G20 and Global Financial Regulatory Reform January 2011 Dr. Jong-Goo Yi Commissioner Financial Services Commission Republic of Korea 0
Contents I. G20 Framework for Regulatory Reform II. III. IV. Agenda for Previous G20 Summits Agenda for G20 Seoul Summit New Bank Capital & Liquidity Framework V. SIFI Policy Framework VI. OTC Derivatives VII. Other Agenda VIII. Beyond G20 Seoul Summit 1
I. G20 Framework for Regulatory Reform FSB Devises, coordinates and monitors implementation of global financial regulations SSBs BCBS IOSCO IAIS IASB SSBs : Standard Setting Bodies G20 IMF Int l currency FX stability Emergency funds World Bank Economic development Poverty reduction 2
I. G20 Framework for Regulatory Reform(4 Pillars) Need to devise and implement concrete reforms to prevent recurrence of crisis Should not waste the opportunity to carry out necessary reforms Strong regulatory reform measures Monitoring of implementation by IMF/FSB Clear reform timeline Consistent implementation 3
II. Agenda for Previous G20 Summits Washington Summit ( 08.11) London Summit ( 09.4) Pittsburgh Summit ( 09.9) Selection of 47 action plans to implement 5 principles for reform - Strengthen transparency and accountability - Enhance sound regulations - Promote integrity in financial markets - Reinforce international cooperation - Reform international financial institutions Selection of 8 core reform agenda - Establish the FSB - Improve prudential regulations - Enhance international cooperation - Expand regulatory scope - Improve compensation system - Respond to non-cooperative jurisdiction - Improve accounting system - Enhance CRA regulations Interim check for progress of regulatory reform Agreed on timeline for outstanding agenda - bank capital/liquidity regulations(end of 2010) -OTC derivatives regulations(end of 2012) - convergence of accounting standards(june 2011) - approved FSB implementation standards for compensation (Completed) Development of new agenda: SIFI regulations (Oct. 2010) Toronto Summit ( 10.6) 4 pillars for financial regulatory reform - Strong regulatory framework - Effective supervision - Resolution and addressing SIFIs - Transparent international assessment and peer review(fsap& FSB peer review) Acceleration of timeline - Agreed to move forward to the G20 Seoul Summit in November 2010 the timeline on bank capital/liquidity regulation and SIFI recommendations 4
III. Agenda for G20 Seoul Summit New bank capital and liquidity framework(basel III) SIFI policy framework OTC derivatives and market infrastructure Reducing reliance on external ratings FSB outreach arrangements 5
IV. New Bank Capital & Liquidity Framework 1. Quality and quantity of capital p%? 0-2.5%` 2.5% SIFI Surcharge Counter-cyclical capital buffer Capital conservation buffer 4% Tier 3 Tier 2 2% 1.5% Tier 2 Other Tier 1 Tier 2 Other Tier 1 13% in boom 2% Other Tier 1 4.5% Common equity Common equity 2% Common equity <Current> <Quantity of capital> <Capital buffers & SIFI> * Regulatory capital deductions such as goodwill and deferred tax assets are to be taken from common equity rather than Tier 1 or Tier 2 capital 6
IV. New Bank Capital & Liquidity Framework 2. Transition period for capital increase ` * Common equity capital= Common equity Tier I + Capital conservation buffer 10.5% 10% 10.5% 9% 3.5 8% 7% 6% 5% other Tier 1 + Tier 2 : 4.5 4.0 3.5 3.5 0.625 3.5 1.25 3.5 1.875 Capital conservation buffer 2.5 7% 4% Common Equity Tier I 3.5 4.0 4.5 4.5 4.5 4.5 4.5 0% 2013 2014 2015 2016 2017 2018 2019 7
V. SIFI Policy Framework 1. Conceptual framework Higher loss absorbency Prevent failures Reduce default probability Intensive supervision and Supervisory College Structural options (Subsidiarisation, Volcker Rule) Ensure smooth failures Improve resolution capability X-border Crisis Management Group Recovery and Resolution Plans Resolution regimes and tools Reduce spillovers Strengthen core financial infrastructure Reduce interdependence (Establishment of CCP) 8
V. SIFI Policy Framework Overall policy framework 2. SIFI framework All SIFIs(Global + National SIFI) Higher loss absorbency capacity with application to G-SIFI initially Effective resolution framework Intensive supervision Robust core financial market infrastructures to reduce contagion risk Supplementary prudential regulations by national authorities Global SIFIs Development of Recovery and Resolution Plans Firm-specific cooperation agreement for X-border resolution Peer Review Council(PRC) to monitor implementation 9
V. SIFI Policy Framework 3. Identification of SIFIs FSB and national authorities, in consultation with BCBS and other SSBs, to determine G-SIFIs based on quantitative/qualitative measures by mid 2011 4. Enhancement of loss absorbency capacity All SIFIs, but initially G-SIFIs to have higher loss absorbency capacities capital surcharge, contingent capital and/or bail-in-able debt instruments BCBS to study magnitude of additional loss absorbency required for G-SIFIs FSB to examine legal, operational and market capacity issues surrounding contractual and statutory bail-in FSB, in consultation with BCBS, to recommend additional G-SIFI loss absorbency levels and instruments 10
V. SIFI Policy Framework 5. Contractual & Statutory Bain-in * Source : FSB SIFI paper(draft Sep. 2010) Reducing risks created by SIFIs 11
VI. OTC Derivatives Regulation on OTC Derivatives Standardize OTC derivatives Clearing and Settlement through CCP Reporting all OTC derivatives to trade repositories CCP Without CCP With CCP seller buyer seller CCP (buyer) CCP (seller) buyer 12
VII. Other Agenda Reducing reliance on CRA Banks, institutional investors & market participants make their own credit assessments Regulatory authorities look for alternatives to reduce reliance on CRA Central banks reach their own credit judgments on the securities for collateral FSB Outreach Program Establishment of regional groups comprising member and non-member authorities 1 Provide timely information to non-members 2 Induce implementation of reform agenda 3 Promote financial stability through exchange of opinions on reform agenda 13
VIII. Beyond G20 Seoul Summit Further work on macro-prudential regulatory frameworks * Tools to mitigate impact of excessive capital flows * LTV & DTI, and other policy tools * FSB, IMF & BIS to make a joint report on progress in identification of best practices Regulatory reform issues of emerging market and developing economies * Management of FX risks * Regulatory and supervisory capacity * Information sharing between home and host supervisors * Trade finance Strengthen supervision of shadow banking system * As banks are more tightly regulated, risky activities are likely to move to shadow banking system Improve regulations for commodities derivatives markets Enhance consumer protection * Disclosure, transparency and education * Protection from fraud, abuse and errors * Recourse and advocacy 14
Thank You! 15