strengthening the regulatory and supervisory capacity of the financial regulators

STRENGTHENING THE REGULATORY AND SUPERVISORY CAPACITY OF THE FINANCIAL REGULATORS

Strengthening prudential supervision in response to the

crisis

Rumen SimeonovDeputy Governor,

Bulgarian National Bank

Twinning project funded by The European Union

Outline

• THE COORDINATED EU RESPONSE TO THE CRISIS

• GLOBAL SOLUTIONS TO THE CRISIS

• REGULATORY PACKAGE

• INSTITUTIONAL CHANGES

• EXIT FROM FINANCIAL SUPPORT MEASURES

• NATIONAL VERSUS EU MEASURES

• BULGARIAN RESPONSE


The coordinated EU response to the crisis

Common principles and main lines of actions agreed on ECOFIN Council - October 7, 2008:

• public intervention has to be decided at national level but must be part of a coordinated framework

• cross-border effects of national decisions have to be taken into account

• recapitalization of vulnerable systemic financial institutions

• distortion of treatment between US and European banks due to differences in accounting rules must be avoided.

• deposit guarantee protection - at least 50,000 euro


The coordinated EU response to the crisis

• Registration and oversight of rating agencies

• Common guidelines for transparency about risk exposures

• Improvements of the “executive-pay” model

• Clear guidelines on valuation, applied consistently

• Strengthening cross-border stability arrangements - EU wide MoU

• Enhanced effectiveness of supervision and convergence and harmonization in the implementation of rules.


A global crisis requires global solutions

15 November 2008 - G20 Declaration outlines the strategy for reforming the existing financial architecture

Main G-20 proposals:

• Strengthen the regulatory systems, prudential oversight and risk management

• All financial markets, products and participants to be regulated or subject to oversight

• Promote integrity in financial markets

• Enhance international cooperation - college of regulators


Regulatory reform

Lessons from the crisis and the need for regulatory reform

• Need for common EU supervisory response

• Need for changes in the accounting framework

• Improving quality of capital

• Dealing with the cyclicality of finance

• Liquidity issues

• Transparency & disclosure of important information

• Supervisory cooperation

• Introduction of new tools for early intervention and crisis management

• Stress tests


Regulatory package

2009: Directive 2007/44/EC – changes in the assessment of acquisitions and increase of holdings in the financial sector;

2010: CRD II (Directives 2009/111/ЕC, 2009/83/ЕC and 2009/27/ЕC) – changes in own funds items, large exposures, supervisory arrangements, crisis management, securitisation, technical risk management provisions;

2011: CRD III (not yet approved and numbered) – changes in the Trading book capital requirements, re-securitisations and the supervisory review of remuneration policies;

2011: Directive 2009/110/ЕC – putting electronic money institutions outside the credit institutions area;

CRD IV (no Commission proposal yet) – as regard quality of capital, liquidity risk standards, counterparty credit risk and dynamic provisioning.


De Larosière Report

25 February 2009 - De Larosière Report

31 recommendations:

– Towards a new regulatory agenda – to reduce risk and improve risk management; to improve systemic shock absorbers; to weaken pro-cyclical amplifiers; to strengthen transparency; and to get the incentives in financial markets right.

– Towards stronger coordinated supervision – macro-prudential and micro-prudential, built on existing structures but much stronger and coordinated

– Towards effective crisis management – to build confidence among supervisors with agreed methods and criteria.


Building on the “De Larosière Report”

23 September 2009 – The EU Commission proposals for a new European financial supervisory architecture:

• European System of Financial Supervisors (ESFS) - a network of national financial supervisors working in tandem with new European Supervisory Authorities (ESAs)

• European Systemic Risk Board (ESRB) – to monitor and assess potential threats to financial stability that arise from macro-economic developments and from developments within the financial system as a whole


The EU supervisory reform

Micro supervision – individual banks

Macro supervision – systemic risks, financial stability

ECB

ESRB

ESFS

EBA - banking

ESMA – securities markets

EIOPA – insurance,

pension funds

National Supervisory Authorities

The EU supervisory reform

The newly proposedEU regulatoryframework allowsthe application ofnetwork approaches


ECB

ESFS – European System of Fina ncial Supervisors

Council EC Parlament

EBC EIOPC ESC EFCC

implementation

CEBS CEIOPS CESR

ESRB - European Systemic Risk Board

Lamfalussy model De Larosiere model (from 2010 / 2011 г.)

Exit from financial support measures

02 December 2009 - ECOFIN Council agreed the following principles for exit strategies:

• Phasing out of the public support measures in order to avoid negative spill-over effects

• The timing of exit should take into account all relevant factors and individual Member State’s circumstances

• The phasing out of support should normally start with government guarantees.

• Existing legal framework should be taken into account, including the relevant state aid decisions and the legitimate interest to minimize the potential loss of public money


National versus EU measures


Capital injections Guarantees on bank

liabilities Relief of impaired

asset Liquidity and bank

funding support

Total approved measures

Effective capital

injections


Guarantees granted


Effective asset relief


Effective liquidity

intervention

Total for all

approved measures

Total effective

for all measures

Austria 15.1 4.7 70.6 18.8 15.0 1.2 4.4 4.4 105.1 29.1 Belgium 17.9 20.9 240.8 55.5 27.7 27.7 n.a. n.r. 286.3 104.1 Bulgaria 0 0 0 0 0 0 0 0 0 0

Cyprus 0 0 0 0 0 0 0 0 0 0 Cz Republic 0 0 0 0 0 0 0 0 0 0

Denmark 14.1 5.5 580 5.8 0 0 0.7 0.6 594.7 11.9 Estonia 0 0 0 0 0 0 0 0 0 0 Finland 0 0 50 0 0 0 0 0 50 0 France 24.0 22.8 319.8 105.1 4.7 4.7 0 0 348.4 132.5

Germany 104.4 48.7 445.0 170.7 32.5 32.5 0 0 581.9 251.9 Greece 5.0 3.8 15.0 3.0 0 0 8.0 4.5 28.0 11.3

Hungary 1.0 0.1 5.2 0 0 0 0 2.3 6.2 2.4 Ireland 11.0 10.8 275.0 275.0 0 0 0 0 286.0 285.8

Italy 20 1.5 n.a 0 0 0 0 0 20 1.5 Latvia 0.3 0.2 5.0 0.5 0 0 2.1 0.9 7.4 1.6

Lithuania 0 0 0 0 0 0 0 0 0 0

National versus EU measures


Capital injections Guarantees on bank

liabilities Relief of impaired

asset Liquidity and bank

funding support

Total for all

approved measures

Total effective

for all measures

Total

approved measures

Effective capital

injections


Guarantees granted


Effective asset relief


Effective liquidity

intervention

Luxemburg 2.5 2.9 4.5 n.r. 0 0 0.3 0.3 7.3 3.2 Malta 0 0 0 0 0 0 0 0 0 0

The Netherlands 37.1 39.6 200 45.0 22.8 22.8 43.5 9.2 303.3 116.5

Poland 0 0 0 0 0 0 0 0 0 0 Portugal 4.0 0 16.5 5.4 0 0 0 0 20.5 5.4 Romania 0 0 0 0 0 0 0 0 0 0 Slovakia 0 0 0 0 0 0 0 0 0 0 Slovenia 0 0.2 12.0 2.3 0 0 0 0 12.0 2.5

Spain 0 0 200 22.3 0 0 30 19.3 230 41.6 Sweden 4.6 0.5 137.2 31.1 0 0 35.5 0 177.3 31.6

UK 54.0 40 337.0 175.0 0 0 255.2 228.0 646.2 442.9 Total EU 314.8 202.0 2,913.4 917.8 102.7 88.9 379.8 269.5 3,710.7 1,478.1

Total Euro Area 240.9 155.7 1,849.1 705.4 102.7 88.9 86.2 37.7 2,278.8 987.6

Bulgarian response

• THE BUFFERS OF THE BULGARIAN BANKING SYSTEM

• MEASURES TOWARDS THE BANKING SYSTEM

• CHANGES IN REPORTING CULTURE


The buffers of the Bulgarian banking system

The conservative application of the capital adequacy regime in Bulgaria and the maintenance of increased capital requirements

by banks provided for a “cushion” against unexpected losses during the crisis:

• 12% minimum capital adequacy ratio

• Non-inclusion of interim profit until 2008

• Increased risk weights in Retail and Mortgages

• Conservative approach to usage of prudential filters

• Reduced reliance on hybrids and other non typical capital instruments

• Introduction of a specific supervisory provisions, aimed at capturing the amount of potential future losses


Measures towards the banking system

Some of the most important steps to insure the smooth functioning of the banking systems were:

• Reduction of the minimum reserves requirement in 2008;• Increased frequency of on-site visit, focused on risk areas;• Increased dialogue with the bank managers;• Banks to keep additional capital above the regulatory

minimum;• Banks to keep liquidity ratios above the regulatory minimum;• Requiring regular stress tests under different assumptions


Measures towards the banking system

• Increased dialogue with home supervisors, focused on issues of the local subsidiary

• Issuing recommendation for non-distribution of dividends by banks;

• Raising the minimum guaranteed amount of customer deposits to 50,000 EUR in 2009

• Widening the scope of supervision – introduction of registration requirements for other financial institutions (e.g. leasing, cash credit, etc.)

• No state aid or government guarantees were provided to commercial banks during the crisis


Changes in reporting culture

• Raising the importance of supervisory reporting as a key function in commercial banks - it should not be a secondary task of the accounting department;

• Difference between financial and supervisory reporting - COREP is a tool for supervisory reporting and FINREP is a tool for financial reporting;

• Supervisory reporting is best done by risk managers;


Bulgarian banking system

Total assets Change

Q3 2007 26,540,326 -

Q3 2008 35,457,373 +33.60%

Q3 2009 35,740,050 +0.80%

Profit (pre tax)

Q3 2007 483,558

Q3 2008 625,744

Q3 2009 355,366

Siz

e

Profitability Structure (2009)*

All sums in thousands EUR

16%

77%

7%Locally ownedbanks

Foreignsubsidiaries

Branches offoreigninstitutions

Bulgarian banking system

Own funds Change Cap. adequacy

Q3 2007 2,634,590 - 13.85%

Q3 2008 3,878,743 +47.22% 14.35%

Q3 2009 4,806,729 +23.92% 17.34%

Reg

ula

tory

Cap

ital

Retail loans Change Corp. loans Change

Q3 2007 5,881,314 - 10,790,387 -

Q3 2008 8,572,246 +45.75% 16,046,307 +48.71%

Q3 2009 9,390,127 +9.54% 16,625,315 +3.61%

Cre

dit

Gro

wth

All sums in thousands EUR

Looking forward to working with you!Thank you!


strengthening the regulatory and supervisory capacity of the financial regulators

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