securities or investment firmsand FMIs.In a majorityof jurisdictions,authoritieshave the power to establish andoperatea bridge institution, although that poweris not alwaysbasedonexpressstatutoryauthority.In most caseswheretheuseof a bridgeinstitutionisavailable, it is usedonlyforbanks;relativelyfew jurisdictionsreporthavingbridgepowersforinsurers,securitiesor investment firmsor FMIs.Similarly, in amajorityof jurisdictions,authoritieshave the powertoestablishan asset management company, and totransfer assetsof afailing entityintoit although, aswithbridgeinstitutions,this powerislargelyconfined tothe banking sector.Bail-in within resolution, ascontemplated by the KAs, requirespowersthat enableauthoritiesto:(i)writedown equityin and unsecured creditorclaims againsta firm inresolutiontotheextent necessaryto absorb the lossesof thefirm; and(ii)convert all or partsof unsecured creditor claimsintoequityof thefirm inresolution, its parent company or any successor in resolution (such as abridge institution).Onlytwojurisdictionsreport that bothpowersareconferredbystatuteontheir resolution authority, while another jurisdictionreportsthat it is abletoboth writedown and convert liabilitieswithin resolution usingotherpowers.Several other jurisdictions report that they can achieve, at least to somedegree, the economic effect of bail-in through existing powers, such astransfer and bridge bank powers,although thosepowersaloneare notInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  51. 51. P a g e | 51fullyequivalent tothebail-inwithinresolutionpowerthat is specifiedintheKAs.Powersfor a resolution authority towritedownand convert liabilitiesaregenerallynot availablefor insurers,securitiesor investment firms andFMIs.In some cases, jurisdictions reported that the use of (at least some)resolution powers requires the cooperation of the failing firm or itsshareholders.This is not consistent withthe concept of a resolutionpower under theKAs and is insufficient for thepurposesof a resolution regime.It is critical for effectiveresolution that all resolution powersbeexercisableby authoritieswithout any needfor shareholder consent ortriggeringany other third partyrights(subjecttothe safeguardsdescribedin KAs 4 and 5).This is becauseresolution authoritiesmust be ableto take action, whichmay includeinterferingwiththird partyrightsquickly and without theconsent of shareholders,creditorsor other stakeholdersof thefirm.At least one of the twospecific resolution powersfor insurers(portfoliotransferand ‗run-off‘) is availablein nearlyall FSB jurisdictions,althoughin some jurisdictionsthe powersare onlyexercisableby the liquidatorininsolvencyproceedings.In many jurisdictions,resolutionpowersare distributedacrosstwoormore authorities.In other jurisdictions,includingsome that have a singleresolutionauthority, the exerciseof resolution powersmay require a court order orconfirmationtobe effective.While thisis not inconsistent withthe KAs, a requirement for courtapproval may impederapid interventionand the abilityto achievetheInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  52. 52. P a g e | 52specifiedobjectivesof resolution, and may be uncertain astotheoutcome.This is recognised by KA 5.4, whichrequires authoritiestotake accountof the timeneeded for court processesin resolutionplanning soasnot tocompromiseeffectiveimplementationof resolution measures.However,anassessment ofthat requirement wasbeyond thescopeofthispeer review.4. Set-off, collateralisation, segregation of client assets(KA4)KA4 requires that resolution authoritieshave the powerto imposeatemporarystay on theexercise of accelerationand earlyterminationrightsinfinancial contractsthat aretriggeredbyentry in resolutionortheexerciseof resolution powers.That stayshouldbesubjecttothesafeguardsspecifiedinAnnex IV totheKAs, includingstrict limitationintheperiod ofthestay, applicationofthe‗no cherry-pickingrule‘, and preservationof earlyterminationrightstriggeredby defaultsother than entry intoresolution(such asa failure tomake payment or deliver margin).Onlyfour jurisdictionscurrentlyprovide for the imposition of a temporarystay on the exercise of contractual acceleration or early termination rightsin financial contracts(seeTable2).In all of thosejurisdictions(except for theUS in caseswherethe FDIChasbeen appointedasreceiver) thepower is limitedtobanks, while onlythreejurisdictionsprovide for safeguardsfor counterpartiestofinancialcontractscomparable to thosespecifiedinAnnex IV to the KAs.Where a power toimposeastay on earlytermination rightsin financialcontractsisnot accompaniedbyadequatesafeguards,thisfailstoachievetheintended balancebetweeneffectivetransfer powersin relation tofinancialcontractstopreservevalueandcontinuityof criticalservicesandminimisingdisruption to counterparties.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  53. 53. P a g e | 535. Safeguards(KA 5)KA5 setsout a number of legal safeguardsfor personsaffectedbyresolution actions,and in particularcreditorsof a firm in resolution.These require respect for the hierarchy of claims in resolution; departurefrom the principle of equal treatment of creditors of the same class onlyinaccordance with specified principles; rights to compensation for creditorsthat are worse off in resolution than they would have been in liquidation;and a right tojudicial review of resolution actions.Almost all memberjurisdictionsreportthat their legalframeworksrequireresolution authoritiesto respect the hierarchyof claimswhen exercisingresolutionpowers(seeTable4 inAnnex D), although it is not clear inevery casewhetherthoseframeworksapply outside of corporateinsolvency.Only a few FSB jurisdictions report that resolution authorities have thepower to depart where necessary (e.g. for reasons of financial stability)from the general insolvency principle of equal treatment of creditors ofthesameclass(pari passu).Very few jurisdictionsprovidean explicit statutoryright to compensationfor any creditorthat is worseoff in resolutionthan wouldhave been thecasein liquidation, and set out a mechanism for administeringany suchcompensation.This right wouldbe particularlyrelevant wherethe regime alsopermitsdeparture from theprincipleof equal treatment of creditorsof thesameclass(and that departure resultsin somecreditorsbeingworseoff than inliquidation) or in theunlikely circumstancethat insolvencywouldhaveresultedin lessdestruction of valuethan the resolution action that wastaken.There aredifferencesacrossFSBjurisdictionsin therightsto judicialreview of resolution actionsand the formsof redressavailableunder theirlegal frameworks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  54. 54. P a g e | 54Themajorityof jurisdictionsprovide a right to such judicial review eitherunder general administrativelaw or asan explicit right under theresolution regime and, in most cases,remediesother than monetarycompensation areavailable.In such cases,thelegalframeworkneedstostrike anappropriate balancebetweenprotected legal remedieson the onehand and the certaintyofresolution and the effectivenessof themeasurestaken on theother.6. Funding of institutionsin resolution (KA6)KA6 requires jurisdictionstohave adequate arrangementsfor fundingresolution from private sources(such asdeposit insuranceor resolutionfunds) or temporary public funding.In order toreducemoral hazard, any provision of temporarypublicfundingshould be subject to conditionsand mechanismsfor recoveryfrom thefirm itself, its creditorsor theprivatesector.In general, resolution funding arrangementsare available for banks, butlesssofor insuranceand securitiesfirms, and are largely non-existent forFMIs(seeTable5 inAnnex D).Arrangementstofund the resolution of banksare generallybasedon amix of private and public sources.Amajorityof jurisdictionsreport theexistenceofprivate sectorsourcesoffundingfor resolution purposes, although their current adequacyforresolving failing SIFIs hasnot been examined.Specifically, three FSBjurisdictionshaveprivatelyfundeddedicatedresolution funds, while fifteen jurisdictionshave a deposit insurancesystem (fundedeither ex anteor ex post by industry levies) that may bedrawnon to fund bank resolution, in additionto pay-out.Where a deposit insurancefund can be used to support resolutionmeasures,it is generallysubject to conditionssuch aslimitationson thepurposefor whichthosefundsmay be used or capsin the amount thatInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  55. 55. P a g e | 55can be used for a specific resolution (e.g. no more than theamount thatwouldhave been available topay out depositors).Policyholder or investment protection fundshave been establishedinsome jurisdictionsbut play a limitedrolein fundingresolution forinsuranceor securitiesor investment firms.Fourteen jurisdictionshave a protection fund for insurancepolicyholdersor investors,but several of them restrict usetocompensation ofpolicyholders or investorsin a liquidationscenario and donot allowthefund to be usedfor financingthe resolution.No jurisdictionsreportedhaving a resolution fund dedicated to FMIs.Notwithstandingtheexistenceof privatesourcesof funding, publicfinancial support remains an important component of resolution fundingarrangements.While themajorityof FSB jurisdictionsindicatethat public fundingforresolutionmeasuresis available, particularlyfor banks, in only one casethistakesthe form of a dedicated, publiclysourcedresolution fund.Mechanisms for recovery of public funds from shareholders, participantsor creditors of the failed firm, or the wider financial industry, are lesswelldeveloped, although several jurisdictionshave facilitiesfor appropriationsorleviestorecouponanexpostbasisanypublic fundsusedinresolution.In addition, conditionson the useof public funds(for example, arequirement that lossesshould be borne by shareholdersand unsecuredcreditors)are largely absent.7. Legal framework for cross-border cooperation (KA 7)KA7 requires that resolution authoritiesare empoweredand encouragedbystatutorymandateto achievea cooperativesolution withforeignauthoritieswhereverpossible,includingby exercisingpowersin relationtobranchesof foreign FIsto support foreign resolution measuresandInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  56. 56. P a g e | 56sharinginformationwith foreign authorities for the purposesof planningand carrying out resolution.Legislative frameworks should not contain provisions whereby automaticactionsin relation to a firm are triggered by the initiation of insolvency orresolutionproceedingsin another jurisdiction.Tofacilitatecooperation, jurisdictionsshouldprovidefor transparent andexpeditedprocessestogive effect toforeign resolutionmeasures,eitherbywayofproceduresformutual recognitionorbyusingpowersunderthedomesticframeworkto take measuresthat support and complement theforeign resolution in relationsto localoperationsof the firm.Theresolutionregime shouldalsoconfer powersover branchesof foreignfirms, whichmay beused either tosupport resolution measurescarriedout by thehome resolution authorityor, in exceptional cases, to takemeasureson itsowninitiativetoprotect domesticfinancial stability.National legal frameworksfor cross-bordercooperation in resolutionare, overall, lesswell-developedacrossall sectorsthan other areasof theKAs(seeTable6 inAnnex D).In most FSB jurisdictions,there are few or norelevant statutoryprovisionsfor coordinationand cooperation for the effectiveresolutionof cross-border firms.Thelegal frameworkof most jurisdictionsneither requires nor prohibitscooperation withforeign resolution authorities.Eight jurisdictionshavestatutoryprovisionsthat explicitlyempowerorstronglyencourageresolution authoritiesto cooperatewith foreignauthorities, whileseveralothersindicatethat it istheir policytocooperatewherepossible.No jurisdictionhascomprehensiveobligationsfordomesticauthoritiestoavoid takingresolutionactionsthat may have an adverseeffect onthefinancial stabilityof other jurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  57. 57. P a g e | 57Authoritiesin EU member statesare required to considerthe impact oftheir actionson financial stabilityin other EU states.No jurisdictionsreport that their legal framework containslegislativetriggersthat require automatic actionsin relationtoa firm for whichtheyare a host jurisdictionwhenthehome jurisdictioninitiatesresolution orinsolvencyproceedingsor undertakesanyother official intervention inrespect of that firm.While the legal frameworksin the majorityof FSB jurisdictionsdonotprovidefor differential treatment of creditors(includingdepositorsandpolicyholders) by location of their claim or the jurisdiction in whichtheclaim is payable, there is provision for differential treatment of certainclaims – in most cases,deposits– under the insolvencyor resolutionregimeof eight jurisdictions.About a third of FSB jurisdictionshave mechanisms for giving legal effectto decisions by foreign authorities, but the majority of those are based onapplication tothe court.While court-based processesare not precluded by the KAs, theyaregenerallylesswell-adaptedto meetingthe objectivesof KA7 thanadministrativeproceduresin that theymay be more time-consumingandtheoutcome lesspredictable.Very few jurisdictionshave provisionsfor administrativerecognitionandenforcement by the resolution authorityof resolutionactionstaken byforeign authorities.In only one of thosejurisdictionsdoesthenational resolution authorityhavethe powerto recognisethetransferby thehome country resolutionauthorityof local assetsand liabilitiesof a foreign bank, and make thattransfer effectiveunder locallaw.Most jurisdictionsreport that theyhave some powersover branchesofforeign banks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  58. 58. P a g e | 58However, in most cases, those powersstem from the domestic insolvencyframework or are much less comprehensive than the powers available forlocallyincorporatedbanks.Domestic authoritiesmay be able tousethosepowersto supportresolution actionstaken by the home authority, but the legal frameworkgenerallydoesnot make that explicit or set anyconditionstotheexerciseof such powersindependentlyof home state action.8. Resolvability assessments (KA10)KA10 requires jurisdictionsto undertakeregular resolvabilityassessments,at least for G-SIFIs.Theresolvabilityassessmentsshould beconducted in accordancewiththeguidanceset out in Annex II tothe KAs, and in coordination withother authoritiesresponsiblefor the firm in question.Supervisoryor resolutionauthoritiesshould havepowersto require firmstoadopt appropriate measureswherenecessaryto improve theirresolvability.Onlyone jurisdictionhasin placea formal statutoryrequirement forresolvabilityassessmentstobe carried out (see Table3).Home jurisdictionsof G-SIFIs report that, in theabsenceof formalrequirements,supervisorscan usegeneral supervisory powersandprocessesto carry out such assessments.Few host jurisdictionsof G-SIFIs report that theyundertake resolvabilityassessmentsat thisstage,althoughsomeindicatetheir intentiontodoso.A few other jurisdictions also report that they are planning to undertakeresolvability assessments as a core part of domestic resolution planningwork.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  59. 59. P a g e | 59Where resolvability assessments are being carried out or planned, thefocus is generally on global or domestic systemically important banks(G-SIBs and D-SIBs respectively) rather than on a wider rangeof FIs.Onlytwojurisdictionscurrentlyrequire resolvabilityassessmentsforinstitutionsfrom other financial sectors.Given the lack of a formal statutoryframework or rules,few jurisdictionshaveestablishedguidanceabout howresolvabilityassessmentsshouldbeconducted or the consequencesif firmsare not assessed asresolvable.In most FSB jurisdictions,supervisoryauthoritieshave some powerstoasksupervised institutionstomakechangestotheir businessorganisationand legal structure, but thepurposesfor and circumstancesunder whichauthorities can exercise such powersvary acrossjurisdictionsand financial sectors.Afew jurisdictionsreport that their supervisoryauthority hasa broadrange of powersto take necessary measurestoensure financialstability, and that theexerciseof thosepowersis not restrictedtospecificcircumstancesbased on distressof the institutionin question.However,it is not clearwhethertheauthority can actuallyrequirechangessolelytoimprove resolvabilityof a firm, asspecifiedin theKAs.In other jurisdictions,thepowersto require certain actionscan onlybeexercised, or may more readily be used, after a firm fails tomeet specificregulatoryrequirements,comesclosetomeetingthe conditionsforresolution, isfacinginsolvency, or is alreadyin resolution.Given the intrusivenature of requirementstotakemeasuresto improveresolvabilityand thefact that, where necessary, theyshould take effect inadvanceofanydeteriorationinafirm‘scondition, aclearpowertorequirechangesexplicitlyfor the purposesof improving resolvability isnecessary.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  60. 60. P a g e | 60International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  61. 61. P a g e | 619. Recovery and resolution planning (KA11)KA11requiresjurisdictionstoput in placea processfor on-goingrecoveryand resolution planningfor domesticallyincorporatedfirmsthat could besystemicallysignificant or critical in theevent of failure.RRPsshould contain the essential elementsset out in Annex III to theKAs, and home resolution authoritiesof G-SIFIs should coordinatewiththefirm‘s CMG toproducea group resolutionplan.Although few jurisdictionshave formal statutory requirementsfor RRPs,manyaredeveloping suchplansfor G-SIBsand D-SIBs.Currently, jurisdictionsthat are home authoritiesof G-SIBshavestartedworkingon the development of RRPsthrough supervisorypolicy, andmanyjurisdictionshaverequired firmsto prepare recovery plansunderexistingsupervisorypowers.Recovery and resolution planningin FSB jurisdictions– whetherundertaken currentlyor under development – is predominantlyfocusedon banks.Only two jurisdictions have a framework for RRPs for other categories offinancial institution, while another jurisdiction is developing RRPs undergeneral supervisorypowers.Many jurisdictionsreport that theyhavelegal frameworksin placeforauthoritiestoapprove firms‘recovery plans,and some emphasised thatauthoritieshavethepowertorequirechangestosubmittedrecoveryplansif they are not satisfiedwiththem.For jurisdictionswherethere is no formal requirement for RRPs, thesourceof powersto require changesis not clear, although somejurisdictionsstated that their general supervisory framework providesthenecessarypowers.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  62. 62. P a g e | 6210.Accessto information and information sharing (KA12)KA12 requires jurisdictionsto ensure that nolegal, regulatory or policyimpedimentshinder thedisclosureof firm-specificinformationtodomesticand foreign authoritiesfor thepurposesof planningandcarrying out resolution, irrespectiveof whetherthoseauthoritieshavesupervisoryfunctions.Domestic authoritieswithresolutionfunctionsaregenerallyabletosharenon-publicinformation witheach other.Thisgeneral principleis subjecttoa few exceptions,wherethesharing ofconfidential information withnon-supervisory domesticauthoritiesforboth planningand carrying out resolution is either not permitted; limitedtospecificcircumstances,such asthe entry of a firm intoresolutionorconditional on a decision to undertake a resolutioninvolvingpublic funds.Where powerstodiscloseinformation are limitedor conditional in thatway, this may prevent authorities from sharinginformation for thepurposesof resolution planningand assessingresolvability.Cross-border information sharing is considerablymore restricted. EightFSB jurisdictionsallowdomestic authoritiestoshare non-publicinformation with foreign resolution authoritiesthat are not supervisors.In many cases,informationcan be shared cross-border betweensupervisoryauthoritiesusingexistingsupervisorygateways, but not asreadilythrough other channels.Supervisorygatewaysare not, however,sufficientlybroad toallowconfidential informationtobesharedwithall foreignauthoritiesthathavea responsibilityfor planningor carrying out resolution of thefirm inquestion.In most cases,jurisdictionsdonot require a memorandum ofunderstanding(MoU) asa condition for disclosure of information underInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  63. 63. P a g e | 63existinggateways,but a number of jurisdictionsindicatedthat a MoUwasin practice a prerequisiteor seen asdesirable.IV. Planned reforms to resolution regimesSomejurisdictionshavealreadyundertakenmajor legislativereformssincethe financial crisistodevelop new or reviseexistingresolutionregimes(seesection II andAnnex A).Severalother FSBjurisdictionshaveeithersubmittedformal reform planstothe national legislatureor for public consultation, or have reformsunder development (seeAnnex C).This is necessitatedby thefact that in most casesthe relevant legislationpre-datestheKAs. The reformsaim at a range of objectives,including:(i)Strengtheningthepowersavailable for the resolution of financialinstitutions;(ii) Expandingresolutionregimestonon-bank financial sectors;and(iii) Aligning resolution regimeswiththeKAs.Many of thesejurisdictionsarebasingtheir draft legislation on selectedelementsof the KAs.Jurisdictionsare at varying stagesof thereform process.Ninejurisdictionshaverecentlyenactedrelevant legislationand arepreparingimplementingrulesand regulations.In most cases,thesereformsapplyto the banking sector and donotestablishor extend resolution powersfor non-banks.Eight jurisdictionsand theEuropean Commission (for the EU) haveissueddocumentsfor publicconsultationor arepreparing draftlegislationto further strengthentheir resolution regimes,includingbyInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com

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