Regulation and Operational Risk Helmut Bauer | 7 February 2006
Outline • About a long march that ended in banking regulation • Committee of European Banking Supervisors („CEBS“) and the Lamfalussy architecture • CEBS guidelines on validation of AMA (CEBS CP 10 revised) • A new neoliberal breed of standardization programs or collective intelligence? • From design to delivery - CEBS work program for 2006 operational networks for home/host cooperation and „maintenance“ of guidelines Regulation and Operational Risk | 7 February 2006 2
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Mao Tse Tung: “Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting the progress of the arts and the sciences and a flourishing socialist culture in our land. Different foms and styles in art should develop freely and different schools in science should contend freely. We think that it is harmful to the growth of art and science if administrative measures are used to impose one particular style of art or school of thought and to ban another. Questions of right and wrong in the arts and sciences should be settled through free discussion in artistic and scientific circles and through practical work in these fields. They should not be settled in summary fashion. ” 4
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§ Advise the Commission § Contribute to the consistent implementation of Community Directives and the convergence of … supervisory practices § Enhance supervisory co-operation Regulation and Operational Risk | 7 February 2006 6
CEBS - Membership CEBS members are high level representatives from the banking supervisory authorities and central banks of the European Union, including the European Central Bank 25 countries and 46 member organisations, observers from EEA* countries, the European Commission and the Banking Supervision Committee of ESCB (European System for Central Banks) Chairman - Danièle Nouy Vice Chair - Helmut Bauer Secretary General - Andrea Enria * Iceland, Liechtenstein and Norway 7
CEBS - The Lamfalussy architecture EU adopted FSAP in 1999 to ensure appropriate regulation and supervision of a single financial market. The current structures of supervisory cooperation were considered inadequate to deal with cross-border integration and financial conglomerates. Committee of Wise Men set up in 2000 chaired by Alexandre Lamfalussy. Recommendations endorsed by the European Council in 2001. Need for faster and more flexible legislation, broad implementing powers for new committees, enhanced cooperation between supervisors to ensure uniform implementation and application in Member States and stronger enforcement. First applied to securities markets, banking and insurance to follow Committee of European Securities Regulators (CESR) established in September 2001 Committee of European Banking Supervisor (CEBS) established in November 2003 Regulation and Operational Risk | 7 February 2006 8
CEBS - The Lamfalussy architecture Ecofin Council Economic and Financial Committee -----------Financial Stability Table Financial Services Committee¹ European Commission EBC¹ European Parliament EIOPC¹ ESC¹ Primary legislators Lamfalussy Level 1 FCC¹ Regulatory Committees Lamfalussy Level 2 Supervisory Committees CEBS² CEIOPS² CESR³ Lamfalussy Level 3 CEBS gives advice to the Commission on level 2 banking policy issues, contributes to a consistent implementation of EU legislation and promotes the convergence of Member States’ supervisory practices as well as co-operation between supervisors EBC = European Banking Committee EIOPC = European Insurance and Occupational Pensions Committee ESC = European Securities Committee FCC = Financial Conglomerates Committee CEIOPS = Committee of European Insurance and Occupational Pensions Supervisors CESR = Committee of European Securities Regulators Regulation and Operational Risk | 7 February 2006 ¹ Finance ministries ² Supervisors and Central Banks ³ Supervisors 9
CEBS - The Lamfalussy architecture Level 1 legislative frame principles based directive European Parliament, ECOFIN Council Level 2 implementation details rules based technical annexes European Commission, European Banking Committee Level 3 consistent implementation, convergence of supervisory practices standards, guidelines, recommendations Regulation and Operational Risk | 7 February 2006 11
§ are consensus-based § are not legally binding – hence not regulation Regulation and Operational Risk | 7 February 2006 12
Guidelines on validation - CP 10 revised Regulation and Operational Risk | 7 February 2006 13
Guidelines on validation - CP 10 revised Regulation and Operational Risk | 7 February 2006 14
General AMA assessment issues Regulation and Operational Risk | 7 February 2006 15
From measurement to management • Use test - internal governance – role of senior management • Data (business environment / internal control factors) and its reporting Regulation and Operational Risk | 7 February 2006 16
Validation guidelines - Use test Regulation and Operational Risk | 7 February 2006 17
Validation guidelines - Use test Regulation and Operational Risk | 7 February 2006 18
Validation guidelines - Data quality Regulation and Operational Risk | 7 February 2006 19
Validation guidelines - Reporting Regulation and Operational Risk | 7 February 2006 20
Validation guidelines - Reporting Regulation and Operational Risk | 7 February 2006 21
Validation guidelines - summary • Reflect current thinking based on supervisory experience • Evolve with industry practice and supervisory experience from examination and decision processes • Address supervisors in the first place • Combine clarification of firm regulatory requirements with flexible principles and related illustrative examples • Are subject to the test of time and require „maintenance“ Regulation and Operational Risk | 7 February 2006 22
Mao Tse Tung: “Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting the progress of the arts and the sciences and a flourishing socialist culture in our land. Different foms and styles in art should develop freely and different schools in science should contend freely. We think that it is harmful to the growth of art and science if administrative measures are used to impose one particular style of art or school of thought and to ban another. Questions of right and wrong in the arts and sciences should be settled through free discussion in artistic and scientific circles and through practical work in these fields. They should not be settled in summary fashion. ” 23
Neoliberal standardization programs Michael Power in “Standardization and the Regulation of Management Control Practices” (2002): “. . . these proposals (i. e. use of in-house models for operational risks) by the Basel Committee, a club of national banking regulators, . . . have stimulated conceptual work to support operational risk management process standards. . ” „In place of hierarchical models of control … ideas of self-organization and self-assessment have grown in influence and have become prominently institutionalised … in banking regulation through the work of the Basel Committee. System and internal control standards produced by these and other agencies express ideas of neoliberal administration …“ The ideal organization is rapidly becoming the one which does not simply comply with imperialistic commands, but which observes itself, knows its risks and which can make its commitment to self-observation and control visible to outsiders. “ „… this new neoliberal breed of standardization programs … combines a normalizing role for standards with an emphasis on the role of local managerial capability for self-ordering. “ „… the state in many cases functions as regulator of last resort or guardian of general principles …“ 24
Collective intelligence Torsten Strulik, Matthias Kussin in “Financial Market Regulation and Knowledge Politics” (2005): “. . . It is apparent that the strategic creation of innovation is a crucial aim in economics, politics and law. . Of central interest is if and to what extent the new ‘cognitive’ supervisory regime (Basel II) creates conditions for a mixed public-private form of risk management that is in accordance with the increasing demands for the creation of stability and innovation. “ „ … For the regulation of the banking system this means, that within the frame of public-private arrangements collective learning may be observed …“ “Basel II - the regulatory constitution of collective intelligence” 25
Learning Perception of Home Regulators Preparedness For Regulatory Approval Process Perception of Home Regulators Helpfulness When Seeking Guidance, Direction, or an Indication of Their Preferred Approach Regulation and Operational Risk | 7 February 2006 26
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From design to delivery - CEBS 2006 • „ 2006 will … mark a shift in orientation and emphasis – from design to delivery of a more convergent supervisory framework“ • „… operational networks for the supervision of cross-border groups and cooperation between consolidating and host supervisors will be responsible for ensuring their (i. e. guidelines) effective application …“ • „… setting up of operational networks is particularly important with regard to the supervision of EU cross-border banking groups – consolidating home … and host supervisors will have to cooperate and coordinate supervisory activities at the operational level …“ • „… CEBS will develop a model for … [written multilateral cooperation] arrangements (as required according to Art. 131 CRD) in order to steer the process and ensure consistency of cooperation …“ • „… CEBS will initiate and coordinate joint home/host supervisory work within the emerging operational networks … “ surveys on market practices Regulation and Operational Risk | 7 February 2006 28
Contact details: Name: Helmut Bauer email: helmut. bauer@bafin. de tel: +49 228 4108 1447
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