regulation and supervision after the storm february 8, 2012 global financial development report 2013...

Regulation and Supervision After the Storm

February 8, 2012

Global Financial Development Report 2013GFDR Seminar

– After the onset of the global financial crisis: much discussion about “not wasting” the crisis, and using it to push for needed reforms

• Basel Committee• Financial Stability Board (FSB)• Dodd-Frank Act, Vickers report, etc.

– Much has been done, but is it appropriate?• Does it address the sources of future financial crises?

Introduction Introduction What changed? What are likely impacts? What’s missing? Conclusion

– Recommendations for regulatory reform developed in academic fora

• Geneva Report (2009)• LSE Report on the Future of Finance,(2010)• Squam Lake Working Group (2010)• CEPR Future of Banking (2010)

– Common themes: • Information asymmetries and structure of incentives under which agents operate in

the financial system are fundamental sources of weakness in financial systems• Incentive issues need to be more fully reflected in the design of regulatory systems

– We take the discussion a step further, and outline an approach to the regulation of financial systems that would place issues of asymmetric information and incentives at its center.


• Key issues– Post-crisis transformation of regulatory practices around the world– Specific issues for emerging market and developing economies

• Questions … and preliminary answers – Lessons from the crisis? … Incentive breakdowns– What has changed? … A few things, but more is needed– How big are the likely impacts? … Manageable, but large in some regions– What’s missing? ... Addressing incentive issues


Introduction: Lessons learned from the global financial crisis

• Shortcomings in the micro prudential approach– Promoted regulatory arbitrage– Focused on risks in individual institutions, did not sufficiently reflect systemic risk– Rules poorly designed, some increased systemic risk– Implementation constrained by capacity and incentives of regulators/supervisors

• Shortcomings in market discipline– Basel II sought to expand the role of market discipline elements– Rating agencies given a role in the evaluation of the risks in the portfolio under Pillar I– Explicit role for market discipline introduced under Pillar III– But underlying assumptions not met due to information asymmetries and perverse

incentives

Introduction What changed? What are likely impacts? What’s missing? Conclusion

Introduction: Lessons learned from the global financial crisis

• Shortcomings in surveillance– Financial stability indicators used Basel ratios and suffered from same shortcomings as the

supervisory measures. Models calibrated using historical data from benign periods and did not provide useful early warnings.

– Assessments against international supervisory standards (Basel, IOSCO, IAIS) generally showed high degrees of compliance but often failed to identify shortcomings in regulatory approach (Demirguc-Kunt, Detragiache, 2010).

– Information failures limited the capacity of financial stability assessors to monitor exposures, risk transfers and threats to systemic stability (Impossible to know the extent to which the failure of one institution would impact others and the system generally)

– Silo approach: systemically important segments of the financial system were not covered by surveillance or crisis management arrangements.

– Political and economic climate dampened the incentives of financial stability analysts to dig deeper and question the adequacy of information and underlying assumptions.

– No procedures for resolving large banking institutions.


What changed in regulation … global response (Basel III) Introduction What changed? What are likely impacts? What’s missing? Conclusion

Key Areas of Change Examples of Specific StepsRaise quality, consistency, and transparency of the capital base

Tier 1 capital narrowed down (common shares, retained earnings) Tier 2 capital instruments harmonized Tier 3 capital eliminated

Strengthen risk coverage of the capital framework

Promote more integrated management of market and counterparty credit risk Reduce procyclicality

Put a floor under the build-up of leverage in the banking sector

Introducing a leverage ratio as a supplementary measure to the Basel II risk-based framework

Reduce procyclicality and promoting countercyclical buffers

Promote more forward looking provisions

Protect the banking sector from periods of excess credit growth.

Requirement to use long term data horizons to estimate probabilities of default, downturn loss-given-default estimates, recommended in Basel II, to become mandatory

Introduce a global liquidity standard for internationally active banks

Includes a 30-day liquidity coverage ratio requirement underpinned by a longer-term structural liquidity ratio (NSFR)

Reducing the externalities created by systemically important institutions

Reviewing the need for additional capital, liquidity or other supervisory measures

What changed in regulation … global response (FSB) Introduction What changed? What are likely impacts? What’s missing? Conclusion

• FSB principles for sound compensation practices– Stated aim: enhance the stability and robustness of the financial system– Not to be used as a pretext to prevent or impede market entry/access

• Rating agencies– Effort to reduce the financial stability-threatening herding and cliff effects that

currently arise from “credit rating agencies” (CRA) rating thresholds being hard-wired into laws, regulations and market practices,

– Principles to reduce reliance on CRA ratings in standards, laws and regulations. – Aim to trigger a significant change in existing practices, end mechanistic

reliance by market participants and establish stronger internal credit risk assessment practices instead.

• Filling information gaps– Major initiative, 20 recommendations to address information gaps (Nov 2009)

What changed in regulation … global response (FSB) Introduction What changed? What are likely impacts? What’s missing? Conclusion

• FSB proposals to deal with too-big-to-fail (TBTF) issues– New international standard (‘Key Attributes of Effective Resolution Regimes’);– Requirements for resolvability assessments and for recovery and resolution planning

for global SIFIs, and for the development of institution-specific cross-border cooperation agreements;

– Requirements for banks determined to be globally systemically important to have additional loss absorption capacity tailored to the impact of their default, to be met with common equity;

– More intensive and effective supervision of all SIFIs.

• FSB/Basel Committee published an initial list of “global SIFIs”– 29 banks, to meet resolution planning requirements by end-2012. – National authorities may extend these requirements to other institutions.– G-SIFI list to be updated and published by the FSB each November.– Methodology and data publicly available so that markets and institutions can

replicate the authorities’ determination.

• Update of the WB banking regulation and supervision survey– Unique dataset of banking regulation and supervision around the world– Previous rounds (2000, 2003, 2007) widely used in research, policy work

• The current, fourth, round of the survey provides comprehensive info on state of regulation and supervision around the world as of 2011

• The first comprehensive look at post-crisis regulation • New data for 134 countries, covering all regions • Contains over 730 questions in 14 sections

– About ½ of Qs same as in previous three survey rounds (comparability)– About ½ of Qs newly added (mostly on macroprudential issues, consumer

protection, Basel II implementation)• Major effort to ensure consistency of responses across countries

– Guidelines, follow-up with respondents via external survey company – FPD and DEC staff involved, seasoned supervisors as consultants

What changed in regulation … national responses Introduction What changed? What are likely impacts? What’s missing? Conclusion

WB database of banking regulation and supervision Introduction What changed? What are likely impacts? What’s missing? Conclusion

• Covers all G20 countries and a majority of non-G20

• The survey has questions in the following 14 sections:1. ENTRY INTO BANKING2. OWNERSHIP3. CAPITAL4. ACTIVITIES5. EXTERNAL AUDITING REQUIREMENTS6. BANK GOVERNANCE7. LIQUIDITY & DIVERSIFICATION REQUIREMENTS8. DEPOSITOR (SAVINGS) PROTECTION SCHEMES9. ASSET CLASSIFICATION, PROVISIONING, AND WRITE-OFFS10. ACCOUNTING/INFORMATION DISCLOSURE11. DISCIPLINE/ PROBLEM INSTITUTIONS/ EXIT12. SUPERVISION13. BANKING SECTOR CHARACTERISTICS14. CONSUMER PROTECTION

What changed in regulation … national responses Introduction What changed? What are likely impacts? What’s missing? Conclusion

• Overall, regulatory changes on country level have been evolutionary– For the qualitative questions in the survey, 85 percent of responses unchanged between

2007 and 2011 (“no” remained “no”, “yes” remained “yes, etc.)– Also, most of the quantitative indicators showed relatively little overall movement ….

Post-crisis regulation around the world … Introduction What changed? What are likely impacts? What’s missing? Conclusion

Source. Staff calculations based on the WB Banking Regulation and Supervision database.

2008 2009 20100%

2%

4%

6%

8%

10%

12%

14%

16%

18%

standard de-viation

average

Capital to assets (unweighted)

• … but notable changes in individual countries in several areas.• For example, in an attempt to respond to the crisis, countries introduced a

plethora of new requirements on bank governance framework….



Other

Existence of a Board risk committee

Chief risk officer direct reporting line to the Board or Board Committee

Independence of the Board

Executive compensation

0 10 20 30 40 50 60 70

Number of responses

• … and they have sought (or are seeking) to strengthen bank insolvency frameworks.



No revisions

Revisions under consideration

Implemented coordination arrangements among domestic authorities

Introduced a separate bank insolvency framework

0 10 20 30 40 50 60 70 80 90

Number of responses

• An important part of the crisis response was increased generosity of deposit protection systems, e.g. in terms of the amounts covered…



Only minor changes or no change

Government guarantee of deposits and bank debts

Expansion of coverage (types of exposures, nature of depositors etc.)

Increase in amount covered

0 5 10 15 20 25 30 35 40

Number of responses

• Renewed impetus after the crisis• New bodies (FSOC, ESRB…), financial stability reports (U.S., Italy, India, ….), stress test publication

• Ongoing work on good practices in macroprudential surveillance• Simply publishing a financial stability report seems to have no impact

– Quality of reports matters (Čihák, Muñoz, Teh Sharifuddin, and Tintchev, 2012)

Push on macroprudential front has intensified… Introduction What changed? What are likely impacts? What’s missing? Conclusion

Push to implement new Basel rules continues… Introduction What changed? What are likely impacts? What’s missing? Conclusion

Developed

Developing

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

median deviation


Standardized Approach

Foundation IRB Approach

Advanced IRB Approach

0

10

20

30

40

50

60

70

80

90

100

2007 survey

2011 survey

% o

f co

untr

ies

adop

ting

Bas

el I

I

• Empirical evidence from crisis (Demirguc-Kunt, Detragiache, Merrouche, 2010)– During the crisis, stock returns of large banks were more sensitive to the simpler capital

ratios than to the risk-adjusted capital ratio– Also, stronger association for “higher-quality capital” (Tier 1, tangible equity) – Builds a case for a simple yet well-defined capital ratios

• The survey suggests no obvious trend (yet?) in use of simple capital ratios– some countries moved to more complex ratios– others re-introduced the simpler ratios

Simple capital ratios: to use or not to use? Introduction What changed? What are likely impacts? What’s missing? Conclusion

newly introduced

stopped using

0 1 2 3 4 5 6 7 8 9 10

Number of countries


• Within Tier 1, respondents put more emphasis on common equity

More emphasis on higher quality capital Introduction What changed? What are likely impacts? What’s missing? Conclusion


Tier 2 Tier 30

10

20

30

40

50

60

70

80

90

100

Is the following in-cluded in regulatory

capital?

% o

f re

spon

dent

s

2007 20110

10

20

30

40

50

60

70

80

90

100

Is subordinated debt included in

regulatory capital?

% o

f re

spon

dent

s

Risk-based capital ratios: minimums vs. actuals



10

20

30

40

Actu

al risk b

ased

ca

p %

of b

an

kin

g s

yste

m (

end

-20

10

)

8 10 12 14 16Min req risk-based reg cap % (end of 2010)

Reported impact of the new capital rules so far … Introduction What changed? What are likely impacts? What’s missing? Conclusion


Increased substan-tially

Increased slightly Neutral / little change

Decreased slightly Decreased substantially

0

5

10

15

20

25

30

impact of moving to Basel II on the overall regulatory capital level of the banking system

% o

f co

untr

ies

that

ado

pted

Bas

el I

I

• Objective: Analyze the implications of the Basel III regulatory measures for emerging market and developing countries

• Scope of the analysis

– Impact of Basel III capital requirements

• Higher and better quality capital• Mostly common equity with loss absorbing features• Deductions from current core capital the amount of intangible and qualified assets that have less loss-

absorbing qualities• Such assets can be included in capital only up to 15 %• Implementation period: gradual phase in from 2013 with introduction of deductions from 2014 to

meet 7% common equity ratio (w/ conservation buffer) by 2019

– Impact of liquidity requirements (promote longer term funding of assets and reduce reliance on volatile, wholesale funding sources—Net Stable Funding Ratio (NSFR)

– No analysis of LCR (short term liquidity coverage ratio)—data issues

– No analysis of leverage ratio—data issues

• Caveats: Analysis very preliminary and incomplete – Used Bankscope data and company reports as a basis for the computations– Many missing data to be refined and explored and assumptions to be verified and checked with staff

with knowledge of specific country cases

What are the likely impacts of the new Basel rules? Introduction What changed? What are likely impacts? What’s missing? Conclusion

Sample Coverage: 127 banks over 6 regions, 42 countries Introduction What changed? What are likely impacts? What’s missing? Conclusion

25

0

4

8

12

Tier 2Other Tier 1Common Equity

Higher Quality of Capital

Higher Level of Capital

4.5%

7%4%2%

2%

Basel III capital rules aim to achieve more and better quality capital

Mostly common equity with better risk absorption features


Share of assets with less loss absorbing characteristics relatively small on average for EMDE banks, except in LAC region

Assets deductions: higher quality capital(in % of Core Tier 1)


ALL LAC ECA MENA EAP SA SSA0%

20%

40%

60%

80%

100%

0.828758615334965

0.513274446091746

0.9023158444068060.8940927598767330.8915987845842780.9517615083160950.836314936506876

0.171241384665037

0.486725553908255

0.09768415559319470.1059072401232660.1084012154157220.04823849168390530.163685063493125

% of remaining Core Tier 1% of Deduction Items according to BCBS proposal

Very Preliminary!

LAC ALL EAP MENA ECA SSA SA0%

10%

20%

30%

40%

50%

60%

% of core tier 1 to be deducted

As a result, the needed increase in capital to meet the new capital requirements can be large for some regions


0%

2%

4%

6%

8%

10%

8.99%

1.54%

0.55%

6.90%

0.59%

7.49%

Impact of Basel Regulation on Core Capital Ra-tio by end 2012, sample average

Current and adjusted capital ratios, with and without retained earnings

Very Preliminary!

Capital declines by 1.5 pp

ALL LAC ECA MENA EAP SA SSA0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

9.0%9.5%

11.6% 11.5%

8.2% 8.3%

9.4%

6.9%

4.5%

9.5% 9.5%

6.8%7.4%

8.1%

7.5%

5.2%

10.5% 10.7%

7.2%7.8%

9.1%

Core Tier 1 Ratio Basel III Core Ratio, 2010New Basle III Core Ratio, 2012

Also wide variation in banks’ ability to meet the required 100% level for the NSFR

Net Stable Funding Ratio (Available Stable Funding / Required Stable Funding) • ECA and LAC may be the most affected by the

NFSR requirement.• But there is also wide variation within the

same region• Most banks in EAP, SSA and MENA have NSFRs

> 100 %• For ECA, the lowest NFSRs are associated with

some banks in Hungary, Slovenia, some CIS countries (Ukraine, Kazakhstan), and Baltics

• For LAC, most Mexican and some Brazilian banks have NSFRs less than 100%.

• Most banks in MENA and SA are well above 100 % level (some banks in UAE, Kuwait, Thailand and Korea have lower ratios)

• For SSA, 3 out of 5 banks in South Africa are below 100% NSRF target.

Note: Diamonds represent min, median and max values


ECA LAC EAP SSA MENA0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Very Preliminary!

In general banks with high L/D ratios and high wholesale funding ratios have low NSFRs


0% 50% 100% 150% 200% 250% 300% 350% 400% 450%0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

NSFR vs. Loan-to-Deposit Ratio

EAP ECA LAC

MENA SSA

Loan-to-Deposit Ratio

NSF

R

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

NSFR vs. Share of Wholesale Funding

EAP ECA LAC MENA SSA

Share of Wholesale Funding to Total Fund-ing

NSF

R

• Basel III may have varying degrees of impact on EMDEs across regions, with wide variations also within a given region.

• ECA and LAC regions seem to be the most vulnerable to the LT liquidity requirement (NSFR), where dependence on wholesale funding (ECA) or Loan to Deposit ratios are high (ECA and some LAC). However, other factors may also affect the level of NSFR (e.g., different amounts of government securities in asset portfolios—low levels may result in low NSFRs)

• Further challenges may be ahead in meeting the NSFR requirement: e.g., upcoming rollover needs of European banks and sovereigns may raise the cost of term funding and result in competition for deposits. There are also challenges associated with holding high levels of (liquid) government securities: this would help in meeting the NSFR target but expose the bank to higher sovereign risk

• These findings should be interpreted with caution. The analysis is very preliminary and is subject to significant data problems. Lack of available data and benchmarks for the analysis also calls for further analysis of the assumptions used in the computations.

What do these estimates tell us about Basel III impacts? Introduction What changed? What are likely impacts? What’s missing? Conclusion

What are some of the risks with the response?

• Implementation– Resources– Partial responses– National priorities versus level playing field– Need for flexibility

• Design– Basel framework, despite recent improvements, is still primarily a micro prudential

regulatory response (“raise bank capital standards”), not explicitly founded in optimal control theory and likely to fail as conditions change

– Economic theory identifies fundamental sources of weakness :• Asymmetric information• Perverse incentives.

– Missing in Basel is explicit assessment of sources of market failures/externalities– FSB agenda has begun to incorporate elements to address perverse incentives and

asymmetric information --e.g., compensation practices, moral hazard in SIFIs, and information gaps


Alternative framework for financial system oversight

• Alternative approach would move issues of asymmetric information and incentives to center of the regulatory framework.

• Alternative is an evolution of existing approaches but has a different emphasis • Asymmetric information:

– Enhanced disclosures (examples):• Major counterparty and sectoral exposures of the firm• Benchmarks for the evaluation of the models used to value assets and risk exposures.

– Permit investors /creditors to assess directly the solvency/liquidity of financial institutions and not rely on Basel -- potentially multiple measures that can evolve as conditions change

– Allows simplification of regulatory measures

• Incentive issues:– adverse selection, moral hazard, principal-agent and monitoring problems, rational herding,

ad contagion -- supported by wide academic literature– The identification of incentive problems would require a specific analysis of incentives -- an

incentive audit


Outline of an incentive audit

• Approach would need to be evolved but elements could include:– underlying legal, institutional and regulatory environment; – ownership and governance structure of financial institutions;– compensation practices;– conflicts of interest;– explicit and implicit guarantees.

• Audit could be conducted through a sequenced analysis that would proceed from higher level to progressively more detailed questions that would identify for the particular environment the relevant incentives that motivate decision making.

• Sequenced approach would enable the audit to drill down and identify factors that could lead to market failures and excessive risk taking in the particular environment (Chai and Johnston 2000)

• Incentive audits would become a key part of the financial stability analysis and FSAPs.


Differences compared with existing approaches

• Clearly delineates the responsibilities of public bodies (market failures/externalities/systemic risk) and those of private investors (risks in individual firms, contracts and instruments).

• Focuses on addressing failures creates less incentives for regulatory arbitrage. • Rebalancing use of public resources away from micro management of risk and

capital adequacy in financial institutions to one that focused on the sufficiency of information disclosures, factors that influence the incentives to monitor activities, corporate governance, conflicts of interest, explicit and implicit guarantees etc.

• Potentially better attuned to a country's circumstances (an incentive based approach starts with an analysis of the structural characteristics of the individual country, and drills down to identify the sources of perverse incentives/market failure in that specific context; regulatory solutions tailored to the country's circumstances).

• Focus on incentives provides a framework to integrate the different branches of policies that impact the financial system, specifically: (1) financial regulation and supervision; (2) crisis management and safety net arrangements; and (3) competition policy.


Incentive audits: practical/implementation issuesIncentive issues and macroprudential policy

• Alternative approach would be consistent and can inform the new emphasis on a macroprudential approach.

• The development of macroprudential approaches is still at an early stage and so far has emphasized the use of prudential tools to address systemic risk (FSB/IMF/BIS 2011).

• Under the alternative approach financial regulatory policy should be directed towards the fundamental sources of weakness.

• Macroprudential policy would have the aims of identifying and mitigating systemic risk, and should have the capacity to look beyond systemic risk, to identify and address the fundamental sources that give rise to it :

– Asymmetric information and perverse incentives – Market failures due to negative externalities that give rise to systemic risk– Failures in regulatory and supervisory practices– Failures in crisis management arrangement


Incentive audits: practical/implementation issuesDifferences in policy responses

• Difference of approach would be in the assessment tools and policy response.• For example FSB/IMF/BIS (2011) recommends dealing with systemic risk by building capital and

liquidity buffers to enhance resiliency (on SIFS to deal with risks in interconnections and pro cyclical buffers to deal with pro cyclicality)

• The alternative framework would identify and correct the incentive distortions/ information frictions that contribute to the buildup of excessive risk at source e.g.

• In interconnectedness: – serious information gaps that prevented the assessment of exposures and network risks; – incentives in the micro prudential regulations that encouraged risk transfers; – moral hazard associated with the failure of the crisis management

• In pro-cyclicality: – distortions created by the risk weightings on different types of loans; – procedures for the calibration of risk models, provisioning policies, the valuation of collateral

etc; – compensation policies that reward short-term performance; and – incentives to take on excessive debt created by tax system, bankruptcy procedures, etc

• Central to the different approaches is the question of the effectiveness of the response: would it be possible to mitigate systemic risk without addressing the underlying failures and incentives that give rise to it?


Incentive audits: practical/implementation issuesPolicy instruments

• The main policy instruments under the alternative approach would be instruments to correct "failures" in the financial system. The scope of the potential failures is potentially very broad and only a subset could be under the direct control of the macroprudential authority. The following instruments could be considered: – micro prudential tools (capital and liquidity requirements, provisioning and collateral

policies, prompt corrective action) tailored to address systemic risks;– disclosure requirements that could be graduated depending on the threat to systemic risk

and which would cover both regulated and unregulated entities; – conduct of business rules, intended to address conflicts of interest and transparency of

financial transactions, to be applied to all financial firms, agents, auditors and rating agencies;

– compensation practices in financial firms that pose a threat to systemic stability;– mergers and acquisitions involving financial firms that pose or potentially pose a threat to

financial stability;– cease and desist orders covering both regulated and unregulated entities intended to deal

with threats to systemic stability; and– resolution regimes for financial firms intended to address moral hazard .

• There would need to be a mechanism for coordination with other policies that impact incentives and systemic risk, especially central banking and fiscal policies


Incentive audits: practical/implementation issues

• Policy instruments and institutional arrangements


Macroprudential Authority

(microprudential, disclosures, conduct of business, compensation , mergers, acquisitions)

Monetary Authority

Fiscal Authority

Payment system, monetary and exchange rate policies

Payment system, monetary and exchange rate policies

Crisis managementCrisis management

Tax code effects on debt/leverage, safety net effect effects on monetary aggregates

Tax code effects on debt/leverage, safety net effect effects on monetary aggregates

Figure 1. Triumvirate of Macroeconomic Policy Authorities

Conclusion

• It would be wrong to conclude from the recent crisis experience that just "regulating more" is the way to go.

– Regulatory efficiency and regulatory gaps are the real issue.– Market discipline and regulatory/supervisory discipline are complementary (when

regulation is ineffective or has gaps, market discipline breaks down )

• It would be also wrong to conclude that more complex regulations, such as more complex systems to calculate risk-weighted asset ratios, are necessarily better than simpler ratios.

• Complicated regulations are trying to mimic markets in estimating economic capital required by each institution commensurate with its risk, but they may end up leading to regulatory arbitrage and manipulated ratios.

• More fundamentally, changes in ratios are unlikely to address the underlying failures in economic incentives that led to the global financial crisis.


Conclusion

• We call for a bolder re-orientation of the regulatory approach, so that it has at its core identification of incentive problems on an on-going basis.

• The challenge of financial sector regulation is to align private incentives with public interest without taxing or subsidizing private risk-taking.

• Credible threats of market entry and exit, healthy competition, and disclosure of quality information are essential in getting this balance right.


Conclusion

• Specifically, we propose “incentive audits” as a tool to help identify and address perverse incentives faced by financial institutions, market participants, regulators, supervisors and politicians, before they give rise to systemic risk.

• These audits need to be combined with some basic but well-defined capital and liquidity ratios (more difficult for market participants to circumvent), strong enforcement of transparency and use of complementary market signals.

• In this context, transparency does not mean simply more mindless reporting. what matter is not the sheer volume of information, but the clarity and comparability of the disclosures.


Thank you for your comments and suggestions!

Global Financial Development Report 2013GFDR Seminar

(Additional slides included for your information)

Additional slides … banking entry


Do you have the authority to take legal action against those entities that undertake banking activities without a given license?

Is more than one license required (e.g. one for each banking activity, such as deposit-taking, consumer lending etc.)?

Are foreign entities prohibited from entering through Acquisition?

Are foreign entities prohibited from entering through Subsidiary?

Are foreign entities prohibited from entering through Branch?

Are foreign entities prohibited from entering through Joint Venture?

Pre-crisisPost-crisiso/w Developingo/w Developed

Additional slides … ownership


What are the requirements for evaluation / approval of significant bank shareholders?: Minimum level of education

What are the requirements for evaluation / approval of significant bank shareholders?: Minimum level of financial and/or banking related experience

What are the requirements for evaluation / approval of significant bank shareholders?: Financial capacity to support bank capital

What are the requirements for evaluation / approval of significant bank shareholders?: No criminal record

What are the requirements for evaluation / approval of significant bank shareholders?: No bankruptcy record

What are the requirements for evaluation / approval of significant bank shareholders?: Lack of conflict of interest

Does the regulator have the legal authority to oppose the ultimate (beneficial) owner when assessing bank ownership?

Do laws or regulations require the ultimate (beneficial) owner and controller of a bank to be publicly disclosed?

Can related parties own capital in a bank?


Additional slides … capital


Which regulatory capital adequacy regimes did you use as of end of 2010?: Basel I

Which regulatory capital adequacy regimes did you use as of end of 2010?: Leverage ratio

Do you review internal assessments performed by banks?

Do you apply different risk weights than those in the Basel Committee's original Basel I framework for any material exposures (e.g. corporate lending, mortgage loans, consumer loans, loans to government etc)?

What variants are offered to banks in calculating capital requirements for credit risk: Standardized approach (SA)?

What variants are offered to banks in calculating capital requirements for credit risk: Advanced internal ratings-based approach (A-IRB)?

Is Tier 1 allowed in regulatory capital?

Is Tier 3 allowed in regulatory capital?


Additional slides … audits


Is an audit by a professional external auditor required for all commercial banks in your jurisdiction?

Are specific requirements for the extent or nature of the audit spelled out?

Do regulations explicitly prohibit auditing firms from providing non-audit services to the banks whose financial accounts they audit?

Is the audit report on the financial statements of a bank required to be publicly disclosed together with these financial statements?

Are external auditors subject to independent oversight by Ministry of Finance or other government department?

Are external auditors subject to independent oversight by Specialized public entity (e.g. independent audit regulator)?

Are external auditors subject to independent oversight by Banking supervisory agency?

In cases where the supervisor identifies that the bank has received an inadequate audit, does the supervisor have the powers to take actions against The bank?

In cases where the supervisor identifies that the bank has received an inadequate audit, does the supervisor have the powers to take actions against The external auditor?


Additional slides … bank governance


Do the above guidelines or requirements apply uniformly to all banks (e.g. including state-owned and foreign banks)?

Does the supervisor exercise approval authority with respect to the appointment of Board directors?

Does the supervisor exercise approval authority with respect to the appointment of Senior bank management?

Is the remuneration or compensation of Board directorsevaluated as part of the supervisory process to ensure that they do not lead to excessive risk-taking?

Is the remuneration or compensation of Senior bank management evaluated as part of the supervisory process to ensure that they do not lead to excessive risk-taking?

Is the remuneration or compensation of Other bank staff (e.g. traders) evaluated as part of the supervisory process to ensure that they do not lead to excessive risk-taking?

Does the supervisory agency have the authority to take regulatory action when it considers that the remuneration or compensation is excessive?

Does the regulatory definition of related parties include Significant/controlling shareholders?

Does the regulatory definition of related parties include Board directors?

Does the regulatory definition of related parties include Relatives of significant/controlling shareholders and board directors?

Does the regulatory definition of related parties include Business interests of significant/controlling shareholders, board directors, and their relatives?

Is there a regulatory limit on related party exposures?


Additional slides … liquidity and diversification


Are there any exempted items (e.g. cash secured lending, government or government guaranteed lending etc.) in applying the limits?

Are there any regulatory rules or supervisory guidelines regarding asset diversification?

Are banks prohibited from making loans abroad?

Are there regulatory rules or supervisory guidelines regarding Diversification of funding sources of banks' liquidity management?

Are there regulatory rules or supervisory guidelines regarding Contingency funding plans, including stress testing of banks' liquidity management?

Is Banks' liquidity management of foreign currencies requirements in place in your jurisdiction?

Is Central Bank reserve and/or deposit requirements in place in your jurisdiction?

Is Regulatory minimum ratio on liquid assets (e.g. as a percentage of total balance sheet or deposit base) requirements in place in your jurisdiction?

Is Maturity mismatch/'gap' limits requirements in place in your jurisdiction?

Are banks required to hold reserves in foreign currencies or other foreign-denominated instruments in order to fulfill the requirements listed above?


Additional slides … depositor protection schemes


Is there an explicit deposit insurance protection system for commercial banks?

Does the deposit insurance agency/fund administrator have Authority to access information collected by banking supervisors as part of its mandate?

Does the deposit insurance agency/fund administrator have Method of failure resolution authority as part of its mandate?

Does the deposit insurance authority by itself have the legal power to cancel or revoke deposit insurance for any participating bank?

Is participation in the deposit insurance system compulsory for Foreign bank subsidiaries?

Is Foreign currency deposits excluded from deposit insurance coverage?

Is Deposits of the foreign branches of domestic banks excluded from deposit insurance coverage?

Is the deposit insurance coverage Per depositor account?

Is the deposit insurance coverage Per depositor per institution?

Were any deposits not explicitly covered by the deposit insurance scheme at the time of failure compensated the last time a bank failed (excluding funds later paid

out in liquiditation procedures)?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%


Additional slides … asset classification, provisioning


Do you have an asset classification system under which banks have to report the quality of their loans and advances using a common regulatory scale?

Does Asset classification system Apply to all commercial banks?

Does Asset classification system Cover all types of borrowers (e.g. including government)?

Does Asset classification system Cover all loans and advances to a borrower?

Does Asset classification system Impose a uniform classification requirement for specific borrowers (e.g. government and/or state-owned enterprises can only be graded at or above a certain category)?

Does accrued, though unpaid, interest/principal enter the bank's income statement while the loan is classified as non-performing?

Are banks allowed to upgrade the classification of a loan or advance immediately after it has been restructured?

If a customer has multiple loans and advances and one of them is classified as non-performing, are all the other exposures automatically classified as non-performing as well?

Are there minimum levels of specific provisions for loans and advances that are set by the regulator?

Is there a regulatory requirement for general provisions on loans and advances?

Do you require banks to write off non-performing loans after a specific time period?


Additional slides … accounting/info disclosure


Are banks required to prepare consolidated accounts for accounting purposes?

Are all banks operating in your country (including foreign bank branches) required to make available to the public their annual financial statements On a consolidated basis (if applicable)?

Do banks disclose to the public Off-balance sheet items?

Do banks disclose to the public Regulatory capital and capital adequacy ratio?

Do banks disclose to the public Any other material information (i.e. information which omission or misstatement could change or influence the assessment or decision of a user relying on that information for making decisions)?

Are bank directors legally liable if information disclosed is erroneous or misleading?

Do supervisors require banks to publicly disclose Other information not required by financial reporting standards (e.g. prudential reports)?


Additional slides … discipline/problem institutions


Cease and desist-type orders for imprudent bank practices

Forbearance (i.e. to waive regulatory and supervisory requirements)

Require a bank to meet supervisory requirements (e.g. capital, liquidity etc.) that are stricter than the legal or regulatory minimum

Require bank to enhance governance, internal controls and risk management systems

Require bank to apply specific provisioning and/or write-off policies

Require banks to constitute provisions to cover actual or potential losses

Restrict or place conditions on the types of business conducted by bank

Withdraw the bank's license

Require banks to reduce/restructure their operations (e.g. via asset sales and branch closures) and adjust their risk profile

Require banks to reduce or suspend dividends to shareholders

Require banks to reduce or suspend bonuses and other remuneration to bank directors and managers

Suspend or remove bank directors

Suspend or remove managers

Require commitment/action from controlling shareholder(s) to support the bank with new equity (e.g. capital restoration plan)

Are bank regulators/supervisors required to make public formal enforcement actions, which include cease and desist orders and written agreements between a bank regulatory/supervisory body and a banking organization

Does the supervisory agency operate an early intervention framework (e.g. prompt corrective action) that forces automatic action when certain regulatory triggers/thresholds are breached?

Is there a separate bank insolvency framework that is distinct from that of non-financial firms?

Is the insolvency framework the same for bank holding companies and banks?

Is court approval required to Declare insolvency?

Is court approval required to Supersede shareholders' rights?


Additional slides … supervision


Are there any banks that are not under the jurisdiction of this agency?

Can the supervisory authority force a bank to change its internal organizational structure?

Is the appointment based on a recommendation by an external expert or panel of experts?

Does the head of the supervisory agency have a fixed term?

Is there a maximum number of terms?

Does the supervisory agency need to obtain approval from the government in order to Issue binding secondary regulations for the banking sector?

Does the supervisory agency need to obtain approval from the government in order to Determine its budget?

Does the supervisory agency need to obtain approval from the government in order to Obtain funding?

Does the supervisory agency need to obtain approval from the government in order to Hire and fire senior staff?

Does the supervisory agency need to obtain approval from the government in order to Define salaries and benefits structure of staff?

Does the supervisory agency need to obtain approval from the government in order to Define its organizational structure?

Can individual supervisory staff be held personally liable for damages to a bank caused by their actions or omissions committed in the good faith exercise of their duties?

Can the supervisory agency be held legally liable for damages to a bank caused by its actions?


Additional slides… consumer protection


Is there a separate unit or team designated to work on consumer protection in your agency?

Issue warnings to financial institutions to enforce consumer protection laws and regulations?

Require providers to refund excess charges to enforce consumer protection laws and regulations?

Require providers to withdraw misleading advertisements to enforce consumer protection laws and regulations?

Impose fines and penalties to enforce consumer protection laws and regulations?

Issue public notice of violations to enforce consumer protection laws and regulations?

Withdraw the offending provider’s license to operate to enforce consumer protection laws and regulations?

Post-crisiso/w Developingo/w Developed

regulation and supervision after the storm february 8, 2012 global financial development report 2013...

Documents

conclusion4 introduction

conclusion5 introduction

likely impacts

regulatory reform

information asymmetries

systemic stability impossible

lse report

vickers report