Victor osakwe
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Victor Osakwe gave a presentation on systemically important financial institutions (SIFIs). He defined SIFIs as institutions whose failure could significantly disrupt the financial system and economy. The Basel Committee identifies SIFIs based on their size, complexity, interconnectedness, and lack of substitutes. Basel III established higher capital and liquidity requirements for SIFIs to reduce systemic risk. Osakwe discussed the implementation of Basel III in Europe, the US, and for other SIFIs like insurers. He concluded SIFIs will remain an important topic and Basel IV may introduce even stricter new rules.
Victor osakwe
- 1. Osakwe, Victor Financial Stability Seminar July 3rd, 2015 The more destructive power an institution has when it fails determines how important it is for the financial system! What is a Systemically Important Institution? How is it Defined (Basel)
- 2. Systemically Important Financial Institutions Banks Non-Bank Entities (Insurers) Evaluation, Conclusion and Prospect Introduction Brief History and Definition Basel III and Implementation European Union Implementation United States Implementation Overview 3rd July, 2015 2
- 3. The global financial crises of 2007-2008 is making the international community to be proactive in protecting the global financial system by preventing or limiting the effects of failure of a systemically important financial institution (SIFI). Results Introduction 3rd July, 2015 3
- 4. A set of rules for regulating the SIFIs are contained in the Basel report with new versions at different time and circumstance. The Basel Committee and the Financial Stability Board research and develop policy; advise and recommend as contained in the Basel reports. Each country determines which institution qualifies as a SIFI. The global scale and interconnectedness of financial institutions make it more difficult to ascertain if a firm is a SIFI until crisis break out and the effect assessed Introduction 3rd July, 2015 4
- 5. 1988: World central bankers agreed on a set of international standards for the regulation of banks. 1988: The Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published first set of minimum capital requirements for banks (Basel I). 1999: The (BCBS) released Basel II for regulating the activities of banks and other financial institutions. Basel II was revised in 2001, 2003, 2004 and 2005. The implementation began in 2007 2011: First version of Basel III appeared alongside Basel 2.5. Brief History 3rd July, 2015 5
- 6. What is a SIFI? The starting point for identifying a SIFI is having the assertion that the insolvency of such an institution may destabilize the financial system and having negative effects on the real economy (Bongini and Nieri, 2014). An institution is systemically relevant if it cannot exit the market without causing major disruptions to the financial system. Factors used in identifying SIFIs are: size, complexity, interconnectedness, absence of substitutes for the financial infrastructure it provides, and global activity(Basel Committee 2011). SIFIs are not only banks but includes insurance companies and financial market infrastructure providers. Definition 3rd July, 2015 6
- 7. It is a global and voluntary regulatory framework on the adequacy of bank capital, market liquidity risk and stress testing. First version published in late 2011 giving banks approximately three years to satisfy all requirements. Developed in response to the deficiencies in financial regulation revealed by the financial crisis of 2007-2008. Major focus is on the run on the bank risk by requiring differing levels of reserves for different forms of bank deposits and other borrowings. Basel III 3rd July, 2015 7
- 8. Capital Requirements: Leverage Ratio: Liquidity Requirements: Basel III: Key Principles 3rd July, 2015 8
- 9. Europe: The implementing act of the Basel III agreements in the European Union has been the new legislative package comprising Directive 2013/36/EU (CRD IV) and Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (CRR). The new package, approved in 2013, replaced the Capital Requirements Directives (2006/48 and 2006/49); (www.europa.eu). U.S.A: The U.S. Federal Reserve will implement substantially all of the Basel III rules for institutions with assets over US$50 billion as announced in December 2011, Wyatt (2011); though still on the process of implementation as of January 2014 and with some differences in calculation. Basel III: Implementation 3rd July, 2015 9
- 10. The first official version of the G-SIB list was published in November 2011 and updated yearly (Slovik 2012). G-SIBs and D-SIBs headquartered in Europe and USA are required to submit an updated emergency resolution plan to their Financial Supervision Authority each year. On November 10, 2014; the FSB issued a consultative document that defines a global standard for minimum amounts of TLAC to be held by G-SIBs in addition to the Basel III Capital Adequacy Ratio requirements. Criteria for assessing, stress testing and adopting a SIB varies with country and continent. Systemically Important Financial Institutions (Banks) 3rd July, 2015 10
- 11. SIBs: Europe Entity HQ Country HQ Currency FSB-G- SIB Total Capital Ratio Requirement (% of RWA) Dexia Group Belgium €, Euro 2011 - BNP Paribas France €, Euro 2011– 12.5% (CET1=min.9%) Crédit Agricole France €, Euro 2011– 11.5% (CET1=min.8%) Banque Populaire CE France €, Euro 2011– 11.5% (CET1=min.8%) Société Générale France €, Euro 2011– 11.5% (CET1=min.8%) Commerzbank Germany €, Euro 2011 10.5% (CET1=min.7%) Deutsche Bank Germany €, Euro 2011– 12.5% (CET1=min.9%) Unicredit Group Italy €, Euro 2011– 11.5% (CET1=min.8%) ING Bank Netherla nds €, Euro 2011– 11.5% (CET1=min.8%) 3rd July, 2015 11
- 12. SIBs: Europe Entity HQ Country HQ Currency FSB-G- SIB Total Capital Ratio Requirement (% of RWA) Banco Bilbao Vizcaya Argentaria Spain €, Euro 2012– 11.5% (CET1=min.8%) Santander Spain €, Euro 2011– 11.5% (CET1=min.8%) Nordea Sweden Kr, Krona 2011– 11.5% (CET1=min.8%) Credit Suisse Switzerla nd Fr, Swiss franc 2011– 12.0% (CET1=min.8.5%) UBS Switzerla nd Fr, Swiss franc 2011– 11.5% (CET1=min.8%) Royal Bank of Scotland United Kingdom £, GBP 2011– 12.0% (CET1=min.8.5%) Barclays United Kingdom £, GBP 2011– 12.5% (CET1=min.9%) HSBC United Kingdom $, USD 2011– 13.0% (CET1=min.9.5%) Lloyds Banking Group United Kingdom £, GBP 2011 10.5% (CET1=min.7%) Standard Chartered United Kingdom £, GBP 2012– 11.5% (CET1=min.8%) 3rd July, 2015 12
- 13. Entity HQ Country HQ Currency FSB-G- SIB Total Capital Ratio Requirement (% of RWA) Mizuho FG Japan ¥, Yen 2011– 11.5% (CET1=min.8%) Sumitomo Mitsui Japan ¥, Yen 2011– 11.5% (CET1=min.8%) Mitsubishi UFJ FG Japan ¥, Yen 2011– 12.0% (CET1=min.8.5%) Bank of China China ¥ or 元 ,Renminbi 2011– 11.5% (CET1=min.8%) ICBC China ¥ or 元, Renminbi 2013– 11.5% (CET1=min.8%) Agricultural Bank of China China ¥ or 元, Renminbi 2014– 11.5% (CET1=min.8%) SIBs: Asia 3rd July, 2015 13
- 14. Entity HQ Country HQ Currency FSB-G- SIB Total Capital Ratio Requirement (% of RWA) Bank of America USA $, USD 2011– 12.0% (CET1=min.8.5%) Bank of New York Mellon USA $, USD 2011– 11.5% (CET1=min.8%) Citigroup USA $, USD 2011– 12.5% (CET1=min.9%) Goldman Sachs USA $, USD 2011– 12.0% (CET1=min.8.5%) JP Morgan Chase USA $, USD 2011– 13.0% (CET1=min.9.5%) Morgan Stanley USA $, USD 2011– 12.0% (CET1=min.8.5%) State Street USA $, USD 2011– 11.5% (CET1=min.8%) Wells Fargo USA $, USD 2011– 11.5% (CET1=min.8%) SIBs: America 3rd July, 2015 14
- 15. Insurance companies are perceived to be non-relevant for financial stability in the past due to relatively low levels of interconnectedness with the rest of the financial system. In October 2014, IAIS published the first-ever global insurance capital standard; Basic Capital Requirements (BCR). BCR ratio is expected this year but will be reported on a confidential basis to group-wide supervisors and be shared with the IAIS for purposes of refining the BCR as necessary. From January 2019, all G-SIIs will be required to hold capital not lower than the BCR plus HLA. This is subject to jurisdictional regulator and not the FSB/IAIS. Systemically Important Financial Institutions: Non-Bank Entities (Insurers) 3rd July, 2015 15
- 16. Allianz AIG Assicurazioni Generali Aviva AXA MetLife Ping An Prudential Prudential Financial G-SIIs 3rd July, 2015 16
- 17. SIFIs have been in the financial literature for a while, 2007- 08 financial crises brought it to limelight and has continue to enjoy much attention both from the financial institutions, regulators, and the academic world. There still a fundamental error with Basel reports, it only expand regulatory base without questioning its main principles, importantly the ever-growing reliance on standardized assessments of "credit risk”(Marc Labonte, 2014). Implementation of Basel III is 2019 technically but how long it will be in force is dependent on the necessity and how soon a new report emerged from the mist. Evaluation and Conclusion 3rd July, 2015 17
- 18. Many criticism of Basel III and the developments in the banking market in recent times suggests stricter rules may be applied and it won’t be long before the subsequent framework make its way out and is being labelled Basel IV. The BCBS had already released a consultative paper to seek out views on its plan to change how capital requirements and market risks are to be calculated. Basel IV may include: 1. meeting higher minimum leverage ratios; 2. highlighting standardised models for calculation of capital requirements; 3. more detailed disclosure of available reserves and other financial statistics. Prospect 3rd July, 2015 18
- 19. Question & Discussion Thanks for listening! 3rd July, 2015 19