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International Association of Risk and Compliance
Professionals (IARCP)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.risk-compliance-association.com
Top 10 risk and compliance management related news stories
and world events that (for better or for worse) shaped the
week's agenda, and what is next
Dear Member,
According to Benjamin Lawsky,
superintendent of financial services at the
New York Department of Financial
Services (NYDFS), a bank's cyber security
is often only as good as the cyber security
of its vendors.
A survey of 40 banks by the NYDFS found
that fewer than half of the institutions
require any on-site assessments of their
third-party vendors.
Only 46% of the surveyed institutions are required to conduct pre-contract
on-site assessments of at least high-risk third-party vendors, while only
35% are required to conduct periodic on-site assessments of at least
high-risk third- party vendors.
Only about 30% of a banks surveyed require their third-party vendors to
notify them in an eventuality of an information confidence crack or other
cyber confidence breach”.
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This is definitely going to change.
Regulators in the USA and in Europe are developing new regulations
strengthening cyber confidence standards for banks’ third-party vendors.
Read more at Number 2 below.
We have another very interesting speech this week, by Dr Andreas
Dombret, Member of the Executive Board of the Deutsche Bundesbank. He
explains a very important problem in the European Union, and he is very
clear:
“The European monetary union is special in that it combines a single
monetary policy with national fiscal policies.
The monetary policy for the 19 countries of the euro area is decided by the
Governing Council of the ECB in Frankfurt.
However, the fiscal policies of the 19 euro-area member states are a matter
for the national policymakers - each country decides on its own government
revenues and expenditures.
This imbalance of responsibilities gives individual countries an incentive
to borrow - a "deficit bias" is built into the system.
This is because the negative consequences of borrowing are spread across
all the member states of monetary union - for example, by means of a
higher interest rate level for all of them.
Our objective should be to counter that "deficit bias" to ensure a stable
monetary union.
This can only be achieved by realigning responsibilities - liability and
control have to be in balance.
And one way to rebalance liability and control is deeper fiscal integration.
If we were to take this path, the European level would gain certain control
rights over national budgets.
This would amount to what is known as a fiscal union.
However, such a step would depend on the countries of the euro area
transferring national sovereignty to the European level.
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Giving up sovereignty in this way would be a radical change and require
wide-ranging changes to national and European legislation.
More than anything, such changes would need the support not only of
policymakers but also of the general public.
And on this point we need to be realistic.
I cannot identify any willingness to do that at present - not in Germany or in
any other country of the euro area.
This means that, for the foreseeable future, control of fiscal policy in
Europe will remain at the national level.
In this area, deeper integration still lies beyond the horizon.”
Read more at Number 3 below.
Welcome to the Top 10 list.
Best Regards,
George Lekatis
President of the IARCP
General Manager, Compliance LLC
1200 G Street NW Suite 800,
Washington DC 20005, USA
Tel: (202) 449-9750
Email: [email protected]
Web: www.risk-compliance-association.com
HQ: 1220 N. Market Street Suite 804,
Wilmington DE 19801, USA
Tel: (302) 342-8828
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The size of Central Bank
balance sheet - how relevant
(important) is it?
Speech by Mr Christian Noyer, Governor of the Bank of France and
Chairman of the Board of Directors of the Bank for International
Settlements, at the GIC (Global Interdependence Center)/Bank of France
annual seminar "New Policies for the Post Crisis Era"
“In all major economies, Central Banks' balance sheets have dramatically
increased in size and as a percentage of GDP.
That movement was temporarily reversed in the euro area, but our balance
sheet is set to increase again following the recently decided -and
implemented - asset purchase programs, most notably the Public Sector
Purchase Programme (PSPP).
Since 2007, the aggregate size of central banks' balance sheets over the
world has tripled, reaching the amount of 22 trillion dollars at the end of
2014.”
Update on Cyber Security in the Banking
Sector: Third Party Service Providers
April 2015
In May 2014, the New York State Department of
Financial Services (“the Department”) published a
report titled “Report on Cyber Security in the Banking Sector” that
described the findings of its survey of more than 150 banking organizations.
The report specifically highlighted the industry’s reliance on third-party
service providers for critical banking functions as a continuing challenge.
In light of the increasing number and sophistication of cyber attacks,
including recent breaches at both banks and insurers, the Department is
now considering, among other regulations, cyber security requirements for
financial institutions that would apply to their relationships with
third-party service providers.
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International Association of Risk and Compliance Professionals (IARCP)
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Looking to the future - what comes next in
terms of European financial integration?
Speech by Dr Andreas Dombret, Member of the
Executive Board of the Deutsche Bundesbank, at the
South African Institute for International Affairs,
Johannesburg
“A globalised economy offers huge potential to all its members.
Nevertheless, while we all share the benefits in good times, we also have to
share the burdens in bad times.”
Committee on the Global Financial System
Markets Committee
CGFS Papers No 53 - Central bank operating
frameworks and collateral markets
Collateral facilitates the intermediation of funds from
savers to borrowers and, hence, helps the financial
system allocate capital in support of real economic
activity.
The use of collateral has risen considerably in the aftermath of the financial
crisis, and may well increase further as risk management practices continue
to evolve and as financial institutions respond to regulatory changes.
In this environment, the design and implementation of central bank
operating frameworks is becoming more important for markets in assets
that also serve as collateral.
This is especially so, given the substantial footprint that key central banks
have left in such collateral markets, following their large-scale asset
purchases and use of other unconventional policy tools in recent years.
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Customer Due Diligence – use of smart
phone and tablet applications
Technology now offers the possibility of
collecting information and obtaining evidence of an individual’s identity in
new and different ways.
Accordingly, the Jersey Financial Services Commission (JFSC) has started
to consider what additional guidance may be needed in its AML/CFT
Handbooks in cases where wholly new concepts are used, such as the use of
smart phone and tablet applications to capture images of customers and
documents.
Bank Liabilities Survey
Developments in banks’ balance sheets are
of key interest to the Bank of England in its
assessment of economic conditions.
Changes in the price, quantity and composition of banks’ liabilities may
affect their willingness or ability to lend, and the price of lending.
The aim of this survey is to improve understanding of the role of bank
liabilities in driving credit and monetary conditions, complementing the
existing Credit Conditions Survey.
The first section provides information on developments in the volume and
price of bank funding, covering both wholesale market funding and
deposits from households and companies.
The second section covers developments in the loss-absorbing capacity of
banks as determined by their capital positions.
The third section provides information on the internal price charged to
business units within individual banks to fund the flow of new loans,
sometimes referred to as the ‘transfer price’.
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Enhancing financial inclusion through Islamic
finance
Keynote address by Mr Agus D W Martowardojo,
Governor of Bank Indonesia, at the IFSB International
Seminar "Enhancing Financial Inclusion through Islamic
Finance", Jakarta
“Having observed that providing greater financial access is very crucial in
delivering equitable opportunities to all segments in the society and
preserving more sustained economic development, I am pleased to observe
that Islamic finance has a great concern over having a better outreach in
delivering financial services.”
Increasing payment efficiency to improve
productivity
Keynote address by Mr Muhammad bin Ibrahim, Deputy
Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at the JomPAY's Official Launch Event, Kuala
Lumpur
In today's challenging and rapidly evolving world, one must constantly find
innovative and efficient ways to remain productive, or risk being left
behind.
As payments represent an indispensable activity for both individuals and
businesses, increasing payment efficiency through the adoption of
electronic payments (e-payments) will improve productivity and reduce the
cost of transactions.
At the macro level, the adoption of e-payments has the potential to enhance
Malaysia's overall economic efficiency and competitiveness.
The benefits in terms of cost savings and efficiency gains from a successful
migration to e-payments are substantial.
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Greek economy - current developments,
challenges and prospects
Speech by Mr Yannis Stournaras, Governor of the
Bank of Greece, at the Hellenic Observatory of the
London School of Economics, London
“I will share with you my thoughts on the prospects of
the Greek economy and I will focus on four issues:
First, the achievements so far during the difficult years of the economic
adjustment.
Second, current developments in the Greek economy and future challenges
and prospects, in view of the 20 February 2015 Eurogroup agreement and
the 20 March high level agreement between the Greek government and the
EU partners.
Third, the reasons why Grexit is not an option. Fourth, issues related to the
sustainability of Greek public debt.”
Fewer securitisations in 2014, but
institutional investment in securitisations
increased
In 2014, external investors bought EUR 10.3 billion worth of packaged
loans via new securitisations issued by financial institutions based in the
Netherlands (down 32% on 2013).
The total amount outstanding in such external securitisations in 2014 fell
5% to EUR 74 billion.
Dutch institutional investors in 2014 expanded their holdings of Dutch
securitisations by EUR 1.1 billion (up 23%).
The increase was largely concentrated with a small number of investors.
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International Association of Risk and Compliance Professionals (IARCP)
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The size of Central Bank
balance sheet - how relevant
(important) is it?
Speech by Mr Christian Noyer, Governor of the Bank of France and
Chairman of the Board of Directors of the Bank for International
Settlements, at the GIC (Global Interdependence Center)/Bank of France
annual seminar "New Policies for the Post Crisis Era"
1. A widespread increase in CB balance sheet
In all major economies, Central Banks' balance sheets have dramatically
increased in size and as a percentage of GDP.
That movement was temporarily reversed in the euro area, but our balance
sheet is set to increase again following the recently decided -and
implemented - asset purchase programs, most notably the Public Sector
Purchase Programme (PSPP).
Since 2007, the aggregate size of central banks' balance sheets over the
world has tripled, reaching the amount of 22 trillion dollars at the end of
2014.
Interestingly, this increase has been almost equally split between advanced
and emerging economies.
In advanced countries, Central Banks have acquired domestic assets.
On average, their balance sheets have grown from 10 to 20% of GDP over
the last seven years.
In emerging economies, accumulation of foreign exchange reserves
accounts for most of the expansion.
Situations remain very diverse among advanced economies: while the
balance sheet of the Bank of Canada amounts to 5% of its nation's GDP, the
Swiss National Bank holds assets equivalent to 80% of the Swiss GDP.
Discretionary and technical factors both explain those differences and
evolutions.
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The former holds for countries that choose to accumulate foreign exchange
reserves.
The latter is topical in the case of the euro area: the ECB's balance sheet
performs an intermediation function between National Central Banks
through the so-called Target 2 system.
So, as a mechanical phenomenon, balances in the system tend to grow in
times of market segmentation i.e. an impaired interbank market and strong
capital flows inside the euro area.
Similarly, conducting monetary operations via open market or via repos
makes the size of the balance sheet more or less dependent on the size of
the interbank market.
However, the recent increase in size mainly results from a shift in the
monetary policy regime.
Central Banks have taken a proactive - rather than purely passive approach to their balance sheets.
They have, according to the common parlance, "put these balance sheets to
work".
And, as a result, in the formulation of monetary policy, "quantities" - the
amounts of assets and liabilities - have come to play an increasing role as
compared to "prices" - the level of interest rates.
This, of course, is a component and a consequence of unconventional
monetary policies.
Traditional channels, - through interest rates- have become ineffective: first
of all because economies have hit the zero lower bound; and in some case,
like in the euro area, because transmission - through credit - has been
clogged.
The expansion of balance sheets results from attempts to overcome those
limits and allow monetary policies to fulfill their mandates via large scale of
assets purchases.
2. Is it the size of the balance sheet or the means of its increase
that matter?
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The causes and consequences of changes in balance sheets size are rather
diverse.
Broadly speaking, both liabilities and assets of Central Banks matter.
An expansion of liabilities occurs when, as the Eurosystem did in many
instances, the Central Bank increases liquidity provision to the banking
sector, with the explicit objective of easing pressures on funding, reducing
its costs, and ultimately, influence lending behavior.
Expansion of liabilities may be more passive though when setting an
exchange rate floor such as in the case of the SNB.
Looking, now, at the asset side, asset purchases bring down risk premia,
they trigger portfolio rebalancing, flatten the yield curve, increase risk
taking in the private sector and shift expectations in a more positive
territory.
As you all know, the Eurosytem has now embarked into a major purchase
program, the PSPP, that follows other programs of smaller sizes for
asset-backed securities (ABSPP) and covered bonds (CBPP3).
There are many technical discussions. Some people would argue that the
stocks of assets held by Central Banks matter more than the flows of
purchases.
Others would contend that the composition and size of purchases are the
real levers.
The issue boils down to whether an expansion in the monetary basis is
enough to trigger credit expansion or whether the latter is correlated to
banks willingness to expand credit and more importantly to the appetite of
economic agents to borrow.
Based on how monetary policies have been conducted for the past several
decades, banks have always had the ability to expand credit at a given level
of interest rate irrespective of the size of the Central Bank's balance sheet.
Being at the ZLB does not change that simple reality.
Hence I would tend to argue that, given the transmission channels of an
asset purchase program, its composition and length may matter as much as
its size.
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In any event, increasing the size of the Central Bank's balance sheet, via
large scale asset purchases, sends very important signals.
This "signaling" operates at several levels. It may contribute to
strengthening forward guidance on the policy rate.
More importantly, it may have a direct impact on inflation expectations,
therefore contributing to lowering real interest rates.
When the balance sheet size is explicitly linked to the achievement of an
inflation objective as in Japan, it may prove an effective tool to
communicate the monetary authority's determination - what economists
would call a "commitment device".
Signals on the Eurosystem's balance sheet have played a great role in the
recent past.
In November 2014, the Governing Council stated that the balance sheet was
expected to move toward the dimensions it had at the beginning of 2012.
Markets started to anticipate an asset purchase program.
More recently, the asset purchase program which will last until
end-September 2016 has been an important and clear signal of the
expansionary monetary policy stance over an extended horizon.
Those signaling effects have been very effective and following the
announcement of the expanded asset purchase program on 22 January,
significant movements took place on financial markets with, inter alia a
decline in the forward interest rates across all maturities, a decline in
government and corporate debt yields, and a rise in equity prices.
3. Are there drawbacks to be feared from the increase in CB
Balance sheets?
The active use of their balance sheets by major Central banks has raised a
number of concerns.
I shall focus on three questions.
First, when unconventional monetary policies started to be implemented,
many analysts were worried that the expansion of the monetary base would
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trigger inflationary pressures and Central Banks would lose control over
price stability.
As we all know, the reverse happened. Broad money aggregates have been
basically flat - in the euro area- over the last eighteen months, the money
multiplier collapsed and inflation has decreased well below our definition of
price stability.
Second, other, stronger, questions are raised as to the "quasi fiscal"
implications of Central Banks' balance sheets.
There is a perception that expanded balance sheets create a new
environment where the relationship between Central Banks and
governments gets more complicated.
Basically, the expansion would expose Central Banks to new risks, increase
their vulnerability and compromise their independence.
Third, there is a huge theoretical literature on Central Banks' solvency. I
read the conclusions as follows.
Nearly all analysts agree that a Central bank cannot go technically bankrupt
as it can issue as much currency and reserves as needed to face its payments
and commitments. Indeed, a few Central banks with great reputation have
operated in the past with negative net equity for long periods of time.
Most economists would point, however, that unlimited issuance of base
money would certainly endanger price stability in ordinary circumstances.
So, while the existence of a Central bank cannot be put into danger by its
technical insolvency, its ability to fulfill its mandate might certainly be
compromised.
And so would its independence as the Central bank would depend on the
Government to rebuild its capital.
It is very important to understand that the Eurosystem is fully protected
against such a contingency.
It has been created with a solid capital base and has kept strengthening it
through retained profits and occasional recapitalizations.
The Eurosytem is unique, in this regard, amongst advanced economies.
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Both its independence and ability to fulfill its mandate are guaranteed even
in very adverse economic circumstances.
While it should not lead to complacency and negligence, the existence of
such buffers should alleviate any concerns about the potential risks that the
expansion of the balance sheet may entail.
Finally, huge Central Banks' balance sheets may be seen as influencing the
allocation of resources, or effecting implicit fiscal transfers, an issue of
special sensitivity inside the euro area.
To discuss this question, it is useful to refer to the famous Musgrave
classification of public policies between three purposes: allocation,
distribution and stabilization.
There is no doubt that monetary policy is only and exclusively concerned
with stabilization - and a very focused part of it : price stability.
No monetary policy action should be taken for any other purpose.
So to the extent that "unconventional" tools are implemented, there should
be no ambiguity as to their close link with the Central Bank's mandate of
price stability.
I believe that has been the case in all major countries and certainly so in the
Eurozone.
4. How to mitigate unintended consequences?
The truth is, however, that the real world does not always fit perfectly with
the beauty of Musgrave's classification.
Some public policies may aim at several objectives.
Others may inadvertently, have unintended side effects.
All public policies with no exception, health, energy, infrastructures,
unwillingly affect some citizens more than others.
Those side effects should be minimized, but cannot always be totally
avoided.
Monetary policy is not immune from the complexity of the real world.
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For instance, some unconventional policies may have had unintentional
distributional consequences by pushing up asset prices, hence benefiting
some households with important financial wealth.
On the other hand, fostering economic recovery and reducing
unemployment goes in the direction of helping the most vulnerable part of
the population.
In other cases, strong intervention may raise legitimate moral hazard
concerns.
Should Central Banks have refrained from acting at the risk of not fulfilling
their mandate?
Those simple questions remind us that decision making always involves
some tradeoffs.
It is all the more important that policy makers keep a clear focus on their
ultimate objective.
Central Banks should do their utmost to avoid any undesirable allocation or
distribution effects of their policies.
Those policies should be designed as neutrally as possible.
This being said, the possibility of unintended side effects should not
paralyze decision making when required by the situation in order to fulfill
their mandates.
The Eurosystem has faced such a situation when deciding on its program of
large-scale asset purchases.
I believe the decisions taken reflect an appropriate balance between the
necessity of achieving the mandate and the desire to avoid undesirable side
effects.
Key principles underlying the implementation of the PSPP have been the
minimization of unintended consequences and full neutrality, as illustrated
for instance by the choice of the capital key to allocate purchases between
various Governments debts.
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It is also important to note that unwanted side effects can be minimized if
different public authorities operate in a well-defined and respected
framework.
We have such a framework in the Eurozone.
It is based on fiscal discipline leading to debt reduction.
If those disciplines are not respected or implemented with insufficient
vigilance, then monetary policy through public sector debt securities
purchases may be perceived as creating strong moral hazard, thereby
weakening the necessary consensus and compromising its efficiency.
When fiscal transfers take place between countries of the Eurozone, they
are implemented through mutually agreed and conditional programs.
There are permanent temptations to blur the distinction between those
fiscal programs and the monetary and liquidity operations of the Central
Bank.
Those temptations should be resisted.
This is the reason why the Eurosystem has been extremely rigorous in
implementing its collateral rules in a transparent and neutral way.
Let me conclude.
Unconventional monetary policies are necessary but complex.
They create more interference with markets than policies conducted in
ordinary times.
As a consequence, it becomes more difficult to avoid unintended spillovers
of stabilization policies on the allocation and distribution of resources.
This reality should not prevent Central Banks from acting decisively when
there are risks for price stability.
But such actions demand rigor and precision in their implementation.
For Central Banks, their balance sheet has become the main tool of
monetary policy for the foreseeable future. It has proven effective.
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It can and will be deployed all the more efficiently that the rest of the policy
environment remains sound.
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Update on Cyber Security in the Banking
Sector: Third Party Service Providers
April 2015
I.
Introduction
In May 2014, the New York State Department of Financial Services (“the
Department”) published a report titled “Report on Cyber Security in the
Banking Sector” that described the findings of its survey of more than 150
banking organizations.
The report specifically highlighted the industry’s reliance on third-party
service providers for critical banking functions as a continuing challenge.
In light of the increasing number and sophistication of cyber attacks,
including recent breaches at both banks and insurers, the Department is
now considering, among other regulations, cyber security requirements for
financial institutions that would apply to their relationships with
third-party service providers.
In connection with that effort, the Department sent a letter in October 2014
to 40 regulated banking organizations requesting information about the
practices currently in place surrounding the management of their
third-party service providers.
After reviewing the responses (which included relevant policies and
procedures), the Department noted a number of common issues and
concerns and has drafted this update to the May 2014 report to highlight
the most critical observations.
The October 2014 letter asked for information about due diligence
processes, policies and procedures governing relationships with third-party
vendors, protections for safeguarding sensitive data, and protections
against loss incurred due to third-party information security failures.
For the purposes of this report, banking organizations have been
categorized as “small” (assets < $100 billion), “medium” (assets between
$100 and $1 trillion), and “large” (assets > $1 trillion).
Additionally, the Department asked each of the surveyed banking
organizations to describe any steps it has taken to adhere to the Framework
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for Improving Critical Infrastructure Cybersecurity issued by the U.S.
Commerce Department’s National Institute of Standards and Technology
(“NIST”) on February 12, 2014 concerning third-party stakeholders.
The NIST framework is generally viewed as a set of baseline principles for
cybersecurity.
Interestingly, while the overwhelming majority of the respondents stated
that they had taken or were taking steps to incorporate NIST principles, the
application of those principles may vary across institutions, described in
more detail below.
II.
A.
Observations
Due Diligence Processes
The Department asked each banking organization to describe any due
diligence processes used to evaluate the adequacy of information security
practices of third-party service providers.
All but one of the surveyed banking organizations classify their third-party
service providers by risk and 95% of the surveyed banking organizations
conduct specific information security risk assessments of at least their
high-risk vendors.
Banking organizations typically classify any vendors with access to sensitive
bank or customer data as high-risk, material, and/or critical.
Examples of third-party vendors that were classified as high-risk or
material include check/payment processors, trading and settlement
operations, and data processing companies.
However, some banking organizations have exemptions from their
customary due diligence for individual consultants and professional service
providers (e.g., legal counsel).
Examples of third-party vendors that were classified as low-risk include
providers of office supplies, printing services, food catering, and janitorial
services.
Ninety percent of the banking organizations surveyed have information
security requirements for their third-party vendors, although the nature
and specificity of these requirements vary.
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Some large institutions set forth specific requirements, including data
encryption, access controls, data classification, and business continuity and
disaster recovery plans, while other institutions (both large and small)
merely require compliance with more general information security
standards.
While nearly all of the surveyed banking organizations have policies and
procedures that require reviews of information security practices both
during vendor selection and as part of their periodic review, fewer than half
of the institutions surveyed require any on-site assessments of their
third-party vendors, as illustrated in Table 1.
Only 46% of the surveyed institutions are required to conduct pre-contract
on-site assessments of at least high-risk third-party vendors, while only
35% are required to conduct periodic on-site assessments of at least
high-risk third- party vendors.
B. Policies and Procedures Governing Relationships with
Third-Party Service Providers
The Department asked each banking organization to provide a copy of any
policies and procedures governing relationships with third-party service
providers that address information security risks, including setting
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minimum information security practices or requiring representations and
warranties concerning information security.
All of the institutions surveyed have written vendor management policies,
and all but three have written procedures for selecting third-party vendors.
Most of these policies appear to have been written and/or updated within
the last several years.
Most of the institutions surveyed require third-party vendors to represent
that they have established minimum information security requirements,
although 21% of them do not, as illustrated in Table 2.
Only 36% of the surveyed banking organizations require those information
security requirements to be extended to subcontractors of the third-party
vendors.
Most of the surveyed banking organizations require the right to audit their
third party vendors, although 21% of them do not.
Nearly half (44%) of the institutions do not require a warranty of the
integrity of the third-party vendor’s data or products (e.g., that the data and
products are free of viruses).
Larger institutions are more likely to require such warranties than small
and medium-size institutions, as illustrated in Table 3.
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Thirty percent of the banking organizations surveyed do not appear to
require their third-party vendors to notify them in the event of an
information security breach or other cyber security breach.
C.
Protections for Safeguarding Sensitive Data
The Department asked each institution to describe any protections used to
safeguard sensitive data that is sent to, received from, or accessible to
third-party service providers, such as encryption or multi-factor
authentication.
Ninety percent of the surveyed banking organizations utilize encryption for
any data transmitted to or from third parties.
However, only 38% of the surveyed institutions (50% of large institutions)
use encryption for data “at rest.”
Seventy percent of the surveyed institutions require multi-factor
authentication (“MFA”) for at least some third-party vendors to access
sensitive data or systems.
However, the surveyed foreign banks (primarily large institutions) require
MFA much more than large or small domestic institutions.
When used, MFA is primarily required for third-party vendors that
remotely access sensitive data or banking systems, either on computers or
portable devices.
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D. Protections against Loss Incurred by Third-Party
Information Security Failures
The Department asked each banking organization to list any and all
protections against loss incurred as a result of an information security
failure by a third-party service provider, including any relevant insurance
coverage.
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Sixty-three percent of the surveyed institutions (78% of large institutions)
informed the Department that they carry insurance that would cover cyber
security incidents.
However, only 47% of the surveyed institutions reported having cyber
insurance policies that explicitly cover information security failures by a
third-party vendor.
Only half of the banking organizations surveyed require indemnification
clauses in their agreements with third-party vendors
V. Conclusion
Based on the responses that the Department received, banking
organizations appear to be working to address the cyber security risks
posed by third-party service providers, although progress varies depending
on the size and type of institution.
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Looking to the future - what comes next in
terms of European financial integration?
Speech by Dr Andreas Dombret, Member of the
Executive Board of the Deutsche Bundesbank, at the
South African Institute for International Affairs,
Johannesburg
1. Introduction
Ladies and gentlemen
Thank you for inviting me to speak at the South African Institute for
International Affairs.
I appreciate the Institute's objective of conducting evidence-based policy
research as part of an international dialogue.
It is therefore a great pleasure to be here today to take part in and to
promote such an international exchange of ideas.
A dialogue is essential in the age of globalisation, in which countries are no
longer isolated but part of a closely interconnected community.
And this community consists of a growing number of countries.
Over the past decades, we have seen the emerging economies steadily being
integrated into the global economy.
And looking to the future, I firmly believe that the role played by emerging
economies will become greater still.
Your country is a prime example: South Africa plays a leading role in
Sub-Saharan Africa and is also a respected member of the G20, reflecting
its role in the world economy.
A globalised economy offers huge potential to all its members.
Nevertheless, while we all share the benefits in good times, we also have to
share the burdens in bad times.
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The global financial crisis has highlighted how closely the world has grown
together and how quickly a problem in one corner of the world can spread
around the globe.
This truth applies all the more to countries sharing a common currency
such as the member states of the Common Monetary Area here in southern
Africa or the euro area in Europe.
Let us take a closer look at the euro area and the challenges it is currently
facing.
Back in 1999, 11 European countries adopted the euro as their common
currency.
Today, the single currency is shared by 19 countries and more than 300
million people, which in my eyes makes it a success story.
That being said, it has not always been plain sailing.
In the wake of the global financial crisis of 2008, the euro area slid into a
financial crisis of its own.
This was compounded in 2010 when Greece entered into a sovereign debt
crisis, leading to other member states suffering a sudden loss in confidence,
which eventually brought the euro area to the brink of collapse.
Extensive rescue packages by the governments along with non-standard
measures taken by the European Central Bank helped to calm the markets
and prevented the crisis from escalating.
To some commentators, the current situation might look similar.
Greece's newly elected government objected to complying with the financial
assistance agreements and intended to withdraw some of the reforms that
had already been adopted.
There were even brief calls for further debt relief. However, after intense
negotiations among the finance ministers of the euro area, the Greek
government settled for requesting an extension of the current programme.
After the Greek government had also committed to pushing ahead with
economic and fiscal reforms, the finance ministers of the euro area
approved a four-month extension of the programme.
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The details of a new financial assistance programme need to be worked out
by summer.
Greece certainly needs further assistance from the rest of the euro area.
However, further assistance can only be granted if Greece continues with its
efforts to restore sound public finances and competitive economic
structures.
Some observers see these developments as an indication that financial
integration in Europe has failed.
I see these developments as an indication that financial integration in
Europe has to go further.
Let us take a look at three areas where further integration could be the way
forward for Europe.
2. Fiscal union - beyond the horizon
The first area is public finances.
And in order to understand the core of my argument, it is important to be
familiar with the particular features of the European monetary union.
The European monetary union is special in that it combines a single
monetary policy with national fiscal policies.
The monetary policy for the 19 countries of the euro area is decided by the
Governing Council of the ECB in Frankfurt.
However, the fiscal policies of the 19 euro-area member states are a matter
for the national policymakers - each country decides on its own government
revenues and expenditures.
This imbalance of responsibilities gives individual countries an incentive to
borrow - a "deficit bias" is built into the system.
This is because the negative consequences of borrowing are spread across
all the member states of monetary union - for example, by means of a
higher interest rate level for all of them.
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Our objective should be to counter that "deficit bias" to ensure a stable
monetary union.
This can only be achieved by realigning responsibilities - liability and
control have to be in balance.
And one way to rebalance liability and control is deeper fiscal integration.
If we were to take this path, the European level would gain certain control
rights over national budgets.
This would amount to what is known as a fiscal union.
However, such a step would depend on the countries of the euro area
transferring national sovereignty to the European level.
Giving up sovereignty in this way would be a radical change and require
wide-ranging changes to national and European legislation.
More than anything, such changes would need the support not only of
policymakers but also of the general public.
And on this point we need to be realistic.
I cannot identify any willingness to do that at present - not in Germany or in
any other country of the euro area.
This means that, for the foreseeable future, control of fiscal policy in
Europe will remain at the national level.
In this area, deeper integration still lies beyond the horizon.
3. Banking union - the reality of today
At this point in time, a fiscal union remains more of a vision than of a
concrete step to be taken anytime soon.
However, in another area, Europe has just taken a significant step towards
deeper integration.
On 4 November 2014, the European Central Bank assumed direct
supervision of the largest banks in the euro area - thereby erecting the first
pillar of a European banking union.
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As of today, this concerns 123 banks which together account for more than
80% of the aggregated balance sheet for the euro-area banking sector.
The European Central Bank has therefore become one of the world's largest
supervisors.
The banking union is certainly the biggest step towards financial
integration in Europe since the launch of the euro in 1999.
And to me, it is the most logical step to take.
Single monetary policy requires integrated financial markets - which
includes, without doubt, European-level banking supervision.
European banking supervision allows banks throughout the euro area to be
supervised according to the same high standards.
In addition, cross-border effects can be covered better through joint
supervision than by national supervisors.
And adding a European perspective to the national view puts more distance
between the supervisory authority and the entities it supervises.
This minimises the danger of supervisors getting all too close to their banks
and treating them with "kid gloves" out of national interest.
Meanwhile, a comprehensive banking union has to comprise more than just
an effective European banking supervision.
The second pillar of the banking union is a European resolution mechanism
to deal with future bank failures.
This mechanism will be in place from 2016 onwards.
If push comes to shove and a bank is no longer viable, shareholders and
creditors will be first in line to bear banks' losses, and taxpayers' money will
only be the very last resort.
This will realign incentives and make the entire banking system more
stable.
4. Capital markets union - the day after tomorrow?
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The European banking union is definitely a major step forward in designing
a better framework for the European monetary union.
However, Europe should broaden its view beyond the banking sector.
Consequently, the EU-Commission has proposed to establish a European
capital markets union.
Following monetary union and the banking union, this will be the third
major step of financial integration in Europe.
In essence, the European capital markets union has two objectives.
The first objective is to increase the share of capital markets in the funding
mix of the real economy.
The second objective is to integrate capital markets more closely across
borders.
Some people relate the first objective to the question of whether a capital
markets-based financial system is superior to a bank-based financial
system.
Well, to sum up the empirical evidence: it depends.
It depends on a number of factors and country-specific characteristics,
which makes it hard to provide a general answer.
Nevertheless, the recent crisis shed light on these issues from another
angle.
A system in which the real economy relies on a single source of funding will
most certainly run into trouble when that source dries up - regardless of
whether it is bank funding or capital market funding.
Therefore, it is not a question of "either/or".
The objective of the European capital markets union is not to abandon
bank-based funding but to supplement it with capital markets-based
funding.
And in Europe above all places there is ample room to do so.
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The European stock market is only 60% the size of the US stock market
when measured in relation to GDP.
Likewise, the European market for venture capital is 20% the size of the US
market, and for securitisations the percentage is even lower.
In the end, it comes down to the uncontested argument of diversification.
Increasing the share of capital markets will improve and broaden access to
funding particularly for small and medium-sized enterprises which form
the backbone of many European economies.
At the same time, it will improve the matching of investors to financial risk,
thereby increasing the efficiency of the financial system.
As a result, the financial system will be able to better support sustainable
economic growth.
The second objective of the European capital markets union is to improve
the integration of capital markets in the entire European Union.
One of the main arguments is that integrated capital markets can improve
private risk sharing.
The technical question is: to what degree does a shock to the economy affect
consumption?
Empirical studies for the United States show that integrated capital
markets cushion around 40% of the cyclical fluctuations among the US
federal states.
A share of around 25% is smoothed via the credit markets, while fiscal
policy cushions 10-20% of shocks.
Altogether, around 80% of a given economic shock is absorbed before it can
affect consumption. Studies for Canada yield similar results.
In Europe, the picture looks different.
Here, it is mainly credit markets that cushion economic shocks - and they
are not very effective in doing so.
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Altogether, only around 40% of a given shock is absorbed before it can
affect consumption.
Increasing the share of capital markets and integrating them across borders
would therefore help improve risk sharing in Europe and reduce the
volatility of consumption.
To be sure, the argument for a capital markets union is straightforward, but
implementation will be much less so.
The capital markets union is a complex undertaking affecting many
different areas. Consequently, the European Commission has presented a
wide range of suggestions and steps to be taken.
Nevertheless, I firmly believe that Europe should embark on the path
towards a capital markets union in order to enhance the stability and
prosperity of its economy.
5. Conclusion
Ladies and gentlemen
George Washington is credited with having written, more than two
centuries ago in a letter to a friend, that a United States of Europe would
come into being.
This is certainly a bold vision aiming at an encompassing political
integration.
In my speech today, I have taken a more modest approach and argued from
an economic point of view.
I have highlighted three areas where deeper integration might help to
enhance the stability of monetary union.
The first area is public finances, although a European fiscal union is
currently a rather unrealistic vision.
The second area is the banking system, and here we have taken a major step
towards integration - in November 2014, the banking union became a
reality.
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The third area is capital markets. Looking to the future, I consider a capital
markets union another project that would contribute to enhancing the
stability of the European economy.
To be sure, these are all big steps, but in my view they are worth taking. A
stable monetary union will eventually benefit all member states and also
the rest of the world.
Thank you.
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Committee on the Global Financial System
Markets Committee
CGFS Papers No 53 - Central bank operating
frameworks and collateral markets
Report submitted by a Study Group established by
the Committee on the Global Financial System and
the Markets Committee
Preface
Collateral facilitates the intermediation of funds from savers to borrowers
and, hence, helps the financial system allocate capital in support of real
economic activity.
The use of collateral has risen considerably in the aftermath of the financial
crisis, and may well increase further as risk management practices continue
to evolve and as financial institutions respond to regulatory changes.
In this environment, the design and implementation of central bank
operating frameworks is becoming more important for markets in assets
that also serve as collateral.
This is especially so, given the substantial footprint that key central banks
have left in such collateral markets, following their large-scale asset
purchases and use of other unconventional policy tools in recent years.
Against this background, in November 2013, the Committee on the Global
Financial System (CGFS) and Markets Committee (MC) jointly established
a Study Group on central bank operating frameworks and collateral
markets (chaired by Timothy Lane, Bank of Canada) to explore whether
and how the design of central banks’ operational frameworks influences
private collateral markets, including collateral availability, pricing, market
practices, and resilience.
This report presents the Group’s findings. It highlights the complex
interrelationship between operational frameworks of central banks and
markets for collateral.
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Central banks influence markets for collateral through either the supply of
assets available for use as collateral (a scarcity channel), the pledgeability of
assets in private transactions (a structural channel), or both.
In addition to the fundamental choice of the monetary policy
implementation framework, central banks’ policy parameters include
numerous dimensions, such as asset eligibility, haircuts and counterparty
access policy.
Hence, while being constrained by their mandates and legal frameworks,
they have a variety of design choices to influence collateral markets as well
as to fine-tune the effects of their operations for these markets.
We expect that the report, and the metrics and tools described therein, will
facilitate coherent and meaningful discussions among central banks of their
operational frameworks and of any impact that changes to these
frameworks may have on collateral markets.
William C Dudley
Chair, Committee on the Global Financial System President, Federal
Reserve Bank of New York
Guy Debelle
Chair, Markets Committee
Assistant Governor, Reserve Bank of Australia
Executive summary
Collateral markets have become increasingly important as demand for
collateral assets has increased in recent years, driven by changing market
practices and an evolving regulatory landscape.
In this environment, the design and implementation of central bank
operating frameworks has gained importance for collateral markets, as
central banks’ operational choices can affect these markets in a variety of
ways, both intentionally and unintentionally, and vice versa.
The potential effects of central bank operations on collateral markets are
more important than ever, given the substantial footprint many central
banks have left in markets for assets that also serve as collateral, following
their large scale asset purchases and use of other unconventional policy
tools over recent years.
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Central bank operations are, in essence, asset swaps which alter the mix of
assets available for use by private market participants.
For example, a central bank that is providing liquidity to the financial
system will typically either take collateral or purchase assets outright – so
that, in either case, the central bank liquidity provided may be partly offset
by a reduction in the stock of assets available for use as collateral in private
transactions, such as repurchase agreements.
Whether such effects on collateral markets are likely to be material depends
on the size of these operations in relation to the markets for collateral assets
and on whether financial market participants are constrained by the
collateral available, as well as on a number of features of the financial
system.
Thus, these effects have the potential to become more important, due to any
greater scarcity of collateral assets stemming from the global financial crisis
and resulting regulatory changes.
Central banks have a number of design choices at their disposal that can
influence markets for collateral – either through the supply of assets
available for use as collateral, the pledgeability of various assets as
collateral for private transactions, or both.
In addition to the choice of monetary policy instrument and the operational
parameters (scale, term, etc) of their transactions, these design choices
include eligibility policy, haircuts and other terms and conditions, as well as
counterparty access policy.
In many cases, these choices are assigned to other objectives, notably
central bank risk management; but they may be – and in some cases have
been – used deliberately to support the functioning of collateral markets.
Examples include the loosening of eligibility criteria by the Eurosystem
during the recent euro area sovereign debt crisis, as well as the various
support programmes implemented by the US Federal Reserve to support
collateral markets at the height of the financial crisis.
To examine this set of issues, the report first provides a broad conceptual
framework for the analysis of such changes that distinguishes two main
channels of impact: scarcity effects and structural effects.
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Drawing on a range of sources, including case studies as well as surveys and
interviews with private market participants, it then examines the effects of
different central bank choices on collateral markets.
The report also suggests a number of metrics and other practical tools that
might be useful as central banks assess how markets for collateral assets are
influenced by their operational choices.
To help clarify the impact of central bank operations on collateral markets
in conceptual terms, the report also distinguishes two different policy
regimes: normal times versus times of stress.
In normal times, when central banks tend to operate at the margin and on a
limited scale, they typically set the features of their operating framework to
be market-neutral.
Beyond the intended effect on interest rates or asset prices, the impact of
operations on collateral markets as such will thus tend to be small.
Even so, central banks may of course decide to take targeted action to
influence collateral markets even under such normal market conditions.
Crisis times, on the other hand, are associated with greater scarcity of
collateral in the financial system, as declining market confidence prompts a
shift from unsecured to secured financing.
Under such conditions, central banks may operate on a much larger scale,
in some instances also inducing unintended side effects on collateral
markets that have to be managed.
Moreover, they are more likely to attempt to directly influence the
functioning of collateral markets, for example by introducing facilities that
allow banks to post illiquid collateral assets in place of liquid securities that,
in turn, can be used to obtain funding in the private market.
In this light, the effects of central bank operations on collateral markets
should be monitored carefully, particularly in connection with
unconventional monetary policies and the eventual exit from those
policies.
Once central banks start to normalise their monetary policies, they will
need to consider the implications for collateral markets of different tools
available for use in that process.
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The report also assesses the menu of available policy instruments that can
influence collateral markets.
Among other things, it suggests that, to prepare for any crisis response,
some aspects of operational frameworks may need to be examined.
This includes the adequacy of available inventories of collateral assets and
of central banks’ risk management capabilities in stressed financial
conditions.
Introduction
Collateral plays a key role in supporting the allocation of funds necessary to
support real economic activity.
The importance of these markets has risen considerably in recent years, as
demand for collateral assets has increased.
The use of collateral in financial transactions, and particularly in bank
funding operations, has grown in many jurisdictions in the aftermath of the
financial crisis, and may well increase further as risk management practices
continue to evolve and as financial institutions respond to regulatory
changes.
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In this environment, the design and implementation of central bank
operating frameworks has gained importance for collateral markets.
This is especially so, given the substantial footprint many central banks
have left in markets for assets that also serve as collateral, following their
large-scale asset purchases and use of other unconventional policy tools
over recent years (see Graph 1).
As monetary policies normalise and central banks start to shrink their
footprint in financial markets, collateral markets are sure to be affected.
More generally, in both normal and crisis times, central bank operational
frameworks and collateral policies influence asset markets, private sector
collateral practices and private sector risk management.
It is therefore important to understand these interrelationships in order to,
inter alia, inform future policy development.
To facilitate a better understanding of the impact of central bank operations
on collateral markets, the Committee on the Global Financial System
(CGFS) and the Markets Committee (MC) jointly decided in November
2013 to establish a Study Group, chaired by Timothy Lane (Bank of
Canada).
The Group was asked to explore whether and how the design of central
banks’ operational frameworks influences private collateral markets,
including collateral availability, pricing, related market practices, and
market performance under stress.
This report documents the Group’s findings, which are based on
information from a range of sources, including central bank case studies as
well as surveys and interviews with private sector participants in collateral
markets.
The report aims to facilitate coherent and meaningful discussions among
central banks of their operational frameworks and of any impact that
changes to these frameworks may have on collateral markets.
It is organised as follows.
Chapter 2 develops a broad framework for the assessment of how central
bank policy choices may affect collateral markets.
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Specific features of central bank operating frameworks, and how changes to
these features may impact collateral markets, are examined in
Chapter 3, which also proposes a number of metrics and similar tools that
can help central banks assess the impact that different policy choices may
have on collateral markets.
The final section discusses possible policy implications in the form of some
high-level messages.
Conceptual framework
This section addresses key issues related to the impact of central bank
operating frameworks on collateral markets.
First, it is useful to define what collateral markets are and to discuss what
central banks do, what their operating frameworks encompass, and whom
they interact with.
This provides some insight on central bank actions and how central bank
motives and behaviour may differ across advanced and emerging market
economies (EMEs).
Given this background, it is possible to develop a broad framework for the
assessment of how central bank policy choices may affect collateral
markets.
In doing so, it is recognised that central bank operations influence collateral
markets through a scarcity channel reflecting the change in collateral
availability or collateral composition and through a structural channel
reflecting changes in the underlying structure of collateral markets.
Defining collateral markets
Collateral assets are any assets that can be used by financial market
participants to collateralise a creditor’s claim in normal market conditions,
as well as any other assets that are likely to be used as collateral in a
stressed environment.
A collateral market is then simply a market that involves collateral assets.
Pledgeability. It is useful to think about collateral assets as a subset of all
financial assets, with their key defining feature being market participants’
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ability to pledge them against borrowed funds.
Different collateral assets may have different degrees of pledgeability,
which measures the quantity of collateral services an asset provides.
Total pledgeability can then be thought of as the product of two
components: first, the total size of a given collateral market; second, the
extent to which each individual unit of collateral can be used to generate
funding.
Changes in central bank operating frameworks can obviously affect either
or both of these components.
Collateral asset features. Whether or not assets may serve as collateral
depends not only on features of the assets themselves – the fact that they
are clearly identifiable, for example, reduces operational and legal risk –
but also on the willingness of market participants to accept or reject these
assets as collateral.
Such decisions depend on the assessment of other risks associated with the
assets, including credit and liquidity risks.
The definition of what is or is not a collateral asset can therefore in part be
endogenous to evolving market practice.
Thus the categorisation of any particular asset as collateral may vary with
time, jurisdiction and across market participants.
To be pledgeable, an asset must typically be relatively easy to value and
amenable to legal segregation.
Moreover, marketable assets tend to have a higher degree of pledgeability
than non-marketable ones. Government debt, for example, commonly
serves as collateral for repo transactions for both the private sector and
central banks.
Central bank eligibility. Collateral assets also include assets that are used as
collateral by the central bank.
These assets may or may not be used by private market participants as
collateral.
Typically, in “normal” times, many central banks tend to accept only a
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subset of the collateral used in private transactions for their regular
refinancing operations.
Equities, for example, are used as collateral assets by the private sector but
are not generally acceptable in central bank operations.
As discussed above, assets accepted as collateral in private transactions, in
turn, are a subset of all available assets.
In crisis times, collateral acceptance typically becomes more conservative in
private markets, and the pool of assets deemed suitable as collateral shrinks
as the perceived risk of assets and counterparties rises.
Central banks, on the other hand, often find that they need to expand the
range of assets eligible as collateral during crises so that they can provide
sufficient liquidity to the economy, and/or for financial stability purposes.
For example, individual credit claims against debtors from the
non-financial corporate sector may in exceptional circumstances be used as
collateral with the central bank (for some central banks also during normal
times).
These claims can also be securitised and then either posted to the central
bank or used in private collateral markets.
The latter includes residential mortgage-backed securities (RMBS) and
other asset-backed securities (ABS).
In sumary, collateral assets are assets that can be accepted as collateral by
the private sector, and/or eligible assets at the central bank.
The size of this pool of assets depends on features of the assets themselves,
decisions of important market participants (including the central bank),
exogenous factors (such as the size of government debt markets), and
whether markets are functioning normally or not.
To read more: http://www.bis.org/publ/cgfs53.pdf
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Customer Due Diligence – use of smart
phone and tablet applications
Innovative technology
Technology now offers the possibility of collecting information and
obtaining evidence of an individual’s identity in new and different ways.
Accordingly, the Jersey Financial Services Commission (JFSC) has started
to consider what additional guidance may be needed in its AML/CFT
Handbooks in cases where wholly new concepts are used, such as the use of
smart phone and tablet applications to capture images of customers and
documents.
Requirement to find out identity and obtain evidence
Article 3(4) of the Money Laundering (Jersey) Order 2008 (Money
Laundering Order) explains that identification of a person means:
•
Finding out the identity of that person, including that person’s name
and legal status
•
Obtaining evidence on the basis of documents, data or information
from a reliable and independent source, that is reasonable capable of
verifying that the person to be identified is who the person is said to be, and
satisfies the person responsible for the identification of a person that the
evidence does establish that fact.
Section 4.3.2 of the AML/CFT Handbooks explains how a relevant person
may demonstrate that it has obtained evidence that is reasonably capable of
verifying that an individual to be identified is who the individual is said to
be. Inter alia, it states that use of the following documentary evidence will
be reasonably capable of verifying an individual’s identity:
•
A current passport, or copy of such a passport certified by a suitable
certifier
•
A current national identity card, or copy of such a national identity
card certified by a suitable certifier
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•
A current driving licence, or copy of such a driving licence certified by
a suitable certifier.
As an alternative to using documentary evidence, Section 4.3.4 of the
AML/CFT Handbooks allows the use of independent data sources to verify
that the person to be identified is who the person is said to be.
In practice, it may be possible to demonstrate compliance with Article 3(4)
of the Money Laundering Order through a combination of documentary
evidence and independent data sources.
Whereas there is currently no reference made to the use of smart phone and
tablet applications in the AML/CFT Handbook, there is nothing to preclude
their use in customer due diligence (CDD) measures so long as senior
management of a relevant person is satisfied that it achieves compliance
with Article 3(4) of the Money Laundering Order.
Note: A relevant person is a person that carries on a financial services
business listed in Schedule 2 to the Proceeds of Crime (Jersey) Law 1999
and which carries on that business in, or from within, Jersey or through a
Jersey company or other legal person.
Other requirements
Other requirements are relevant.
Article 11 of the Money Laundering Order requires a relevant person to have
policies and procedures for the identification and assessment of risks that
arise in relation to the use of new or developing technologies for new or
existing products or services.
An AML/CFT Code requires a relevant person to assess, record and
monitor risk when any element of the CDD process is outsourced to another
party.
Senior management responsibility
The decision to use smart phone and tablet applications rests solely with
the senior management of a relevant person.
Before taking such a decision, senior management must have:
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•
Identified and addressed technological and outsourcing risks in line
with Article 11 of the Money Laundering Order and Section 2.4.4 of the
AML/CFT Handbooks
•
Satisfied itself that compliance with Article 3(4) of the Money
Laundering Order is achieved and be able to demonstrate to the JFSC why
this is so.
In order to properly consider outsourcing and technological risk, it will be
necessary for senior management to be very clear what the smart phone
and tablet application does and what it does not do.
or example:
•
Is it to be used only to collect information about an individual from
that individual?
•
Is it to be used to verify that individual’s identity?
•
Is it to be used to collect more general relationship information about
an individual from that individual, e.g. source of funds?
•
Is it also to be used to collect information about an individual from
reliable and independent data sources?
To the extent that a smart phone and tablet application does not cover
elements of identification measures (or more general CDD measures), then,
in line with Article 13 of the Money Laundering Order, these should
continue to be applied using existing systems, controls, policies and
procedures.
The JFSC will not endorse the use of particular smart phone and tablet
applications.
Guidance on use of smart phone and tablet applications
The introduction to each of the AML/CFT Handbooks explains that
guidance identifies ways of complying with the Money Laundering Order
and AML/CFT Codes.
Where smart phone and tablet applications are used to capture images and
documents, additional guidance will be published in the AML/CFT
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Handbooks to recognise the legitimate use of such applications in CDD
measures.
It is expected that guidance will cover the particular risks that arise when
documents are not physically presented to a relevant person or a suitable
certifier, and consider some of the measures that might be taken by a
relevant person to mitigate such risks.
•
There is a risk that documents have been tampered with or forged
•
There is a risk that images of the customer or of documents are
tampered with before or during transmission to the relevant person
•
There is a risk that documents or images captured are stolen or their
use unauthorised.
In order to assist with the development of such guidance, relevant persons
that are already using, or considering the use of, smart phone and tablet
applications are invited to contact the JFSC’s Financial Crime Policy
Division (FCP Division) as soon as possible.
In particular, it will be helpful to provide outsourcing and technological risk
assessments to the FCP Division.
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Bank Liabilities Survey
Developments in banks’ balance sheets are of
key interest to the Bank of England in its
assessment of economic conditions.
Changes in the price, quantity and composition of banks’ liabilities may
affect their willingness or ability to lend, and the price of lending.
The aim of this survey is to improve understanding of the role of bank
liabilities in driving credit and monetary conditions, complementing the
existing Credit Conditions Survey.
The first section provides information on developments in the volume and
price of bank funding, covering both wholesale market funding and
deposits from households and companies.
The second section covers developments in the loss-absorbing capacity of
banks as determined by their capital positions.
The third section provides information on the internal price charged to
business units within individual banks to fund the flow of new loans,
sometimes referred to as the ‘transfer price’.
Developments in banks’ transfer prices are an important factor in
determining the cost of borrowing for firms and households.
Funding
• UK banks and building societies reported that total funding volumes had
decreased in the three months to early March 2015, driven by slight falls in
both retail and ‘other’ funding. Lenders expected total funding volumes to
be broadly unchanged in 2015 Q2.
• Spreads — relative to appropriate reference rates — on retail deposits were
reported to have fallen in 2015 Q1, while spreads on ‘other’ funding fell
slightly. Lenders expected spreads to pick up in Q2.
• Lenders reported that the supply of deposits from households had pushed
down slightly on the volume of deposits raised in Q1. Firms’ supply of
deposits was broadly unchanged in Q1. The supply of deposits from
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households and PNFCs was expected to be broadly unchanged in Q2.
• The proportion of wholesale market funding accounted for by long-term
instruments was broadly unchanged in Q1. Lenders did, however, expect
the proportion of long-term issuance to increase in Q2, driven by regulation
and price considerations.
To read more:
http://www.bankofengland.co.uk/publications/Documents/other/moneta
ry/bls/2015/q1.pdf
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Enhancing financial inclusion through
Islamic finance
Keynote address by Mr Agus D W Martowardojo,
Governor of Bank Indonesia, at the IFSB
International Seminar "Enhancing Financial
Inclusion through Islamic Finance", Jakarta
Greeting
1. It is a great honor for me to deliver a keynote address in this IFSB
international seminar that is emphasizing on the need to enhance financial
inclusion through Islamic finance.
Having observed that providing greater financial access is very crucial in
delivering equitable opportunities to all segments in the society and
preserving more sustained economic development, I am pleased to observe
that Islamic finance has a great concern over having a better outreach in
delivering financial services.
The international seminar that we have today may serve as one of the
efforts to deliberate ideas on how Islamic finance could formulate its roles
through better financial products and regulations.
Recent development of Islamic financial industry
Distinguished Guests, Ladies and Gentlemen,
2. We have already witnessed that Islamic financial industry has been
rapidly developing in terms of economic sectors, asset size, physical
outreach, and financial products offered.
Islamic financial products have been used in commercial retail products,
corporates, and government.
The products of Islamic banks, takaful, and capital market have been widely
used in various economic sectors including agriculture, manufacturing,
trade finance, transportation, infrastructure development, and others.
Branches of Islamic financial institutions have also been established to
reinforce physical presence in the market; besides technological
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advancement that allows the customers to enjoy sophisticated Islamic
financial products such as mobile banking and e-finance.
The global Islamic financial industry is expected to reach the total assets of
USD 2 Trillion this year.
The industry is growing at about 17.3 percent compounded average growth
rate.
It is almost twice as much as the conventional industry has achieved.
3. The development of Islamic financial services industry is still dominated
by the 2 major industries, namely the Islamic banking sector and Islamic
capital market with the share of 80 percent and 15 percent respectively.
The interest of non-Muslim populated countries like the United Kingdom,
South Africa and Luxembourg to issue global Sukuk has been monumental.
The total of Sukuk issuance in 2014 has reached the amount of USD 114.7
Billion.
At the regulatory and infrastructure side, we could also see some significant
progress taking place.
The Islamic Financial Services Board has consistently produced regulatory
references that are beneficial to enhance governance of the industry.
Those cover prudential measures for Islamic banking, takaful (or Islamic
insurance), and Islamic capital market.
4. The latest efforts coming into plates are the Guidance Note on Liquidity
Risk Management and the core principles of Islamic banking supervision.
Those regulatory references are expected to further streamline Islamic
finance operations globally and serve as a basis for assessing the strength
and effectiveness of regulation and supervision.
The International Islamic Liquidity Management Corporation has also
shown its presence by increasing its sukuk issuance that can be used for
liquidity management of the internationally operating Islamic banks more
efficiently.
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Despite some exogenous disturbing factors like geopolitical crises and
shocks to oil prices, we could expect that the industry could sustain its
development until it reaches its significant role as one of key drivers of the
global economic development.
5. Cross sector activities between Islamic banking and capital market in
terms of Basel III compliant sukuk, "green" sukuk issuance, and social
based sukuk have also indicated progressive innovation in the industry.
The central banks have also equipped themselves with some innovation
allowing them to perform monetary operations using sharia compliance
financial instruments and enriching the industry with more compatible
products such as sharia compliance repurchase agreement (repo).
At the industry level, we could also see the involvement of Islamic
Development Bank as one of the Multilateral Development Banks deserves
appreciation. It was through its initiatives that the establishment of
supporting institutions like the Islamic Financial Services Board (IFSB),
International Islamic Financial Market (IIFM), the Accounting and
Auditing Organization for Islamic Financial Institutions (AAOIFI), and the
International Islamic Liquidity Management (IILM) was successfully
arranged.
The latest Ten-Year Framework and Strategies tries to consolidate all the
efforts into a well-developed program.
Current global Islamic financial industry development
Distinguished Guests, Ladies and Gentlemen,
6. The global economy is still trying to regain its momentum for the
economic development in the last 5 years.
The economic recovery is surrounded by uncertainty which could easily
affected by economic policies of advanced economies and other
disturbances.
The tapering of the US quantitative easing and the shock of international oil
price caused a destabilizing force to the emerging economies that are
fundamentally sustained by domestic demands well-formulated monetary
policy.
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The growth in the capital market has also been challenged by the oil price
decline and low interest policy in the advanced market.
7. Despite the uncertainty faced by the industry, I am confident that the
Islamic financial industry could maintain its pace of growth in years to
come.
There are at least five driving forces to sustain the industrial development
including the growth of emerging economies, cross-border financial
transactions, innovative Islamic financial products, regulatory
advancement driven by more advanced and comprehensive regulatory
standards, and continuous growth of Muslim population.
Achieving greater sustainability in the economic development
and financial outreach
Distinguished Guests, Ladies and Gentlemen,
8. The development of Islamic finance is expected to provide benefits to
wide range of customers.
Those include the low income society that currently does not have access to
the financial system to make their life better.
According to some studies, it is found that there are quite many people in
OIC member countries that still live under poverty line.
Most of them is unable to upgrade their quality of life and turn themselves
into productive society due to the lack of assets in hand and the absence of
financial products and services with low cost of funds.
9. Moreover, due to lacks of other resources, they are also remote from
supportive education program and health facilities that are potential to
strengthen the basic necessities to gain quality in human capital.
Without properly designed poverty alleviation program that particular
group of people may be trapped in the poverty for ages.
In some occasion, low income society has been perceived as involving high
risk and too expensive to manage since it requires an extensive effort to
manage highly dispersed customers.
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As a matter of fact, if proper mechanism and procedures supported by
well-developed regulation, microfinance industry can also be highly
lucrative.
10. Islamic finance with a wider application of equity-based financing and
micro-finance products can facilitate greater outreach to medium, small
and micro enterprises to promote entrepreneurship and value-creating
activities.
Conceptually, greater access to financial services can be provided by
commercial based Islamic financial institutions such as Islamic banks
providing microfinance products or micro takaful provided by takaful
institutions.
Other steps can be formulated such as integrating commercial sector with
Islamic social sector to come up with financial services that are reachable by
the micro entrepreneurs and low income society in general.
The program is aimed at improving social welfare arrangement through
variety of vehicles such as optimization of awqaf funds, innovative zakat
disbursement program that is contributive to the job creation initiatives
and poverty alleviation program.
11. Conceptually, the practice of Islamic finance signifies its favor to
financial stability and quality economic development which is characterized
by the use of risk-sharing concept, discouragement to excessive debt, the
emphasis on ethical investment activities, and other sharia specific
preferences.
The emphasis on equity based investment underlines the importance of
reinforcing the basic relationship between financial sector and real
economy.
12. The development of Islamic financial sector could reduce over-reliance
to the debt funding and excessive speculation.
Having observed from the past economic crises, it has been evidence that
excessive debt funding and speculation significantly contributed to the
financial system fragility.
In relation to the formulation of public preference, the principle to the
prohibition of excessive debt taking could serve as a medium of public
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education that could create positive effect on the moderation of the
aggregate demand; and thus more stable macroeconomic condition.
13. The application of risk-sharing principle could give more gravity to
partnership in the society rather than creating lender-debtor relationship.
Despite the requirement to have a favorable environment that promotes
more symmetric market, the application of sharing concept could offer the
potential to reinforce the link between financial sector and the real
economy which base the financial contracts on value creation and viability
of the enterprises.
Once the transparency and governance are in place to allow better
partnership, over-creation of financial engineering can be minimized since
the financial activities will be focused on the intrinsic value added offered in
the financial contracts.
14. From the governance perspective, the risk sharing concept strengthens
the incentive to the financial institutions to exercise appropriate due
diligence to the financial transactions assuring that the expected profits
commensurate their risk taking.
Supported by sound information and reporting system, the risk-sharing
contract opens up opportunities for the entrepreneur and the financier to
monitor and calculate the intrinsic values of the financial transaction that is
reflected by its expected profit, cash-flow, risks involved and other
influencing factors to the projects.
This concept promotes greater discipline and responsibility to all
contracting parties to assure its success.
The combination of good governance, greater transparency and
well-designed risk management would shape trust-based relationship that
is essential to make the intermediation process efficient.
15. The attention of the IFSB towards enhancing the role of microfinance in
the Islamic finance industry deserves appreciation.
The Islamic financial institutions should be able to play significant roles in
the economic development covering all segments in the society.
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The availability of standards on the microfinance activities is important to
ensure operational prudence practiced by the Islamic financial institutions
when extending their facilities to the low income society.
Some regulatory incentive needs to be created in terms of relatively lower
risk weighted asset to provide lower cost of capital when entertaining the
micro-entrepreneurs.
Although, further research need to take place to find the optimal number
and prerequisites when applying the incentives.
Closing
16. Finally, please allow me to wish you all a productive discussion and
deliberation in this important seminar.
I am confident that supported by internationally reputable academics and
players, we can achieve significant outcomes that are beneficial to promote
development in the area of microfinance for Islamic finance. I wish this
program a great success.
Thank you very much.
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Increasing payment efficiency to improve
productivity
Keynote address by Mr Muhammad bin Ibrahim, Deputy
Governor of the Central Bank of Malaysia (Bank Negara
Malaysia), at the JomPAY's Official Launch Event, Kuala
Lumpur
In today's challenging and rapidly evolving world, one must constantly find
innovative and efficient ways to remain productive, or risk being left
behind.
As payments represent an indispensable activity for both individuals and
businesses, increasing payment efficiency through the adoption of
electronic payments (e-payments) will improve productivity and reduce the
cost of transactions.
At the macro level, the adoption of e-payments has the potential to enhance
Malaysia's overall economic efficiency and competitiveness.
The benefits in terms of cost savings and efficiency gains from a successful
migration to e-payments are substantial.
The launch of JomPAY today is part of the journey towards realization of
these objectives.
JomPAY provides greater efficiency, convenience and accessibility for the
public to make bill payments.
It also represents a conscious strategy that will contribute towards making
the way we conduct financial transactions more efficient.
My speech today focuses on 3 areas:
Firstly, I will provide an update on the recent developments in Malaysia's
payment ecosystem and the progress that we have made thus far in
accelerating the country's migration to e-payments;
Secondly, I will highlight how JomPAY helps to address the current
limitations in online bill payments and how it complements the existing
efforts to expand e-payment services; and
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Finally, I will elaborate on the importance of industry-wide collaborative
efforts and the role that MyClear and the industry can play in bringing the
online bill payments market to greater heights.
Recent developments in Malaysia's payment ecosystem
The use of cash and cheques remains prevalent in Malaysia.
Malaysia's cash usage measured by currency-in-circulation (CIC) over GDP
was about 6% in 2013, which is 100% higher than the average in advanced
economies.
Likewise, Malaysia's cheque usage per capita was 6.6 in 2013, which is 33
times higher than that in advanced economies.
But the recent measures being instituted have shown tangible results. I am
pleased to inform you that promising progress has been made since the
introduction of the Pricing Reform Framework in May 2013 and the more
concerted efforts taken to improve and promote the use of Interbank GIRO
(IBG).
In 2014, cheque usage declined at a faster rate of 10%, compared to only 3%
in 2013.
At the same time, the number of IBG transactions increased by 36% in 2014
compared to 19% in 2013.
Consequently, Malaysia's cheque usage had fallen from 6.6 per capita in
2013 to 5.8 per capita in 2014.
This is indeed an encouraging development.
To reduce the country's reliance on cash usage, the Bank has issued the
Payment Card Reform Framework (Framework) which took effect in stages
beginning 2 January 2015.
The Framework aims to ensure that the cost of accepting payment cards is
fair and reasonable, whilst creating an enabling environment for the wider
acceptance of payment cards, especially by smaller merchants.
Over the next six years till 2020, together with the banking industry we
plan to expand the payment card acceptance network from about 240,000
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terminals to 800,000 terminals and further accelerate the use of debit
cards.
These measures, if implemented successfully, will lessen the need for cash
payments.
While this target seems ambitious, we can achieve this milestone with
collective efforts by all.
Cash and cheques are still the main modes for bill payments in
Malaysia
Whilst efforts are being made to facilitate the wider acceptance of payment
cards, bill payments in Malaysia are still predominantly made with either
cash or cheques.
In Malaysia, bill payments made via electronic channels 3 are still relatively
low at 2.4 transactions per capita in 2014 compared to more than 10
transactions per capita in countries with successful electronic bill payment
platforms such as Australia.
Malaysia has an online bill payments model where merchants need to
maintain multiple banking relationships in order to receive bill payments
from customers who bank with different banks.
Merchants, especially SMEs, find it difficult and costly to maintain multiple
banking relationships.
As a result, only about 1,000 merchants are currently registered to accept
online bill payments via the individual banks' proprietary bill payments
system.
Therefore, there is still tremendous potential for greater efficiency and cost
savings through the consolidation and expansion of the online bill
payments market in Malaysia.
Enhancing the efficiency, accessibility and convenience of online
bill payment via JomPAY
JomPAY addresses the limitations of the current bank-centric model by
establishing an open electronic bill payments platform which leverages on
the combined infrastructure and network of the entire banking industry.
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With JomPAY, merchants only need to maintain a banking relationship
with one bank, in order to receive bill payments from customers of all other
banks.
Likewise, customers only need to maintain an account with one bank in
order to make bill payments to the entire network of merchants registered
with JomPAY.
The JomPAY model thus reduces duplication and facilitates the pooling of
resources from the entire banking industry.
This in turn will enable us to build a wider and more efficient network for
online bill payments.
Businesses should leverage on JomPAY to accept online bill payments from
their customers.
Handling cash and cheques is very costly.
Businesses incur an estimated RM2.7 billion 6 annually for cash handling,
in addition to bearing the risk of pilferage and theft.
Businesses also incur an estimated RM113 million 7 annually for cheque
handling.
Migrating to electronic bill payments would lower the cost of transactions
and provide businesses with a faster, more secure and more efficient means
of collecting payments.
Businesses should leverage on JomPAY not only for bill payments, but also
for invoice payments to facilitate a more efficient management of their
receivables.
Consumers, on the other hand, should also take advantage of the increased
convenience of making bill payments via this new channel.
JomPAY provides a one-stop centre for consumers to make bill payments
electronically anytime, anywhere and without any transaction fee.
By migrating to electronic bill payments, a lot of time and effort previously
incurred by travelling and queuing to make over-the-counter payments can
be saved and redirected to more productive use.
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Importance of industry collaborative efforts
Now I will touch on the third and last point.
The payments industry in Malaysia has a history of collaboration in
industry-wide infrastructure developments.
A notable example is the migration from magnetic stripe to chip-based
cards.
The migration exercise, which was completed in 2005, successfully
eradicated cases of counterfeit fraud and contributed to greater confidence
in the use of payment cards in Malaysia.
As a result, the investment cost of about RM200 million was recovered in
just two and a half years, most of it arising from cost savings from fraud
avoidance.
Tourist spending via credit cards had also doubled from RM4.3 billion in
2006 to RM8.7 billion in 2014, signifying greater confidence and the ease of
use of payment cards in Malaysia.
This is a very good illustration on how industry collaboration in the area of
payment systems has contributed to the country's economic growth.
A successful payment system is often dependent on the network of payment
systems reaching an optimum size, thus enabling its participants to build
critical mass and achieve economies of scale.
However, building a payment system infrastructure and expanding the
network can be costly to an individual market player.
Hence, the industry should pool its resources to develop and share
infrastructure costs.
As a principle, basic payment infrastructure should not be used as a
competitive tool but rather as a means to reduce cost, promote
inter-operability and support an enlarged network.
Such collaborative industry effort in infrastructure sharing would allow the
industry to compete directly on product offerings and the quality of services
provided, thus providing better value to both consumers and merchants.
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In this regard, the recent industry-wide initiatives to enhance the payment
card infrastructure and to modernise the online bill payments market via
JomPAY are commendable and should be sustained.
In this respect, I would also like to call upon MyClear and MEPS to jointly
embark on payment infrastructure projects and initiatives that would
benefit both the industry and the country.
Role of MyClear and the industry moving forward
Achieving the critical mass in terms of usage and acceptance remains a key
priority.
In this regard, banks in collaboration with MyClear should take concerted
efforts to expand the number of businesses accepting JomPAY, especially
among the underpenetrated sectors of SMEs and the federal and state
government agencies.
This can be done through coordinated media campaigns, workshops,
roadshows and other outreach programs. MyClear and the participating
banks should target to register 5,000 merchants onto JomPAY by 2020.
To educate the public, especially those who are not IT savvy to use JomPAY,
MyClear and the banks should also come up with instructional videos and
pamphlets to provide the necessary guidance and assistance.
This should move in tandem with the industry's plans to promote the usage
of electronic fund transfer services such as the Interbank GIRO (IBG) and
the Instant Interbank Fund Transfer (IBFT) via different payment
channels, and to drive more pervasive usage of debit cards.
To provide the public with an alternative channel to access JomPAY
services, banks should also accelerate the offering of JomPAY via the
network of about 12,000 ATMs and 2,700 self-service Internet kiosks
(SSKs) nationwide.
This would expand the accessibility of online bill payments to a greater
segment of the society, including those that have limited access to the
Internet.
This is also one specific area where MyClear and MEPS should mobilise
their resources for the collective good.
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To drive the reduction in paper-based bill payments over-the-counter
(OTC), the banking industry should also deploy more payment card
terminals at merchant outlets, government counters and at the premises of
collecting agents such as bank branches and post offices.
With a high penetration of 45 million debit cards for a population of 30
million, Malaysians have the option of using their debit cards to pay bills
over-the-counter, thus lessening the need to carry cash.
In addition, banks should continuously enhance the value proposition of
JomPAY to bring greater convenience to consumers and efficiency to the
business processes of corporate customers.
Efforts should be directed towards creating an end-to-end solution by
integrating electronic bill payment facilities with electronic presentment of
bills and e-invoicing to minimize the cost of print-and-mail billing.
Banks should also explore the offering of real-time payment facilities for
bill payments where there is demand for such services.
Conclusion
Ladies and gentlemen, the introduction of JomPAY will complement the
existing measures to accelerate the country's migration to e-payments.
Moving forward, MyClear, MEPS and the banks should continuously
collaborate to explore new and innovative ways to achieve greater payment
efficiency.
Both consumers and businesses should capitalize on the benefits and
opportunities derived from the adoption of e-payments to enhance
competitiveness in this rapidly evolving world.
Let me conclude by congratulating MyClear and the banks on the successful
establishment of the national bill payment scheme, JomPAY.
I hope such a collaborative spirit will be enhanced to drive the country
towards a successful migration to e-payments.
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Greek economy - current developments,
challenges and prospects
Speech by Mr Yannis Stournaras, Governor of the
Bank of Greece, at the Hellenic Observatory of the
London School of Economics, London
Ladies and Gentlemen,
It is a great pleasure to be with you tonight. I will share with you my
thoughts on the prospects of the Greek economy and I will focus on four
issues:
First, the achievements so far during the difficult years of the economic
adjustment.
Second, current developments in the Greek economy and future challenges
and prospects, in view of the 20 February 2015 Eurogroup agreement and
the 20 March high level agreement between the Greek government and the
EU partners.
Third, the reasons why Grexit is not an option. Fourth, issues related to the
sustainability of Greek public debt.
a) Economic adjustment during the past five years
Since the beginning of the crisis, five years ago, Greece has come a long way
in adjusting its fiscal and external imbalances and has implemented a bold
programme of structural reforms.
First, there has been unprecedented fiscal consolidation. In 2013, Greece
returned to a primary surplus in the general government for the first time
since 2002.
Moreover, by achieving a primary surplus (as defined in the programme) of
1.2% of GDP, it outperformed the programme target of a balanced primary
result in the general government.
Fiscal consolidation achieved a more than 11 percentage point
improvement in the primary budget as a percentage of GDP over the period
2009-2013, despite the deepening recession.
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Adjusting for the effect of recession, the improvement in the "structural"
primary budget balance over the period 2009-2013 reached 18 percentage
points of GDP, at least twice as much as the adjustment in other
programme member-states.
Second, competitiveness has been restored. Greece has now recovered all of
the cost competitiveness it had lost relative to its trading partners since
joining the euro area.
Cost competitiveness has improved by more than 25 per cent since 2009.
According to the ECB's Harmonized Competitiveness Indicators, Greece
has been one of the best performers in improving labour cost
competitiveness over the period 2000-2014.
This development reflects the effect of structural reforms in the labour
market, which have allowed more flexibility in the process of wage
bargaining, as well as the impact of the sharp rise in unemployment on
labour costs.
Structural competitiveness is also showing signs of significant
improvement, as suggested by indicators compiled by the OECD, the World
Bank and the World Economic Forum.
Third, external adjustment has been significant. The current account in
2014 was in surplus for the second year in a row (0.9% of GDP) with
exports of both goods and services increasing at a faster rate than that of
the previous year.
This development marks a significant turnaround of the current account
balance of about 15 percentage points of GDP since 2008.
Adjustment came primarily through a decline in imports of goods,
particularly in 2009, when world trade collapsed due to the global
recession.
However, after 2009, adjustment was nearly equally shared between
exports and imports.
It is worth highlighting that, during the last four years, exports of goods
have rebounded, with growth rates of real exports outpacing those of the
euro area average.
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Moreover, the share of goods exports in extra-EU trade has nearly doubled
and the share in world trade has increased by about 30% since 2010.
These developments have occurred despite the adverse liquidity and
financial conditions faced by Greek exporters.
By contrast, exports of services underperformed until recently largely as a
result of uncertainty, which had a negative impact on tourism, and global
factors, which affected the performance of the shipping industry.
Nevertheless, exports of services rebounded in 2013 and 2014 after years of
underperformance, reflecting both a strong tourism season and, more
recently, a rebound of the global shipping sector.
Fourth, the policy agenda has included structural reforms. A series of
structural reforms have been implemented in labour and product markets
as well as in public administration.
In the labour market significant changes were adopted aiming at:
- better aligning wage developments with firm performance; and
- enhancing labour mobility across sectors.
- More specifically, reforms involved measures to decentralise wage
bargaining to firm level, reduce minimum wages and increase flexibility.
Progress with structural reforms in product and services markets, by
contrast, was markedly slower than in the labour market.
Nevertheless, according to the OECD, Greece ranks first in the
responsiveness to structural reform recommendations made by the
Organisation.
Moreover, according to the Euro Plus Monitor 2014, Greece ranks first in
the adjustment progress among twenty-one European economies, based on
indicators capturing fiscal and external adjustment, labour costs and
structural reforms.
This period also witnessed significant institutional changes geared towards
streamlining the public administration and downsizing the public sector.
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In the period 2010-2013, public sector employment fell by more than 20%
or 180,000 employees.
New institutional reforms were adopted that lay the foundations for
ensuring the better control of public spending and improving public
financial management.
Finally, the Greek authorities have greatly reshaped the taxation system by
adopting the Income Tax and Tax Procedures Codes and the new unified
Property Tax.
Measures have also been adopted to bolster the autonomy of the revenue
administration in order to strengthen the collection of current and overdue
revenue.
All these reforms will boost the growth potential of the Greek economy in
the long term.
Bank of Greece staff estimates suggest that structural reforms in labour and
product markets are likely to increase potential growth by about 1.6% per
annum over a period of ten years, mainly coming from gains in total factor
productivity.
Lastly, bank recapitalization and considerable consolidation have
taken place.
Over the past few years, the landscape of the banking system has changed
significantly with the number of banks being reduced through mergers,
takeovers and resolutions.
Today the system comprises four core banks and a number of smaller
banks.
The four core banks, following recapitalization and the implementation of
restructuring plans, are well-placed to meet the new challenges that the
banking system faces going forward.
This was also confirmed by the results of the Asset Quality Review and the
EU-wide stress test exercise, conducted by the European Central Bank
(ECB) in cooperation with the European Banking Authority (EBA), made
public on 26 October 2014.
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b) Current developments, challenges and prospects
Recent data suggest that, after six years of deep recession, the economy has
started to rebound since the second quarter of 2014.
Real GDP grew by 0.8% in 2014, positive for the first time since 2007.
The increase in GDP is driven by buoyant exports of goods and services, the
recovery of private consumption and investment in machinery and
transport equipment.
The pickup in economic activity also led to a strong rebound of dependent
employment and the decline in the unemployment rate, which, however,
remains particularly high.
Based on the latest available data, GDP growth in 2015 is projected to be
higher than in 2014 and to pick up even further in 2016.
The main elements of uncertainty weighing on the prospects for economic
activity in the medium term refer to our ability to fulfil successfully the
transitional agreement struck with our partners, a possible deterioration in
public finances and reform fatigue.
If these uncertainties can be contained, then the economy will show strong
growth in 2015, driven by exports of goods and services and by private
consumption and supported also by rising business investment.
Exports of goods and services are expected to remain one of the growth
drivers in 2015, with the global economic environment projected to
improve as growth rates pick up both in the EU and the other markets and
world trade strengthens.
A positive impact is also expected from the further improvement in
structural competitiveness and possibly in cost competitiveness, combined
with restored access to financing for Greek businesses and an improving
business climate.
Disposable income developments, the declining general level of prices and
reduced uncertainty are expected to affect consumer spending positively in
the course of 2015.
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Private consumption is therefore expected to increase in the year as a
whole, supported by the fall in oil prices and the ensuing strengthening of
Greek households' real disposable income.
However, although recent hard data show that the economy continues to
show signs of stabilizing, soft data paint a mixed picture, with PMI and
some sentiment indicators softening over the past two months.
Financial indicators (such as Greek sovereign and corporate bond yields
and stock prices), which had improved significantly from mid-2012 up until
autumn 2014 in line with the improved macroeconomic performance of the
country and the consistent implementation of the adjustment programme,
have been deteriorating over the last months.
The 20 February Eurogroup agreement combined with the 20
March high level agreement alleviated part of the uncertainty
The Eurogroup's decision on 20 February 2015 to grant Greece an
extension of the current programme and its approval on 24 February of the
Greek government reform measures alleviated part of the uncertainty and
gave Greece's government time to complete the reforms still pending and to
set its own priorities.
As a follow up, on 9 March, the Greek authorities presented to the
Eurogroup a more detailed list of reform measures which allowed the
commencement of the evaluation process.
As reaffirmed by the joint statement by Greece and the EU on 20 March,
the Greek authorities are expected to present a full list of specific reforms to
be considered by the Eurogroup.
These positive developments led to a stabilization of bank deposits, after
some outflows during the past three months. However, a large risk
premium has been built into Greek financial assets, which still remains at
high levels.
The Greek government is now proceeding fast towards agreeing a reform
programme with the EU partners and the involved institutions and making
progress in the implementation of the agreed policy actions.
The 20 March high level agreement in Brussels confirmed the willingness of
all parts to respect the rules of the game and the procedures agreed in the
Eurogroup of 20 February.
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Once the implementation of the current agreement is under way and Greece
fulfils its commitments, then financing and liquidity constraints for the
Greek state and Greek financial and non- financial corporations will ease
and Greek assets should be expected to recover.
Moreover, the decision by the ECB's Governing Council to lift the waiver
affecting marketable debt instruments issued or fully guaranteed by the
Hellenic Republic will soon be re-examined and should be revoked, as in
similar cases in the past, as long as Greece fulfils its current agreement with
its EU partners.
The full implementation of the agreed reforms and the conclusion of the
evaluation process are prerequisites for the restoration of confidence to the
prospects of the Greek economy.
Moreover, upon the conclusion of the current evaluation procedure, the
Greek government in close cooperation with our EU partners should reach
a mutually beneficial agreement on the follow-up arrangement involving a
credible reform and medium term fiscal policy programme backed by a
reliable credit line paving the way for Greece's return to international
financial markets.
These actions will enable Greece to benefit from July 2015 onwards from
the recently announced ECB decision on the implementation of
Quantitative Easing (QE) at least up until September 2016.
Provided that uncertainty is quickly resolved, the positive momentum of
the economy will be maintained and economic recovery will gain speed over
the course of the year.
Policy actions that promote long term growth
In the long term, the growth outlook of the Greek economy is expected to
improve following the rebalancing of fundamentals such as the twin deficits
and competitiveness, provided reforms continue and emphasis is placed on
the following priorities:
-
Speeding up structural reforms in the product and services markets in
order to enhance competition and innovation, increase price flexibility
and improve competitiveness.
-
Consolidating fiscal achievements. Efforts must focus on structural
measures to strengthen the independence and efficiency of tax
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administration, with the aim to tackle tax and social contribution
evasion.
The application of modern, risk-based tax audit methods and the
activation of a nationwide asset registry are fundamental in the fight
against tax evasion.
-
Reviewing tax exemptions and other favourable tax treatment. Tax
exemptions and favourable tax treatment, including reduced VAT rates,
need to be reviewed and streamlined.
-
Lowering tax rates and reviewing the efficiency of public spending. To
the extent that fiscal achievements are safeguarded, a lowering of the
direct and indirect tax rates will become possible.
On the expenditure side, efforts to better target social benefits must
continue, while the existing exemptions from the general pension
system provisions must be re-examined.
-
Increasing public sector efficiency. Completing the national cadastre
and eliminating the chronic obstacles to the efficient and speedy
delivery of justice are fundamental prerequisites for a well-functioning
state, as are the efficient deployment of human resources and a
transparent staff appraisal framework that rewards productivity and
work ethic.
-
Strengthening active labour market policies with particular emphasis
on education and training, as a way to improve the job-finding chances
of people on the sidelines of the labour market, such as the long-term
unemployed and young people, who have borne the burden of
unemployment.
-
Managing in an effective way non-performing loans (NPLs). Greek
banks must now adopt an active management of distressed loans, in a
manner that not only eases the burden on cooperating borrowers facing
temporary difficulties in servicing their debt, but also enables banks to
unlock funds tied up in troubled loans that are unlikely to be repaid.
The banking sector must be assisted in this effort through
improvements in the legal framework that would lift restrictions on, for
instance, (pre-) bankruptcy procedures, out-of-court settlements or, as
already mentioned, a speeding up of the judicial procedure.
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c) Grexit is not an option
After six years of severe recession and five years of fiscal adjustment, the
economy has stabilized and is showing signs of improvement.
If this momentum is maintained, the economy is likely to return to a steady
growth path in the next few years.
Grexit is not an option to Greece for the simple reason that the
competitiveness of the Greek economy has been restored over the past five
years through internal devaluation and bold reforms in the labour market.
Hence, Grexit would deliver no benefit but a lot of pain.
In case of Grexit, the Greek economy would enter another deep recession
characterized by extremely tight financing and liquidity conditions, on
account of massive deposit outflows and a dramatic fall in confidence and
living standards.
These developments would lead to trade disruption, push unemployment
further up and reduce government revenues, generating fiscal and
financing gaps and concerns for the stability of the financial system.
As a consequence, another round of fiscal consolidation would be required,
while capital controls would be imposed and a deposit freeze could also be
required.
Moreover, the rapid depreciation of the new currency would serve to
improve Greece's international price competitiveness, but this would also
drive higher inflation as import prices rise.
As a result, the gains from depreciation would be only temporary.
Finally, de-anchoring of inflation expectations would imply substantially
higher inflation, requiring a tightening of monetary policy.
Hence, leaving the euro would not allow the country to run an independent
monetary policy, as the primary goal of the central bank would be to
stabilize the value of the currency.
Grexit would also risk the elimination of EU-budget related inflows to
Greece (cohesion and structural funds, agricultural subsidies).
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Overall, Grexit would imply huge costs for the Greek people, firms and the
Greek financial system.
IMF and official debt would run in arrears, while foreign law bonds would
force Greece into a lengthy litigation process in international courts.
In the event of such actions, it is uncertain how long it would take until
Greece would regain access to financial markets and would depend on the
eventual resolution of official foreign law debt.
On top of all, a Grexit scenario could also have negative contagion effects on
weak euro area countries, by introducing a permanent convertibility risk
premium into sovereign bond yields and financial asset prices. Last but not
least, Grexit might entail very substantial geopolitical risks.
d) Actions to improve debt sustainability
Turning to public debt sustainability, some points are worth-highlighting:
-
Nearly 80% of Greece's general government debt is held by the official
sector, i.e. bilateral loans by EU countries under the GLF, IMF and
EFSF loans, as well as debt securities held by the ECB and NCBs.
-
Up until now, Greek debt has benefited from the lowering of the interest
rate and the extension of maturities on the GLF loans.
The interest rate charged on bilateral loans from euro-area partners is
Euribor plus 50 basis points, which is currently about 0.56% per year.
GLF loans have an average maturity of about 16 years.
In addition, the lending rate from the European Financial Stability
Facility (EFSF) is a mere 1-10 basis points over the average borrowing
cost of the EFSF.
The average maturity of EFSF loans is over 25 years with the last loan
expiring in 2051, while Greece benefits also from the deferral of
principal payments on GLF and EFSF loans by 10 years and a 10-year
grace period for interest payments on most EFSF loans.
-
Moreover, Greece has been receiving the profits made by the ECB and
NCBs on their Greek government bond holdings (SMP and ANFA).
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As a consequence of these actions, the average maturity of the Greek
government debt has increased from 6.3 years in 2011 to about 16.5 years
by end 2014 and debt servicing costs have decreased to levels comparable
with other southern European countries (i.e. around 4.3% of GDP in 2014),
while the actual debt servicing cost is much lower, i.e. about 2.6% of GDP if
one takes into account that the interest paid to the ECB and euro-area
national central banks (NCBs) is returned to Greece and interest payments
on EFSF loans are deferred.
Taking into account the fall in interest rates over the past three months, the
actual interest expenditures of Greece will be likely about 2% of GDP in
2015.
In view of the existing favourable debt servicing arrangements, it can be
argued that the stock of debt, despite amounting to approximately 177% of
GDP, need not pose such a big a concern, conditional on there being a
credible commitment to the agreed fiscal targets and the implementation of
structural reforms which can improve the growth potential of the Greek
economy in the long term.
However, in view of the progress achieved so far in terms of reaching
primary surpluses and meeting the various conditions incorporated in the
adjustment programme, further debt relief should be provided to Greece
along the lines of the Eurogroup decision of 27 November 2012.
This is necessary for achieving a further credible and sustainable reduction
of the Greek debt-to-GDP ratio and in order to smooth out a demanding
government borrowing profile post 2022/23, i.e. after the expiration of the
10-year grace period currently applied on GLF interest payments and on
EFSF loan principal and interest payments.
There are various ways to do that without losses for euro area creditors.
For example:
-
By reducing the lending rate on the Greek Loan Facility by setting the
spread over the Euribor - currently at 50 basis points - to zero;
-
by a further 10-year extension of the maturity profile of EFSF and GLF
loans.
The combination of these actions would amount to a net present value
benefit of about 17 percent of 2015 GDP for Greece over the next 35 years,
thus improving debt sustainability.
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This will also make possible a relaxation of fiscal targets, making some
room for additional investment spending and catering social needs.
In fact, extending maturities and reducing interest rates on the outstanding
debt may improve the growth outlook of the Greek economy and, hence,
provide further support to public debt sustainability.
Bank of Greece Staff estimates that a permanent reduction of the interest
payments -to- GDP ratio by 0.6 percentage points can lead to an increase in
real GDP by a total of 4-7% over the next ten years, depending on the fiscal
policy mix.
This corresponds to a boost in real GDP growth of ½ percentage point per
year on average for a ten-year period.
The economic rationale that debt relief of this form can provide a "growth
dividend" is that reducing the debt servicing costs can free up resources
which can be used for investment, job creation and economic growth.
The growth dividend is more pronounced if such debt relief is combined
with a credible expenditure based fiscal consolidation programme.
However, broadening the tax base and fighting tax evasion should not be
expected to weigh negatively on growth performance.
Alternative options could also be considered to improve the sustainability
of Greece's public debt.
However, they might be more contentious as they likely involve some costs
for euro area partners.
Concluding remarks
Concluding, the immediate challenges of the government are to:
-
consolidate fiscal achievements, further specify and agree with the
institutions the full list of specific reforms by the end of April 2015,
-
implement the agreed reforms in order to allow for a speedy and
successful conclusion of the current evaluation procedure.
This would allow Greek banks to regain full access to the ECB's monetary
operations, alleviating liquidity pressures, reducing the funding costs for
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the Greek financial system and the Greek economy as a whole, and
exploiting the accomodating monetary policy applied by the ECB in the
Eurozone.
The conclusion of the current evaluation procedure by the end of June 2015
will pave the way for a final agreement on the follow up arrangement
between Greece and the EU partners.
This should involve a credible medium term fiscal and structural reform
programme, backed up by a reliable credit line, as well as further debt relief
along the lines of the November 2012 Eurogroup decision.
These actions are prerequisites for strengthening both economic growth
and employment and for Greece's return to international financial markets,
thus, signaling the definitive exit from the crisis.
The new Greek government has a unique opportunity to implement bold
structural reforms, which would be backed by a large majority of political
forces in the country.
This is in my view a historical opportunity which should not be missed.
Thank you very much for your attention.
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Fewer securitisations in 2014, but
institutional investment in securitisations
increased
In 2014, external investors bought EUR 10.3 billion worth of packaged
loans via new securitisations issued by financial institutions based in the
Netherlands (down 32% on 2013).
The total amount outstanding in such external securitisations in 2014 fell
5% to EUR 74 billion.
Dutch institutional investors in 2014 expanded their holdings of Dutch
securitisations by EUR 1.1 billion (up 23%).
The increase was largely concentrated with a small number of investors.
Securitisations involve bundling of loan assets, especially bank loans to
households and businesses, which are then packaged and sold as
marketable securities (via Special Purpose Vehicles).
Securitisations constitute an additional source of funding for banks.
In the years following the outbreak of the credit crisis (mid-2007), such
loans packaged into bonds were not or hardly sold to external investors, as
trust in securitised products had been compromised.
Consequently, few of these external (non-retained) securitisations were
effectuated during these years, but a large number of internal (retained)
securitisations did take place.
Banks do not sell these internal securitisations on to the market, but hold
on to them principally for use as collateral in obtaining liquidity from
central banks in particular.
As such, these internal securitisations enable banks to raise funding
indirectly.
External investors' appetite for securitisations has picked up again since the
end of 2009, although the number of investors has fallen since the outbreak
of the crisis and securitisations are placed on the private market more
often.
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Fewer issues of securitisations
In 2014 Dutch securitisations to the total of EUR 10.3 billion were sold to
external investors.
This represents a EUR 5.0 billion (32%) drop on 2013 (see Chart 1) and a
40% drop on the annual average since 2010.
For securitisations of residential mortgages, external placements totalled
EUR 9.2 billion, EUR 6 billion (40%) lower than in 2013.
This is related to several developments.
The uncertainty about future regulations for banks and insurance
companies and the possibility of more stringent requirements may make
the securitisation market less attractive to investors.
New issues of securitisations have also declined owing to the favourable
funding terms prevailing on the financial markets, which in turn are partly
attributable to the accommodating financing facilities offered by central
banks.
The fragile macroeconomic environment and weak credit growth were also
contributing towards lower funding requirements.
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In addition to these external securitisations, internal securitisations in the
Netherlands in 2014 totalled EUR 15.1 billion, EUR 8.9 billion (37%) less
than in 2013.
These mostly served as replacements for maturing internal securitisations.
Outstanding amounts of securitisations also drops
As more securitisations matured than were newly issued on balance, the
total amount in securitisations outstanding in 2014 declined by EUR 10.6
billion to EUR 255.5 billion (down 4%) (see Chart 2).
A decline was observed in both external and internal securitisations.
The volume of external securitisations shrank by EUR 3.9 billion to EUR
74.2 billion (down 5%), the majority of which concerned residential
mortgage securitisations, which dropped by EUR 4.3 billion to EUR 70.5
billion (down 5.8%).
Internal securitisations outstanding declined by EUR 6.7 billion to EUR
181.2 billion (down 3.6%).
This means that the volume of outstanding external securitisations dropped
to about half the level observed in mid-2007, when the credit crisis broke
out.
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Although the volume of outstanding residential mortgage securitisations
also declined substantially by EUR 22 billion (24%), the most dramatic falls
were observed in other securitisations, which were down EUR 42 billion
(92%).
The latter mainly consist of synthetic securitisations.
These are structured transactions in which credit risk is transferred to third
parties by means of credit derivatives.
The fall reflects investors' waning appetite for more complex and less
transparent securitisations since the start of the crisis.
Securitisation holdings of Dutch institutional investors increased,
but the rise was not observed across the board
Dutch insurance companies, pension funds and investment funds on
balance invested EUR 1.1 billion in Dutch securitisations in 2014, lifting
total holdings by 23% to EUR 5.7 billion (see Chart 3; holdings of
investment funds indirectly represent investments made by pension funds
in particular).
This lifted the proportion of investments made by institutional investors in
external securitisations to 7.6% from 5.9%.
That said, the increase did not occur across the board, but was mainly
concentrated with a small number of institutional investors.
The lion's share (two-thirds) of Dutch securitisations is being held by Dutch
banks based on the ever substantial volume of outstanding internal
securitisations.
This brings the amount of Dutch securitisations held by banks (i.e. the
domestic banking sector, known as monetary-financial institutions) to EUR
168 billion.
These holdings have, however, fallen substantially over the past few years,
due to the decline in the amounts outstanding in internal securitisations.
Other institutions in the Netherlands hold securitisations to the equivalent
of EUR 8 billion.
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These holdings primarily concern internal securitisations of (non-domestic
and domestic) banks in the possession of Dutch subsidiaries. The
remainder is held by non-domestic entities.
This means that EUR 74 billion, almost 30%, of all Dutch securitisations
was placed abroad.
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