Financial Integration and Supervision Challenges for Central Banks. Nestor A. Espenilla, Jr. Deputy Governor Bangko Sentral ng Pilipinas

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1 Financial Integration and Supervision Challenges for Central Banks Nestor A. Espenilla, Jr. Deputy Governor Bangko Sentral ng Pilipinas

2 Issues Covered in this Discussion The premise of regional integration (with specific focus on ASEAN Financial Integration Framework) How banking supervision needs to adjust under the mandate of financial stability and policy direction of regional integration (the strategic framework) Some policy challenges faced by banking authorities arising from greater cross-border integration (the tactical concerns)

3 Herd of Net Private Capital Towards EM/ASEAN

4 Came in Together, Went Out Together as Well Net Portfolio Flows (in million USD) 2012 Q1 to 2013 Q2 Covers The Philippines, Singapore and Thailand

5 The Prospects May Not Be As Obvious to All Forecast Gross National Savings rate for ASEAN 5 in 2013 is % The world's average Gross National Savings rate is only at % Historically, ASEAN saving has been invested outside ASEAN

6 Using ASEAN Financial Integration as an Example Capital Account Liberalization Integrated Payment & Settlements Systems FSL / ASEAN Banking Integration CMD / ASEAN+3 Bond Market Initiative

7 The Linkages are Clearly Comprehensive Linking jurisdictions requires linking financial markets and setting omnibus standards for acceptable behaviour But markets are never going to be identical across jurisdictions... gaps and overlaps will be inevitable Governance Institutions Individuals Conflicts of Interest Products Markets Fin Market Infrastructure

8 Financial Stability, Banking Supervision and Regional Integration

9 Our Stylized Approach Towards Bank Supervision Conflicts of interest are mitigated by having the bank supervisor take an active role between the financial consumer and the bank itself Financial Consumer Banking Policy & Supervision Banks But the pursuit of financial stability will change the nature of the prudential relationships

10 Supervision Framework Has to Consider FinStab It is no longer enough to ensure that each bank is operating safely and soundly Linkages matter, the sequence of effects matter and the expected magnitude of impact certainly matters

11 Macroprudential versus Micro Oversight Stable and Resilient Financial System Prudential Policy Framework Other Policy Considerations Capital Adequacy Market Conduct Consumer Protection Safety and Soundness Monetary policy Payments system policy Securities market policy Insurance market policy

12 Macroprudential versus Micro Oversight Prudential Policy Framework Macro-Prudential Stable Policy and Framework Resilient Financial System SYSTEMIC (and SYSTEMATIC) RISKS Other Policy Considerations Monetary policy Payments system policy Securities market policy Insurance market policy

13 Setting Up What is Needed At Home In-country situations will be different as you move from one jurisdiction to another There will be a lot of focus on idiosyncratic conditions across jurisdictions

14 Migrating Local Stability into Regional Integration Moving from intracountry dynamics to inter-country linkages presents a major challenge Harmonizing the prudential framework within the region will not be a trivial task

15 Some Policy Considerations for Banking Authorities

16 The Integration Agenda is About Gaps & Overlaps There is significant diversity across the jurisdictions in the region The adjustments to be made by banking regulators will depend on the form of regional integration: a) The prudential framework in effect (A regional Basel Accord?) b) Cross-border financial transactions c) Cross-border network of FIs d) Focusing on the Regional Customer

17 Calibrating the Application of the Basel Continuum Basel 1 Basel 2 Basel 3 Basel 4? Link exposures to risk back to capital position Link exposures to risk back to capital position Link exposures to risk back to capital position Define how to manage credit risk Improve credit risk mgt Extend risk coverage Improve further credit risk mgt Further extend risk coverage Intro 3 pillars Retain 3 pillars Improve quality of capital

18 Open Financial Access to Regional Markets Open economies always face the double-edged sword of external flows Source: Institute of International Finance. Capital Flows to Emerging Market Economies. October 2013 The portion that stays as financial investments typically: a. are prone to sudden reversals since they are driven by spreads and gaps b. affect market spot and forward rates c. thus, distort fundamentals

19 The Idea Behind Qualified ASEAN Banks (QABs) Harmonized Banking Supervision Framework Multilateral Standards Bilateral Discussions Among Banking Authorities Resolution Mechanism (Both Corporate & Personal) 45 Possible Bilateral Agreements

20 The Agenda for the Regional Customer 1. Crisis Management and/or Remedial Measures 1. Bilateral Agreement 2. Evolving agenda item for EMEAP, FSB-RCGA 2. Consumer Redress Mechanisms 1. Own country Consumer Protection Framework 2. ASEAN CP Committee 3. Capacity Building for Regulators (By Regulators) 1. SEACEN; FSI; IMF 2. ABIF Capacity Building 3. Individual CB Initiatives

21 Issues Covered in this Discussion The premise of regional How banking supervision needs to adjust Some policy challenges faced by banking authorities as a result of greater integration Potential is clear But significant adjustments are needed Has to start from an agreed prudential framework... and let s not forget the consumer

22 Financial Integration and Supervision Challenges for Central Banks Nestor A. Espenilla, Jr. Deputy Governor Bangko Sentral ng Pilipinas