Financial Integration and SupervisionChallenges for Central Banks

Nestor A. Espenilla, Jr.Deputy Governor

Bangko Sentral ng Pilipinas

Issues Covered in this Discussion

• The premise of regional integration (with specific focus on ASEAN Financial Integration Framework)

• How banking supervision needs to adjust under the mandate of financial stability and policy direction of regional integration (the strategic framework)

• Some policy challenges faced by banking authorities arising from greater cross-border integration (the tactical concerns)

Herd of Net Private Capital Towards EM/ASEAN

Came in Together, Went Out Together as Well

Net Portfolio Flows (in million USD)

Covers The Philippines, Singapore and Thailand

2012 Q1to

2013 Q2

The Prospects May Not Be As Obvious to All

• Forecast Gross National Savings rate for ASEAN 5 in 2013 is 30.61 %

• The world's average Gross National Savings rate is only at 18.95 %

• Historically, ASEAN saving has been invested outside ASEAN

Using ASEAN Financial Integration as an Example

Capital Account Liberalization

Integrated Payment & Settlements Systems

FSL / ASEAN Banking Integration

CMD / ASEAN+3 Bond Market Initiative

The Linkages are Clearly Comprehensive

Markets

Institutions

Fin MarketInfrastructure

Products

Individuals

Governance

Conflictsof

Interest

• Linking jurisdictions requires linking financial markets and setting omnibus standards for acceptable behaviour

• But markets are never going to be identical across jurisdictions. . . gaps and overlapswill be inevitable

Financial Stability, Banking Supervisionand Regional Integration

BanksFinancialConsumer

Our Stylized Approach Towards Bank Supervision

Conflicts of interest are mitigated by having the bank supervisor take an active role between the financial consumer and the bank itself

But the pursuit of financial stability will change the nature of the

prudential relationships

Banking Policy& Supervision

Supervision Framework Has to Consider FinStab

It is no longer enough to ensure that each bank is operating safely and soundly

Linkages matter, the sequence of effects matter and the expected magnitude of impact certainly matters

Prudential Policy Framework Other Policy Considerations

• Capital Adequacy

• Market Conduct

• Consumer Protection

• Safety and Soundness

Monetary policy •

Payments system policy •

Securities market policy •

Insurance market policy •

Stable and ResilientFinancial System

Macroprudential versus Micro Oversight

Stable and ResilientFinancial System

Prudential Policy Framework Other Policy Considerations

Monetary policy •

Payments system policy •

Securities market policy •

Insurance market policy •

SYSTEMIC (and SYSTEMATIC) RISKS

Macro-PrudentialPolicy Framework

Macroprudential versus Micro Oversight

Setting Up What is Needed At Home

In-country situations will be different as you move from one jurisdiction to another

There will be a lot of focus on idiosyncratic conditions across jurisdictions

Moving from intra-country dynamics to inter-country linkages presents a major challenge

Harmonizing the prudential framework within the region will not be a trivial task

Migrating Local Stability into Regional Integration

Some Policy Considerations for Banking Authorities

The Integration Agenda is About Gaps & Overlaps

• There is significant diversity across the jurisdictions in the region

• The adjustments to be made by banking regulators will depend on the form of regional integration:

a) The prudential framework in effect (A regional Basel Accord?)

b) Cross-border financial transactions

c) Cross-border network of FIs

d) Focusing on the Regional Customer

Basel 1

• Link exposures to risk back to capital position

• Define how to manage credit risk

Basel 2

• Link exposures to risk back to capital position

• Improve credit risk mgt

• Extend risk coverage

• Intro 3 pillars

Basel 3

• Link exposures to risk back to capital position

• Improve further credit risk mgt

• Further extendrisk coverage

• Retain 3 pillars

• Improve quality of capital

Basel 4?

Calibrating the Application of the Basel Continuum

Open Financial Access to Regional Markets

Source: Institute of International Finance. “Capital Flows toEmerging Market Economies”. October 2013

• Open economies always face the double-edged sword of external flows

• The portion that stays as financial investments typically:

a. are prone to sudden reversals since they are driven by spreads and gaps

b. affect market spot and forward rates

c. thus, distort fundamentals

The Idea Behind Qualified ASEAN Banks (QABs)

MultilateralStandards

BilateralDiscussions

AmongBanking

Authorities

45 PossibleBilateral

Agreements

Harmonized Banking Supervision Framework

Resolution Mechanism(Both Corporate & Personal)

The Agenda for the Regional Customer

1. Crisis Management and/or Remedial Measures

3. Capacity Building for Regulators (By Regulators)

2. Consumer Redress Mechanisms

1. SEACEN; FSI; IMF

2. ABIF Capacity Building

3. Individual CB Initiatives

1. Own country Consumer Protection Framework

2. ASEAN CP Committee

1. Bilateral Agreement

2. Evolving agenda item for EMEAP, FSB-RCGA

Issues Covered in this Discussion

• The premise of regional

• How banking supervision needs to adjust

• Some policy challenges faced by banking authorities as a result of greater integration

• Potential is clear

• But significant adjustments are needed

• Has to start from an agreed prudential framework . . . and let’s not forget the consumer

Financial Integration and SupervisionChallenges for Central Banks

Nestor A. Espenilla, Jr.Deputy Governor

Bangko Sentral ng Pilipinas