Transcript Macro-prudential Policy and Financial Stability: Issues

Macro-prudential Policy and Financial
Stability: Issues and Challenges
December 16 – 18, 2013
Amman, Jordan
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• Severe systemic
disruption
• Extreme losses
to taxpayers
• Moral Hazard
Ensure
To resolve bank Weaknesses / Problems and
crises:
Prevent
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• Minimum losses to
depositors
• That shareholders
and unsecured
creditors absorb
losses within a well
defined hierarchy
• Market Discipline
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5. Resolution
4. Intervention
Early Warnings
Normal Monitoring
Banking Safety Net
3. Explicit Deposit Insurance
Scope
Resolution Authority
Resolution Powers
Safeguards
Funding of firms in Resolution
Cross Border Issues
Crisis Management Groups
Resolvability Assessments
Recovery and Resolution Planning
Access to Information and Information sharing
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Applied to systemically significant / critical
entities
Should be clear as to which institutions fall into
its scope
Extends to holding companies of a firm,
significant non-regulated financial entities within
a financial group or conglomerate, branches of
foreign firms
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Designated authority for exercising resolution
powers
In case different resolution authorities are in
charge for resolving different entities within a
group, a lead authority should be designated
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Pursue financial stability and continuity of systemically important
financial services
Protect (in coordination with insurance schemes) such depositors
and creditors covered by those schemes
Avoid unnecessary destruction of value and minimize overall costs
of resolution in home and host jurisdictions and losses to creditors
Consider the impact of its resolution action on financial stability in
other jurisdictions
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Operational Independence
Transparent Processes
Sound governance and Adequate
resources
Subject to rigorous evaluation and
accountability mechanisms
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Expertise and adequate capacity
Protection against liability for actions in
faithful discharge of duties
Unimpeded access to relevant firms
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Remove / Replace senior management and directors
Appoint an administrator to take control and manage firm to restore its
viability
Operate and resolve the firm
•Terminate / continue / assign contracts
•Purchase / sell assets
•Write down debt / Restructure operations
Ensure Continuity of essential services and functions through other
group companies
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Override Rights of shareholders in resolution
• Permit a merger / acquisition
• Permit sale of substantial business operations
• Recapitalization
• Other restructuring / disposal measures
Transfer / Sell Assets and Liabilities, legal rights and obligations to a solvent
third party
Establish a temporary Bridge Institution
Establish a separate asset management vehicle where NPLs / Problem Assets are
transferred to be managed
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Carry-out Bail-in Within Resolution to achieve continuity of essential
functions by
•Recapitalizing the entity
•Capitalizing a newly established entity or bridge institution to which the functions can be
transferred following the closure of the non-viable entity
Impose a moratorium with:
•Suspension of payments to unsecured creditors and customers
•Stay on creditor actions to attach assets or collect money or property from the firm
•Enforcement of eligible netting and collateral agreements
Effect the closure of the firm and orderly wind-down with timely payout or
transfer of insured deposits and prompt access to transaction accounts
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Does not require consent
of interested party or
creditor to be valid
Does not constitute a
default or termination
event
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Enter into legally enforceable agreements to transfer
assets and liabilities of failed firm
Establish terms and conditions relating to:
•Operation of the bridge institution as a going concern
•The prudential and other regulatory requirements applicable to
the institution
•Corporate governance arrangement within the institution
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Reversal of any asset and liability transfers to a bridge
institution subject to appropriate safeguards
Arrange the sale or wind-down of the bridge firm or sale of all
or some of its assets and liabilities:
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Convert or Write-down any contingent convertible or
contractual bail-in instruments that had not been triggered
prior to entry into resolution
Write down equity and other instruments of ownership as
necessary to absorb losses
Convert into equity or other instruments of ownership all or
parts of secured and uninsured creditor claims
In a manner that respects the hierarchy of
claims in liquidation
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Apply one or combination of powers
Apply different powers to different parts of the
firm business
Wind-down non-critical operations
Take into account impact on the group as a whole
Consider impact on financial stability of other
affected jurisdictions
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Respect of creditor hierarchy and “no creditors worse off”
principle
Directors and officers of firm under resolution should be
protected in law for actions taken when complying with
decisions of resolution authority
Speed and flexibility in applying resolution measures taking
into consideration time required for judicial action
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Legislation establishing resolution regimes should
allow for constraining judicial processes
To preserve market confidence, there should be
some flexibility to allow temporary exemptions from
disclosure requirements
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In case temporary funding is needed to maintain essential
functions, resolution or funds-Extending authority Should
recover any losses from:
• Shareholders and unsecured creditors
• the financial system, if possible
Avoid Moral hazard by:
• Ensure that funding is necessary to promote financial stability and will permit
success of resolution option
• The allocation of losses to: 1- equity holders; 2-unsecured / uninsured
creditors; 3- industry through ex-post assessments, insurance premium,
etc…
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Place the firm under temporary
public ownership and control
• Used as a last resort to maintain financial
stability
• Seek to arrange for a permanent solution
such as sale / merger
• Recover any losses incurred by the state from
unsecured creditors / financial system
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Resolution authority should act for a cooperative
solution with other foreign authorities
No automatic action in a jurisdiction as result of
intervention or initiation of resolution action in
other jurisdiction
Right of discretionary action to achieve domestic
stability in absence of effective cooperation and
information sharing
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Resolution powers should apply to local
branches of foreign firms
-EXCEPTIONAL
Support resolution carried by
Home Authority
Alternatively Take Measures
on its own initiative if home
jurisdiction is not considering
local financial stability.
-In case of
discretionary
action, need to
give prior
notification
and consult
with home
supervisor
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Central Banks
Supervisory
Authorities
(Home and
Key host)
Resolution
Authorities
CMG
Finance
Ministries
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Enhance Preparedness for and facilitate
management of cross-border financial crisis
affecting firm
Establish objectives and processes for cooperation through CMGs
Roles and responsibilities before and during a crisis
Process for information sharing before and after the crisis
Process for coordination in development of Recovery and Resolution
Plans (RRPs) for firm and its group
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Process for home-host coordination in resolvabity assessment
Include agreed procedures for Home authority to inform and
consult host authorities in timely manner on issues having material
adverse impact before taking any action, and vice-versa
At least annual meetings (top officials of home / host authority) to
review robustness of the overall resolution strategy for G-SIFIs
Regular (a least annual) reviews by appropriate senior officials of
the operational plans, implementing the resolution strategy.
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Evaluate the feasibility of the resolution
strategy and credibility
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Particular Considerations:
◦ Extent to which critical financial services can
continue to be performed
◦ Nature and extent of intra-group exposures and
impact on resolution
◦ Ability of firm to provide accurate and timely data
in a resolution
◦ Robustness of cross-border and information
sharing arrangements
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Host
Supervisors
Home
Supervisor
Foreign
Branch 1
GROUP
Foreign
Branch 2
CGM
Parent
Bank
Foreign
Sub 1
Foreign
Sub 2
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At Least for domestic systemically significant
institutions
RRP for G-SIFI is to be informed by resolvability
assessment
Updated regularly at least annually
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Plan that details options to restore financial
strength and viability when firm comes under
severe stress
Should Include
◦ Credible options to deal with range of idiosyncratic
as well as market wide stress scenarios
◦ Scenarios addressing capital shortfalls and liquidity
pressures
◦ Processes to ensure timely implementation of
recovery options on a range of stress situations
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To protect systemically important functions
Making resolution of firm without severe
disruption and without exposing taxpayers to
loss
Includes:
◦ Resolution strategy:
◦ Operational Plan
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Strategy and plan should be reviewed
annually by top officials of home and host
authorities
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Financial and economic functions for which continuity is critical
Resolution options for the above functions
Data requirements on firm’s business operations and important
functions
Potential barriers for effective resolution and mitigating actions
Actions to protect insured depositors
Options to exit the resolution process
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Sharing of information for recovery and resolution
planning
• Normal times as well as during crisis
• At domestic as well as cross-border level
• May be restricted depending on nature of information
Institutions should have a Management Information
system (MIS) able to:
• Produce timely and accurate data in normal times and during resolution
• Produce information at group level and legal entity level (intra-group
transactions)
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