Basel II. Consolidated Supervised Entity (CSE) Rule:

Transcription

1 Speech by Randal K. Quarles U.S. Treasury Assistant Secretary for International Affairs Institute for International Bankers Washington, DC May 26, 2005 I am delighted to be here again to share with you a brief overview of Treasury s international financial sector work. I d like to begin with a just few comments on major regulatory matters that will be impacting financial markets in the years ahead. Then I ll give you an update on some of the issues we discussed last October: multilateral and bilateral financial services negotiations and our financial markets dialogues particularly with China, Japan and the European Union. Before I begin, let me emphasize that the underlying goal of our financial sector work is to strengthen global economic growth and development prospects. Financial stability, financial sector openness and sound regulatory policy are essential financial pillars for growth. We work to strengthen these three pillars via a variety of means: from global and multilateral programs to bilateral engagement. Basel II One of the biggest contributors to financial stability has been adherence to the international standards on capital adequacy for banking institutions embodied in the Basel Accord. We anticipate that implementation of the revision of those standards, known as Basel II, will prove equally valuable. As you know, the U.S. banking regulators jointly announced on April 29 a delay in the publication of the joint notice of proposed rule-making (NPR) which will implement the Basel II risk-adjusted capital framework in the US. Originally targeted for June, our regulators agreed to delay the NPR to consider issues raised in a fourth impact study, which showed wide dispersion of impact with a drop in required capital levels for half of the 26 surveyed institutions. The goal is to issue the NPR at the earliest date possible, while allowing time to consider how to minimize these unintended consequences and thus get it right the first time. Our regulators remain committed to the Basel process and will continue to take the steps necessary to try and implement the revised Accord by their original 2008 target. Consolidated Supervised Entity (CSE) Rule: Regarding the CSE rules of the SEC, we are aware of a number of issues you have raised with respect to the application of the CSE regime. These include the alternative net capital treatment of broker-dealer subsidiaries, reporting and recording keeping for non- US holding companies and deference in supervisory regimes. These matters cut across a number of important supervisory and regulatory areas and are areas that I understand you are continuing to pursue with the SEC and Federal Reserve. As further experience is gained in implementing the rule, I trust that any misunderstandings regarding the rule and its application will be fully clarified... 1

2 Financial Services Trade Negotiations The next topic on our growth agenda is trade in financial services. As I ve discussed with this group before, liberalization of financial services is vital to the Doha Development Agenda. Research has shown that developing countries with open financial sectors experience higher economic growth. WTO Financial Services Negotiations This growth orientation has several implications for our WTO stance. For example, we have advocated to a large number of WTO Members--not just the big emerging markets-- the adoption of fundamental openness, especially to foreign direct investment in this sector. We also have proposed the adoption of transparency principles in the regulation of financial services. We are entering an important phase of these negotiations. WTO members will submit revised offers by the end of this month. Treasury and USTR held a series of meetings in February in Geneva to encourage improved offers and more talks will take place in June. We will continue to articulate the benefits of financial services liberalization in our bilateral meetings and other fora. We have no illusions that securing a WTO financial sector agreement will be quick or easy, but the importance of the issues and breadth of WTO participation merit our continued efforts. Bilateral Free Trade Agreements Since 2002, we have expanded the number of countries which with we are negotiating (or have completed) bilateral free trade agreements. Agreements are now in place with Chile, Singapore and Australia and negotiations have been concluded with Bahrain, Morocco, five Central American countries and the Dominican Republic. Negotiations are actively underway with Thailand, Oman, the UAE and three Andean countries. These agreements provide our financial institutions with key legal rights and increase regulatory transparency, contributing to an overall sounder financial sector and more sustainable economic growth. Ongoing Dialogues in Financial Services In addition to trade negotiations, we conduct informal financial dialogues with our counterparts from a number of countries, as we seek to: (1) encourage movement toward more competitive, better regulated financial systems; and (2) find ways to mitigate cross border friction. In addition to our long running Japan financial sector dialogue, we now also hold financial dialogues with our NAFTA partners, as well as with China, Australia, India, Russia and the European Union. Before each of these meetings, Treasury officials reach out to U.S. private financial sector officials and trade associations for their input and 2

3 expertise. Let me give you a brief update on what has been happening with some of these dialogues. U.S.-China As I m sure most of you know, the Bush Administration has had an unprecedented level of engagement with the Chinese to encourage them to move to a market-based, flexible exchange rate regime as quickly as possible. While Secretary Snow, myself and others have been out front, publicly making the macro-economic case that a flexible exchange rate is in China s own best interest, we have also been working behind the scenes to help China prepare its financial sector for such a move. In addition to our high level annual Joint Economic Committee meetings, Treasury has established a Technical Cooperation Program (TCP) to share our experiences on the regulatory and financial market underpinnings that support market-oriented reforms. The TCP s four session have covered a broad set of topics including: banking supervision, corporate governance, asset disposition, forex derivatives markets, treasury cash management and debt management operations. Another session, next week in Beijing, will cover deposit insurance. And a follow up on banking issues is under consideration. We believe that these efforts have helped the China prepare to move ahead and introduce flexibility in the exchange rate regime. Of course, no financial sector is perfect, and despite their progress, the Chinese will still need more sophisticated financial technology and human capital to address coming competitive challenges. Since foreign banks and other financial institutions bring just such technology and know-how as well as much needed fresh capital, we ve continued to push for market access. China s commitment under its WTO accession to open the banking sector to foreign banks by 2007 is on track, but we continue to advocate raising the cap on foreign ownership in banks, securities companies and asset management firms beyond their WTO commitments. U.S - Japan Notwithstanding all of the attention on China, we must remember that Japan is still the world s second largest economy. We have an active financial dialogue with Japan on a variety of issues and in a variety of forums, some on-going, and other ad hoc. The latter enables us to address issues as they arise. Over recent years, a persistent subject of discussion has been banking sector stability. Significantly, Japan s banking sector seems to have stepped back from the brink thanks to an improved economy, and importantly, a tougher supervision regime. Japan s FSA has made remarkable progress by focusing on resolving NPLs, improving the quality of bank capital, and inspecting banks the major banks more thoroughly. While more remains to be done, especially at regional banks, the major Japanese banks have cut reported bad debt to within the government target of 4 percent of total loans. That s a remarkable 50 percent decline over just three years. Less regulatory forbearance 3

4 has raised the pressure on banks to restructure their bad debts, while stronger balance sheets have made the banks more willing, and able, to do so. The privatization of Japan Post has also been a frequent topic of discussion --- especially with regard to its savings and life insurance businesses, which are the world's two largest financial institutions. We are watching closely to ensure that privatization does not disadvantage private firms, including foreign ones, that are already operating in Japan. It is also important to note that a successful privatization has the potential to significantly improve (1) the efficiency in Japan's financial markets, (2) the profitability and stability of bank earnings, and (3) ultimately the prospects for growth in Japan. U.S. EU Three years ago, we launched the U.S-EU informal financial markets regulatory dialogue between Treasury, the US regulators and the European Commission. By promoting quiet discussion, this dialogue has contributed to stronger working relationships among regulators and is now moving beyond just problem solving to more forward looking issues. The EU has fundamentally overhauled the legal framework of its financial markets, but still faces the difficult stage of implementation. The challenge is to have the new measures implemented, interpreted and enforced consistently across all 25 member states. This would be a big victory for growth, as various studies have shown that the integrated, efficient, open capital market envisioned by Europe s Financial Services Action Plan could boost annual economic growth by over one percentage point. Moreover, this convergence within the EU has given impetus to convergence between the U.S. and EU and, indeed between other markets, most notably in accounting standards. The EU s requirement for listed EU firms to use IFRS beginning this financial year has encouraged the U.S. SEC staff to lay out roadmap by which they could recommend SEC acceptance of IFRS financial statements from US-listed firms by as early as 2007 (and no later than 2009). This roadmap has been well received in Europe, and would be a remarkable achievement, reducing costs for businesses on both sides of the Atlantic. US-Mexico-Canada Treasury and US regulators have been discussing financial sector issues with our NAFTA partners for the past eleven years since the trade agreement was signed. Much has been achieved but some issues in financial services and in many other areas pertaining to economic integration remain unresolved. In March of this year, Presidents Bush and Fox and Prime Minister Martin launched the Security and Prosperity Partnership of North America, which will entail wide-ranging discussions by officials of the three countries on economic and security issues under various working groups. I will chair the Financial Services Working Group (FSWG). Other US participants in this group will include representatives from the Department of Commerce, USTR and our financial regulators. This group will address cross-border issues for banking, securities and insurance. All three parties agree that well-developed, efficient capital markets are essential for 4

5 economic growth and national security. We will identify and discuss ways to facilitate the free flow of capital and the efficient provision of financial services throughout the three countries. Preparatory work for the FSWG has included outreach to private sectors and legislatures in the three countries to ensure that interests and concerns are appropriately being taken into account. On June 23, our Leaders will meet again and are expected to formally kick of the real work envisaged under SPP. Conclusion: As you can tell, Treasury has been busy promoting more robust financial policy regimes in many different fora around the globe. Close contact among U.S. and foreign regulators and financial institutions has led to better policy reform. We ve worked together to improve the quality of financial regimes and to enhance opportunities for competition in each other s markets. To the extent we have been successful, the efficiency of capital markets will increase and the capacity for higher sustained economic growth will expand. Thank you. 5

6 OLD TOPICS for Possible Q&A Standards & Codes Today, I would like to highlight three of our global initiatives. Perhaps the most ambitious of the three is the Standards and Codes Initiative. In the late 1990s, following the series emerging market financial crises, the international community under the leadership of the US Treasury launched a multilateral group, the Financial Stability Forum (FSF), to identify and address the sources of global financial instability. The FSF, in which I have been able to participate, continues to meet every six months and bring together a unique mix central bankers, finance officials and financial regulators to discuss sources of financial risk and ways to address them. One of the key efforts of the FSF was to launch, again under US leadership, an extensive effort to improve legal and regulatory frameworks, financial supervision, and transparency: the Standards and Codes Initiative. The regulators, government officials and standard setting bodies, brought together in the FSF, identified 12 international financial standards most critical to financial stability. Where necessary the standard setting bodies had to strengthen their standards and implementation guidance, and develop compliance assessment methodologies. The IMF and World Bank were then tasked with pro-actively evaluating countries and producing Reports on the Observance of Standards and Codes, or ROSCs. These reports have helped national authorities to assess strengths and weaknesses in their financial systems and to set priorities for policy reforms. In just over 5 years, roughly 2/3 of the IMF s membership has participated in at least one ROSC assessment, and some members have eagerly sought to participate in and publish all of the twelve ROSCs, The publication of these ROSCs can help the private sector to make more informed judgments about a country s financial system. While some authorities remain fearful that ROSC publication will shock investors or even lead to the exploitation of weaknesses in its regulatory framework, we observe that markets are rewarding transparency with lower risk premia, in part because publication signals a willingness to acknowledge weaknesses and address them. Corporate Governance Let me expand on our global policy efforts in one of the 12 key areas of the Standards and Codes Initiative: Corporate Governance. Like the other key standards, strengthening the standard and its implementation requires a significant international initiative. Treasury leads the US delegation to the OECD Steering Group on Corporate Governance. We were deeply involved in last year s revisions to the OECD s Principles for Corporate Governance. Up to now, approximately 32 countries mostly emerging markets -- have had their corporate governance practices assessed by the World Bank. We expect that more countries especially developed countries --- will also take part in the program after a uniform assessment methodology is finished later this year. Given the corporate scandals we ve seen across the globe in recent years, I think you d agree that addressing weaknesses in corporate governance can help preserve the stability of our financial markets, and restore faith in our financial systems. 6

7 Remittances The last global policy initiative I would like to discuss is remittances. As foreign banks operating in the U.S., you surely all know about workers remittances. But you may not know that remittance flows to developing countries reached an estimated $126 billion in 2004, and they now dwarf official development assistance and in some regions are nearly equal to foreign direct investment flows. While the technology now exists to transmit these flows almost instantaneously and at a very low cost, the vast majority of remittance flows continue to travel through expensive and inefficient formal channels or informal networks. As a result, the potential growth and development impact of these flows is compromised. Enhancing the potential development impact of remittance flows is a top priority for us. We believe that to achieve that goal, it is first necessary to improve access to, and use of, formal financial services by remittance senders and recipients, and then to encourage or facilitate the use of other financial services. Our specific efforts have focused on: Identifying and addressing impediments to the provision of remittance services by formal financial institutions, including banks. Addressing factors that discourage senders from using formal remittance services, such as financial illiteracy. Getting the big picture right: improving the quality and comparability of statistics on remittance flows; and making sure that the supervisory/regulatory regimes are sound, but not excessively restrictive. We address these issues via bilateral and multilateral avenues, including, for example, the G-7, the Summit of the Americas, APEC, and the Partnership for Prosperity with Mexico. Significant progress has been made, with numerous new, efficient and innovative remittance services now available in some markets. Much remains to be done. 7