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P a g e 1
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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,
It is so difficult to establish common
international standards in different
languages.
Although the risk-based capital
requirements in India are assessed as
compliant with the minimum Basel capital
standards, we have some linguistic clarity
issues…
According to the (Regulatory Consistency
Assessment Programme) assessment:
“The team identified an overarching issue
regarding the use of the word “may” in
India’s regulatory documents for
implementing binding minimum
requirements.
The team considers linguistic clarity of overarching importance, and would
recommend the Indian authorities to use the word “must” in line with
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International Association of Risk and Compliance Professionals (IARCP)
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international practice.
More generally, authorities should seek to ensure that local regulatory
documents can be unambiguously understood even in an international
context, in particular where these apply to internationally active banks.
The issue has been listed for further reflection by the Basel Committee.
As implementation of Basel standards progresses, increased attention to
linguistic clarity seems imperative for a consistent and harmonised
transposition of Basel standards across the member jurisdiction.”
Interesting! According to Abraham Lincoln, important principles may, and
must, be inflexible.
Our friends in India must use the word “must” instead of “may”. Must is not
a bad word. According to Hans Christian Andersen: “Just living is not
enough... one must have sunshine, freedom, and a little flower.”
Read more at Number 10 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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International Association of Risk and Compliance Professionals (IARCP)
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Commission welcomes agreement on
improving transparency of certain
financial transactions in the shadow
banking sector
The European Commission welcomes the political agreement on the
proposal for a regulation on reporting and transparency of securities
financing transactions (known as SFTR).
The agreement follows negotiations between the Commission, the
European Parliament and the Council of the EU to find common ground on
the regulation.
NIST announces the release of
Special Publication 800-171,
Protecting Controlled Unclassified
Information in Nonfederal
Information Systems and Organizations
Special Publication 800-171, Protecting Controlled Unclassified
Information in Nonfederal Information Systems and Organizations has
been approved as final.
The protection of Controlled Unclassified Information (CUI) while residing
in nonfederal information systems and organizations is of paramount
importance to federal agencies and can directly impact the ability of the
federal government to successfully carry out its designated missions and
business operations.
Net Stable Funding Ratio disclosure standards
The disclosure requirements for the Net Stable Funding
Ratio ("NSFR") have been developed to improve the
transparency of regulatory funding requirements
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International Association of Risk and Compliance Professionals (IARCP)
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Presentation of the Swiss National
Bank's Financial Stability Report
Introductory remarks by Mr Jean-Pierre
Danthine, Vice Chairman of the
Governing Board of the Swiss National Bank, at the Media News
Conference of the Swiss National Bank, Berne
“As my colleague Thomas Jordan has explained, global economic growth in
the first quarter of 2015 was below expectations.
However, over the last 12 months, we have seen an improvement in
international economic and financial conditions, although substantial risks
remain.”
Hearing at the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement by Mr Mario Draghi, President
of the European Central Bank, before the Hearing at
the Committee on Economic and Monetary Affairs of
the European Parliament, Brussels
“Today, I would like to share with you the ECB's assessment of the current
economic and monetary conditions in the euro area.”
New priorities for banking reform
Speech by Christopher Woolard, Director of Strategy &
Competition, FCA, delivered at the Warwick Business
School Westminster Forum
Good morning, I’m delighted to be here, even if the title
of my session is a bit of a misnomer. I’ll explain why.
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International Association of Risk and Compliance Professionals (IARCP)
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Comments on financial market
developments
Introductory remarks by Mr Fritz
Zurbrügg, Member of the Governing Board
of the Swiss National Bank, at the media news conference of the Swiss
National Bank, Berne
“Since the beginning of the year, monetary policy has continued to be an
important pacesetter on the financial markets.
This applies first and foremost to Switzerland, where events, especially on
the foreign exchange and interest rate markets, were shaped by the
discontinuation of the minimum exchange rate and the lowering of the
negative interest rate on 15 January.”
NIST Workshop Considers Ways to
Improve Tattoo Recognition
An international group of experts from
industry, academia and government gathered at the National Institute of
Standards and Technology (NIST) to discuss challenges and potential
approaches to automated tattoo recognition, which could assist law
enforcement in the identification of criminals and victims.
One in five American adults sport a tattoo, and among the criminal
population, that number is much higher.
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International Association of Risk and Compliance Professionals (IARCP)
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EIOPA modifies the methodology
for calculating the relevant risk-free
interest rate term structures for
Solvency II
Since February 2015 EIOPA publishes on a monthly basis relevant risk-free
interest rate term structures that are based on the Solvency II Directive.
The methodology for deriving those term structures is set out in a technical
documentation published on EIOPA's website.
EIOPA has decided to slightly modify the methodology for calculating the
term structures.
The modification relates to the daily fixing times of the swap rates,
overnight indexed swap rates and government bond rates that the
calculation is based on.
Basel III implementation assessments of India
and South Africa published by Basel Committee
The Basel Committee on Banking Supervision
published reports assessing the implementation of the
Basel risk-based capital framework and the Liquidity
Coverage Ratio (LCR) for India and South Africa.
These form part of a series of reports on Basel Committee members'
implementation of Basel standards under the Committee's Regulatory
Consistency Assessment Programme (RCAP).
A key component of the RCAP is to assess the consistency and completeness
of a jurisdiction's adopted standards and the significance of any deviations
from the regulatory framework.
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International Association of Risk and Compliance Professionals (IARCP)
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Commission welcomes agreement on
improving transparency of certain
financial transactions in the shadow
banking sector
The European Commission welcomes today's political agreement on the
proposal for a regulation on reporting and transparency of securities
financing transactions (known as SFTR).
The agreement follows negotiations between the Commission, the
European Parliament and the Council of the EU to find common ground on
the regulation.
The proposed regulation aims to increase the transparency of certain
transactions in the shadow banking sector to avoid that banks circumvent
other rules by moving those activities to the shadow banking sector.
Today's agreement will significantly improve the transparency of securities
financing transactions and help identify their risks and their magnitude.
Securities financing transactions (SFTs) allow market participants to access
secured funding, i.e. to use their assets to secure financing for their
activities.
This involves the temporary exchange of assets as a guarantee for a funding
transaction (e.g. the lending or borrowing of securities, repurchase or
reverse repurchase transactions, buy-sell back or sell-buy back
transactions, or margin lending transactions).
"Today's agreement is an important step forward in bringing transparency
in securities financing markets," said Jonathan Hill, EU Commissioner
responsible for Financial Stability, Financial Services and Capital Markets
Union.
"These activities are important for the financing of the economy and the
right kind of oversight will make it easier to monitor and assess the risks
involved."
The formal adoption of the proposal is expected later this year.
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International Association of Risk and Compliance Professionals (IARCP)
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Background:
Securities financing transactions were identified as a source of systemic risk
for the stability of the financial system in the Commission’s Communication
on Shadow Banking in 2013 (IP/13/812), and therefore would need to be
better monitored.
The lack of transparency in these SFTs markets makes it difficult to identify
property rights (who owns what?), monitor risk concentration and identify
counterparties (who is exposed to who?).
The proposal on the Securities Financing Transactions Regulation that was
adopted in January 2014 alongside the proposal for the structural reform of
the EU banking sector seeks to address these issues (IP/14/85 and
MEMO/14/63).
The proposal contains three measures to improve the transparency of
securities financing transactions (SFTs).
First, all SFTs, except those concluded with central banks, will be reported
to central databases known as trade repositories.
Second, information on the use of SFTs by investment funds will be
disclosed to investors in the regular reports and pre-investment documents
of funds.
Finally, minimum transparency conditions will need to be met on reuse of
collateral, such as disclosure of the risks and the need to grant prior
consent.
In August 2013, the Financial Stability Board adopted recommendations to
address the risks inherent to securities lending and repurchase agreements.
The proposed regulation is in line with these recommendations.
Note:
Proposal on transparency of securities financing transactions
On 29 January 2014, the European Commission adopted a proposal for a
regulation to stop the biggest banks from engaging in proprietary trading
and to give supervisors the power to require those banks to separate other
risky trading activities from their deposit-taking business.
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International Association of Risk and Compliance Professionals (IARCP)
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To prevent banks from attempting to circumvent these rules by shifting
parts of their activities to the less-regulated shadow banking sector, the
Commission adopted a proposal for a regulation aimed at increasing
transparency of certain transactions outside the regulated banking sector.
This proposal provides a set of measures aiming to enhance regulators’ and
investors’ understanding of securities financing transactions (STFs).
These transactions have been a source of contagion, leverage and
procyclicality during the financial crisis and they have been identified in the
Commission’s Communication on Shadow Banking as needing better
monitoring.
What are securities financing transactions? What are they used
for?
Securities financing transactions (SFTs) include a variety of secured
transactions that have similar economic effects such as lending or
borrowing securities and commodities, repurchase (repo) or reverse
repurchase transactions and buy-sell back or sell-buy back transactions.
The main SFTs are securities lending and repos.
Securities lending is primarily driven by market demand for specific
securities and is used, for instance, for short selling or settlement purposes.
In this type of transaction, the lending counterparty lends securities for a
fee against a guarantee in the form of financial instruments or cash given by
their clients or counterparties.
Repos/reverse repos are generally motivated by the need to borrow or lend
cash in a secure way.
This practice consists of selling/buying financial instruments against cash,
while agreeing in advance to buy/sell back the financial instruments at a
predetermined price on a specific future date.
What is shadow banking?
Shadow banking can be defined as a system of credit intermediation that
involves entities and activities outside the regular banking system.
Shadow banks are not regulated like banks, though their operations are like
those of banks, as they:
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International Association of Risk and Compliance Professionals (IARCP)
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-
Take in funds similar to deposits;
-
Lend over long periods and take in deposits that are available
immediately (known as maturity and/or liquidity transformation);
-
Take on the risk of the borrower not being able to repay; and
-
Use borrowed money, directly or indirectly, to buy other assets.
They may include ad hoc entities such as securitisation vehicles or conduits,
money market funds, investment funds that provide credit or are leveraged,
such as certain hedge funds or private equity funds and financial entities
that provide credit or credit guarantees, which are not regulated like banks
or certain insurance or reinsurance undertakings that issue or guarantee
credit products.
Shadow banking also includes activities, in particular securitisation,
securities lending and repurchase transactions, which constitute an
important source of finance for financial entities.
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International Association of Risk and Compliance Professionals (IARCP)
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NIST announces the release of
Special Publication 800-171,
Protecting Controlled Unclassified
Information in Nonfederal Information Systems and
Organizations
Special Publication 800-171, Protecting Controlled Unclassified
Information in Nonfederal Information Systems and Organizations has
been approved as final.
The protection of Controlled Unclassified Information (CUI) while residing
in nonfederal information systems and organizations is of paramount
importance to federal agencies and can directly impact the ability of the
federal government to successfully carry out its designated missions and
business operations.
This publication provides federal agencies with recommended
requirements for protecting the confidentiality of CUI:
(i) when the CUI is resident in nonfederal information systems and
organizations;
(ii) when the information systems where the CUI resides are not used or
operated by contractors of federal agencies or other organizations on behalf
of those agencies; and
(iii) where there are no specific safeguarding requirements for protecting
the confidentiality of CUI prescribed by the authorizing law, regulation, or
governmentwide policy for the CUI category or subcategory listed in the
CUI Registry.
The requirements apply to all components of nonfederal information
systems and organizations that process, store, or transmit CUI, or provide
security protection for such components.
The CUI requirements are intended for use by federal agencies in
contractual vehicles or other agreements established between those
agencies and nonfederal organizations.
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International Association of Risk and Compliance Professionals (IARCP)
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Introduction
Today more than at any time in history, the federal government is relying
on external service providers to help carry out a wide range of federal
missions and business functions using state-of-the-practice information
systems.
Many federal contractors, for example, routinely process, store, and
transmit sensitive federal information in their information systems to
support the delivery of essential products and services to federal agencies
(e.g., providing credit card and other financial services; providing Web and
electronic mail services; conducting background investigations for security
clearances; processing healthcare data; providing cloud services; and
developing communications, satellite, and weapons systems).
Additionally, federal information is frequently provided to or shared with
entities such as State and local governments, colleges and universities, and
independent research organizations.
The protection of sensitive federal information while residing in nonfederal
information systems and organizations is of paramount importance to
federal agencies and can directly impact the ability of the federal
government to successfully carry out its designated missions and business
operations, including those missions and functions related to the critical
infrastructure.
The protection of unclassified federal information in nonfederal
information systems and organizations is dependent on the federal
government providing a disciplined and structured process for identifying
the different types of information that are routinely used by federal
agencies.
On November 4, 2010, the President signed Executive Order 13556,
Controlled Unclassified Information.
The Executive Order established a government wide Controlled
Unclassified Information (CUI) Program to standardize the way the
executive branch handles unclassified information that requires protection
and designated the National Archives and Records Administration (NARA)
as the Executive Agent to implement that program.
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International Association of Risk and Compliance Professionals (IARCP)
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Only information that requires safeguarding or dissemination controls
pursuant to federal law, regulation, or governmentwide policy may be
designated as CUI.
The CUI Program is designed to address several deficiencies in managing
and protecting unclassified information to include inconsistent markings,
inadequate safeguarding, and needless restrictions, both by standardizing
procedures and by providing common definitions through a CUI Registry.
The CUI Registry is the online repository for information, guidance, policy,
and requirements on handling CUI, including issuances by the CUI
Executive Agent.
Among other information, the CUI Registry identifies approved CUI
categories and subcategories, provides general descriptions for each,
identifies the basis for controls, and sets out procedures for the use of CUI,
including but not limited to marking, safeguarding, transporting,
disseminating, reusing, and disposing of the information.
Executive Order 13556 also required that the CUI Program emphasize
openness, transparency, and uniformity of government wide practices, and
that the implementation of the program take place in a manner consistent
with applicable policies established by the Office of Management and
Budget (OMB) and federal standards and guidelines issued by the National
Institute of Standards and Technology (NIST).
The federal CUI regulation, developed by the CUI Executive Agent,
provides guidance to federal agencies on the designation, safeguarding,
dissemination, marking, decontrolling, and disposition of CUI, establishes
self-inspection and oversight requirements, and delineates other facets of
the program.
To read the paper:
http://nvlpubs.nist.gov/nistpubs/SpecialPublications/NIST.SP.800-171.pd
f
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Net Stable Funding Ratio disclosure standards
The disclosure requirements for the Net Stable Funding
Ratio ("NSFR") have been developed to improve the
transparency of regulatory funding requirements, reinforce
the Principles for sound liquidity risk management and
supervision, strengthen market discipline, and reduce
uncertainty in the markets as the NSFR standard is implemented.
Similar to the LCR disclosure framework, and to promote the consistency
and usability of disclosures related to the NSFR, internationally active
banks in all Basel Committee member jurisdictions will be required to
publish their NSFRs according to a common template.
This NSFR disclosure template includes the major categories of sources and
uses of stable funding.
In parallel with the implementation of the NSFR standard, supervisors will
give effect to these disclosure requirements, and banks will be required to
comply with them from the date of the first reporting period after 1 January
2018.
Net Stable Funding Ratio disclosure standards
Introduction
1.
The fundamental role of banks in financial intermediation makes
them inherently vulnerable to liquidity risk, of both an institution-specific
and market nature.
Financial market developments have increased the complexity of liquidity
risk and its management.
During the early “liquidity phase” of the financial crisis that began in 2007,
many banks – despite meeting the capital requirements then in effect –
experienced difficulties because they did not prudently manage their
liquidity.
The difficulties experienced by some banks arose from failures to observe
the basic principles of liquidity risk measurement and management.
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2.
In 2008, the Basel Committee on Banking Supervision responded by
publishing Principles for Sound Liquidity Risk Management and
Supervision (the “Sound Principles”), which provide detailed guidance on
the risk management and supervision of funding liquidity risk.
The Committee has further strengthened its liquidity framework by
developing two minimum standards for funding liquidity.
These standards aim to achieve two separate but complementary objectives.
The first objective is to promote the short-term resilience of a bank’s
liquidity risk profile by ensuring that it has sufficient high-quality liquid
assets (HQLA) to survive a significant stress scenario lasting for 30 days.
To this end, the Committee published Basel III: The Liquidity Coverage
Ratio and liquidity risk monitoring tools.
The second objective is to reduce funding risk over a longer time horizon by
requiring banks to fund their activities with sufficiently stable sources of
funding in order to mitigate the risk of future funding stress.
To achieve this objective, the Committee published Basel III: The Net
Stable Funding Ratio.
The NSFR will become a minimum standard by 1 January 2018.
This ratio should be equal to at least 100% on an ongoing basis.
These standards are an essential component of the set of reforms
introduced by Basel III and together will increase banks’ resilience to
liquidity shocks, promote a more stable funding profile and enhance overall
liquidity risk management.
3.
This disclosure framework is focused on disclosure requirements for
the Net Stable Funding Ratio (NSFR).
Similar to the LCR disclosure framework, this requirement will improve the
transparency of regulatory funding requirements, reinforce the Sound
Principles, enhance market discipline, and reduce uncertainty in the
markets as the NSFR is implemented.
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4.
It is important that banks adopt a common public disclosure
framework to help market participants consistently assess banks’ funding
risk.
To promote the consistency and usability of disclosures related to the
NSFR, and to enhance market discipline, the Committee has agreed that
internationally active banks across member jurisdictions will be required to
publish their NSFRs according to a common template.
There are, however, some challenges associated with disclosure of funding
positions under certain circumstances, including the potential for
undesirable dynamics during stress.
The Committee has carefully considered this trade-off in formulating the
disclosure framework contained in this document.
5.
The disclosure requirements are organised as follows.
Section 1 presents requirements on the scope of application,
implementation date, and the frequency and location of reporting.
The disclosure requirements for the NSFR are set out in Section 2 and
include a common template that banks must use to report their NSFR
results and selected details of the NSFR components.
6.
The Committee recognises that the NSFR is only one measure of a
bank’s funding risk and that other information, both quantitative and
qualitative, is essential for market participants to gain a broader picture of a
bank’s funding risk and management.
Section 3 of the LCR disclosure framework provides additional guidance on
other information that banks may choose to disclose in order to facilitate
understanding and awareness of their internal funding liquidity risk
measurement and management.
Section 1: Scope of application, implementation date and
frequency and location of reporting
7.
The disclosure requirements set out in this document are applicable
to all internationally active banks on a consolidated basis but may be used
for other banks and on any subset of entities of internationally active banks
to ensure greater consistency and a level playing field between domestic
and cross-border banks.
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International Association of Risk and Compliance Professionals (IARCP)
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8.
Supervisors will give effect to the disclosure requirements set out in
this standard by no later than 1 January 2018.
Banks will be required to comply with these disclosure requirements from
the date of the first reporting period after 1 January 2018.
9.
Banks must publish this disclosure with the same frequency as, and
concurrently with, the publication of their financial statements (ie typically
quarterly or semi-annually), irrespective of whether the financial
statements are audited.
10. Banks must either include the disclosures required by this document
in their published financial reports or, at a minimum, provide a direct and
prominent link to the completed disclosure on their websites or in publicly
available regulatory reports.
Banks must also make available on their websites, or through publicly
available regulatory reports, an archive (for a suitable retention period as
determined by the relevant supervisors) of all templates relating to prior
reporting periods.
Irrespective of the location of the disclosure, the minimum disclosure
requirements must be in the format required by this document (ie
according to the requirements in Section 2).
Section 2: Disclosure requirements
11.
The disclosure of quantitative information about the NSFR should
follow the common template developed by the Committee.
Annex 1 presents an explanation of the common template’s design.
The NSFR information must be calculated on a consolidated basis and
presented in a single currency
12.
Data must be presented as quarter-end observations.
For banks reporting on a semi-annual basis, the NSFR must be reported for
each of the two preceding quarters.
For banks reporting on an annual basis, the NSFR must be reported for the
preceding four quarters.
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13.
Both unweighted and weighted values of the NSFR components must
be disclosed unless otherwise indicated.
Weighted values are calculated as the values after ASF or RSF factors are
applied. See Annex 2 for more details.
14.
NSFR common disclosure template:
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15.
In addition to the common template, banks should provide a
sufficient qualitative discussion around the NSFR to facilitate an
understanding of the results and the accompanying data. For example,
where significant to the NSFR, banks could discuss:
(a)
the drivers of their NSFR results and the reasons for intra-period
changes as well as the changes over time (eg changes in strategies, funding
structure, circumstances etc); and
(b) the composition of the bank’s interdependent assets and liabilities
(as defined in paragraph 45 of the NSFR document) and to what extent
these transactions are interrelated.
Annex 1
Explanation of the NSFR common disclosure template
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Annex 2
Instructions for completion of the NSFR common disclosure
template
•
Rows in the template are set and compulsory for all banks.
Annex 1 provides a table that sets out an explanation of each line of the
common template, with references to the relevant paragraph(s) of the Basel
III NSFR rules text.
Key points to note about the common template are:
-
Each dark grey row introduces a section of the NSFR template.
-
Each light grey row represents a broad subcomponent category of the
NSFR in the relevant section.
-
Each unshaded row represents a subcomponent within the major
categories under ASF and RSF items.
-
The relevant subcomponents to be included in the calculation of each
row are specified in Annex 1.
-
No data should be entered for the cross-hatched cells.
•
Figures entered in the template should be the quarter-end
observations of individual line items.
•
Figures entered for each RSF line item should include both
unencumbered and encumbered amounts.
•
Figures entered in unweighted columns are to be assigned on the
basis of residual maturity and in accordance with paragraphs 18 and 29 of
the NSFR rules text.
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International Association of Risk and Compliance Professionals (IARCP)
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Presentation of the Swiss
National Bank's Financial
Stability Report
Introductory remarks by Mr
Jean-Pierre Danthine, Vice
Chairman of the Governing Board of the Swiss National Bank, at the Media
News Conference of the Swiss National Bank, Berne
As my colleague Thomas Jordan has explained, global economic growth in
the first quarter of 2015 was below expectations.
However, over the last 12 months, we have seen an improvement in
international economic and financial conditions, although substantial risks
remain.
The domestic environment has become more challenging due to the strong
appreciation of the Swiss franc that followed the discontinuation of the
minimum exchange rate in January 2015.
Against this background, I would like to examine the situation at Swiss
banks from a financial stability perspective, looking first at the big banks
and then moving on to a discussion of domestically focused banks.
A more detailed assessment of the situation can be found in the latest
Financial Stability Report published today.
Big banks
Further improving resilience
Over the past year, the Swiss big banks have continued to improve their
capital situation, albeit at a slower pace than the year before.
They already meet most of the requirements which will apply from 2019.
While acknowledging the progress made, the SNB recommends that the big
banks do not lose momentum in their efforts to improve their resilience.
This is particularly warranted with regard to the leverage ratio.
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Resilience needs to be further improved for three reasons:
First, the big banks' loss potential relative to their capitalisation continues
to be substantial.
Second, while the Swiss big banks' risk-weighted capital ratios are above
the average for large globally active banks, the same cannot yet be said for
their leverage ratios.
Third, it can be expected that regulatory developments at both international
and national level will result in increased capital requirements.
The Swiss big banks should prepare for these developments.
RWA problem identified, but not yet resolved
In the capital regulation of banks, risk-weighted assets (RWA) play a key
role.
As mentioned in previous Financial Stability Reports, both markets' and
authorities' confidence in RWA calculated using banks' internal models has
steadily declined.
A number of studies have shown that, in some instances, model-based
RWA do not properly reflect a bank's economic risks .
As a consequence, capital ratios calculated using model-based RWA may
overstate the true level of resilience.
To address this problem, regulatory initiatives have been launched at
international and national level.
At international level, the Basel Committee on Banking Supervision is
fundamentally revising the standardised approach.
The Committee is also examining the introduction of a floor for internally
modelled RWA based on this revised standardised approach.
One important objective of the floor would be to ensure that capital
requirements based on banks' internal models do not fall below a prudent
level.
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At national level, FINMA - together with the big banks and with the support
of the SNB - has conducted a comparison between RWA calculated using
the model-based and standardised approaches.
The results of this comparison, in addition to the measures already taken by
FINMA and those expected at the international level, will be taken into
account by a working group led by the Federal Department of Finance.
This working group will draw up proposals and the associated legal
adjustments for implementing the recommendations in the Federal
Council's 'too big to fail' evaluation report.
Alongside these regulatory initiatives, the SNB still considers it necessary
that the big banks increase transparency with regard to RWA.
FINMA has now called on these banks to disclose the differences between
calculations using the model-based and standardised approaches. Such
enhanced transparency is necessary to restore the credibility of
model-based RWA and to strengthen market discipline.
The SNB continues to hold the view that risk-weighted capital requirements
- including a floor for model-based RWA - and leverage ratio requirements
should complement each other.
Risk-weighted requirements should guide economic decisions at the
margin, while the leverage ratio should serve as a backstop.
Yet, until the measures to resolve the RWA problem take effect, it is
prudent to give a greater weighting to the leverage ratio when assessing the
big banks' resilience.
Indeed, analysts increasingly pay attention to the leverage ratio when
assessing and comparing banks.
Domestically focused commercial banks
Increased mortgage exposure, capital situation stable
I would now like to turn to the domestically focused commercial banks. In
2014, these banks further increased their exposure to the Swiss mortgage
and residential real estate markets.
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International Association of Risk and Compliance Professionals (IARCP)
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While the share of new loans with high loan-to-income ratios - a measure of
affordability risk - remained persistently high, mortgage lending growth
and the share of new mortgage loans with a high loan-to-value ratio
decreased.
Hence, the increase in exposure was lower than in previous years.
With respect to bank capitalisation, the situation remained largely
unchanged in 2014.
First, the domestically focused commercial banks' leverage ratios remained
stable at high levels by historical standards.
Second, these banks' risk-weighted capital ratios increased slightly and are
significantly above regulatory minimum requirements overall.
Furthermore, stress test results suggest that most domestically focused
banks should be able to absorb estimated losses without seeing their
capitalisation fall below the regulatory minimum.
Nevertheless, under the most relevant adverse scenarios for these banks,
the losses would deplete a large proportion of their surplus capital.
Experience in Switzerland in the 1990s, as in other countries, suggests that
this would lead to a general weakening of the banking sector and
significantly affect banks' ability to lend, with negative and lasting
repercussions for the real economy.
The stress test results highlight the importance of banks holding significant
capital surpluses relative to the regulatory minimum requirements.
The activation of the countercyclical capital buffer in 2013 and its increase
in 2014 has made a significant contribution in this respect.
Risk of renewed increase in imbalances on mortgage and real
estate markets
Overall, imbalances on the mortgage and residential real estate markets
have remained broadly unchanged since the last Financial Stability Report.
From a financial stability perspective, this is a positive development.
However, it is still too early to give the all-clear.
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On the one hand, imbalances remain at a high level and have not yet started
to decline.
On the other hand, the further decline of capital and money market interest
rates observed since January 2015 carries the risk of a renewed increase in
imbalances on the Swiss mortgage and residential real estate markets over
the medium term.
First, compared to alternative assets, investments in real estate appear to
have become more attractive for banks, commercial investors and
households.
In the residential investment property segment in particular, additional
demand from investors searching for yield might push prices up further.
Second, the unprecedented interest rate environment creates additional
incentives for banks to incur higher interest rate and credit risks.
They might be tempted to increase both maturity transformation and
lending to compensate for the additional pressure on margins and to
stabilise short-term profitability.
Such strategies would further increase banks' exposure to large interest rate
shocks and to a correction on the mortgage and real estate markets.
Given these risks to financial stability, banks and authorities should remain
alert and, if necessary, take measures to contain such risks.
In particular, should momentum on the mortgage and residential real
estate markets pick up again, additional measures might become necessary.
In this regard, particular attention should be paid to the investment
property segment.
This segment is more likely to be materially affected by the additional
demand from investors searching for yield in the current environment.
Furthermore, the measures taken so far have predominantly addressed the
segment of owner-occupied residential real estate.
For its part, the SNB will continue to monitor developments on the
mortgage and real estate markets closely, and will reassess the need for an
adjustment to the countercyclical capital buffer on a regular basis.
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Hearing at the Committee on Economic and
Monetary Affairs of the European Parliament
Introductory statement by Mr Mario Draghi,
President of the European Central Bank, before the
Hearing at the Committee on Economic and
Monetary Affairs of the European Parliament,
Brussels
Mr Chairman,
Honourable members of the Committee on Economic and Monetary
Affairs,
Ladies and gentlemen,
I am happy to be back to this committee for my regular hearing.
Today, I would like to share with you the ECB's assessment of the current
economic and monetary conditions in the euro area.
I will then touch on the subject chosen for our exchange of views, namely
the risks and side-effects of our asset purchase programme.
Finally, I will say a few words about the current situation in Greece.
Economic outlook and monetary policy
The latest economic indicators and survey data broadly confirm our
assessment that the economic recovery is proceeding at a moderate pace.
While growth has been mainly supported by private consumption in recent
quarters, we now see encouraging signs that also private investment is
picking up, which underlies our expectation that the economic recovery
should broaden.
This will be supported in particular by our monetary policy measures,
which are working their way through to the real economy, by the
comparatively low price of oil, and by improvements in external price
competitiveness.
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This is also reflected in the latest Eurosystem staff projections: we project
economic growth to increase from 1.5% of GDP in 2015 to 1.9% in 2016 and
to 2.0% in 2017.
After some months with negative or zero rates, inflation in May has
increased modestly, standing at 0.3% in year-on-year terms, as the negative
contributions from energy prices are fading.
We expect inflation to remain low in the months ahead before rising
stepwise around the turn of the year.
Thereafter, inflation is expected to gradually converge toward levels closer
to but still below 2%.
In the Eurosystem staff projections of June, inflation is projected to
increase from 0.3% in 2015 to 1.5% in 2016 and 1.8% in 2017.
Over the last quarter, money and credit dynamics have strengthened
overall.
The growth of broad money in April stood at 5.3%, and in part reflects the
expansion of bond purchases by the Eurosystem.
While improving further, loan growth to the private sector, standing at
0.8% in April, has lagged somewhat the pace at which monetary trends
have been firming.
It remains moderate - atypically so, after such a prolonged phase of credit
compression - and uneven across the euro area economies with new loans
to enterprises particularly weak.
Overall, we remain prudently confident that all economic and monetary
conditions are in place to support a gradual reflation of the euro area
economy, with a sustained return of inflation rates to levels below, but close
to, 2%.
This assessment is based on the full implementation of all our monetary
policy measures.
We need to keep a steady monetary policy course and firmly implement
those measures, including our expanded asset purchase programme.
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It is our clear intention to purchase private and public sector securities of
EUR 60 billion per month on average until the end of September 2016 and,
in any case, until we see a sustained adjustment in the path of inflation that
is consistent with our aim of achieving inflation rates below, but close to,
2% over the medium term.
Over recent weeks, financial markets have registered a measurable trend
reversal in prices and a surge in volatility, with the fixed-income market the
epicentre of the correction.
Let me make two observations in this respect.
First, a period of higher volatility is a phenomenon that is frequently
observed not long after the start of a large quantitative programme, when
short-term rates are pressed against their lower bound.
Price discovery is gradual and complex in a world in which central banks
intervene in long-dated securities and markets re-appraise prospects for
the macro-economy in exceptionally uncertain conditions.
Second, and notwithstanding these developments, financial market
conditions remain accommodative and supportive of the economic recovery
in the euro area.
For example, given the amount of accommodation that was introduced
even before our expanded asset purchase programme commenced in
March, bank lending rates - a key indicator of financing conditions in the
euro area - are still trending down.
Since the announcement of the expanded APP, the composite bank lending
rates for euro area NFCs declined by 13 basis points to 2.30% in April (and
compared with 2.79% in June 2014).
Bank lending rates on loans to households for house purchase declined by
25 basis points to 2.25% in April (and compared with 2.87% in June 2014).
In addition, most measures of cross-country dispersion show tangible
declines for NFCs.
As interest rates on outstanding loans are re-set, and new credit contracts
embodying more favourable terms for borrowers replace old ones, financial
accommodation reaches a growing number of consumers and investors.
This incremental process has not yet run its course. It is still on-going.
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This being said, in the process of price adjustment, the term structure of the
money market interest rates has come under intense upward pressure.
The expected policy rate path implied by money market quotes has shifted
up and steepened noticeably as a consequence.
The very short end of the curve - because of expanding surpluses of liquidity
- has remained well-anchored around levels that are broadly in line with
our forward guidance over those horizons.
We are closely monitoring conditions to detect signs of an unwarranted
tightening of our stance, to which we would need to react.
Risks and side-effects of APP
Engaging in a large-scale asset purchase programme is not without risks
and side effects.
Let me focus here on the financial risks of our own balance sheet, on
financial stability implications for the euro area, and on effects on income
distribution.
We monitor very closely the risks for the Eurosystem's balance sheet
associated with our asset purchase programmes and we manage those risks
to keep them at levels that do not threaten our capacity to fulfil our policy
mandate to maintain price stability.
In particular, we manage credit risk by exclusively purchasing assets of
sufficient credit quality, by defining an asset allocation and a limit
framework that ensures some degree of diversification, and by applying
severe due diligence and monitoring processes.
With regard to PSPP, we also decided that the purchases of government
bonds conducted by the Eurosystem NCBs will not be risk-shared within
the Eurosystem.
This does not hamper the effectiveness of the purchase programme and the
singleness of our monetary policy.
The Governing Council has full control over all the design features of the
programme.
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The specific risk-sharing agreement takes into account the unique
institutional structure of the euro area, in which a common currency and a
single monetary policy coexist alongside 19 national fiscal policies.
As regards possible financial stability risks, we assess these risks as rather
contained for now. Looking in particular at housing markets in the euro
area, we don't see any signs of general overvaluation.
Important indicators for increasing financial imbalances are real estate
prices and credit growth, but so far we have witnessed low growth rates of
both.
For instance, the annual growth rate of prices for houses and apartments in
the euro area increased on average by 0.8% in the last quarter of 2014.
The annual growth rate of loans for house purchases stood at 0.1% in April
2015.
Nevertheless, we monitor developments closely.
If needed, macro-prudential policy tools should be used to safeguard
financial stability.
Finally, large-scale asset purchases - as any other monetary policy measure
- have distributional consequences.
In the short run, the current combination of low interest rates, forward
guidance and asset purchases is conducive to a change in asset prices and to
wealth gains for investors holding a wide spectrum of assets.
But this mechanism of asset price changes lies at the heart of monetary
policy transmission and is set in motion every time a central bank activates
its instruments of monetary policy, whether conventional or
unconventional, in the pursuit of its objective.
Interest rate changes always alter the attractiveness of saving relative to
consumption and can influence the debt burden of borrowers.
Likewise, the current accommodative monetary policy stance eases
financing conditions throughout the economy, boosting consumption and
investment and, ultimately, inflation.
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This is an absolute precondition for interest rates to return to more normal
levels consistent with sustainable growth and price stability.
By reducing the cyclical component of unemployment, it also contributes to
reducing a major source of inequality, particularly amongst the young and
lower-income groups.
In the end, all citizens across the euro area will benefit most from an
environment of stable prices, macroeconomic stability, economic growth
and job creation in the longer run.
The current situation in Greece
Finally, let me say a few words on the situation in Greece and the ECB's
role.
As is the case for any member country of the euro area, the ECB, in the
context of the euro system, fulfils its mandate as central bank toward
Greece.
Furthermore, the SSM Regulation you adopted together with the Council in
2013 made the ECB the supervisor of the Greek banking system through
direct and indirect supervision.
And in the two-pack, Parliament and Council have asked the Commission
to liaise with the ECB when negotiating the conditionality attached to the
adjustment programmes and when reviewing their implementation.
When it comes to monetary policy and supervisory action, the ECB will
continue to take its decisions in full independence and in accordance with
our legal framework.
This rules-based approach is what is required from us.
This is what we have been following and will continue to follow.
In this context, the Eurosystem has provided support to allow Greek banks
to continue financing the economy.
Currently, the central bank liquidity extended to Greek banks amounts to
around EUR 118 billion, more than double the amount at end 2014.
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The current liquidity support represents around 66% of Greece's GDP, the
highest level as a share of GDP of any euro area country.
Last week, the Governing Council decided not to object to a further increase
in the ELA ceiling, by EUR 2.3 billion to EUR to 83 billion.
Liquidity will continue to be extended as long as Greek banks are solvent
and have sufficient collateral.
However, in a situation where the Greek government does not have market
access, this liquidity can not be used to circumvent the prohibition of
monetary financing, as laid out in Art. 123 of the Treaty on the Functioning
of the European Union.
This, together with supervisory considerations, explains why there is a
ceiling on the Greek T-bills held by the Greek banking sector.
For the Governing Council to reconsider the T-Bills ceiling, there should be
a credible perspective for a successful conclusion of the current review and
subsequent implementation which would imply the disbursement of
programme funds by euro area Member States.
This would also significantly improve the outlook for future market access
by the Greek government.
It should be absolutely clear that the decision on whether to conclude the
review of the current programme and disburse further financial support to
Greece lies entirely with the Eurogroup, so ultimately with euro area
Member States.
Hence this is a political decision that will have to be taken by elected
policymakers, not by central bankers.
In the meantime, we will continue to provide our advice on the adjustment
programmes.
It is within this context, that we need a strong and comprehensive
agreement with Greece, and we need this very soon.
By strong and comprehensive I mean an agreement that produces growth,
that has social fairness, but that is also fiscally sustainable, ensures
competitiveness, and addresses the remaining sources of financial
instability.
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I can assure you that the ECB is doing all it can to facilitate a successful
outcome.
Such a strong and credible agreement with Greece is needed, not only in the
interest of Greece, but also of the euro area as a whole.
While all actors will now need to go the extra mile, the ball lies squarely in
the camp of the Greek government to take the necessary steps.
Conclusion
The situation in Greece reminds us again that the Economic and Monetary
Union is an unfinished construction as long as we do not have all tools in
place to ensure that all euro area members are economically, fiscally and
financially sufficiently resilient.
To complete the Economic and Monetary Union, we need a quantum leap
towards a stronger, more efficient institutional architecture.
As you know, my colleagues and I are currently working on a report that
will aim at showing a roadmap for this.
We are in the final stages of this process, and I hope you understand that
also out of respect for my colleagues, I will not be able to tell you more than
what I have already said repeatedly: That we will need to put our
institutional framework on a much stronger footing; that we need, as I just
said, a quantum leap.
I am now looking forward to our discussion.
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New priorities for banking reform
Speech by Christopher Woolard, Director of
Strategy & Competition, FCA, delivered at the
Warwick Business School Westminster Forum
Good morning, I’m delighted to be here, even if the
title of my session is a bit of a misnomer. I’ll explain
why.
This morning, we have already heard a pretty extensive unpacking of the
reforms that occurred as a result of international, European and UK policy
makers responding to the financial crisis.
From a regulator’s point of view it is less a case of new priorities rather
more a case of making a reality of the new reforms and ensuring we have a
long-term sustainable model for regulation.
So today I want to spend some time looking at the FCA’s continuing
priorities for the year, reflect on the pace of change in the financial sector
and look at the how competition agenda is becoming increasingly
important for us as a regulator.
Priorities
In our business plan this year we have particularly highlighted we will
continue to focus on accountability and making a reality of the new senior
manager’s regime.
We will continue to focus on culture within firms, and as Martin Wheatley
said last month there is an obvious commercial imperative for firms to
address culture.
From our point of view, it would be hard to underestimate the impact of FX
coming on the heels of LIBOR.
Of some of the conversations between traders that we have seen in
evidence.
The Governor’s speech last week was pretty clear that it would be a mistake
for us or our colleagues at the Bank of England and PRA to fool ourselves
the job is done in terms of prudential risks or conduct.
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If we want fair markets that operate well in the interests of those who rely
on them – their consumers – whether that is in the wholesale space, retail
banking, insurance or pensions, then we will have to give those issues
continued and consistent attention.
However, it is also pretty clear we are entering a different phase of
regulation where the need for the significant legislative programme we have
seen may have passed.
A phase where we need to both remain alert to problems, but also adapt to
make markets work well in a rapidly changing world.
Pace of change
A phase where we need to be just as worried about the things that could be
in the interest of consumers that may not happen as well as preventing
negative risks.
The pace of some of the challenges are quite hard to conceptualise, but
given this is London Technology Week, a good example is those of you with
the latest smartphone in your pocket are carrying around more computing
power than most supercomputers offered 20 years ago.
Applepay launched in the US a year ago and now accounts for $2 of every
$3 spent on contactless payments.
Other challenges are more easy to understand the speed of change, but no
less challenging – within 20 years we will have moved from having the sixth
youngest population in Europe to the twenty-third oldest.
So the challenge is how do we keep pace with and adjust to the implications
of these changes?
What role should regulation play in ensuring we have markets to serve
consumers in different circumstances?
The FCA’s new strategy
In December last year, the FCA published a short document setting out our
future strategy.
We described this as a more market-based form of regulation.
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An evolution, not a revolution – supervision and enforcement against
individuals and specific firms still underpin our ability to act and maintain
confidence in the financial system.
There are also a number of important actions we need to take including
better use of intelligence.
And we also talked about greater use of our competition mandate. I want to
spend the next few minutes talking to you about how that competition lens
will shape our forward work.
Competition
I should say up front that when we talk about competition we are often
asked how we decide which objective to pursue as if competition was
opposed to market integrity or consumer interests.
We tend not to see the world that way – there are many overlaps and
synergies.
We believe the protection of consumers and market integrity are served by
competition.
Of course, there can be difficult balancing acts to perform.
Crowdfunding is a good example – where we have set the balance between
fostering a new source of competition to some traditional forms of lending
or investment against a relatively light regulatory and consumer protection
regime.
I should also underline we are not interested in competition for its own sake
- consumer benefit is what drives us - including to businesses in the wider
economy.
In looking at investment banking, we have made clear that outcomes for
smaller firms is one of the key issues we are looking at.
It is a massive simplification, but it is reasonably fair to characterise
traditional regulation as tending to be relatively static whereas competition
can be a way to deliver resilient yet dynamic markets.
We want to use our competition work to help us strike the right balance
between static rules and adapting with the grain of markets to get good
long-term, sustainable consumer outcomes.
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To look at markets that may not be working well for consumers, but also
look for solutions that set the conditions for the market to work better.
One small example of that is a piece of work we have recently submitted to
the CMA’s study into retail banking.
In an attempt to tackle high overdraft charges the industry agreed to a
regulation whereby annual statements of overdraft interest were sent to
bank customers.
Our research has shown that this remedy – whilst well intentioned –
basically has no effect.
Yet consumers who have a combination of internet banking and text alerts
reduce their overdraft charges by up to 24%.
That has been a market-led development by some firms - how do we
harness that across the sector?
It is easy faced with examples like this to say disclosure doesn’t work.
We don't agree with those who say complexity of financial services means
consumers will never drive effective competition.
That is a counsel of despair, but what our behavioural work is showing time
and time again that it is a case of the right information at the right time that
prompts really effective engagement.
For example, we already know we can increase switching by getting right
the timing of warnings about your cash savings deal running out.
At the moment we are trialing with a number of pensions firms how we can
get consumers to understand their options better and shop around for the
best deals as a result of improving so-called ‘wake-up packs’.
On the supply side of the market, we are often asked if the competition
objective means that FCA is becoming a price regulator?
The answer to is mostly no, but not entirely.
Price regulation is not the first tool we look to, but where demand side is too
weak to provide effective discipline it must be considered.
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In our work on the cash savings market we are mandating a number of
changes designed to encourage transparency and greater switching.
But we have also capped the price of pay-day lending, albeit under a direct
legislative requirement to do so.
And no consideration of competition would be complete without noting of
course there are the new CA98 powers, where we have been put on an equal
footing with the CMA and other competition authorities.
Not every competition problem breaches the law, but we are ready to bring
to bear the FCA's enforcement expertise to take firm action.
Innovation
Finally, having a competition mandate also means looking hard at potential
barriers to entry and competition.
Are there things we do as a regulator that inhibit competition?
Are there rules that favour incumbents?
Are there missing markets we need to meet future demands?
So we have already looked at the barriers to entry created by our system for
banking licenses, resulting in 14 new banks being licensed in the last two
years and 20 more applications in the pipeline when there had only been
two in the previous decade.
It is also critically important that we foster disruptive innovation in the
interests of consumers.
We launched Project Innovate seven months ago to encourage innovation
in financial markets, both from small new entrants and from established
firms. Innovate has assisted 91 firms so far.
In line with our commitment to innovation, I wanted to close by
highlighting the call for input we have launched today on the potential
regulatory barriers to innovation in mobile and digital services.
This is an area of the market where we are on the brink of the potential for
fundamental change - with real positives to be gained and new risks too.
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We want UK consumers to benefit from the most innovative market in
Europe in which to do mobile and digital financial business.
So we are asking everyone interested in digital and mobile solutions for
financial services to give us their views so we can shape the future
environment, in the UK and play a full role in influencing the shape of
European regulation.
Conclusion
So in summary, the course for reform is set – we need to stay that course,
for example to ensure accountability becomes a reality for all staff in the
banking sector.
To continue to pursue wrong-doing where it occurs.
And we need to look forward too. As we do so we will be using the lens of
market-based regulation to lead us to more of the answers and seeking to
use our competition tools to find long-term solutions.
Thank you.
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Comments on financial market
developments
Introductory remarks by Mr Fritz
Zurbrügg, Member of the Governing
Board of the Swiss National Bank, at
the media news conference of the
Swiss National Bank, Berne
I will begin with a review of the situation on the financial markets.
I will then talk about the implementation of negative interest and its impact
on the Swiss money and capital markets.
Situation on financial markets
Since the beginning of the year, monetary policy has continued to be an
important pacesetter on the financial markets.
This applies first and foremost to Switzerland, where events, especially on
the foreign exchange and interest rate markets, were shaped by the
discontinuation of the minimum exchange rate and the lowering of the
negative interest rate on 15 January.
The Swiss stock market experienced a price correction, but losses were
rapidly recouped.
At present, the SMI is at roughly the same level as the start of the year.
Thus Swiss shares benefited from a generally favourable mood among
investors. Since the beginning of 2015, all the major share indices have
recorded gains - albeit to varying degrees.
On international bond markets, exceptional price movements have been
recorded over the past few months, as shown in chart 1.
Until mid-April, the government bonds of a number of countries with high
credit ratings traded at historically low, or even - in some cases - negative
yields.
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With both this development and the introduction of negative interest, yields
on Confederation bonds declined over the entire spectrum of maturities.
However, since mid-April, the government bond markets have suffered
substantial losses, with yields on ten-year German government bonds, for
instance, rising within a very short period from about 0.1% to, most
recently, 0.8%.
In Switzerland the increase in interest rates was significantly smaller.
Yields on ten-year bonds are currently around 0.1%, compared with -0.2%
in mid-April.
Since the beginning of the year, numerous central banks have adopted more
expansionary monetary policy stances.
They include, in particular, the European Central Bank, which in January
announced an asset purchase programme in excess of market expectations
as regards both the amount and duration.
In the US, by contrast, monetary policy continues to point in the opposite
direction.
Thus, most market participants expect that the US Federal Reserve will
initiate a reversal in interest rates before the end of the year.
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For over a year, this monetary policy divergence has been a major factor
behind the depreciation of the euro against the US dollar.
As chart 2 shows, since mid-2014, the European currency has declined
some 18% in value and has also weakened on a trade-weighted basis, by
around 9%.
The trade-weighted US dollar, by contrast, has gained approximately 15% in
this period.
Another important issue on financial markets has been the increased
uncertainty due to the unresolved debt problem in Greece.
Despite the fact that risk attitudes, as such, are positive, demand for safe
investments and thus for the Swiss franc has remained particularly strong.
Consequently, recent movements in the Swiss franc have been influenced
not only by the divergence between the dollar and euro regions, but also by
persistent safe haven flows.
The discontinuation of the minimum exchange rate led to a very substantial
but short-lived appreciation in the Swiss franc.
The extent of this appreciation is shown in chart 3.
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The extreme movements in the exchange rate were accompanied by a sharp
increase in volatility on the Swiss franc foreign exchange market.
Since then, Swiss franc volatility has declined, although it remains high in a
long-term comparison with the period prior to the financial crisis.
At the same time, bid-ask spreads, i.e. differences between the best
purchasing and selling offers, widened substantially following the end of
the minimum exchange rate.
These, too, have declined in the past few months, although the bid-ask
spreads remain relatively large.
In trade-weighted terms, the Swiss franc is no longer at the extreme levels
that prevailed immediately after the discontinuation of the minimum
exchange rate.
However, it is still some 12% above the level at the beginning of the year.
Thus, the Swiss franc is still substantially overvalued.
Implementation and impact of negative interest
Exactly six months ago, on 18 December 2014, the Swiss National Bank
(SNB) decided to impose negative interest on sight deposit account
balances at the SNB for the first time, setting the rate at -0.25%.
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When it discontinued the minimum exchange rate, it lowered the rate once
again by 0.5 percentage points, to -0.75%.
By imposing negative interest on sight deposits, the SNB intends to move
the three-month Libor into negative territory and significantly reduce
interest rates in the money and capital markets.
The lower interest rate makes it much less attractive to hold Swiss francs
compared to other currencies.
This should lead to a weakening in the Swiss franc over time.
How the negative interest rate is applied
I would like to take a moment to remind you how our negative interest rate
is applied.
It is imposed on all sight deposit account balances of banks and other
financial market participants held at the SNB exceeding a given exemption
threshold.
For domestic banks, the exemption threshold is 20 times the statutory
minimum reserve requirement.
For non-banks and foreign-domiciled banks (which are not subject to the
minimum reserve requirement), a fixed exemption threshold of at least
CHF 10 million has been set.
The cumulative exemption thresholds come to about CHF 300 billion.
This means that, with current sight deposits amounting to some CHF 455
billion, approximately CHF 155 billion are subject to negative interest.
To date, the interest due on this amount has totalled around CHF 100
million per month.
The exemption thresholds take account of the very high level of liquidity in
the banking system, which is due to the SNB's past interventions on the
foreign exchange market.
The exemptions are calculated to ensure that they remain virtually
unchanged over time.
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This means that the interest burden increases as soon as the SNB feeds
more liquidity into the system - in particular in the event of further foreign
exchange interventions.
Consequently, the SNB's readiness to remain active in the foreign exchange
market and the negative interest rate are two mutually reinforcing
measures.
By imposing negative interest on sight deposits that exceed a given
exemption threshold, we set incentives for the entire financial system to
give preference to investments in foreign currencies over those in Swiss
francs, thereby limiting new inflows into the Swiss currency.
Since the exceptional demand for Swiss francs is not only foreign but also
domestic, there is no economic argument for differentiating by origin of
investor.
What is more, we have reduced to a minimum the number of exceptions
from the obligation to pay negative interest.
Impact of negative interest
Six months after the announcement of negative interest, we can see that the
measure is having the desired effect on the money and capital markets.
The money market is working well, even with negative interest.
Money market interest rates have reacted rapidly, and the three-month
Libor has settled in the middle of the range we targeted.
This shows that marginal costs - the costs of an additional unit of Swiss
franc liquidity - are relevant for transmission on the interbank market.
Although trading activity on the money market remains lower than before
the financial crisis, it has revived somewhat.
For instance, turnover on the secured money market, in particular on the
Swiss franc repo market, has risen since the introduction of negative
interest.
As intended, negative interest has been transmitted from the money market
to the capital market.
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The lower interest rates for all maturities have widened the traditional
interest rate differential against other countries again somewhat.
Previously, they had narrowed substantially.
On the money and capital markets, the interest rate differential is now
greater than it was without negative interest, in particular for short-term
interest rates.
Chart 4 shows the path of interest rates for three-month loans on the Swiss
franc and euro money markets, together with the differential.
The greater interest rate differential helps to ensure that Swiss franc
investments are less attractive than investments in euros and other
currencies.
Moreover, the rise in the interest rate differential has increased the cost of
hedging foreign currency positions on the forward exchange market, which
is an additional factor dampening Swiss franc demand.
Although the interest rate differential has risen, it is still considerably below
the long-term average, particularly since interest rates abroad decreased
more substantially during the financial crisis than those in Switzerland.
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This can be seen in chart 5, which shows the example of interest rate
differentials between Germany and Switzerland for three-month, two-year,
five-year and ten-year maturities.
While interest rates on the money and capital markets declined as a result
of negative interest, mortgage rates did not decrease to the same extent.
Indeed, for mortgages with longer terms, rates are slightly higher than they
were at the beginning of the year.
The main reason for this divergence is that a major part of bank refinancing
costs consists of interest paid on savings deposits, which has not fallen
below zero as did interest rates on the money market.
Because interest on savings deposits is significantly higher than the money
market interest rate, bank interest margins came under pressure after they
had hedged the interest rate risk associated with their mortgage business,
and some mortgage rates were increased.
Fears that negative interest might contribute to a significant decline in
mortgage rates and, in turn, to stronger growth in mortgage lending have so
far proved unfounded.
For investors, by contrast, the current low interest rate environment means
that the challenges have increased.
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It is even more difficult for them to find yield-bearing investments.
I should emphasise, however, that this investment predicament is an
international phenomenon and not limited to the Swiss franc alone.
Conclusion
I will now come to my concluding remarks. Initial experience has shown
that the interest rate instrument is also effective in negative territory.
As intended, negative interest on sight deposits at the SNB was rapidly
transmitted to all segments of the money and capital markets.
In the current situation, negative interest fulfils a very important monetary
policy purpose: to help correct the overvaluation of the Swiss franc over
time.
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International Association of Risk and Compliance Professionals (IARCP)
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NIST Workshop Considers Ways to
Improve Tattoo Recognition
An international group of experts from
industry, academia and government gathered at the National Institute of
Standards and Technology (NIST) to discuss challenges and potential
approaches to automated tattoo recognition, which could assist law
enforcement in the identification of criminals and victims.
One in five American adults sport a tattoo, and among the criminal
population, that number is much higher.
And while tattoos can be used to assist identification of people who may
have committed a crime, they also are potentially valuable in supporting
identification of victims of mass casualties such as tsunamis and
earthquakes.
Participants at NIST's Tattoo Recognition Technology Challenge Workshop
heard the results of a preliminary trial of existing tattoo recognition
software.
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NIST challenged industry and academia to take initial steps into automated
image-based tattoo matching technology at the request of the FBI Biometric
Center of Excellence (BCOE).
The current method of cataloging tattoo images for sharing relies on a
keyword based process.
But the increasing variety of tattoo designs requires multiple keywords, and
examiner subjectivity can lead to the same tattoo being labeled differently
depending on the examiner.
All of the participating organizations used the same BCOE-provided dataset
of thousands of images from government databases.
NIST provided five use cases and asked the participants to report their
performance on finding:
-
visually similar or related tattoos from different subjects;
-
different instances of the same tattoo image from the same subject over
time;
-
a small region of interest that is contained in a larger image;
-
visually similar or related tattoos using different types of images such as
sketches, scanned print, computer graphics, or natural images; and
-
whether an image contains a tattoo or not.
NIST computer scientist Mei Ngan organized the challenge and found that
"the state-of-the-art algorithms fared quite well in detecting tattoos, finding
different instances of the same tattoo from the same subject over time, and
finding a small part of a tattoo within a larger tattoo."
Two areas that could use further research, she said, were detecting visually
similar tattoos on different people and recognizing a tattoo image from a
sketch or sources other than a photo.
"Improving the quality of tattoo images during collection is another area
that may also improve recognition accuracy," Ngan said.
The six organizations that participated in the challenge include Compass
Technical Consulting, LLC.; the Fraunhofer Institute of Optronics, System
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Technologies and Image Exploitation; the French Alternative Energies and
Atomic Energy Commission; MITRE; MorphoTrak and Purdue University.
In addition to discussing the self-reported finding in this initial research
step, participants also discussed the utility of image-based tattoo matching
in operations, identified gaps and needs to improve tattoo recognition and
discussed next steps NIST might take in this area.
For more details regarding the discussions and outcomes of the workshop,
visit www.nist.gov/itl/iad/ig/tatt-c.cfm
NIST has been the go-to source for testing and evaluation in biometrics for
more than half a century, with the goal of ensuring biometric systems are
accurate.
The laboratory has played a major role in biometric research, including
large-scale evaluations of fingerprint and face recognition systems.
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EIOPA modifies the methodology
for calculating the relevant risk-free
interest rate term structures for
Solvency II
Since February 2015 EIOPA publishes on a monthly basis relevant risk-free
interest rate term structures that are based on the Solvency II Directive.
The methodology for deriving those term structures is set out in a technical
documentation published on EIOPA's website.
EIOPA has decided to slightly modify the methodology for calculating the
term structures.
The modification relates to the daily fixing times of the swap rates,
overnight indexed swap rates and government bond rates that the
calculation is based on.
In the future the fixing time for different currencies will be as follows:
-
for European and African currencies - London market closing time;
-
for currencies of Asia and Australia - Tokyo market closing time;
-
for American currencies - New York market closing time (remains
unchanged).
The aim of the change is to improve the reliability of the market rates used
in the calculation by determining them at times of high trading activity.
The average impact of the change on the term structures is expected to be
very low.
The modified methodology will be applied for the first time for the
derivation of the term structures of end-June 2015, which will be published
in July 2015.
The technical documentation has been updated to reflect the modification.
EIOPA will continue reviewing the methodology to implement any
necessary changes in time before the start of Solvency II on 1 January 2016.
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To learn more:
https://eiopa.europa.eu/Publications/Standards/20150619%20RFR%20B
oS%20Technical_Documentation%20quick%20fix%20(clean).pdf
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Basel III implementation assessments of
India and South Africa published by Basel
Committee
The Basel Committee on Banking Supervision
published reports assessing the implementation of
the Basel risk-based capital framework and the
Liquidity Coverage Ratio (LCR) for India and
South Africa.
These form part of a series of reports on Basel Committee members'
implementation of Basel standards under the Committee's Regulatory
Consistency Assessment Programme (RCAP).
A key component of the RCAP is to assess the consistency and completeness
of a jurisdiction's adopted standards and the significance of any deviations
from the regulatory framework.
The RCAP does not take account of a jurisdiction's bank supervision
practices nor does it evaluate the adequacy of regulatory capital and
high-quality liquid assets for individual banks or a banking system as a
whole.
Overall, the assessment outcomes for both India and South Africa are
highly positive and reflect various amendments to the risk-based capital
and LCR rules undertaken by the authorities during the assessment.
The Basel Committee noted that several aspects of the domestic rules in
both countries are more rigorous than required under the Basel framework.
India
Overall, the domestic implementation of the risk-based capital framework
is found to be "compliant" with the Basel standards as all 14 components
are assessed as "compliant".
Regarding the LCR, India is assessed overall as "largely compliant",
reflecting the fact that most but not all provisions of the Basel standards
were satisfied.
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The implementation of the LCR regulation's component is assessed as
"largely compliant" and the implementation of the LCR disclosure
standards' component is assessed as "compliant".
South Africa
Overall, the domestic implementation of the risk-based capital framework
is found to be "compliant" with the Basel standards as all 14 components
are assessed as "compliant".
South Africa is also assessed as "compliant" with the Basel LCR standards,
including the LCR regulation and the LCR disclosure standards.
In carrying out the reviews of India and South Africa, the assessment teams
held discussions with senior officials and technical staff of the Reserve Bank
of India and the South African Reserve Bank.
The teams also met with a select group of banks in both countries.
Notes
The Basel Committee on Banking Supervision consists of senior
representatives of bank supervisory authorities and central banks.
Member countries include Argentina, Australia, Belgium, Brazil, Canada,
China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan,
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia,
Singapore, Spain, South Africa, Sweden, Switzerland, Turkey, the United
Kingdom, and the United States.
The RCAP is a central element of the Basel Committee's continuing efforts
to promote timely adoption of its standards and to monitor its members'
full and consistent compliance with the Basel framework.
The RCAP also helps member jurisdictions identify deviations from the
Basel framework, weigh the materiality of any deviations and undertake
necessary reforms.
Based on the findings of these assessments, many assessed jurisdictions
have already amended their regulations to align them more closely with the
Basel framework, thereby helping to promote global financial stability and a
level playing field for internationally active banks.
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The Basel Committee has previously published jurisdictional assessments
of Australia, Brazil, Canada, China, the European Union, Hong Kong SAR,
Japan, Mexico, Singapore, Switzerland, and the United States.
To learn more:
http://www.bis.org/bcbs/implementation/l2.htm
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Disclaimer
The Association tries to enhance public access to information about risk and
compliance management.
Our goal is to keep this information timely and accurate. If errors are brought to
our attention, we will try to correct them.
This information:
is of a general nature only and is not intended to address the specific
circumstances of any particular individual or entity;
should not be relied on in the particular context of enforcement or similar
regulatory action;
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is not necessarily comprehensive, complete, or up to date;
is sometimes linked to external sites over which the Association has no
control and for which the Association assumes no responsibility;
is not professional or legal advice (if you need specific advice, you should
always consult a suitably qualified professional);
-
is in no way constitutive of an interpretative document;
does not prejudge the position that the relevant authorities might decide to
take on the same matters if developments, including Court rulings, were to lead it
to revise some of the views expressed here;
does not prejudge the interpretation that the Courts might place on the
matters at issue.
Please note that it cannot be guaranteed that these information and documents
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It is our goal to minimize disruption caused by technical errors.
However some data or information may have been created or structured in files or
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The Association accepts no responsibility with regard to such problems incurred
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The International Association of Risk and Compliance
Professionals (IARCP)
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You can find more information about the CRCMP program at:
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