institute seminar on the impact of basel ii a european perspective on basel ii implementation...
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Institute Seminar on the Impact of Basel II
A European Perspective on Basel II implementation
Institute of International BankersNew-York
Danièle Nouy | 11 December 2007
New York, 11 December 2007 | Danièle Nouy 2
Outline
1. Moving from Basel 1 to Basel 2
2. Key challenges raised by the implementation of Basel II in Europe
3. CEBS responses:
-Phase I: Guidelines,
-Phase II: Shift to implementation.
Objective : Create a virtuous circle for a smooth, efficient and consistent implementation of Basel II
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CEBS’ role
Main tasks:
• Advice the Commission on banking policy issues,
• Promote consistent implementation of the EU legislation and convergence of supervisory practices,
• Exchange information and enhance supervisory cooperation.
Objectives:
Promote cross-border supervisory cooperation and safety and soundness of the EU financial system through:
• Effective regulation,
• Efficient and cost-effective approaches to supervision of cross-border groups,
• Good supervisory practices,
• Level playing field and proportionality.
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1- Moving from Basel I to Basel II - What’s new?
• Three pillars with checks and balances;
• Complex in detail but clear purpose and architecture;
• Based on the best practices of the industry => It is an efficient regulation from an economic perspective;
• Flexible framework for both small and big banks: “Proportionality” is the magic word.
3 pillars
Minimum Capital
Requirements
Regulatory view
Supervisory review and evaluation
(SREP)+
Banks’ internal view (ICAAP)
Market discipline
Market view
Credit riskMarket riskOperational
risk
Supervisory judgment
Disclosure requirements
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2- Key challenges in the implementation of Basel II 1) Potential divergence in national implementation
• Options and national discretions;
• Additional layers of national rules (“goldplating”);
• Different interpretations.
2) Complex and fragmented supervisory process
• Misalignment between legal and operational structures in banking groups challenge to supervisory process;
• Validation and Art. 129 of the CRD;
• Supervisory review process for Pillar 2.
3) Administrative costs for compliance
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3- Efforts to address implementation issues
Phase I: Guidelines
• Supervisory disclosure, for enhanced transparency of the process and outcome;
• validation of advanced approaches for credit and operational risk (high level principles not enough to achieve convergence);
• Common (but not fully harmonised) reporting frameworks (COREP and FINREP);
• Structured use of supervisory judgment: Supervisory Review Process (Pillar 2).
Joint effort from CEBS and Commission to ensure consistent interpretation of Basel 2 in Europe.
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3- Efforts to address implementation issues
A CRD Transposition Group
• Joint effort of CEBS and European Commission to ensure a consistent interpretation and implementation of the CRD provisions and to enhance transparency.
• Answers are published on the websites of CEBS and the European Commission.
Statistics
Questions received so far: 287
Responses published as of mid October: 261
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3- Efforts to address implementation issues
Example: Guidelines on validation
• Need for common approaches allowing both institutions and their supervisors to make appropriate preparations and pave the ground for final decision;
• Extensive involvement of supervisors from all Member States.
A common understanding on how supervisory authorities can deal with IRB or AMA applications.
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3- Efforts to address implementation issues
Example: Guidelines on Pillar 2
•Set of guidelines covering:
• The application of the Supervisory Review Process -SREP- under Pillar 2,
• Concentration risk, interest rate risk in the banking book and stress testing.
•… And work in progress on some specific points including:
• The practical aspects of home-host cooperation in SREP,
• The methodologies for assessing claimed diversification benefits and Capital allocation…
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3- Efforts to address implementation issues
Phase II: The shift to implementation
• Enhanced coordination and cooperation obtained by:
– Operational networking: e.g. networks of supervisors,
– Developing new tools, in particular delegation of tasks, joint EU examinations, mediation, common training, staff exchanges … to promote a common EU supervisory culture.
• Market pressure:
– Supervisory disclosure, as a tool for market pressure,
– Peer review.
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3- Efforts to address implementation issues
Operational networking: What do we mean?The implementation of the CRD into day-to-day practices and supervisory decision give rise to a number of issues:
• Technical issues,
• Consistency issues.
Operational networking is about creating a stable connection between national supervisors to address practical issues:
• Colleges of supervisors, supported by:
• A line function: connection between colleges of supervisors,
• A support function: network of experts on specific topics (e.g. reporting, validation etc).
Industry proposal for the “Lead supervisor model”.
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Operational networking
Line function: SON
The target is to establish an operational network of line supervisors in charge of day-to-day supervision of cross-border groups
• Objective: identifying and addressing Basel 2 implementation issues in a bottom-up fashion,
• First areas of attention: working of colleges, identification and prioritisation of IRBA and AMA validation issues, Pillar 2 cross border issues,…
• Deliverables:
– A best practices paper on the functioning of colleges of supervisors,– Templates for written arrangements for banking groups, – Analyses on the practical implementation of article 129 of the CRD,– As well as collection of Pillar 2 cross-border processes and issues.
Dialogue with the Industry “Operational Network Platform”.
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Operational networking
Support function: NOVI – Validation and reporting networks
• For example : validation experts, two strands:
• credit risk, and • operational risk.
• Tasks: follow-up work resulting from the guidelines on validation:
• Exchange information on technical validation issues,• Suggest areas where further input from CEBS is deemed
necessary,• And, where necessary, conduct surveys of good practices on
validation issues.
• Similar approach in the area of reporting (FINREP and COREP networks).
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New tools - Supervisory disclosure
Links to national websitesfor more detailed information
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New tools - Peer pressure: a new mechanism …
• Benchmarking based on objective assessment criteria,
• A comply or explain approach,
• Transparency.
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… To create a virtuous circle
2-Practicalapplication in
Member States
3-Monitoring and
updating
1-CEBSGuidelines
Consistent implementation
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Strengthening the EU dimension
• Debate under way on the “review of the so-called Lamfalussy
process”
• CEBS issuing proposals for strengthening the Lamfalussy
approach by improving:
– Regulatory convergence (for example “sunset clauses for
national options and discretions),
– Supervisory convergence, as well as
– The role and working procedures of EU committees.
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Strengthening the EU dimension
Supervisory convergence
• Ex ante definition of convergence targets:
-”Soft convergence”: converge on principles, with some flexibility,
- “Vertical convergence”: group specific convergence, for cross-border groups,
-”Hard convergence”: country-neutral approach, complete uniformity.
• … And assessment of the outcome vis à vis the selected convergence target.
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Strengthening the EU dimension
The role and working procedures of EU committees
• Reviewing the mandates: EU and national,
• Possibility of majority voting, coupled with peer review and the “comply or explain principle”,
• No EU-wide legally binding tool at supervisory level, but guidelines, standards and recommendations linked to different convergence targets.
• Learning from the US model: the Federal Financial Institutions Examination Council - FFIEC.
A decentralised, but integrated system.
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Conclusion
• A lot of efforts to create the tools,
• Feedback from market participants rather positive but room for
improvement,
• Need to translate the convergence efforts into the day-to-day
practices,
• Global perspective, beyond EU,
• Increased need for effective and regular dialogue with market
participants who should stay fully involved in the process.