Special edition 2017 Journal of the Banking Supervisor Promoting Best Practices for Banking Supervision Dear subscriber, The Association of Supervisors of Banks of the Americas (ASBA) is pleased to present its third Special Edition of the Journal of the Banking Supervisor. In its first section, this issue covers all international standards for financial regulation published during 2017 by the Basel Committee on Banking Supervision (BCBS), the Financial Stability Board (FSB), and the Financial Action Task Force (FATF). The most relevant regulatory topics published during the year include: i. Standards: Pillar 3 Disclosure Requirements Consolidated and Enhanced Framework; ii. Standards: Regulatory Treatment of Accounting Provisions Interim Approach and Transitional Arrangements; iii. Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs ( Internal TLAC ); and, last but not least, iv. The finalization of the Basel III postcrisis reforms. Regarding financial stability, the FSB has published guidance on policy recommendations to address structural vulnerabilities, as well as how to transform shadow banking into a more resilient marketbased industry. Finally, publications by the FATF focused on addressing several of its standards and procedures, such as: i. Consolidated FATF Standards on Information Sharing; ii. Procedures for the FATF Fourth Round of AML/CFT Mutual Evaluations. For ease of use, all frequently asked questions published by the BCBS have been gathered in the second section of this issue. During 2017, frequently asked questions were issued for the market risk capital requirements, the Net Stable Funding Ratio, the Liquidity Coverage Ratio, and the definition of capital. Finally, the third section covers other recommended publications relevant for banking regulators and supervisors. Some of the topics covered include: i. Basel III Liquidity Monitoring Tools - Possible Application of the Additional Tools; @ASBAnews Tel. +52 (55) 5662 0085, Fax +52 (55) 2615 5603 asba@asbasupervision.org ASSOCIATION OF SUPERVISORS OF BANKS OF THE AMERICAS
Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities Read more: https://goo.gl/ulnrct Financial Stability Board January 2017 This document sets out the final policy recommendations to address risks to global financial stability associated with the relevant structural vulnerabilities from asset management activities. Some of the recommendations will be operationalized by IOSCO. The FSB will regularly review progress in the operationalization and implementation of the recommendations. The document begins with an overview of recent trends in the asset management sector and potential structural vulnerabilities from asset management activities (Section 1). This is followed by detailed discussion on each of the four structural vulnerabilities: liquidity transformation by investment funds (Section 2); leverage within funds (Section 3); operational risk and challenges in transferring investment mandates in stressed conditions (Section 4); and securities lending activities of asset managers and funds (Section 5). Transforming Shadow Banking into Resilient Market-based Finance - Non-Cash Collateral Re-Use: Measure and Metrics Read more: https://goo.gl/eshfx5 Financial Stability Board January 2017 The re-use of collateral plays a key role in the functioning of financial markets: it increases the availability of collateral, and consequently reduces transaction and liquidity/funding costs for many market participants, since a given pool of collateral assets can be re-used to support more than one transaction. This lowers the cost of trading, which is beneficial for market liquidity. Similarly, this increase in the availability of collateral can reduce the costs associated with long and short positions, thereby facilitating price discovery and market efficiency. Furthermore, collateral reuse may facilitate the clearing and settlement processes by increasing the availability of securities that could be borrowed to complete the settlement process, potentially reducing the likelihood of settlement failures. Collateral re-use, however, may also pose financial stability risks, for example by contributing to the build-up of excessive leverage of individual entities and in the financial system as a whole. To this end, the FSB has now finalized the measure and metrics of noncash collateral re-use as well as the related data elements, as described in this document. 2
Standards: Pillar 3 Disclosure Requirements Consolidated and Enhanced Framework Read more: https://goo.gl/wfxuvj Basel Committee on Banking Supervision March 2017 Following completion of the first phase of its review of the Pillar 3 framework, the Basel Committee on Banking Supervision (BCBS, the Committee) issued revised Pillar 3 disclosure requirements in January 2015 ( January 2015 standard ). These requirements superseded the Pillar 3 disclosure requirements issued in 2004 (as amended in July 2009). The Committee subsequently issued a consultative document on the second phase of its review of Pillar 3 in March 2016. The comment period for the consultation ended in June 2016. This standard sets out the disclosure requirements arising from the second phase of the review and reflects comments received from respondents in the consultation process. The disclosure requirements in this standard cover three elements: 1. Consolidation of all existing BCBS disclosure requirements into the Pillar 3 framework; 2. Two enhancements to the Pillar 3 framework (this standard introduces a dashboard of a bank s key prudential metrics); and, 3. Revisions and additions to the Pillar 3 standard arising from ongoing reforms to the regulatory policy framework. Standards: Regulatory Treatment of Accounting Provisions Interim Approach and Transitional Arrangements Read more: https://goo.gl/nrdq7k Basel Committee on Banking Supervision March 2017 Since the publication of International convergence of capital measurement and capital standards (Basel I), the Basel Committee has recognized the close relationship between capital and provisions. The timely recognition of, and provision for, credit losses promote safe and sound banking systems and plays a key role in bank regulation and supervision. In response to lessons learned from the financial crisis, the international accounting standard-setting bodies have modified provisioning standards to incorporate forward-looking assessments in the estimation of credit losses. This paper sets out the Basel Committee s considerations for retaining the current regulatory treatment of accounting provisions for an interim period. It also sets out the transitional arrangements to take effect from 1 January 2018 and the corresponding Pillar 3 disclosure requirements, should individual jurisdictions choose to implement such transitional arrangements. 3
Handbook for FSB Peer Reviews Read more: https://goo.gl/rfefm1 Financial Stability Board March 2017 The Handbook for FSB Peer Reviews (Handbook) was originally prepared on the basis of a December 2009 report of a sub-group mandated by the FSB Standing Committee on Standards Implementation (SCSI) to develop a framework for FSB peer reviews by drawing on the experience of international organizations and standard setting bodies (SSBs). This document sets out guidelines for the conduct of FSB peer reviews. The rest of Section 1 sets peer reviews in the broader context of the FSB s implementation monitoring framework, describes the process used to develop the Handbook and provides an overview of the two types of peer reviews as well as of the various stages in the review process. Section 2 describes the overall objectives of FSB peer reviews and the principles that underlie the process. Sections 3 to 7 detail the different stages of the reviews, distinguishing where appropriate between the two types of reviews. Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms Read more: https://goo.gl/ztscqa Financial Stability Board July 2017 The G20 launched a comprehensive program of financial reforms post-crisis to increase the resilience of the global financial system, while preserving its open and integrated structure. By making the financial system more resilient and thereby reducing the likelihood and severity of crises, the reforms support the G20 objective of strong, sustainable and balanced growth. The role of the FSB has been to coordinate the development and support the full, timely and consistent implementation of these reforms. With the main elements of the post-crisis reforms agreed and implementation of core reforms underway, initial analysis of the effects of those reforms is becoming possible. Implementation monitoring and the evaluation of the effects of reforms represent good regulatory practice, form part of the FSB s accountability to the G20 and the public, and inform structured policy discussions among FSB members and standard-setting bodies (SSBs). 4
Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs ( Internal TLAC ) Read more: https://goo.gl/bxjqyq Financial Stability Board July 2017 A key objective of the TLAC standard is to provide home and host authorities with confidence that G-SIBs can be resolved in an orderly manner without putting public funds at risk. This should diminish any incentives on the part of host authorities to ring-fence assets domestically, either ex ante or ex post in a resolution, and thereby avoid the adverse consequences of such actions, including global fragmentation of the financial system, and disorderly resolutions of failed cross-border firms. TLAC standard states that host authorities must have confidence that there is sufficient loss-absorbing and recapitalization capacity available to subsidiaries in their jurisdictions with legal certainty at the point of entry into resolution. To this end, there must be sufficient flexibility to use loss-absorbing capacity within a G-SIB where needed and a credible mechanism in place to allow losses and recapitalization needs to be passed with legal certainty to the resolution entity or entities. Guidance on Continuity of Access to Financial Market Infrastructures ( FMIs ) for a Firm in Resolution Read more: https://goo.gl/zda9ec Bank for International Settlements July 2017 Providers of critical FMI services should take appropriate steps to consider and plan for the interaction between the resolution regimes of their FMI service users and their own risk management framework; thereby clarifying the actions they may take in a resolution scenario, to support firms and authorities in enhancing resolution readiness. Also, firms should take measures to facilitate their continued access to critical FMI services in resolution. This should be based on analyses on how the firm would maintain access to critical FMI services, including by ensuring that obligations to FMI service providers are met throughout resolution and through the provision of information to the relevant authorities, both as part of resolution planning and in contingency planning by a firm ahead of, and during, resolution. This paper also draws on how the relevant authorities of firms and providers of critical FMI services play a significant role in facilitating continuity of access to critical FMI services for a firm in resolution and should therefore have adequate cooperation arrangements in place. 5
Implementation of Net Stable Funding Ratio and Treatment of Derivative Liabilities Read more: https://goo.gl/4pqk7r Basel Committee on Banking Supervision October 2017 At its meeting on 4-5 October, the Basel Committee on Banking Supervision discussed the net stable funding ratio (NSFR) standard and agreed to allow national discretion for the NSFR s treatment of derivative liabilities. This should facilitate the implementation of the NSFR, which is expected to begin on 1 January 2018. The NSFR assigns a 20% required stable funding factor to derivative liabilities. The Committee has agreed that, at national discretion, jurisdictions may lower the value of this factor, with a floor of 5%. The Committee is considering whether any further revisions to the treatment of derivative liabilities are warranted, and if so, will undertake a public consultation on any proposed changes. High-Level Summary of Basel III Reforms Read more: https://goo.gl/a328p6 Basel Committee on Banking Supervision December 2017 This note summarizes the main features of the finalized Basel III reforms. The Basel III framework is a central element of the Basel Committee s response to the global financial crisis. It addresses a number of shortcomings in the pre-crisis regulatory framework and provides a foundation for a resilient banking system that will help avoid the build-up of systemic vulnerabilities. The framework will allow the banking system to support the real economy through the economic cycle. 6
Consolidated FATF Standards on Information Sharing Read more: https://goo.gl/pmptqr Financial Action Task Force November 2017 Effective information sharing is one of the cornerstones of a well-functioning antimoney laundering/counter-terrorist financing (AML/CFT) framework. This is a consolidation of the existing FATF Standards on information sharing. The FATF is publishing them in this form in response to feedback from the private sector that this would add value and clarify the requirements which are currently spread across 30 of the FATF Recommendations, and which impact 7 Immediate Outcomes in the FATF Methodology for assessing effectiveness. This consolidation is comprised of relevant excerpts from the FATF Recommendations which set out requirements on: a) the types of information that should be shared, including the types of information that competent authorities are required to make publicly available; b) the circumstances in which such information should be shared, etc. Procedures for the FATF Fourth Round of AML/CFT Mutual Evaluations Read more: https://goo.gl/fqpsek Financial Action Task Force November 2017 The FATF is conducting a fourth round of mutual evaluations for its members based on the FATF Recommendations (2012), and the Methodology for Assessing Compliance with the FATF Recommendations and the Effectiveness of AML/CFT Systems (2013), as amended from time to time. This document sets out the procedures that are the basis for that fourth round of mutual evaluations. The scope of the evaluations will involve two inter-related components for technical compliance and effectiveness. The technical compliance component will assess whether the necessary laws, regulations or other required measures are in force and effect, and whether the supporting anti-money laundering (AML) / countering the financing of terrorism (CFT) institutional framework is in place. The effectiveness component will assess whether the AML/CFT systems are working, and the extent to which the country is achieving the defined set of outcomes. 7
Basel III: Finalising Post-Crisis Reforms Read more: https://goo.gl/xsqggh Basel Committee on Banking Supervision December 2017 This document sets out the Basel Committee s finalization of the Basel III framework. It complements the initial phase of Basel III reforms previously finalized by the Committee. The Basel III framework is a central element of the Basel Committee s response to the global financial crisis. It addresses a number of shortcomings with the pre-crisis regulatory framework and provides a regulatory foundation for a resilient banking system that supports the real economy. A key objective of the revisions in this document is to reduce excessive variability of risk-weighted assets (RWAs). At the peak of the global financial crises, a wide range of stakeholders including academics, analysts and market participants lost faith in banks reported risk-weighted capital ratios. Even though, the Committee s own empirical analyses highlighted a worrying degree of variability in the calculation of RWAs by banks. 8
Frequently Asked Questions on Market Risk Capital Requirements Basel Committee on Banking Supervision. January 2017. https://goo.gl/2akvww Basel III The Net Stable Funding Ratio: Frequently Asked Questions Basel Committee on Banking Supervision. February 2017. https://goo.gl/einvwj Basel III The Liquidity Coverage Ratio Framework: Frequently Asked Questions Basel Committee on Banking Supervision. June 2017. https://goo.gl/ch8smv Framework for Post-Implementation Evaluation of the Effects of the G20 Financial Regulatory Reforms: Frequently Asked Questions Financial Stability Board. July 2017. https://goo.gl/mefpfp Basel III Definition of Capital Frequently Asked Questions Basel Committee on Banking Supervision. September 2017. https://goo.gl/8hzcqz 9
International Standards for Financial Regulation Basel III Liquidity Monitoring Tools - Possible Application of the Additional Tools Financial Stability Institute. October 2017. https://goo.gl/vggujz Finalising Basel III In Brief Basel Committee on Banking Supervision. December 2017. https://goo.gl/isck5q Progress Report on the Implementation of Principles for Effective Supervisory Colleges Basel Committee on Banking Supervision. December 2017. https://goo.gl/gahycr Assessment of Shadow Banking Activities, Risks and the Adequacy of Post-Crisis Policy Tools to Address Financial Stability Concerns Financial Stability Board. July 2017. https://goo.gl/pwnbjq Identification and Management of Step-in Risk Basel Committee on Banking Supervision. October 2017. https://goo.gl/nzhn8e FSB Action Plan to Assess and Address the Decline in Correspondent Banking: Progress Report to G20 Summit of July 2017 Financial Stability Board. July 2017. https://goo.gl/ufk11c Sound management of risks related to money laundering and financing of terrorism: revisions to correspondent banking annex - final document Basel Committee on Banking Supervision. June 2017. https://goo.gl/eqjfba 10
Reducing Misconduct Risks in the Financial Sector: Progress Report to G20 Leaders Financial Stability Board. July 2017. https://goo.gl/srm8it Supervisory and bank stress testing: range of practices Basel Committee on Banking Supervision. December 2017. https://goo.gl/1fetp6 FinTech / Cyberisk Chairman s Summary of Outcomes from the Industry Roundtable on FinTech and RegTech Financial Action Task Force. February 2017. https://goo.gl/gfbfex FinTech Credit Market Structure, Business Models and Financial Stability Implications Committee on the Global Financial System / Financial Action Task Force. May 2017. https://goo.gl/axkvdg Financial Stability Implications from FinTech - Supervisory and Regulatory Issues that Merit Authorities Attention Financial Stability Board. June 2017. https://goo.gl/6brfq2 Summary Report on Financial Sector Cybersecurity Regulations, Guidance and Supervisory Practices Financial Stability Board. October 2017. https://goo.gl/ogme5q Misconduct Stocktake of Efforts to Strengthen Governance Frameworks to Mitigate Misconduct Risks Financial Stability Board. May 2017. https://goo.gl/rvcd9p 11
Re-hypothecation, Collateral Re-Hypothecation and Collateral Re-Use: Potential Financial Stability Issues, Market Evolution and Regulatory Approaches Financial Stability Board. January 2017. https://goo.gl/eteubj Global Systemically Important Banks 2017 List of Global Systemically Important Banks (G-SIBs) Financial Stability Board. November 2017. https://goo.gl/wxwzdt 12
ii. Progress Report on the Implementation of Principles for Effective Supervisory Colleges; iii. Assessment of Shadow Banking Activities, Risks and the Adequacy of Post-Crisis Policy Tools to Address Financial Stability Concerns; iv. FSB Action Plan to Assess and Address the Decline in Correspondent Banking; v. Reducing Misconduct Risks in the Financial Sector; vi. Stress Testing range of practices. By actively sharing information and disseminating knowledge, the Association expects this compendium could help to strengthen the region s banking regulatory and supervisory activities as well as to contribute to its financial stability. Subscribe to Our Journal or send us Comments and Suggestions: Email us at asba@asbasupervision.org or Call +52 (55) 5662-0085 Visit Our Website at: http://www.asbasupervision.org/ Follow us on Twitter: https://twitter.com/asbanews/ DISCLAIMER / COPYRIGHT Published by the Association of Supervisors of Banks of the Americas (ASBA). Its headquarters are located at C. Picacho Ajusco #238 Int. 601 Col. Jardines en la Montaña, Mexico City, Zip Code 14210, Mexico. To subscribe to this Newsletter send an email to asba@asbasupervision.org or call (5255) 5662-0085. Reproduction in whole or in part is prohibited without prior permission from ASBA. The information has been obtained by ASBA from sources deemed as reliable and, in most cases, publicly available or provided by an Associate Member. However, given the possibility of human and/or mechanical error from our sources, ASBA does not guarantee the accuracy, adequacy or completeness of any information. ASBA is not responsible for errors, omissions, or the results from using such information. The opinions and assertions contained in articles and documents published by individual authors are the sole responsibility of the authors, and do not represent the opinion of the Association of Supervisors of Banks of the Americas, its Board of Directors or the General Secretariat. ASBA reserves the right to release documents to the supervisory community in the Region, and it does not receive any payment for doing so. 13