David Rozumek
QUOVADIS SUPERVISION:
POST-BASEL III REFORMS
Integrated Approach to Regulation and Supervision
1 December 2014
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REDMOND,WASHINGTON (The Borowitz Report) — Bill Gates’s first day at work
in the newly created role of technology adviser got off to a rocky start yesterday as
the Microsoft founder struggled for hours to install the Windows 8.1 upgrade.
The installation hit a snag early on, sources said, when Mr. Gates repeatedly received
an error message informing him that his PC ran into a problem that it could not
handle and needed to restart.
After failing to install the upgrade by lunchtime, Mr. Gates summoned the new
Microsoft C.E.O. Satya Nadella, who attempted to help him with the installation, but
with no success.
While the two men worked behind closed doors, one source described the
situation as “tense.”
“Bill is usually a pretty calm guy, so it was weird to hear some of that language
coming out of his mouth,” the source said.
A Microsoft spokesman said only that Mr. Gates’s first day in his new job
had been “a learning experience” and that, for the immediate future, he
would go back to running Windows 7.
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REGULATORY PACKAGE
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Pillar 1 Capital
Requirement Pillar 1I Capital
Requirement Capital
Buffers
Capital Stress
Tests
LiquidityRequirement
Leverage
Ratio
Liquidity StressTests
Capital
Definition
Recovery
Tools
Resolution
Tools
Management
RequirementsInternal Control
Mechanism
Requirements
SUPERVISORY ACTIVITIES
Prevention of imprudent behavior
Authorization procedures
Analysis based on pre-defined set of data
Day-to-day communication with industry’s staff
Comprehensive analysis
Middle and top management interviews
Enforcement actions
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REGULATORY CHALLENGES
For effective use of regulation, necessary precondition is
foreseeable response
Challenge is (not only) complexity:
Overall risk awareness
Unforeseen interlinkages
Flexibility of use and flexibility of change
Public trust
Challenge is (above all) reflection of patterns of human
behavior
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REGULATORY FAILURES
Regulation does not sufficiently support multilayer
(interconnected) communication within banks and between
banks and supervisors.
Regulation does not sufficiently contribute to its primary goal:
financial stability (which is dependent on psychological
setting/comfort of its users).
Failures towards professionals.
Failures towards general public.
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SUPERVISORY GOAL
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Financial stability
Trust
TRUST
One party is willing to rely on the actions of another party; the situation is
directed to the future.
Firm belief in the reliability, truth, or ability of someone (person or institution)
or something.
Acceptance of the truth of a statement without evidence or investigation.
Society needs trust because it increasingly finds itself operating at the edge
between confidence in what is known from everyday experience, and
contingency of new. Without trust, all contingent possibilities should be always
considered, leading to a paralysis of inaction.
Trusting requires that we can,
be vulnerable to others (vulnerable to betrayal in particular);
think well of others, at least in certain domains; and
be optimistic that they are, or at least will be, competent in certain respects.
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IS CURRENT REGULATORY
CONCEPT WRONG?
Individual elements of regulation are right in substance..
..they only need to be..
..(slightly) reshaped and
reassembled..
..in order to target right and clear incentives leading to
financial stability..
..which is solely dependent on perception of users of
regulation not on level of sophistication of its individual
elements.
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REGULATORY SOLUTION?
Streamlined tools designed to work in accord
Tools supporting formal and informal actions
Tools allowing flexibility
Tools enabling/supporting effective communication with all
stakeholders (across banks and general public) and timely
actions
Tools supporting accountability and responsibility of all
stakeholders
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REGULATORY INTEGRATEDTOOLKIT
SUPERVISORY SOLUTION?
Enhances qualities of integrated approach to regulation
COMMUNICATION IS KEY
Clear and well-aimed
Based on strong authority of supervisors
Using right (rather pragmatic) angle of view
Regulation enables structuring our communication
Target is to incentivize human behavior in order to reach
general goal: financial stability
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SUPERVISORY INTEGRATEDTOOLKIT
WHERETO START?
Establishing interdisciplinary open-minded view on regulation
and supervision
Defining steering element of regulatory toolkit
Natural part of day-to-day banking business
Center of system with interconnected satellites (elements of current
framework)
Redesigning system of regulatory tools - in every moment:
Work with all interlinkages
Have in mind general goals (and overall implications)
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BENEFITS
Stable system of regulation and supervision (in long run):
Covering all important risks
Gaining public support for supervisory actions
Supporting public confidence in financial system
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Financial stability
The CNB disclaims responsibility for any private publication or personal statements of any CNB employee.
The views in this presentation are the views of their authors and do not necessarily reflect those of the CNB.
THANK YOU
FOR
YOUR KIND ATTENTION
David Rozumek
Executive Director
Financial Market Supervision Department
www.cnb.cz
David.Rozumek@cnb.cz