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Regulation and Operational Risk Helmut Bauer | 7 February 2006.

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Presentation on theme: "Regulation and Operational Risk Helmut Bauer | 7 February 2006."— Presentation transcript:

1 Regulation and Operational Risk Helmut Bauer | 7 February 2006

2 Regulation and Operational Risk | 7 February Outline About a long march that ended in banking regulation Committee of European Banking Supervisors (CEBS) and the Lamfalussy architecture CEBS guidelines on validation of AMA (CEBS CP 10 revised) A new neoliberal breed of standardization programs or collective intelligence? From design to delivery - CEBS work program for operational networks for home/host cooperation and maintenance of guidelines

3 Regulation and Operational Risk | 7 February

4 4 Mao Tse Tung: Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting the progress of the arts and the sciences and a flourishing socialist culture in our land. Different foms and styles in art should develop freely and different schools in science should contend freely. We think that it is harmful to the growth of art and science if administrative measures are used to impose one particular style of art or school of thought and to ban another. Questions of right and wrong in the arts and sciences should be settled through free discussion in artistic and scientific circles and through practical work in these fields. They should not be settled in summary fashion.

5 Regulation and Operational Risk | 7 February

6 6 Advise the Commission Contribute to the consistent implementation of Community Directives and the convergence of … supervisory practices Enhance supervisory co-operation

7 Regulation and Operational Risk | 7 February CEBS - Membership CEBS members are high level representatives from the banking supervisory authorities and central banks of the European Union, including the European Central Bank 25 countries and 46 member organisations, observers from EEA* countries, the European Commission and the Banking Supervision Committee of ESCB (European System for Central Banks) Chairman - Danièle Nouy Vice Chair - Helmut Bauer Secretary General - Andrea Enria * Iceland, Liechtenstein and Norway

8 Regulation and Operational Risk | 7 February CEBS - The Lamfalussy architecture EU adopted FSAP in 1999 to ensure appropriate regulation and supervision of a single financial market. The current structures of supervisory cooperation were considered inadequate to deal with cross-border integration and financial conglomerates. Committee of Wise Men set up in 2000 chaired by Alexandre Lamfalussy. Recommendations endorsed by the European Council in Need for faster and more flexible legislation, broad implementing powers for new committees, enhanced cooperation between supervisors to ensure uniform implementation and application in Member States and stronger enforcement. First applied to securities markets, banking and insurance to follow Committee of European Securities Regulators (CESR) established in September 2001 Committee of European Banking Supervisor (CEBS) established in November 2003

9 Regulation and Operational Risk | 7 February CEBS - The Lamfalussy architecture Ecofin Council EBC¹ Economic and Financial Committee Financial Stability Table CESR³ Financial Services Committee¹ European Parliament European Commission CEIOPS² EIOPC¹ Primary legislators Lamfalussy Level 1 Regulatory Committees Lamfalussy Level 2 Supervisory Committees Lamfalussy Level 3 ESC¹ FCC¹ CEBS² CEBS gives advice to the Commission on level 2 banking policy issues, contributes to a consistent implementation of EU legislation and promotes the convergence of Member States supervisory practices as well as co-operation between supervisors ¹ Finance ministries ² Supervisors and Central Banks ³ Supervisors EBC = European Banking Committee EIOPC = European Insurance and Occupational Pensions Committee ESC = European Securities Committee FCC = Financial Conglomerates Committee CEIOPS = Committee of European Insurance and Occupational Pensions Supervisors CESR = Committee of European Securities Regulators

10 Regulation and Operational Risk | 7 February technical annexes directive European Parliament, ECOFIN Council European Commission, European Banking Committee standards, guidelines, recommendations CEBS - The Lamfalussy architecture

11 Regulation and Operational Risk | 7 February technical annexes directive European Parliament, ECOFIN Council European Commission, European Banking Committee standards, guidelines, recommendations Level 2 implementation details rules based Level 1 legislative frame principles based Level 3 consistent implementation, convergence of supervisory practices CEBS - The Lamfalussy architecture

12 Regulation and Operational Risk | 7 February are consensus-based are not legally binding – hence not regulation

13 Regulation and Operational Risk | 7 February Guidelines on validation - CP 10 revised

14 Regulation and Operational Risk | 7 February Guidelines on validation - CP 10 revised

15 Regulation and Operational Risk | 7 February General AMA assessment issues

16 Regulation and Operational Risk | 7 February Use test - internal governance – role of senior management Data (business environment / internal control factors) and its reporting From measurement to management

17 Regulation and Operational Risk | 7 February Validation guidelines - Use test

18 Regulation and Operational Risk | 7 February Validation guidelines - Use test

19 Regulation and Operational Risk | 7 February Validation guidelines - Data quality

20 Regulation and Operational Risk | 7 February Validation guidelines - Reporting

21 Regulation and Operational Risk | 7 February Validation guidelines - Reporting

22 Regulation and Operational Risk | 7 February Validation guidelines - summary Reflect current thinking based on supervisory experience Evolve with industry practice and supervisory experience from examination and decision processes Address supervisors in the first place Combine clarification of firm regulatory requirements with flexible principles and related illustrative examples Are subject to the test of time and require maintenance

23 Regulation and Operational Risk | 7 February Mao Tse Tung: Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting the progress of the arts and the sciences and a flourishing socialist culture in our land. Different foms and styles in art should develop freely and different schools in science should contend freely. We think that it is harmful to the growth of art and science if administrative measures are used to impose one particular style of art or school of thought and to ban another. Questions of right and wrong in the arts and sciences should be settled through free discussion in artistic and scientific circles and through practical work in these fields. They should not be settled in summary fashion.

24 Regulation and Operational Risk | 7 February Neoliberal standardization programs Michael Power in Standardization and the Regulation of Management Control Practices (2002):... these proposals (i.e. use of in-house models for operational risks) by the Basel Committee, a club of national banking regulators,... have stimulated conceptual work to support operational risk management process standards.... In place of hierarchical models of control … ideas of self-organization and self-assessment have grown in influence and have become prominently institutionalised … in banking regulation through the work of the Basel Committee. System and internal control standards produced by these and other agencies express ideas of neoliberal administration … The ideal organization is rapidly becoming the one which does not simply comply with imperialistic commands, but which observes itself, knows its risks and which can make its commitment to self-observation and control visible to outsiders. … this new neoliberal breed of standardization programs … combines a normalizing role for standards with an emphasis on the role of local managerial capability for self-ordering. … the state in many cases functions as regulator of last resort or guardian of general principles …

25 Regulation and Operational Risk | 7 February Collective intelligence Torsten Strulik, Matthias Kussin in Financial Market Regulation and Knowledge Politics (2005):... It is apparent that the strategic creation of innovation is a crucial aim in economics, politics and law.... Of central interest is if and to what extent the new cognitive supervisory regime (Basel II) creates conditions for a mixed public-private form of risk management that is in accordance with the increasing demands for the creation of stability and innovation. … For the regulation of the banking system this means, that within the frame of public-private arrangements collective learning may be observed … Basel II - the regulatory constitution of collective intelligence

26 Regulation and Operational Risk | 7 February Learning Perception of Home Regulators Preparedness For Regulatory Approval Process Perception of Home Regulators Helpfulness When Seeking Guidance, Direction, or an Indication of Their Preferred Approach

27 Regulation and Operational Risk | 7 February

28 Regulation and Operational Risk | 7 February From design to delivery - CEBS will … mark a shift in orientation and emphasis – from design to delivery of a more convergent supervisory framework … operational networks for the supervision of cross-border groups and co- operation between consolidating and host supervisors will be responsible for ensuring their (i.e. guidelines) effective application … … setting up of operational networks is particularly important with regard to the supervision of EU cross-border banking groups – consolidating home … and host supervisors will have to cooperate and coordinate supervisory activities at the operational level … … CEBS will develop a model for … [written multilateral cooperation] arrangements (as required according to Art. 131 CRD) in order to steer the process and ensure consistency of cooperation … … CEBS will initiate and coordinate joint home/host supervisory work within the emerging operational networks … surveys on market practices

29 Contact details: Name: Helmut Bauer tel:


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