Professional Workshop : Professional Workshop : Macroprudential supervision and systemically Macroprudential supervision and systemically important institutions IRMC 2014 Conference 23–24 June 2014 Warsaw , Poland Michał Kruszka Deputy Director, Analyses and International Cooperation Department 1 Cooperation Department
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Professional Workshop :Professional Workshop :
Macroprudential supervision and systemicallyMacroprudential supervision and systemicallyimportant institutions
IRMC 2014 Conference23–24 June 2014Warsaw , Poland
Michał Kruszka Deputy Director, Analyses and International
Cooperation Department
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Cooperation Department
Systemically important institutions and Systemically important institutions and sytemic risk – introductory remarks
Questions to be answered when dealing with SIFIs issue
What is systemic risk ?y
How to identify Systemically Important Financial Institutions?
How to measure systemic importance in terms of the impacty p pon the global financial system?
Which criterions are to be used for SIFI identification ?
2
Systemically Important Institutions and systemic risk – introductory remarks
Financial crisis in 2007 showed some major issues linkedwith Too Big to Fail financial institutions
Lack of proper prudential regulations
Deep cross border interconnectedness between big financialinstitutionsinstitutions
Impact of moral hazard (broad expecations that in case oftroubles goverment will rescue troubleshooted bank)
Lack of proper resolution procedures. Need to prevent bigbanks from disorderly collapse by government’s bail out
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Systemically Important Institutions and systemic risk – introductory remarks
After crisis some initiatives were put in to place toprevent form such situation in the future. They wereaimed at identificication and stenghtening SIIaimed at identificication and stenghtening SII
BCBS introduced Basel III a new regulatory framework forcapital and liquidity for banks. „Basel III: A global regulatoryframework for more resilient banks and banking systems”(BCBS 2009)
FSB made an attempt to identify SIFI the issuing the FSB made an attempt to identify SIFI the issuing the„Guidance to Assess the Systemic Importance of FinancialInstitutions, Markets and Instruments: Initial Considerations—Background Paper” (FSB, 2010). FSB also delegated IOSCOBackground Paper (FSB, 2010). FSB also delegated IOSCOand IAIS to develop similar framework for capital marketinstitutions and insures respectably
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Systemically Important Institutions and systemic risk – introductory remarks
One has to remember that neither FSB nor BCBS framework islegally binding. In the EU solutions aimed at the resilience ofbanking sector has been implemented through two major legalbanking sector has been implemented through two major legaldocuments REGULATION (EU) No 575/2013 OF THE EUROPEAN PARLIAMENT AND
OF THE COUNCIL of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, (commonly called Capital Requirements Regulation -CRR)
DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing , g / / p gDirectives 2006/48/EC and 2006/49/EC, (commonly known as Capital Requirements Directive - CRDIV)
G-SIIs Additionally up to 3 5%G SIIs Additionally up to 3,5%
O-SIIs Additionally up to 2%
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G SIBs and D SIBs G-SIBs and D-SIBs BASEL FRAMEWORK
Global Systemically Important Banks (G-SIBs)
The additional requirement above the Basel III requirementsq q
Limiting negative cross-border externalities on the globaleconomy (resulting from failure of the most globally systemicbanks)banks)
Systemic importance measured in terms of the impact on theglobal financial system
Domestic Systemically Important Banks (D-SIBs)
D-SIB framework is complementary to the G-SIBs frameworkand addresses the impact of the failure of banks on thedomestic economies
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IAIS and IOSCO adaptations of BASEL FRAMEWORK
Global Systemically Important NoN Banks Non Insurer(NBNI)-IOSCO proposal for capital market and GlobalSystematically Important Insurer (G SII) IAIS proposalSystematically Important Insurer (G-SII)-IAIS proposalfor insurance sector
NBNI identification proposal came from joint paper of IOSCOand FSB, on framework for
Works started in 2014 and are ongoing now
Main solutions are adopted from Basel framework
A several indicators for NBNI identification are to be discussed
IAIS proposed to develop methodology for G-SII identificationand additional requirements. Works are ongoing now.
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IAIS and IOSCO adaptations of BASEL FRAMEWORK
Global Systemically Important Non-Banks Non-Insurer(NBNI)-IOSCO propsal of identification criterions
Interconnectedness
Leverage ratio
Substitutability
Complexity
Cross jurisdictional activities
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IAIS G-SII FRAMEWORK
Global Systemically Important Non-Banks Non-Insurer(NBNI)-IOSCO propsal of identification criterions
• Size
• Global activity
• Interconnectedness
• Non traditional and non Insurance activities
• Substitutability
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Implementation challenges for SIBs regulatory frameworkregulatory framework
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Global Systemically Important Banks (G-SIBs) – BASEL FRAMEWORK
Identification of G-SIBs - indicator-based measurementapproach
National authorities can consider other measures/dataNational authorities can consider other measures/data
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Domestic Systemically Important Banks (D-SIBs) – BASEL FRAMEWORK
Higher loss absorbency
Buffer should be commensurate with the degree of systemic Buffer should be commensurate with the degree of systemicimportance
Cooperation between home and host authorities in caseswhere the subsidiary of a bank is considered to be a D-SIB
The HLA requirement should be covered fully by CET1
European framework (CRD) introduced buffer of up to 2 %subject to decision of national authorities
Additional requirements and other policy measures to address Additional requirements and other policy measures to addressthe risks posed by a D-SIB are at discretion of nationalauthorities
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Domestic Systemically Important Banks (D-SIBs) – BASEL FRAMEWORK
Examples of additional requirements and policy measures:
Recovery plans and resolution plans required earlier than from Recovery plans and resolution plans required earlier than from rest of institutions
Stricter requirement in terms of LCR (100% from 2015)q ( )
Imposed requirements regarding stable funding
More focused supervision in other areas (e.g. corporate p ( g pgovernance, risk appetite)
More frequent on-site examinations
More frequent reporting concerning liquidity
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CAPITAL RATIOS – POLISH PERSPECTIVE
Commercial banks – data as of September 2013
All banks comply with the required levels of CET1 Tier1 and All banks comply with the required levels of CET1, Tier1 andoverall capital adequacy ratio
As a result of gradual introduction of capital buffers,maximum possible level of the required capital ratio is 13% in2019
32 out of 42 banks have their capital ratio calculated 32 out of 42 banks have their capital ratio calculatedaccording to the new rules above 13%
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Domestic Systemically Important Banks (D-SIBs) – POLISH PERSPECTIVE
Criteria currently used to assess the systemic importance of banks on the Polish market
Size of the bank
Significance of the interrelations on the financial market/ Interconnectedness
Substitutability
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Domestic Systemically Important Banks (D-SIBs) – POLISH PERSPECTIVE
Polish systemically important banks – data as ofSeptember 2013p
Analyses under assumption that capital buffer would beintroduced in its maximum amount (2%):introduced in its maximum amount (2%):
6 systemically important banks have overall capital ratioabove 15%
4 systemically important banks need more capital (equivalentof no more than 1p.p.)
5 t i ll i t t b k d it l th 5 systemically important banks need more capital thanequivalent of 1 p.p.
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Implementation challenges for Liquidity requirementsrequirements
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History of liquidity regulations in PolandHistory of liquidity regulations in Poland
Liquidity risk always is one of the most important areas for bankingLiquidity risk always is one of the most important areas for bankingsupervision closely monitored during on-site examinations
M i l t i t tMain regulatory instruments:
– The Banking Act „Banks shall be required to maintain adequate pa ment liq idit co esponding to the scale and t pes of acti it payment liquidity, corresponding to the scale and types of activity conducted, in a manner which ensures that all cash obligations are fulfilled according to their maturity dates.”
– Recommendation P concerning liquidity management (1996)
Banks (assets over 200 million PLN):– Short-term measures:
• M1 – short-term liquidity gap (minimal value 0)• M2 – short-term liquidity ratio (minimal value 1)
– Long-term measures:• M3 ratio of illiquid assets to own funds (minimal value 1)• M3 – ratio of illiquid assets to own funds (minimal value 1)• M4 – ratio of illiquid and partially liquid assets to own and stable external funds
(minimal value 1)
Banks (assets under 200 million PLN):• M1 – ratio of core and supplementary liquidity reserve to total assets (minimal value 0,2)• M2 – ratio of illiquid assets to own funds (minimal value 1)
Branches of foreign credit institutions (assets over 200 million PLN):• M1 – short-term liquidity gap (minimal value 0)
M2 h li idi i ( i i l l 1)• M2 – short-term liquidity ratio (minimal value 1)
Branches of foreign credit institutions (assets under 200 million PLN):• M1 ratio of core and supplementary liquidity reserve to total assets (minimal value 0 2)
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• M1 – ratio of core and supplementary liquidity reserve to total assets (minimal value 0,2)
Strengthening long-term sources of funding (long term bonds, cover bonds, securitization)
Matching level of liquid assets to bank’s operating scale
M t hi th li idit d d i ti i Matching the liquidity needs and sources in respective currencies
Parent banks’ position and commitment to support their subsidiaries in host countries in a case of liquidity or solvency problems
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Concluding RemarksConcluding Remarks
Activity of supervision should be aimed at finding interconnectednessod SII. This is a crucial role for development of contingency plans.
Activities of supervisory authorities should be more aimed atassessing possible loss in case of SIFI default rather than pureprobability of default.
In case of SII collapse supervisory authorities should provide orderlyresolution of such institution
I th E U i FSB d BCBS d ti In the European Union FSB and BCBS recommendations aretransformed into binding law by CRDIV/CR. One has to rememberthat quality of level one regulations is highly dependent on the RTSand ITS (level II regulations) Thus a big responsibility of relevantand ITS (level II regulations). Thus a big responsibility of relevantauthorities to develop proper legal framework.