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Finance 110631-1165 Banking regulation and supervision
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Finance 110631-1165 Lecture outline Areas of banking regulation The Basel Committee EU-banking regulation American banking regulation Banking regulation challenges
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Finance 110631-1165 Financial supervisory functions of the central bank Entry into banking regulation Banking activity regulation Capital requirements Deposit insurance schemes Finance 110631-1165
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Entry into banking regulation Limitations placed on the ownership of banks Legal requirements for obtaining a license Competition in banking
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Finance 110631-1165 Banking activity regulation Can banks engage in non-banking activities e.g. Securities activities Insurance activities Real estate activities
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Finance 110631-1165 Capital requirements How much capital must banks hold? What type of capital must banks hold? Initial and overall capital stringency
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Finance 110631-1165 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?
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Finance 110631-1165 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?
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Finance 110631-1165 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
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Finance 110631-1165 International banking supervision The goals: Ensuring safe and effective payment settlements Risk minimalisation Ensuring international financial system stability
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Finance 110631-1165 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
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Finance 110631-1165 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
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Finance 110631-1165 Basel I 1988 Basel Accord Minimum capital requirements for banks Banking supervision- international responsibility Information exchange
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Finance 110631-1165 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)
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Finance 110631-1165 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
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Finance 110631-1165 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
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Finance 110631-1165 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
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Finance 110631-1165 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
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Finance 110631-1165 American banking regulation (1) Edge Act- 1916 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
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Finance 110631-1165 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
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Finance 110631-1165 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”
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Finance 110631-1165 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
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Finance 110631-1165 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
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Finance 110631-1165 International banking regulation difficulties (1) Offshore banking No deposit guarantees No minimum reserve requirements Difficulties in supervision Lender of last resort???
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Finance 110631-1165 International banking regulation difficulties National regulations vs, international regulations Emerging markets International non-banking institutions
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Finance 110631-1165 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, 2009. K. Sum, The role of banking regulation in shaping the economic performance of the EU- countries during the financial crisis of 2007- 2009, Gospodarka Narodowa 4/2013
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