Meeting of the Financial Stability Board in Tokyo (3)

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Hi everyone! I feel like winter has come all of sudden, and hope that all of us are not catching a cold. This is the 3rd as well as the last post for ‘Meeting of the Financial Stability Board in Tokyo’.

 

 

As I wrote in the previous posts, this year’s FSB meeting was held on 10th and 11th of October in Tokyo, and the Vice-Chairman of FSC attended the meeting. If you are interested in the previous posts, here are the links!

Meeting of the Financial Stability Board in Tokyo (1)https://financialservicescommission.wordpress.com/2012/10/23/meeting-of-the-financial-stability-board-in-tokyo-1/

Meeting of the Financial Stability Board in Tokyo (2)https://financialservicescommission.wordpress.com/2012/11/01/meeting-of-the-financial-stability-board-in-tokyo-2/

 

 

Monitoring of Basel III implementation

FSB members discussed the publication of the BCBS report dealing with the implementing process of Basel III. This report includes BCBS’s Level 2 report evaluating the draft rules in the EU, Japan and the US to see whether they are consistent with the actual text of Basel III. The FSB requested that all the members follow a progress towards a domestic implementation of Basel III in a timely manner, which is consistent with the globally agreed standard.

Reducing reliance on Credit Rating Agencies

Members of the FSB discussed a roadmap to expedite the implementation of measures to reduce reliance on Credit Rating Agencies. This roadmap will be reported at the G20 meeting of Finance Ministers and Central Bank Governors in November. It includes measures to ensure a full implementation of the principles with dates. The FSB will report to the G20, as the progress is being fulfilled.

Regional consultative groups

The co-chairs of the three FSB regional consultative groups (Europe, Middle East & North Africa, and Sub-Saharan Africa) provided the members with their reports. The reports were based on the co-chairs’ meeting since the FSB’s May Plenary meeting.

FSB capacity, resources and governance

Members reviewed the remaining process to implement its recommendations published in June 2012. This is for the purpose of strengthening the FSB’s capacity, resources and governance. A further process will be reported at the G20 Finance Ministers and Central Bank Governors Meeting this month. Also, the members agreed on organizing a new Standing Committee on Budget and Resources as well as rotating Chairs of the Committee.

 

So this is the end of post about the FSB meeting in Tokyo. I hope everybody got some general ideas of what was discussed at this meeting. And then I’ll see you next time with more interesting topics!

Meeting of the Financial Stability Board in Tokyo (2)

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Hi. How is everybody? I’m still tangled up with my exam.

Yet I’m posting the second part of the FSB meeting, as a follow-up post. As I already mentioned in the previous post, ‘Meeting of the Financial Stability Board (FSB) in Tokyo’ was held on 10th and 11th of October. The Vice-Chairman of FSC, Choo Kyung-ho, attended this meeting as a representative. If you missed the first part of the meeting, you can read it from this link; https://financialservicescommission.wordpress.com/2012/10/23/meeting-of-the-financial-stability-board-in-tokyo-1/

In this post, I would like to tell you the other agendas having talked at the meeting; Over-the-counter (OTC) Derivatives Reforms, Disclosure and Accounting, LIBOR and other financial benchmarks, and Legal Entity Identifier (LEI). Let us closely look at the details of each agenda.

OTC (Over-the-counter) Derivatives Reforms

The FSB meeting sought ways to implement the G20 commitments to OTC derivatives reforms. Members were encouraged not to impede further progress towards the G20 commitments, letting enough room for market infrastructure to work out properly. Following the progress made earlier this year in putting in place the FSB’s four safeguards for global central clearing, the FSB Chair will report to the November meeting of G20 Finance Ministers and Governors on the decisions made by member jurisdictions on their national approaches to central clearing.

However, there were concerns raised by the members, the unresolved issues in the cross-border application of regulation. When an extent of application varies in each country, the validity of regulation will be in question. Keeping this in mind, members came to a conclusion that each country implements a related legislation and regulation within domestic system until the end of 2012. By doing so, members would address the problems of inconsistencies and narrow down the gaps in each country’s national framework.

Disclosure and Accounting

The FSB welcomed the update on the EDTF (Enhanced Disclosure Task Force)’s work to develop recommendations for risk disclosures by banks. These recommendations are developed for investors to understand information more easily. The final report of recommendations will be uploaded soon within several weeks.

Also, the meeting discussed the progress of unifying the accounting standards of the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB). Despite the recognized process made by the IASB and FASB, it was noted that a standard for impairment of loans is not in a converging process. An improved standard based on expected losses was urged by the FSB.

LIBOR and other financial benchmarks

Regarding the setting of LIBOR and other financial benchmarks, the FSB reviewed several reports provided by the British Financial Services Authority (FSA), the International Organization of Securities Commissions (IOSCO), the European Commission (EC) and the Bank for International Settlements (BIS).

After the review, the FSB member came to an end that they should share information and knowledge so as to adopt good examples of standardization and principles. Furthermore, the members were ensured that there is a potential in the public sector to set up a guideline for such reviews and hence establish financial principles applying to a benchmark-setting in general.

LEI (Legal Entity Identifier)

The progress in implementing the global Legal Entity Identifier (LEI) was positively reviewed by the FSB. Briefly explaining, LEI is a kind of serial number identifying financial transactions done by each corporation. A draft Charter for the LEI Regulatory Oversight Committee (ROC) was reviewed and supported by FSB. Members agreed that the establishment of the ROC as a global supervisory organization would be a key step to launching the global LEI system by March next year. The FSB keeps mapping out specific plans to establish a global LEI foundation which will manage the Central Operating Unit. For this ends, FSB is actively cooperating with preparatory groups in private sector.

I know that lots of agendas are covered in this single post. If you are confused or lost by any of these agendas, please leave your comment. The last part of the FSB meeting will come up shortly, so please stay tuned to our blog!

Meeting of the Financial Stability Board in Tokyo (1)

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Hi! How’s everyone doing?

Probably, most of the university students have there mid-term pretty soon. Cheer up!

Today, I want to talk about the ‘Financial Stability Board (FSB) meeting in Tokyo’ which was held for two days last week, 10th and 11th of October. The Vice-Chairman of FSC, Mr. Choo Kyung-ho, attended this meeting. As well as Mr. Choo, the financial chief officers from FSB member countries and the Basel Committee on Banking Supervision (BCBS) were at the meeting.

 

 

Now you may notice it was an international meeting on a pretty large scale. Then why was this meeting held? It was a follow-up meeting for the G20 Summit in June. FSB meeting was organized to check the progresses of G20 leaders’ commitment about financial regulatory reform initiatives. Based on this check-up, FSB meeting discussed additional measures gainst possible risks in global financial system. From now on, I will let you know some of the agendas discussed at the meeting.

 

Vulnerabilities in the financial system

It is said that the confidence of investors and access to financial markets have improved with the implementation of recent regulations in the global financial system. This is shown from the enhanced competitiveness and current account adjustment of EU’s neighboring countries. Hence, it is important to keep this pace to maximize the expected effects of the reforms.

The meeting discussed the current financial stability risk caused by a slowdown of global growth. In order to prevent further instability, the supervisors are advised to be aware of signs of asset quality deterioration and ensure robust provisioning and capital levels.

The issue of recent fragmentation phenomenon in the global financial system was also brought up. It is found that many banks are increasingly retrieving from global activities

While this trend mainly appeared in euro area only, it is getting spread out across other regions. In this regards, supervisors and regulators should monitor measures acting as disincentive to cross-border activities to ensure they do not go beyond prudent risk mitigation.

 

Addressing SIFI (Systemically Important Financial Institutions)

The FSB endorsed for publication the finalized framework for dealing with Domestic Systemically Important banks (D-SIBs) developed by the BCBS. Along with D-SIBs, the annual update of Global Systemically Important Banks (G-SIBs) was discussed. G-SIBs publication will come out next month on the basis of end-2011 data.

FSB Members were showing their ongoing interests about ‘FSB peer review’. The review will be finalized in early next year, which is for the purpose of evaluating member jurisdictions’ existing resolution regimes. The review also deals with any planned changes in line with the FSB’s Key Attributes of Effective Resolution Regimes. A consultation paper with guidance on recovery and resolution planning will be issued in this October.

 

Shadow banking

The FSB discussed a draft set of recommendations to strengthen the oversight and regulation of shadow banking. The recommendations covered the following areas; interactions between banks and shadow banking entities, money market funds, shadow banking entities other than money market funds, securitization, and securities lending and repos. Regarding the matter, FSB expects to publish a finalized version of policy recommendations to strengthen regulation of shadow banking. The publication will be available after the g20 Ministers and Governors meeting in November.

 

 

In this post, I addressed three agendas discussed at the meeting. Actually, there were more discussions covering a variety of issues in the global financial system. About the other agendas, another blog post will be written. Then, please look forward to the next post, and I wish you a good luck for your mid-term exams!

The FSB Conference of Financial Reform in Seoul

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The importance of FSB conference in Seoul

It is significant that the FSB conference was held in Seoul, because it is the first meeting in the emerging country. Korea dealt with Asian financial crisis in 1997, and managed the global financial crisis in 2008 efficiently. In addition, member states expect that Korea will have the leading role in the financial reform as a chairman country of G20.

Topics come up for discussion by Korea

Korea selected items for an agenda mainly from the perspective of the chair position of G20 and emerging country. As chair position of G20, Korea focused on the agreement of several topics related to the financial regulation among member states. Furthermore, as an emerging country, Korea poses a question regarding the importance of global safety net.

There are several issues suggested by Korea. The global SIFI would be separated from the domestic SIFI, leading to the heavy regulation. In order to increase the participation of emerging states, it is necessary to share the information between the home and host country. In terms of the establishment of IFRS and the dependence on the credit agency, the opinion of emerging states should be included.

The results of the FSB conference

1.      The regulation on the asset of banking industry

After the global financial crisis in 2008, the banking industry would extensively recover. Thus, the liquidity risks should be prepared. At Sep. 12, each country reached to the agreement of calibration and phase-in arrangement in BCBS meeting. The asset regulation will be implemented in 2013, and the degree of regulation will be gradually increased until 2018.

 

2.      The heavy regulation on SIFI

The real economy in the large number of countries is affected by SIFI. This is why the liquidation of the huge SIFI is difficult. Instead of that the public funds will be provided. This might lead to the moral hazard in financial sector. Thus, the resolution would be the higher loss absorption capacity. It should be implemented in global SIFI first. Due to the huge impact on many institutes and even whole country, it is essential for SIFI to have the capacity of liquidation. On top of that, other regulation should concentrate on lower the possibility of failure base on the intensity of SIFI supervision. Peer review council will confirm the consistency and effectiveness in SIFI supervision.  

 

3.      The standardization and transparency of derivatives traded through over-the-counter

The weak regulation on OTC derivative market leads to the severe financial crisis in 2008. The central clearing with standardized derivatives is encouraged. In addition, the regulation on the central counterparties will be increased.

 

4.      The decrease in the dependence on the credit agencies

The FSB approved the principles regarding the decrease in the dependence on credit agencies. Accordingly, legal codes should not be based on the rating given by credit agencies. The credit rating conducted by banks, institutional investors and market participants will be encouraged.

 

5.      FSB outreach program

The FSB encourage the participation of member states and non-member states by setting up the regional groups. This leads to the active implementation of global regulation. The outreach program will be specified with extra discussion.

The summary and expected effect of financial reform in FSB conference

The financial reform will contribute to the recovery of financial system. The regulation on the soundness of banking industry will result in the higher loss absorption capacity with superior financial structure. The heavy supervision on SIFI will lead to decrease the problems of moral hazard caused by too-big-to-fail. The transparency in the OTC derivative market, which is one of the causes of financial crisis, will be improved. Lastly, the real economy will have the positive impact regarding sustainable growth, thanks to the stability in financial system.

Min Gyo Jeong (misomk@naver.com)