strengthening banking supervision - world...
TRANSCRIPT
Strengthening Banking
Supervision in a rapidly evolving environment
Washington DC
Introduction
• Environment
• Economic
• Banking (financial) systems
• Regulatory & Supervisory framework
• Who is to blame for the crisis?
2
Public policy
Monetary policy
Accountants
Rating agencies
Market players
Supervisors
Standard setters
Health ministry
Pharma industry
Patient’s family
Pathologist
Patients
Doctors
WHO
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
3
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
4
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
5
Strengthening
supervision: Areas for
consideration
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?
7
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
8
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
9
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
10
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
11
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
12
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
13
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
14
Supervisory agency : Governance
• Board (independent members)
• Industry participation
• Funding model
• Transparency
• External accountability
• Supervisory decision making – governance arrangements
• Appeals process against supervisory decisions
15
Environmental factors
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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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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Conclusions
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
20
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
21
Questions?