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Independence of LebaneseCentral Bank compared with
FED and ECB
Project presented by:
Aline Chelala Kahwaji
Rebecca Sidawi
Anthony SaadeMarwan Azouri
To:
Dr. Nehme AZOURY
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Outline:1. Lebanese Central Bank (BDL)
2. European Central Bank (ECB)3. Federal Bank Reserve (FED)
4. Independence of the CB
5. How to perform a better Governance
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Part 1: Lebanese Central
Bank (BDL)
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History & context of BDL Due to the fact that concession to issue the
Lebanese pound was coming to an end in
1963. Lebanon decided, since theConvention of May 29, 1937 to create a
central bank.
It started to operate effectively on 1st April,
1964.
It has established the Banque du Liban with
the privilege of issuing the national currency.
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History & context of BDL BDL is a legal public entity enjoying financial
and administrative autonomy.
The capital is totally appropriated by theState.
The rate of the Lebanese pound was set inpure gold.
The hard currencies were to be computed onthe basis of the new provisional legal rate,and for the State external expenses, theycontinued to be transferred at the free market
rate.
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History & context of BDL The gold and foreign-currency assets
included in the balance sheet of the
Banque du Liban had to be revalued on
the basis of the new provisional legal
rate.
The coverage of the Lebanese pound issecured with gold (9,222,000 ounces)
and dollar reserves
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History & context of BDL A partial transformation of the Lebanese
pound to the Euro might be considered
in the near future, depending on the
development of economic and
commercial activities of the country.
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Mission, Function and
Objectives
Monetary and economic stability,Monetary and economic stability,
Soundness of banking sector.Soundness of banking sector.
Development of money & financial markets.Development of money & financial markets.
Development & regulation of the paymentDevelopment & regulation of the paymentsystem and instruments.system and instruments.
Money transfer operations.Money transfer operations.
Cooperation with GovernmentCooperation with Government
Foreign Currency SupervisionForeign Currency Supervision
Control of LiquidityControl of Liquidity
Banking Regulations InsuranceBanking Regulations Insurance
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Structure and Governing
Body
Governor (6y.)4th Vice Gov. 2
nd Vice Gov.
1st Vice Gov. (all 5y.)
3rd Vice Gov.
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Directors of BDL Mr. Riad T. Salameh Governor & Chairman
Mr. Raed H. Charafeddine First Deputy
Governor Mr. Saed Andari Second Vice-Governor
Mr. Muhammad Baasiri Third Vice-Governor
Mr. Harout Samuelian Fourth Vice-Governor
Mr. Alain Biffani Director General of theMinistry of Finance.
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Management of BDLTHE GOVERNING BODY
The Governor
Vice-Governors The Central Council:
Governor
The fourVice-Governors
The DirectorGeneral of the Ministry of Finance
The DirectorGeneral of the Ministry ofEconomyand Trade
The Government Commissariat
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Branches & Departments of
BDL BDL Branches (9 all over Lebanon)
BDL Departments (19)
Accounting Banking Branches Current Op. Fin. Markets
Fin. Op. Foreign
Studies
Foreign
Exchange
Gen.
Secretariat
IT
Inspection &
Audit
Legal Personnel Training &
Develop.
Real Est. &
Fin. Assets
Purchase &
MaintenanceStats & Econ.
Research
Treasury Org. &
Development
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Control procedures of BDLControl on financial operations for fighting
money laundering:
Ascertain that correspondents dealing with them really
exist. They must make sure that the foreign bank with which
they deal Is not a shell bank.
Exercise control on their operations with clients to avoid
involvement in money laundering operations.
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Control procedures of BDLChecking the client's identity, determining the economic rightowner (the actual beneficiary) of the intended operation
Adopting clear procedures for opening new accounts. Theymust also check the identity of all their permanent and transientclients, whether resident or non-resident.
Requesting from each client a written statement about theidentity of the economic right owner (the actual beneficiary) ofthe intended operation, notably his full name and residential
address and information about his professional and financialstatus.
Checking periodically the identity of the client or re-determinethe economic right owner.
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Control procedures of BDLControlling some operations and clients
Enquiring from the client about the source and destination of funds.
When accepting a check drawn or executing banking transaction orwhen the value of the check or transaction exceeds USD 10,000 or itsequivalent the bank must:
- Make sure that it has received the notification, the source and
destination of funds, and the identity of both the beneficiary and the
beneficial owner.
- Keep this notification for a five-year period.
Informing the Governor of the Banque du Liban in his capacity as
chairman of the Special Investigation Commission.
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Control procedures of BDLControlling some operations and clients
Adopt a risk-based approach to classify clients and transactions:
- Customer risks
- Country risks
- Service risks
Establish risk-based control measures and procedures, andadopt the following measures and procedures :
- Raise awareness concerning strict control as a priority.- Obtain more detailed information about clients
- Obtain the necessary administrative approvals, which allowdealing with customers and executing transactions.
- Undertake periodic reviews of relationships with customers.
- Make continuous peer comparisons
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Control procedures of BDLCommittees and administrative units in charge of the controlof operations for fighting money laundering, and their tasks.
Establish a special committee consisting of the DirectorGeneral, the Risk Director, the Operations Director, the TreasuryDirector, the Branches Director, and the person in charge of theUnit.
Establish a unit to ascertain compliance with the laws,
regulations and procedures in force, hereafter named "theCompliance Unit".
Appoint an officer responsible for the control of operations.
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Control procedures of BDLFinal Provisions
Establish a computerized central archive of Collected information
that would include, for indicative purposes but not restrictively, thenames circulated by the Special Investigation Commission, and those
of holders of doubtful accounts reported by the bank/financial institution
itself. The latter must also notify the SIC about any account opened
subsequently by any of these persons, whether directly, indirectly, or by
proxy.
Ensure an ongoing training of their staff and the participation of the
concerned officers and those responsible for training in relevant
seminars, workshops and lectures, so that they may keep abreast of
money laundering-fighting methods.
Not close any suspicious account before consulting with the SIC.
Keep a special record of persons who open or activate accounts by proxy.
Require, for recruitment, the highest standards of honesty
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Control procedures of BDLFinal Provisions
Instruct their staff that, subject to liability, they must refrain from
notifying Clients when the SIC proceeds to investigate or audit theiraccounts, until the SIC makes a decision on lifting banking secrecy on
he said accounts and notifying the concerned clients.
Inform their branches operating abroad that they must, as a minimum,
apply the procedures mentioned in these Regulations, provided they
are not incompatible with the laws and rules of the host country.
When enlisting the help of intermediaries such as brokers and
introducers, to deal only with those who meet the criteria adopted by
banks and financial institutions in dealing with their clients.
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Social responsibility issues
of BDL1.The safeguard of monetary and economic stability
2.The safeguard of the soundness of the banking sector
3.The development of money and financial markets
4.The development and regulation of the payment systems
and instruments
5.The development and regulation of money transfer
operations including electronic transfers
6.Development and regulation of the clearing and
settlement operations relative to different financial andpayment instruments and marketable bonds.
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Part 2: European Central
Bank (ECB)
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History & context ofECB Plans for a single currency started in the late1960's
Three levels of EMU integration: EUAccession, Exchange Rate Mechanism(ERM), Eurozone
Maastricht Treaty of1992, Copenhagen
Criteria of1993, individual AccessionFramework
Four Convergence Criteria to join Eurozone
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Three level ofEMU integration:
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FourConvergence Criteria:1. Inflation Rate, should be no more than 1.5
percent.
2. Government finance.Should not exceed 3% of the annual deficit tothe GDP.The government debt should not exceed 60%of the GDP.
3. Exchange rate, applicant countries should havejoined the ERM (European Rate Mechanism)under the EMS (European Monetary System).
4. Long term interest rate, should not exceed 2%.
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History & context ofECB The national central banks are an
integral part of the ESCB (Eurosystem
Central Bank).
European Central Bank siege is in
Germany, Frankfurt.
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Mission, Function and
Objectives Monetary and economic stabilityMonetary and economic stability
Development & regulation of the payment systemDevelopment & regulation of the payment systemand instruments.and instruments.
Money transfer operations.Money transfer operations. Cooperation with Governments and NCBsCooperation with Governments and NCBs
Foreign Currency SupervisionForeign Currency Supervision
Control of LiquidityControl of Liquidity
Banking Regulations InsuranceBanking Regulations Insurance Supervising the four convergence criteria'sSupervising the four convergence criteria's
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Structure and Governing
Body
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The tasks of the governing
body Governing Council:
- Formulating monetary policy, which means, keyECB interest rates and liquidity.
- Adapting guidelines and decisions to ensure theperformance of the tasks of the Eurosystem.
Executive Board:- Implementation of the monetary policy.- Preparation of meetings for the governing council.- Conduct of the day - to - day business.
General Council:- Reports on the four convergence criteria.- Contributes in advisory functions, collection ofstatistical data, the reporting activities and the layingdown of the conditions of the employees.
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Executive Board Jean-Claude Trichet
President of the ECB
Lucas D. PapademosVice-President of the ECB
Lorenzo Bini SmaghiMember of the Executive Board
Josee Manuel Gonzalez-ParamoMember of the Executive Board
Jurgen StarkMember of the Executive Board
Gertrude Tumpel-GugerellMember of the Executive Board
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Management ofECB
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Tasks and the control
procedure1. To conduct foreign exchange operations
2. To define and implement monetary policy
3. To promote the smooth operation ofpayment systems
4. To hold and manage the official foreignreserves of the participating EU memberState
5. Collection and compilation of statistics
6. International cooperation
7. Advisory functions
8. Issuance of banknotes
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Definition of some of the Tasks
and the control procedure1. Eurosystem policies:
The Governing Council of the ECB is in charge of monetary policy for the
single currency. This includes the definition of price stability, how
inflationary risks are analyzed, etc.
2. Deciding, coordinating & monitoring the monetary policy: The ECBinstructs the NCBs on the details of the required operations (value, time,
date, etc.) and checks their successful execution.
3. Interventions on the foreign exchange markets:
If needed, also jointly with individual NCBs. This involves the buying
and/or selling of securities on foreign exchange markets.
4. Monitoring financial risks:This involves assessing the risks of securities, either those purchased in
the context of the investment of the ECB's own funds and foreign
reserves or of those securities that have been accepted as collateral in
Eurosystem credit operations.
5. Banknotes:
the ECB has the exclusive right to authorize the issuance of banknoteswithin the euro area.
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Part 3: Federal Reserve Bank
(FED)
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Background: Since the charter for the Second Bank of the
United States was allowed to expire the U.S. hadbeen without a central bank for almost eightyyears. After different financial panics, particularlya severe one in 1907, some Americans becameconvinced that their country needed some sort ofbanking and currency improvement, that would
provide a ready reserve of liquid assets, whenthe USA is threatened by financial panics, and inaddition allow for currency and credit to expandand contract seasonally within the U.S. economy.
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History of the FED: The Federal Reserve System was
created by an act of congress on
December 23, 1913 served as thenations central bank. The Systemconsists of a seven member Board ofGovernors with the HQ in Washington,
D.C., and twelve Reserve Bankslocated in major cities throughout theUnited States.
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History of the FED: The Federal Reserve Act
is the act of Congress that
formed the Federal
Reserve System, thecentral banking system of
the United States of
America, which was
signed into law by
President WoodrowWilson.
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Structure and Body: 12 Federal reserve banks for12 districts in
the states 7 members board governors elected by the president of the
United State of America and confirmed by the senate, theyserve for a period of14 years.
Chairman is elected from the board of governors for 4years.
Federal Open Market Committee Board of governors
Governor of NY FRB
4 other FRB governors
Federal Advisory Council
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Formal Structure of FED
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Informal Structure of FED
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Executive Board of the FED Ben Bernanke Chairman of the board
Donald Kohn Vice - Chairman
Kevin Warsh
Elizabeth Duke
Danielle Tarullo And two other vacant position
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Role and responsibility of each
body:
Roles and Responsibility of the 12 FRBs Clear checks and issue currency
withdraw damaged currency from circulation evaluate proposed banks mergers
administer discount loans in their own districts
coordinate between business community and the FRS
examine bank holding companies and state chartered
banks collect data on local business conditions
Participate in the monetary policy through their staff ofprofessional economists
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Role and responsibility of each
body:
Roles and Responsibility of the Board of
Governors
decide about the monetary policy
Sets reserve requirements
sets the presidents salary and the officers
review bank mergers specify activities of the bank holding
companies
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Role and responsibility of each
body: Roles and Responsibility of the FOMC
(federal open market committee)
Meets eight times per year decides regarding the conduct of the open market
operations
after each meeting they set the federal fund anddiscount rates
They issue the three research books (Green, blueand beige books).
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Part 4: Independence of the
CB A Comparison Between:
BDL
ECB
FED
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Concept of dependency Central Bank have the authority to decide about the
monetary policy
Central Bank have the authority to ensure price stability
Central Bank is able to take a long term decisions
There is no interference of government orpolitical leaders
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Relation with the Inflation Theres a negative correlation between Independence and
inflation:
BDL : existence of inflation (Lack of independency)
FED : control of inflation (decision maker)
ECB : controls inflation by setting low interest rates (decision
maker)
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Relation with budget deficit Theres a correlation between Independenceand budget
deficit. The most independent CBs revealed a budget deficit
BDL: government spending still high, so the BDL is not highly
independent
FED: The Federal Reserve act prohibits the Fed from buying the
debt directly from the Treasury instead the Fed buys treasury
bonds in the open market.
ECB: no direct relation with budget deficit because its not a
national CB
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Relation with the GDP Theres no relation between these variables and
independence. But higherinflation is associated with lower
economic growth. The primary goal must be to promote
price stability.
BDL : Slow growth
FED : Monitors GDP in order to decide on the best monetary policy
ECB : keeps inflation low to maintain price stability
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Bureaucratic behavior The objective of bureaucracy is to maximize its own
welfare. The most important factoraffecting the CB is to
increase its power.
BDL : ups and down, depending on the personality of the governor
FED : tries to avoid conflicts with the government and preserve its
autonomy
ECB : it has the sole responsibility regarding the operationalframework
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Political business cycle A CB who is susceptible to political direction orpressure
may encourage economic cycles (boom and bust).
BDL : it is still concerned with politicians short-term objectives
FED : Its monetary policy does not always conform with political
objectives
ECB : it has a total political independence
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MonetaryPolicy An Independent CB can run a more credible monetary
policy, making market expectations more responsive to
signals from the CB.
BDL : decides for monetary policy and sets terms and regulations
FED : implements a non inflationary policy which Stabilizes
economic cycle & financial markets
ECB : with ECB, markets know what to expect. The ECB decides
separately
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Fiscal Policy Fiscal policy is not isolated from monetary policy. Its
important to reach economic stability.
BDL : coordination between the BDL and the government
(Taxation)
FED : Sometimes the monetary policy of the Fed outweighs the
Fiscal policy of the government
ECB : it has no fiscal agent function as its not a national CB.
Theres no financing of the public sector.
Part 5: How to perform a better
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Part 5: How to perform a better
Governance and what was the
response of the BDL
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The Organization for Economic Cooperation and Development (OECD)
principals define corporate governance as involving a set of relationships
between a companys management, its board, its shareholders, and other
stakeholders. Corporate governance also provides the structure through which
the objectives of the company are set, and the means of attaining thoseobjectives and monitoring performance are determined
From a banking industry perspective, corporate governance involves the manner
in which the business and affairs of a bank are governed by its board and senior
management, including how they:
Set the banks strategy and objectives,
Determine the banks risk tolerance/appetite
Operate the banks business on a day-to-day basis
Protect the interests of depositors, meet shareholders obligations,
and take into account the interests of other recognized
stakeholders; and
Align corporate activities and behavior with the exception that the
bank will operate in a safe and sound manner, with integrity and in
compliance with applicable laws and regulations.
Corporate Governance
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Importance of Corporate
GovernanceCentral Banks must definitely have strong corporate governancepractices because:
It manages a big portion of the nations wealth
It influences the growth of economy
It may influence the other non-banking sector One single bank may cause a general crisis
Good Corporate Governance will ensure:
Better information flows
Strategic decision making
Improved market understandingMore efficient allocation of resources
Reduction of capital costs
Prevention of abuse of minority shareholders rights
Building trust among investors
Long lasting business relationship with stakeholders
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Objective of Banking Control
Commission of Lebanon The Banking Control Commission of Lebanon (BCCL) was established in 1967
by law no. 28/67, as an administratively independent body to replace the
banking control department of the central bank.
The commission is composed of five members who are appointed by the council
of ministers for a five-year term The BCC's function is to supervise banks, financial institutions, money dealers,
brokerage firms and leasing companies.
The BCC performs its supervisory functions as an independent body, but in
close coordination with the Governor of the Central Bank
The BCC evaluates financial soundness of regulated entities. This is done
through on-site and off-site reviews
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Corporate Governance BDL issued intermediary circular No.60 requiring all investments and
placements and decisions of a bank to be taken by specializedcommittee
This committee is responsible to study and understand all kinds of
investments in capital and money market.
BDL issued intermediary circular No.116 requiring banks to assesssuch operations by using stress testing to make necessary adjustmentsbased on each banks risk appetite.
The objective is to control the risk of financial investment through
creation of various committees that made up of qualified individualswho are able to distinguish different types of risks.
The Central Bank emphasized on stress testing scenarios that clearlyidentify the various market risks: foreign currency, bond risk, stock riskas well as other financial related risks
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BDL issued basic circular No.103 requiring certain qualifications andcertificates for some key positions in banks and financial institutions.
BDL issued basic circular No.122 that defines rules for the rotation ofexternal auditors
BDL issued basic circular No.106 that defines the principles ofcorporate governance in the financial and banking sector according toBasel Committee requirements.
The Basel Committee on banking supervision is a committee ofbanking supervisory authorities which was established by the centralbank governors of the group of ten countries in 1975.
The committee guidance assists banking supervisors and provides areference point for promoting the adoption of sound corporategovernance practices by banking organizations in their countries. Theprinciples also serve as reference point for the banks own corporategovernance efforts.
Corporate Governance
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THANKYOU !