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New challenges facing financial market regulators: A preliminary assessment and outlook

New challenges facing financial market regulators: A preliminary assessment and outlook. 3 rd Annual Compliance Anti-Money Laundering Conference 22-23 March 2011, Riyadh. Pier Carlo Padoan Deputy Secretary-General and OECD Chief Economist. What is being done? .

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New challenges facing financial market regulators: A preliminary assessment and outlook

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  1. New challenges facing financial market regulators:A preliminary assessment and outlook 3rd Annual Compliance Anti-Money Laundering Conference 22-23 March 2011, Riyadh Pier Carlo Padoan Deputy Secretary-General and OECD Chief Economist

  2. What is being done? G20 starting point: Pittsburgh financial reform proposals, September 2009 • Revision of capital rules (higher and better quality capital, countercyclical, leverage ratio) • Better liquidity risk measurement and management. • Enhanced disclosure (off-balance sheet positions taken into account.) • Oversight of credit rating agencies • Unified accounting standards • Market practices and underwriting standards in particular have become better regulated. • Centralised clearing of CDS contracts and the trading of standardised OTC derivatives on exchanges • Compensation standards aim to align compensation with long-term value creation • Supervisory colleges and contingency planning for co-ordination between supervisors and firms for crisis management involving major cross-border firms, a legal framework for crisis intervention and improved information sharing in times of stress. • Tools and frameworks for the effective resolution of financial groups Source: Leaders' statement, the Pittsburgh Summit, 25 September 2009, available at www.g20.org

  3. What is being done? (cont’d) Recent financial reforms • Basel III: Higher capital & liquidity requirements, with phasing in period • US Dodd-Frank Bill with new Financial Stability Oversight Council, to be chaired by Treasury, new resolution authority and existing institutions reinforced (Federal Reserve, SEC, FDIC…); new Consumer Financial Protection Bureau; “Volcker rule” may change banks’ business model; derivatives to be traded on supervised markets • EU reform efforts include: European Systemic Risk Board to monitor systemic risk assessments, issue risk warnings and recommendations, and monitor follow-up actions on these warnings and recommendations; European System of Financial Supervisors ; new Alternative Investment Directive (passport); Solvency II” framework is to ensure that insurance and reinsurance undertakings are financially sound …

  4. What is being done? (cont’d) Basel III reforms and likely effects Capital requirements and phase-in periods Impact estimates on average annual GDP growth rates in 2011–2018 Sources: BCBS (2010), MAG (2010), OECD (2010).

  5. What are the risks? Banking sectors are still weak…[to be updated] Source: Thomson Reuters Datastream, OECD.

  6. What are the risks?(cont’d)2011 EU stress tests need to be stricter than those of 2010Exposures to EU sovereign debt, consolidated over CEBS stress-tested banks in respective country, end-March 2010, in million euro Notes: Haircuts in trading book valuation as applied in CEBS stress tests; hypothetical haircuts in banking book applying the same relative haircuts as in the trading book to the banking book. Source: Committee of European Banking Supervisors (CEBS), 2010 EU wide stress test exercise; bank statements; Blundell-Wignall & Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 4, August 2010, www.oecd.org/dataoecd/17/57/45820698.pdf. Notes: Haircuts in trading book valuation as applied in CEBS stress tests; hypothetical haircuts in banking book applying the same relative haircuts as in the trading book to the banking book. Sources: CEBS (2010); Blundell-Wignall and Slovik (2010).

  7. What are the risks? (cont’d) Different reform speeds create unlevel playing field? US and EU reform efforts broadly aligned but not in lock-step: EU and US are broadly aligned in: • Financial Stability Oversight/Systemic Risk Council • Moving derivatives to central clearing/on-exchange • Securitisation: minimum risk retention ratios for banks US is moving more quickly on: • Bank separation (“Volcker rule”) • Leverage ratio EU is moving aheadon: • Rating agency regulation (ESMA exclusive supervisory powers) • Alternative investors (hedge funds, private equity)

  8. What are the needs for further reform? Some outstanding issues • Central clearing of OTC products • Enlarging regulatory perimeter to shadow banking sector • Enhancing corporate governance • Fostering long-run, green, sustainable growth • Mortgage market reforms, US: Fannie Mae & Freddie Mac • SIFIs, “too-big-to-fail” issues, bank structure • Bank resolution, systemic crisis funding (bank levies, FTT?) • Reducing regulatory reliance on credit ratings • OECD work in the financial market area going forward • Three new structural priorities: • Financial markets and growth: • fostering long-term investment • Society/individuals (“better lives”): • financial consumer protection & financial literacy • new task force on financial consumer protection • Financial markets and ageing: • follow up from earlier work in addressing demographic challenges

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