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Strengthening Banking Supervision in a rapidly evolving environment Washington DC

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Page 1: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Strengthening Banking

Supervision in a rapidly evolving environment

Washington DC

Page 2: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Introduction

• Environment

• Economic

• Banking (financial) systems

• Regulatory & Supervisory framework

• Who is to blame for the crisis?

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Public policy

Monetary policy

Accountants

Rating agencies

Market players

Supervisors

Standard setters

Health ministry

Pharma industry

Patient’s family

Pathologist

Patients

Doctors

WHO

Page 3: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

What are the lessons from the crisis?

ISSUES

• TBTF

• Capital rules

• Business model

• Ratings and market driven

• Funding & liquidity risk

• Procyclicality

• Microprudential perspective

• Compensation practices

• Shadow banking

RESPONSES

• TBTF

• Basel 2.5 and 3

• Reducing reliance on rating

agencies

• Macroprudential focus

• Compensation principles

• Shadow banking

• Ring fencing

• Revision of standards

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Page 4: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Select issues for consideration

• National discretion

• Countercyclical buffers

• Liquidity ratios

• Sovereign exposures

• Bail-ins and Co-Cos

• TBTF

• Identification of SIBs

• Shadow bank – incentives

• Solutions or new risks

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Page 5: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Select issues for consideration (2)

• External ratings

• Ring fencing

• Cross-border resolution

• Macroprudential supervision – who, how, implications for micro

• Ownership of supervisory tools

• Bank resolution – how it affects supervision

• Safety net

• Crisis preparedness and crisis management

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Page 6: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Strengthening

supervision: Areas for

consideration

Page 7: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

For consideration

• Institutional structure

• Full integration; part integration; under central bank

• Regulation; Off-site; on-site; enforcement

» Bank ownership basis

» Dedicated bank specific teams

• Clarity of mandate

• Adequacy of powers and independence

• Supervisory approach

• Supervisory techniques

• Governance

• Whether outsourcing can help?

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Page 8: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Mandate, Powers & Independence

•Perimeter

•Multiple authorities

•Primary objective : Safety and soundness

•Use of judgment for differential prudential requirements

•Access to bank group’s board, senior management, staff and records

•Include prompt remedial actions

•Step in when unsafe or unsound practices are observed

•Transparent processes for appointment and removal of heads of

supervisory agency

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Page 9: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Supervisory Approach

• Gate keeping

• Board’s collective knowledge: material activities & risks

• Risk management ability

• Reckon quality of home and host supervision

• Structure should not hinder supervision, including PRAF

• Impose prudential requirements: on bank, significant

shareholders, major acquisitions

• Address concerns at licensing stage

• Innovations

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Page 10: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Supervisory approach (2)

• Frequency, intensity and prioritisation of supervisory work

• Analyses of business focus, group structure, risk profile and

resolvability

• Require and analyse RRPs

• Crisis preparedness and Contingency planning

• Assist in identification of bank-like activities outside regulatory perimeter

• Risks from banking system

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Page 11: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Supervisory Techniques

• Determine appropriateness and adequacy of risk management

• Current profile (market & economic conditions) for banks and

banking groups

• Forward looking view

• How relates to business & risk strategies

• How relates to bank’s risk appetite

• How bank modulates risk strategies

• Stress tests and contingency plans

• Understanding of risks assumed (transactions, products, business)

• How managed – mitigants

• How priced

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Page 12: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Supervisory Techniques (2)

• Proportionality principle

• Financial analysis – trend, business plan, risk appetite, sustainability

• Undertake peer reviews – trend, prudential requirements, outliers

• Macro (system level) analysis

• Business models & products – sustainability

• Challenge board and senior management assumptions in

strategy and business models

• Supervision of financial models

• Stress tests – top down, bottom up;

• Undertake horizontal reviews – practices and regulatory risks

• Valuation practices – reliability of inputs, consistency, verification &

validation

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Page 13: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Supervisory Techniques (3)

•Outsourcing of supervisory activities – responsibility, reliability, biases,

concentration

•Intervene early when risks to bank or to banking system are perceived

•Escalate supervisory response as per gravity

•Periodically review adequacy and effectiveness of the range of

supervisory tools and their use

•Consolidated supervision

• Enforce fit & proper norms for the owners and senior

management of parent companies

• Limit the range of activities – when risks are perceived

• Cooperation & coordination

• Also supervise banks on solo basis

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Page 14: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Supervisory Techniques (4)

•Exchange information on principal risks, risk management practices,

judgments on safety and soundness

•Home to lead a group resolution plan

•Allow host access to group offices

•Have contingency plans to handle cross border crisis situations

•Alert or consult other authorities while taking recovery and resolution

measures

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Page 15: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Supervisory agency : Governance

• Board (independent members)

• Industry participation

• Funding model

• Transparency

• External accountability

• Supervisory decision making – governance arrangements

• Appeals process against supervisory decisions

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Page 16: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Environmental factors

Page 17: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Pre-conditions

• Sound macroeconomic policies

• Public infrastructure

• Legal framework

• Independent judiciary

• Accounting frameworks

• Auditing framework for companies

• Supervision of other financial market and players

• Secure and efficient payment system

• Market discipline

• Safety net

• Resolution regime

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Page 18: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Environment

• Macro economic scenario

• Fiscal position

• Monetary policy

• External trade and capital flows

• Increasing cross border integration of real and financial sectors

• Growing complexity of businesses and institutional structures

• Any other ?

• Asset prices

• Household indebtedness

• Unhedged fx risk

• Corporate indebtedness

• Quality of supervision by others

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Page 19: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Conclusions

Page 20: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Summary of discussion

• Have clarity on evolving issues

• Adopt a more intrusive supervision

• Adopt a multi-discipline approach

• Modulate for environmental factors

• Enhance inter-agency and home-host cooperation and coordination

• Maintain a macro (system-wide) view also

• Improve quality control framework

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Page 21: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Summary of discussion (2)

• Self-assess compliance with national and international standards

• Be prepared for public scrutiny

• FSAPs, FSB peer reviews, BCBS – SIG, Home-host, rating

agencies; Media; RTI

• Clearly document assessment, finding, & action taken

• Demonstrate active on-going supervision

• Skill upgrade

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Page 22: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Questions?

Page 23: Strengthening Banking Supervision - World Banksiteresources.worldbank.org/...Krishnamurti_StregthenSupervision... · Supervisory Techniques (2) • Proportionality principle • Financial

Thank You

[email protected]

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