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Regulation and supervision of German cooperative … and supervision of German cooperative banks 06....
Transcript of Regulation and supervision of German cooperative … and supervision of German cooperative banks 06....
Regulation and supervision ofGerman cooperative banks
06. June 2013 1
Dr. Marc Rennert,Representative of Deutsche Bundesbank in Latin America
Outline
1. Structure of the German banking sector
2. The German supervisory framework
3. The Application of the German framework
4. Basel III
5. Banking Union
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1. Structure of the German banking sector
2. The German supervisory framework
3. The Application of the German framework
4. Basel III
5. Banking Union
Structure of the German banking sector
Germany has a de-centralised banking system with importantbanks in each federal state
❙German Financial System dominated by universal bankswhich domicile in various places throughout the country
❙Consolidation and a redefinition of the value chain of theGerman banking industry is still in progress
❙Need for the same set of rules for all heterogeneous banks.
Germany has a de-centralised banking system with importantbanks in each federal state
❙German Financial System dominated by universal bankswhich domicile in various places throughout the country
❙Consolidation and a redefinition of the value chain of theGerman banking industry is still in progress
❙Need for the same set of rules for all heterogeneous banks.
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Structure of the German banking sector
Banking Sectortotal number of institutions: 1868
274Private Sector
4 Big Banks163 Medium/Small Size107 Foreign Branches
432Public Sector
9 State Banks423 Savings Banks
1104Cooperative Sector
2 Coop Central Banks1102 Credit Cooperatives
58Specialised
Banks
18 Mortgage Banks22 Building and Loanassociations18 Special PurposeBanks
Uni
vers
al B
anks
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274Private Sector
4 Big Banks163 Medium/Small Size107 Foreign Branches
1104Cooperative Sector
2 Coop Central Banks1102 Credit Cooperatives
58Specialised
Banks
18 Mortgage Banks22 Building and Loanassociations18 Special PurposeBanks
Uni
vers
al B
anks
Resource: Bundesbank Monthly Report April 2013 (as of February 2013)
Structure of the German banking sector
CooperativeSector
13%
SpecialisedBanks21% Private
Sector38%
PublicSector
28%
Volume of Business(Balance Sheet)
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CooperativeSector
13%
SpecialisedBanks21% Private
Sector38%
PublicSector
28%
Resource: Bundesbank Monthly Report April 2013 (as of February 2013)
The German supervisoryframework
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The German supervisory framework
❙Up to the market risk amendment to Basel I in 1996 bankingsupervision was purely rule based
❙Since then change of paradigm:“Take a look at the risks, not (only) at the rules”❙Assess bank’s risk measurement and management procedures
❙Idea:“Make sure that target is reached, do not prescribe the wayhow to get there”
❙Reduction of capital requirements possible by using internalmodels for regulatory purposes
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❙Up to the market risk amendment to Basel I in 1996 bankingsupervision was purely rule based
❙Since then change of paradigm:“Take a look at the risks, not (only) at the rules”❙Assess bank’s risk measurement and management procedures
❙Idea:“Make sure that target is reached, do not prescribe the wayhow to get there”
❙Reduction of capital requirements possible by using internalmodels for regulatory purposes
❙Advantage: allows for flexible adaptation of banking supervisionto technological and market developments (no need to change alaw for a “comma”)
❙“Disadvantage”: Institutions do not know whether or not they docomply, Supervisors need to know better the business of thebanks
❙Adequate principles based supervision cannot be designed at agreen desk only -> need to involve the industry to get to knowmarket practice
❙ Improves Quality, interpretation and application as well asacceptance among banks supervised
The German supervisory framework
❙Advantage: allows for flexible adaptation of banking supervisionto technological and market developments (no need to change alaw for a “comma”)
❙“Disadvantage”: Institutions do not know whether or not they docomply, Supervisors need to know better the business of thebanks
❙Adequate principles based supervision cannot be designed at agreen desk only -> need to involve the industry to get to knowmarket practice
❙ Improves Quality, interpretation and application as well asacceptance among banks supervised
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The German supervisory framework
❙ Basic principles of microprudential supervision inGermany:
1. Liberal supervision following market principles
2. Mixture of quantitative and qualitative supervision
3. Risk based supervision
4. Forward-looking supervision
5. Supervision in public interest only
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❙ Basic principles of microprudential supervision inGermany:
1. Liberal supervision following market principles
2. Mixture of quantitative and qualitative supervision
3. Risk based supervision
4. Forward-looking supervision
5. Supervision in public interest only
The German supervisory framework
Credit risk
Market risk § 10 Solvency
General rules:Banking act
Primary legislation
Derived ordinanceon ...
Secondary legislation
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Operational risk
Concentration risk
Risk management
Liquidity risk
§ 13, 14
§ 25a (1)
§ 11
Large exposures
Risk management
Liquidity
The German supervisory framework
❙No business without licensing❙Minimum initial capital❙Fitness and properness of managers❙Exceptions for certain banks
❙Ongoing supervision based on relevant information❙Annual reports❙Supervisory dialogue❙Monthly or quarterly reporting requirements (solvency ratio, liquidityratio, etc.)
❙ Insolvency❙can only be declared by the banking supervisory authority not the bankitself
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❙No business without licensing❙Minimum initial capital❙Fitness and properness of managers❙Exceptions for certain banks
❙Ongoing supervision based on relevant information❙Annual reports❙Supervisory dialogue❙Monthly or quarterly reporting requirements (solvency ratio, liquidityratio, etc.)
❙ Insolvency❙can only be declared by the banking supervisory authority not the bankitself
The German supervisory framework
Credit risk
Market risk Solvency ratios- simple
-more elaborated- internal models
Supervisory ratiosto comply with Approaches
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Operational risk
Concentration risk
Liquidity risk
Large exp. ratio
Liquidity ratio
- simple-more elaborated- internal models
Limits for-single large exp.-total large exp.
Standardised app.
The German supervisory frameworkRisk management (MaRisk)
General part (AT)AT1 Preliminary remarksAT2 Scope of applicationAT3 Management responsibilityAT4 General requirements forrisk managementAT5 Organisational guidelines
AT 4.1 Risk-bearing capacityAT 4.2 StrategiesAT 4.3 Internal control systemAT 4.4 Special functionsAT 4.5 Risk management on group level
Special part (BT)BT1 Internal control system
- BT0 Organisational andoperational structure- BTR Risk managementand control
BT2 Internal audit
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General framework with a modular structure
Special part (BT)BT1 Internal control system
- BT0 Organisational andoperational structure- BTR Risk managementand control
BT2 Internal audit
BTR 1 Credit riskBTR 2 Market riskBTR 3 Liquidity riskBTR 4 Operational risk
❙ German model: Integrated model with central bank support
❙ Banking supervision conducted by two organizations:❙Federal Financial Supervisory authority (BaFin)❙Deutsche Bundesbank
❙ BaFin as the “competent authority” (“bad cop”)❙ Deutsche Bundesbank supporting BaFin („good cop“)
❙ Support also from the auditors' associations of the savingsbanks and the cooperative banks sector
The German supervisory framework
❙ German model: Integrated model with central bank support
❙ Banking supervision conducted by two organizations:❙Federal Financial Supervisory authority (BaFin)❙Deutsche Bundesbank
❙ BaFin as the “competent authority” (“bad cop”)❙ Deutsche Bundesbank supporting BaFin („good cop“)
❙ Support also from the auditors' associations of the savingsbanks and the cooperative banks sector
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Cooperation between Bundesbank andFederal Financial Supervisory Authority
Integrated Supervision ofFinancial Services: Banking,Insurance, Securities Markets.
Legal acts, licensing,monitoring and closingindividual institutions.
Issuing principles andregulations in agreement withthe Bundesbank.
Bundesbank
Sec. 6: Functions of BaFin Sec. 7: Cooperation with BBK
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Integrated Supervision ofFinancial Services: Banking,Insurance, Securities Markets.
Legal acts, licensing,monitoring and closingindividual institutions.
Issuing principles andregulations in agreement withthe Bundesbank.
The Bundesbank is assignedmost of the operational tasks inbanking supervision.
Ongoing monitoring process. Regular audits of banking
operations. Routine and ad hoc prudential
discussions with the institutions.
The Application of the Germanframework
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The Application of the German framework
Two sides of the same medal
Bundesbank
Information gatheringSupervisory
roadmap
BaFin
Measures
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Information structuring
Supervisoryroadmap
Information evaluation Riskprofile
Decision on possible action
Information assessment
❙Contribution of theManagement❙Annual dialogue andsupervisory dialogue❙Statements❙Notifications
❙Contribution of the Auditor❙Annual audit report pursuantto the “PrüfBV” (if necessarywith focus given by BaFinaccording to Sec. 30Banking Act)❙Specific Inspections /Interval Inspections
The Application of the German framework
Risk profile and classification
❙Contribution of theManagement❙Annual dialogue andsupervisory dialogue❙Statements❙Notifications
❙Contribution of the Auditor❙Annual audit report pursuantto the “PrüfBV” (if necessarywith focus given by BaFinaccording to Sec. 30Banking Act)❙Specific Inspections /Interval Inspections
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Examinations ofOrganisations(qualitative)
Examinations ofMeasurementApproaches
Market Risk Minimumrequirements formarket riskmanagement
Internal riskmodels (value atrisk)
Credit Risk Minimumrequirements forcredit riskmanagement
Internal rating-systems (IRBA),sec. rules (IAA)
Total Bank ICAAP,interest rate riskfrom non-trading
Models for op.risk (AMA) andfor Liquidity risk
Specific Inspections
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Examinations ofOrganisations(qualitative)
Examinations ofMeasurementApproaches
Market Risk Minimumrequirements formarket riskmanagement
Internal riskmodels (value atrisk)
Credit Risk Minimumrequirements forcredit riskmanagement
Internal rating-systems (IRBA),sec. rules (IAA)
Total Bank ICAAP,interest rate riskfrom non-trading
Models for op.risk (AMA) andfor Liquidity risk
Examination Approach
How is the compliance with regulatory rules assured bythe internal control system“?
Emphasis on those areas where expect mostthreatening risks are expected.(But also scan other areas in case our assessment was wrong.)
Check individual cases to examine the functionality of theinternal control system.
Our approach is a„risk oriented system audit“,
not focused on individual cases.
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How is the compliance with regulatory rules assured bythe internal control system“?
Emphasis on those areas where expect mostthreatening risks are expected.(But also scan other areas in case our assessment was wrong.)
Check individual cases to examine the functionality of theinternal control system.
Examination Approach
We try to grasp the organisation and processes, portfolio andrisk situation through interviews and reports.
Relevant structures and processes are investigated anddocumented.
Documentation, reconciliations, confirmations and valuationsare checked in samples.
We use examination guidelines but we hate questionnaires.
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We try to grasp the organisation and processes, portfolio andrisk situation through interviews and reports.
Relevant structures and processes are investigated anddocumented.
Documentation, reconciliations, confirmations and valuationsare checked in samples.
We use examination guidelines but we hate questionnaires.
Organisation and Processof an Examination
ContactwithBAFin
Exami-nationOrderbyBAFin
Announ-cementbyBundes-bank
FirstmeetingwithBank
Start on-site
FinalmeetingwithBank
DraftingReport
SendingReportto BaFin
Followup offindings
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ContactwithBAFin
6 - 8Weeksbeforestart
Exami-nationOrderbyBAFin
Announ-cementbyBundes-bank
FirstmeetingwithBank
Start on-site
FinalmeetingwithBank
DraftingReport
SendingReportto BaFin
Followup offindings
Day 0
1 week3 monthsor longer
Qualityassurance
1 - 3Weeksbeforestart
2 monthsafter finalmeeting
Pre-Examination Work
Planning Examinations: Man power Time frame Locations Main focuses Depth (e.g. size of the samples) Specification with regard to Products
Examination diary
Documentation ofplanning and
risk assessment
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Planning Examinations: Man power Time frame Locations Main focuses Depth (e.g. size of the samples) Specification with regard to Products
Documentation ofplanning and
risk assessment
Pre-Examination Work
Criteria for Choosing Staff :
Qualification of the employees Knowledge about the enterprise to be checked Continuity or scheduled change ? Temporal availability of the employees Independence of the employees concerning the enterprise to be
examined Experience in leadership
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Criteria for Choosing Staff :
Qualification of the employees Knowledge about the enterprise to be checked Continuity or scheduled change ? Temporal availability of the employees Independence of the employees concerning the enterprise to be
examined Experience in leadership
Pre-Examination Work
Evaluation of available information: Documents requested beforehand
Annual auditor’s report Analysis of the risk situation Analysis of the balance sheet Analysis of the profit and loss situation Study internal memorandums and Databases Internal and external reports of the bank
Discussion with our colleagues from desk top supervision
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Evaluation of available information: Documents requested beforehand
Annual auditor’s report Analysis of the risk situation Analysis of the balance sheet Analysis of the profit and loss situation Study internal memorandums and Databases Internal and external reports of the bank
Discussion with our colleagues from desk top supervision
Examples for Requested Documents(e. g. Risk Controlling)
Strategy papers
Executive board decisions
Organization charts
Organization guidelines
Valuation libraries
IT system overviews
Daily, monthly reports
Limit book
Data flow pictures and descriptions
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Strategy papers
Executive board decisions
Organization charts
Organization guidelines
Valuation libraries
IT system overviews
Daily, monthly reports
Limit book
Data flow pictures and descriptions
Organisation and Processof an Examination
ContactwithBAFin
Exami-nationOrderbyBAFin
Announ-cementbyBundes-bank
FirstmeetingwithBank
Start on-site
FinalmeetingwithBank
DraftingReport
SendingReportto BaFin
Followup offindings
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ContactwithBAFin
6 - 8Weeksbeforestart
Exami-nationOrderbyBAFin
Announ-cementbyBundes-bank
FirstmeetingwithBank
Start on-site
FinalmeetingwithBank
DraftingReport
SendingReportto BaFin
Followup offindings
Day 0
1 week3 monthsor longer
Qualityassurance
1 - 3Weeksbeforestart
2 monthsafter finalmeeting
Running the Examination
Team size reaches from 3 to 13 examiners.
Teams go to head offices of the institutes and the largestlocations, domestic or abroad.
An examination can take from a week up to about six weeks,depending on size of the Institute and scope of the audit
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Team size reaches from 3 to 13 examiners.
Teams go to head offices of the institutes and the largestlocations, domestic or abroad.
An examination can take from a week up to about six weeks,depending on size of the Institute and scope of the audit
Internal Organisation of the Teams
Examiners work in sub teams of two on a specified task,e.g. partitioned along product lines or processes.
Sub teams draft their part of the examination report.
Relatively low specialization degree but specialists for themathematical models and IT.
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Examiners work in sub teams of two on a specified task,e.g. partitioned along product lines or processes.
Sub teams draft their part of the examination report.
Relatively low specialization degree but specialists for themathematical models and IT.
We evaluate
internal audit reports, policies and manuals
to see if they are in line with minimum requirements.
At the bank we do a lot of interviews with
trading, controlling, operations, IT, internal audit and other areasto understand the bank and assess the internal control system.
Conducting Examinations
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We evaluate
internal audit reports, policies and manuals
to see if they are in line with minimum requirements.
At the bank we do a lot of interviews with
trading, controlling, operations, IT, internal audit and other areasto understand the bank and assess the internal control system.
Reporting lines Systems for dealcapture,
position keeping, file keeping Interfaces to operations and
controlling Manpower Strategic goals Market limit system and its
monitoring
Portfolio structure Trading volumes Sources of revenues Illiquid markets Exotic instruments New products: frequency,
introduction process,volumes
Areas of interest
Organisation: Risk situation:
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Reporting lines Systems for dealcapture,
position keeping, file keeping Interfaces to operations and
controlling Manpower Strategic goals Market limit system and its
monitoring
Portfolio structure Trading volumes Sources of revenues Illiquid markets Exotic instruments New products: frequency,
introduction process,volumes
Documentation
Documentation of examiner‘s work(interview minutes, evaluation reports)
Documentation of examination results(examination report, findings list)
Documentation of Quality assurance
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Documentation of examiner‘s work(interview minutes, evaluation reports)
Documentation of examination results(examination report, findings list)
Documentation of Quality assurance
End of On Site Phase
In a final meeting our findings are discussed with themanagement of the bank.
Our report describes and assesses organization, processes andfindings. We use four categories for findings: F1 (light) to F4 (very severe).
The report goes to the BAFin and also to the examined bank.
The bank is asked for a statement and its plans about how todeal with the findings.
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In a final meeting our findings are discussed with themanagement of the bank.
Our report describes and assesses organization, processes andfindings. We use four categories for findings: F1 (light) to F4 (very severe).
The report goes to the BAFin and also to the examined bank.
The bank is asked for a statement and its plans about how todeal with the findings.
ExaminedBank
Report plus requestfor a statement
Last Steps
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Examination teamof the Bundesbank
BaFinFinal clarificationof facts
Report plus commentand proposals for actions
decisionabout measures
Basel III
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Basel III
❙Capital Requirement Directive IV & Capital RequirementRegulation accepted by❙European Parliament on 17th April❙Council on the 27th of March
❙Aim:❙Single Rule book❙Quantitative and qualitative enhancement in capital adequacy❙Harmonised liquidity requirements for EU
❙ Delayed start❙National implementation❙Target date of application 1st of January 2014
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❙Capital Requirement Directive IV & Capital RequirementRegulation accepted by❙European Parliament on 17th April❙Council on the 27th of March
❙Aim:❙Single Rule book❙Quantitative and qualitative enhancement in capital adequacy❙Harmonised liquidity requirements for EU
❙ Delayed start❙National implementation❙Target date of application 1st of January 2014
Banking Union
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Banking Union
❙Three main components:❙Single supervisory mechanism❙European recovery and resolution mechanism for systemicallyimportant banks❙European bank deposit insurance scheme
❙Three main challenges:❙conflicts of interest and complex decision-making processes❙clear hierarchy of liability and an orderly procedure❙distribution of “legacy risks”
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❙Three main components:❙Single supervisory mechanism❙European recovery and resolution mechanism for systemicallyimportant banks❙European bank deposit insurance scheme
❙Three main challenges:❙conflicts of interest and complex decision-making processes❙clear hierarchy of liability and an orderly procedure❙distribution of “legacy risks”