INTERNATIONAL REGULATORS TO START IDENTIFYING GLOBALLY SYSTEMATICALLY IMPORTANT FINANCIAL INSTITUTIONS
On 8 January 2014, the Financial Stability Board ("FSB") and the International Organization of Securities Commissions ("IOSCO") published a public consultation paper entitled, "Assessment Methodologies for Identifying Non-bank Non-insurer Global Systemically Important Financial Institutions (NBNI G-SIFIs)".
As a consequence of the financial crisis the FSB, which is a global coordinator for the world's financial services regulators, identified and developed a methodology for the supervision of globally systemic banks (including investment banks) ("G-SIBs") and insurers ("G-SIIs").
Until now, the work has been limited to banks and insurers but IOSCO, which works under the FSB's umbrella, has published the consultation paper cited above which will also mean a catch all "other" category for institutions that are systemic but don't fit into the other categories.
In developing the methodologies, the FSB and IOSCO based their work on the following principles:
- The overarching objective in developing the methodologies is to identify NBNI financial entities whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the global financial system and economic activity across jurisdictions.
- The general framework for the methodologies should be broadly consistent with methodologies for identifying G-SIBs and G-SIIs, i.e. an indicator-based measurement approach where multiple indicators are selected to reflect the different aspects of what generates negative externalities and makes the distress or disorderly failure of a financial entity critical for the stability of the financial system (i.e. "impact factors" such as size, interconnectedness, and complexity).
In the finance company category, reference is made to both large finance company subsidiaries of banks and large finance companies of car manufacturers. Most types of funds are likely to be captured – although only the largest funds are likely to be selected.
It will take some time before specific institutions are identified and subjected to additional supervisory requirements for being globally important but IOSCO hope that the public consultation will help it to better understand the market intermediaries and investment funds whose failure pose systemic risks to the wider financial system and economic activity.
IAIS CONSULTS ON PROPOSA L FOR BAS IC CAPITAL REQUIREMENTS FOR GLOBAL SYSTEMICALLY IMPORTANT INSURERS
On 16 December 2013, the International Association of Insurance Supervisors ("IAIS") published a consultation paper on proposed options for the development of global basic capital requirements ("BCR") for global systemically important insurers ("G-SIIs"). It also published a cover note alongside this.
This is the first of two planned public consultations and it will inform the design of field testing of the BCR, which is scheduled to begin in March 2014. The second consultation is scheduled to begin in July 2014, after field testing, and will provide an opportunity for comments on more specific BCR proposals. The timeline for the development of the BCR allows for their endorsement at the G20 meeting in November 2014.
The IAIS has developed and endorsed six principles to guide the development of the BCR and to provide a high-level framework against which the final design will be considered. The three substantive principles are that:
- Major risk categories should be considered.
- There is comparability of outcomes across jurisdictions.
- The BCR has resilience to stress.
These are complemented by three constructive principles.
The development of the BCR is the first step of an IAIS project to develop group-wide global capital standards. The second step is the development of higher loss absorbency ("HLA") requirements to apply to G-SIIs, due to be completed by the end of 2015. The HLA will build on the BCR and address additional capital requirements for G-SIIs reflecting their systemic importance in the international financial system. The third step is the development of a risk-based group-wide global insurance capital standard ("ICS"), due to be completed by the end of 2016, and to be applied to internationally active insurance groups ("IAIGs") (as defined using the common framework for the supervision of IAIGs criteria) from 2019 after refinement and final calibration in 2017 and 2018. The development of the ICS will be informed by the work on the BCR.
The deadline for comments on the paper and the cover note is 3 February 2014.
BCBS PROGRESS REPORT ON ADOPTING PRINCIPLES FOR EFFECTIVE RISK DATA AGGREGATION AND RISK REPORTING
On 18 December 2013, the Basel Committee on Banking Supervision ("BCBS") issued a report on progress in adopting its principles for effective risk data aggregation and risk reporting ("BCBS268").
The principles, which were finalised in January 2013, aim to strengthen risk data aggregation and risk reporting practices at banks to improve their risk management practices, decision-making processes and resolvability. Firms designated as global systemically important banks ("G-SIBs") are required to implement the principles in full by 1 January 2016. As a first step towards a co-ordinated approach for monitoring and assessing banks' progress in adopting the principles, during 2013 the BCBS issued a stocktaking self-assessment survey completed by G-SIBs, other large banks and supervisors.
In BCBS268, the BCBS sets out the results of that survey. The BCBS found that many banks are facing difficulties in establishing strong data aggregation governance, architecture and processes. 10 of the 30 banks that were identified as G-SIBs during 2011 and 2012 reported that they will not be able to comply fully with the principles by January 2016.
The BCBS recommends that national supervisors should consider enhancing their efforts to integrate fully the principles in a comprehensive way within their supervisory programmes, test banks' capabilities to aggregate and produce reports in stress or crisis situations, including resolution, conduct thematic reviews and develop concrete supervisory plans or other supervisory tools for 2014 and 2015. The BCBS will continue to monitor the progress of G-SIBs towards meeting the January 2016 deadline.
The BCBS also recommends that national supervisors should apply the principles to institutions identified as domestic systemically important banks ("D-SIBs") three years after being designated as a D-SIB.
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