Global Financial Regulation Present by Group 2 SEOUL 2015

 I. IMPORTANCE OF FINANCIAL REGULATIONS LESSONS FROM FINANCIAL CRISIS  II.FINANCIAL REFORM IN PROGRESS AFTER THE CRISES  III. BENEFITS AND COSTS  IV. COUNTRY PERSPECTIVES OUTLINE

Importance of Financial Regulations Lessons from financial crisis Excessive leverage Financial bubble Interconnectedness Global financial market stress Global economic recession

 Leverage – investment technique, which increases profits and losses via borrowing more money Excessive leverage

US Households’ debt to income ratio

US Mortgage debt to GDP ratio

Bubble on financial market Dow Jones Index

US National Home Price Index

Financial interconnectedness MSCI index

Financial system affects real sector Real GDP Growth in %

II.FINANCIAL REFORM IN PROGRESS AFTER THE CRISES  1. Basel III (Banking sector)  2. IOSCO (Security market)  3. IAIS (Insurance market)  4. CFM (capital flow management)

BASEL III  Basel III (or the Third Basel Accord) is a global, voluntary regulatory framework on bank capital adequacy, stress testing and market liquidity risk.capital adequacystress testingmarket liquidityrisk  It was agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11, and was scheduled to be introduced from 2013 until 2019.Basel Committee on Banking Supervision  The third installment of the Basel Accords was developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08.Basel Accordsfinancial regulationfinancial crisis of 2007–08  Basel III was supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage.capital requirementsleverage 

Key principles  CAPITAL REQUIREMENTS  Basel III rule from 2010 required banks to hold 4.5% of common equity (up from 2% in Basel II) of risk-weighted assets (RWAs). common equityrisk-weighted assets  Furthermore, Basel III introduced two additional capital buffers:  A mandatory "capital conservation buffer", equivalent to 2.5% of risk-weighted assets.  Considering the 4.5% CET1 capital ratio required, banks have to hold a total of 7% CET1 capital, from 2019 onwards. >2% CET1 RWAs CET1 RWAs >4,5% BASEL IIIBASEL II

Key principles  LEVERAGE RATIO  Basel III introduced a minimum "leverage ratio“  The banks are expected to maintain a leverage ratio in excess of 3% under Basel III. Sum of assets Tier 1 capital LT=<3%

Key principles  LIQUIDITY REQUIREMENTS  Basel III introduced 2 required liquidity ratios.  The "Liquidity Coverage Ratio" was supposed to require a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days.  The Net Stable Funding Ratio was to require the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stressNet Stable Funding Ratio The available amount of stable fund The required amount of stable fund over 1 year >100%

International Organization of Securities Commissions (IOSCO)  The International Organization of Securities Commissions (IOSCO) is an association of organisations that regulate the world’s securities and futures markets.securitiesfutures  OSCO has members from over 100 different countries, who regulate more than 95 percent of the world's securities markets.  Located in Madrid. Established in 1983  It works intensively with the G20 and the Financial Stability Board (FSB) on the global regulatory reform agenda.

Objectives The IOSCO Objectives and Principles of Securities Regulation sets out 38 Principles of securities regulation, which are based upon three Objectives of securities regulation. These are:  protecting investors;  ensuring that markets are fair, efficient and transparent;  reducing systemic risk.

IOSCO Risk Identification Methods: - Method 1: IOSCO Committee on Emerging Risks - Method 2: IOSCO Emerging Risk Survey - Method 3: IOSCO Risk Dashboard - Method 4: IOSCO Securities Markets Risk Outlook

Insurance market reforms (IAIS)  The IAIS was established in 1994 to promote cooperation among insurance supervisors around the globe and with supervisors in other financial sectors.IAIS  The IAIS represents insurance regulators and supervisors of more than 200 jurisdictions in nearly 140 countries.  The Insurance Core Principles (ICPs) developed by IAIS provide a globally accepted framework for the regulation and supervision of the insurance sector.

Mission  Standard setting:  Financial stability:  Implementation:

Mission  Standard setting: to develop supervisory material (principles, standards and guidance) for effective supervision of insurance-related activities.  The IAIS also prepares supporting papers (such as issues' papers) that provide background on specific areas of interest to insurance supervisors.  Financial stability: The IAIS plays a central role in financial stability issues, including developing a methodology for the identification of any global systemically important insurers  It assists its Members in developing enhanced macroprudential surveillance tools.

Mission  Implementation: The IAIS actively promotes the implementation of its supervisory material.  Working closely with international organisations, regional groups and supervisors, it supports training seminars and conferences and addresses financial inclusion.  In addition, the IAIS conducts assessments and peer reviews of observance of supervisory material, consistent with the Financial Sector Assessment Program (FSAP) conducted by the International Monetary Fund (IMF) and the World Bank.

Capital Flow Management (CFM)   Why we need Capital flow management?  Strengthening and deepening financial markets, and improving countries‘ institutional capacity, would help improve their ability to handle capital flows.  Volatile capital flows can give rise to macroeconomic and financial stability risks.  When capital flows contribute to systemic financial risks, CFMs in combination with macro-prudential measures more broadly can help to safeguard financial stability, although their costs need also to be taken into account.

Macroprudential regulations  There is a continuum between three types of regulations:  Strict counter-cyclical prudential regulations (capital, provisions and/or liquidity)  Foreign-exchange related prudential measures  Capital-account regulations (capital management techniques, capital flow management measures)

III. BENEFITS AND COSTS

Possible benefits of adoption global financial regulations:  Strengthened institutional capacity in term of having enough capital and liquidity;  Better image of market safety from the points of views of better regulations following the international standard;  Reduction of expected losses and other cost associated with:  Operational failure  Financial failure  Systemic failure  Reduction of contagent risk;  Market confidence, and consumer would gain the value of better choices (transparent and informative).

COST  Discourage Banks to lend more  Limit for FC foreign capital  Negative impact on GDP growth  An OECD study released on 17 February 2011, estimated that the medium-term impact of Basel III implementation on GDP growth would be in the range of −0.05% to −0.15% per yearOECD

IV. Do we need strong financial regulation? CountriesYESNo Uzbekistan√ Tajikistan√ Turkmenistan√ Kyrgyzstanv Cambodiav Lao PDR√ Korea√

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