Session 3: Cross-Border Financial Positions and Exposures

What data do we need to form a better picture of cross-border exposures, including among

financial institutions and financial systems, and external debt obligations?

Cross Border Risks

Institutions• Risk-bearing• Policy actions ultimately

taken at institution level• Types of risk:

– Maturity mismatches

– Currency mismatches

– Open positions

Markets• Risk-matching• Focus on transparency

to identify collective risks• Types of risk:

– Counterparty risk

– One-way market positioning

– Liquidity

Risk Focused Approach• Systemically important• “80/20” approach• Feasibility

Financial Institutions

Sub’ry

Branch

Sub’ry

Branch

Branch

Branch

Branch

Branch

Branch

Sub’ry

Branch

Sub’ry

Reg’FI

Branch

Local FI

Local FI

Financial Institutions

Risk-Focused Approach

Systemically-important global financial

institutions

Global FI

Global FI

Global FI

Local FI

Local FI

Local FI

Reg’FI

Branch

Local FI

Local FI

Local FI

Local FI

Local FI

Local FI

Local FI

Local FI

Local FI

Local FI

Reg’FI

Sub’ry

Local FI

Local FI

Local FI

Local FI

Local FI

Reg’FI

Branch

Local FI

Home-HostColleges

Home

Host

Global FI

Branch Sub’ry BranchSub’ry Branch BranchBranch Branch Sub’ry

Global FI

Global FI

HomeSup’vr

HomeSup’vr

HomeSup’vr

HostSup’vr

HostSup’vr

HostSup’vr

Supervision of Global FIs

Host

Home Home-HostColleges

Aggregated Overview

Global FI

Branch Sub’ry BranchSub’ry Branch BranchBranch Branch Sub’ry

Global FI

Global FI

HomeSup’vr

HomeSup’vr

HomeSup’vr

HostSup’vr

HostSup’vr

HostSup’vr

Data Gaps

Enhance

Global FI

Branch Branch Sub’ry

HomeSup’vr

Current Framework

Enhancing Home-Host Co-operation

Proposed Template

•Group-level ALM (global funding model)

•Capital and sources of capital

•Intragroup exposures

•Group exposure to unregulated entities

•VAR concentration

•Trade finance, e.g. bills, LCs

•Counterparty concentration

•Stress test results•Off balance sheet items

Dated Information•Capital ratios•NPL ratios•LTD ratios•Headoffice funds•Liquidity profile•Quarterly results

Public Sources•News •Ratings actions•Analyst reports•Credit default spreads

Supervisory Colleges•When invited only

HostSup’vr

HostSup’vr

HostSup’vr

AggregatedOverview Global

FI

Branch Sub’ry BranchSub’ry Branch BranchBranch Branch Sub’ry

Global FI

Global FI

HomeSup’vr

HomeSup’vr

HomeSup’vr

HostSup’vr

HostSup’vr

HostSup’vr

Aggregated Overview

Shock IdentificationSources of disturbances to major financial systems

• NPLs, funding profiles• Credit conditions• Concentrated exposures• Holdings of securities and loan

exposurese.g. property, corporate (size, rating), consumer, securities (rating, maturity), trading assets

Transmission ChannelsInterbank and portfolio capital flows:

• Consolidated cross-border interbank exposures (each other)

• Banking exposures to non-bank FIs, e.g. insurers, hedge funds

• Greater disclosure of hedge fund terms of funding, leverage, etc.

Home-Host College

Aggregated

Overview

Global FI

Global FI

Global FI

HomeSup’vr

Proposed Monitoring Framework

HomeSup’vr

HomeSup’vr

International Financial Institution

Aggregate systemically-important global FIs

Policy action feedback loop

Framework• Home supervisors

– Submit common data template

• IFI – Aggregates and

analyses data– Identifies collective

risks – Publishes

assessment

• Feedback loop– Supervisors check

individual institution risk against collective risks

– Supervisors undertake policy action if necessary

Home-Host College

Aggregated

Overview

Global FI

Global FI

Global FI

HomeSup’vr

Proposed Monitoring Framework

HomeSup’vr

HomeSup’vr

International Financial Institution

Aggregate systemically-important global FIs

Policy action feedback loop

Delineation of Focus Areas

Home-Host Colleges

• Institution focused

• Proprietary risks

Aggregated Overview

• System focused

• Market-wide risks

Financial Markets

Markets

ACTIONABLE• Credit Default Swaps• Collateralised Debt Obligations• Collateralised Loan Obligations• Currency options• Forward Rate Agreements

PRIORITY• Interest rate swaps • Interest rate options

LOW HANGING FRUIT• Index options• Equity options• Commodities and environment

No exchange, clearinghouse or central settlement system

Substantially on exchange, clearinghouse or central settlement system

Risk-Focused Approach

“Bang for the buck”

Large

Small

Market Infrastructure

Risks• Systemically-

important counterparties

• One-way market positioning

• Cross-border contagion

• Liquidity

Indicators• Top volume

– Counterparties– Contracts and

reference names– Open interest– Jurisdiction

• Amount of assets on loan

• Settlement failures• Turnover volume• Collateral types and

haircuts

Unified Framework

HomeSup’vr

Home-Host College

Aggregated

Overview

Global FI

Global FI

Global FI

HomeSup’vr

Proposed Monitoring Framework

HomeSup’vr

International Financial Institution

Policy action feedback loop

MarketMarket Market

ExchClear’house

SSS

International Financial Institution

Cross-Check Systemic Risks

MARKETSINSTITUTIONS

Way Forward

Institutions• Identify systemically-

important FIs and criteria• Build common data

template for home-host co-operation on systemically-important FIs

• Aggregate common indicators and analyse common risks to systemically-important FIs

Markets• Identify systemically-

important markets and central infrastructure

• Build template of indicators of different market risks

• Migrate systemically-important OTC markets to exchanges and clearinghouses

Pillars of Co-operation• International organisations, supervisors, market infrastructure• Data collection is a means; policy co-ordination to be effective• Do not inadvertantly impede cross-border capital flows