Finance 110631-1165

Banking regulation and supervision

Finance 110631-1165

Lecture outline

Areas of banking regulation

The Basel Committee

EU-banking regulation

American banking regulation

Banking regulation challenges

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Financial supervisory functions of the central bank

Entry into banking regulation

Banking activity regulation

Capital requirements

Deposit insurance schemes

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Entry into banking regulation

Limitations placed on the ownership of banksLegal requirements for obtaining a licenseCompetition in banking

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Banking activity regulation

Can banks engage in non-banking

activities e.g.Securities activities

Insurance activities

Real estate activities

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Capital requirements

How much capital must banks hold? What type of capital must banks hold?Initial and overall capital stringency

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Deposit insurance

What requirements have to fulfilled by banks in order to be covered by deposit insurance?

What part of the banks assets is covered by the fund?

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Banking supervision

When can supervisors take action?How far can they intervene in the banks

activity?When can be a bank declared insolvent by

authorities? Loan qualification- when is a loan

doubtfull or loss?

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Regulation on national and international levels

Each country has its own regulatory standards

Moreover international institutions try to set common standards

The Basel CommitteEU-regulation

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International banking supervision

The goals: Ensuring safe and effective payment settlements

Risk minimalisation

Ensuring international financial system stability

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The Basel Committee (1)

A forum for regular cooperation on banking supervisory

Its objective is to enhance understanding of key supervisory issues

Its activity is aimed at improving the quality of banking supervision worldwide

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The Basel Committe (2)

The Committee's members come from all around the world

The Committee issues recommendations concerning supervisory and regulatory standards

It communicates its research results to regulators

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Basel I

1988 Basel Accord

Minimum capital requirements for banks

Banking supervision- international

responsibility

Information exchange

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Basel II

2004 Basel Accord

Capital allocation should more risk adjusted

Precise methods of quantifying: operational,

credit and market risk

Limitation regulatory arbitrage (the possibility to

use differences in regulatory standards)

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Basel III

2012 Basel Accord

A response to the financial crisis

More stringent capital requirements

Tier I capital- common equity and disclosed reserves

Tier II capital- instruments specified in the Accord eg.

undisclosed reserves, provisions

Stringent capital requirements for transactions with

derivatives

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Basel III

Countercyclical buffer- banks should hold an additional

buffer of capital as provision for an economic downturn

The goal is to dampen procyclicality in loans

Leverage indicator

Short term and medium term liquidity indicators

Stressed value-at-risk- banks undergo stress test

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EU-regulations

European Banking Authority

The institution was created in 2011 as a

reaction to the crisis

Its task is to monitor EU-banks e.g. by

means of stress tests

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EU-regulations

In the case of failure of national rules the EBA

regulation supersedes national regulations

The goal of EBA is also to avoid regulatory

arbitrage

It sets a common reporting framework for the

regulated banks

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American banking regulation (1)

Edge Act- 1916

Edge Act corporations- eclectic financial

intitutions

Since the American law limited strictly the

banking activity (e.g. limitation of foreign

transactions financing)

American banks started to go offshore

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American banking regulation (2)

Onshore banks- act under the national jurisdiction

Offshore banks- national banks located beside the

national jusrisdiction

Onshore offshore banks- national banks located in the

home country but they act beside the national jurisdiction

International Banking Facilities- 1981

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International banking and the globalisation of financial markets (1)

The establishment of non-bank financial institutions led

to a shrinking area of banking activity

This led to changes of the activity profile of the banks

Deregulation

Competitive pressure led banks to come up with new

strategies- competing through „sevices quality”

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International banking and the globalisation of financial markets (2)

Banking regulation vs. protection by the

state

Mergers and acquisitions led to capital

concentration oligopolistic structure

Large banks were systemtically important

institutions Too big to fail

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International banking and the globalisation of financial markets (3)

Technological progress

Innovations

Securitisation- selling consolidated debt as bonds or

other securities

Internationalisation of banks

New risk management techniques

Bank started to face new types of risks

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International banking regulation difficulties (1)

Offshore bankingNo deposit guarantees

No minimum reserve requirements

Difficulties in supervision

Lender of last resort???

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International banking regulation difficulties

National regulations vs, international

regulations

Emerging markets

International non-banking institutions

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References

International framework for liquidity risk measurement, standards

and monitoring, Basel Committee on Banking Supervision, BIS,

2010

Strengthening the resilience of the banking sector, Basel

Committee on Banking Supervision, BIS, 2009.

K. Sum, The role of banking regulation in shaping the economic

performance of the EU- countries during the financial crisis of

2007-2009, Gospodarka Narodowa 4/2013