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International Insurance Society44th Annual Seminar, 14 July 2008CEO Panel I: Regulators’ Perspective: Consumer Issues and Natural Disasters
Simon Topping, KPMG China
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A Banking Regulatory Perspective on Consumer Issues
Traditionally, banking regulators have been concerned primarily with systemic stability
But systemic stability is heavily dependent on depositor confidence, and so there has always been an interest in consumers/customers on the liability side of the balance sheet at least
These days, many regulators – but not all - are increasingly concerned with the treatment of consumers/customers on both sides of the balance sheet (i.e. borrowers as well as depositors)
But this is adding to the conception that the industry is over-regulated
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A Banking Regulatory Perspective on Consumer Issues
Examples of the sort of consumer/customer issues arising in banking include:
Customer complaints re service quality/pricing
Mis-selling (e.g. of investment products)
Lack of clarity/disclosure on product features
Inappropriate customer selection
Aggressive marketing
Data security issues
System integrity of e-banking/stored value cards
Social responsibility (e.g. right of access to banking services/delivery channels)
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A Banking Regulatory Perspective on Consumer Issues
But the most serious and problematic consumer/ customer issue arising in banking is clearly that of deposit protection/insurance
A measure of protection is necessary for unsophisticated investors, but how much?
Potential moral hazard of insulating investors from the consequences of their actions/decisions
Potential moral hazard of insulating bank shareholders /management from the consequences of their actions/ decisions
Who foots the bill, the public or the industry? Is DP “insurance” for depositors, or for the public good?
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A Banking Regulatory Perspective on Consumer Issues
Increasing interference by regulators/politicians in the bank/customer relationship is regarded by some as:
Adding a cost/compliance burden which is adding significantly to the cost of financial services to consumers
Discouraging innovation
Discouraging diversification
Affecting the relative attractiveness of foreign markets to internationally-active banks
Heightening tensions in the bank/customer relationship – and the bank/regulator relationship
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A Banking Regulatory Perspective on Natural Disasters
Clearly, natural disasters can potentially have some major effects on the banking industry:
Disruption to markets
Disruption to payment systems
Demand for emergency finance
Possible credit/liquidity squeeze
Negative effect on borrowers’ repayment ability
Concerns about the ongoing viability of institutions which are heavily exposed
The effect which is generally most serious to banks, long-term, however, is economic slowdown/collapse
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A Banking Regulatory Perspective on Natural Disasters
Banks don’t need a natural disaster to get into these sorts of difficulties, however; they are well capable of generating their own major “disasters”:
Sub-prime crisis
Société Générale loss
Northern Rock
What lessons can be drawn from these recent episodes, e.g. which may be of relevance to a wider (insurance) audience?
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A Banking Regulatory Perspective on Natural Disasters
1. Stress-testing
Heightened importance should be attached to (sophisticated) stress-testing
Need to challenge assumptions, e.g. re market behaviour/business models
Need to consider more extreme scenarios
2. Contingency planning
Needs to be more robust and needs to drill down to an operational level
Needs to cater for the simultaneous occurrence of a number of unfavourable events
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A Banking Regulatory Perspective on Natural Disasters
3. Over-reliance on models
Models are only as good as the underlying data/assumptions
Models are a tool, not the be-all and end-all
Need to focus more on “tail events”
4. Valuation uncertainties
Need plausible alternatives when markets are inactive
Avoid reliance on sole sources; build up alternatives/cross-checks
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A Banking Regulatory Perspective on Natural Disasters
5. Disclosure
Greater transparency/disclosure required – but of exactly what is at present a bit uncertain
6. Basel II
Still “a good thing”
Some refinements needed o/a capital treatment of complex products/securitisations/commitments
Supplemented by new requirements on liquidity risk
The onus should be on the banks themselves – not on the regulators – to bring forward the necessary risk management improvements
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Presenter’s contact details
Simon Topping
KPMG China
+852 2826 7283
www.kpmg.com.hk
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2008 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated withKPMG International, a Swiss cooperative. All rights reserved. Printed in Hong Kong.