The role of integrated supervision to maintain financial stability and economic development

The role of integrated supervision to
maintain financial stability and
economic development
Takafumi Saito
Supervisory Policy office
Supervisory Bureau
Financial Service Agency, JAPAN (JFSA)
The views expressed in the presentation are the speaker’s and not necessarily the JFSA’s.
The slides are prepared for the purpose of discussion at this conference only.
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1.Basic Concept of Supervision (in Japan)
2.Integrated Supervision
3.Focus of Supervision for Large and Complex firms
(Integrated Supervision)
4. Macro Prudential Supervision
5. Crisis Management
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Basic Concept of Supervision (in Japan)
Overcome deflation and build a positive economic cycle
Effective financial intermediation
Provide financial products/services
for the benefits of customers
Positive cycle
Stable profit growth for financial
institutions
Financial institutions benefit from
the growth of their customers
Growth/development of customers
• Maintain sustainable growth of
industries/enterprises
• Encourage stable asset formation
by individuals
Maintain safety and soundness of the financial system and financial institutions
as precondition for effective financial intermediation
(Source: JFSA Financial Monitoring Policy for 2014-2015)
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Integrated Supervision
• Systemically Important Banks (SIB)
- Size, Interconnectedness, Substitutability, Global activity, Complexity
• Higher prudential standards
Internationally agreed
• More intensive integrated and macro-prudential supervision
How ?
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Department
of
the Treasury
HM
Treasury
SEC
AMF
CFTC
NAIC
Insurance
State
Regulators
Bafin
(former:
ACAM)
FSB
BCBS
IOSCO
SESC
FCA
State Authorities
OJK
PRA
FDIC
Ministere
des
Finances
BOE
OCC
Banks
Securities
Bundesministerium
der
Finanzen
France
IAIS
FRB
District Fed Banks
German
Autorite de Controle Prudentiel
FSA
UK
（former:
Commission
Bancaire）
Ministry
of
Finance
US
FPC
Planning
of
Financial
System
Japan
Bundesbank
Indonesia
International
Forum
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G20
Integrated Supervision : Organizational Arrangement
Focus of Supervision for Large and Complex firms (Integrated Supervision)
Group Governance:
• It is important that
- the holding company takes the lead and properly understands and
controls risks facing the group, and
- the management personnel takes appropriate actions to implement
a risk appetite framework (a group-wide framework to discuss,
understand, and evaluate the risk level which the group is willing to
take based on the group management strategy).
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Focus of Supervision for Large and Complex firms (Integrated Supervision)
Stress Testing, Recovery Plan and Capital Adequacy:
• Intensive discussions in order to validate G-SIBs’ stress testing
methodology in the process of stress testing with common
supervisory scenarios and reviewing their recovery plans.
 It enables regulators to gain a deeper understanding on not only
their stress testing method but their risk profile and risk management
as a whole.
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Focus of Supervision for Large and Complex firms (Integrated Supervision)
Management Information Systems:
•System development plans to achieve quick aggregation and reporting
on a group-wide basis, which are needed for making business
judgment and reporting to regulators.
•The progress of “principles for effective risk data aggregation and risk
reporting,” issued by the Basel Committee.
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Focus of Supervision for Large and Complex firms (Integrated Supervision)
Legal Compliance Systems:
• The financial group appropriately establishes and makes a
functioning legal compliance system encompassing the prevention
of the abuse of dominant bargaining power, control of customer
information, and management of conflicts of interest.
Human Resource Management:
• In view of the fact that risks facing financial groups with large and
complex operations are becoming more and more complex, these
financial groups are encouraged to take actions from a medium to
long-term perspective to ensure that personnel, including at the
management level, in charge of risk management and internal
control, are fostered and retained.
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Macro Prudential Supervision
Interacting
Global economy/market trends
・Safety and Soundness of the Japanese
financial system
・Business and behavior of individual
financial institutions
JFSA will make an analysis of the following issues with a forward-looking perspective and review
the risk management framework of financial institutions based on its result.
1) Impact of the global economy and market trends towards the safety and soundness of the
Japanese financial system and financial institutions
2) Impact of the business and behavior of financial institutions towards the Japanese economy
and markets
(i.e.) ・Change in globally expanding credit market
・Change of interest rates and other asset prices in response to overcoming deflation in
Japan
(Source: JFSA Financial Monitoring Policy for 2014-2015)
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Crisis Management
Risk of overshooting the bottom due to negative feedback loops between:
•Banks and other banks,
•banks and market,
•financial system and real economy,
•banking system and public finance, and
•economy and politics
through:
•interbank exposures,
•fire sales and declines in asset prices and market liquidity,
•panic and runs on deposits and other claims,
•credit crunch, recession and increased credit costs, and
•economic performance, confidence in political leadership and feasibility
of taking effective measures.
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Crisis Management
Lessons Learned:
1. A non-systemic case can have a systemic signaling effect.
2. Sequencing is the key.
3. Publish bad news and remedial measures at the same time.
4. Practical detail matters.
5. Be strict on management and shareholders, careful on creditors.
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Thank you !
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