February 2015
Summary
Réalités industrielles
Regulating the financial sector
Complete issue
This issue was coordinated
by Rémi STEINER
This issue was coordinated
Avant-propos : Quelles priorités pour la régulation financière aux niveaux français, européen et mondial ? par Michel SAPIN,
The financial crisis and its lessons for regulatory oversight
Banking crises: An examiner’s interventions
By Patrick MONTAGNER
Autorité de contrôle prudentiel et de résolution (ACPR)
There have been several explanations of the causes and origins of the financial crisis that started in the summer of 2007. Readers are invited to review this topic by consulting reports by the Bank of France and French authorities who supervise the banking system. How did an examiner react and analyze the situation “day in, day out”?
Stabilizing the international financial system through regulations: A place for quantitative indicators?
By Nicole EL KAROUI
Professeur de Mathématiques Appliquées - Université Pierre et Marie Curie (Paris VI) et École polytechnique
Quantitative indicators have become increasingly important as the regulation of markets has evolved, in particular since the 2008 crisis. It is tempting to try to measure extreme losses in order to associate them with equity in compliance with a given ratio of solvency. Given the power of current means of calculation, we can, a priori, imagine doing that. But as in bookkeeping, quantitative indicators have to be credible and not very “sensitive” to the model used to make them. Indicators of extreme losses over a year, of the sort VaR at 99,9%, are quite sensitive to the model. They cannot, therefore, play the role of “social” quantification of market risks in the sense of A. Desrosières. This naturally leads us to reconsider the ranking of risks and of risk controls.
Regulating the financial sector is wanting: Rating agencies
By Pierre CAILLETEAU
AMUNDI
Although the regulation of financial rating agencies freed us from frustrations with private parties setting standards, it has not advanced very far toward more important public policy objectives. Owing to regulations, a disparaged oligopoly has taken root. The financial system’s lack of biodiversity is much more harmful than the risk of a rating agency hastily downgrading, or belatedly upgrading, the scores it fixes. Possibilities are explored for regulating less but better…
The Fed and ECB at the crossroads
By Pierre JAILLET
Chief Representative for the Americas, Banque de France Contact : pierre.jaillet@banque-france.fr et nyoffice@banque-france.fr
The major developed economies plunged together in 2008. They are emerging from the recession, each in its own time. Paradoxically, the macroeconomic gap between the United States and the eurozone is widening, but the monetary policies of the Federal Reserve and European Central Bank are still similar. At the start of 2015, pressures from different directions are being brought to bear on the two central banks. The Fed is being pressured to gradually bring its benchmark interest rates back to normal, toward a level compatible with a recovering economy that is now deemed robust, whereas the ECB is under pressure to reinforce its actions for stimulating a faltering economy by adopting new measures to ward off risks related to the anticipation of inflation. In the long run however, the central banks will face the same problems.
The impact of regulating banks on the model for financing the economy
By Clémentine GALLÈS
Responsable des Études macrosectorielles, Société Générale
et Olivier GARNIER
Chef-économiste et membre du Comité de direction du groupe Société Générale
Under pressure from the recession, the financial meltdown, regulatory authorities and investors, banks have been forced to make massive adjustments since 2009. Major changes are occurring in the place and role of brokerage, especially in the eurozone and, above all, in France. They will have consequences for other parties involved in financing the economy. Owing to macroprudential regulatory reforms, the size and structure of banks’ financial statements have been significantly modified. This will undeniably affect the risks ultimately borne by households, firms and other middlemen in the financial sector.
The mother of all regulations: The Glass-Steagall Act
By Christian STOFFAËS
Ingénieur général des Mines honoraire
Six years after the Lehman Brothers crash, analysts’ views about the origin of the financial meltdown are converging. New, sophisticated financial instruments served as a cover for speculation. As always, excessive speculation led to the bankruptcy of the most imprudent players, who lacked equity (specifically insufficient debt-to-capital ratios) or senselessly used leverage, in traders’ lingo, to dodge prudential standards. After ten years of unlimited liberalization, banks and financial markets are once again being regulated. A look back at history, to ponder…
Regulatory oversight put to the test of global finance
Regulating finance: Between globalization and fragmentation
By François VALÉRIAN
Ingénieur en chef des Mines, Conseil général de l’Économie. Professeur associé de finance au Conservatoire National des Arts et Métiers (CNAM)
For two hundred years now, the sphere of finance is more fluid and uniform than that of politics, fragmented as it is by national borders. This difference was acceptable as long as financial crises were regional. As we now know however, a decline in the American real estate market can make Iceland change its constitution and push Greece into bankruptcy. The tension between the globalization of finance and the fragmentation of politics is dangerously augmenting due to the interdependence of financial markets. The 2008-2012 crisis has put the international coordination of public regulatory authorities to the test. The G20’s increasing role as a pseudo world government, the nonbinding but highly respected regulations approved by the Basel committee, EU efforts to coordinate budgets and oversight… all this is evidence that the political sphere is being globalized in an effort to cope with the financial sector’s systemic risks.
For an ecosystemic regulation of finance?
By Dominique DRON
Ingénieure générale des Mines, CGE, ministère de l’Économie, de l’Industrie et du Numérique
The financial system’s resilience has repeatedly - and even more after the subprimes exploded - been a major concern. From 1970 to 2010, the IMF tallied the following crises: 208 related to monetary systems; 145, to banks; and 72, to sovereign debt. Ecosystems - another type of complex systems - have, over a very long period, developed and selected principles of regulation effective enough to resist shock or restore the system afterwards. Observations of this ecosystemic regulation can probably contribute to the current debate about the conditions for resilient financial systems.
International cooperation between financial market regulators
By Benoît de JUVIGNY
Secrétaire général de l’Autorité des Marchés Financiers (AMF)
et Françoise BUISSON
Directrice des Affaires européennes et internationales, Autorité des Marchés Financiers (AMF)
International cooperation is now essential to regulating finance. Rather than being an end in itself, it is becoming a basic component, like authorization, regulation, supervision, investigation and sanction. The growing internationalization and interconnection of markets are forcing regulatory authorities to strike a delicate balance between protecting investors and opening the markets under their oversight to parties and products from foreign countries. In this context, international cooperation is both a key to the efficiency of regulations and a factor capable of facilitating cross-border market activities.
Clearing derivatives: Structural and regulatory aspects
By Margherita REDAELLI
Docteur de recherche ès sciences politiques et expert scientifique à l'Université de Pise
Given the success during the financial crisis of the risk-control arrangements used by central counterparties, regulatory authorities have assigned the latter roles and risks that have the potential of changing them from what they used to be — in particular in the clearing of privately negotiated derivatives. This trend, along with problems in implementing new regulations and the evolving structure of the market, might implant new risks in the financial system that will necessitate stronger oversight and tighter international coordination.
Should we worry about the Chinese banking sector’s prospects?
By Jean BEUNARDEAU
Directeur Général, HSBC France
Given that China direly needs strong, sustained growth for its economic and social development, the Chinese financial system’s solidity is a fundamental question. Even if accommodating monetary and fiscal policies do not alter forecasts in the short run, the banking sector must be efficient and robust enough to ensure domestic economic development in the long term. Changes in the Chinese banking system, concern about its current state and its impact on the national economy are analyzed. Shadow banking is brought under discussion along with its quite real risks for the Chinese economy.
How to regulate the insurance industry worldwide?
By Catherine LEZON
Secrétaire Générale adjointe, International Association of Insurance Supervisors (IAIS)
The International Association of Insurance Supervisors (IAIS) regulates the insurance industry worldwide through standards drawn up in three successive phases: the insurance core principles (ICPs); a common framework (ComFrame) for supervising internationally active insurance groups (IAIGs); and specific measures for globally systemically important insurers (G-SIIs). The IAIS has set ambitious objectives, in particular, to draft in three years the first international capital standards (ICS). These risk-based standards will apply to IAIGs and inevitably have a considerable impact. Although the IAIS takes into account what exists on the regional or national levels, its work is not intended to mirror any existing standard. Since each nation-state will have to transpose IAIS standards, the systems now being enforced will have to be adjusted. The IAIS and its members are convinced that this change is in the general interest. But 2016 is not the terminus of IAIS activities in this field. The organization will examine the phases of transposition and transition; and eventually have to reexamine the construction and calibration of capital standards. As we see, the worldwide regulation of the insurance industry by the IAIS is a long-term project.
Regulation/deregulation: A sectoral focus
Means of payment and daring to change
By Rémi STEINER
Ingénieur général des Mines, CGE, ministère de l’Économie, de l’Industrie et du Numérique
The facility of using checks and debit cards, access for everyone to debit cards and ATMs, a single price for a consumer good independently of the means of payment… are so many familiar, reassuring aspects of modern life. Underlying them is an abundance of regulations that have, over time, shaped our habits and ways of paying for goods and services. Technological innovations and changing purchasing patterns are powerful factors of change. EU plans for a single market without internal borders aim to do away with national differences in matters related to payment.
Solvency II: On your mark, get set, go!
By Sandrine LEMERY
Première secrétaire générale adjointe de l’Autorité de contrôle prudentiel et de résolution (ACPR)
Solvency II has long been awaited. This EU directive seeks to both harmonize prudential regulations for the insurance sector in Europe and prod organizations into better understanding and assessing their risks. Talks started in 2002. Seven years of bargaining went into the publication of the 2009 framework directive, and as much time will be needed for its (partial) application in 2016. Incorporating thirteen existing directives in a single text, Solvency II introduces regulatory principles for the insurance industry fundamentally different from those set under Solvency I. Calculated on company accounts, capital requirements will, under Solvency II, be evaluated by estimating assets and liabilities at market value. The principle of taking into account the exposure to risk replaces the caps imposed on organizations; and rules of governance will be reinforced to goad firms to adopt adequate risk-management procedures. Insurance groups will be controlled through new regulations based on greater cooperation between the relevant regulatory authorities in EU lands.
Mediation in business credit, a new form of public intervention
By Jeanne-Marie PROST
Ex-Médiatrice nationale du crédit aux entreprises
Given the dangerous risks ensuing from the September 2008 financial meltdown, which menaced the whole economy as banks suddenly stopped making loans to businesses, the French government intervened quickly and massively to shore up the banking system. This bailout entailed increasing the equity capital of banks. The latter were lent 20 billion euros for equity; and the SFEF (Société de Financement de l’Économie Française, set up at the end of 2008) made loans of approximately 80 billion euros to banks. This intervention avoided a panic that would have driven the economy into an even deeper recession. In spite of this bailout, the risks were still high that firms strapped for cash would file for bankruptcy. To intervene faster in support of the production system during this difficult phase, the French president, Nicolas Sarkozy, announced in late October 2008 the appointment of a “mediator of business credit”.
Protecting customers: A new issue for the ACPR and regulators
By Olivier FLICHE
Ingénieur général des Mines, directeur du Contrôle des pratiques commerciales (ACPR)
Supervising the financial sector’s stability means protecting the customers of financial institutions and, more broadly, citizens and their economic environment. Protecting this customer base helps stabilize the financial system by maintaining confidence in it. As the 2007 meltdown has shown, it was no longer possible to control the financial sector while overlooking business practices. Since then, French, European and international frameworks for regulating practices and protecting customers in this sector have been worked out under pressure. Given its experience with supervising banks and insurance companies, the Autorité de Contrôle Prudentiel et de Résolution (ACPR) is suited to assist the implementation of the new framework in France.
Regulating high-frequency trading: The French approach and difficulties
By Alexandra GIVRY
Directrice de la Surveillance des marchés à l’AMF
The publication of Michael Lewis’s Flash boys: A Wall Street revolt on 31 March 2014 was a bomb loaded with accusations that high-frequency traders had rigged the market. Back in 2009, in its preliminary work on modifying the EU directive on markets in financial instruments, the French Autorité des Marchés Financiers (AMF) called for tighter controls over this sort of trading. Since then, high-frequency trading has become a major concern for most market regulatory authorities. While it might be excessive to vilify high-frequency trading, an analysis of its positive and negative effects turns out to be lukewarm. Beyond the risks of instability, the mistrust spawned by this practice is the main tort caused to financial markets, since it strips them of their major function, namely channeling savings and investments. For this reason, the AMF actively seeks to promote efficient regulations at the European level. To identify and avoid excesses, it seeks to foster a degree of competence as sophisticated as that of the players to be overseen.