0

January 2011

G20 and Global Financial Regulatory Reform

Dr. Jong-Goo Yi

CommissionerFinancial Services Commission

Republic of Korea

1

Contents

I. G20 Framework for Regulatory Reform

II. Agenda for Previous G20 Summits

III. Agenda for G20 Seoul Summit

IV . New Bank Capital & Liquidity Framework

V. SIFI Policy Framework

VI. OTC Derivatives

VII. Other Agenda

VIII. Beyond G20 Seoul Summit

2

I. G20 Framework for Regulatory Reform

G20

• SSBs : Standard Setting Bodies • SSBs : Standard Setting Bodies

FSBDevises, coordinates and monitors implementation

of global financial regulations

IMFInt’l currency

FX stability

Emergency funds

World BankEconomic

development

Poverty reduction

SSBs

BCBS IOSCO IAIS IASB

3

Strongregulatory

reform measures

Consistent implementation

Monitoring of implementation

by IMF/FSB

Clearreform

timeline

Need to devise and implement concrete reforms to prevent recurrence of crisis

Should not waste the opportunity to carry out necessary reforms

Need to devise and implement concrete reforms to prevent recurrence of crisis

Should not waste the opportunity to carry out necessary reforms

I. G20 Framework for Regulatory Reform(4 Pillars)

4

Selection of 47 action plans to implement 5 principles for reform- Strengthen transparency and accountability - Enhance sound regulations- Promote integrity in financial markets - Reinforce international cooperation - Reform international financial institutions

Selection of 8 core reform agenda- Establish the FSB - Improve prudential regulations - Enhance international cooperation - Expand regulatory scope- Improve compensation system - Respond to non-cooperative jurisdiction- Improve accounting system - Enhance CRA regulations

London Summit(‘09.4)

Interim check for progress of regulatory reform Agreed on timeline for outstanding agenda

- bank capital/liquidity regulations(end of 2010) -OTC derivatives regulations(end of 2012)- convergence of accounting standards(June 2011)- approved FSB implementation standards for compensation (Completed)

Development of new agenda: SIFI regulations (Oct. 2010)

Pittsburgh Summit(‘09.9)

4 pillars for financial regulatory reform- Strong regulatory framework - Effective supervision - Resolution and addressing SIFIs - Transparent international assessment and peer review(FSAP& FSB peer review)

Acceleration of timeline- Agreed to move forward to the G20 Seoul Summit in November 2010 the timeline

on bank capital/liquidity regulation and SIFI recommendations

Toronto Summit(’10.6)

II. Agenda for Previous G20 Summits

Washington Summit(‘08.11)

5

Reducing reliance on external ratings

SIFI policy framework

OTC derivatives and market infrastructure

FSB outreach arrangements

New bank capital and liquidity framework(Basel III)

III. Agenda for G20 Seoul Summit

6

IV. New Bank Capital & Liquidity Framework

1. Quality and quantity of capital

Tier 2

Capital conservation

buffer

Counter-cyclical capital buffer

<Quantity of capital> <Capital buffers & SIFI>

2.5%

0-2.5%`

SIFI Surcharge

p% ?

13% in boom

4%

2%

2%

Tier 2

Tier 3

<Current>

Commonequity

Other Tier 1

2%

4.5%

Tier 2

Commonequity

1.5%

Commonequity

Other Tier 1

* Regulatory capital deductions such as goodwill and deferred tax assets are to be taken from common equity rather than Tier 1 or Tier 2 capital

Other Tier 1

7

IV. New Bank Capital & Liquidity Framework

`

* Common equity capital= Common equity Tier I + Capital conservation buffer

10.5%

10%10.5%

3.59%

3.53.5

7%

8%

3.5otherTier 1

+Tier 2: 4.5

4.03.5

7%Capital

conservation

buffer

2.5

6%

1.8751.255%0.625

4%

4.5 4.5 4.5 4.5 4.54.0

CommonEquityTier I3.5

0%

2013 2014 2015 2016 2017 2018 2019

2. Transition period for capital increase

8

V. SIFI Policy Framework

Higher loss absorbency

Intensive supervision andSupervisory College

X-border Crisis Management Group

Recovery and Resolution Plans

Resolution regimes and tools

Reduce interdependence (Establishment of CCP)

Prevent failures

Ensure “smoothfailures”

Reduce spillovers

Reduce default probability

Improveresolutioncapability

Strengthencore financialinfrastructure

Structural options(Subsidiarisation, Volcker Rule)

1. Conceptual framework

9

•Higher loss absorbency capacity with application to G-SIFI initially

•Effective resolution framework

• Intensive supervision

•Robust core financial market infrastructures to reduce contagion risk

•Supplementary prudential regulations by national authorities

All SIFIs(Global + National SIFI)

•Development of Recovery and Resolution Plans

•Firm-specific cooperation agreement for X-border resolution

•Peer Review Council(PRC) to monitor implementation

Global SIFIs

V. SIFI Policy FrameworkOverall policy framework

2. SIFI framework

10

FSB and national authorities, in consultation with BCBS and other SSBs, to determine G-SIFIs based on quantitative/qualitative measures by mid 2011

3. Identification of SIFIs

All SIFIs, but initially G-SIFIs to have higher loss absorbency capacities※ capital surcharge, contingent capital and/or bail-in-able debt instruments

BCBS to study magnitude of additional loss absorbency required for G-SIFIs

FSB to examine legal, operational and market capacity issues surrounding contractual and statutory bail-in

FSB, in consultation with BCBS, to recommend additional G-SIFI loss absorbency levels and instruments

4. Enhancement of loss absorbency capacity

V. SIFI Policy Framework

11

V. SIFI Policy Framework

5. Contractual & Statutory Bain-in

* Source : FSB SIFI paper(draft Sep. 2010) “Reducing risks created by SIFIs”

12

VI. OTC Derivatives

Without CCP With CCP

seller CCP(buyer)

seller buyer

CCP (seller) buyer

Regulation on OTC Derivatives

Clearing and Settlement through CCP

StandardizeOTC derivatives

Reporting all OTC derivatives to trade

repositories

CCP

13

VII. Other Agenda

Reducing reliance on CRA

Regulatory authoritieslook for alternatives to reduce reliance on

CRA

Banks, institutional investors & market

participants make their own credit

assessments

Central banksreach their owncredit judgmentson the securitiesfor collateral

FSB Outreach Program

Establishment of regional groups comprising member and non-member authorities

①

Provide timely information to non-members

②

Induce implementation of reform agenda

③

Promote financial stability through exchange of opinions on reform agenda

14

VIII. Beyond G20 Seoul Summit

Improve regulations for commodities derivatives markets

Enhance consumer protection

* Disclosure, transparency and education* Protection from fraud, abuse and errors * Recourse and advocacy

Regulatory reform issues of emerging market and developing economies* Management of FX risks * Regulatory and supervisory capacity* Information sharing between home and host supervisors * Trade finance

Strengthen supervision of “shadow banking system”* As banks are more tightly regulated, risky activities are likely to move to shadow banking system

Further work on macro-prudential regulatory frameworks* Tools to mitigate impact of excessive capital flows * LTV & DTI, and other policy tools* FSB, IMF & BIS to make a joint report on progress in identification of best practices

15

Thank You !