Sai Sireesh: Journey to Regulatory Vision 2020 – Prescriptive Enforcement

The continued wave of Systemic Risks in Greece and now increasingly Spain, the environmental disaster threaten to shatter the relative financial and economic calm in the business world. Amidst this many countries are undergoing some major changes in the regulatory landscape as a result of the events in the last two years.


 As I mentioned in one of my previous blogs, the age of “light touch “ supervision has certainly shifted towards the more heavy handed and “ Prescriptive and Intrusive” regulation for a few years to come.  These changes will have profound impact on the Risk and Compliance practices to come across all industries and sectors.


 With increasing clamor for more operational risk, environmental compliance and disaster management oversight for Oil and Gas, there certainly will be some big changes to come in the Oil and Gas regulations.


This week has particularly seen many announced changes in the financial sector with fairly global impact, given the influence of some of these regulators across borders.


Continuing from my last blog on Regulatory Vision 2020, I cover off a few of these developments:

1.       Ireland - Irish Financial Services Regulatory Authority plans to reveal its plans to enhance and intensify the regulation of banks from the previous light touch supervision. As per initial reports this will be more prescriptive and intrusive. Next week the authority will release its report. The report is expected to cover off some of the enhancements such as:

  • Liquidity Buffers
  • Remuneration & Pay
  • Operating Procedures
  • Counterparty Exposure Limits
  • Sector based Loans exposure limits
  • Loan to Value caps on mortgages

There are also discussion on a Bad banks or Failed banks mitigation plan. These would establish some norms for managing at a national level the failed and at risk banks.  Another area would be the cross border supervision and tightening oversight of the global banks that operate out of Dublin’s International Financial Services Center. It will be interesting to see as to how the authority balances out the financial sector promotion with prescriptive supervision. Like many other offshore centres, IFSC has in the past offered many incentives like low corporate-tax rates, lighter touch supervision, faster approvals etc.


2.       London - The recent political change in UK has directly impacted the financial sector much earlier than expected. Currently UK’s Financial Services Authority (FSA) is the independent oversight regulator spun off from Bank of England (BOE) in 1998 – a model that many other countries around the world followed. This week FSA functions were split across 3 new agencies and its role eliminated. BOE will its inherit prudential supervision role.  The Bank of England governor Mervyn King is expected to drive enhanced regulatory approach. The dual focus for BOE would be Monetary policy and Systemic risk. The FSA was split into:

  • BOE Subsidiary - Prudential Regulatory Authority
  • New Agency - Law Enforcement
  • New Agency - Consumer Protection

In addition, an independent commission is also established to reshape the banking sector and recommend structural changes to manage the too big to fail banks in future. The decision on separation of investment banking from retail banking is still up for consideration.


3.       Switzerland - After long and iterative deliberations, the Swiss parliament approved a law that allows the Swiss government to hand over names of US tax evaders to the US tax authorities. This has profound implications on the need for balance between local country banking secrecy laws and cross border regulatory /taxation/anti money laundering oversight needs. It is too early in my opinion to judge the impact of this on the overall banking secrecy act but it certainly puts pressure on other financial wealth and offshore centres around the world to be more transparent.


4.       EU agree on Stress Testing disclosures - EU agreed to subject their public banks to stress tests results and disclose results. Each country will publish results of national stress testing on all its banks once completed. Test results are to be published be end of July. This will provide transparency on Europe’s big banks to debt in Greece, Portugal and Spain. The new stress tests will provide more details compared to the broad October 2009 European stress testing of its entire banking sector, not for individual countries or banks. The results in autumn 2009 gave a pass to the banks against worse case economic downturn. The new 2010 parameters for stress testing across all 27 countries need to be agreed upon. But, I do expect that Europe's 25 biggest banks will be subject to these stress tests.


 5.       Spain - Bank of Spain proactively has completed its industry  wide stress testing to reinforce its banks solvency strengths. The results are to be released in next few days. The following are part of the Bank of Spain efforts - Restructuring of financial system, budget adjustment, public pension reform. 


6.       Asia - Central banks in both South Korea and Indonesia have introduced stricter capital controls to better manage global capital swings.


There is a lot happening in the US around financial regulations. But more on that in another blog! 



Comments (1)

  1. Bruce McKee says:

    The EU stress tests are definitely a "double-edged sword".  The latest thinking is they don't go far enough in terms of modelling the outcome from soverign defaults or simply a slow down in the property market.  You have to remember that banks these days don't lend to businesses, they lend to property companies, and property backed businesses.  As a way to manage their risks their look at asset backed loans, and so now around three quarters of all loans in UK are against property.

    The risk is a double dip perhaps casused by on-going liqiuidity problems in Spain will hit the property market and thus increase  the level of non-performing bank assets.  As a result the EU Stress tests have to meet the criteria of being representative of the worse scenarios, if not they will do more harm than good.  What could be worse than seeing a bank only just pass a weak stress test?

    The results may just provide hedge funds with a sell list.  The silver lining is Ferrari will sell more cars in Mayfair.

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