Navigating Financial Stability in an Evolving Global Financial System

Transcription

1 Navigating Financial Stability in an Evolving Global Financial System Giacomo Gianneto Senior Financial Sector Specialist Asian Development Bank 13 July 2017 DISCLAIMER: Views and opinions expressed here reflect that of the speaker and not necessarily those of the Asian Development Bank, its management or Board

2 Agenda Historical context of financial stability Implications Practical methods Financial Innovations, Interconnectedness and the Rising Systemic Risks How can regulators monitor and adapt to changing market environments? How best to manage the dynamics between micro and macroprudential regulators without bringing about unnecessary burden to market intermediaries?

3 Impact from GFC Reexamination of banking and financial regulatory systems and financial system stability and integration with monetary policy in countries around the globe. Fundamental changes occurred especially for financial stability arrangements. Substantial reforms or undergone reorganization in response to new challenges. Challenges include highly integrated global financial systems with growing interdependence Prompt transfers of the implications of monetary policy decisions from one country to another Risks from too-big-to-fail financial institutions Rapid movements of global financial liquidity 3

4 Impact from GFC Addressing challenges: Governance frameworks concerning organizational roles and responsibilities and overall authorities have been enhanced Financial toolkits have been strengthened Financial stability mandates and macro-prudential supervisory powers of central banks have been expanded Debate remains about the balance between monetary and financial stability, and the most effective financial supervisory structure that should be adopted and whether the trend to re-empower central banks with this role is the best approach. The global trend prior to the GFC was to separate financial sector supervision from the monetary policy role of central banks. The debate about where to place financial supervision authority remains a question globally and that one solution is not necessarily the best fit for all. 4

5 Implications due to GFC Addressing new financial system challenges Central bank objectives have widened beyond monetary policy to focus on financial stability. Objectives have evolved to focus concurrently on monetary stability, financial stability, and economic growth. This move to a broader set of core functions brings challenges in balancing the requirements of what can occasionally result in conflicting objectives. Central banks have taken much more of a core role in the functioning of the financial system. Emerged at the center of the interbank market, not only as lender of last resort, but also central source of liquidity to support market functioning. 5

6 Implications due to GFC Addressing new financial system challenges Increased attention to financial stability has resulted in changes to regulatory and policy-making structures of central banks, especially relating to their role in financial stability issues. The level of global regulatory changes and legal initiatives in the finance sector has increased drastically causing central banks to quickly reform functions. The level of interconnection among global financial systems and the growth of larger cross-border financial conglomerates have increased the need for international cooperation and coordination among central banks and financial regulators. Technology is impacting finance and central banking materially with the emergence of new forms and mechanisms for finance. Development of new approaches to financial services and participants in the market pose greater challenges in managing the economy and financial stability 6

7 What should be the FSC Responsibilities? High Level Financial Stability issues: Macro prudential supervision of the economy Council authority needs to be specified. Including the authority to introduce macroprudential measures: decide and introduce measures advise /instruct the regulators to introduce measures include large financial conglomerates Inter-Regulatory Coordination Financial Sector Development - mandate Competition policies Financial Inclusion, literacy and financial consumer protection Coordinating with international financial sector entities

8 Financial Stability Secretariat Skills, expertise and capacity Hub and spoke approach relying on expertise in other departments Designated counterparts in Supervision, Research and Statistics, Balance of Payments, Markets, Foreign Exchange, Ministry of Finance, etc. Committees or working groups to carry the work Focus on preparing substantive background analytical documents with options for decisions for discussion at the Financial Stability Council FSC issues discussed must be actionable A brief and focused Financial Stability Report is a secondary priority. The Financial Stability Report should focus on risks and fragility issues and actions taken by the Council.

9 Financial Stability Cooperation Example Common Objective of Financial Stability Capital Adequacy Example Macro - General Regulations are established in cooperation with the Micro supervisor concerning capital adequacy. While the entire capital framework is important, the principal concerns relate to whether SIB s have sufficient capital and also with the functioning and triggers for counter-cyclical capital buffers in relation to economic conditions. Analysis is prepared to determine breaking-points for SIB s in relation to various high-level, holistic economic scenario risks. Results of SIB impacts are combined with other economic modeling to determine the state of overall financial stability and/or the need for mitigations. General economic risks are superimposed on the pool of financial institutions (FI s) to determine their breaking point, the industry s overall resiliency, and the need for macro-economic policy changes. Changes in monetary and economic policy will impact financial stability & ultimately impact the risk-taking choices of FI s, their earnings, levels of capital and means for capital augmentation. Overall impact results from risks evidenced by an individual entity that are beyond their control. Micro - Specific Regulations are established to provide a framework for individual bank and consolidated financial institution capital adequacy. The entire capital framework is of importance as its precise application is needed in detail to each individual entity/institution Each entity is assessed individually considering capital level vs. risk and risk management using entity specific data and results from direct supervision of the institution. The risks are assessed in terms of their possible impact to only one specific entity/group. The individual assessments and application of rules reduce the risk that the institution or group will fail rather than considering overall systemic resiliency. This micro implementation of policy will aid in mitigating misperceptions about the industry as a whole that can reduce contagion to other banks and ultimately systemic risk. Overall impact results from risks taken by an individual financial institution that are within their control. 9

10 Macro-Micro Coordination Ongoing surveillance and coordination Tacticalize the working and cooperative framework including higher level MOU and dayto-day cooperative methods (Tactical MOU) Consider Tie- Breaker rules when dealing with conflicting rules and interests between entities. Matrix Management surveillance with a lead Portfolio Manager 10

11 THANK YOU 11