Finance Banking regulation and supervision

Finance Lecture outline  Areas of banking regulation  The Basel Committee  EU-banking regulation  American banking regulation  Banking regulation challenges

Finance Financial supervisory functions of the central bank  Entry into banking regulation  Banking activity regulation  Capital requirements  Deposit insurance schemes Finance

Entry into banking regulation  Limitations placed on the ownership of banks  Legal requirements for obtaining a license  Competition in banking

Finance Banking activity regulation  Can banks engage in non-banking activities e.g.  Securities activities  Insurance activities  Real estate activities

Finance Capital requirements  How much capital must banks hold?  What type of capital must banks hold?  Initial and overall capital stringency

Finance Deposit insurance  What requirements have to fulfilled by banks in order to be covered by deposit insurance?  What part of the banks assets is covered by the fund?

Finance Banking supervision  When can supervisors take action?  How far can they intervene in the banks activity?  When can be a bank declared insolvent by authorities?  Loan qualification- when is a loan doubtfull or loss?

Finance Regulation on national and international levels  Each country has its own regulatory standards  Moreover international institutions try to set common standards  The Basel Committe  EU-regulation

Finance International banking supervision  The goals:  Ensuring safe and effective payment settlements  Risk minimalisation  Ensuring international financial system stability

Finance The Basel Committee (1)  A forum for regular cooperation on banking supervisory  Its objective is to enhance understanding of key supervisory issues  Its activity is aimed at improving the quality of banking supervision worldwide

Finance The Basel Committe (2)  The Committee's members come from all around the world  The Committee issues recommendations concerning supervisory and regulatory standards  It communicates its research results to regulators

Finance Basel I  1988 Basel Accord  Minimum capital requirements for banks  Banking supervision- international responsibility  Information exchange

Finance Basel II  2004 Basel Accord  Capital allocation should more risk adjusted  Precise methods of quantifying: operational, credit and market risk  Limitation regulatory arbitrage (the possibility to use differences in regulatory standards)

Finance Basel III  2012 Basel Accord  A response to the financial crisis  More stringent capital requirements  Tier I capital- common equity and disclosed reserves  Tier II capital- instruments specified in the Accord eg. undisclosed reserves, provisions  Stringent capital requirements for transactions with derivatives

Finance Basel III  Countercyclical buffer- banks should hold an additional buffer of capital as provision for an economic downturn  The goal is to dampen procyclicality in loans  Leverage indicator  Short term and medium term liquidity indicators  Stressed value-at-risk- banks undergo stress test

Finance EU-regulations  European Banking Authority  The institution was created in 2011 as a reaction to the crisis  Its task is to monitor EU-banks e.g. by means of stress tests

Finance EU-regulations  In the case of failure of national rules the EBA regulation supersedes national regulations  The goal of EBA is also to avoid regulatory arbitrage  It sets a common reporting framework for the regulated banks

Finance American banking regulation (1)  Edge Act  Edge Act corporations- eclectic financial intitutions  Since the American law limited strictly the banking activity (e.g. limitation of foreign transactions financing)  American banks started to go offshore

Finance American banking regulation (2)  Onshore banks- act under the national jurisdiction  Offshore banks- national banks located beside the national jusrisdiction  Onshore offshore banks- national banks located in the home country but they act beside the national jurisdiction  International Banking Facilities- 1981

Finance International banking and the globalisation of financial markets (1)  The establishment of non-bank financial institutions led to a shrinking area of banking activity  This led to changes of the activity profile of the banks  Deregulation  Competitive pressure led banks to come up with new strategies- competing through „sevices quality”

Finance International banking and the globalisation of financial markets (2)  Banking regulation vs. protection by the state  Mergers and acquisitions led to capital concentration  oligopolistic structure  Large banks were systemtically important institutions  Too big to fail

Finance International banking and the globalisation of financial markets (3)  Technological progress  Innovations  Securitisation- selling consolidated debt as bonds or other securities  Internationalisation of banks  New risk management techniques  Bank started to face new types of risks

Finance International banking regulation difficulties (1)  Offshore banking  No deposit guarantees  No minimum reserve requirements  Difficulties in supervision  Lender of last resort???

Finance International banking regulation difficulties  National regulations vs, international regulations  Emerging markets  International non-banking institutions

Finance References  International framework for liquidity risk measurement, standards and monitoring, Basel Committee on Banking Supervision, BIS, 2010  Strengthening the resilience of the banking sector, Basel Committee on Banking Supervision, BIS,  K. Sum, The role of banking regulation in shaping the economic performance of the EU- countries during the financial crisis of , Gospodarka Narodowa 4/2013