STRENGTHENING%20THE%20REGULATORY%20AND%20SUPERVISORY%20CAPACITY%20OF%20THE%20FINANCIAL%20REGULATORS

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STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
Twinning project funded by The European Union

• Strengthening prudential supervision in response
  to the crisis
• Rumen Simeonov
• Deputy Governor,Bulgarian National Bank

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Outline

• THE COORDINATED EU RESPONSE TO THE CRISIS
• GLOBAL SOLUTIONS TO THE CRISIS
• REGULATORY PACKAGE
• INSTITUTIONAL CHANGES
• EXIT FROM FINANCIAL SUPPORT MEASURES
• NATIONAL VERSUS EU MEASURES
• BULGARIAN RESPONSE

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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The coordinated EU response to the crisis

• Common principles and main lines of actions
  agreed on ECOFIN Council - October 7, 2008
• public intervention has to be decided at national
  level but must be part of a coordinated framework
• cross-border effects of national decisions have
  to be taken into account
• recapitalization of vulnerable systemic financial
  institutions
• distortion of treatment between US and European
  banks due to differences in accounting rules must
  be avoided.
• deposit guarantee protection - at least 50,000
  euro

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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The coordinated EU response to the crisis

• Registration and oversight of rating agencies
• Common guidelines for transparency about risk
  exposures
• Improvements of the executive-pay model
• Clear guidelines on valuation, applied
  consistently
• Strengthening cross-border stability arrangements
  - EU wide MoU
• Enhanced effectiveness of supervision and
  convergence and harmonization in the
  implementation of rules.

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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A global crisis requires global solutions

• 15 November 2008 - G20 Declaration outlines the
  strategy for reforming the existing financial
  architecture
• Main G-20 proposals
• Strengthen the regulatory systems, prudential
  oversight and risk management
• All financial markets, products and participants
  to be regulated or subject to oversight
• Promote integrity in financial markets
• Enhance international cooperation - college of
  regulators

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Regulatory reform

• Lessons from the crisis and the need for
  regulatory reform
• Need for common EU supervisory response
• Need for changes in the accounting framework
• Improving quality of capital
• Dealing with the cyclicality of finance
• Liquidity issues
• Transparency disclosure of important
  information
• Supervisory cooperation
• Introduction of new tools for early intervention
  and crisis management
• Stress tests

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Regulatory package

• 2009 Directive 2007/44/EC changes in the
  assessment of acquisitions and increase of
  holdings in the financial sector
• 2010 CRD II (Directives 2009/111/?C, 2009/83/?C
  and 2009/27/?C) changes in own funds items,
  large exposures, supervisory arrangements, crisis
  management, securitisation, technical risk
  management provisions
• 2011 CRD III (not yet approved and numbered)
  changes in the Trading book capital requirements,
  re-securitisations and the supervisory review of
  remuneration policies
• 2011 Directive 2009/110/?C putting electronic
  money institutions outside the credit
  institutions area
• CRD IV (no Commission proposal yet) as regard
  quality of capital, liquidity risk standards,
  counterparty credit risk and dynamic
  provisioning.

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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De Larosière Report

• 25 February 2009 - De Larosière Report
• 31 recommendations
• Towards a new regulatory agenda to reduce risk
  and improve risk management to improve systemic
  shock absorbers to weaken pro-cyclical
  amplifiers to strengthen transparency and to
  get the incentives in financial markets right.
• Towards stronger coordinated supervision
  macro-prudential and micro-prudential, built on
  existing structures but much stronger and
  coordinated
• Towards effective crisis management to build
  confidence among supervisors with agreed methods
  and criteria.

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Building on the De Larosière Report

• 23 September 2009 The EU Commission proposals
  for a new European financial supervisory
  architecture
• European System of Financial Supervisors (ESFS) -
  a network of national financial supervisors
  working in tandem with new European Supervisory
  Authorities (ESAs)
• European Systemic Risk Board (ESRB) to monitor
  and assess potential threats to financial
  stability that arise from macro-economic
  developments and from developments within the
  financial system as a whole

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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The EU supervisory reform
Macro supervision systemic risks, financial
stability

• Micro supervision individual banks

ESFS
ECB
EBA - banking
ESMA securities markets
ESRB
EIOPA insurance, pension funds
National Supervisory Authorities
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The EU supervisory reform

• The newly proposed
• EU regulatory
• framework allows
• the application of
• network approaches

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Exit from financial support measures

• 02 December 2009 - ECOFIN Council agreed the
  following principles for exit strategies
• Phasing out of the public support measures in
  order to avoid negative spill-over effects
• The timing of exit should take into account all
  relevant factors and individual Member States
  circumstances
• The phasing out of support should normally start
  with government guarantees.
• Existing legal framework should be taken into
  account, including the relevant state aid
  decisions and the legitimate interest to minimize
  the potential loss of public money

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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National versus EU measures
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CAPACITY OF THE FINANCIAL REGULATORS
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National versus EU measures
STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Bulgarian response

• THE BUFFERS OF THE BULGARIAN BANKING SYSTEM
• MEASURES TOWARDS THE BANKING SYSTEM
• CHANGES IN REPORTING CULTURE

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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The buffers of the Bulgarian banking system

• The conservative application of the capital
  adequacy regime in Bulgaria and the maintenance
  of increased capital requirements by banks
  provided for a cushion against unexpected
  losses during the crisis
• 12 minimum capital adequacy ratio
• Non-inclusion of interim profit until 2008
• Increased risk weights in Retail and Mortgages
• Conservative approach to usage of prudential
  filters
• Reduced reliance on hybrids and other non typical
  capital instruments
• Introduction of a specific supervisory
  provisions, aimed at capturing the amount of
  potential future losses

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Measures towards the banking system

• Some of the most important steps to insure the
  smooth functioning of the banking systems were
• Reduction of the minimum reserves requirement in
  2008
• Increased frequency of on-site visit, focused on
  risk areas
• Increased dialogue with the bank managers
• Banks to keep additional capital above the
  regulatory minimum
• Banks to keep liquidity ratios above the
  regulatory minimum
• Requiring regular stress tests under different
  assumptions

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Measures towards the banking system

• Increased dialogue with home supervisors, focused
  on issues of the local subsidiary
• Issuing recommendation for non-distribution of
  dividends by banks
• Raising the minimum guaranteed amount of customer
  deposits to 50,000 EUR in 2009
• Widening the scope of supervision introduction
  of registration requirements for other financial
  institutions (e.g. leasing, cash credit, etc.)
• No state aid or government guarantees were
  provided to commercial banks during the crisis

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Changes in reporting culture

• Raising the importance of supervisory reporting
  as a key function in commercial banks - it should
  not be a secondary task of the accounting
  department
• Difference between financial and supervisory
  reporting - COREP is a tool for supervisory
  reporting and FINREP is a tool for financial
  reporting
• Supervisory reporting is best done by risk
  managers

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS
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Bulgarian banking system
Total assets Change
Q3 2007 26,540,326 - 
Q3 2008 35,457,373 33.60
Q3 2009 35,740,050 0.80
Size
Profitability
Structure (2009)
  Profit (pre tax)
Q3 2007 483,558
Q3 2008 625,744
Q3 2009 355,366
? All sums in thousands EUR
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Bulgarian banking system
  Own funds Change Cap. adequacy
Q3 2007 2,634,590 -  13.85
Q3 2008 3,878,743 47.22 14.35
Q3 2009 4,806,729 23.92 17.34
Regulatory Capital
Retail loans Change Corp. loans Change
Q3 2007 5,881,314 -  10,790,387  -
Q3 2008 8,572,246 45.75 16,046,307 48.71
Q3 2009 9,390,127 9.54 16,625,315 3.61
Credit Growth
? All sums in thousands EUR
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• Looking forward to working with you!
• Thank you!

STRENGTHENING THE REGULATORY AND SUPERVISORY
CAPACITY OF THE FINANCIAL REGULATORS