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CPMI and IOSCO release guidance on cyber resilience for financial market infrastructures

News Item, Technology /

On June 29th The Committee on Payments and Market Infrastructures (CPMOI) and the Board of the International Organisation of Securities Commissions (IOSCO) released a final report on ‘Guidance on cyber resilience for financial market infrastructures’. Both parties promote an enfacement of financial stability and security regulations for the wider financial economy. The Cyber Guidance is the first internationally agreed report on cyber security for the financial services sector. It has been developed in response to a rising number of highly sophisticated cyber-attacks against the financial industry. The objective of the Cyber Guidance is to add additional cyber protection to the financial market infrastructure surroundings and their Financial Management Information Systems (FMIs). The guidance aims to anticipate and respond hastily and effectively to cyber-attacks and to obtain a safer and faster recovery environment. It also intends to align cyber resilience actions in different countries. This could provide authorities with internationally aligned guidelines to support effective actions and maintain clear oversight of FMIs in case of a cyber attack. In order to fend malicious cyber attacks, FMIs need to undertake action by implementing recommended security protection as advised by the Cyber Guidance. Implementing the Cyber Guidance rules not only strengthens the cyber resilience of FMIs but it also reinforces the ecosystem in which the financial services sector functions. FMIs should operate safely and efficiently to be able to cultivate and boost financial growth and balance. If FMIs are not properly regulated, they can be the main driver of financial shocks, such as liquidity dislocations and credit losses. They can even become a potential window for financial shocks to reach the financial market and its infrastructure. In conclusion, FMIs should implant high cyber risk awareness criteria in their systems. The implementation should systematically contribute to a continuous enrichment of FMIs’ cyber resilience at every possible organisation-networked level. The original article can be found here.

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The Basel Committee issues revised standards for Interest Rate Risk in the Banking Book

Basel, News Item, Regulations /

On April 21st 2016 The Basel Committee on Banking Supervision (BCBS) issued the final standards for Interest Rate Risk in the Banking Book (IRRBB). The revised standards consist of supervisory expectations for banks’ identification, measurement, monitoring and control of IRRBB as well as their supervision. The key enrichments to the 2004 Principles include: Broader instructions for a banks’ IRRBB management process in areas such as the improvement of interest rate shock scenarios, as well as crucial behavioral and modelling expectations that need to be considered by banks when measuring IRRBB; Augmented conditions to boost consistency, transparency and comparability when measuring and managing IRRBB. The requirements include quantitative disclosure conditions based on prevalent interest rate shock scenarios; A modernised and regulated framework which allows supervisors to command banks to follow or adopt; and Rigorous guidelines for identifying outlier banks, which have reduced 20% of a bank’s total capital to 15% of a bank’s Tier 1 capital. The primary objection of the issued standards is to make changes in the 2004 Principles market and supervisory practices which are particularly relevant for the current low interest risk rates. The revised standards are expected to be implemented in 2018.

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IMF: ‘The European banking sphere is at risk’

News Item /

On April 13th, 2016 the International Monetary Fund (IMF) published a review about the failing banking system in the Global Financial Stability Report. According to the report, financial institutions in European countries are at risk if they remain utilising their current business models. Using these business models could result in a reduction of the global economy by nearly 4%. In a statement IMF-economist José Viñals says that ‘banks will have to adapt to a reality that puts profitability under severe pressure’. The current reality is too challenging for banks and could gradually lead to a minimisation of the banking sphere if banks refuse to adjust their business models. To solve this problem accurately, rigorous adjustments to the banking system, stock market, interest rates and problematic loans are also fundamental. Market turbulence In 2016 the instability of the banking system was notably visible in Greek, Italian, Portuguese and German banks. According to Viñals the bank’s responses reflected how insufficiently the financial crisis was processed: up to today institutions face problematic loans on their balances. On top of that, European financial institutions still endure difficulties implementing regulations and attracting foreign capital that can be used in times of crises to absorb losses. Taken together, the mentioned problems lead to higher costs of bank funding. In turn this higher cost base has consequences for profitability. Currently only 60% of the banks utilise ‘adequate’ business models, as reported by IMF. A quarter will be ‘tested’ and thus 15% is in the danger zone.Negative interest rates Another phenomenon affecting commercial banks are negative interest rates, which can vary. There are a number of financial institutions that benefit from the stabilising effect of the policy of monetary authorities. However, this ‘stabilising’ effect has a counter effect: it decreases interest rate margins for banks, meaning that they are forced to offer lower lending rates to customers at short notice. In addition, this results in lower profit growth. Problematic loans IMF advises policymakers to not ignore the challenging problems. If the issues continue to be ignored, market turbulence will take place earlier and at a higher pace. ‘It’s essential to solve complications concerning problem loans’, says Viñals. ‘In order to do so, supervision is necessary as well as reforming the bankruptcy loan law and developing a ‘non-performing’ loans market’. Another issue that needs to be addressed is overcapacity in the banking sector. Finally, Viñals highly recommends completing The Banking Union and introducing a deposit organisation system. Following up the mentioned advice could give the global economy a push in the right direction. In 5 years profit growth could rise with 1.7%. However, ignoring the troubling issues could result in less profit growth, stricter financial conditions and rising debt burdens.This article has been translated. It was originally written by Marcel de Boer and published in Het Financieele Dagblad on April 13th 2016. Click here for the original article.

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Constraints and proposed changes in the consultative document on reducing variation in credit risk-weighted assets when using the internal model approaches

News Item, Risk /

The consultative document about reducing variation in credit risk-weighted assets and its constraints on the use of internal model approaches gives insight into the Committee’s proposed alternations. The changes are mainly focused on the advanced internal ratings-based approach and the foundation internal ratings-based approach. A number of proposed changes to this approach include complementary measures, which aim to diminish the often complex regulatory framework, improve its correlation and address inordinate variability in the capital requirements for credit risk. Specifically to this change the Basel Committee set out the following adjustments: • Remove the IRB approaches option for certain exposures, because the approaches’ parameters cannot adequately and accurately estimate regulatory capital purposes   • Maintain exposure-level, model-parameters floors to establish a minimum level of conservatism for portfolios where the IRB approaches remain available   • Reduce variability in risk-weighted assets (RWA) for portfolios where the IRB approaches remain available by equipping parameter estimation practices with stronger specifications The Committee has previously consulted on the design of aggregate capital floors based on standardised approaches and is still considering the design and calibration. This would complement the proposed constraints discussed in this consultation paper.

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Basel Committee issues proposed revisions to the operational risk capital framework

Basel, News Item, Regulations, Risk /

On March 4th 2016, the Basel Committee on Banking Supervision (BCBS) specified the proposed alternations to the operational risk capital framework, also known as the new Standardised Approach (SMA). The SMA is part of BCBS’s consultation paper which has been issued in October 2014. The suggested alternations of the operational risk capital framework are aimed at achieving BCBS’ broad objectives of balancing simplicity, comparability and risk sensitivity. The changes are necessary to make a step towards completing the post-crisis reforms of the current year. The objectives of the proposals are necessary, but they will have a neutral impact on overall capital requirements of most banks. BCBS recommends simplifying the regulatory framework by replacing three existing standardised approaches for calculating operational risk capital, as well as the Advanced Measurement Approach (AMA). Besides the regulatory framework, the risk-sensitive framework that combines financial statement-based measures of operational risk with an individual firms’ past operation losses have to be strengthened. Finally, the AMA needs to be discharged. Removing this framework will lead to a less complex modelling of the operational risk for regulatory capital purposes and less variable in risk weighted assets and insufficient levels of capital.

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European Commission extends the application date for the MiFID II package by one year

MiFID, News Item, Regulations /

On February 10th, 2016 the European Commission has proposed national competent authorities and market participants one additional year to comply with the rules set out in the revised Markets in Financial Instruments Directive (MiFID). The new deadline is January 3th 2018. MiFID was created in response to the financial crisis. The program provides harmonised regulation for investment services across the financial market, investment intermediaries and trading venues in the European Union. MiFID also commissions financial markets to be more efficient, resilient and transparent. However, an extension of MiFID II was necessary because the program has demonstrated that it features a complex infrastructure. The European Securities and Markets Authority (ESMA) also notified the European Commission that neither competent authorities, nor market participant, will have the necessary systems ready by January 3th 2017, the date by which the MiFID II package was initially scheduled to become operational. The unforeseen postponement will not impact the timeline for the adoption of the ‘level II’ measures of MiFID II/MiFIR. The European Commission will proceed with their adoption irrespective of the new date of entry into application of MiFID II.

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ABN AMRO joins blockchain initiative Digital Assets Holdings

Blockchain, News Item, Technology /

On January 21th 2016 Digital Asset Holdings, a developer of Distributed Ledger Technology for the financial services industry, announced that it has raised funding from a broad range of firms from all corners of the international financial ecosystem. ABN AMRO is one of those leading firms. See the Press release.

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Revised Market Risk Framework published

Basel, News Item, Regulations, Risk /

The BIS has published on January 14th, 2016 the revised market risk framework,  also referred to as Fundamental Review of the Trading Book (FRTB). The 2007-2008 period of severe market stress exposed weaknesses in the framework for capitalising risks from trading activities. In 2009, the Committee introduced a set of revisions to the Basel II market risk framework to address the most pressing deficiencies. A fundamental review of the trading book was also initiated to tackle a number of structural flaws in the framework that were not addressed by those revisions.This has led to the revised market risk framework, which is a key component of the Basel Committee’s reform of global regulatory standards in response to the global financial crisis. The purpose of the revised market risk framework is to ensure that the standardised and internal model approaches to market risk deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions. The final standard incorporates changes that have been made following two consultative documents published in October 2013 and December 2014 and several quantitative impact studies. The key features of the revised framework include: A revised boundary between the trading book and banking book A revised internal models approach for market risk A revised standardised approach for market risk A shift from value-at-risk to an expected shortfall measure of risk under stress Incorporation of the risk of market illiquidity The revised market risk framework comes into effect on 1 January 2019. More information can be found on http://www.bis.org/bcbs/publ/d352.htm.

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Nine of world’s biggest banks join to form blockchain partnership

Blockchain, News Item, Technology /

Nine of the world’s leading banks announced on September 15th, 2015 the formation of a partnership to design and deliver advanced distributed/shared ledger technologies to global financial markets. The project – in addition to developing commercial applications – will seek to establish consistent standards and protocols for this emerging technology across the financial industry in order to facilitate broader adoption and gain a network effect. The press release can be found here.

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ESMA consults on MIFID II standards regarding trading suspensions, data service providers and derivatives reporting

MiFID, News Item, Regulations /

The European Securities and Markets Authority (ESMA) has published on August 31st, 2015 a consultation paper (CP) on the remaining draft implementing technical standards (ITS) under MiFID II on which ESMA has not yet consulted. This CP covers the following: (1) the suspension and removal of financial instruments from trading on a trading venue, (2) the notification and provision of information for data reporting services providers (DRSPs) and (3) the weekly aggregated position reports for commodity derivatives, emission allowances and derivatives thereof. This consultation runs until 31 October 2015. ESMA will use the input received to finalise its draft implementing technical standards which will be sent for endorsement to the European Commission on 3 January 2016. MiFID II/ MiFIR and its implementing measures will be applicable from 3 January 2017.

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