resolution of global systemically important …...2016/02/17 · not necessarily identical to those...

* Any views expressed in this presentation are those of the speaker, andnot necessarily identical to those of the JFSA or any other institution.

Resolution of Global Systemically Important Financial Institutions (G-SIFIs)

- Overview of International Efforts -

Masamichi KonoVice Minister for International Affairs

Financial Services Agency, Japan

9th DICJ Roundtable“Lessons Learned

from Respective Countries”

17 February 2016

Contents

1. Overview of FSB work on resolution

2. Recent progress in removing obstacles to resolvability

3. The critical role of deposit insurance

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1. Overview of FSB work on resolution

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Policy Framework for Systemically Important Financial Institutions (SIFIs)

G20 Cannes Summit (November 2011)Agreed on comprehensive measures so thatno financial firm can be deemed “too big tofail” and to protect taxpayers from bearing thecosts of resolution

i) Additional loss absorbency for G-SIFIsii) A new international standard for resolution

regimes (“The Key Attributes”)iii) More intensive and effective supervision

Identification of global systemically importantfinancial institutions (G-SIFIs) updated eachyear in November

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Assessing and Designating Systemically Important Financial Institutions (SIFIs)

Currently 30 banking groups are selected asglobal systemically important banks (G-SIBs)based on an agreed assessment methodology

The assessment methodology uses indicatorswhich reflect 5 risk categories:1. Size2. Global Activity3. Interconnectedness4. Complexity5. Substitutability

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30 financial Institutions identified as G-SIBs based on end-2014 data(Published in November 2015)

【5th bucket（3.5%※）】

【4th bucket（2.5%※）】HSBCJP Morgan Chase【3rd bucket（2.0% ※）】BarclaysBNP ParibasCitigroupDeutsche Bank【2nd bucket（1.5%※）】Bank of AmericaCredit SuisseGoldman SachsMitsubishi UFJ FGMorgan Stanley

【1st bucket（1.0%※）】Agricultural Bank of ChinaBank of ChinaBank of New York MellonChina Construction Bank (New)Group BPCEGroup Crédit AgricoleIndustrial and Commercial Bank of ChinaING BankMizuho FGNordeaRoyal Bank of ScotlandSantanderSociété GénéraleStandard CharteredState StreetSumitomo Mitsui FGUBSUnicredit GroupWells Fargo

(In alphabetical order for each bucket)※G-SIBs are required to accumulate equity capital over regulatory standards of the Basel III according to each bucket.

The G-SIBs List

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Requiring Additional Loss Absorbency(Capital Surcharges for G-SIBs)

2018 20192013 2014 2015 2016

10

6

2017012345

789

Minimum Common Equity Tier 1 (CET1)

Capital Conservation Buffer

Countercyclical Capital Buffer(0%-2.5%)

G-SIBSurcharge(1% - 2.5%)

8.0- 12.0%

7.0- 9.5%

7.0%

4.5%

G-SIB capital surcharge: 1% to 2.5% according to the G-SIB bucket

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Enabling Orderly ResolutionThe Key Attributes of Effective Resolution

Regimes for Financial Institutions (the KAs)Adopted by the FSB and endorsed by the G20 inNovember 2011The aim of the KAs is to help address the TBTFproblem by making it possible to resolvefinancial institutions in an orderly manner,without causing severe systemic disruption orexposing the taxpayer to the risk of loss.This is to be achieved by protecting criticalfunctions and by using mechanisms for losses tobe absorbed (in the order of seniority) byshareholders and unsecured and uninsuredcreditors (=bail-in). 7

Enabling Orderly ResolutionThe Key Attributes of Effective Resolution

Regimes for Financial Institutions (the KAs)1. Enhancement of the resolution framework: The

KAs define resolution powers that resolutionauthorities should have at their disposal.

2. Recovery and resolution plan (RRP): The KAsrequire development of RRPs to promoteresolvability for each G-SIFI.

3. Resolvability assessment process (RAP): TheRRP of each G-SIFI is evaluated for its feasibilitybased on internationally agreed standards.

4. Cooperation agreements (COAG): The KAs setout the essential elements of institution-specificcooperation agreements. 8

Establishment of an Orderly Resolution Regime for Financial Institutions in Japan

In Japan, the Deposit Insurance Act wasrevised in June 2013 to implement the KAs,and the revised Act entered into force inMarch 2014.

The revised Act introduces an enhancedframework for orderly resolution of financialinstitutions, including insurers and broker-dealers in order to address risks that mayspread across financial markets.

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• Financial institutions including deposit-takingfinancial institutions, insurance companies,financial instruments business operators,financial holding companies

• The Prime Minister determines the need toimplement the orderly resolution mechanismfor financial institutions, following deliberationsof the Financial Crisis Response Council(chaired by the Prime Minister and with MOF,BOJ and FSA as participants)

Scope

Procedure


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Measures• Where it is considered necessary to prevent

severe market turmoil:⇒ Special oversight by the Deposit Insurance

Corporation of Japan⇒ Provision of liquidity and financial support

(Capital injection may be undertaken asnecessary, when the financial institutions arenot in a state of insolvency)

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An orderly wind-down of market transactionsis to be effectuated, while ensuring that thecritical functions of the financial institutionare maintained for the stabilization of thefinancial system, thereby enabling an orderlyresolution of the financial institution andpreventing severe market turmoil.When the above measures are implemented,contractual bail-in options (writing down ofunsecured debt or converting unsecured debtinto equity) are exercised.


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• Government guarantee is provided for fundingof the Deposit Insurance Corporation of Japan(DICJ). If losses are incurred by the DICJ, theyare compensated ex post by the industry.The government may provide financial supportin exceptional cases.The DICJ provides financial support throughits Crisis Management Account.

Funding

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2. Recent progress in removingobstacles to resolvability

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The G20 Leaders’ Commitment to end TBTFWe welcome the FSB report on the progress made and nextsteps towards ending “too big to fail”. We renew ourcommitment to make any necessary reforms to implementfully the FSB’s Key Attributes of Effective ResolutionRegimes for all parts of the financial sector that could causesystemic problems. We will undertake the necessary actionsto remove obstacles to cross-border resolution. We reaffirmour commitment to ensure that supervisors have strongmandates, adequate resources and independence to act. Wecall on the FSB, in consultation with standard setting bodies,to assess and develop proposals by end-2014 on theadequacy of global systemically important financialinstitutions’ loss absorbing capacity when they fail.

G20 LEADERS’ DECLARATION Saint Petersburg Summit

5-6 September 2013 15

Towards Full Implementationof the Key Attributes

Total Loss-Absorbing Capacity (TLAC)Resolvability Assessment Process (RAP)Removing impediments to resolvability• Securing cross-border effectiveness of

resolution actions• Providing funding in resolution• Ensuring operational continuityEnabling an orderly resolution of globalsystemically important insurers (G-SIIs)and FMIs (in particular CCPs)

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Finalized the TLAC standard for G-SIBsTLAC is “total loss-absorbing capacity”available in resolution to facilitate an orderlyresolution of a G-SIB by absorbing lossesand recapitalizing the resolved entity withoutimposing losses on taxpayers.In response to a call from G20 Leaders, theFSB released a consultative document onTLAC in November 2014.Based on the consultation and afterassessing the findings of impact assessmentstudies including an analysis of marketimpact, the FSB finalized and agreed on afinal TLAC standard in November 2015. TheFSB reported the final standard to the 2015G20 Antalya Summit. 17

Overview of the TLAC standard for G-SIBs

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• RWA basis : 16% of RWAs from January 2019 and18% from January 2022

• Basel III leverage ratio denominator basis: 6%from January 2019 and 6.75% from January 2022

• Extended conformance period for G-SIBs of EMEs

Basic components

Calibration and conformance period

• TLAC consists of (i) Basel III regulatory capitaland (ii) other TLAC-eligible instruments (such assenior bail-inable debt issued by the holdingcompany)

• “Credible ex-ante commitments” may be countedin (ii)


Internal TLAC• To facilitate cross-border resolution, material

sub-groups of a G-SIB are required to issue loss-absorbing capacity (internal TLAC) to theresolution entity (to which resolution tools areapplied (e.g. the parent holding company).

• The FSB is to specify further details for internalTLAC by 2016.Disclosure

• The Basel Committee is responsible for developingTLAC disclosure requirements under Basel III by2016.

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• To reduce the risk of contagion, G-SIBs mustdeduct their exposures to TLAC issued by otherG-SIBs from their own TLAC or regulatory capital.

• The Basel Committee issued a consultativedocument to further develop and specifyrequirements for TLAC holdings (public commentperiod ended on February 12, 2016).

Regulation of TLAC holdings

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Cross-border effectiveness of resolution actions

To support cross-border enforcement of atemporary stay on early termination rights,18 G-SIBs signed and adhered to the ISDAResolution Protocol in November 2014.Under the Protocol, the G-SIBs agreed tocross-border enforceability of temporarystays on early termination rights for OTCderivatives in case their counterparty G-SIBs enter into resolution.In November 2015, 21 G-SIBs signed andadhered to a revised Protocol, which isextended to cover securities lending andrepo transactions.

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Cross-border effectiveness of Resolution ActionsIn parallel with the industry initiatives, inNovember 2015, the FSB finalized itsPrinciples on cross-border recognition ofresolution actions.The Principles contain elements ofcomprehensive statutory recognitionregimes and contractual recognitionclauses relevant for giving cross-bordereffect to resolution action.While emphasizing the importance of astatutory approach, the Principles alsosupport contractual approaches as aworkable solution until statutory regimesare adopted, and act as a complement tosupport such regimes being adopted. 22

Resolvability Assessment Process (“RAP”)Senior policymakers from the home and keyhost jurisdictions are to assess theresolvability of each G-SIB in the frameworkof the Resolvability Assessment Process(RAP).

The FSB has been addressing the keyimpediments to resolvability of G-SIBsidentified in the first round of RAPcompleted in 2015:• Funding and liquidity needs in resolution• Operational Continuity of critical services• Cross-border effectiveness of resolution

actions23

Funding in resolution and operational continuityThe FSB released consultative documents inthe following areas in November 2015.• Funding in resolution: addresses the risk

of banks having insufficient liquidity tomaintain critical operations during aresolution

• Operational continuity: identifies a numberof arrangements that could supportcontinuity of critical shared services (e.g.risk management and treasury-relatedfunctions, IT infrastructures) in resolution

The relevant documents containing guidanceare expected to be finalized in 2016.

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Implementation of the KAs in the insurance sectoris less advanced than in the banking sector.(Japan has taken a cross-sectoral approach andintroduced an orderly resolution regime thatcovers the insurance sector.)

CMGs have been established for G-SIIs andresolution planning is being developed.To support this process, FSB will finalize the draftguidance on “developing effective resolutionstrategies and plans for systemically importantinsurers” by Q2 2016.

Resolvability in the Insurance Sector

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Based on a growing concern over riskconcentration for CCPs resulted from mandatoryCCP clearing, policymakers have focused morerecently on central counterparties (“CCPs.”)FSB ReSG is undertaking the work of CCPresolution regimes regarding resolution strategies& planning and resolution tools for CCPs, cross-border cooperation and implementation, and thepotential need for additional prefunded resourcesin resolution, and develop a proposal as needed.By the end of 2016, the FSB will examine the needfor and, if appropriate, develop proposals forfurther guidance to support CCP resolvability.

Resolvability of CCPs

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Further work towards ending TBTFRemaining challenges identified in the first RAP• Making a bail-in operational• Ensuring continuity of access to FMIs• Supporting implementation of the TLAC standard

by developing further guidance on internal TLAC& rules for disclosure and for holdings of TLAC,as mentioned above

The ISDA Protocol• More G-SIBs to adhere to the revised 2015 ISDA

Protocol• ISDA to develop a Protocol for non-G-SIBs and

for the buy-side• Introduction of regulatory measures by national

authorities to promote adherence to theProtocol 27

Further work towards ending TBTF

RAP• Crisis Management Groups (CMGs) for G-SIBs

to conduct a second RAP• CMGs for G-SIIs to conduct a first RAP

Monitoring implementation of the KAs• Finalizing the Assessment Methodology for

KAs

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3. The critical role of deposit insurance

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The critical role of deposit insuranceDeposit insurance is a key element inpreventing systemic crises and ensuringfinancial stabilityNo one-size-fits-all model for a depositinsurer’s functions, but its role in enhancingconfidence among retail depositors andpreventing bank runs is critical for financialstability; i.e. it prevents systemic risk frommaterializingEx ante funding and development of skills,procurement of necessary resources may becritical for deposit insurance schemes tofunction effectively in a crisis 30

The critical role of deposit insurance

In many jurisdictions, deposit insurers playimportant roles in resolution, including asreceivers and as resolution authority as wellas providers of liquidity in resolution.Its role in mutualizing the costs of a bankfailure can also be extremely useful inenabling an orderly resolution withouttaxpayers bearing losses

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The critical role of deposit insurance

Cross-border cooperation between depositinsurers is critical in operationalizing anorderly resolutionThe IADI is expected to actively participatein the FSB work and contribute to buildingan orderly resolution process in eachjurisdictionResolution infrastructure is still being builtaround the world

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Thank you very much for your kind attention!

www.fsa.go.jp/en/

resolution of global systemically important …...2016/02/17 · not necessarily identical to those...

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