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Macro-prudential Policy and Financial Stability: Issues and Challenges 1 December 16 – 18, 2013 Amman, Jordan.

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Presentation on theme: "Macro-prudential Policy and Financial Stability: Issues and Challenges 1 December 16 – 18, 2013 Amman, Jordan."— Presentation transcript:

1 Macro-prudential Policy and Financial Stability: Issues and Challenges 1 December 16 – 18, 2013 Amman, Jordan

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3 3  To resolve bank Weaknesses / Problems and crises: Prevent Severe systemic disruption Extreme losses to taxpayers Moral Hazard Ensure Minimum losses to depositors That shareholders and unsecured creditors absorb losses within a well defined hierarchy Market Discipline

4 5. Resolution 3. Explicit Deposit Insurance 1. Prompt Correction 4. Intervention 2. Lender of Last Resort Normal Monitoring Early Warnings Banking Safety Net

5 ScopeResolution AuthorityResolution PowersSafeguardsFunding of firms in ResolutionCross Border IssuesCrisis Management GroupsResolvability AssessmentsRecovery and Resolution PlanningAccess to Information and Information sharing 5

6 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 6

7  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 7

8 8 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

9 Operational Independence Transparent Processes Sound governance and Adequate resources Subject to rigorous evaluation and accountability mechanisms 9

10 Expertise and adequate capacity Protection against liability for actions in faithful discharge of duties Unimpeded access to relevant firms 10

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12 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 12

13 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 13

14 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 14

15 Does not require consent of interested party or creditor to be valid Does not constitute a default or termination event 15

16 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 16

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18 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: 18

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20 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 20 In a manner that respects the hierarchy of claims in liquidation

21 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 21

22 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 22

23 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 23

24 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… 24

25 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 25

26 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 26

27  Resolution powers should apply to local branches of foreign firms 27 Support resolution carried by Home Authority Alternatively Take Measures on its own initiative if home jurisdiction is not considering local financial stability. -EXCEPTIONAL -In case of discretionary action, need to give prior notification and consult with home supervisor -EXCEPTIONAL -In case of discretionary action, need to give prior notification and consult with home supervisor

28 CMG Supervisory Authorities (Home and Key host) Central Banks Resolution Authorities Finance Ministries 28

29  Enhance Preparedness for and facilitate management of cross-border financial crisis affecting firm 29 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

30 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. 30

31  Evaluate the feasibility of the resolution strategy and credibility  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 31

32 32 Parent Bank Foreign Branch 1 Foreign Sub 1 Foreign Sub 2 Foreign Branch 2 Home Supervisor Host Supervisors CGM GROUP

33  At Least for domestic systemically significant institutions  RRP for G-SIFI is to be informed by resolvability assessment  Updated regularly at least annually 33

34  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 34

35  To protect systemically important functions  Making resolution of firm without severe disruption and without exposing taxpayers to loss  Includes: ◦ Resolution strategy: ◦ Operational Plan  Strategy and plan should be reviewed annually by top officials of home and host authorities 35

36 36 Financial and economic functions for which continuity is criticalResolution options for the above functions Data requirements on firm’s business operations and important functions Potential barriers for effective resolution and mitigating actionsActions to protect insured depositorsOptions to exit the resolution process

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38 38 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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