basel iii news, may 2018turnover league. the riksbank's rix system settles transactions...

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________________________________________ Basel iii Compliance Professionals Association (BiiiCPA)

Basel iii News, May 2018 Dear members and friends, The Basel Committee has issued the Fourteenth progress report on adoption of the Basel regulatory framework. The report sets out the adoption status of Basel III standards for each BCBS member jurisdiction as of end-March 2018. It includes for the first time the finalised Basel III post-crisis reforms published by the Committee in December 2017. These recent reforms will take effect from 1 January 2022. As noted by the Committee's oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), the Committee expects full, timely and consistent implementation of Basel III post-crisis reforms by member jurisdictions. Since the last report published in October 2017, member jurisdictions have made further progress in implementing standards. Notably, the report shows that: - the leverage ratio, based on the existing exposure definition, is now in

force in most member jurisdictions

- 24 member jurisdictions have issued draft or final rules for the Net Stable Funding Ratio (NSFR)

- 19 member jurisdictions have issued draft of final rules for the revised securitisation framework

However, the report also shows that: - limited progress has been made in the implementation of some

technical standards whose implementation deadlines passed in 2017. These include the standardised approach for measuring counterparty

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credit risk exposures, and the capital requirements for bank exposures to central counterparties and for equity investments in funds.

- member jurisdictions continue to work towards implementing Basel III standards that have an implementation deadline within the next 12 months. These include the supervisory framework for measuring and controlling large exposures (LEX), the standard for interest rate risk in the banking book (IRRBB) and the requirements for total loss-absorbing capacity (TLAC).

The Committee urges member jurisdictions to strive for full, timely and consistent implementation of Basel III post-crisis reforms, and will keep monitoring closely the implementation of these reforms.

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Fourteenth progress report on adoption of the Basel regulatory framework, April 2018 This report sets out the adoption status of Basel III standards for each Basel Committee on Banking Supervision (BCBS) member jurisdiction as of end-March 2018. It updates the Committee’s previous progress reports, which have been published on a semiannual basis since October 2011. In 2012, the Committee started the Regulatory Consistency Assessment Programme (RCAP) to monitor progress in introducing domestic regulations, assessing their consistency and analyzing regulatory outcomes. As part of this programme, the Committee periodically monitors the adoption of Basel standards. The monitoring initially focused on the Basel III risk-based capital requirements, and has since expanded to cover all Basel III standards. These include the finalised Basel III post-crisis reforms published by the Committee in December 2017, which will take effect from 1 January 2022 and will be phased in over five years. The Group of Central Bank Governors and Heads of Supervision, the oversight body of the Committee, reaffirmed its expectation of full, timely and consistent implementation of all elements of this package. As of end-March 2018, all 27 member jurisdictions have risk-based capital rules, liquidity coverage ratio (LCR) regulations and capital conservation buffers in force. Twenty-six member jurisdictions have also final rules in force for the countercyclical capital buffers and domestic systemically important bank (D-SIB) requirements. With regard to the global systemically important bank (G-SIB) requirements, all members that are home jurisdictions to G-SIBs have final rules in force. Since the last report published in October 2017, member jurisdictions have made further progress in implementing standards whose implementation deadlines passed at the start of 2018.

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These include, notably, the leverage ratio based on the existing (2014) exposure definition, which is now in force in most member jurisdictions. Also, 24 member jurisdictions have issued draft or final rules for the Net Stable Funding Ratio (NSFR) and 19 member jurisdictions have issued draft of final rules for the revised securitisation framework. However, rules for these standards are yet to be finalised and come into force in many member jurisdictions. Limited progress has been made in the implementation of some standards whose implementation deadlines passed in 2017. These include, notably, the standardised approach for measuring counterparty credit risk exposures (SA-CCR), the capital requirements for bank exposures to central counterparties (CCPs) and for equity investments in funds. Also, member jurisdictions continue to strive to implement other Basel III standards whose implementation deadline is within a year. These include the supervisory framework for measuring and controlling large exposures (LEX), the standard for interest rate risk in the banking book (IRRBB) and the requirements for total loss-absorbing capacity (TLAC). To read more: https://www.bis.org/bcbs/publ/d440.pdf

https://www.bis.org/bcbs/publ/d440.pdf

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Statistical release: OTC derivatives statistics at end December 2017

The gross market value of outstanding OTC derivatives contracts fell to $11 trillion at end-2017, its lowest level since 2007. The share of centrally cleared credit default swaps (CDS) rose to 55% at end2017, as central clearing made further inroads. The BIS revised the full history of the OTC derivatives statistics to incorporate more data from the Triennial Central Bank Survey. The grand total for all contracts remains unchanged, but amounts for all breakdowns are higher due to the allocation of previously undistributed amounts.

Since 2015, the notional amount of outstanding OTC derivatives contracts has fluctuated in a range between about $480 trillion and $550 trillion.

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Notional amounts remained in this range in the second half of 2017, ending the year at $532 trillion. In contrast, the gross market value of OTC derivatives, which provides a more meaningful measure of market and counterparty credit risk, continued to decline, from $13 trillion at end-June 2017 to $11 trillion at end-2017. The last time this value had been so low was end-June 2007. Gross credit exposures, which adjust gross market values for legally enforceable bilateral netting agreements (but not for collateral), also fell to their lowest level since 2007. They declined to $2.7 trillion at end-2017. To read more: https://www.bis.org/publ/otc_hy1805.pdf

https://www.bis.org/publ/otc_hy1805.pdf

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Central banking: trending and cycling Agustín Carstens, General Manager of the BIS, at the Sveriges Riksbank's 350th anniversary conference on "350 years of central banking: the past, the present and the future", held at the Riksdag, Stockholm.

The Riksbank's journey from public savings bank to modern central bank epitomises the central bank as an adaptive, learning and improving organisation. Often crisis spurs adaptation, as it did in 2008. The Riksbank's evolution points to broad trends in central banking towards fiat money, public governance, centralised payments and a lender of last resort role. I submit that these trends will persist. However, we have not reached "the end of history". In important respects, central banking cycles, or at least fluctuates. Should central banks favour government bonds as assets? What relative weights to assign to price stability and financial stability? How independent should the central bank be? Different times give different answers. Going last, my remarks to some extent organise my fellow panellists' reflections into four trends and three cycles. Along the way, I argue that public, centralised large payment systems will survive advancing technology. I close with some thoughts on central bank independence and cooperation.

Trends Let me start with four trends in central banking. The bar for reversing any of them looks high. 1. One trend is from metallic convertibility (as either goal or constraint) to fiat money.

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Historically, fiat money was at best a temporary war expedient and at worst a breach of trust. Today, institutional credibility grounds price expectations, not gold. The Riksbank deserves credit for having "pioneered non-convertible paper money". 2. Also taking a long perspective, a second trend is from private to public governance of central banks. No one laments the 1947 nationalisation of the Bank of England. After its private, for-profit predecessor failed, the Riksbank started as a public institution in 1668. 3. A third trend is towards the centralisation of the payment system at the national (or regional, as with the euro area) level. A state monopoly of the large payment system "became the international standard by the mid-twentieth century". Only such infrastructure offers finality, so that a payment discharges the debt irrevocably. Today, Fedwire, TARGET2 and the BoJ wire dominate the turnover league. The Riksbank's RIX system settles transactions amounting to Swedish GDP every week. 4. A fourth trend is for the central bank to lend in the last resort to relieve financial stress. Whether first done in the 18th or 19th century, once this practice begins, it tends to continue. In the Great Financial Crisis, central banks innovated in last-resort lending to non-banks. Internationally, the Riksbank, a pioneer in foreign currency last-resort lending, joined a broad effort in 2008 to relieve a global dollar shortage that shrank Swedish banks' cross-currency funding. These trends to a public, centralised payment system backed by last-resort lending leave me sceptical that new technology will displace central bank money. First, like the Riksbank's ill fated predecessor, private moneys founder on self-serving over-issuance.

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Second, once market participants have enjoyed finality of payments, they will not abandon it. Third, cryptocurrency creators' effort to separate money from a trusted institution burdens it with congestion. More use increases the size of the blockchain but decreases efficiency. By contrast, incumbent central bank money enjoys a virtuous circle from network externalities: the more use a money, the greater my incentive to use it. In sum, central bank money enjoys a scalable network: the more the merrier. Blockchain creates congestion: the more the sorrier. To be sure, central banks will champion new technology, as they have with digital payments. But this would be an evolution of the present publicly run, centralised and digital system.

Cycles Let us turn to cyclic, or at least changeable, aspects of central bank governance and functions. Consider three. 1. The holding of government debt as the preferred central bank domestic asset varies. Some fear excessive central bank credit to the government as the greatest risk, even if bonds are bought in the market, as is generally done today. Others contend that a central bank holding anything but government debt allocates credit and therefore resources, as fiscal policy does. Norms change, however. At the outset, the Federal Reserve was set up to hold bank-related domestic assets, not government bonds. By contrast, the Riksbank has long held government debt. My bottom line is that the composition of central banks' assets should not be subject to dogma. It should respond to the policy needs that the institution faces at any particular point in time to achieve its mandate. The mandate is the anchor. 2. The weights assigned to monetary or price stability, on the one hand, and financial stability, on the other, also vary.

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The United States provides a good example. The original Federal Reserve Act sought an "elastic currency" to assure financial stability. In 1926-28, the head of the Federal Reserve Bank of New York argued to Congress against a Federal Reserve mandate for stable prices, given the imprecision of its control. The Fed's legislated dual mandate dates only to 1977. Somewhat related is whether the central bank has responsibility for banking supervision. The widespread impulse to change that responsibility after a financial crisis has led to cycling. Sweden stands out here: after the banking crisis of the early 1990s, the legislature strengthened supervision but did not move it into the central bank. As a profession, economists have still not constructed an integrated framework for monetary and financial stability. We follow with great interest the Riksdag's consideration of the Riksbank's role in financial stability and parallel discussions elsewhere. 3. Despite recent events, central bank independence varies, at least in the choice of means to agreed ends. If the first victim of war is truth, then the second is central bank independence. Variations in independence arise not only from legal but also behavioural sources, such as the timing of the appointment of the central bank head in the political cycle. Most but not all BIS members enjoy substantial independence to pursue agreed goals. War apart, we can recognise two current challenges to central bank independence. First, adaptation of monetary policy to unprecedented conditions has left some central banks with huge domestic asset holdings, including government securities. For example, the Riksbank holds about a quarter of the outstanding Swedish government debt. With the best of will and communication, undoing this could prove delicate.

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Any government may find it easier to live with a large buyer of its debt than a substantial seller. But domestic assets must be reduced, privileging monetary control. Second, financial stability mandates pose challenges to the model of agreed goals and independent means. Such mandates resist the clarity of an inflation target. What is more, financial stability is most often a shared responsibility. Sweden's Financial Supervisory Authority and National Debt Office both have financial stability tasks. To achieve financial stability, the central bank cannot be the only game in town. I am confident that we will rise to these challenges. At the Riksbank's 400th anniversary, central bank independence will be a trend. To get there, we should embrace clear goals, articulate the means to reach them and engage with elected officials, as we do here at the Riksdag. I close on what I hope will be a trend rather than a cycle: central bank cooperation. With global financial markets, central bankers value Basel discussion of policy spillovers and spillbacks. Understanding these enlightens self-interest in the pursuit of national mandates. Often, Basel discussions lead to joint action. Ben Bernanke recalled that "a number of cooperative efforts among central banks had their origin at - [Basel] meetings, especially during the crisis". Extensive cooperation in banking supervision owes much to Governor Ingves' time, devotion and steely determination. BIS member central banks, both those here represented and others, hope that Sweden will continue to overachieve in central bank cooperation.

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Welcome Address by the Secretary-General of the IFSB at the CBK-IFSB Conference on Islamic Finance: A Universal Value Proposition Dr. Bello Lawal Danbatta, Secretary General, IFSB - CBK-IFSB Conference on Islamic Finance: A Universal Value Proposition, Kuwait City, Kuwait.

Assalamu’alaikum and a very good morning to all of you. It gives me great pleasure and honour to welcome you today to this high-level international Islamic finance conference, themed, ‘Islamic Finance: A Universal Value Proposition’, in this beautiful city of Kuwait, a country considered as one of the pioneers of Islamic finance. I am grateful to all governors and senior officials of the central banks and monetary authorities, heads of supervisory authorities, officials representing international organisations, heads of financial institutions as well as other distinguished guests, for being here with us today. To our members, I would like to add my personal words of welcome and to thank you for your continued support of the IFSB. My special vote of thanks goes to H.E. Dr. Mohammad Y. Al-Hashel, the Governor of the Central Bank of Kuwait and Chairman of the IFSB Council 2018 for his generosity and support for organising this joint high-level conference, in conjunction with the IFSB Annual Meetings 2018. I believe, under His Excellency’s leadership, the IFSB is determined to take a giant leap forward in delivering its mandates. Thank you, Chairman. Taking this opportunity, I also would like to candidly thanking the staff of the CBK and my colleagues at the IFSB, for their enormous efforts in making this conference a success.

The Role of the IFSB: Global Regulation for Islamic Finance Your Excellencies, Distinguished guests, Ladies and Gentlemen, Please allow me to give you some brief updates on the IFSB and our activities.

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With the efforts of its founding members, the IFSB was established in 2002 with a clear vision and mandate for the benefit of global Islamic finance industry. The IFSB serves as an international standard-setting body of the regulatory and supervisory authorities that have vested interest in ensuring the soundness and stability of the Islamic financial services industry. Today, the IFSB is recognised as the leading international institution, promoting the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards that are consistent with Sharīʻah principles. The mandate of the IFSB is defined broadly to include banking, capital market and insurance sectors. For this reason, the work of the IFSB complements that of the Basel Committee on Banking Supervision (BCBS), International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS). We work closely with these institutions in delivering our mandate. As this year marks the 15th anniversary of the IFSB, the growth and development of this international institution, has been only possible with the unwavering support of its members. The journey, which started with its nine founding members (Bahrain, Indonesia, Iran, Kuwait, Malaysia, Pakistan, Saudi Arabia, Sudan and the Islamic Development Bank), has transformed the IFSB into an institution with 185 members operating in 57 jurisdictions. In our membership, we have 75 regulatory and supervisory authorities, 8 international inter-governmental organisations such as BIS, ADB, IMF, IDB, World Bank, and 102 market players (financial institutions, professional firms, industry associations and stock exchanges). In the last 15 years, the IFSB has played a critical role in the global Islamic financial services industry by issuing international standards that take into account the specificities of Islamic finance. Apart from research and reports, the IFSB has issued 27 high quality standards, guiding principles and technical notes that provide the basis for the orderly development of a broad-based Islamic financial services covering all three sectors of the IFSB mandate: Islamic banking, takāful and Islamic capital market sectors.

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These standards include first-generation standards and second-generation standards, such as equivalence of Basel III issued after the global crisis. Since its inception, one of the key challenges the IFSB faced is to establish its international authority and credibility as a standard-setting institution. However, this is where most of the success has come for the IFSB and with the commitment of its members we will continue to develop and sustain that inshAllah. This accomplishment is the outcome of a collective effort of the IFSB Council, Technical Committee and its Working Groups, active participation of all IFSB members, contribution of my predecessors, cordial relations with IFSB counterparts such as BCBS and IAIS, and last but not the east the relentless efforts of the IFSB Secretariat. The result of the IFSB’s standard implementation surveys indicated that these standards have been adopted by the national supervisory authorities and have helped in promoting the harmonisation and standardisation of regulatory approaches to provide a level playing field in the Islamic financial services sectors of our members’ jurisdictions. However, more work need to be done collectively to improve the level of adoption across these jurisdictions. I would like to take this opportunity to assure all IFSB members that the IFSB Secretariat is ever committed to adding value to your memberships and we are ever ready to address your concerns and to assist you in the implementation of our standards either through workshop, technical assistance, policy advice or capacity building. We solicit your kind cooperation in telling us your expectations. I also would like to take this opportunity to inform all Full, Associate and Observer Members that we currently working on new initiatives that will enhance our services to you and the global Islamic finance industry.

Theme of the Conference Your Excellencies, Distinguished guests, Ladies and Gentlemen, Please permit me say few words about today’s conference. With the double-digit growth, the Islamic financial services industry has undergone rapid expansion globally, which echoes its capability to meet the global goals of economic and social development for both Muslims and non-Muslims consumers and businesses alike.

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The theme of the conference itself reflects the significance of the universality of Islamic finance philosophy. Islamic finance - with its essential features and overarching principles of inclusiveness, innovation, stability - offers a universal value proposition, which can fit into all types of economies regardless of religious dominance, and can address key economic and financial challenges, which we face in today’s world. It can help in achieving a vibrant socio-economic development that can lead to more prosperous, diversified and equitable societies. With this background, today’s conference provides a platform for global dialogue to all industry stakeholders to deliberate and highlight collectively the role of Islamic finance in the broader context in order to promote global economic cooperation and generate ideas that can transform the recent technological developments and disruptions into an opportunity. Particular emphasis and debate on macro-economic diversifications, building a dynamic and robust regulatory eco-system, and addressing the emerging risks facing the Islamic financial services industry, will provide intellectual inputs that is necessary for the sustainable economic growth and shared prosperity for all. To address these issues, we have distinguished panellists, and I hope that the discussions will produce solid recommendations for the Islamic financial services industry moving forward.

Concluding Remarks: How IFSB can support the global IFSI Your Excellencies, Distinguished guests, Ladies and Gentlemen, Let me conclude by highlighting some points on how the IFSB can play its role to support the global Islamic financial services industry. First, as H.E. Dr. Mohammad Y. Al-Hashel rightly pointed out in one of his speeches, ‘enabling environment for a sustainable and resilient industry is very important’. In this respect, the IFSB as an international institution will continue playing its due role to achieve its objectives under its mandates. Recently, the IFSB has issued three Exposure Drafts including the Core Principles for Islamic Finance Regulation [Islamic Capital Market Segment] for a two-month Public Consultation period starting 28 March 2018 to 28 May 2018, and I would like to invite comments from all stakeholders of the industry to improve the quality of the drafts.

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Moreover, all stakeholders are also invited to participate in the public hearing of these three Exposure Drafts scheduled for 7-8 May 2018 in Kuala Lumpur, Malaysia. Second, we are committed for cooperation that is more global and inclusive. The collaboration of capacity building with our members to adopt the IFSB standards that we have issued is our top priority in our Strategic Performance Plan agenda. Third, our diversified membership is a unique source of strength for the IFSB and we will continue to deepen our engagement with our members and with the global IFSI. In this respect, I would like to express my profound gratidude and appreciation to H.E. Dr. Mansur Muktar, Vice President of the IDB Group for their continuous financial support to the IFSB including the latest technical assistance of grant of USD 250,000 which we signed yesterday. Fourth, I believe that the IFSB has a pivotal role to play towards integrating Islamic finance into the global economy through its cross-sectoral standards. In this case, among others, we have issued a Core Principles for Islamic Finance Regulation [Islamic Banking Segment] and with the support and commitments from the IMF and World Bank. We are hoping soon this standard will be in the compendium of standards of the FSB. These Principles include an assessment methodology that can assist all regulatory and supervisory authorities to carry out self-assessments of the progress made in the development of their regulatory frameworks and in achieving greater consistency in the implementation of the IFSB standards. It is worth mentioning that the IMF, World Bank, the BCBS, IDB, ADB, have been members of this important working group. Finally, with the rapid technological development in the global financial industry, in which capacity wise, the market players are six-steps ahead of the regulators and the international standard-setting bodies, especially due to emerging regulatory challenges such as Fintech, Blockchain, Big data analytics, artificial intelligence, and robotics. There is a strong need for immediate commitment of resources and intellect in building a robust capacity to manage the challenges posed by these technological innovations. My specific submission here includes, among others, building the capacity of our Sharīʻah scholars.

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On that note, I wish you very productive deliberations and discussions which will allow us to generate new ideas in realising the objectives of today’s high-level conference. Once again thank you all for your participation and wassalamu alaikum wa rahamatullah ta’ala wa barakatuhu.

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Why EMU requires more financial integration Keynote speech by Mr Vítor Constâncio, Vice-President of the European Central Bank, at the joint conference of the European Commission and European Central Bank, Frankfurt am Main.

I am pleased to host you today in Frankfurt at the Financial Integration Conference. The 2018 Financial Integration Report is the last issue published under my tenure as ECB Vice-President. I wish therefore to take this opportunity to reflect on the relevance of financial integration to Economic and Monetary Union (EMU) and provide some suggestions for future directions. Already at the very early stages of the project, it was clear that financial integration was needed to make the Monetary Union sustainable. The 1970 Werner Report mentioned the complete liberalisation of capital transactions and the full integration of financial markets as one of three necessary conditions for a monetary union. Along with this, it was understood that the single currency would secure the full benefits of a single market for capital. During the run-up to the Maastricht Treaty and in the context of the Delors report discussions, it became clear that the dictum "one money one market" also implied addressing possible new concerns about financial stability in Economic and Monetary Union. In some cases this translated into prescient calls - like that from Alexandre Lamfalussy - for assigning the European Central Bank a role in banking supervision. Eventually however the institutional set-up of Monetary Union left financial stability considerations largely unaddressed. This approach clearly showed its limits during the financial crisis. The financial fragmentation of EMU during the financial crisis was partly a result of the initial choices concerning EMU's institutional architecture - to

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be precise, its minimalist design which left economic and financial policies mostly at national level. This was maybe due to an overriding faith in the efficiency of financial markets that - even though not shared by all of EMU's founding fathers - prevailed in Maastricht. It has to be acknowledged, however, that over the following years, financial market integration in EMU and at global level, accelerated at a speed that was hard to grasp in those early days after the creation of Monetary Union. The introduction of the single currency gave a major impetus to financial integration in the euro area. Financial integration was impressive in terms of quantitative indicators but it was not sustainable - it proved to be shallow and reversible. In fact, it even contributed to the rapid contagion in the early days of the crisis. We learned the hard way that a single currency requires a financial system that is sustainably integrated and, indeed, as single as possible. Much has been done to correct the initial design failures of EMU. Along with the introduction of the euro, the EU's Financial Services Action Plan was launched to provide an overall framework for the integration of financial services in Europe. With the surge of the financial crisis, it also became very clear that macroprudential policy needed to complement both monetary policy and microprudential supervision. The European Systemic Risk Board (ESRB) and the European Supervisory Authorities were then established at the beginning of this decade. However, these reforms quickly proved to be insufficient to keep pace with adverse financial sector developments - especially concerning the role of the banking sector in the Monetary Union. In response, the banking union project was launched in the depths of the financial crisis in 2012. But convergence in regulatory and supervisory standards is not enough to spur the development and integration of capital markets that is needed for growth and private-risk sharing. Therefore, efforts in this direction were also undertaken, with the launch of the capital markets union (CMU) initiative. In short, the history of EMU is marked by an evolving search for the right institutional embedding of financial markets. And in that search, Europe

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has to be agile to react to changing circumstances. In doing so it has to find a balance: between markets and regulation, between liability and control, and between the European and national level. However, the crucial question is whether we will achieve a sustainable financial integration that is commensurate with a single currency.

Why financial integration is currently insufficient for EMU The crisis made it clear that deep financial integration is essential to prevent EMU going into reverse. Financial integration in Europe and in the euro area had been growing steadily before the financial and sovereign debt crisis. However, the system was not structurally integrated and when the crisis financial erupted integration quickly reversed, exactly when it was most needed. In response to global and local shocks almost all financial markets became highly fragmented and retrenched inside domestic borders. These developments represented an existential threat to the Monetary Union and the single currency. That fragmentation has reversed along several dimensions in the last few years. But significant room for further improvements in financial integration remains, for example in the integration of retail banking services and in the financing of the corporate sector. Financial integration provides risk sharing mechanisms which can reduce the impact of country-specific shocks and contributes to macroeconomic stability. Internationally diversified portfolios - cross-regional and cross-border asset holdings, including firm ownership claims - are more resilient to global and local shocks and can mitigate the impact of such adverse scenarios. This is particularly true when integration occurs also in the equity markets as opposed to the current bias towards debt finance intermediated by banks. For countries in a monetary union, this risk sharing mechanism is particularly important because the single monetary policy is unable to address asymmetric shocks, since other important adjustment mechanisms, for example related to fiscal policy and exchange rates, are limited.

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Therefore more private financial risk sharing can significantly improve the macroeconomic stabilisation of the euro area and thereby the functioning of EMU. However, bear in mind that in recessionary periods, the power of this risk sharing mechanism is significantly reduced, in particular via the powerful credit channel. Let me point out that this channel accounts for about one-quarter in the United States and around 12% in the euro area, of the overall income smoothing that is achieved in both jurisdictions in normal times. Perhaps even more important, financial integration is also essential to foster economic growth. Integrated capital markets provide a wider source of financing and lower funding costs for households and firms and ultimately support innovation and the efficient allocation of capital. A financial system which allocates resources efficiently and is resilient to shocks ultimately supports the transmission of monetary policy and its effect on price stability. The banking union and the CMU affect different parts of the financial system at different stages of development, but follow similar objectives to achieve a more efficient and stable financial system. They are also complementary projects: work on them should run in parallel and require a solid monetary union.

Completing banking union The first task ahead is to complete the banking union. Each of its three pillars, notably the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the planned European Deposit Insurance Scheme (EDIS) address the risk of fragmentation. They are also all necessary to ensure a proper balance between markets and regulations, and liability and control at European and national level. The SSM ensures that banks are subject to the same set of rules and supervised on the basis of common standards. This reduces the risks of spillovers from bank failures to sovereigns and provides a common framework conducive to further integration in the banking markets, a process which has been lagging. Since bank failures cannot always be avoided - and indeed this may not be desirable either, as it may undermine market discipline - we need a credible and well-functioning crisis management and resolution mechanism.

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This is ensured by the second pillar of the banking union. With the setting-up of the BRRD, the Single Resolution Mechanism and the Single Resolution Fund (SRF), we have made a quantum leap in the institutional organisation of the EMU. However, the framework is still incomplete. Most notably, it requires a common public backstop to the SRF, which is essential to inspire full confidence in the resolution regime. In addition, it would be desirable to eliminate national divergences in the insolvency and liquidation of credit institutions, and in the implementation of the BRRD through national resolution laws. Allowing these divergences to persist ultimately implies that the geographical location of a failing bank may still influence the outcome of the resolution, which is inconsistent with the idea at the heart of a banking union. Finally, in order to complete the banking union, we need a single, fully-fledged EDIS. The EDIS would strengthen depositors' confidence through an equal level of depositor protection across Member States and therefore promote financial integration. Ultimately, a fully-fledged EDIS would be strengthened by the pooling of resources, thus building confidence in the single currency, throughout the Monetary Union. The finalisation of the banking union through its third pillar would require an adequately sized fund, built and financed by banks by raising ex-ante contributions, accompanied by a public backstop as recommended by the ECB opinion on EDIS. The calibration of these contributions should help to minimise the risk of some banking systems subsidising other banking systems in the event of a crisis. A recently published ECB Occasional Paper simulating severe banking crises, demonstrates precisely that, with proper bank risk-based contributions, an almost negligible cross-border subsidisation occurs. For this reason, a crucial element of a fully-fledged EDIS would consist of risk-adjusted contributions to the fund based on bank-specific strengths and weaknesses benchmarked at the banking union level.

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Progress is also needed in the framework for macroprudential regulation. I regard this as a precondition for safeguarding financial stability in an integrated market and therefore protecting the Single Market. The CRR/CRD IV, the ESRB and the SSM Regulations already define the key elements of the macroprudential framework, but as the framework is tested and more experience is gained the rules will need to be steadily revised. Authorities with a mandate in this area must have well-defined roles and responsibilities, including a distinct set of instruments. Current overlaps between instruments should be eliminated, and more flexibility in the macroprudential policy framework should be maintained, so that authorities can implement those measures in a consistent and timely manner, which would require significant changes to Article 458 of the CRR. A more integrated financial market will support the emergence of new types of risk and also require extending the toolkit with new instruments. For the banking sector, this includes complementing the toolkit with borrower-based instruments (such as limits on loan-to-value, or loan-to-income ratios) as well as sectoral buffers and a time-varying leverage ratio add-on so that all aspects of systemic risks can be addressed in the banking union. Finally, the mandatory reciprocity framework needs to be expanded so as to ensure the effective mitigation of cross-border spillover effects and regulatory arbitrage across jurisdictions in the EU. The significant progress we have made with our banking union needs to be recognised also from the international regulatory framework perspective. A case in point is the G-SIB framework, which currently penalises cross-border transactions within the banking union by attaching a higher systemic risk score to banks with more transactions of that kind. This goes against the very rationale of the banking union, as it reduces the incentives for cross-border transactions and risk diversification, thus making banks more vulnerable to local shocks. At the same time, we also need to remove the remaining obstacles to further integration within our banking union. Such obstacles are often due to regulatory fragmentation and ring-fencing of national markets.

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For example, a number of national options and discretions, such as diverging large exposure rules, are hindering the free flow of liquidity and capital in the banking union and should be harmonised further. Turning to other parts of the financial system, we can expect that the CMU will provide further impetus to the growth of market-based finance and may present new challenges to financial stability. Additional steps should be taken to strengthen the ability of European regulators and supervisors to address systemic risks stemming from the non-banking part of the financial sector. This could be achieved by expanding the mandate of relevant authorities and, in the medium run, by creating a single supervisor for the capital markets. Adequate macroprudential instruments need to be envisaged as well, including instruments targeted at market-based finance. Macroprudential tools for this area either still need to be provided to authorities or need to be further clarified in respect of their application. For Securities Financing Transactions (SFT) and derivative markets, macroprudential margins and haircuts have been identified as potentially powerful tools for reducing the excessive build-up of leverage and procyclicality in these markets. For alternative investment funds, the existing macroprudential leverage limit needs to be operationalised. The forthcoming review of the Alternative Investment Fund Managers Directive provides an opportunity to resolve any issues that may hinder the future implementation of this leverage limit. Moreover, as the ESRB recently recommended, for the investment fund sector, the role of authorities when using their powers to suspend redemptions needs to be further specified in law. In addition, European Securities and Markets Authority should have a general facilitation, advisory and coordination role in relation to the National Competent Authorities' powers to suspend redemptions in situations where there are cross-border financial stability implications.

The need for a European safe asset The stability and integration of financial markets in the Monetary Union is also closely related to the creation of a euro area-wide safe asset, for a number of reasons.

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First, it could help reduce the excessive home bias in banks' sovereign exposures, which exacerbates the feedback loop between banks and sovereigns. Reforms to the resolution regime (i.e. BRRD) have tackled the issue from one direction, from banks to the sovereign. However, at present, there is no clear solution for tackling it in the other direction, from the sovereign to the banks. The creation of a euro area-wide safe asset, composed of a pool of sovereign bonds, would lead to a reduction in the home bias of banks' portfolios by facilitating de-risking and diversification. Second, a euro area safe asset would be crucial for the financial integration and the capital markets union. In fact, it is necessary for the creation of an integrated, deep and liquid European bond market as a central piece of CMU. A single term structure of risk-free interest rates could serve as a euro area pricing benchmark for the valuation of bonds, equities and other assets. The safe asset could also be used as collateral, for example for repo and derivatives transactions across the euro area. In principle, several options are available for creating a safe asset. Some options are not politically viable, while others may not be economically sound. I am not referring to the type of eurobonds that would replace national sovereign debt as a joint liability of Member States, as these would require a deep political union. Various proposals have been put forward, but I will concentrate on just two: a variant of the European safe bonds (ESBies) or sovereign bond-backed securities (SBBS) and the e-bonds as proposed in the Monti Report. The current proposal of the SBBSs refers to a tranched, synthetic bond backed by national sovereign bonds. The senior tranche would have very low risk levels, presumably below German debt, as a result of the diversification gains based on historical correlations and of the protection granted by lower-grade tranches. Market practitioners and rating agencies have been skeptical about the instrument. Their main concern is a perceived lack of diversification to ensure that the senior tranche can be indeed as safe as claimed because

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correlations among several countries' debt could increase in a stressful situation (as occurred during the financial crisis). Also, it may be difficult to sell the junior tranche at coupons that do not fatally compromise the overall economics of the synthetic security issuance. Indeed, if the junior tranche had to be placed at a relatively high coupon, then the senior tranche would need to offer a lower coupon than Bunds, a doubtful selling prospect. This would likely render the economics of the SBBS as unviable, which would be very unfortunate. These obstacles could be overcome if, for instance, a small first loss tranche were to be covered by public guarantee, jointly provided by member states. Such contingent liability could be limited to a reasonable level. The success of the synthetic European Bonds would have significant benefits for financial integration and for the banking and capital markets unions. Alternatively, a European entity could issue e-bonds as a pure securitisation of sizable amounts of national sovereign bonds but with a preferred creditor status over national sovereign bonds. Such a structure would be less efficient and could increase the cost of issuing the non-preferential part of national debt that is not included in the securitisation. However, this could even act as a disciplining device and would not necessarily imply an increase in the costs of the total debt issuance. The amounts achieved could nevertheless be considerable. For instance, according to a recent working paper of the Peterson Institute, in order to have an expected five-year loss rate of 0.5% or lower, the European entity could securitise 50% of a country's debt or 25% of its GDP.

Capital Markets Union, financial integration and economic growth A European safe asset is crucial for the CMU project which in turn important for economic growth. A big and liquid market, both of debt and equity, would spur innovation and enable the development of an efficient venture capital market. This relates to the importance of boosting the euro area's capacity to engage in activities conducive to innovation and productivity growth. In the years since the Great Recession, the pace of productivity growth in Europe has been persistently slow. In fact, European productivity growth had already started to stagnate during the mid-1990s.

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While some economists have argued that this is all part of a global secular decline in growth, driven by factors such as an ageing population and growth convergence across emerging markets, others believe that scientific progress will keep pushing the technological frontier forward. In any case, it is vital that we have financing mechanisms in place in Europe that can support science and technology's contribution to economic growth. One powerful way in which policy can assist this process is by stimulating the emergence of deep and integrated European capital markets. Capital markets, after all, play an important role in sharing economic risks and in smoothing consumption. But even more fundamentally, they contribute greatly to innovation and growth. Evidence increasingly suggests that while both banks and markets are important for the financing of economic growth, non-bank financial intermediation provides a relatively more powerful contribution to innovation and productivity-enhancing activities in modern sophisticated economies, also in the euro area. Importantly, complementarities between banks and markets increase, as the economy develops, and so deep capital markets will end up complementing banks as sources of financing. While the European Commission's current CMU initiative is an important step in the right direction, a much more ambitious agenda for bolstering capital markets in Europe is needed in the future. Developing well-functioning capital markets which support economic growth across Europe requires a comprehensive approach. To that end, Europe needs to boost the supply of equity finance. Policies which stimulate individual ownership of traded shares, such as reducing the tax advantage of debt over equity or enhancing financial literacy, can have a material effect on public equity markets in Europe. At the same time, because stock markets often penalise companies which undertake radical, but uncertain, innovative activities, the contribution of private equity - particularly in the form of early-stage venture capital finance - is indispensable, as a critical mass of angel investors who can provide financing for medium-size projects is also needed. Only with a deep, liquid market is it possible to launch IPOs of successful projects that can offset the losses with projects that fail. Harmonising insolvency rules across jurisdictions would be a major step towards supporting capital markets.

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This is critical for mobilising finance through capital markets, as it would create incentives and favourable conditions for institutional investors to overcome the home bias in their investment strategies. This is especially true for pension investment, as large private pension funds tend to be a complement to deep capital markets. We need to establish a harmonised regulatory environment for new types of finance, such as crowd funding. The emergence of increasingly complex financial products needs to be accompanied by adequate consumer protection of financial investment, in order to safeguard financial stability and ensure the protection of individual investors. The second component of a comprehensive approach entails policies that will stimulate entrepreneurship. High-tech entrepreneurial firms that aspire to go public should be supported and facilitated by stock exchanges specialising in IPOs for young innovative companies. A reduction in the wedge between corporate income taxes and personal income taxes has already been shown to have a strong positive effect on high-tech investment in a European context. Last but not least, the efficient application of R&D tax incentives and increased public funding of private research universities, whose labs often make key scientific and technological breakthroughs, are other important avenues for stimulating innovation and the commercialisation of science.

Conclusion Let me conclude. So far, measures adopted in the context of the CMU initiative, albeit positive and helpful, are not yet commensurate with the ambition of the project. With CMU, we should aim to reach a situation where both issuers and investors enjoy the same basic legal rights concerning capital markets activity regardless of the EU country where they are located. The CMU project involves all EU member states but it is particularly important for the euro area member countries. It is a big waste to have taken the huge step to adopt a single currency and continue to forgo the benefits that could be reaped by creating a true banking and capital markets union. I believe that euro area countries should forge ahead in enhanced co-operation in order to achieve CMU more rapidly.

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We should however, be well aware that CMU requires a European safe asset, the harmonisation of taxes on financial products, a convergence of company law, including on bankruptcy, the creation of a single rule book of regulation for markets activity and ultimately a European Single Securities Market Supervisor. The other big condition is a rock solid monetary union so that assets' risks and returns are not significantly influenced by redenomination risk but exclusively by their idiosyncratic features. A heavy toll, I know, but I will believe that the CMU project is possible when I see authorities start making inroads in some of those difficult issues. Thank you for your attention.

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Iran and India ban cryptocurrencies

Iran’s central bank has banned Iranian banks, credit institutions and currency exchanges from selling or purchasing digital currencies. It says cryptocurrencies, like Bitcoin, are used in money-laundering and financing terrorism, and that they are inherently unreliable and risky. The same concerns are expressed widely around the world, including by the Chief of the International Monetary Fund, but many also believe digital currencies and the technology behind them could have a positive effect as a low-cost payment method. Iran’s actions follow similar decisions by other central banks, such as the Reserve Bank of India’s decision in April to serve three months’ notice for entities they regulate to cease dealing in digital currencies. The central bank decisions have been concerning for digital currency users in these countries (reportedly around five million in India), but it is too early to say whether these actions will last, have any long-term impact on the wider cryptocurrency market or whether other countries will follow suit. Some countries are debating the regulation of digital currencies: Japan has recently created a regulatory body for its cryptocurrency exchanges, for example, and others have considered creating their own state-backed digital currencies. The future of digital currencies is still unknown, which is a major contributing factor to their price volatility, but they are likely to be with us for the foreseeable future.

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The fintech phenomenon - five emerging habits that may influence effective fintech regulation Opening remarks by Mr François Groepe, Deputy Governor of the South African Reserve Bank, at the Inaugural Intergovernmental Fintech Outreach Workshop, Council for Scientific and Industrial Research, Pretoria.

Introduction Good morning, ladies and gentlemen. Welcome to the inaugural Intergovernmental Fintech Outreach Workshop. Let us begin with the words of Joseph Schumpeter: “Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.” There is no doubt that we are witnessing a wave of disruptive innovation and technology that one can liken to Schumpeter’s ‘creative destruction’, one that will leave no aspect of human endeavour untouched. Financial services in particular are within the eye of the storm of the change as a result of financial technology, or ‘fintech’. An elementary Google search on fintech results in no fewer than 35.2 million hits. Investment in fintech over the last three years is estimated to have been well over US$300 billion dollars. Attention to the emergence of fintech has come from every quarter. There have been contributions from the World Economic Forum reflecting the potential of distributed ledger technology across wide-ranging financial services and activities. The International Monetary Fund has been vocal about the potential impact of cryptocurrencies. More recently, under the Argentinian

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presidency, the G20 has committed to deepening the analysis on how financial inclusion could be achieved through digital innovations. All of these examples suggest a heightened expectation of shifts to financial services as a result of fintech. At the outset, it may be appropriate to attempt to define what fintech is. ‘Fintech’ usually refers to innovative start-ups or underlying technologies such as blockchain, cloud computing, and machine learning. Founded on an activity-based analysis conducted by the Financial Stability Board (FSB), the evolving definition of ‘fintech’ is that it is neither the fintech firms, nor the start-ups, nor the emerging technologies. Rather, ‘fintech’ is the technology-enabled innovation in financial services as a result of the process of ‘creative destruction’. It may lead to new business models and new configurations within financial services To read more: https://www.bis.org/review/r180426e.pdf

https://www.bis.org/review/r180426e.pdf

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Between "shadow" banking and an angelic vision of the market - towards a balanced development of non-bank finance Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the presentation of the 22nd Financial Stability Review, Paris.

Ladies and Gentlemen, I am very pleased to welcome you this morning to this presentation of the 2018 Financial Stability Review (RSF), dedicated to non-ban k finance. Intended as a forum for dialogue and exchange, the FSR offers leading personalities from diverse backgrounds the chance to have an open debate. I am delighted to see many of this year's contributors here among us this morning, and I would like to extend my warm thanks to all the speakers: Klaas Knot, President of the Dutch Central Bank; Philip Lane, Governor of the Central Bank of Ireland; Robert Ophèle, President of the Autorité des marches financiers; Paul Hamill, Global Headof FICC at Citadel Securities; Yves Perrier, CEO of Amundi; and Richard Portes, Professor of Economics at the London Business School. The topic we have chosen to address is far from anodyne: according to the Financial Stability Board (FSB), non-bank financing totalled USD 160 trillion in 2016 [Monitoring Universe of Non-Bank Financial Intermediation, MUNFI], up 50% relative to 2008 and accounting for close to half of all financial assets held by financial institutions worldwide, compared with 40% in 2008. And yet - or maybe precisely because of this - there is still much heated debate over its scope and over what exactly it should be called. In order to better understand it, we need to rid ourselves of two mindsets: first, one of irrational fear, as non-bank finance also enables the financing of growth and innovation; and, in contrast, an over-idealised or "angelic" vision of the sector, as shadow banking does indeed carry risks and regulators have a role to play in mitigating them.

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1. Overcoming our irrational fears: the benefits of market-based financing To overcome our irrational fears of non-bank finance, the words we use to describe it matter. Is it "shadow banking", with all the negative connotations this implies, or rather, as some regard it, "market-based finance" or "non-bank credit intermediation"? For the title of this FSR, we have chosen the term "non-bank finance" in its broadest sense. The work carried out by the FSB enables us to better determine its scope: the higher measure, which is entity-based [Other Financial Intermediaries or OFIs], puts the total at USD 99 trillion. However, those activities liable to pose a risk to financial stability, that is "narrow shadow banking", only account for USD 45 trillion, in other words a little under 30% of total non-bank finance. Market-based finance is still not very widespread in the euro area: it accounts for just 20% of total non-financial corporation debt, with the remaining 80% taking the form of bank lending. In the United States, these proportions are reversed. We should stress here that, of the larger euro area countries, France has the highest proportion of market-based financing, at 40%. Non-bank financing in France totals EUR 1.748 trillion, and the leading asset manager in Europe is a French firm, Amundi. France also has an internationally recognised regulator, in the form of the AMF, while Paris is home to the European Securities and Markets Authority, ESMA. After Brexit, I also have every reason to believe that a significant share of the market activities of the largest global banks will be based in Paris. First of all, I want to put an end to the non-debate over whether market-based finance is better than bank-based finance and vice versa, and the misconception that the US system should be replicated in Europe: working towards a balanced development of non-bank finance simply means giving companies the option of diversifying their debt financing. Fundamentally, the real debate lies elsewhere: it is about switching from debt to equity.

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This is crucial in advanced economies, where growth is dependent on innovation. Equity financing is better suited to the uncertainty and often long-term returns associated with innovative projects. The euro area is seriously lagging behind in this respect: equity only accounts for 74% of GDP, compared with 125% in the United States. Moreover, it only makes up half of the total external financing of euro area corporations (equity + debt), compared with three quarters in the United States. In practice, how can we successfully diversify the sources of financing? At the national level, I am pleased to see that the "Pacte" law drafted by the Minister for the Economy and Finance seeks to foster long-term and equity-based life insurance contracts - by overhauling Eurocroissance - and encourage and simplify retirement savings, including the annuity component which has the longest investment horizon. Moreover, one approach supported by the Banque de France is the implementation of an ambitious European framework: a "Financing Union for Investment and Innovation" to better channel the euro area's EUR 400 billion savings surplus into equity financing and innovation. This Financing Union needs to unite and build on existing initiatives, first and foremost the Capital Markets Union, but also the Banking Union and the Juncker Investment Plan. It also means making concrete progress in several areas: the revision of accounting rules, taxation and insolvency laws in order to facilitate cross-border investment, notably in equity; the European-wide development of long-term savings products and investment vehicles such as venture capital funds; the completion of the Banking Union.

2. Avoiding an angelic vision: monitoring, testing, regulating So no irrational fears in the face of the shadows; but no angelic vision either. A portion of shadow banking is still overly exposed to credit, liquidity, leverage and maturity risk, and there is significant potential for these to spread to the rest of the financial system and cause financial instability. We discussed this issue at the IMF and G20 meetings in Washington just last week. In my view, therefore, there are three priorities for regulators: monitoring, testing and regulating. Monitoring first, thanks to the compilation of detailed data on shadow banking.

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The FSB already contributes to this with its annual report on shadow banking, as does the ESRB with its European Union shadow banking monitor. But we need to go further: we need an even more precise picture of the sector as participants and business models can vary considerably from one country to another, and are sometimes extremely complex. It is particularly crucial to put together a mapping of the interconnections within the shadow banking sector and with traditional banks and insurers. The second priority is to be able to test for systemic risks, using appropriate tools. In order to measure the global impact of shocks, we have a particular need for liquidity macro stress-tests that take into account investment funds: the latter are especially vulnerable to runs, in the event of a stock market crash for example, if they are open-ended and have no system of gates. To achieve this, we need to develop, jointly and at a global level, a harmonised framework for systemic stress tests: the FSB already recommended such tools in 2017, but there is a real risk that they will remain in the exploratory phase, and that no action will be taken at the level of the financial system. The third and last priority is to regulate. Following the finalisation of the Basel III reform in December 2017, the main focus for financial regulation is no longer bank solvency, but non-bank liquidity. We nonetheless need to avoid making two mistakes. The first would be to favour one sector over another, be it banks or shadow banking: the existence of opportunities for regulatory arbitrage could to lead to the transfer of capital-intensive activities to less regulated, or even unregulated entities, which would be counterproductive. The other mistake would be to impose banking regulation on shadow banking, as the risks are not the same; in particular, the same capital requirements cannot be applied. At the global level, the non-bank sector needs to be provided with microprudential and macroprudential regulations that are tailored to its particular business model and risks. With regard to macroprudential regulation, France is a pioneer in this field with its decision to introduce, as of 1 July this year, a measure regarding

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large enterprises that also takes into account their market debt. We shall publish details on how it will work this week. But we need to be honest with ourselves and admit that our experience of using macroprudential tools outside the bank sector is still very limited. One of our priorities in terms of regulation should also be to develop liquidity management tools for investment funds, and to refine the measurement of their leverage, two issues that, fortunately, the FSB has already identified. It is also important that we increase the transparency of shadow banking activities. In this respect, the entry into force of the European regulations EMIR2 and SFTR should be a considerable step forward. As I've been talking about macroprudential measures regarding large corporations, and our subject is financial stability, I'd like to bring you up to date on bank lending in France: lending to the private sector - to households and businesses - is growing rapidly in France, at a rate of close to 6% per year. At the next meeting of the High Council for Financial Stability (HCSF) in June, we shall look at whether we need to introduce additional measures. To sum up, we have not yet finished exploring the issue of non-bank finance and I am certain that today's event will make a valuable contribution to the debate. I would like to pass the floor now to Aurélia End, who will host the round table, and wish you all an excellent morning.

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Global Shadow Banking Monitoring Report 2017

Non-bank financing provides a valuable alternative to bank financing and helps support real economic activity. For many firms and households, it is also a welcome source of diversification of credit supply, and provides healthy competition for banks. However, if nonbank financing involves bank-like activities, such as transforming maturity/liquidity and creating leverage, it can become a source of systemic risk, both directly and through its interconnectedness with the banking system. Since 2011, the Financial Stability Board (FSB) has been conducting an annual monitoring exercise to assess global trends and risks in the shadow banking system. This Report presents the results of the FSB’s seventh annual monitoring exercise. It covers data up to end-2016 from 29 jurisdictions, including Luxembourg for the first time, which together represent over 80% of global GDP. This Report also includes, for the first time, a classification of non-bank financial entities in China into the FSB’s narrow measure of shadow banking. This assessment was conducted on a conservative basis and may be further refined as more granular data become available and in light of further analysis. As in previous monitoring exercises, this Report compares the size and trends of financial sectors across jurisdictions based primarily on sector balance sheet data. It then narrows the focus to those parts of non-bank credit intermediation that may pose financial stability risks (hereafter the “narrow measure of shadow banking” or “narrow measure”), based on the FSB’s methodology. Depending on the context, two samples are presented in this Report. The first sample is comprised of 21 individual non-euro area jurisdictions and the euro area as a whole.

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For more detailed assessment using granular data, the second sample is comprised of 29 reporting jurisdictions.

To read more: http://www.fsb.org/wp-content/uploads/P050318-1.pdf

http://www.fsb.org/wp-content/uploads/P050318-1.pdf

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An annuity is a very serious business David Rule, Executive Director of Insurance Supervision of the Bank of England, at Bulk Annuities - The Expanding Market, Westminster and City, London.

Today I am going to talk about the bulk purchase annuity market, the increasing use by life insurers of illiquid assets – and in particular equity release mortgages – to back these annuities and the significance of the Solvency II matching adjustment. First, though, I want to reflect briefly on the UK life insurance sector as a whole. Standing here in 2018 it is a very different market to the one I might have been describing just 20 years ago. The big change is that most new life and pension products do not guarantee returns. The great majority of savings products are unit linked. And individual pensioners are increasingly choosing draw down products rather than annuities. In both cases, investment risks lie with the policyholders. Other things being equal, that should mean a less risky life insurance sector and fewer sleepless nights for a prudential supervisor like me. The other side of the current life insurance market though is managing the legacy of past promises. Two trends are clear here: first, a very active market in transfers of books of annuities and closed life books between firms, with insurers specialising in particular niches; second, transfers of annuities to life insurers from corporate, defined benefit pension schemes – the bulk purchase annuity market that is the subject of this conference.

Risks for insurers in the bulk purchase annuity market

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The bulk purchase market has grown over recent years from a flow of around £5bn in 2010 to over £10bn in each of the past four years. With the funding position of many defined benefit schemes improving and company boards still keen to shed pension risks, commentators expect the market to expand further. Transfers in excess of £15bn are predicted this year. The number of life insurers active in this market has increased, with most of them seeing it as a priority for future growth. Our sense is that the market has become more competitive. This is good news for UK companies seeking to shed pension risks. For the insurers, finer margins make it more important that they understand the risks on deals and get the pricing right. A concern is that firms might relax risk management standards or take short cuts in order to win deals and meet new business targets. I want to highlight three areas of risk: data due diligence; longevity and its reinsurance; and asset selection, rating and valuation. I will touch briefly on the first two before spending more time on the third. On data due diligence, it seems obvious to say that insurers should not enter into bulk purchase transactions without understanding in some depth the nature of the annuity liabilities they are taking on. But this is an area where we see firms taking different approaches and willing to price with different levels of risks. One particular aspect is whether insurers have a full picture of their potential obligations to pensioner spouses and dependents. Insurers need to be clear about their appetite in relation to data risks. Most of the longevity risk on new transactions is currently being reinsured, often outside of the UK. To read more: https://www.bis.org/review/r180511d.pdf

https://www.bis.org/review/r180511d.pdf

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Virtual currencies ante portas Yves Mersch, Member of the Executive Board of the European Central Bank, at the 39th meeting of the Governor's Club of The Central Asia, Black Sea Region and Balkan Countries, Bodrum, Turkey.

New innovations based on distributed ledger technology (DLT) and blockchain have brought about wide-spread euphoria. Their use to create "cryptocurrencies" or "virtual currencies" (VCs) - to denote their lack of legal recognition - is often touted as something that could fundamentally change the financial sector. The spectacular rise in the market valuation of VCs over the past year suggests that many people shared this belief. In the course of 2017 the global VC pool both deepened, from USD 30 billion to USD 400 billion, and widened, with the proliferation of "initial coin offerings" or "ICOs" - virtual fundraising facilities for start-up investors. But in my view, the subsequent market plunge rather points to a fading fad. From December to February the price of bitcoin, the top dog among VCs, fell from almost USD 20,000 to below USD 7,000. Don't get me wrong: I am an ardent believer in progress through innovation. Technological progress can provide us with significant efficiency gains and increases in general welfare. Perhaps DLT and blockchain can do just that2 But I am very sceptical towards the use of these technologies to create currency. Although they combine decentralised payments and label them as currency, VCs are still not legitimised by any authority. Moreover, VCs rely on financial intermediation via exchanges and wallet providers to re-enter the real economy. Any fiat money requires trust to gain and maintain the acceptance of those who use it. Indeed, history has shown that confidence in public money is

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best provided by a trusted issuing authority, that is, an independent central bank issuing safe and stable liabilities that people can access and hold. Trust in a central bank, in turn, is created and sustained via legal safeguards, a clear price stability mandate and a sufficient degree of democratic accountability. In contrast, nobody is liable for VCs, nor are they backed by any trustworthy authority. Under these circumstances, it may well be that VCs will fail, as so many other earlier forms of money did. There are, at present, more than 1,500 VCs in circulation, with dozens of new schemes being launched monthly. The total value outstanding has fluctuated sharply, largely because of speculative activity, and most have failed to attract users. Yet authorities need to be aware of the potential risks they pose for the economy. Are VCs the latest incarnation of money? The answer for now, and indeed for the foreseeable future, is no.

What is money? Economists identify money as a verifiable asset that serves as a medium of exchange, a unit of account and a store of value. How well do VCs carry out those functions? First, VCs' performance as a medium of exchange is weak - to say the least. Some have attained patchy acceptance - the largest at present, bitcoin, is accepted by some retail outlets. But on a global scale these outlets remain small in number, and hardly any actual transactions take place. On a daily basis, there are around 200,000 bitcoin transactions globally, compared with 330 million retail payments in the euro area. Bitcoin is far inferior to existing payment options. Transactions generally require confirmation from six miners, which can take an hour, or potentially much longer due to network congestion. Bitcoin payments are also expensive: the cost varies over time, but reached €25 in December 2017. And even if recent claims put the price at between €1 and €30 and the processing time at under ten minutes, this compares poorly to 0.2 euro cents and a maximum of ten seconds for transactions on the forthcoming TARGET Instant Payment Settlement (TIPS) service. The second function of money is acting as a unit of account, without which buyers and sellers would not be able to measure the value of a particular good or service.

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VCs fail this test - none of them are generally accepted as a unit of account. In part this is due to the lack of widespread recognition. VCs are not legal tender and are not backed by a central bank. Moreover, their prices are too volatile to establish a reference value. But the lack of acceptance as a unit of account is also down to the third function of money - being a store of value. VCs exhibit wild fluctuations in value. For instance, the average volatility of the top ten VCs by market capitalisation was more than 25 times higher than that of the US equities market. Such fluctuations mean that businesses setting prices in VCs could find themselves with a large and detrimental gap between their actual price and their optimal price. Similarly, households cannot rely on VCs as a stable store of value to optimise their spending over time by saving. VCs have neither intrinsic value, such as the commodity content of gold coins, nor extrinsic value, such as the value assigned to traditional fiat currencies by the trusted public issuing authority. It is very clear that VCs currently do not fulfil the three basic functions of money: they are inefficient media of exchange, poor stores of value and are not used as units of account. It is these failures that make the label "currency" a misnomer.

Potential impact of virtual currencies Yet even if VCs are not money, public authorities should still be aware of the potential risks they pose for financial stability - although currently these markets are too small to be of systemic importance. VCs are inherently risky compared to conventional financial assets. They are excessively volatile and illiquid due to the fragmented nature of unregulated exchanges and their high ownership concentration: 96% of current bitcoin holdings are estimated to be held by 2.5% of users. This facilitates price manipulation and other misconduct and is further compounded by operational and technical weaknesses of the underlying technology. Yet, VCs do not appear to pose material financial stability risks. One reason is that they are small compared to the financial system as a whole. The

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market capitalisation of VCs was USD 432 billion in early 2018, about 1.5% of the market capitalisation of the S&P500. But the significant rise in the market valuation of VCs we saw prior to December 2017 calls for caution. If, in the future, such a boom led to a large enough VC market, it could become a factor that affects financial stability in the event of a crash. Such risks could intensify via several channels. Wealth effects could disrupt financial stability not only through consumer spending but also through collateral valuation. If VCs were indeed used as collateral for loans, a fall in the value of such collateral could lead to margin calls and increased defaults, with knock-on effects on borrowing and economic activity. The effects of a crash could be further magnified if VC investors were highly leveraged. Not only would investors lack equity to absorb losses, but losses would also spread to creditors. Moreover, the use of derivative contracts could spread the losses more broadly across the economy by allowing other market participants to hold leveraged positions against VCs. A crash could affect the stability of the wider financial system if big banks were to hold huge unhedged exposures to VCs. Similarly, the widespread use of VCs for payment or settlement could affect economic transactions on a large scale and disrupt the financial system. Amid such potential risks, resolute ring-fencing measures may be needed to safeguard the integrity of financial sector services, protect investors and consumers, and prevent negative spill-overs to the real economy. The four broad areas that require particular attention are: (i) VCs themselves; (ii) the facilitators - VC exchanges, wallet-providers and brokers; (iii) financial market infrastructures (FMIs); and (iv) the banking sector.

Regulating virtual currencies VCs cannot be directly regulated or overseen in the absence of a centralised governance and legal framework. In fact, most VCs are "mined" peripherally by a computer programme explicitly to prevent any one legal entity being in control. Several countries have banned VCs outright or

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ring-fenced them from the financial sector, notably China, where VCs were very active and computing capacity was concentrated. In most countries regulatory action has focused on issuing warnings. In the United States for instance, the Securities and Exchange Commission (SEC) outlined more than 30 questions that had to be answered before it would give the green light to mutual funds and exchange-traded funds (ETFs) that invest in VCs. Some countries have adopted "regulatory sandboxes", granting fintechs active in VCs temporary, conditional exceptions to regulatory requirements. Although such sandboxes may be useful to try and test regulation, they clearly risk incentivising regulatory arbitrage. We ultimately need global answers in the absence of a defined jurisdiction for VC issuance. At their meeting this year in Buenos Aires, the G20 finance ministers and central bank governors acknowledged that technological innovation, including DLT and blockchain, had the potential to improve the efficiency and inclusiveness of the financial system. They warned, however, of the risks stemming from VCs regarding consumer and investor protection, market integrity, tax evasion, money laundering and terrorist financing, not least because VCs lack the key attributes of sovereign currencies. Ministers and governors therefore committed to extending global standards for combating money laundering and terrorist financing to VCs, and called on international standard-setters to monitor VCs closely - and assess multilateral responses where needed.

Restraining the facilitators Let me turn to the facilitators of VCs. We need to hold VC exchanges to the same rigorous standards as the rest of the financial system. For this purpose, the 5th Anti-Money Laundering Directive will bring VC exchanges and wallet-providers within the scope of anti-money laundering (AML) and combating the financing of terrorism (CFT). But we need a broader perspective on regulation. Possible regulatory action to extend licensing and supervision rules to VC facilitators could be explored.

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Protecting financial market infrastructures Third, I would like to cover financial market infrastructure services. One of the key questions is whether VCs could become a settlement asset in payment and settlement services or be used in the clearing domain. Existing standards for FMIs refer to the usage of "a settlement asset with little or no credit and liquidity risk"8 While this appears to exclude settlement involving VCs, such standards do not systematically apply to all FMIs. The situation is similar in the field of securities settlement. Could VCs be used as an asset for settling securities transactions or constitute a security per se? The answer hinges on whether they could be legally characterised as a "financial instrument" under the applicable regulation. And this depends on whether crypto-assets allow the identification of an issuer who can be held liable. The use of VCs at central counterparties (CCPs) should also be monitored. Here too, standards require CCPs to accept highly liquid collateral with minimal credit and market risk. While it is doubtful that a VC would meet such a requirement, clear guidelines ex ante would be helpful. In my view, there's a need to examine whether any VC activity carried out by FMIs should have to be ring-fenced. The enforcement of segregated accounts and liabilities could be discussed. FMIs play an important role in financial markets, and any liquidity support offered by central banks should be to mitigate shocks emanating from the real economy, not from gambling in risky assets.

Regulating banks Finally, we need to look at the banking sector. Due to the high volatility of VCs it might seem appropriate to require any VC trading to be backed by adequate levels of capital, and segregated from other trading and investment activities. Given the risks posed by leverage, banks should not accept VCs as collateral, or should only accept them with haircuts that appropriately reflect past volatility and liquidity, as well as market and operational risks. Likewise, limits on leverage could be examined.

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Conclusion Let me conclude. Do VCs herald a new world of money? No, virtual currencies are a misnomer in the first place. They are not money, nor will they become money in the foreseeable future. They lack the official recognition and backing of a public authority. Their market share is still small, the amount of money at risk in financial market infrastructures is insignificant and their ties to the real economy are still limited. But this can change. Authorities should therefore pay close attention to mitigating the potential risks that could stem from a growing VC market. We have to be mindful not to have the complex and interlinked financial system contaminated by immature technologies or shallow business models. Interfaces and gatekeepers require particular scrutiny. Likewise, we should not succumb to the temptation to sacrifice the achievement of a level playing field for innovative advances that are aimed at regulatory arbitrage. But I don't want to sound too negative. It is not unknown for new innovations to bring about euphoria, which in turn fuels bubbles that eventually burst. Still, just because the initial euphoria subsequently fades, does not mean that the innovation itself is without virtue. These virtual currencies are clearly not suitable for use as money, but the underlying technology may, in time, become useful and widespread. And although we at the ECB don't intend to introduce a central bank digital currency for the foreseeable future, we are actively experimenting with the technologies. We will be able to cater for changing needs in trusted and stable central bank liabilities that are accessible to the citizens, if and when this becomes necessary.

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Financial Stability and Central Bank Transparency Chairman Jerome H. Powell, "350 years of Central Banking: The Past, the Present and the Future," A Sveriges Riksbank anniversary conference sponsored by the Riksbank and the Riksdag, Stockholm, Sweden.

Thank you for inviting me here to celebrate this important milestone. Today is a special day for all of us, since the founding of the Riksbank 350 years ago marked the beginning of central banking. As we meet to discuss the challenges and opportunities the future may hold, it is worth pausing to note that the three and a half centuries since the Riksbank's founding have seen economic growth and dynamism the breadth and duration of which have been unprecedented in world history. The Swedish innovation we celebrate today, I believe, is a vital part of the financial foundations that support the continuation of rising prosperity. In my comments today, I will explore the road ahead for public transparency and accountability of central banks in a time of intense scrutiny and declining trust in public institutions in many places around the world. As you know, the importance of transparency and accountability to monetary policymaking was recognized and became firmly entrenched in practice over the past few decades. The Riksbank has been a leader in this transparency revolution. Today I will focus on the less-often emphasized but critically important role transparency and accountability play in regulatory and financial stability policies. To preview my conclusions, public transparency and accountability around both financial stability and monetary policy have become all the more important in light of the extraordinary actions taken by central banks in response to the Global Financial Crisis.

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Financial stability policymaking has evolved from managing individual crises as they arise to establishing a policy framework that emphasizes prevention. This framework now includes measures to increase the resiliency of the financial system; enhanced monitoring of financial institutions and of building risks to the system; and measures, such as resolution planning, that require firms to take steps today to better prepare for future episodes of stress. These innovations have placed special demands on transparency and accountability, and we have worked hard to explain them to the public. The framework is still evolving, and we will need to be open to making changes and to new ways to enhance transparency and accountability.

Government, Central Banking, and Independence This is a challenging moment for central banking. Opinion polls show that trust in government and public institutions is at historic lows. In this environment, central banks cannot take our measure of independence for granted. For monetary policy, the case for central bank independence rests on the demonstrated benefits of insulating monetary policy decisions from shorter-term political considerations. But for a quarter century, inflation has been low and inflation expectations anchored. We must not forget the lessons of the past, when a lack of central bank independence led to episodes of runaway inflation and subsequent economic contractions. As for financial stability, the crisis and the severe recession that followed revealed serious flaws at many private and public institutions, including shortcomings in supervision and regulation. The crisis and its aftermath led central banks to take extraordinary actions, actions that challenged the ingenuity of experts in the field and were understandably difficult to explain and justify to a skeptical public. While these actions were authorized by law and on the whole necessary to avert the complete collapse of the financial system's ability to service households and businesses, they may have also contributed to the erosion of public trust.

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Central banks are assigned narrow but important mandates. For monetary policy, the Fed's mandate is to keep inflation low and stable and to achieve maximum employment. For financial sector supervision and regulation, part of our mandate is to foster the safety and soundness of individual institutions. In addition, we have a responsibility, shared with other government agencies, to promote financial stability. I view this responsibility as being highly complementary to other aspects of our mission: Financial stability promotes sustainable economic growth, and a stable, well-functioning financial system is an effective transmission channel for monetary policy. Indeed, there can be no macroeconomic stability without financial stability. Within our narrow mandates, to safeguard against political interference, central banks are afforded instrument independence‑‑that is, we are given considerable freedom to choose the means to achieve legislatively-assigned goals. While the focus is often on monetary policy independence, research suggests that a degree of independence in regulatory and financial stability matters improves the stability of the banking system and leads to better outcomes. For this reason, governments in many countries, including the United States, have granted some institutional and budgetary independence to their financial regulators.

Financial Stability, Transparency and Accountability In a democratic system, any degree of independence brings with it the obligation to provide appropriate transparency. In turn, transparency provides an essential basis for accountability and democratic legitimacy by enabling effective legislative oversight and keeping the public informed. Of course, central banks also need to stick closely to our mandates; the case for independence weakens to the extent that central banks stray into issues that the legislature has not assigned to us. There is also an important policy effectiveness argument in favor of transparency. In the financial stability arena, there is no better example of this than the role that the first round of stress tests played during the crisis in restoring confidence in the U.S. banking system.

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So in the financial stability realm, the case for enhanced transparency is not just about being accountable; it is also about providing credible information that can help restore and sustain public confidence in the financial system. The post-crisis regulatory system recognizes the importance of enhanced transparency, both about financial institutions themselves and about the processes and expectations of regulators and supervisors. Before the crisis, supervision focused on the safety and soundness of individual institutions and was insufficiently attentive to risk in the financial system as a whole. Supervisory judgments about firms were shared with the public only in rare and exceptional circumstances. Financial stability tools were deployed after the fact, to address specific events that emerged to threaten stability. It is an understatement to say that this approach proved inadequate in the crisis. The post-crisis regime has shifted to implementing preventive policies well in advance of any crisis. Newly established ex ante policies include building the resilience of institutions by requiring more and higher-quality capital and liquidity buffers; a regime of stress tests undertaken by supervisors; and resolution planning, which requires firms to analyze their own potential for distress or failure and create a plan to be used in the event of bankruptcy. These post-crisis policies have benefitted from public solicitation of feedback and in many cases from consideration in open meetings of the Board of Governors. Transparency and incorporation of public feedback in these areas have produced more effective supervision and regulation. For example, transparent and clearly communicated policies make it easier for regulated entities to know what is expected of them and how best to comply. Of course, as with any large-scale, complex undertaking, the standards adopted over the past decade can undoubtedly be improved. At the Fed, we are committed to transparency as we assess the efficacy and efficiency of post-crisis reforms. In a sense, stress testing is itself a step forward in transparency.

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Pre-crisis, supervisors' views of the risks facing our most systemically important firms--and the firms' ability to understand and survive these risks--were shrouded in secrecy. Post-crisis, as part of our stress-testing regime, these supervisory views and expectations are transparent. We expect that these firms will have capital, liquidity, and risk-management capabilities that are adequate for the firms not only to survive, but to continue to perform their key functions even in the event of truly severe stress, akin to the global financial crisis. We make a great deal of information regarding the stress tests public, including the scenarios we use, portfolio-level projected losses for participating firms, and, of course, the results. We have also proposed for public comment a range of ways to further enhance the transparency of the supervisory stress tests. This detailed disclosure provides the public with a wealth of information on how these institutions would perform under severe stress. And this transparency both enhances public confidence and holds banking regulators accountable for their judgments. At the Federal Reserve we use a variety of additional means to enhance public understanding of our supervisory and financial stability efforts and judgments. The Board's Vice Chairman for Supervision testifies before the Congress twice a year. The Board staff's assessment of financial stability is discussed four times a year at Federal Open Market Committee meetings, and these discussions are summarized in the meeting's published minutes. And, since 2013, the semiannual Monetary Policy Report to the Congress has contained a review of financial stability conditions.

The Way Forward The post-crisis framework remains novel and unfamiliar. Some of these new policies, such as stress testing and resolution planning, are inherently complex and challenging for all involved. As a result, transparency and accountability around financial stability tools present particular challenges. We will continue to strive to find better ways to enhance transparency around our approach to preserving financial stability.

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Efforts to engage with the public‑‑including consumer groups, academics, and the financial sector‑‑are likely to lead to improved policies. Moreover, ongoing dialogue will work to enhance public trust, as well as our ability to adapt to new threats as they emerge. There is every reason to expect that technology and communications will continue to rapidly evolve, and to affect the financial system and financial stability in ways that we cannot fully anticipate. While future innovations may well improve the delivery of financial services and make the system stronger, they may also contain the seeds of potential future systemic vulnerabilities. We will need to keep up with the pace of innovation, which will doubtless require changes to our approach to financial stability. As we consider such changes, it will remain critically important to provide transparency and accountability. By doing so, we strengthen the foundation of democratic legitimacy that enables central banks to serve the needs of our citizens, in the long and proud tradition of the Riksbank.

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Joint EU-U.S. statement following the EU-U.S. Justice and Home Affairs Ministerial Meeting

On 22 and 23 May 2018, the EU-U.S. Ministerial Meeting on Justice and Home Affairs was hosted by the Bulgarian Presidency of the EU Council in Sofia, Bulgaria. The meeting reaffirmed the long-standing, fruitful cooperation between the United States of America and the European Union in the areas of justice and home affairs, as well as the importance of jointly addressing common security threats. The United States was represented by the U.S. Attorney General, Jeff Sessions, and the Acting Deputy Secretary for Homeland Security, Claire Grady. The European Union, hosting the meeting, was represented by the Commissioner for Migration, Home Affairs and Citizenship Dimitris Avramopoulos, the Commissioner for Justice, Consumers and Gender Equality Věra Jourová, the Commissioner for the Security Union Julian King, as well as Bulgarian Minister of Interior Valentin Radev and Minister of Justice Tsetska Tsacheva, together with Austrian Federal Minister for the Interior Herbert Kickl and Federal Minister for Constitutional Affairs, Reforms, Deregulation and Justice Josef Moser, on behalf of the current and incoming Presidencies of the Council of the European Union. The European Union and the United States discussed their shared efforts to combat terrorism, focusing on effective information sharing, preventing radicalization, use of the internet for terrorist purposes, and vigilance with respect to aviation security, and chemical, biological, radiological and nuclear threats, and explosives, especially in relation to the evolving chemical threats to aviation and in public spaces. With regard to EU-U.S. information sharing on Passenger Name Records (PNR), participants of the meeting emphasized the importance of such sharing, and noted impending developments in the separate EU-Canada PNR discussions. The participants agreed to continue the discussion of PNR, at the next EU-U.S. Ministerial, which will take place in Washington, D.C., in the second half of 2018.

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Participants also discussed security and law enforcement cooperation in cyber-space, affirming the importance of allowing swift access to electronic evidence by law enforcement and judicial authorities, while also protecting privacy and civil liberties. Similarly, they stressed the need to maintain a safe, open, and secure cyberspace for the promotion of economic and social development, and exchanged views on how to best address this growing challenge. The European Union and the United States also exchanged information on developments in the area of migration, border management, and their respective visa policies. The European Union provided an update on migration trends in Europe and ongoing initiatives to enhance the management of its external borders; the European Union and the United States took stock of the continuing progress by the European Union and the United States, including that of the five concerned EU Member States, towards meeting the statutory requirements of the Visa Waiver Program, in order to be considered for designation. Both sides also acknowledged the need for strengthening operational cooperation to effectively prevent and eradicate migrant smuggling and trafficking in human beings, and also discussed the importance of secure and lawful immigration systems. Finally, the United States and European Union discussed the importance of ensuring swift exchange of financial information and improving the effectiveness of financial investigations. The European Union and the United States discussed the latest developments in these areas and shared best practices in an effort to step up their common fight against anti-money laundering and terrorism financing. Underlining the progress made in these vital areas of common interest, and re-emphasizing the fact that common solutions are necessary in order to address global security threats, the European Union and the United States committed to meet again in the second half of 2018 in Washington, D.C.

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