Journalof the - ASBA

Journal of the

Banking Supervisor Promoting Best Practices for Banking Supervision

43

In this Issue:

Research & Analysis

REGULATORY STABILITY AND THE ROLE OF SUPERVISION AND GOVERNANCE

Banking Supervision

Read more: http://goo.gl/vEQ8zV

Speech by Mr. Jaime Caruana, General Manager Bank for International Settlements. October 2015.

Contributions and News

“Proactive supervision can usefully complement regulation. In addition, effective prudential supervision requires assessing the appropriateness of a bank’s culture.”

ASBA Events

A

lthough regulation is important, supervision is critical in achieving financial and economic stability as well as restoring public trust in the financial system. Supervision plays three important functions: (i) It ensures consistent implementation of the rules; (ii) It deals with complexity, innovation, and continuous change; and (iii) It contributes to changes in behavior and culture. As the financial system undergoes constant evolution, any regulatory framework would face limitations. In response, challenges can be addressed through complementary and flexible supervisory tools, thus reducing the need for frequent rule changes. Proactive supervision can usefully complement regulation. In addition, effective prudential supervision requires assessing the appropriateness of a bank’s culture. Supervisors should set clear expectations for banks, engage in active dialogue about a bank’s culture and governance, as well as assess the effectiveness of bank’s frameworks and processes.

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ASSOCIATION OF SUPERVISORS OF BANKS OF THE AMERICAS

RESEARCH & ANALYSIS

CHANGES IN FUNDING PATTERN BY LATIN AMERICAN BANKIN SYSTEMS: HOW LARGE? HOW RISKY? In this Issue:

Research & Analysis Banking Supervision

Contributions and News ASBA Events

Liliana Rojas-Suárez and José María Serena Bank of Spain. 2015. Read more: http://goo.gl/9w7KXD

The authors found that all types of Latin American groups significantly increased their issuance of external debt securities. The recent increase in banks’ external indebtedness has not resulted in financial difficulties given the low debt to liabilities ratio before the crisis, as well as solid solvency and improved supervisory capacity. However, an early assessment of the risks shows the emergence of signs of vulnerability. For example, some banking groups have increased their external debt through reliance on wholesale funding. In addition, rollover risks have significantly increased for Latin American banking groups considering a context of major uncertainties in international capital markets, this risk is especially noticeable in Brazil an Chile. Finally, the large increase in banks’ external debt might have contributed to reducing resilience of central banks to deal with severe adverse shocks.

TRENDS IN CRYPTO-CURRENCIES AND BLOCK-CHAIN TECHNOLOGIES: A MONETARY THEORY AND REGULATION PERSPECTIVE Gareth W. Peters, Efstathios Panayi, and Ariane Chapelle August 2015. Read more: http://goo.gl/kIXdMH

The internet era has generated the need for low cost, anonymous, and rapidly verifiable transactions to be used for online barter, and fast settling money has emerged as a result. E-money has mainly fulfilled this role, but the last few years have seen two new types of money emerge. Centralized virtual currencies, usually for the purpose of transacting in social and gaming economies, and crypto-currencies, which aim to eliminate the need for financial intermediaries by offering direct peer-to-peer online payments. The authors describe the historical context which led to the development of these currencies, and some recent trends related to their usage in the real economy and as investment products. As these currencies are purely digital constructs, with no government or local authority backing, the authors discuss them in the context of monetary theory, in order to determine how they may be have value under each. Finally, the paper provides an overview of the state of regulatory readiness in terms of dealing with transactions in these currencies in various regions of the world.

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RESEARCH & ANALYSIS

BETWEEN CAPTURE AND DISCRETION - THE DETERMINANTS OF DISTRESSED BANK TREATMENT AND EXPECTED GOVERNMENT SUPPORT In this Issue:



Magdalena Ignatowski, Charlotte Werger, and Josef Korte European Central Bank. August 2015. Read more: http://goo.gl/3cK6R7

This paper analyzes how sources of political influence relate to the actual regulatory treatment of distressed banks and to the expectation of bank support provided by the government. The authors utilize a dataset linking U.S. banks’ sources of influence (e.g., lobbying expenditures, proximity to the relevant legislative committee, prior affiliation with regulatory or government institutions) to bank financial data, actual bank supervisory actions, and market-inferred expected government support. This data is analyzed to show how regulatory decision making is affected by these sources of influence. The findings suggest that banks’ influence matters for the regulatory treatment of distressed banks, as well as for the expectation of support regardless of bank distress. Several conditions increase the effectiveness of sources of influence in actual regulatory treatment. In fact, lobbying activities are more effective with increasing lobbying expenditures, deteriorating capital ratios, and with the aid of former politicians.

IDENTIFYING EARLY WARNING INDICATORS FOR REAL ESTATE-RELATED BANKING CRISES Stijn Ferrari, Mara Pirovano, and Wanda Cornacchia European Systemic Risk Board. August 2015. Read more: http://goo.gl/j6XWte

This paper presents an statistical evaluation of potential early warning indicators for real estate-related banking crises. The results in this paper provide an analytical underpinning for decision-making based on guided discretion with regard to the activation of macro-prudential instruments targeted to the real estate sector. This paper highlights the important role of both real estate price variables and credit developments in predicting real estate-related banking crises. The results indicate that, in addition to cyclical developments in these variables, it is crucial to monitor the structural dimension of real estate prices and credit. Macroeconomic and market variables such as the inflation rate and short-term interest rates may add to the early warning performance of these variables. Overall, the findings indicate that combining multiple variables improves early warning signaling performance compared with assessing each indicator separately.

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BANKING SUPERVISION

AN UPDATE ON THE WORK OF THE BASEL COMMITTEE In this Issue:



Speech by Mr. Stefan Ingves, Chairman of the Basel Committee on Banking Supervision Bank for International Settlements. October 2015. Read more: https://goo.gl/kQU86v

Mr. Ingves’ speech covers the Basel Committee’s future work agenda. In general terms, the Committee’s policy agenda will cover the following topics: (i) finalizing the post-crisis regulatory reforms, including the revision of the standardized approach for credit risk, as well as operational risk; (ii) revising the risk-based capital framework, in particular the Committee’s aim is to reduce the excessive variability in risk-weighted assets (RWAs) under internal models; and (iii) monitoring the impact of the agreed reforms to assess whether the standards have been implemented consistently and to strengthen supervision.

CAPITAL REGULATION ACROSS FINANCIAL INTERMEDIARIES Speech by Mr. Daniel K. Tarullo, Member of the Board of Governors of the Federal Reserve System Bank for International Settlements. September 2015. Read more: http://goo.gl/3Cl5E4

The recent regulatory reform has been focused on strengthening the quantity and quality of capital held by banks. However, the crisis also exposed weaknesses in other financial intermediaries that carried systemic implications. The question then is whether nonbank financial intermediaries should be subject to capital regulations developed by the BCBS. The speaker proposes that the liability side of an intermediary’s balance sheet should determine the form and stringency of capital regulation. The significant shifts in the nature and scope of an intermediary’s liabilities may provide reasons for varying applicable capital regulation among firms that are primarily identified as a particular type of intermediary. In fact, the Basel framework itself might benefit by further differentiation of capital and liquidity requirements based on the liability structures of firms.

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BANKING SUPERVISION

“BUT WE ARE DIFFERENT!”: 12 COMMON WEAKNESSES IN BANKING LAWS, AND WHAT TO DO ABOUT THEM In this Issue:



Wouter Bossu and Dawn Chew International Monetary Fund. September 2015. Read more: http://goo.gl/adCHMX

This paper highlights common weaknesses in banking legislation and introduces solutions to them, by focusing on a selected set of legal policy principles. Well-designed banking laws are critical for regulating the market access and operations of banks, as well as their removal from the market in case of failure. While at a financial policy level there is a broad consensus as to the content of banking laws, from a legal perspective their drafting often leaves something to be desired. In spite of what is often argued, the types of weaknesses of banking laws are hardly country-specific; several banking laws face the same weaknesses in their legal framework. Some of the selected topics include: scope and definitions, the supervisory mandate, the legal nature of secondary regulatory instruments, licensing requirements, the distinction and relationship between licensing criteria and ongoing requirements, corporate governance, and the power to control changes in ownership, among others.

SUPERVISION OF BANKS AND NONBANKS OPERATING THROUGH AGENTS Consultative Group to Assist the Poor. August 2015. Read more: http://goo.gl/lvzOHI

Supervisors are challenged to build regulatory and supervisory frameworks that maintain financial stability and reduce the risk of money laundering and financing of terrorism across bank and nonbank providers that use agents, while protecting consumers and pursuing the objective of financial inclusion. Supervisors consider that the major agent-related risks fall under consumer, operational, and money-laundering/terrorist-financing (ML/TF) risk. As for consumer risk, some of the concerns relate to fraud, unauthorized fees, lack of receipts, inadequate dispute resolution procedures, and insufficient liquidity at agent premises. In terms of operational risk, the concerns are associated to IT continuity, contingency planning, and the internal controls of the financial institution. ML/TF risk was also raised as an issue, but was far more country-specific relative to the other risks.

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BANKING SUPERVISION

A CLEAR DIRECTION Alejandro Werner International Monetary Fund. September 2015. In this Issue:



Read more: http://goo.gl/H9jjZL

After five years of declining growth, Latin America is facing its slowest growth in a decade and a half. Some of the causes that affect confidence include: a lack of policy direction now that the commodity boom is over, uncertainty about potential new sources of growth, as well as political crises associated with a growing middle class and episodes of corruption. Stronger policy frameworks and structural reforms are necessary to support recovery, but political leaders may have to take additional steps to strengthen governance, transparency, and the rule of law. Restored confidence is essential to reversing declining growth. In addition, political leaders must take charge, explaining priorities clearly and seeking support for hard choices through social dialogue.

GLOBAL FINANCIAL STABILITY REPORT: VULNERABILITIES, LEGACIES, AND POLICY CHALLENGES - RISKS ROTATING TO EMERGING MARKETS THROUGH AGENTS International Monetary Fund. October 2015. Read more: http://goo.gl/lQDWQr

While financial stability in advanced economies has improved, risks remain high for emerging markets. The IMF identifies three main challenges in the global financial outlook: emerging market vulnerabilities, legacy issues from the crisis in advanced economies , and weak systemic market liquidity. Recent market developments including, the downtrend in commodity prices, the bursting of China’s equity bubble, pressure on exchange rates, and the prospect of the U.S. Federal Reserve raising interest rates further accentuates the identified challenges. Without the implementation of policies to ensure successful normalization, potential shocks may rise leading to a global market disruption and a sudden drying up of market liquidity.

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BANKING SUPERVISION

COLLATERAL DAMAGE: DOLLAR STRENGTH AND EMERGING MARKETS’ GROWTH In this Issue:



Pablo Druck, Nicolas E. Magud, and Rodrigo Mariscal International Monetary Fund. July 2015. Read more: http://goo.gl/h0XhCo

In this paper, the authors show that U.S. dollar appreciation cycles mitigate the impact on real GDP growth in emerging markets. These effects hold despite potential opposite effects resulting from the relative currency depreciation of emerging market economies. The paper also illustrates a negative effect on emerging markets’ growth of U.S. interest rates beyond the effects of the U.S. real exchange rate and real GDP growth. Considering the external environment at the time of writing, emerging markets’ growth is expected to remain subdued reflecting, among other things, the expected persistence of a strong dollar and the anticipated increase in U.S. interest rates.

ASBA Events

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CONTRIBUTIONS AND NEWS FROM OUR MEMBERS Guarantee Fund

Autoridad de Supervisión del Sistema Financiero Bolivia

In this Issue:



http://goo.gl/DHpWYf (Text in Spanish)

Colombia Advances in Corporate Governance Superintendencia Financiera de Colombia

http://goo.gl/vwQA8O (Text in Spanish)

Financial Vulnerability Index: Private Banking System Superintendencia de Bancos del Ecuador

http://goo.gl/RbLP6Z (Text in Spanish)

What Drives Bank-Intermediated Trade Finance? Evidence from Cross-Country Analysis Bank of Spain

http://goo.gl/D6ZquF

Securitization and Asset Prices Bank of Spain

http://goo.gl/TQHbeX

Credit Bureaus for Decision Making Superintendencia de Bancos Guatemala

http://goo.gl/afertT (Text in Spanish)

Research and Regulatory Amendments Comisión Nacional Bancaria y de Valores Mexico

http://goo.gl/udrKgB (Text in Spanish)

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CONTRIBUTIONS AND NEWS FROM OUR MEMBERS Supervisory Insights - Summer 2015 Federal Deposit Insurance Corporation United States of America

http://goo.gl/WLfXHN

In this Issue:

Research & Analysis

Speech by Mr. Martin J. Gruenberg, FDIC Chairman Federal Deposit Insurance Corporation United States of America

http://goo.gl/G6utcq

Banking Supervision


Federal Reserve’s GSIB Capital Surcharge

Board of Governors of the Federal Reserve System United States of America

http://goo.gl/du29H2

FFIEC Cybersecurity Assessment Tool


http://goo.gl/OOXnG2

Bank Secrecy Act and Anti-Money Laundering Examination Manual


http://goo.gl/MqE4NF (Text in Spanish)

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ASBA EVENTS

INSTITUTIONAL EVENTS

In this Issue:

LXXIV ASBA´s Board of Directors Meeting October 27, 2015 Uruguay

Research & Analysis

X High Level Meeting October 28 - 29, 2015 Uruguay

Banking Supervision

XVIII Annual Assembly October 30, 2015 Uruguay


LXXV ASBA’s Board of Directors Meeting December 10 – 11, 2015 USA

ASBA Events

INTERNATIONAL PARTICIPATION FELABAN Annual Assembly November 14-17, 2015 USA

TRAINING Liquidity Risk Management November 2 - 6, 2015 Aruba Regional and Domestic Systemically Important Banks – Emerging Regulatory and Supervisory Approaches http://goo.gl/9sfpZ9 November 24 - 26, 2015 Brazil Banking Crisis and Resolutions http://goo.gl/I7kC8X November 30 - December 4, 2015 Guatemala Technology Risk Supervision http://goo.gl/rcs0A7 December 7 - 11, 2015 Peru

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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 [email protected] 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.