Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Page |2
They are built on a constrained judgement approach, so as to ensure
consistency across the SSM, while allowing for expert judgement to
consider the complexity and variety of situations within a clear and
transparent framework.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
Page |3
The SSM is responsible for the supervision of around 4,700 supervised
entities within participating Member States.
To ensure efficient supervision, the respective supervisory roles and
responsibilities of the ECB and the NCAs are allocated on the basis of the
significance of the supervised entities.
To determine whether or not a credit institution is significant, the SSM
conducts a regular review: all credit institutions authorised within the
participating Member States are assessed to determine whether they fulfil
the criteria for significance.
A credit institution will be considered significant if any one of the following
conditions is met:
the total value of its assets exceeds 30 billion or unless the total
value of its assets is below 5 billion exceeds 20% of national GDP;
the total value of its assets exceeds 5 billion and the ratio of its
cross-border assets/liabilities in more than one other participating Member
State to its total assets/liabilities is above 20%.
Read more at Number 3 below. Welcome to the Top 10 list.
Best Regards,
George Lekatis
President of the IARCP
General Manager, Compliance LLC
1200 G Street NW Suite 800,
Washington DC 20005, USA
Tel: (202) 449-9750
Email: lekatis@risk-compliance-association.com
Web: www.risk-compliance-association.com
HQ: 1220 N. Market Street Suite 804,
Wilmington DE 19801, USA
Tel: (302) 342-8828
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
Page |4
Topical developments on
pensions: an EIOPA perspective
Gabriel Bernardino
Chairman of EIOPA
9th European Pension Funds Congress, Frankfurt am Main
This event has become a key annual gathering where different
stakeholders debate the future of pensions in the EU, the ways to deal with
the challenge of an ageing society and deliver safe, sustainable and
adequate pensions for EU citizens.
Page |5
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
Page |6
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
Page |7
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
Page |8
Page |9
- higher demands on the quality of capital,
- a leverage ratio,
- an international liquidity framework, with both short-term and structural
liquidity requirements (I am proud to note that the Basel Committee, less
than a week ago, published the final standard for the net stable funding
ratio, NSFR), and
- a regulatory framework for global systemically important banks (G-SIBs).
When you add to this ongoing work related to reducing RWA variability
and disclosure, you end up with a pretty impressive list - a list that
represents an unprecedented leap forward in terms of global banking
regulation.
So then, how do I see this?
Do I claim to know how all these new rules will play out together?
Am I confident that there will be no inconsistencies and contradictions? No,
definitely not.
We have every reason to be humble in this respect. Monitoring and
assessing the effects of reforms will therefore be imperative.
Will the reforms be costly for banks in the short term? Yes, they will.
Will banks have to adjust their activities? Yes, a return to pre-crisis
banking behaviour is neither appropriate nor viable.
Do I therefore think that regulation has gone too far and that parts should
be undone? No, not at all.
In this presentation I will try to explain why I think this is so. I will also
speak about what is still lacking and the regulatory challenges we face
ahead.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 10
First of all, my experience is that important regulatory and structural
reforms are all too often hindered by myopia.
People tend to focus on costs and pains in the short run, leaving aside the
longer term gains that reforms aim to achieve.
The perceived short-term costs are simply much easier to sell politically,
compared to the abstract benefits of lowering the risk of crises.
This is especially so, since the benefits may accrue only to future
generations - a group that has difficulties making its voice heard in today's
policy debate.
This time has been no exception: for years, people shied away from
necessary actions to strengthen the financial system.
When the crisis hit, perceptions changed, providing a window of
opportunity for regulatory reforms that were long overdue.
However, we must not begin to close this window and lose sight of why we
are undertaking these reforms.
Let me start with a reminder of the regulatory framework before the crisis.
Both Basel I and II included a risk-weighted capital adequacy framework.
However, for the last 20 years banks' balance sheets ballooned, while their
equity failed to take off.
For example, from 1993 to 2008 the total assets of a sample of what we call
global systemically important banks saw a twelve-fold increase (increasing
from $2.6 trillion to just over $30 trillion).
But the capital funding these assets only increased seven-fold, (from $125
billion to $890 billion).
Put differently, the average risk weight declined from 70% to below 40%.
The problem was that this reduction did not represent a genuine reduction
in risk in the banking system.
To take an even more concrete example from my own country: during the
past twenty years or so, the risk weights for retail mortgages in the major
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 11
Swedish banks have decreased from 50% to 35% with the adoption of Basel
II (from Basel I) and further, to about 6% when banks themselves were
allowed to model risk weights.
In equity terms, this means that instead of SEK 17,000 of their own equity
to fund a mortgage of 1 million, banks' models implied that SEK 1,200 was
enough.
In retrospect, it is clear that the decrease in risk weights did not reflect
actual risks and banks therefore needed more capital.
Furthermore, although it is a historical fact that banks' problems often
start in the form of liquidity constraints, there were no global liquidity
regulations for banks prior to the crisis.
This meant that banks could rely heavily on very short-term market funding
to finance highly illiquid and long-term assets.
This worked fine during the Great Moderation, but unfortunately with the
collapse of Lehman Brothers another old truism suddenly came to life:
"markets function the worst when you need them the most".
Against this background, it is quite embarrassing that so few could see the
crisis coming.
From a regulatory point of view, all the ingredients were there, or rather
they were lacking.
And this is the first point I want to make - the regulatory framework was
unsatisfactory and becoming more so the more complex the financial
system became.
Then, turning to my second point, which is: The costs of financial crises are
huge.
This is true in general, but especially so for the recent one.
For example, according to a recent study by IMF economists, in a sample of
countries representing just over 50% of world GDP, the total amount of
government recapitalisation, asset purchases and guarantees during the
period 2007-2011 amounted to nearly $5 trillion.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 12
This is equivalent to 16% of the GDP of these economies, or nearly $5,000
per citizen.
But, this is only a lower bound of the cost of the crisis.
If we also include the impact on GDP and the loss of production relative to
its pre-crisis trend, the costs rise.
This has been showed by several studies, including the one just mentioned
by IMF economists, which estimates that banking crises that occurred
between 1970 and 2000 are resulting in output losses of more than 20% on
average if we look at all countries, and more than 30% of GDP in advanced
economies.
These results are in line with the BIS finding that the median discounted
cumulative loss of output over the course of a crisis in the same period was
about 19% of pre-crisis GDP.
Now, the question of exactly how much regulation leads to the optimal
outcome in terms of long-term growth is, of course, debatable.
But let me underline that ambitious attempts have been made by the BIS,
but also the OECD and others, to assess the net effect of recent regulatory
reform measures, and the results generally point in one direction: that the
net effect of reforms is positive.
In addition, let me also underline that the Basel Committee has not been
blind and deaf to the worries expressed by the industry about excessive
regulation.
Many adjustments have been made, not least when it comes to the new
liquidity regulation.
It is also standard procedure that new regulations are subject to industry
consultation and in many cases additional discussions also take place with
the industry itself, as well as with investors, to avoid unintended
consequences.
In this context, however, let me remind us all that the reactions we get
from the banking industry are sometimes slightly biased, if I dare say so.
A telling example is the lobbying effort during the design of the Basel II
framework.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 13
As part of that work, in 2003 the Committee consulted on a new
securitisation framework, which, with the benefit of hindsight, turned out
to be very weak.
Yet the comments from the industry on the proposed securitisation
framework were in general quite alarming.
Allow me to quote just a couple of the replies to the consultation proposal
that the Committee received (all of which are publicly available):
One bank wrote: "The prescribed risk weightings for securitisation
exposure(s)-result in excessive risk weights compared to the economic risks
of securitisation tranches, particularly for retail and mortgage portfolios."
This particular bank happened to incur $24.7 billion in losses from CDOs
during the crisis.
Another bank wrote: "If adopted, the current proposal for securitisation
will materially impair the ability of banks to distribute risk from their own
balance sheets into the capital markets." - This bank incurred USD 13
billion losses in Q1 2008 and USD19 billion in writedowns on real estate
and related structured credit positions.6
Let me emphasise that there is nothing special with these two examples.
I can assure you that there are many more similar examples to quote - the
message being that the proposed reforms were overly restrictive, would
damage the market and reduce activity.
This illustrates that we need perspective when assessing the feasibility of
reforms.
To sum up so far: yes, there has been a strong regulatory reaction to the
crisis, but as I see it, this is appropriate, given
- the pre-crisis regulatory framework,
- the costs crises give rise to, and
- the efforts that the Basel Committee has made to mitigate risks of
unintended consequences,
The problem is that myopic observers tend to forget these aspects.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 14
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 15
And here I would like to focus on the interlinked issues of implementation
and calibration.
Let me start with some reflections on implementation.
For some time now, the Basel Committee has engaged in the process of
monitoring and assessing how members implement what has been agreed
by the Committee.
The assessment work is carried out on a jurisdictional as well as on a
thematic basis.
In the jurisdictional assessment we look at how Committee members have
implemented the Basel standard - determining whether or not it is a fair
reflection of the Basel III requirements.
After an assessment has been thoroughly debated in the Committee, the
final assessment becomes public.
The assessments, and the publication of the results, have proved to be a
powerful tool.
To date, more than 200 adjustments have been made by member
jurisdictions in response to findings raised by the assessment teams.
In addition, the process has also generated a positive feedback loop,
meaning that the lessons learnt from assessments are used to improve and
clarify the standards.
So far, the assessments have concentrated on the capital framework, but
from 2015 onwards the scope of this work will widen further to include the
implementation of the liquidity coverage ratio and the SIB-requirements.
However, for the new, stricter requirements to bring the benefits we are
aiming for, it is important that they be properly reflected, not only in
national legislation, but also at the level of individual banks.
To use an analogy of car safety, if we are now providing banks with air bags,
in the form of higher capital requirements, it is important that those airbags
are actually activated in case of an accident.
For this to happen, the sensors need to be functioning and well-calibrated.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 16
For banks, this means that risk weights need to signal appropriately the
risks that individual banks actually face.
This aspect is captured in the Committee's thematic assessments.
To put it simply, in these assessments we examined whether the banks'
risk-weighted assets could be trusted.
The results showed that banks' risk-weighted assets differ to an extent that
goes well beyond what can be explained by business models and historical
experiences.
If we just take the banking-book results, two banks with exactly the same
assets could report capital ratios that differ by as much as 4 percentage
points.
The potential for differences this wide, particularly as they are derived
from only a part of a bank's business, weakens confidence in the
measurement of bank capital.
Of course, this was not a total surprise.
It was a reflection of what I mentioned earlier: that internally-modelled risk
weights lead to capital not keeping pace with asset expansion.
This has undermined the confidence in banks and the credibility of the
concept of banks' internally-modelled risk weights.
Ensuring consistency in the implementation of risk-based capital standards
will therefore be a key factor in restoring confidence in banks.
The Committee is thus assessing bank capital ratios with a view to ensuring
that they appropriately reflect the risks that banks face.
There should be "truth in advertising" for the regulatory ratios that banks
present.
To achieve this, the regulatory framework needs to deliver readily
comprehensible and comparable outcomes.
In my view, these assessments, both the jurisdictional and the thematic that
compares risk-weighted assets, are absolutely vital for achieving our goals.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 17
This will be an important focus for the Committee in the coming years.
I would now like to take a step further and focus on the link between
implementation and how the system should be calibrated.
Because my view is that there are a number of trade-offs at play here, which
need to be taken into account.
For instance, if we don't implement the necessary changes and succeed in
properly restoring the credibility of risk-weighted capital ratios, a more
important role will have to be played by other parts of the regulatory
system, such as the leverage ratio.
For now, our working hypothesis is a regulatory minimum leverage ratio of
3%, but to me this is more of a place-holder.
What the final outcome should be will depend on the calibration of the
whole regulatory framework, in which the risk weights and leverage ratio
are important pieces.
An important element in this calibration will be transparency - the more
transparent banksare with methods and models to calculate risk weights,
the better it will be for the credibility of the system as such.
If we widen the perspective further, I think there is also an interesting issue
of calibration linked to the concept of going-concern capital requirements
on the one hand, and gone-concern capital requirements on the other.
When we discuss appropriate levels of TLAC we should keep in mind that
the less we strengthen the credibility of the system for going concern capital
requirements, the higher banks' gone-concern capacity to absorb losses will
have to be.
Concluding remarks
So, to wrap up: I see no reason to pull the brake on regulatory reforms. We
must not lose sight of the long-term benefits of limiting the costs to society
that financial crises cause.
And, although a lot has been achieved, challenges still remain - especially
when it comes to implementation, implementation monitoring and
calibration of the whole framework.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 18
As I said earlier, I do not know with full certainty how all the different parts
of the reforms will play out together.
This further underlines the necessity to constantly monitor what is
happening, very much in line with what the organisers of this conference
are doing.
And as financial systems have an amazing ability to reinvent themselves,
regulatory reform is a never-ending task.
Therefore, we need forums such as this conference to evaluate where we
are, and where we should be going - hopefully, then, we won't have to make
regulatory leaps quite as far as we were forced to this time.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 19
Topical developments on
pensions: an EIOPA perspective
Gabriel Bernardino
Chairman of EIOPA
9th European Pension Funds Congress, Frankfurt am Main
Ladies and Gentlemen,
I would like to congratulate Pensions Europe for organising for the ninth
time the European Pension Funds Congress here in Frankfurt as part of the
Euro Finance Week.
This event has become a key annual gathering where different stakeholders
debate the future of pensions in the EU, the ways to deal with the challenge
of an ageing society and deliver safe, sustainable and adequate pensions for
EU citizens.
I would also like to thank Pensions Europe for the opportunity to speak to
you today.
In my intervention I will talk about EIOPAs vision, strategy and objectives
on pensions and how we are implementing it.
The percentage of the EU population that is covered by decent pension
systems is still too low.
We are indeed facing an EU pensions landscape in need of reforms.
Reforms require choices and courage.
The European pensions landscape we are facing is very heterogeneous,
with public pay-as-you-go, occupational, and personal pension vehicles
playing a very different role in the 28 Member States.
Despite such diversity that understandingly reflects the different cultures
and traditions, pension systems have one thing in common.
They are all facing tremendous challenges to deliver on their promises.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 20
Challenges like longevity growth, a sluggish economic environment, low
employment, budget deficits and debt burdens, low interest rates, volatility
of asset values.
Public pay-as-you-go pension schemes face an increasing expenditure,
meaning growing pressure on public finances and on the younger
generations, and are affected by lower contributions due to higher
unemployment.
Reforms of public pension systems are introduced as part of current
initiatives to restore confidence in government finances.
On the other side, private funded schemes are affected by the volatility of
asset values and by reduced returns which lower the funding ratios in
defined benefit schemes and diminish the ultimate value of pensions paid
by defined contribution schemes.
These effects are not always transparent to members and beneficiaries,
contributing to an environment of lack of confidence.
To ensure that citizens will have a chance to maintain appropriate
standards of living in their retirement it is self-evident that we need a
comprehensive package of reforms.
Changes to ensure the future sustainability of public pay-as-you-go pension
systems need to be accompanied by reforms incentivising the creation of
funded complementary private schemes be it 2nd pillar occupational
pensions or 3rd pillar personal pensions.
From a policy perspective this should be the first strategic priority at
national and EU level.
I believe that an important strategy to achieve this goal is to provide a
robust and proportionate EU regulatory framework capable of regaining
the trust and confidence of EU citizens in private complementary pension
savings.
This regulatory framework needs to deliver on three fundamental
objectives:
Enhanced sustainability, strong governance and full transparency. These
are the fundamental building blocks of EIOPAs pensions vision.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 21
Enhanced sustainability, because the first step to ensure protection of
members and beneficiaries is to make sure that any pension scheme
disposes of sufficient assets to fulfil its liabilities within a realistic valuation
scenario.
The QIS that we performed last year showed that pension funds in many
member states have vulnerabilities. Local measurements sometimes
provide a more optimistic view on pension funds solvency than applying a
more realistic measurement.
In these cases, the reliance on future payments by the sponsoring
employers is very large. We need to recognise this and assess if this
dependency is sustainable in the long run.
Strong governance, because pensions deserve to be governed by fit and
proper persons, with the appropriate skills, experience and integrity;
because conflicts of interest need to be identified and managed in order to
make sure that Board Members act in the sole interest of members and
beneficiaries; because strong risk management capabilities and robust
internal controls are fundamental to deliver to pensioners the promises
made or the expectations created.
Full transparency, because if we want to regain trust of citizens we cannot
hide anymore behind jargon; in the digital era we cannot justify
difficulties of providing information; we need to provide full disclosure of
all costs, be it investment or transaction costs; we need to give members
and beneficiaries a full picture of the returns that they get on their pension
products.
In all our work we recognise that pensions are different from other areas.
Pensions are different because of their embeddedness in social and labour
law; because of their social objectives; because of their particular
governance, involving employers and social partners; different because of
their unique distribution of risks.
But, in spite of these differences, members and beneficiaries are citizens
who deserve adequate protection, who have the right to know the
sustainability of the promises that are made to them, who need to
understand the risks that they are running, the costs that they are paying,
who deserve that pension funds are properly governed and that pension
schemes have a high degree of quality.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 22
So pension funds need specific regulation that takes into account these
differences and thats what EIOPA has been advocating and practising.
P a g e | 23
By making IORPs more aware of their commitments to their beneficiaries,
the preparation of the Risk Evaluation will help them make better informed
decisions about investments in long-term assets.
Furthermore, IORPs should enhance transparency towards members and
beneficiaries on the key features of occupational pension schemes, in
particular of Defined Contribution schemes.
Also in Defined Benefit plans, the financial situation of IORPs and how it
affects benefits should be understandable to a member.
Therefore, we welcome the Commissions proposal for an annual Pension
Benefit Statement.
We need to provide standardised and simplified information to active
scheme members on contributions, costs and charges, investment options
and expected benefits.
Nevertheless a balance needs to be found on the amount of information
given and on the capacity of members to digest and use appropriately that
information.
I am confident that the ongoing and future discussions in the EU Council
and the EU Parliament will allow for some further refinements that will
contribute to achieve the defined goals, in particular concerning the
Pension Benefit Statement.
On the solvency side, we all recognised that further work was needed to
develop a robust and tested proposal.
Recently EIOPA published a consultation paper on further technical work
on the holistic balance sheet to gather input from stakeholders.
The paper constitutes a further step in EIOPAs work on a risk-based
framework for occupational pension funds.
EIOPA is undertaking this work on its own initiative, in its role as
independent advisor to the European political institutions.
The consultation paper proposes improved definitions and methodologies
to value the holistic balance sheet, covering areas such as the valuation of
sponsor support, the benefit reduction mechanisms and discretionary
decision-making processes and the definition of contract boundaries.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 24
Most importantly, the paper consults on different possible uses of the
holistic balance sheet within a supervisory framework, ranging from an
instrument to establish funding requirements to a risk-management and
transparency tool to assess the long-term sustainability of IORPs.
The scope of this consultation paper is broader than previous work done by
EIOPA in this area.
There are indeed various ways to shape a market-consistent and risk-based
supervisory framework.
The consultation paper not only considers the holistic balance sheet being
used to set solvency capital requirements at the EU level, but also to
establish minimum funding requirements and as a risk management tool to
assess the sustainability of pension funds.
I would like to emphasise that using the holistic balance sheet as a risk
management tool should in my view not be a requirement without
consequences.
First of all, the outcomes of assessments should be disclosed to raise
awareness about the financial situation of the pension fund and, where
necessary, stimulate reforms.
Secondly, if it was concluded that the pension fund is providing
unsustainable pension promises, I believe that national supervisory
authorities should be empowered to take supervisory action, using a flexible
approach.
We are not promoting an EU one size fits all approach.
A common prudential regime should have built-in flexibility to deal with a
wide range of occupational pension schemes in Member States.
I would like to emphasize that any supervisory framework should in my
view be sufficiently flexible to also avoid short-term, pro-cyclical
investment behaviour of pension funds during adverse market
developments.
It is also essential for me that the holistic balance sheet can be implemented
in a proportionate way and without imposing high costs on pension
funds.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 25
The consultation paper proposes that pension funds with strong sponsors
may establish the value of sponsor support as a balancing item.
I am convinced that such an approach will considerably simplify the
valuation of the holistic balance sheet for a large number of pension funds.
In addition, it provides the right incentives by requiring pension funds with
weak sponsors to do more detailed assessments.
The further work on the holistic balance sheet has to be tested through a
quantitative assessment.
EIOPA expects to publish draft technical specifications for such an
assessment by early 2015.
Our final aim is to deliver robust, tested proposals to the EU political
institutions by the end of 2015, beginning of 2016.
I want to thank all stakeholders for the level of engagement and
contributions received in our previous consultations.
I believe that we showed that we take consultations seriously and that we
are ready to listen, discuss and evolve in our proposals, remaining faithful
to our vision, but using pragmatic and proportionate solutions.
Please continue to engage with us in this important consultation.
Your views, positions and suggestions will be duly considered and will
increase the quality of our work and its adherence to reality.
Remaining vigilant to the risk of financial instability is important as well to
EIOPA.
One of the lessons from the recent global financial crisis is the need to
understand and assess the interplay between the financial sector and
economic stability as well as the transmission mechanisms between
different market participants.
Recent events have highlighted the need for supervisors to remain vigilant
about systemic risk and the importance of expanding the scope of stress
tests.
EIOPA is now preparing a pensions stress test. We are taking a two-stage
approach: preparatory work in 2014 and running the stress test in 2015.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 26
Our aim is to develop a stress test framework that is appropriate and
suitable for pension funds.
An important part of the preparatory work is to gain insight in the role of
IOPRs in financial stability.
To analyse transmission channels of IORPs to financial markets, EIOPA
started a data collection exercise covering a sample of defined benefit,
hybrid and defined contribution schemes in Member States with a
significant IORP sector.
This exercise will allow us to assess the pro-cyclicality of pension funds
investment behaviour during the past decade, including the financial crisis
in 2008.
We would be very grateful for the participation of pension funds in this
exercise.
The stress test will assess the resilience and the behaviour of IORPs in
adverse market developments, such as a prolonged low interest
environment or a sudden material reassessment of risk premia.
It will also incorporate stresses in longevity as one of the major risks in
pension funds overall financial condition.
Our intention is that the pension stress test will cover IORPs that provide
defined benefit schemes as well as the ones that finance hybrid or defined
contribution plans.
We will conduct the stress test in parallel with the quantitative assessment
on the solvency side in order to avoid the duplication of calculations.
This will limit to the extent possible the burden on pension funds and
supervisory authorities.
But our work on delivering on the three objectives mentioned before is also
more and more focused on defined contribution plans.
We are looking at costs and charges in the occupational defined
contribution world and at different best practices to establish default
options.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 27
As part of the construction of a more integrated Europe we all should show
readiness to implement a truly internal market for private pensions.
EU citizens are increasingly mobile: 6.6 million EU citizens live and work in
a member state other than their own.
That is already 3.1% of workers in the EU.
A further 1.2 million live in one EU country but work in another.
How many of these millions have been able easily to transfer their pension
rights?
How many of their employers have been able easily to establish a
pan-European pension scheme?
Of course, questions of cross-border pension rights are not the only issue
which determines whether someone works in another Member State.
But they may play an increasing role in whether or not a citizen can stay for
the long term in another Member State.
And even if it is not the primary consideration in deciding to work abroad,
the individual should be able to avail of coherent and continuing pension
arrangements while abroad.
And those arrangements should be similar to the way that can be achieved
by staying at home.
An important step towards facilitating worker mobility in the EU was taken
earlier this year when the European Parliament and the Council adopted
the Directive on minimum requirements for enhancing worker mobility by
improving the acquisition and preservation of supplementary pension
rights.
The Directive does not foresee any minimum requirements concerning the
transferability of supplementary pension rights.
Nevertheless, pension transferability remains an important aspect of
worker mobility, and Member States are encouraged to improve the
transferability of vested pension rights.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 28
In this context, EIOPA received last June a formal Call for Advice from the
Commission to provide an overview of the existing arrangements for
transfers of acquired supplementary pension rights between occupational
pension schemes in different Member States.
In addition, the Commission asked EIOPA to highlight any good practices
related to the transfers of acquired supplementary pension rights as well as
identify the main obstacles/difficulties affecting (or preventing) transfer,
both within countries and across borders.
EIOPA will provide its response to the Commission's Call for Advice by the
middle of next year.
Finally EIOPA is also working on personal pensions.
Following the publication of our preliminary report "Towards an EU single
market for personal pensions", EIOPA received last July a Call for Advice
from the Commission with a view to support the development of an
EU-wide framework for personal pension products.
EIOPA will explore how the development of simple, standardised and fully
transparent personal pension products could help to reduce costs and
mitigate miss-selling.
We are also keen on finding a proportionate regulatory treatment to these
products to ensure that there are no excessive burdens for market
participants.
A single market for personal pensions can be advantageous for consumers,
providers, and for the broader EU economy.
EU citizens will have the opportunity to participate in different schemes
across Europe according to their preferences and needs, in particular with
respect to investment strategies.
Developing a truly internal market for pensions can increase member
protection, transparency and be the catalyst for better outcomes for
citizens, through economies of scale.
Pension providers will also have the opportunity to achieve economies of
scale, especially in the case of standardised products, which allow for
successful cross-border selling.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 29
Overall, the EU economy could benefit from personal pensions becoming a
main driver for sustainable long-term investments, contributing to the
Capital Markets Union.
As you see EIOPA has a clear vision on pensions, important objectives to
achieve and a comprehensive work plan for the coming years.
We will continue to extensively involve our Occupational Pension
Stakeholder Group that gives an excellent contribution to EIOPA, by
providing advice and challenge in a cooperative way.
We will continue to engage with all stakeholders in a clear and transparent
manner.
To conclude, creating sustainable and adequate pension systems will be one
of the major challenges for Europe in the coming years.
It is a goal worthy of all the efforts.
At the EU level, EIOPA will continue in its efforts to ensure that:
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 30
I like to end by quoting Barack Obama who said: If you're walking down
the right path and you're willing to keep walking, eventually you'll make
progress.
Thank you.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 31
P a g e | 32
The ECB is responsible for the effective and consistent functioning of the
SSM and exercises oversight over the functioning of the system, based on
the distribution of responsibilities between the ECB and NCAs, as set out in
the SSM Regulation.
To ensure efficient supervision, credit institutions are categorised as
significant or less significant: the ECB directly supervises significant
banks, whereas the NCAs are in charge of supervising less significant banks.
This guide explains the criteria used to assess whether a credit institution
falls within the significant or less significant institution category.
This guide is issued in accordance with the Interinstitutional Agreement
between the European Parliament and the ECB.
The procedures described in the guide may have to be adapted to the
circumstances of the case at hand or the necessity to set priorities.
The guide is a practical tool that will be updated regularly to reflect new
experiences that are gained in practice.
This guide is not, however, a legally binding document and cannot in any
way substitute for the legal requirements laid down in the relevant
applicable EU law.
In case of divergences between these rules and the guide, the former
prevail.
Introduction
1
The Single Supervisory Mechanism (SSM) comprises the ECB and
the national competent authorities (NCAs) of participating Member States.
The SSM is responsible for the prudential supervision of all credit
institutions in the participating Member States.
It ensures that the EUs policy on the prudential supervision of credit
institutions is implemented in a coherent and effective manner and that
credit institutions are subject to supervision of the highest quality.
The SSMs three main objectives are to:
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 33
2
On the basis of the SSM Regulation, the ECB, with its extensive
expertise in macroeconomic policy and financial stability analysis, carries
out clearly defined supervisory tasks to protect the stability of the European
financial system, together with the NCAs.
The SSM Regulation and the SSM Framework Regulation provide the legal
basis for the operational arrangements related to the prudential tasks of the
SSM.
3
The ECB acts with full regard and duty of care for the unity and
integrity of the Single Market based on the equal treatment of credit
institutions with a view to preventing regulatory arbitrage.
Against this background, it should also reduce the supervisory burden for
cross-border credit institutions.
The ECB considers the different types, business models and sizes of credit
institutions as well as the systemic benefits of diversity in the banking
industry.
4
In carrying out its prudential tasks, as defined in the SSM Regulation,
the ECB applies all relevant EU laws and, where applicable, the national
legislation transposing them into Member State law.
Where the relevant law grants options for Member States, the ECB also
applies the national legislation exercising those options.
The ECB is subject to technical standards developed by the European
Banking Authority (EBA) and adopted by the European Commission, and
also to the EBAs European Supervisory Handbook.
Moreover, in areas not covered by this set of rules, or if a need for further
harmonisation emerges in the conduct of the day-to-day supervision, the
ECB will issue its own standards and methodologies, while considering
Member States national options and discretions under EU legislation.
5
P a g e | 34
the distribution of tasks between the ECB and the NCAs of the
participating Member States;
Supervisory principles
6
In the pursuit of its mission, the SSM constantly strives to maintain
the highest standards and to ensure consistency in supervision.
The SSM benchmarks itself against international norms and best practices.
The revised Basel Committees Core Principles for Effective Banking
Supervision as well as the EBA rules form a sound foundation for the
regulation, supervision, governance and risk management of the banking
sector.
7
The SSM approach is based on the following principles, which inspire
any action at the ECB or centralised level and at the national level, and
which are essential for an effective functioning of the system.
These principles underlie the SSMs work and guide the ECB and the NCAs
in performing their tasks.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 35
P a g e | 36
P a g e | 37
Principle 7 Proportionality
The supervisory practices of the SSM are commensurate with the systemic
importance and risk profile of the credit institutions under supervision.
The implementation of this principle facilitates an efficient allocation of
finite supervisory resources.
Accordingly, the intensity of the SSMs supervision varies across credit
institutions, with a stronger focus on the largest and more complex
systemic groups and on the more relevant subsidiaries within a significant
banking group.
This is consistent with the SSMs risk-based and consolidated supervisory
approach.
P a g e | 38
It intervenes as early as possible, thus reducing the potential losses for the
credit institutions creditors (including depositors).
However, that does not mean that individual credit institutions cannot be
allowed to enter resolution procedures.
The SSM works with other relevant authorities to make full use of the
resolution mechanisms available under national and EU law.
In the event of a failure, resolution procedures as provided by the Bank
Recovery and Resolution Directive are applied to avoid, in particular,
significant adverse effects on the financial system and to protect public
funds by minimising reliance on extraordinary public financial support.
The SSM combines the strengths of the ECB and the NCAs.
3.1
P a g e | 39
Box 1
Classification of institutions as significant or less significant
To determine whether or not a credit institution is significant, the SSM
conducts a regular review: all credit institutions authorised within the
participating Member States are assessed to determine whether they fulfil
the criteria for significance.
A credit institution will be considered significant if any one of the following
conditions is met:
the total value of its assets exceeds 30 billion or unless the total
value of its assets is below 5 billion exceeds 20% of national GDP;
the total value of its assets exceeds 5 billion and the ratio of its
cross-border assets/liabilities in more than one other participating Member
State to its total assets/liabilities is above 20%.
Notwithstanding the fulfilment of these criteria, the SSM may declare an
institution significant to ensure the consistent application of high-quality
supervisory standards.
The ECB or the NCAs may ask for certain information to be submitted (or
resubmitted) to help facilitate the decision.
Through normal business activity or due to exceptional occurrences (e.g. a
merger or acquisition), the status of credit institutions may change.
If a group or a credit institution that is considered less significant meets any
of the relevant criteria for the first time, it is declared significant and the
NCA hands over responsibility for its direct supervision to the ECB.
Conversely, a credit institution may no longer be significant, in which case
the supervisory responsibility for it returns to the relevant NCA(s).
In both cases, the ECB and the NCA(s) involved carefully review and
discuss the issue and, unless particular circumstances exist, plan and
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 40
implement the transfer of supervisory responsibilities so as to allow for a
continued and effective supervision.
To avoid rapid or repeated alternations of supervisory responsibilities
between NCAs and the ECB (e.g. if a credit institutions assets fluctuate at
around 30 billion), the classification has a moderation mechanism:
whereas the shift in status from less significant to significant is triggered if
just one criterion is met in any one year, a significant group or credit
institution will only qualify for a reclassification as less significant if the
relevant criteria have not been met over three consecutive calendar
years.
Institutions are notified immediately of the SSMs decision to transfer
supervisory responsibilities from the NCA to the ECB, or vice versa: prior to
the adoption of the decision, the ECB gives the institution the opportunity
to provide written comments.
During the transition, institutions receive regular updates as needed and
are introduced to their new team of supervisors.
Once the transition is complete, a formal handover meeting is organised for
representatives from the supervised institution and the outgoing and
incoming supervisors.
_________________________
10
The ECB directly supervises all institutions that are classified as
significant (see Figure 1), around 120 groups representing approximately
1,200 supervised entities, with the assistance of the NCAs.
The day-to-day supervision will be conducted by Joint Supervisory Teams
(JSTs), which comprise staff from both NCAs and the ECB (see Box 3).
The NCAs continue to conduct the direct supervision of less significant
institutions, around 3,500 entities, subject to the oversight of the ECB.
The ECB can also take on the direct supervision of less significant
institutions if this is necessary to ensure the consistent application of high
supervisory standards.
11
The ECB is also involved in the supervision of cross-border
institutions and groups, either as a home supervisor or a host supervisor in
Colleges of Supervisors (see Box 2).
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 41
Moreover, the ECB participates in the supplementary supervision of
financial conglomerates in relation to the credit institutions included in a
conglomerate and assumes the responsibilities of the coordinator referred
to in the Financial Conglomerates Directive.
Box 2 Colleges of Supervisors
Established in accordance with the Capital Requirements Directive (CRD
IV), Colleges of Supervisors are vehicles for cooperation and coordination
among the national supervisory authorities responsible for, and involved in,
the supervision of the different components of cross-border banking
groups.
Colleges provide a framework for the supervisors and competent
authorities to carry out the tasks referred to in CRD IV, for example
reaching joint decisions on the adequacy of own funds and their required
level and on liquidity and model approvals.
Within the SSM, the ECB may have the following roles in supervisory
colleges for significant banking groups:
home supervisor for colleges that include supervisors from nonparticipating Member States (European colleges) or from countries outside
the EU (international colleges);
P a g e | 42
The EBA and the Basel Committee have issued guidelines/principles for the
operational functioning of the colleges.
12
Against this background, the ECB is responsible for the direct
supervision of around 120 groups, which together account for almost 85%
of total banking assets in the euro area.
Supervised credit institutions that are considered less significant are
supervised directly by the relevant NCAs under the overall oversight of the
ECB.
This structure for banking supervision adequately reflects the SSM
Regulation.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 43
All credit institutions under the SSMs supervision are subject to the same
supervisory approach.
13
3.2
The Supervisory Board plans and carries out the SSMs supervisory tasks
and proposes draft decisions for adoption by the ECBs Governing Council.
The Supervisory Board is composed of the Chair and Vice-Chair, four
representatives of the ECB, and one representative of the NCAs in each
participating Member State, usually the top executive of the relevant NCA
responsible for banking supervision.
The Supervisory Boards draft decisions are proposed on the basis of
thorough, objective, and transparent information, bearing in mind the
interest of the EU as a whole.
The Supervisory Board operates in a way that ensures its independence.
14
The decision-making process is based on a non-objection
procedure (see Figure 2).
If the Governing Council does not object to a draft decision proposed by the
Supervisory Board within a defined period of time that may not exceed ten
working days, the decision is deemed adopted.
The Governing Council may adopt or object to draft decisions but cannot
change them.
The ECB has created a Mediation Panel to resolve differences of views
expressed by the NCAs concerned regarding an objection by the Governing
Council to a draft decision of the Supervisory Board.
15
The ECB has also established an Administrative Board of Review to
carry out internal administrative reviews of decisions taken by the ECB in
the exercise of its supervisory powers.
Any natural person or supervised entity may request a review of an ECB
decision, which is addressed to them, or is of direct and individual concern.
The Administrative Board of Review may also propose to the Governing
Council that it suspend the application of the contested decision for the
duration of the review procedure.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 44
The Board is composed of five independent members who are not staff of
the ECB or an NCA.
A request for a review of an ECB decision by the Administrative Board of
Review does not affect the right to bring proceedings before the Court of
Justice of the EU.
3.3
16
The ECB has established four dedicated Directorates General
(DGs) to perform the supervisory tasks conferred on the ECB in
cooperation with NCAs (see Figure 3):
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 45
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 46
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 47
17
DG Micro-Prudential Supervision I is responsible for the supervision
of the most significant groups (around 30); DG Micro-Prudential
Supervision II is in charge of the remaining significant groups.
The day-to-day supervision of significant groups is conducted by Joint
Supervisory Teams (JSTs), supported by the horizontal and specialised
expertise divisions of DG Micro-Prudential Supervision IV (see Box 3).
18
Ten horizontal and specialised divisions of DG Micro-Prudential
Supervision IV support JSTs and NCAs in the conduct of supervision of
both significant and less significant credit institutions.
These ten divisions are: Risk Analysis, Supervisory Policies, Planning and
Coordination of Supervisory Examination Programmes, Centralised
On-site Inspections, Internal Models, Enforcement and Sanctions,
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 48
Authorisations, Crisis Management, Supervisory Quality Assurance, and
Methodology and Standards Development.
The horizontal divisions interact closely with the JSTs in, for example,
defining and implementing common methodologies and standards, offering
support on methodological issues and helping them to refine their
approach.
The aim is to ensure consistency across the JSTs supervisory approaches.
19
The SSM actively fosters a common supervisory culture by bringing
staff from various NCAs together in the JSTs, in the context of the
supervision of less significant institutions, and in the horizontal and
specialised divisions.
In that respect, the ECB also plays a role in organising staff exchanges
between NCAs as an important tool for achieving a sense of commonality of
purpose.
This shared culture is the foundation of consistent supervisory practices
and approaches throughout the participating Member States.
20
The supervisory tasks are supported by the ECBs shared services,
including services for human resources, information systems,
communications, budget and organisation, premises and internal audit,
and legal and statistical services.
The SSM is thus able to exploit operational synergies while keeping the
required separation between monetary policy and banking supervision.
21
3.4
P a g e | 49
supervision and the performance of quality assurance checks feed back into
the definition of methodologies, standards, supervisory policies and
regulation.
23
Experience gained from the practical implementation of the
methodologies and standards feeds through to the planning of supervisory
activities for the forthcoming cycle.
This planning also incorporates the analysis of key risks and vulnerabilities
and strategic supervisory priorities. The supervisory cycle is set out in more
detail below.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 50
Box 4
bodies
To create a safer and sounder financial sector, new rules have been
implemented and new institutions and bodies have been established since
2007, within both the EU and the euro area.
As a key element of this new institutional framework, the SSM cooperates
closely with other European institutions and bodies as explained below.
P a g e | 51
If the ECB uses the macro-prudential instruments defined in the CRD IV or
the Capital Requirements Regulation (CRR), either at the request of the
national authorities or by deciding to adopt stricter measures than the ones
adopted at the national level, it needs to take the ESRBs recommendations
into account.
A close cooperation between the ECB and the ESRB and the development of
information flows is mutually beneficial: it improves the ESRBs ability to
effectively identify, analyse and monitor EU-wide systemic risks, while the
SSM may take advantage of the ESRBs expertise, which goes beyond the
banking sector and covers the entire financial system, including other
financial institutions, markets and products.
P a g e | 52
The SSM will assist the SRM in reviewing the resolution plans, with a view
to avoiding a duplication of tasks.
P a g e | 53
developments in international and European regulations and the role of the
EBA in establishing the single rulebook to ensure harmonised supervisory
practices and consistency of supervisory outcomes within the SSM over
time.
The common set of methodologies and standards covers topics such as the
details of the Supervisory Review and Evaluation Process (SREP) and the
notification and application procedures for supervised entities.
30
risks revealed by stress testing, taking into account the nature, scale
and complexity of an institutions activities.
32
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 54
33
Both the RAS and capital and liquidity quantification follow a
multi-step approach.
They aim to produce supervisory assessments rooted in quantitative and
qualitative analysis.
They rely on a wide range of backward and forward- looking information
(e.g. probability of default, loss given default, stress tests).
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 55
They are built on a constrained judgement approach, so as to ensure
consistency across the SSM, while allowing for expert judgement to
consider the complexity and variety of situations within a clear and
transparent framework.
34
The risks to which credit institutions are exposed are assessed by risk
levels and by the corresponding risk controls/risk mitigation measures.
Institutions business risk and profitability, as well as their internal
governance and overall risk management, are assessed from a more holistic
perspective.
All assessments are then integrated into an overall assessment.
35
The SSM follows a risk-based approach while focusing on compliance
with regulatory requirements.
It also respects the principle of proportionality, taking into account an
institutions potential impact on the financial system, its intrinsic riskiness
and whether it is a parent entity, subsidiary or solo institution.
This results in a differentiated frequency and intensity for the institutions
risk profile assessment within the year.
The risk profile assessment in turn may result in a wide range of
supervisory actions and measures, including short-term ones that are taken
immediately by the relevant JST and more long-term ones that are covered
by the SREP report and annual supervisory planning.
There is a direct link between an institutions overall risk profile assessment
and the level of supervisory engagement.
36
Traceability and accountability are key features of the entire
supervisory assessment process.
The capital requirements defined under Pillar 1 of the Basel Accords are
minimum requirements that credit institutions must fulfil at all times.
Therefore, the SSM constantly monitors the institutions compliance with
the requirements and also considers Pillar 1 capital requirements as a floor.
Internal models, which institutions subject to supervisory approval are
allowed to use to calculate capital requirements for Pillar 1 risks, are
regularly reviewed by the SSM.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 56
37
Furthermore, credit institutions may be required to hold additional
capital and liquidity buffers for risks that are not, or not fully, covered by
Pillar 1.
To this end, credit institutions must use their internal assessment and
calculation methods, specifically their Internal Capital Adequacy
Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment
Process (ILAAP).
Credit institutions are required to carefully document these processes and
calculations.
They are also required to create adequate governance structures to ensure
that their ICAAP/ILAAP outcomes are reliable.
Therefore, a comprehensive review of the ICAAP/ILAAP is performed as
part of the SREP.
38
As recommended by the EBA Guidelines, the SSM strives to take
adequate SREP decisions using a wide range of information coming from
several building blocks.
These include the credit institutions regular reports, ICAAP/ILAAP, the
institutions risk appetite, supervisory quantifications used to verify and
challenge the credit institutions estimates, risk assessment outcomes
(including risk level and control assessments), the outcome of stress tests,
and the supervisors overall risk priorities.
39
Supervisory quantifications calculated for assessing institutions
capital and liquidity needs, as well as ICAAP and ILAAP, play a key role in
anchoring the process.
40
The SSM uses both top-down and bottom-up supervisory stress tests
as part of the capital and liquidity adequacy assessments.
Stress tests are a key forward-looking tool for assessing institutions
exposure and resilience to adverse but plausible future events.
They can also be used to test the adequacy of credit institutions risk
management procedures, their strategic and capital planning and the
robustness of their business models.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 57
41
Based on all the information reviewed and evaluated during the
SREP, the SSM makes the overall assessment of the capital and liquidity
adequacy of the credit institution and prepares SREP decisions (see Figure
6).
At the end of the process, it takes an overall view on the adequate level of
capital and liquidity for an institution.
SREP decisions may also include qualitative measures, for instance to deal
with shortcomings in institutions risk management.
The outcome of this analysis and any necessary corrective actions are
presented to the credit institution and the credit institution is given the
opportunity to comment in writing to the ECB on the facts, objections and
legal grounds relevant to the ECBs supervisory decision.
Where appropriate, specific meetings can be organised with the credit
institution to discuss the outcomes and corrective actions to be taken.
42
The outcome of the SREP for significant credit institutions is
submitted to the Supervisory Board.
For institutions with subsidiaries in non-SSM EU countries, the SREP
decision will be taken jointly by all of the relevant competent authorities.
43
The result of the SREP is also a key input for the SSMs strategic and
operational planning.
In particular, it has a direct impact on the range and depth of off-site and
on-site activities that are carried out for a given institution.
This planning is defined annually and revised on a semi-annual basis.
44
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 58
The Risk Analysis Division hence also considers system-wide risks, such as
those arising from international imbalances or excessive risk concentration
potentially leading to sectorial bubbles (e.g. residential or commercial real
estate). Its risk analysis also draws on analyses performed by other ECB
business areas, particularly macro- prudential analysis.
Sectoral analysis also facilitates the understanding of key market
developments.
46
Risk analyses performed by JSTs and by the dedicated Risk
Analysis Division complement each other.
The Risk Analysis Division monitors the overall risk environment of the
SSM and delivers timely and in-depth risk analyses across institutions.
JSTs are an important source of institution-specific information for the
Risk Analysis Division.
47
Adequate, reliable and up-to-date supervision and risk analysis
is based on accurate supervisory data.
The ECB therefore maintains close cooperation with the NCAs and their
reporting units, which are the first receivers of supervisory reporting data.
The ECBs reporting and statistics units performs its own quality checks
before the data are used for supervisory and risk analysis purposes and for
decision-making.
The SSM reporting schedule defines the reporting timelines and formats,
taking into account the harmonised requirements applicable across the EU.
48
The SSM Regulation speaks about creating a truly integrated
supervisory mechanism.
In practice, this implies, first of all, that key processes are generally the
same for all credit institutions regardless of whether they are significant
or less significant and involve both the ECB and the NCAs.
It also implies a single supervisory approach.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 59
Each credit institution that is covered by the SSM is supervised according to
the same methodology and with due respect to the principle of
proportionality.
The common procedures applying to both significant and less significant
institutions, and the approaches to the supervision of both categories, are
set out below.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 60
P a g e | 61
P a g e | 62
53
Both the ECB and the NCAs of participating Member States where an
institution is established have the right to propose the withdrawal of a
banking licence.
NCAs can propose a withdrawal upon the request of the credit institution
concerned or, in other cases, on its own initiative in accordance with
national legislation.
The ECB can initiate a withdrawal in cases set out in the relevant EU laws.
The ECB and the relevant NCAs consult on any proposals for the
withdrawal of a licence.
These consultations are intended to ensure that, before a decision is taken,
the relevant bodies (i.e. NCAs, national resolution authorities and the ECB)
have sufficient time to analyse and comment on the proposal, raise
potential objections and take the necessary steps and decisions to preserve
the going concern or resolve the institution, if deemed appropriate.
54
Following the consultation, the proposing body composes a
draft decision explaining the rationale behind the proposed withdrawal of
the licence and reflecting the results of the consultation.
Thereafter, the final decision rests with the ECB.
55
Before a draft decision proposal is submitted to the ECB, the
supervised institution in question is prompted to provide its own views on
the matter and is given the right to be heard by the ECB.
Once taken, the ECBs final decision is notified to the respective credit
institution, the NCA, and the national resolution authority.
4.2
56
P a g e | 63
It encompasses the definition of the strategic priorities and the focus of
supervisory work for the following 12 to 18 months.
More specifically, it takes into account factors such as the assessment of
risks and vulnerabilities in the financial sector, as well as guidance and
recommendations issued by other European authorities, in particular the
ESRB and the EBA, findings of the JSTs through the SREP and priorities
highlighted by the relevant NCAs.
The strategic plan frames the nature, depth and frequency of activities to be
included in the individual Supervisory Examination Programmes (SEPs),
which are defined for each significant institution.
57
Operational planning is conducted by the JSTs under the
coordination of the ECBs Planning and Coordination of SEPs Division.
JSTs produce individual SEPs, which set out the main tasks and activities
for the following 12 months, their rough schedules and objectives, the need
for on-site inspections, and internal model investigations.
The Planning and Coordination of SEPs Division, along with the relevant
horizontal functions and NCAs, coordinates the allocation of SSM resources
and expertise to ensure that each JST has the capacity to carry out the
annual supervisory tasks and activities.
Although the main items of individual SEPs are discussed with the credit
institution beforehand, JSTs are always able to perform ad hoc tasks and
activities that are not part of the supervisory plan, especially to address
rapidly changing risks at individual institutions or at the broader system
level.
58
activities.
P a g e | 64
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 65
Once the analysis has been completed and a decision taken, the ECB
notifies the applicant of the outcome.
P a g e | 66
State via passporting procedures14, it has to notify the NCA of the
participating Member State where it has its head office and provide the
necessary documentation.
On receipt of this notification, the NCA immediately informs the ECBs
Authorisation Division, which then assesses the adequacy of the
administrative structure in light of the activities envisaged.
Where no decision to the contrary is taken by the ECB within two months of
receipt of the credit institutions notification, the significant institution may
establish the branch and commence its activities.
A credit institution in a participating Member State wishing to establish a
branch or exercise the freedom to provide services within the territory of a
non- participating Member State informs the relevant NCA of its intention.
On receipt of such notification from a significant institution, the relevant
NCA immediately informs the ECB, which then carries out the required
assessment.
62
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 67
At this stage, credit institutions need to be prepared for intensive
interaction and collaboration to make the process smooth and efficient for
all parties.
This process comprises a range of tools, including off-site and on-site
evaluations.
These activities are carried out by a dedicated project team responsible for
the entire model assessment process.
Project teams can consist of members of the JSTs, experts from the ECBs
horizontal divisions and dedicated model experts from the NCAs, and are
led by project managers who report to the JST coordinator.
65
On the basis of the project teams report, the JST, supported by
the ECBs Internal Models Division, prepares a proposal for a draft decision
for approval by the Supervisory Board and the Governing Council.
The proposal comprises the JSTs views on the authorisation (or refusal) of
the use of internal models to calculate the capital requirements. Conditions,
such as additional reporting requirements as well as additional supervisory
measures, may be attached to the authorisation.
66
Furthermore, the objective of ongoing model supervision is to
keep a close watch on a credit institutions permanent compliance with
applicable requirements.
It comprises the analysis of risk, capital or other reports on model aspects,
the analysis of credit institutions model validations and the assessment of
(immaterial) model changes.
In addition, a full review of internal models with a special focus on
appropriateness in the light of best practice and changes to business
strategies takes place regularly, at least every three years.
The reviews are conducted by the JST, where necessary with the support of
the Internal Models Division. The annual benchmarking required by Article
78 of the CRD is performed by the EBA and the SSM as competent
authority.
P a g e | 68
The fit and proper assessment of the members of the management body of
significant and less significant institutions is a key part of supervisory
activities.
The members need to be of sufficiently good repute and to possess
sufficient knowledge, skills and experience to perform their duties.
In the case of an initial authorisation (licensing) of a credit institution, the
fit and proper assessment is performed as part of the authorisation
procedure.
68
Changes to the composition of the management body of a
significant institution are declared to the relevant NCA, which then informs
the relevant JST and the ECBs Authorisation Division, which, together
with the staff of the NCA, collects the necessary documentation (which may
include an interview with the nominated candidate).
With the assistance of the NCA, the JST and the Authorisation Division
jointly carry out the assessment and then present a detailed proposal to the
Supervisory Board and Governing Council for a decision.
69
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 69
which has emerged at a credit institution and which warrants immediate
supervisory action.
If deemed necessary, follow-up inspections may be carried out to assess a
credit institutions progress in implementing remedial actions or corrective
measures identified in a previous planned or ad hoc inspection.
72
examine and assess the level, nature and features of the inherent
risks, taking into account the risk culture;
examine the quality of balance sheet items and the financial situation
of the credit institution;
73
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 70
of weakening economic sectors or the spread of risky practices across the
banking sector.
74
The composition of the team in terms of size, skills, expertise and
seniority will be tailored to each individual inspection.
The staffing of inspection teams is looked after by the ECB in close
cooperation with the NCAs.
The head of the inspection team (head of mission) and inspectors are
appointed by the ECB in consultation with the NCAs.
Members of the JST may participate in inspections as inspectors, but not as
heads of mission, to ensure that on-site inspections are conducted in an
independent manner.
Where necessary and appropriate, the ECB can call on external experts.
The outcome of on-site inspections is reflected in a written report on the
inspected areas and findings.
The report is signed by the head of mission and sent to the JST and the
NCAs concerned.
Based on the report, the JST is responsible for preparing recommendations.
The JST then sends the report and recommendations to the credit
institution and, in general, calls for a closing meeting with the institution.
75
Under the SSM Regulation, the ECB may at any time make use of its
investigatory powers vis--vis less significant banks.
These powers include the possibility to conduct on-site inspections.
76
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 71
77
The ECB has established a Crisis Management Division, tasked
with supporting the JSTs in times of crisis.
The ECBs Crisis Management Division is also reviews the significant
supervised credit institutions recovery plans and conducts further analysis,
which allows for benchmarking, quality control, consistency checks and
expert support to the JSTs.
With regard to resolution planning, the SSM has a consultative role under
the BRRD and the SRM Regulation.
The Crisis Management Division is a key player in this consultative process.
Moreover, the ECBs Crisis Management Division and the JSTs will
participate in Crisis Management Groups set up for specific banks (see Box
6).
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 72
P a g e | 73
The type of action taken depends on the seriousness of the
deficiencies, the required time frame, the degree of awareness at the credit
institution, the capability and reliability of corporate bodies, and the
availability of human, technical and capital resources within the credit
institution.
If the action is based on the national law of a participating Member State,
the respective NCA might be asked for support to ensure that all the legal
prerequisites are covered.
Supervisory powers consist of measures characterised by increasing
intensity in terms of content and form and may imply:
the accurate listing of goals and the time frame for their achievement,
while entrusting the credit institution, on its own responsibility, with the
task of identifying the most effective measures without enforcing limits or
rules other than the ones laid down in the legal framework;
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 74
82
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 75
Such reports on violations are an effective tool for bringing incidents of
business misconduct to light.
85
4.3
The SSM aims to ensure that the EUs policy relating to the prudential
supervision of credit institutions is implemented in a coherent and effective
manner, that the single rulebook for financial services is applied in the
same manner to credit institutions in all Member States concerned, and
that credit institutions are subject to supervision of the highest quality,
unfettered by non- prudential considerations.
Moreover, the experience of the financial crisis has shown that smaller
credit institutions can also pose a threat to financial stability; the ECB
should therefore be able to exercise supervisory tasks in relation to all
credit institutions and branches, which are established in participating
Member States of credit institutions established in non-participating
Member States.
These objectives can only be achieved through:
P a g e | 76
NCAs will also continue to perform supervision in areas that are not
covered by the SSM Regulation.
87
Even though NCAs have primary responsibility for organising and
conducting the supervision of less significant institutions, ECB staff may
also participate in certain activities, for example on-site inspections.
As well as providing expertise and support to NCAs, this promotes and
facilitates the exchange of staff among NCAs (and between NCAs and the
ECB) and helps to foster a common supervisory culture within the SSM.
88
At the same time, the ECB is responsible for the effective and
consistent functioning of the SSM and is entrusted with an oversight
responsibility to ensure that the supervisory activities carried out by the
NCAs are of the highest quality and that supervisory requirements on all
credit institutions covered by the SSM are consistent.
This task is performed by DG Micro-Prudential Supervision III.
89
DG Micro-Prudential Supervision III achieves these objectives by
applying the supervisory approaches developed by DG Micro-Prudential
Supervision IV for significant credit institutions in a proportional manner.
DG Micro-Prudential Supervision III comprises three divisions:
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 77
It also evaluates whether the ECB should take over direct supervision of a
specific institution and participates in cooperation with DG
Micro-Prudential Supervision IV in on-site examinations of less
significant institutions.
Furthermore, it is responsible for crisis management activities related to
less significant institutions.
91
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 78
Based on the analysis, the ECB can also identify areas where ECB
regulations, guidelines or general instructions are needed to ensure
consistency in supervision and the application of high supervisory
standards.
93
In addition to the regular information received from NCAs
(including supervisory reporting to competent authorities) and taking
account of the principle of proportionality, the ECB may also request
additional information on less significant institutions, generally from
NCAs, as necessary to exercise its oversight task.
94
The ECB is responsible for conducting the general oversight of the NCAs
supervisory activities to ensure the adequate and harmonised conduct of
supervision of the less significant institutions.
Oversight activities can be conducted, for example, through reviews of
specific topics (e.g. risk areas) across all or a sample of NCAs.
They provide a targeted insight into the NCAs supervision at the level of
individual institutions or classes of similar institutions.
95
Furthermore, NCAs provide material draft supervisory
decisions and procedures to the ECB.
The scope of these decisions and procedures is defined in the SSM
Framework Regulation.
They consist of procedures that have a significant impact on the less
significant institutions and the removal of members of the management
boards of less significant institutions and the appointment of special
managers.
A balance is pursued between providing the ECB with information on NCA
activities crucial to the integrity of the SSM, but avoiding an overflow of
notifications to the ECB.
NCAs must also inform the ECB if the financial situation of a less significant
institution deteriorates rapidly and significantly.
96
NCAs report regularly to the ECB on the less significant
institutions in a format defined by the ECB. In addition, some ex post
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 79
reporting procedures have been established under which NCAs report
regularly on the measures that they have taken and the performance of
their tasks with regard to the less significant institutions.
The ECB also reviews how NCAs apply SSM supervisory standards,
processes and procedures, such as the SREP, with regard to the less
significant institutions.
The oversight of processes includes assessing whether standards are
applied in a harmonised way and checking whether comparable situations
lead to comparable outcomes across the SSM.
The ECB can also recommend changes to areas where further
harmonisation is needed and, where appropriate, may also develop
standards as regards supervisory practices.
The ECBs oversight activities are a collaborative assessment of whether
and how SSM standards and processes can be improved to reach the
common goal of harmonised and effective supervision across the SSM.
98
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 80
P a g e | 81
Findings are discussed with the parties involved with a view to improving
and further harmonising future activities.
Abbreviations
European Union
ICAAP
ILAAP
JST
P a g e | 82
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 83
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 84
The Federal Open Market Committee (FOMC) has gone to great lengths to
provide transparency about its policy intentions.
Yet, since Chairman Bernanke first discussed the end of the asset purchase
program in mid-2013, volatility has surprised both on the upside (the
"taper tantrum") and on the downside (the actual taper and the low
volatility throughout most of 2014).
In my view, while market volatility will continue to ebb and flow, these
fluctuations are not likely to have important implications for policy.
The path of policy will depend on the progress of the economy toward
fulfilment of the dual mandate.
Overall, accommodative monetary policy seems to have provided
significant support for U.S. growth.
And, of course, a strong U.S. economy contributes to strong growth around
the globe, particularly in the emerging market economies (EMEs).
But what of the so-called spillovers in the form of flows into, and out of,
EMEs, whose financial sectors are small compared with global investment
flows?
Such spillovers could merely reflect investor responses to changing
differentials between rates of return abroad and in the United States.
But these spillovers could also reflect shifts in investor preferences for risk.
By design, accommodative monetary policy--whether conventional or
unconventional--supports economic activity in part by creating incentives
for investors to take more risk.
Such risk-taking can show up in domestic financial markets, in the
international investments of U.S. investors, and even, ultimately, in general
risk attitudes toward foreign financial markets.
Distinguishing between appropriate and excessive risk-taking is difficult,
however.
I now turn to some recent research on whether there has been an increase
in the riskiness of our investments abroad and whether such increases
might be traced to the current low-interest rate environment.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 85
Many studies of the pre-crisis period document the pro-cyclical nature of
bank lending and leverage, and the buildup of risk-taking and leverage by
banks.
It is much harder to find evidence that low interest rates have led to
increased post-crisis risk-taking by U.S. banks.
Growth in overall lending by U.S. banks has been modest at best.
However, some pockets of increased risk-taking by banks and other
investors are observable in domestic markets, such as leveraged loans.
And on the international front, there has been a notable increase in
syndicated loan originations.
Recent research by Board staff, using a database of loans primarily to U.S.
borrowers but also to some foreign borrowers, suggests that lenders have
indeed originated an increased number of risky syndicated loans
post-crisis, based on the assessed probability of default as reported to bank
supervisors (figure 1).
P a g e | 86
This increase in riskiness of syndicated loans post-crisis has been
accompanied by a shift in the composition of loan holders: An increasing
share is now held not by banks but by hedge, pension, and other investment
funds (figure 2).
These nonbank investors also tend to hold loans with higher average credit
risk (figure 3).
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 87
These data suggest that a tougher regulatory environment may have made
U.S.-based bank originators unable or unwilling to hold risky loans on their
balance sheets.
Related work by the same researchers, using a database with
more-extensive coverage of loans to foreign borrowers, shows a similar
pattern of increased risky loan underwriting by international lenders, an
increase that is also significantly inversely related to U.S. interest rates.
Together, these results suggest a potential spillover from accommodative
U.S. monetary policy through increased risk-taking in syndicated loans
globally, although preliminary results also indicate that investors still
require extra return for this extra risk.
Another area in which to look for links between low interest rates and
risk-taking is in cross-border securities purchases.
The role of low interest rates in advanced economies in encouraging capital
flows to EMEs where returns are higher has been a familiar theme.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 88
And recent studies have found that asset prices in EMEs do respond
systematically to U.S. monetary policy shocks.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 89
For evidence of increased risk-taking in cross-border investment, let's look
at the composition of U.S. investors' foreign bond portfolios.
Although emerging market bonds remain a relatively small proportion of
the aggregate U.S. cross-border bond portfolio (figure 4), within foreign
government bonds, U.S. investors have modestly shifted their portfolio
shares toward higher-yielding bonds of emerging market sovereigns (figure
5).
Ex post, these portfolio reallocations delivered a higher return to U.S.
investors on this part of their portfolio relative to what they would have
received if they had left portfolio compositions unchanged at the average
shares in 2008 and 2009, but at a cost to the portfolio's credit quality
(figure 6).
P a g e | 90
Some shift to safe assets is also seen in U.S. portfolios: U.S. investors
actively rebalanced their holdings of foreign financial sector bonds toward
those with higher credit ratings, but at some cost in returns (figure 7; figure
8).
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 91
Taken together, developments in U.S. bond portfolios do not indicate a
worrisome pickup in risk-taking in external investments.
But it is important to recognize that portfolio reallocations that seem
relatively small for U.S. investors can loom large from the perspective of the
foreign recipients of these flows.
At roughly $400 billion at the end of 2012, emerging market bonds
accounted for a tiny fraction of the roughly $25 trillion in bonds held by
U.S. investors.
But to the recipient countries, these holdings can account for a large
fraction of their bond markets.
Even relatively small changes in these U.S. holdings can generate large
asset price responses, as was certainly the case in the summer of 2013.
Likewise, a reassessment of risk-return tradeoffs could disrupt financing
for projects that are dependent on the willingness of investors to participate
in global syndicated loan markets.
We take the consequences of such spillovers seriously, and the Federal
Reserve is intent on communicating its policy intentions as clearly as
possible in order to reduce the likelihood of future disruptions to markets.
We will continue to monitor investor behavior closely, both domestically
and internationally
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 92
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 93
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 94
Still I would argue that the banking business is more stable.
Moreover, there are more similarities across regular banks than there are
across the heterogeneous group of shadow banking entities, making regular
banks easier to supervise.
Thus regulating and supervising the shadow banking system might be
particularly challenging, if not even impossible.
A better option might be to make sure they have the right incentives to do
their job well.
P a g e | 95
Much has already been done to this end.
For example the Risk Retention Rule guarantees that an originator has a
skin-in-the-game as it must keep a certain part of the risks at its own
balance sheet and thus the bank will measure the risk of the link to the
shadow banking system appropriately.
Similarly the due diligence requirement reduces the information
asymmetry in securitisation structures and makes them more transparent.
This facilitates the understanding of risks taken by regular banks in the
shadow banking system.
The objective of the proposed Regulation of Money Market Funds is to
ensure that the risk of MMFs is properly accounted for by the investors
among which regular banks are frequently found.
The distinction between insured deposits and this important source of
funding for shadow banking entities is clarified.
To further strengthen the securitisation process the EU Credit Rating
Agency (CRA) regulations improves the transparency and accountability of
rating agencies.
Finally, the capital requirements related to securitisations have been
reformed to ensure that the parties involved in the process are sufficiently
protected against potential shortcomings and failures.
Also, there is an ongoing discussion on reforming the structure of banks in
the European Union based on the work of the High-level Expert Group
chaired by governor Liikanen, the member of which our panel chairman,
prof. Jan Pieter Krahnen also was.
Based on the final report of the Group, the Commission proposed
Regulation on structural measures to improve the resilience of EU credit
institutions.
One element of this proposal is to curb the link between banks and the
shadow banking system, by imposing a ban not only on proprietary trading,
but also on exposures to shadow banking entities engaging in proprietary
trading and exposures to hedge funds and entities sponsoring hedge funds.
Similar rules are already implemented in the US through the Volcker-rule.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 96
In January 2014, the Commission also published a proposal on Regulating
shadow banking system transparency.
The aim is to improve the reporting and increase the efficiency of
supervision on securities financing transactions so that the links to the
banking sector are properly understood.
Moreover, the proposed rules on how client assets can be reused as
collateral clarify the complex chains of rehypothecation.
The transparency of the collateral chains, in which both regular banks and
shadow banking entities are involved, is also improved.
During the financial crisis we learned that opacity and uncertainty about
the extent of rehypothecation and the risks involved can severely
undermine confidence in counterparties.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 97
Considering the weakness of the securitisation market, it is obvious that
the market is still suffering from the stigma it received when the global
financial crisis erupted and the failures of the securitisation market were
uncovered.
The market suffers from a reputation as a capital arbitrage tool of banks
that turned out to be disastrous for financial stability.
The stigma is persistent and mutual, even though the European ABS
market performed relatively well during the crisis compared with the
respective American one.
Another reason behind the small and weak European securitisation market
may be the heterogeneity of the European securitisation market, namely
the differences in for example lending criteria, banking institutions, rating
standards and default laws among the European countries.
Diminishing these differences would enable a better-functioning European
securitisation market.
Harmonising some standards and enhancing relevant data availability
could dispel the risk that banks would off-load bad parts of their balance
sheets with securitisation activities.
Moreover, common rules and standards would support the development of
the currently very fragmented market to a pan-European one in a single
market spirit.
Finally, considering the potential role of the ABS market in the monetary
policy transmission mechanism, a central bank should avoid a situation in
which it could become the only buyer in the ABS market.
It is thus utterly important to enhance the development of the private
market in ABS.
So far the ABS market has probably played a minor role in private sector
debt financing; its main driver may have been the collateral needs of banks.
From the view point of regulation these facts should not be forgotten.
It is desirable to make regulation such that it restricts neither the supply
nor the demand side of the ABS market.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 98
Concluding remarks
To conclude, I would like to highlight the following points.
In principle, shadow banking system is beneficial, and one must be careful
with its regulation.
As professor Bengt Holmstrm has reminded: "Of special concern is the
tendency to demonize or ban innovations that backfired, not because they
were fundamentally wrong, but because the particular implementation was
flawed.
The originate-and-distribute model and MBSs [or securitisation in
generally] will certainly have an important place in the future."
Thus, we should learn from the fundamental analyses of what went wrong
last time, and keep restoring the confidence to the securitisation market.
Finally, one thing that should be kept in mind is a possible post-crisis
reinvention of the financial system that Andy Haldane, Chief Economist of
Bank of England, talks about in his recent publication.
As a consequence of the crisis, some part of financial activities will migrate
outside the banking system, inducing the shape and form of risk itself to
change.
This could have further implications for stability of the financial system and
the broader economy.
Haldane continues that as risk changes its composition, not its quantum,
the financial system may exhibit a new strain of systemic risk that is even
more related to shadow banking entities.
Therefore, regulators must follow intensively the development of the post
crisis financial system that might result in new type of systemic risks, and
be ready to adjust regulation accordingly in a proactive manner.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 99
1. Introduction
Ladies and gentlemen
Thank you for the invitation and the opportunity to speak again at the Euro
Finance Week. It is a pleasure to be here today.
Let us briefly discuss physics before we turn to a topic that is more related
to the Euro Finance Week.
The British astronomer Martin Rees once said: "We can trace things back
to the earlier stages of the Big Bang, but we still don't know what banged
and why it banged.
That's a challenge for 21st century science."
Well, the euro area had its own "Big Bang" two weeks ago, and in this case
we know pretty well what banged - and why.
On 4 November, the ECB became the direct supervisor for the 120 largest
banks in the euro area which, in terms of assets, represent more than 80%
of the euro area's banking system.
Thus, with a big bang, the ECB became one of the largest banking
supervisors in the world.
Taking banking supervision from the national to the European level has
been the biggest step of financial integration in Europe since the
introduction of the euro in 1999.
This big bang created a new universe for the banks and the financial
markets.
But what exactly can we expect from the new European banking
supervision?
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 100
And probably even more importantly: what is it that we cannot expect from
it?
In the following I would like to discuss both questions.
P a g e | 101
Supervision itself will take place in so-called joint supervisory teams.
These teams are headed by ECB staff but are composed of national
supervisors.
To sum up: there is a lot we can expect from European banking
supervision, and now it has to deliver.
In this regard, we should remember one thing: European banking
supervision is an immensely complex operation that has been put together
in a very short time.
Thus, it would probably be unrealistic to expect everything to run smoothly
from day one. It will certainly take some time before every detail is sorted
out deep down in the engine room of actual banking supervision.
Nevertheless, I am confident that we will get there and that our
expectations will be fulfilled.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 102
Just remember the 15th of September 2008, when the failure of a single
investment bank pushed the financial system to the brink of collapse.
The lesson is that the failure of very large or interconnected banks can lead
to a systemic crisis.
Thus, these banks are perceived as being "too big to fail": when push comes
to shove, the government might be compelled to step in to prevent disaster.
Consequently, "too big to fail" banks operate with an implicit and cost-free
insurance.
Apart from the costs this insurance imposes on taxpayers, it most definitely
sets the wrong incentives for the risk-conscious behaviour of banks.
Thus, solving the "too big to fail" problem is paramount for making the
financial system more stable and saving taxpayers' money.
Can European banking supervision solve that problem?
Well, it can certainly contribute by putting "too big to fail" banks under
close observation.
And yet it has to be supplemented with other measures.
And here, we recently made some progress - at the global level and at the
European level.
At the global level, the G20 Heads of Governments and States have just this
Sunday decided on international criteria that global systemically important
banks will have to fulfil in future regarding their capital structure.
In particular, these banks will need a minimum amount of Total Loss
Absorbing Capacity - in short TLAC.
This approach combines the existing minimum capital requirements with
new requirements to ensure that large banks have sufficient capacity to
absorb losses, both before and during resolution.
TLAC therefore, in my view, represents a watershed in ending "too big to
fail".
It will allow for the orderly resolution of those banks without disrupting the
financial system and while protecting taxpayers from having to foot the bill.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 103
For the TLAC-concept, I wish to signal my strong support.
To achieve these worthy goals, I suggest agreeing upon a figure at the
upper end of the range of 16% - 20% proposed by the FSB.
However, reaching an agreement on TLAC is not the finish line of the
regulatory agenda.
The next months need to be used for in-depth public consultation as well as
an impact study of the new rules.
I hope that this study will lend support to a figure at the upper end of the
proposed range.
Finally, after both the impact study and the public consultation,
implementation is the next step, and this should not be underestimated.
Another major step towards solving the "too big to fail" problem has been
taken with regard to cross-border resolution.
In October, 18 global banks and the International Swaps and Derivatives
Association agreed to implement new rules on derivatives trading.
Whenever a large bank fails, these rules will allow authorities to
temporarily suspend the right of other banks to terminate derivatives
contracts.
This will buy precious time to organise an orderly resolution of the failed
bank.
However, it is paramount that we not only have the necessary procedures in
place to wind down a failed bank, but the political will to go through with it.
This political will exists in Germany and is a universal pre-condition for
ending "too big to fail".
We have also made progress at the European level.
The Bank Recovery and Resolution Directive spells out clear rules on who
has to bear the costs when a bank fails.
In a nutshell: bail-out is out and bail-in is in.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 104
In future, shareholders and creditors will be first in line when it comes to
bearing losses; taxpayers will be last in line.
This directive will be implemented in Germany in early 2015; the latest
possible date for implementation in other countries is 2016.
Also from 2016 onwards, European banking supervision will be
supplemented with a European resolution mechanism for banks.
From then on, the banking union will rest on two pillars and provide a
stable framework for European financial markets.
P a g e | 105
But again, no bank should give in to complacency.
And neither should supervisors. We should, for instance, be aware that the
comprehensive assessment focused on risk-weighted capital ratios.
Markets and supervisors, however, also cast an eye on unweighted capital
ratios.
And with regard to these leverage ratios, German banks are below average
compared to other euro-area countries.
Thus, there is ample room to catch-up and improve stability even further.
Nevertheless, while stability is necessary for a bank, it is not sufficient.
Banks have to be profitable as well.
And in this regard, too, German banks need to catch up.
Their return on assets and their return on equity are also relatively low
compared to other euro-area countries.
A recent study even comes to the conclusion that only 6% of German banks
earned their cost of capital last year.
What can explain these weak earnings?
Well, the main culprit in Germany seems to be a business model that is
relatively dependent on interest income.
Such a business model poses a major challenge in the current environment
of low interest rates.
Consequently, in the first six months of this year, the operative results of
the large German banks were about 8% below their 2013 levels - a result
which was largely driven by a contracting interest margin.
Nonetheless, banks are also faced with a structural problem in this context:
the interest margin has been declining constantly since the mid980s.
The banks should therefore reconsider their business models and gear
them towards sustainable profitability.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 106
To be sure, the need to adapt business models is not only relevant for
German banks.
However, in its recent Financial Stability Report, the IMF finds that
German banks are again below average in terms of reforming their business
models.
Again, there is room to catch up with international peers.
An obvious strategy for the German banks would be to diversify their
sources of income away from interest income.
Looking at the cost-side, German banks fare rather well compared to other
countries.
That is the good news. But there are still options to reduce costs.
In this regard, mergers may well be a potential strategy.
The German banking market still offers scope for further consolidation the focus here should, of course, always remain on arriving at a sustainable
business model.
As a side note: in future, European banking supervision will also keep a
close watch on the business models of banks.
However, we should not expect supervisors to be the better bankers.
At the end of the day, management decisions have to be taken by those who
bear the risks and reap the rewards.
What the supervisors could do is impose additional capital or liquidity
requirements whenever they have doubts about the sustainability of a
bank's business model.
5. Conclusion
Ladies and gentlemen
There is no doubt: European banking supervision is an important step
forward in ensuring financial stability in the euro area.
Nevertheless, as I said earlier, unrealistic expectations are the roots of
complacency and, consequently, of disappointment.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 107
European banking supervision is just the first pillar of the envisaged
banking union.
It has to be supplemented with the European resolution mechanism for
banks.
This second pillar of the banking union will be erected in 2016.
Eventually, the banking union will provide a stable framework for the
banking system and strengthen market forces.
This, in turn, puts more responsibility into the hands of banks.
It is up to each individual bank to ensure its own stability and profitability.
This requires the banks to rethink their business models and to rethink
their culture. Regulatory measures like TLAC that will abolish implicit
guarantees for banks will also necessitate changes in banks' behaviour for
the better.
The original role of banks is to service the real economy.
Putting this idea back into the heads of bankers would contribute greatly to
making the financial system more stable.
We have to do away with a culture in which everything is allowed that is not
explicitly forbidden.
We need a culture which encourages bankers to look beyond the horizon of
short-term returns.
If banks succeed in creating such a culture, they will eventually regain the
trust of the people that got lost in the crisis. Regulation and supervision can
play a supporting role, but the burden ultimately lies with the banks.
Thank you.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 108
P a g e | 109
of China have been rising steadily, although, so far, they amount only to
about 2% of Chinas GDP.
However, we should not forget that financial liberalisation is an ongoing
process, which is still not complete.
Additionally, in the last few years, central banks across the world have
started to hold onshore Chinese renminbi (CNY) in their reserves
portfolios, usually with the expectation that CNY may become a reserve
currency in the coming years.
Many others indicate interest in reserve asset diversification into CNY once
Chinas onshore market opens up further.
This is an issue that the Eurosystem will also have to further reflect on in
the future.
Also, the Shanghai Hong Kong Stock Connect programme, which allows
institutional and private investors from mainland China to invest up to a
certain quota in Hong Kong and vice versa, is operating as of today and
represents a further important step in opening the capital account and
liberalising financial flows.
The growth in cross-border transactions has also led to an increasing
volume of RMB circulating outside China, giving rise to local RMB markets,
in Asia and in the euro area.
In response to these developments, many central banks have established a
bilateral currency swap arrangement with the Peoples Bank of China
(PBC).
In October 2013, the ECB signed a bilateral currency swap arrangement
with the PBC with maximum sizes of 45 billion euros when euro are
provides euros to the PBC and 350 billion yuan when yuans are provided to
the ECB.
From the ECBs perspective, the swap line serves as a backstop facility to
address sudden and temporary disruptions in the RMB market owing to
liquidity shortages, so as to reassure market participants that a safety net is
in place to address possible future market malfunctioning and reassure
euro area banks regarding the continuous provision of RMB.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 110
After having launched direct trading between the renminbi and a number
foreign currencies in Chinas onshore forex market over the last few years,
direct trading between the euro and the onshore renminbi was launched in
September 2014.
This has the potential to reduce transaction costs, enhance the price
discovery of the EUR/CNY exchange rate and ultimately improve the
functioning of the global financial system.
Considering the rise of China in the global economy, the extent of its
external trade and the continuing development of its domestic financial
markets, it is no surprise that also the number of payments and financial
transactions being conducted between parties in China and elsewhere has
been growing rapidly.
Five years ago, the use of RMB in trade settlement was marginal, but
according to SWIFT statistics, it is now already the seventh most popular
payment currency, accounting for 1.72% of global payments in September
2014.
This might not sound like a lot, but the growth rates are impressive; and it
is worth noting that even the fourth most popular currency, the Japanese
Yen, only accounts for 2.74% of global payments.
The RMB as an invoicing currency for international trade has also been
growing sharply: nowadays, about 25% of Chinese trade is invoiced in
RMB, up from less than 2% in 2011.
Looking forward, the RMB clearly has the potential to become a major
international currency and to be included, when the International
Monetary Fund will deem it appropriate, in the basket of currencies that
determines the value of the Special Drawing Rights (SDRs).
That said, any currency of a truly global reach needs, amongst others, safe
and efficient arrangements and seamless processes to clear and settle
transactions in that currency.
In the euro area, we have undertaken great efforts to introduce safe and
efficient financial market infrastructures for payments and the clearing and
settlement of financial instruments.
Also within China, extensive work has been, and is, underway in this
regard.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 111
However, while these infrastructures facilitate the safe and efficient
handling of transactions within the respective economies, they do not yet
provide for effective automated linkages between the two currency areas.
Therefore, the institutions participating in domestic infrastructures are
acting as intermediaries and service providers to corporates and financial
actors wishing to transact within and between the two currency areas.
Various challenges exist in the processing of cross-border transactions.
One is the need to have common or interoperable technical standards, a
lack of which hamper a fully automated and fast processing of transactions,
leading to higher failure rates and costs.
In this regard, we appreciate the efforts undertaken in China to introduce
state-of-the-art standards such as ISO20022, as well as those by SWIFT to
increase fully-automated processing, for example by developing a
standardised dictionary for the Chinese Commercial Code (CCC).
The setting up of RMB clearing arrangements like the one introduced here
in Frankfurt which I understand is starting operations today- and those
existing or planned for other centres in Europe and other parts of the world,
will play an important role in facilitating cross-border payments, as well as
closer integration and relations between economies.
I am convinced that the continuous development of more efficient payment
and clearing arrangements will benefit corporates and financial actors, both
in the euro area and in China.
To conclude, we should not forget that, together with many opportunities,
the integration of a new major currency in the global economy also brings
risks, as it allows shocks to propagate more easily across borders.
To minimise risks, such a process therefore must be monitored carefully
and complemented by close cooperation between authorities in China and
abroad.
Even more important however, is to strengthen the Chinese financial
sector, in particular banks, so that it is sufficiently resilient to cope with the
new pressures that financial liberalisation inevitably brings.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 112
I fully trust Chinese authorities to continue upgrading financial sector
supervision and cooperate closely in order to safeguard overall financial
stability.
Thank you for your attention.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 113
P a g e | 114
This level of growth is expected to exceed that of potential output with the
effect that a positive output gap might emerge, particularly in 2015.
Other things being equal, this will contribute to higher inflation.
GDP growth in 2014-2016 will be driven by domestic demand, both private
consumption and investment, and the contribution from net trade will be
negative for the entire period.
As a consequence, the sizeable current account surplus we have seen in the
recent term will shrink rapidly next year and give way to a small deficit in
2016.
This is cause for concern in and of itself, and we hope that the forecast will
not materialise, as Iceland needs to maintain a current account surplus in
the next several years as it focuses on putting its external debt onto a
stronger footing and building up domestically financed foreign reserves.
Economic policy and economic incentives would then have to take into
account the task of of improving the outlook for the current account
balance.
Inflation has been below the inflation target for nine consecutive months.
This is the second-longest such period since the inflation target was
adopted in March 2001, the longest being a twelve-month period from
November 2002 through October 2003.
But it is not inconceivable that we might break that record, as the Bank's
forecast, published yesterday, entails that inflation will remain below target
through the early months of 2015.
Inflation below target is not more desirable than inflation above target,
though.
In this context, we mustn't fall into the trap of expecting monetary policy
instruments to be so strong and quick-acting that inflation will always
measure 2.5%, no matter what shocks hit the economy.
The main objective is to keep average inflation close enough to the target
over a long period of time that the target itself provides an anchor for
inflation expectations and the many decisions that require an estimate of
future inflation.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 115
But how close is close enough? In this context, our so-called tolerance
limits for the inflation target - namely, 1% and 4% - are too wide, and it is
worth noting that those limits are merely the trigger for the submittal of a
report to the Government explaining how inflation will be brought back to
target.
In short, then, the inflation target is not 1-4%.
In order to underline the control problem, I sometimes say that the
inflation target is not 2.5% but 2%.
What this means is that, if we think in whole and half percentage points, a
deviation of half a percentage point or less from target would be considered
within the boundaries of target-level inflation.
By that criterion, inflation as projected in the Bank's forecast will be at
target for the entire forecast horizon through end-2017, apart for the last
quarter of 2015 and the first quarter of 2016.
According to the forecast, inflation will average 2.6% during the period
2014-17 and will therefore be at the 2% target.
If this materialises, it is hard to call it anything other than an acceptable
performance.
It is naturally less of a concern if inflation deviates temporarily from target
if inflation expectations do not deviate in the same direction.
Early this year, inflation expectations were above target even though
measured inflation was below it.
But fortunately, inflation expectations have subsided towards the target in
the recent term and, by some measures, are close to it, particularly
short-term expectations.
This is important for monetary policy, as I will explain shortly.
I have briefly discussed the current situation and the economic outlook.
But what about uncertainties and known risks?
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 116
There are risks attached to the global economy, which seems to be on the
downside, at least in the near term, as regards both output growth and
inflation.
And there is the risk that our economic policy and contractual wage
negotiations will not be successful, as has so often been the case during
upswings.
GDP growth will then be somewhat stronger in the short run, but the
current account balance will deteriorate and inflation will rise, and
ultimately GDP growth will fall below what it would have been otherwise.
There is uncertainty about the exchange rate, in connection with the
settlement of the failed banks' estates and the liberalisation of the capital
controls.
There is little I can say about that at this point, but the aim of the work the
authorities are doing at present is to minimise that risk.
It can be done, but it is a risky process, and one that could be derailed at
many points along the way if great care is not taken - and perhaps even if
great care is taken.
And now I will turn to monetary policy.
Yesterday the Monetary Policy Committee decided to lower Central Bank
interest rates by 0.25 percentage points, in view of recent developments
and the near-term outlook for inflation and the decline in inflation
expectations, which I mentioned a moment ago.
If the Bank's interest rates had remained unchanged, its real rate would
have been higher than is warranted by where we are in the economic cycle
and by the near-term outlook, particularly in view of the fact that it could
rise still further in coming months.
Estimating the Central Bank's real rate is not always a simple matter, as
different measures of inflation and inflation expectations give differing
results.
According to an estimate based on the average of various measures of
inflation and inflation expectations, the Bank's real rate was about 2%
before the recent reduction, and it had risen by approximately a percentage
point in the previous year, which is a large change in terms of real rates.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 117
It could be argued, too, that this is more likely an underestimation than an
overestimation, as there is systemic positive bias in household inflation
expectations and the breakeven inflation rate in the market entails risk
premiums.
The effect that the real rate has on domestic demand and inflation depends
on what the equilibrium real rate is considered to be at any given time; that
is, the real rate that neither stimulates nor dampens the economy.
The equilibrium real rate has probably fallen in Iceland, as it has in most
economies in the wake of the financial crisis, but exactly where it lies is
highly uncertain.
One of the Monetary Policy Committee's tasks is to attempt to assess it.
It is normal that Central Bank interest rate should rise above equilibrium
when a positive output gap develops and inflation is above target, but
neither is the case at present.
That being so, it was appropriate to contain the rise in the real rate by
lowering the Bank's nominal interest rates.
Some will surely ask: Shouldn't the Bank have lowered interest rates
earlier?
Hasn't the monetary stance simply been too tight in the recent past?
I don't think this is the right time to dissect these questions, not least
because many things look different in the rear-view mirror.
As is said in Njls saga, "Everything is ambiguous in retrospect."
That said, I think there are solid arguments in favour of a negative response
to both questions.
As regards timing, it is worth mentioning that it was not until very recently
that inflation expectations have moved as close to target as they are now.
As regards the latter question, most measures of the monetary stance have
been well within normal range for quite a while, and there are few other
signs that it has been too tight, expect perhaps in the past few months.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 118
For example, nominal growth in broad money measures about 6% after
adjusting for factors that are largely unconnected to domestic economic
activity, such as deposits of failed financial institutions in active ones.
This growth is consistent with the situation that should exist when the
economy is at equilibrium - when inflation is at target and output is at
capacity.
An examination of nominal GDP growth gives a similar result.
Based on forecasts for 2014, it will average 5% in Iceland over the period
2011-2014, as compared with just under 4% in the US and the UK, about
2% in Sweden - which is just above the inflation target alone- and about
1% in the euro area, which is even below the inflation target for the
region.
This has been used to support the argument that monetary policy has been
too tight in the euro area and Sweden, but as the figures show, this rationale
does not apply to Iceland.
And last but not least, GDP growth has been relatively robust and the
margin of spare capacity in the economy has been disappearing at the same
time as inflation has been trending towards target.
Many observers would consider this to be evidence that monetary policy
has hardly been on the wrong track.
Yesterday's announcement that future interest rate movements would
depend on wage developments in the labour market seems to have drawn
some attention.
But there seems to be some misunderstanding about what this means.
Over time - but not necessarily at every moment in time - wages in the
labour market as a whole - but not necessarily for each group - should rise
by an amount equal to the inflation target plus productivity growth.
How much this is depends, then, on productivity growth.
At present, productivity growth appears to be low - about 1%.
This means that the scope for wage increases consistent with the inflation
target is 3.5%.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 119
What that means for wage settlements depends on the degree to which
wage drift can be contained.
Some groups could receive larger pay rises than this, but then others would
have to have smaller increases. Sometimes there are grounds for this.
Then it is important to bear in mind that this is a long-term relationship.
For a period of time - even perhaps a few years - wages can rise somewhat
more without jeopardising the inflation target - for example, if the ratio of
wages to national income is unusually low following a crisis and businesses
are able to absorb some of the increase.
This has been the case to an extent in the past few years.
Other factors could counteract larger wage increases as well - for instance,
declining foreign-currency prices of imports and a stronger krna have
contributed to declining inflation even though wages have risen
considerably more than the sum of the inflation target and the increase in
productivity.
But there are a number of indications that we will not be able to rely on
these countervailing factors next year.
By then, the slack will have disappeared from the economy, the ratio of
wages to national income is at or above its historical average, and there are
no premises for further appreciation of the krna, as the current account
surplus is narrowing and the real exchange rate is no longer below its
estimated equilibrium value.
Nevertheless, different wage increases could be negotiated for different
groups if there are grounds and will to do so.
As I draw near the conclusion of my talk today, I would like to shift gears a
bit and say a few words about credit ratings.
When all is said and done, the primary objective of a credit rating is to
estimate the probability that a borrower will service its debt in full and on
time.
This probability depends on two factors - the ability to pay and the
willingness to pay - which, as history has shown us, are not necessarily one
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 120
and the same, as could maybe be seen in the examples of Finland and
Argentina.
Sometimes it seems as though rating agencies exceed their mandate and
act as though they are purveyors of some sort of Good Housekeeping seal of
approval for economies and governments.
For example, one could ask what the Republic of Iceland's probability of
default is, since the country didn't default during the financial crisis.
While it is pointless to debate this fact with them, it actually, seems to me
that a number of improvements have taken place in the wake of the crisis.
Upon closer examination, much of what rating agencies take into account is
clearly related to developments in both ability and willingness to service
debt.
Among the factors they consider are debt levels and guarantees, GDP
growth potential, the size and structure of the economy, and other factors
that affect vulnerability to shocks, institutional quality, governance and
policy continuity, and political risk.
This gives some indication, of course, of which factors are a drag on
Iceland's credit rating at present, and how they could be addressed.
Iceland's sovereign credit rating soared during the years before the crisis,
and Icelandic banks' credit ratings followed in its wake.
In fact, perhaps they rose higher than was warranted and was good for us.
In spite of the ensuing nosedive, we managed to keep the sovereign rating
on the bottom rung of investment grade, apart from two years in Fitch
Ratings' speculative category after the first Icesave referendum.
Keeping Iceland's ratings in the investment-grade category cost an
incredible amount of effort, and other countries that have gone on an IMF
programme in recent years have seen their ratings from Moody's and S&P
fall to speculative grade. Some of them have managed to rise up faster than
Iceland has, however.
Studying the rating agencies' reports shows which factors will be most
important in order to improve Iceland's sovereign rating and thereby pave
the way for the banks to follow suit.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 121
Among them are continued reduction of public debt levels and sound,
focused economic policy that provides stability throughout the ongoing
upswing.
The liberalisation of the capital controls is an extremely important factor,
but it could work both ways.
Successful moves towards liberalisation without jeopardising stability will
have a positive effect, but disturbance of economic and financial stability
will do the opposite.
My assessment of this, and of conversations with the rating agencies, is
that it is probably not realistic to expect an improvement in our sovereign
rating in the very near term.
But if we can preserve stability and GDP growth next year while
demonstrating that we can at least begin lifting the capital controls without
compromising stability and confidence, our chances for a higher credit
rating should improve markedly.
Thank you.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 122
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 123
At the same time, our expectation for a moderate recovery in 2015 and 2016
remains in place.
Demand should be supported by a number of factors.
Among them are our monetary policy measures and progress made in fiscal
consolidation and structural reforms in some countries.
At the same time, high unemployment, sizeable unutilised capacity, and the
still ongoing and necessary balance sheet adjustments are likely to dampen
the recovery.
Risks to the economic outlook continue to be on the downside. In
particular, the weakening in the euro areas growth momentum, alongside
heightened geopolitical risks, could dampen confidence and, in particular,
private investment.
In addition, insufficient progress in structural reforms in euro area
countries constitutes a key downward risk to the economic outlook.
Inflation in the euro area remains very low.
In October, it stood at 0.4%.
We expect it to remain at around current low levels over the coming
months, before increasing gradually during 2015 and 2016.
Looking forward, we closely monitor risks to price developments.
The latest monetary data point to subdued underlying growth in broad
money.
Its annual growth rate has increased moderately over recent months.
It appears that the turning point in credit growth is now behind us, and
credit growth rates, while remaining negative, are gradually improving.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 124
Fragmentation in various segments of the financial market has been a
major obstacle to the smooth conduct and transmission of monetary policy,
and ultimately to our ability to deliver on our mandate.
Also owing to determined actions the ECB has taken, fragmentation has
receded significantly since the height of the financial crisis.
Unsecured money market rates are trading again at reasonable spreads
over their secured counterparts.
Sovereign bond spreads in the euro area decreased significantly from their
peaks in 2012.
Together, these developments reflect the gradual return of confidence
among investors in the euro area.
Yet, we still face a situation where our very accommodative monetary policy
stance does not sufficiently reach some final borrowers in the euro area.
This is because credit markets in some parts of the euro area are still
impaired and show only timid signs of recovery.
As a result, credit growth continues to contract and credit conditions - while
having eased recently - remain overall tight from a historical perspective.
Importantly, costs of bank funding have improved, but are still relatively
high in some Member States.
Where they are lower, they are not passed on in full to the real economy.
The monetary policy measures decided in June and September this year,
the Targeted Longer-term Refinancing Operations and the purchase
programmes for asset-backed securities and covered bonds, are designed to
overcome these obstacles.
They will enhance the transmission of monetary policy, support the
provision of credit to the euro area economy and, as a result, provide
further monetary policy accommodation.
We see early indications that our credit easing package is delivering
tangible benefits.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 125
Since the beginning of June, forward money market rates have shown steep
declines across the maturity spectrum.
Now, the forward curve consistently lies below zero over a two-year
horizon.
EONIA is not expected to exceed 25bps before well into 2018.
The 3-month EURIBOR rate, which is an important conduit of monetary
policy impulses to lending rates, dropped to all-time lows and now stands
close to zero.
And the policy decisions, in particular those announced in September,
triggered a compression of spreads across other asset classes, including
ABS, covered bonds and sovereign bonds.
But more time is needed for the full materialisation of the positive effects of
the most recent set of measures.
In this context, let me emphasise that we are committed to scale the total
magnitude of our measures lending operations as well as outright
purchases up to a size that can deliver the intended support to inflation
and the recovery of the euro area economy.
All these measures will have a sizeable impact on our balance sheet, which
we expect to move towards its early 2012 dimension.
This will ensure that our accommodative monetary policy stance will
contribute to a gradual recovery and a return of inflation rates in the
medium term to levels closer to our aim of below but close to 2%.
Nonetheless, we need to remain alert to possible downside risks to our
outlook for inflation, in particular against the background of a weakening
growth momentum and continued subdued monetary and credit dynamics.
We therefore need to closely monitor and continuously assess the
appropriateness of our monetary policy stance.
If necessary to further address risks of too prolonged a period of low
inflation, the Governing Council is unanimous in its commitment to using
additional unconventional instruments within its mandate.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 126
In this context, we have also tasked relevant ECB staff and Eurosystem
committees with the timely preparation of further measures to be
implemented, if needed.
Such measures could include further changes to the size and composition of
the Eurosystem balance sheet, if warranted to achieve price stability over
the medium term.
Monetary policy alone however cannot overcome financial
fragmentation in the euro area.
Fragmentation across national borders also reflects underlying national
imbalances and institutional deficiencies.
Overcoming these require determined structural reforms on the side of
national governments to improve the business environment and setting
incentives to invest, with the aim to boost productivity, create new jobs and
raise the growth potential of the economy.
Reducing financial fragmentation also requires tackling remaining
shortcomings in economic and financial integration.
As already mentioned, substantial progress has been made this year.
Banking union should now be completed following the finalisation of the
Comprehensive Assessment and the SSM taking on supervisory
responsibility.
This means in particular completing the SRM, enhancing the borrowing
capacity of the Single Resolution Fund and thereby delivering on the
commitment to establish a credible backstop.
Moreover, looking forward, a greater integration of financial markets also
referred to as a Capital Markets Union (CMU) would be warranted to
further reduce fragmentation of financial markets, improve funding to
SMEs, enhance the transmission of the ECBs monetary policy, and overall
benefit economic growth.
We look forward to the detailed elements that the Commission will
announce in the course of 2015 and I have no doubt that the European
Parliament as co-legislator will again play a decisive role in this regard.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 127
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 128
This shows that the design of the Eurosystem collateral framework is in
general very robust.
However, some changes were necessary to guarantee a smooth
implementation of monetary policy at times of financial market stress that
led to a general reduction in access to market funding.
A collateral framework must never act in a pro-cyclical manner: Restricting
banks access to liquidity in a crisis for instance, by introducing more
restrictive criteria for collateral might pose a risk not to only to the most
vulnerable banks, but to the whole financial system.
Ultimately, this would increase the risk for the central banks balance sheet
rather than protecting it.
Hence, in order to enable that a wide range of the counterparties could
continue participating in the refinancing operations, the Eurosystem
temporarily relaxed some of the eligibility criteria for underlying assets.
This was done on several occasions.
For instance, from 2008 to 2011 and again as of 2012, we accepted foreign
denominated marketable assets.
In 2012 we created the Additional Credit Claims framework.
Credit standards have been changed by accepting lower rated assets
compared to those accepted at the beginning, notably for ABS that fulfill
certain criteria.
However, these accommodative measures were coupled with a
stronger-scrutinised counterparty framework and with more stringent risk
control measures.
As a result, the total amount of eligible collateral increased.
Thus, an enhanced participation of counterparties in the refinancing
operations was enabled, while at the same time the risks for the Eurosystem
expanded only moderately.
The Eurosystem collateral framework has been quite complex from the very
beginning, not the least because of the variety of national frameworks
preceding it.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 129
With the onset of the monetary union, the goal was to provide access to
Eurosystem credit operations to a broad range of counterparties, in
contrast to some other central banks which rely on a few counterparties.
Therefore, the collateral framework had to take into account the various
national banking systems and financial markets.
Some national central banks, for example, accepted credit claims as
collateral, while others did not.
Some countries had developed covered bond markets, while others only
started to set up a respective covered bonds law later, and the same could
be said for ABS.
For a collateral framework, a common standard had to be found which
embraces these national characteristics, while at the same time ensuring
that sufficient collateral is available.
Several of the measures taken in the crisis have added to this complexity.
Therefore a challenge going forward is to make the collateral framework
simpler and more transparent, without impacting the ability of
counterparties to access our refinancing operations.
I am confident that we will achieve this.
Conclusion
Ladies and gentlemen,
2014 has been a year of profound change.
But what has been achieved so far is not enough.
2015 needs to be the year when all actors in the euro area, governments and
European institutions alike, will deploy a consistent common strategy to
bring our economies back on track.
Monetary policy alone will not be able to achieve this.
This is why there is an urgent need to agree on concrete short-term
commitments for structural reforms in the Member States, on a consequent
application of the Stability and Growth Pact, on the aggregate fiscal stance
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 130
for the euro area, on a strategy for investment, and to launch work on a
long-term vision to further share sovereignty ensuring the sustainable and
smooth functioning of EMU.
On that note, I am looking forward to our discussion.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 131
P a g e | 132
He was famed for his brilliant military record against Napoleon. Less
well-known is that he actually was Prime Minister of Britain, twice.
Thirteen years after defeating Napoleon, the bold Iron Duke conducted his
first cabinet meeting.
The experience must have jolted him as he confided to a friend afterwards:
An extraordinary affair. I gave them their orders, (and damn it) they
wanted to stay and discuss them.
4. I know the feeling after meetings of the Monetary Policy Committee
here.
And, I dare say, so do many of you heroes and veterans of boardroom
battles where unwary captains of industry and corporate honchos meet
their Waterloos.
The future
5. Tonight, I want us to look into the future and ask how we are facing up to
the prospects ahead. Do we have the resilience to survive as a nation, or
indeed as a civilisation?
Resilience is the capacity for bouncing back after shocks.
Despite our small size and our isolation, resilience or anti-fragility has
become our badge of honour.
But is that enough?
6. We survived the 1960's prediction of inevitable catastrophe of a future
Economics Nobel prize-winner.
We exorcised the ghost of Malthus, just as we have seen off the plague of
malaria, that used to kill 2,000 of us a year up to the late 1940's.
We have developed remarkable defences against cyclones that are a regular
occurrence in this part of the world.
We have fought off dengue fever and chikungunya.
And, now we are busy preparing our defences against the dreaded Ebola.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 133
We escaped the geopolitical risks of war.
But more than this, we have come through in pretty good shape from the
global financial and economic crises of recent years.
Hardly a month goes by without the country garnering some new accolades
from the likes of the World Economic Forum, the Heritage Foundation, the
Mo Ibrahim Foundation and so on.
Well done Mauritius! Well done our policy-makers! Well done you
economic operators!
To say nothing of you bankers: well done bankers, indeed!
We are sitting pretty, aren't we?
7. But, as we give ourselves a collective pat on the back, can we spare a
thought to the risks to the future fortunes of this land?
What steps are we taking to move towards a more inclusive society that
leaves no-one behind?
How far will our current plans and policies mitigate the worst economic and
environmental ravages to come?
How will they promote the job-rich and inclusive growth that the head of
the IMF, Christine Lagarde, has recently been calling for?
8. So let me try my hand at prophesy.
Did I hear a sharp intake of breath?
I know that, sometimes, it is said, I have a slight streak of arrogance, though
I trust not as much as the notorious Alfonso the Wise, King of Castile.
Surveying the state of the world in 1252, he observed:
Had I been present at the Creation, I would have given some useful hints for
the better ordering of the universe.
9. Let me polish off my crystal ball and look forward to 2035, as I once did
to 2020, in the sadly defunct Ministry of Economic Planning and
Development, our long-term think tank of times past.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 134
What do I see, twenty or so years ahead?
P a g e | 135
We shall have bankless banking, no counters, no backrooms, no paper, no
sky- high buildings.
There will be more common currencies and digital currencies, with
corresponding declines in fewer exchange transactions.
In short banking will be cash-lite, with fewer staff, and still fewer bankers.
12. This is not a scenario of a distant future.
Some of it is present reality.
It is already happening.
Just a couple of weeks ago, Lloyds Banking Group, a British bank
announced plans to axe 9,000 jobs and close 200 branches as it "digitises"
its business.
Technology is already reaping barren harvest on jobs.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 136
New businesses small, agile, short life-span, not the butterfly but the impala
with many predators.
P a g e | 137
13. In case your worry levels are rising, let me hasten to add that this
dystopian nightmare is not a fatality.
It is certainly not beyond human ingenuity to envisage pre-emptive
measures to temper the worst excesses that can push us in that direction.
Tonight, I shall focus my remarks on inequality, not because I have a
ready-made solution - nobody has - but to stimulate debate on what is often
seen as a taboo subject in polite society.
P a g e | 138
Is that the society we want to perpetuate? Is that a society that is just and
sustainable?
The time bomb of growing inequality is ticking away.
16. We are a country trying hard to escape from the middle income trap.
But we have no chance of doing that if we do not focus on the risks inherent
in jobless growth, persistent high unemployment, and the widening divide
between the haves and the have-nots.
17. Over the last decade, the Gini coefficient points to growing inequality,
worsening from 0.371 in 2001/02 to 0.413 in 2012.
Just over the last five years, households in relative poverty, defined as half
the median household income per adult equivalent, increased from just
below 8% of the total in 2006/07 to 9.4% in 2012.
The distribution of income by quintile paints an even starker picture: the
bottom 20% of households witnessed a fall in their share of total income of
a full percentage point, from 6.4% in 2001/2 to 5.4% in 2012; this went
hand-in-hand with a rise of more than three percentage points (3.4%) in the
share of the topmost 20%, bringing it to 47.4%, not far from half the total
income.
Put differently, in still starker terms, between 2001/2 and 2012, the richest
20% of Mauritian households enjoyed an eight per cent increase in their
incomes while the poorest 20% suffered a steep decline of twice as much.
And, again, the same question arises: is this our idea of a just society?
18. There is much talk of faster economic growth paving the way to a
higher-income status for the country.
There has been learned, if often uninformed, debate about giving a
monetary stimulus to push growth from its current 3.5% to the 5% of
pre-crisis years.
There has been much less concern over the quality of growth.
In a small country, with a heritage of skewed asset ownership, such myopia
can turn out to be very costly.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 139
A headlong rush for growth can be the royal road to social instability and
economic breakdown.
What we need above all is growth that provides for all, a decent house,
quality education, health, transport, food, leisure and respite from debt.
19. Growth is good; sustainable growth is better; sustainable and inclusive
growth is best of all - absolute nirvana.
Is it attainable?
Here in Mauritius, with our population of only 1.3 million, and a policy
environment never trailing too far behind best practice, we could have a
stab at it.
This is not a goal too far - not for us who have made a habit of punching
above our weight.
But we must work for it and encourage our policy-makers to press ahead
with the reform agenda.
And, while they are fixing the policy environment, we must accelerate our
corporate social responsibility (CSR) drive.
Since January 2012, profitable companies have been required to pay 2% of
their book profit into a CSR Fund to finance social and environmental
activities.
This is no doubt a good basis to build on.
But isn't there a better way for corporates to carry and demonstrate their
social responsibility?
20. Let us draw some inspiration from James Wolfensohn, former World
Bank President.
Ten years ago, at a function of the World Savings Bank Institute, he
remarked:
... I want to salute these banks [WSBI's members] and encourage them to
continue in their theme of a double bottom line: to think not just of profit,
but to think also of social responsibility which savings banks carry so well.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 140
21. Double bottom line reporting seeks to extend the conventional bottom
line, measuring financial profit or loss, with which we are all familiar, by
adding a second bottom line to measure their performance in terms of
positive social impact.
Indeed, to address our sustainability concerns, so well encapsulated in the
overarching Maurice Ile Durable concept, we can go one better and
embrace triple bottom line reporting.
This will include the valuation and protection of the rich resources of our
beautiful natural environment.
22. Rising inequality worldwide, and here in Mauritius, raises key issues on
the role of monetary policy and its redistributive role. We need bold policies
to reverse inequality.
Planning ahead
23. So what are we to do?
We certainly can't ignore these threats which are already upon us.
How best to wage war against poverty and inequality?
As I cast about for possible answers, I am reminded of US President
Eisenhower, who was a much-decorated US General and who knew a thing
or two about wars.
He declared:
In preparing for battle I have always found that plans are useless, but
planning indispensable.
24. I agree with Ike that we must have a battle plan.
We must put our minds to the task of planning for both resilience and
inclusive and sustainable growth, and audit the results on the triple bottom
line.
I can only reiterate my forlorn call for a strong and well-resourced strategic
planning capacity at the heart of the policy-making establishment. For me
there are seven essentials.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 141
First, become a learning country, not just adapting to change, but
anticipating it, and thriving on it;
Second, harness knowledge transfer, learning, and investment whether
foreign or domestic, to increase our productive potential;
Third, ensure life cycle education for all, as we adapt and re-adapt to a
rapidly-changing environment;
Fourth, transform our universities into centres for R&D and innovation,
and put undergraduate teaching online;
Fifth, attract and retain our best talents offering international rates for the
job, for them and for our migrant diaspora;
Sixth, build a strong targeted social safety net, with business incubators,
incentives for start-ups and skills development;
Seventh, shift the employer of last resort from the public to the private
sector, and harness technology for your business and for national welfare.
25. Christine Lagarde at the IMF has called for more targeted subsidies and
welfare schemes, with the savings put into education, training and
improved infrastructure.
There is one thing that we definitely must not do: and that is to increase the
fiscal burden.
We must obviously redouble efforts to extract greater efficiency from all
public expenditure, whether recurrent or capital.
26. At this stage of the development of our country, the best contribution
that the Central Bank can make is to keep inflation low, stable, and
predictable as the foundation for a fairer and more equal society. Inflation
is the worst form of taxation.
It is regressive and enemy of the poor. Price stability promotes inclusive as
well as sustainable growth.
Exchange rate stability operates through the import channel to support
price stability.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 142
Regular calls for what is euphemistically called "a competitive rupee" are an
invitation to depreciate the currency.
It is difficult to see how an unequal society, with an import-dependent
economy, can depreciate its way to development.
27. The Central Bank is rightly concerned with the distributional effects of
monetary policy.
Borrowers have been subsidized for too long by savers.
Savers have responded to persistent low interest rates by halving the
savings effort over the last two decades.
In parallel, low interest rates have boosted the wealth of asset holders and
increased inequality.
As the US ends Quantitative Easing and normalises interest rates, we must
prepare for greater currency volatility and changing market sentiment.
The Central Bank will have its hands full in combating these pressures to
ensure continued stability.
We must always bear in mind that price stability and exchange rate stability
engender social stability - and that is the public good we should all be
working for.
The end
28. Without foresight, and concerted action now, we will leave a poor
legacy for our children to live in a socially and environmentally degraded
and divided society. Change we must.
For as the political philosopher Edmond Burke once declared:
A state without the means of change is without the means of its
conservation.
We should all be in the business of change. Change for the better is the
order of the day.
29. After these weighty ponderings, let us turn to lighter things for a
change.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 143
As we prepare to tuck into the delightful fare awaiting us, may I invite your
attention to the First Law of Dietetics, as proclaimed by best-selling science
fiction writer and noted biochemist, Isaac Asimov.
When I tell you what this law says, you will understand why it must be
taken with a pinch of salt, preferably a large one:
If it tastes good, it's bad for you
Salt or no salt, this First Law of Dietetics is suspended tonight. Dinner will
be served and I prophesy it will be good, and taste good too.
Thank you!
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 144
Disclaimer
The Association tries to enhance public access to information about risk and
compliance management.
Our goal is to keep this information timely and accurate. If errors are brought to
our attention, we will try to correct them.
This information:
is of a general nature only and is not intended to address the specific
circumstances of any particular individual or entity;
should not be relied on in the particular context of enforcement or similar
regulatory action;
-
does not prejudge the position that the relevant authorities might decide to
take on the same matters if developments, including Court rulings, were to lead it
to revise some of the views expressed here;
does not prejudge the interpretation that the Courts might place on the
matters at issue.
Please note that it cannot be guaranteed that these information and documents
exactly reproduce officially adopted texts.
It is our goal to minimize disruption caused by technical errors.
However some data or information may have been created or structured in files or
formats that are not error-free and we cannot guarantee that our service will not
be interrupted or otherwise affected by such problems.
The Association accepts no responsibility with regard to such problems incurred
as a result of using this site or any linked external sites.
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 145
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)
P a g e | 146
You can find more information about the CRCMP program at:
www.risk-compliance-association.com/CRCMP_1.pdf
(It is better to save it and open it as an Adobe Acrobat document).
For the distance learning programs you may visit:
www.risk-compliance-association.com/Distance_Learning_and_Certificat
ion.htm
For instructor-led training, you may contact us. We can tailor all programs
to specific needs. We tailor presentations, awareness and training programs
for supervisors, boards of directors, service providers and consultants.
4. IARCP Authorized Certified Trainer
(IARCP-ACT) Program - Become a Certified Risk
and Compliance Management Professional Trainer
(CRCMPT) or Certified Information Systems Risk
and Compliance Professional Trainer (CISRCPT).
This is an additional advantage on your resume,
serving as a third-party endorsement to your knowledge and experience.
Certificates are important when being considered for a promotion or other
career opportunities. You give the necessary assurance that you have the
knowledge and skills to accept more responsibility.
To learn more you may visit:
www.risk-compliance-association.com/IARCP_ACT.html
5. Approved Training and Certification Centers
(IARCP-ATCCs) - In response to the increasing
demand for CRCMP training, the International
Association of Risk and Compliance Professionals is
developing a world-wide network of Approved Training
and Certification Centers (IARCP-ATCCs).
This will give the opportunity to risk and compliance managers, officers and
consultants to have access to instructor-led CRCMP and CISRCP training at
convenient locations that meet international standards.
ATCCs use IARCP approved course materials and have access to IARCP
Authorized Certified Trainers (IARCP-ACTs).
To learn more:
www.risk-compliance-association.com/Approved_Centers.html
_____________________________________________________________
International Association of Risk and Compliance Professionals (IARCP)