The Shadow Banking System
and the Basel frameworks
Welcome to the July 2010 edition of the
Basel ii Compliance Professionals Association (BCPA)
newsletterDear
Members,One of the most
important changes after the official circulation of
the Basel III framework, will definitely be the
supervision and control of the
“Shadow” Banking System. Today we will try to
understand more about it. Banking activities are not
always regulated. The structure of the legal
entities, the banking activities by financial
unregulated intermediaries, and unregulated activities
by regulated institutions, are really interesting
areas. A
chief legal counsel of a Fortune 10 company once told
me: "This is an uncharted,
unregulated territory, and this is why we love it "
Banks profits could
significantly decrease at the end of 2012, because of
the higher Basel III standards and the hit on the
"shadow banking system." The effort to bring
non-bank financial institutions to heel and moderate
their resurgence in credit markets is going to affect
institutions and financial conglomerates.
June
2010 - According to the European Central Bank,
countries must cooperate to regulate the shadow
banking system. New regulations and a material
extension of oversight to the new world of financial
intermediation is required. It is time to
understand more about this interesting subject, and I
believe that we should start from Mr Cox.Testimony of Christopher Cox
Former Chairman, U.S. Securities and Exchange
Commission before the Financial Crisis Inquiry
Commission (FCIC) May 5, 2010
The “Shadow”
Banking System
You have asked me
to address the “shadow” banking
system and the role that it played in the financial
crisis, as well as my perspective on the SEC’s efforts
through a voluntary program to supervise one portion
of that system.
First, I would note that
the term “shadow banking” is an
apt description of a massive, but often opaque,
portion of our financial services sector that
otherwise defies easy classification.
Some analysts have used the term in reference to the
major investment banks. Others
mean it to refer to hedge funds, structured investment
vehicles and other non-bank financial institutions
that play a role in lending.
Attempting to define shadow
banking in terms of institutions, however, is
necessarily both over- and under-inclusive. It makes
more sense to follow the money.
Shadow banking is the business
of borrowing and lending money – and equivalent
non-monetary instruments – outside of the traditional
banking system.
The diverse range of
non-bank financial institutions
that play central roles in that system include
money market mutual funds,
insurance companies, investment banks, securitization
vehicles, hedge funds, and the government-sponsored
enterprises Fannie Mae and Freddie Mac.
Beyond those institutions, however,
commercial banks too have been
significant players in the “shadow banking” system
through off-balance sheet entities, outside the scope
of their traditional borrowing and lending activities.
Over recent decades, the shadow banking system has
grown to a tremendous scale. As of the end of 2008,
84 percent of all credit in the
United States was provided via capital markets
instruments, with only 16 percent provided via bank
loans.
The development of credit risk
transfer instruments in recent decades fundamentally
changed the structure of the financial system.
Structured credit products, through which
portfolios of credit exposures could be sliced and
repackaged to meet the needs of investors,
significantly expanded the creation of commercial
credit.
Not only non-bank institutions but
commercial banks as well were substantial issuers of
such instruments.
In recent years commercial
banks funded a growing amount of long-term assets with
short-term liabilities in wholesale markets
through the use of
off-balance-sheet vehicles, exposing themselves to
credit and liquidity risk outside of regulatory
leverage limits by providing facilities to these
vehicles.
They also held
structured credit instruments on
their own balance sheet, exposing themselves to
embedded leverage and increasing their asset-liability
mismatch and their funding liquidity risk.
The
financial crisis culminated in many parts of this
shadow banking system facing a “run on the bank,”
as counterparties that provide
funding and risk products refused to do business with
entire entities.
The shadow banking
system, like the traditional deposit-taking banking
system, depends on short-term liabilities to finance
long-term assets.
When short-term funding
sources for these liabilities became scarce or
completely unavailable, the institutions that depended
upon them faced existential crises.
The shadow banking system is not
neatly separated from the traditional banking system,
because during recent decades commercial banks —
following their large corporate clients which were
selling more debt, rather than borrowing directly from
banks — have developed large investment banking
businesses.
In the years preceding the
financial crisis of 2008, banks
and non-banks alike issued increasingly larger amounts
of debt to fund everything from consumer loans, to
high-yield corporate debt, to mortgage-backed
securities. This represented
a response both to the historically low interest rates
that resulted from central bank policy and an increase
in global savings flows to the U.S., and to the
sustained increase in housing prices, fueled by
increasingly readily available and inexpensive
mortgage finance.
The abrupt devaluation of
these MBS and other credit risk transfer instruments
contributed significantly to the
loss of confidence in both commercial banks and
non-banks.
The MBS devaluation was
itself the result of an asset bubble in the
residential mortgage market, exacerbated by the rise
in the use of high risk mortgage products including
the notorious “liar loans” and
no-money-down financing.
It is
abundantly clear, as the SEC's former Chief Accountant
Lynn Turner testified in Congress on the failure of
AIG, that "if honest lending
practices had been followed, much of this crisis quite
simply would not have occurred." The nearly
complete collapse of lending standards by banks and
other mortgage originators led to the creation of so
much worthless or near-worthless mortgage paper that
as of September 2008, banks had
reported over one-half trillion dollars in losses on
U.S. subprime mortgages and related exposure.
And while the first mortgage market to come
under stress was subprime, other high-risk mortgage
products contributed significantly to the financial
crisis.
These include subprime,
Alt-A, negative amortization, interest-only, option
ARM’s, “low doc,” “no doc,” FICO’s less than 620,
original loan-to-value greater than 90%, and the
combination of FICO’s less than 620 and original
loan-to-value greater than 90%.
The
shadow banking system helped to spread this contagion
to institutions in every sector —
from commercial banks and
thrifts such as Wachovia, Washington Mutual, and
IndyMac, to investment banks such as Bear Stearns and
Lehman Brothers, to the government-sponsored
enterprises Fannie Mae and Freddie Mac, as well as the
nation's largest insurance company, AIG.
And as the bank and non-bank failures in
Europe and Asia have made
clear, regulated and unregulated enterprises around
the world were susceptible as well.
By far the
largest institutions in the shadow banking system are
Fannie Mae and Freddie Mac.
The combined business of Fannie Mae and Freddie
Mac represents approximately
$5.5 trillion.
They stimulated the
creation of the high risk products that were at the
epicenter of the mortgage market meltdown, by
encouraging mortgage lenders no longer to worry about
the future losses on the loans: instead, lenders could
cash out through securitization or direct sales to
Fannie Mae and Freddie Mac.
Increasingly,
lenders focused on underwriting to the standards of
Fannie Mae or Freddie Mac, which established the
template for the entire securitization market. In this
way, lenders could be assured of selling the mortgages
they originated.
The meltdown of the mortgage
market and the conservatorships of Fannie Mae and
Freddie Mac highlighted the fact that
not only did these shadow banking institutions
effectively establish the underwriting standards for
the mortgage market through the standards they set for
lenders who wanted to sell them mortgages, they also
established the pricing which failed to meaningfully
discern between the high risk products and the
mortgages identified in their congressional charter.
By statute, Fannie Mae and Freddie Mac
were intended to purchase “mortgages which are deemed
by the corporation to be of such quality, type, and
class as to meet, generally, the purchase standards
imposed by private institutional mortgage investors.” But it was their
activities and pricing in high risk mortgage products,
for which they did not have any historical experience,
which substantially fueled the market, and the
resulting bubble, for these high risk mortgages.
As we now know, Fannie Mae and Freddie Mac, which
got affordable housing credit for buying subprime
securitized loans, became a
magnet for the creation of enormous volumes of
increasingly complex securities that repackaged these
mortgages. The market that they
created was typified by conduits and structured
investment vehicles that borrowed in the commercial
paper market and bought longer-term asset-backed
securities; investment banks and other institutions
that financed overnight in the so-called repo market;
and hedge funds.
The failure and near-failure of so many regulated
commercial banks as well as non-banks since mid-2008,
and the extravagant taxpayer cost of bailing them out,
highlights the pre-crisis inadequacy of capital and
liquidity in both categories of institutions. A lack of capital and
liquidity was a common failing in both the traditional
and shadow banking systems. It afflicted both
commercial banks and investment banks, not to mention
the insurance giant AIG and the GSEs, Fannie and
Freddie.
Since a definitional distinction
between the traditional and shadow banking systems is
that the former is heavily regulated,
why did the system of banking
regulation in place in the United States fail to
predict or preempt the crisis in commercial banks? Why
weren’t impending bank crises not identified soon
enough as capital adequacy red lines were tripped?
To answer this question, a good
starting point is to look to the capital standards in
place for commercial banks. In
1988, U.S. commercial banking
supervisors implemented the international Basel
standards for capital adequacy (“Basel I”).
These standards, still in place today,
assign "risk weights" to bank
assets.Most claims are risk-weighted at
100 percent.
But
residential mortgages are ranked as only half as
risky.
And
securities issued by Fannie Mae and Freddie Mac have a
risk weight of only 20 percent — a powerful incentive
to move assets into Fannie and Freddie securities.
In addition to this strong incentive to
move commercial bank assets in
what eventually became the shadow banking system,
U.S. commercial banks have had a leverage ratio
computed on the basis of their
on-balance-sheet assets.
Because
the leverage ratio does not count off-balance sheet
assets, this created incentives to hide risky assets
off the banks’ balance sheets.
Commercial banks funded a
growing amount of long-term assets with highly risky
short-term liabilities in wholesale markets through
the use of off-balance-sheet vehicles.
They further exposed themselves to
credit and liquidity risk
by providing lending facilities to these vehicles.
Beyond this, they also held
structured credit instruments on their own balance
sheet, exposing themselves to embedded leverage
and increasing their asset-liability mismatch and
their funding liquidity risk.
The
inadequacy of the Basel I
standards became manifest with the bailouts of
Wachovia, Citigroup, Bank of America, and hundreds of
other banks whose regulators, such as the Federal
Reserve, relied upon Basel I.
The
failure of over 200 traditional
banks since the crisis began is further evidence.
But even without the benefit of
hindsight, commercial bank
regulators had recognized the incentives in Basel I
for moving risk off-balance sheet, which prompted the
eventual promulgation of the Basel II standards, now
in use around the world.
As Fed Vice
Chairman Don Kohn testified before the Senate Banking
Committee in March 2008, Basel
II was designed to eliminate the incentive to move an
asset off the balance sheet, which “clearly gave banks
a sense that they did not need to manage that risk as
intensely as they would have if it was directly on
their balance sheet.”
The deepening of
the financial crisis after March 2008, which spread to
many U.S. and European institutions that relied on the
Basel II framework, would show that
these standards, too, were
inadequate to provide advance warning of danger.
But in 2004, when the SEC considered
the adoption of capital rules that would apply on a
voluntary basis to the large investment bank holding
companies comprising a key part of the shadow banking
system, the
internationally-accepted Basel standards were
understood to be the strongest and most reliable
regulatory tools for mitigating risk.
SEC Regulation of Investment
Bank Holding Companies
In March 2004, 17
months prior to my joining the Commission, the SEC
adopted rules establishing a
voluntary regulatory regime for large investment bank
holding companies with SEC-regulated broker-dealer
subsidiaries.
The rules were the
product of extensive agency analysis and review,
public notice and comment, the unqualified
recommendation of the agency’s professional staff, and
a unanimous Commission vote.
In creating this
program — voluntary because the Commission lacked
statutory authority over investment bank holding
companies — the SEC was explicit that
this would not be a prescriptive
regulatory regime nor an independent audit of the
consolidated entity, but rather would rely on
information reported by the investment bank holding
companies themselves.
Both
the absence of a statutory
mandate and the limited staff available within the
Division of Market Regulation (subsequently renamed
the Division of Trading and Markets) led to this
architecture.
“We are going to depend
on the firms, obviously the front line. They're going
to have to develop their entire risk framework.
And they'll have to explain that to us, in a way
that makes sense,” Associate Director Michael
Macchiaroli told the Commission in describing the
proposed rules to the Commission at the April 2004
open meeting on their adoption.
The program
was also premised on the investment banks using
their own proprietary risk
models: “And then we'll do
the examinations of that process, in addition to
approving their models, and their risk control
systems,” he said. In so doing, the Commission would
be “using the best available tools to manage risks,”
according to then-Chairman William Donaldson.
The design of the Consolidated
Supervised Entity program represented the best
thinking of the agency's professional staff at the
time. In
addition to relying upon
the internationally-accepted Basel II standards for
computing bank capital, it also adopted the
Federal Reserve's standard of
what constitutes a "well-capitalized" bank, and
required the firms in the program to maintain capital
in excess of this 10% ratio. Indeed, the CSE
program went beyond the Fed's requirements in several
respects, including adding a liquidity requirement,
and requiring firms to compute
their Basel capital 12 times a year, instead of the
four times a year that the Fed required for commercial
banks.
During the unprecedented stress
of the financial crisis, however, these borrowed
approaches from commercial bank regulation had
unfortunate results similar to those that were
eventually experienced throughout the commercial bank
sector in 2008. The creators of the
CSE program in 2004 had designed it
to operate on the
well-established bank holding company model used by
regulators not only in the United States but around
the globe. But the market-wide
failure to appreciate and measure the risk of
mortgage-related assets, including structured credit
products, demonstrated that
neither the Basel I nor Basel II standards as then in
force were adequate. Each had — and continues to have
— serious need of improvement.
Bear Stearns demonstrated
that the CSE program’s reliance
on the internationally accepted Basel standards to
detect signs of impending danger was a
fundamental flaw. The CSE rules
provided that an "early warning"
notice must be filed with the SEC in the event that
the 10% capital ratio was breached or was likely to be
breached. At all times during
the week of March 10-17, up to and including the time
of its agreement to be acquired by JPMorgan Chase,
Bear Stearns had a capital cushion
well above what is required to
meet the Basel standards. As noted by the SEC’s
Inspector General, even at the time of its sale,
Bear Stearns's consolidated
capital, and its broker-dealers' net capital, exceeded
relevant supervisory standards.
The fact
that these standards did not provide adequate warning
of the near-collapse of Bear Stearns, and indeed the
fact that the Basel I standards
used by the Federal Reserve and other U.S. banking
regulators did not prevent the exceptionally costly
failures and taxpayer-funded rescues of many
other large commercial banks and financial
institutions, is now obvious.
But even in
March 2008, after the Bear experience, it had become
clear that the regulatory metrics used by the SEC, the
Federal Reserve, and other commercial or investment
bank regulators in the U.S. and throughout the world
had not used risk scenarios based on a total meltdown
of the U.S. mortgage market.
That is why, in
March 2008, I formally requested that
the Basel Committee address the
inadequacy of the Basel capital and liquidity
standards in light of this experience. The SEC immediately
offered to help with this revision of international
standards through our work with the
Basel Committee on Banking
Supervision, the Senior Supervisors Group, the
Financial Stability Forum, and the International
Organization of Securities Commissions.
As of April 2010,
however, that work has
unfortunately yet to be completed by the Basel
Committee.In my view, it
remains a matter of the utmost
urgency, in particular for commercial bank
holding companies, whose ranks now include
not only such large and
systemically important entities as Citigroup and Bank
of America, but also the nation’s largest investment
banks.
The realization in early 2008
that existing supervisory metrics did not provide an
adequate early warning mechanism led the SEC and the
Federal Reserve to work closely together on the
development of more stringent and varied measures for
large investment banks,
including stress tests based on scenarios of much
shorter duration and that were much more severe, such
as denial of access to secured as well as unsecured
funding.
Those more stringent scenarios
assumed no access to the Fed's discount window or
other liquidity facilities, although in fact such
facilities were then available to the major investment
banks. The SEC also worked
closely with the Federal Reserve in directing
this additional stress testing.
Goldman Sachs, Morgan Stanley,
Merrill Lynch, and Lehman Brothers were urged to
maintain capital and liquidity at levels far above
what would be required under the standards in the SEC
rules.
The SEC and the Federal Reserve
also directed these firms to strengthen their balance
sheets, in part by shedding or marking down illiquid
assets. Despite these efforts and
similar steps taken by the Fed in the commercial
banking industry, the subprime contagion continued to
spread.
Beyond highlighting the
inadequacy of the pre-Bear Stearns CSE program capital
and liquidity requirements, the early experience
during the credit crisis also highlighted the
importance of closer collaboration between the SEC and
the Federal Reserve to close the regulatory gap that
existed for investment bank holding companies.
That is because there was
then (and is now) no provision in the law giving the
SEC, the Fed, or any federal agency the authority to
regulate investment bank holding companies — whether
by requiring them to compute capital measures, or to
maintain liquidity on a consolidated basis, or to
submit to limits regarding leverage.This is attributable
to the decision of Congress in the 1999
Gramm-Leach-Bliley Act, following the formal
recommendation of then-SEC Chairman Arthur Levitt to
Congress at the time, to leave supervision of
investment bank holding companies to voluntary
regulation.
Notwithstanding the lack of statutory authorization,
the SEC in 2004 created its voluntary program,
stretching its authority over the broker-dealer
subsidiaries of investment bank holding companies that
the SEC does regulate by statute, to cover the entire
global conglomerate.
Congress also gave the
SEC authority to regulate the investment companies and
investment adviser subsidiaries
within the investment bank holding company structure.
But this still left a gaping
hole in regulatory coverage. Lehman Brothers, for
example, consisted of over 200 significant
subsidiaries; the SEC was not the statutory regulator
for 193 of them.
Among the vast portions of unregulated terrain were
some of Lehman’s riskiest areas — including
over-the-counter derivatives businesses, trust
companies, mortgage companies, and offshore banks,
broker-dealers, and reinsurance companies. Investment
bank holding companies were effectively outside of the
regulatory jurisdiction of any individual federal
department or agency. This was a
fundamental flaw in the statutory scheme that had to
be addressed — but in the meantime, it was up to the
SEC, the Fed, the Treasury and other regulators to
improvise solutions.
To ensure close
coordination between the Fed and the SEC, Chairman
Bernanke and I negotiated a detailed
Memorandum of Understanding
aimed at better information flows between regulators,
including the communication of market surveillance
information, position reporting, and current economic
data, so that both agencies could get a more
comprehensive picture of capital flows, liquidity, and
risk not only at individual firms but throughout the
system.The MOU did not open
up entirely new territory, but
formalized and strengthened the ongoing cooperation
between the SEC and the Fed. One reason the MOU
was needed was that the Fed was reluctant to share
supervisory information with the SEC, out of concern
that banks would not be forthcoming with information
if they thought it would be referred to the SEC for
enforcement.
The Role of
Over-the-Counter Derivatives in the Financial Crisis
The financial crisis demonstrated
how interrelated the markets for
securities, futures, and unregulated derivatives had
become. In the past,
stovepipe regulation of different products could be
justified on the ground that the boundaries in the
marketplace were clear enough. By 2008, however,
when derivatives were competing with securities and
futures and insurance products being sold for their
investment features, that was no longer true. Entire categories of
derivatives were specifically exempted from regulation
by statute. As a result, as we
approached the end of the first decade of the 21st
century, what had begun as a
modest gap in our legal system of financial regulation
had become yawning.
In particular,
despite its enormous size, the
credit default swaps market operated in the shadows.
There was in 2008,
and is now, no public disclosure
nor any legal requirement for these contracts to be
reported to any regulator. So market
participants and government regulators alike then and
now have had no way to assess
market-wide risk, whether credit default swaps have
been honestly traded, and when those issuing and
trading them have taken on risk that threatens others.
The explosive growth of the over-the-counter
derivatives markets occurred
outside of the statutory and regulatory system. Creatively engineered
financial products touted for increasing the
efficiency of the capital markets and offering
new opportunities to manage risk drew the world's
major financial institutions into a tangled web of
interconnections. While there were
undeniable benefits from
legitimate uses of the products themselves, the
lack of information about who was exposed to whom
created a situation ripe for fear.
Because the
trillions of dollars in
credit default swaps created to insure these risks
were mostly hidden from public view, no one knew for
sure which counterparties were most exposed, or
whether those contracts would pay off in the face of
the impending mortgage crisis. Once the mortgage
bubble burst, the lack of
transparency was then itself a reason for
investors to flee the markets until the hidden
complexities could be sorted out. Rational investors
rushed to the sidelines not because of the mere
existence of huge notional amounts of credit default
swaps or because the contracts themselves were
inherently faulty, but simply
because of the lack of sufficient information about
them.
In real time in 2008, the SEC
undertook enforcement and examination action to
limit the spread of
intentionally false and misleading market rumors,
which in any time of panic can run rampant, and
which are especially likely in the absence of accurate
market data. But the ultimate
solution would lie not only in enforcement but in
greater transparency that provides investors with
better information.
The lack of transparency in
the CDS market has been cited to justify the decision
by the Federal Reserve and the Treasury to commit
$85 billion to the government rescue of the insurance
conglomerate American International Group,
because from their perspective, they could not
determine whether those who held
AIG’s $440 billion in credit default swaps might
suffer crushing losses if those instruments weren’t
honored. It is certainly true
that regulators, just as other market participants,
lacked the necessary information to understand the
risks that these exposures posed.
The cost of
this uncertainty, and the government's acting on the
fear of what might ensue, was enormous in terms of
taxpayer dollars. Less than three weeks
after it was announced, the AIG rescue had escalated
to $123 billion, and four weeks later, to $167
billion. Further taxpayer risk
was added in March 2009, when Treasury exchanged its
November 2008 investment of $40 billion cumulative
perpetual preferred shares for new preferred shares
with revised terms that more closely resemble common
equity. Treasury also committed to a new
$30 billion equity capital facility for AIG.
As large as AIG's swaps exposure was, it
represented only 0.8 percent of the
$55 trillion notional value in
credit default swaps then estimated to be
outstanding — more than the gross domestic product of
all nations on earth combined. This was a
significant change from eight years earlier, when
Congress specifically decided not to regulate credit
default swaps in enacting the Commodity Futures
Modernization Act. At that time, this
market had not yet exploded in size.
Then-SEC
Chairman Levitt testified against regulation of OTC
derivatives before the House, and joined with two
other members of the President's Working Group on
Financial Markets, Treasury Secretary Robert Rubin and
Federal Reserve Chairman Alan Greenspan, in their
November 1999 report, “Over-the-Counter Derivatives
and the Commodity Exchange Act.” President Clinton’s Working
Group envisioned no systemic risk from such
derivatives since “private counterparty discipline” —
investors’ natural desire to keep their own risks to a
minimum — would work to protect the broader financial
system.
But the market for credit
default swaps mushroomed toward the end of the decade,
doubling in size in the two years before the market
collapse. And as the market grew, private
counterparty discipline could not substitute for
publicly available market data.
Despite
the growing size of the market, placing a value on
credit default swaps and the mortgage-related
securities they insured consisted largely of buyers
and sellers of swaps relying on
financial models that couldn’t predict the mortgage
market meltdown. (This same
fundamental flaw undermined the approach of banks and
bank regulators in the traditional banking system
outside the SEC’s jurisdiction, and of the investment
bank holding companies within the SEC’s voluntary
program.) The CDS market also
relied too much upon the credit
ratings of the reference securities and of the
firms selling the credit default swaps, and these
ratings underestimated the risk.
A fundamental
failing of the regulatory and market structure for OTC
derivatives in 2008 — and still today — is that
counterparty risk is not
transparent. This lack of
information about risk makes it difficult not only for
market participants, but regulators as well, to
understand and assess risk
concentrations and interrelations. As it is now, it is
often impossible even to know who stands on the other
side of a swap contract, and this increases the risk
involved.
As Chairman, I recommended that
Congress urgently act to fill this regulatory hole by
passing legislation that would
not only make credit default swaps more transparent,
but also give regulators the power to rein in
fraudulent or manipulative trading practices and help
everyone better assess the risks involved.
Now, two years later, Congress is finally nearing
action on this urgent priority. In addition to
recommending legislation to provide for the use of one
or more central counterparties and the on-exchange
trading of standardized swaps, I recommended that
Congress require dealers in non-standardized swaps
traded over the counter to publicly report both their
trades and the value of those trades. In addition, I
recommended that the Securities and Exchange
Commission be given explicit authority to issue rules
against fraudulent, deceptive or manipulative acts and
practices in credit default swaps.
Because of
the truly global nature of the
over-the-counter derivatives market, U.S. national
legislation and regulation will need to be closely
coordinated with governments in other major markets.
The climate for such cooperation
is good, because the cross-border impacts of the
current market problems are obvious to all.
Transparency is a powerful
antidote for much of what occurred in the
financial crisis, and this is nowhere more true than
in the derivatives markets. Our markets function
best when everyone can see exactly which transactions
are occurring and what the instruments being traded
are worth. Addressing the lack
of regulation and transparency was urgent two years
ago, and it remains so today.
Future Oversight of the Shadow
Banking System
As this Commission, the
Congress, and the executive branch
seek to infer lessons
about regulation from the experience of the financial
crisis, and to eliminate the current
regulatory gaps in which
there is no statutory regulator for investment bank
holding companies and no regulation of the vast market
for credit default swaps and many other derivatives,
the analysis should begin with a recognition of each
agency's core competencies.
The mission of the
SEC is investor protection, the maintenance of fair
and orderly markets, and the facilitation of capital
formation. The mortgage meltdown
and the ensuing credit crisis demonstrated that where
SEC regulation is strong and backed by statute, it is
effective — and that where it relies on voluntary
compliance or simply has no jurisdiction at all, it is
not.
The SEC’s traditional strengths are law
enforcement, public company disclosure, accounting and
auditing, and the regulation of exchanges,
broker-dealers, investment advisers, and other
securities entities and products.
This is a very different range
of specializations than possessed by, for example, the
Federal Reserve.
As former Chairman Alan
Greenspan testified recently before this Commission,
“the Federal Reserve is not an
enforcement agency,” and “has no enforcement division,
for example, as does the SEC.” The SEC’s role in
civil law enforcement is the reason that, in contrast
to the Treasury and the Fed, it remained fiercely
independent from the investment banks and other
regulated entities. This point bears
emphasis going forward. Strong securities
regulation and enforcement requires an
arm's-length relationship, and the SEC's sturdy
independence from the firms and persons it regulates
is unique.
The Fed’s tradition of “prudential
supervision,” shared by other commercial bank
regulators, stands in contrast. Prudential
supervision is focused on applying regulations in a
manner consistent with the specific characteristics of
each intermediary. It seeks to avoid an
excessively prescriptive approach, preferring where
possible general principles supplemented by guidelines
for application, and recommendations on acceptable
practices in widespread use by banks. This
more subjective approach to
regulation requires for its successful implementation
a high degree of collaboration between the bank
supervisor’s staff and personnel of the banks
themselves. The significant difference
between this approach and the SEC's tradition of
arm's-length, prescriptive rules and aggressive
enforcement has historically been a barrier to
complete information sharing between the SEC and
commercial bank regulators.
The Fed’s
tradition of prudential supervision is reflected in
its governance. For example, banks
regulated by the Federal Reserve Bank of New York
elect six of the nine seats on the Board of the New
York Fed. During the financial
crisis, both the CEOs of J.P. Morgan Chase and Lehman
Brothers served on the New York Fed board. This is a significant
difference from the SEC, which is completely
institutionally independent from its regulated
entities.
Current SEC Chairman
Mary Schapiro recently
testified in the House that the SEC’s short-lived
experiment with prudential supervision in its
voluntary investment bank oversight program
“was a substantial departure
from the agency's traditional approach of establishing
clear rules and enforcing compliance with them.”
I agree with this
assessment, which highlights one of the reasons that
the program was fundamentally flawed from the
beginning. Likewise, it would be
a substantial departure for the Commission, in any
future regulatory reform, to be assigned
responsibility for the oversight of systemic risk.
Instead, regulatory reform
should build on existing strengths.Not only the current
crisis, but the significant corporate scandals such as
Enron and WorldCom that preceded
it, have amply demonstrated the need for independent,
strong securities regulation and enforcement. The SEC requires
public companies to disclose to the public their
financial statements and other information that
investors can use to judge for themselves whether to
buy, sell, or hold a particular security. Companies do this
through annual and quarterly
reports, as well as real-time announcements of unusual
events. Administering this periodic reporting system
has been a fundamental role of the SEC since its
founding 76 years ago.
The SEC regulates
the securities exchanges on which stocks, bonds, and
other securities are traded. The SEC makes rules that
govern trading on the exchanges, and also oversees the
exchanges' own rules. While the significant
stress of the financial crisis exposed dangerous
weaknesses in other areas of the regulatory system,
the fact that U.S. securities exchanges remained open
throughout the crisis (as they did not in some
countries) is silent testimony to what worked.
The SEC has also long regulated the securities brokers
and dealers who trade on the exchanges.
Its authority to do this comes
from the original Securities Exchange Act, written in
1934. Although the law has
been amended several times in the intervening 76
years, it lays out today essentially the same role for
the SEC that the agency has always had in this area.
During the financial crisis, the SEC’s
responsibilities in this core area were well met.
Despite remarkable blows to the investment bank
parents of the major U.S. broker-dealers, customers’
securities and cash were protected.
The
agency's Investment Management Division regulates
investment advisers, and also investment companies
such as mutual funds, under statutes written in 1940. During the financial
crisis the Division dealt ably with the potential
crisis in money market funds following the Lehman
bankruptcy, and worked closely with the Treasury to
facilitate its Money Market Mutual Fund Guarantee
Program.
The Office of the Chief Accountant
oversees the independent standard setting activities
of the Financial Accounting Standards Board, to which
the SEC has looked for accounting standards setting
since 1973. It also
serves as the principal liaison
with the Public Company Accounting Oversight Board,
established by the Sarbanes-Oxley Act to oversee the
auditing profession. During the financial
crisis this part of the SEC worked closely with the
Financial Accounting Standards
Board to deal with such issues as consolidation
of off-balance sheet liabilities, the application of
fair value standards to inactive markets, and the
accounting treatment of bank support for money market
funds. Above all, the
SEC is a law enforcement agency.
Each year the SEC brings hundreds of civil
enforcement actions for violation of the securities
laws involving insider trading, accounting fraud, and
providing false or misleading information about
securities and the companies that issue them. In the
runup to the financial crisis, many of these
enforcement actions prefigured the gathering storm in
the shadow banking sector.
In my second year as
Chairman, in May 2006, the SEC charged Fannie Mae with
securities fraud under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5, resulting in a
fraud injunction and a $400 million penalty.
The SEC charged Fannie Mae with
issuing materially false and misleading financial
statements for over six years. The SEC action also
targeted Fannie Mae's failure to revalue its
derivatives every reporting period, and reflect the
changes in its income statement. The effect of its various
violations overstated its income by least $11 billion
— requiring one of the largest restatements in
American corporate history. Likewise, the $400 million
penalty on Fannie Mae was one of the largest in SEC
history.
This action was followed, in
September 2007, with securities fraud charges against
the other financial giant in the GSE sector of the
shadow banking network: Freddie Mac. The SEC charged that
Freddie Mac engaged in a fraudulent scheme over a five
year period to deceive investors about its true
performance and profitability. Like Fannie Mae,
Freddie Mac was subjected to a fraud injunction and a
large corporate penalty, but also separate penalties
against its officers.
If adherence to core
competencies is the touchstone for sound regulatory
reform, the experience of the
financial crisis demonstrated just the opposite:
collectively, the federal government took a dramatic
departure from the statutory norms in response to the
events of 2008. Most significantly,
prior to the Federal Reserve's unprecedented decision
to provide funding for the acquisition of Bear
Stearns, neither the Fed, the SEC, nor any agency had
as its mission the protection of the viability or
profitability of a particular investment bank holding
company. Indeed, it had been a
fact of life in Wall Street's history that investment
banks can and will fail. Wall Street is littered with
the names of distinguished institutions — E.F. Hutton,
Drexel Burnham Lambert, Kidder Peabody, Salomon
Brothers, Bankers Trust, to name just a few — which
placed big bets and lost, and as a result ended up
either in bankruptcy or being sold to save themselves.
Not only is it not a
traditional mission of the SEC to regulate the safety
and soundness of diversified financial conglomerates
whose activities range far beyond the securities
realm, but Congress has given this mission to no
agency of government. In the future, the roles and the
powers of regulators must be clearly defined, their
responsibility to intervene to save specific
institutions or to let them fail must be clearly
delineated, and regulatory gaps such as those that
existed for investment bank holding companies must be
closed.
Much speculation has focused on
whether the government’s
extraordinary financial interventions,
beginning with the relatively smaller Bear Stearns and
ultimately extending to such enormous firms outside
the SEC’s regulatory jurisdiction such as Citigroup,
Bank of America, and AIG, were on balance ameliorative
or disruptive. And in the case of
Lehman Brothers, the question has often been asked
whether there was a legally available option to save
the firm. The discrepancy
between the rescue of the smaller Bear Stearns,
avowedly on systemic grounds, and the abandonment of
Lehman Brothers to bankruptcy is usually raised in
this connection. In attempting to
answer such questions, it is
important to bear in mind that the impact from a
regulatory action or inaction can have unintended
consequences.
Many analysts have
wondered why, following the collapse of Bear Stearns
and the alarms that set off for every investment bank,
Lehman’s management did not agree to sell the firm at
a lower price, or take other actions to save Lehman
earlier during 2008. One possible reason
is that Lehman — inspired by the fact that the much
smaller Bear Stearns had been rescued on the grounds
of its systemic significance
— was expecting that the federal government would
financially participate in any such transaction.
As late as the weekend of September 12-14, 2008,
when Treasury Secretary Paulson, New York Fed
President Geithner, and I met with the chief
executives of financial institutions concerning
Lehman, the attendees at that meeting themselves
appeared uncertain, at least initially, whether the
announcement that there would be no federal help for
Lehman was ironclad or negotiable. In recent testimony
to the House Financial Services Committee, former
Lehman CEO Richard Fuld testified that he had expected
the federal government to provide a “liquidity bridge”
that would stave off disaster.
Likewise,
the U.K. government’s unwillingness to support a
Barclays-Lehman deal may have been influenced by the
lack of such U.S. government participation. These expectations
may well have been created by the earlier public
announcement that Bear Stearns was too systemically
important and interconnected to be allowed to fail. Not unreasonably,
this could be taken to establish
the proposition that larger investment banks would
also be deemed too systemically important and
interconnected to fail. Individuals and firms may have
behaved differently if they had not been expecting the
government to intervene.
An important
lesson from these experiences is that clarity and
consistency in policy making are often as important as
the rules themselves. Individuals and firms
can best order their affairs if they know what rules
will apply. The lack of such
clarity may have contributed to the demise of Lehman
in September 2008, and to the panicked conditions
under which the other investment banks sought
strategic investment.
A final lesson is that
statutory reform is necessary to
close the regulatory gap that the SEC and the Fed
attempted to fill through an ongoing, ad hoc
collaboration. In this connection,
current SEC Chairman Mary Schapiro has endorsed an
Oversight Council that would be responsible for
identifying risk across the system.Among her reasons for
favoring this approach are that multiple sets of eyes
would ensure that different perspectives are brought
to bear on systemic risk
analysis, that the inclusion of multiple
agencies will reduce conflicts of interest, and that
tapping the expertise of several regulators will
ensure a higher level of sophistication in evaluating
risks posed by different kinds of institutions. These are all sound
reasons for favoring such an approach. But as the recent
SEC-Fed experience has shown, the mere existence of a
collaborative forum will not necessarily produce a
high level of information sharing. Clear lines of authority and
responsibility, drawn in statute, will be
important, as will clear mandates for deeper
inter-regulatory collaboration and timely access to
information.
Conclusion
The financial crisis exposed
weaknesses in regulated and unregulated areas,
not least of all the so-called shadow banking system. Failures in the
shadow banking system highlighted regulatory gaps. It
is urgent that these gaps be filled.
During the
crisis, the SEC used its regulatory powers in support
of other agencies and regulators, including the
Federal Reserve and the Treasury, whose
missions led them to act in
extraordinary ways that have (one hopes temporarily)
blurred the distinction between what is government and
what is private. I am pleased that the
legislative proposals the Congress is now considering
will serve to strengthen the SEC in its fundamental
mission of investor protection, and to address some of
the significant problems that have already been
identified. But many serious
issues will remain for this Commission
to confront and for future
legislation to resolve, in particular the status of
the GSEs which represent the largest element within
the shadow banking sector.
As your
Commission works to prepare
recommendations for the wisest structural solutions to
the problems that confront us, it will be important to
assign roles to the SEC and other parts of the
financial regulatory structure that build on their
strengths. This is one of the
most important lessons learned in the recent financial
crisis. If we heed these
lessons, I am confident that the financial regulatory
system of the future will provide a bulwark for
investor confidence and a more transparent and
flexible set of authorities for the federal government
to help restore and sustain American prosperity. BIS, Strengthening the
resilience of the banking sector December 2009 One of the main
reasons the economic and financial crisis became so
severe was that the banking sectors of many countries
had built up excessive on- and
off-balance sheet leverage.
This was
accompanied by a gradual erosion
of the level and quality of the capital base.At the same time,
many banks were holding insufficient liquidity
buffers.
The banking system therefore was not
able to absorb the resulting systemic trading and
credit losses nor could it cope with the
reintermediation of large off-balance sheet exposures
that had built up in the shadow banking system.
The crisis was further amplified by a
procyclical deleveraging process
and by the interconnectedness of systemic institutions
through an array of complex transactions.
During the most severe episode of the crisis, the
market lost confidence in the solvency and liquidity
of many banking institutions.
The weaknesses
in the banking sector were
transmitted to the rest of the financial system and
the real economy, resulting in a massive contraction
of liquidity and credit availability.
Ultimately the public sector had to step in with
unprecedented injections of liquidity, capital support
and guarantees, exposing the taxpayer to large losses.Testimony by Henry M. Paulson,
Jr. Before the Financial Crisis Inquiry Commission,
May 6, 2010
The
“shadow banking” system,
a term that refers to the large capital and credit
markets outside the traditional banking system that
provide credit for municipal governments,
corporations, and individuals for short, intermediate,
and long term funding needs. Before the crisis,
these markets satisfied at least half of consumer and
business credit needs and are one of the hallmarks of
our advanced and highly developed capital markets. They have greatly benefited our
nation, spurring growth and prosperity at all levels
of our economy.They have
enabled more people to receive
higher education, more people to purchase homes, more
people to start new businesses, and more people to
plan effectively for their children’s future.They have increased
consumer choice, stimulated job creation, and allowed
our system to diversify away from the large,
concentrated banks found in other capital markets. But like all activities in the
financial sector, these markets were fueled by the
global excesses and regulatory flaws I have already
discussed. Inside and outside the traditional banking
system, financial institutions overreached, financial
services were misused, and financial products were
misunderstood. In addition, our
regulatory system was
balkanized, outdated, and lacked the
infrastructure to oversee these markets, something I
had observed and attempted to reform throughout my
tenure at Treasury. When the crisis hit,
the stress it placed on these markets exposed many of
these flaws, and these flaws in turn extended and
exacerbated some of the effects of the crisis. These problems
must be addressed. Our financial system cannot move
forward without fortifying the weak parts of its
infrastructure. But in addressing these problems, we
must make sure we retain the benefits of the
underlying financial innovations. In our haste to deal
with the flaws in the non-bank financial system, we
should not move ourselves back to a system of
consolidated, monolithic commercial banks. I am
confident that a thoughtful process can achieve this.Secretary Timothy F. Geithner
Testimony Before the Financial Crisis Inquiry
Commission Causes of the Financial Crisis and the
Case for Reform, May 6, 2010
While the term “shadow banking”
has been given different meanings in different
contexts, we use it to describe the network of
institutions and financial activities that provide
basic bankingtype services outside the scope of
classic banking regulation. At its core,
banking is the business of taking deposits from
“savers” and lending those deposits to borrowers. The basic tension in
this business was perhaps best
described by Jimmy Stewart in “It’s A Wonderful Life”
when facing a run on his bank. Stewart responds to a
depositor who wants to withdraw his savings,
“...the money’s not here…your
money’s in Joe’s house…and in the Kennedy House, and
Mrs. Macklin’s house, and, and a hundred others…”
The challenge of
banking is managing the mismatch
between the needs of depositors who can demand their
money at any time, and those of borrowers who take out
a loan with no obligation to repay the funds for
months or years. The modern policy
framework for banking emerged in
the 1930s to address that inherent instability. It provides banks
with lender-of-last-resort privileges and, for a fee,
access to federal deposit insurance. But
this support does not come
without cost. It creates
moral hazard and encourages
banks to take excessive risks. Our regulatory
system, which includes activity restrictions, capital
requirements, and prudential supervision for banks is
designed in part to constrain that excessive
risk-taking. But this
regulatory system did not evolve to keep pace with
growth and innovations in our financial services
industry. The constraints
imposed by banking regulation were significant enough
to encourage activity to move away from banks in
search of lighter regulation, lower capital
requirements, weaker consumer protections, and better
tax and accounting treatment. Over time, the
size of this parallel banking system grew to the point
where it was almost as large as the entire traditional
banking system. At its peak,
this alternative banking system
financed about $8 trillion in assets. Many of these assets
were financed with short-term
obligations and in institutions or funding vehicles
with substantial leverage – leaving them with
relatively thin cushions of resources to protect
against the possibility of loss. This parallel
system came in many shapes and sizes.
Independent investment banks
like Lehman Brothers and Bear Stearns grew in size and
financed themselves in the overnight repurchase
agreement, or “repo” markets, which rely on assets or
securities as collateral. Asset-backed commercial paper
(ABCP) conduits and structured investment vehicles
(SIVs) were used by banks and a broad range of
other financial institutions as funding vehicles for
different types of assets. Specialized finance
companies expanded into a broad range of consumer and
business lending activities. These
institutions and funds were
financed by institutional investors and by money
market mutual funds, which purchased their short term
commercial paper, or lent to them overnight in the
repo markets secured by various forms of collateral.
Across this system, longer-term financial assets,
which necessarily had some risk of loss, were financed
short term, by investors and funds that had the right
to withdraw their money or refuse to continue to fund
a maturing obligation. This parallel system was
particularly vulnerable to a classic run or banking
panic. As the crisis
intensified, investors began to pull back. This forced
institutions in the parallel financial system to sell
assets to meet those demands. That pushed the price
of financial assets down further, leading to more
pressure on those institutions. Unlike a
traditional bank run, which is visible in lines
outside of banks as people rush to withdraw their
money ahead of a collapse, this
run was led by institutional investors managing mutual
funds and pension funds. The confidence
investors had in the value or assigned rating of the
collateral backing their loans or investments
evaporated. While this panic
might have been less visible than in the panics of
years past, it was no less real. As a result of
this run, aggressive policy measures were required to
prevent a second Great Depression. The
Federal Reserve, acting
under its emergency authorities, launched an
unprecedented expansion of support to preserve
liquidity in the parallel banking sector, lending
against collateral held by primary dealers in
investment banks, providing a backstop to commercial
paper markets. The
Treasury Department used
its existing authority to supply a temporary guarantee
of the money market fund industry. The
FDIC implemented
additional liquidity measures to stabilize the funding
base of the regulated banking system, including a debt
guarantee program and significant expansions of
deposit insurance. Congress enacted the
Emergency Economic Stabilization Act, making it
possible for the Treasury Department to make
preferred equity investments in banks across the
country. How Did This Happen? Despite the fact
that many call this the shadow
banking system, it was not hidden. It was
operating in broad daylight and
financed by sophisticated institutional investors with
bonds issued under the disclosures and protections of
the securities laws. And unlike the moral
hazard risk in banks and the GSEs, this market grew up
without any explicit or implicit
government insurance or any history of government
support in a crisis. This was a pure failure of
market discipline. Why did the system of oversight
in place for decades following the Great Depression
not protect against the growth of risk in this
parallel system? The history of
this crisis is full of examples
where regulators did not use the authority they had
early enough or strongly enough to contain risks in
the system. But a principal cause
of the crisis was the failure to provide legal
authority to constrain risk in this parallel financial
system.
Prudential
regulations were limited to banks, and did not extend
to the parallel financial system. The
Federal Reservedid not have any legal authority
to set and enforce capital requirements on the
major institutions that operated banking businesses
outside of bank holding companies,
no legal authority over
the investment banks, diversified financial
institutions like AIG, or the hundreds of non bank
finance companies competing with banks in the
mortgage, consumer credit, and business lending
markets. The
SEC had no legal authority
to set and enforce capital requirements on a
consolidated basis across the full range of activities
of the investment banks. The
Office of Thrift Supervision
became the holding company supervisor for an
array of large complicated financial institutions like
AIG, without having the ability to supervise them
effectively on a consolidated basis. No single entity had the
authority to act to limit the emerging risk in funding
markets financed by money market funds. No regulator or supervisor had
the legal authority to look across the financial
system and take action to prevent the diversion of
activity away from regulation. A system that applied
safety and soundness regulation only to banks was
unable to protect the overall safety and stability of
a financial system composed substantially of non-banks
that played a role traditionally reserved for
banks. Moreover,
accounting and disclosure
requirements and regulatory capital requirements
helped encourage the shift in risk to the parallel
financial system, without adequately capturing the
remaining exposure of banks to those risks. When the crisis
hit and huge swaths of the American financial system
got caught in the run on the parallel banking system,
many came running to the Federal Reserve for liquidity
and for protection. The emergency
financial response to the run that started in the
parallel financial system was necessary to protect our
economy from an even greater calamity. But if our regulatory
and supervisory systems had had the tools and
authorities to prevent risks from accumulating in
unregulated sectors of the financials system in the
first place, such a large emergency response would not
have been necessary. That is a key reason why
financial reform is so essential. Financial Reform
The financial reform proposals now being considered by
the Congress have been crafted to address these and
other failures and they are being complemented by
enhanced regulatory oversight of key aspects of the
shadow banking system.
•
Comprehensive Constraints on Risk Taking. The
proposed reforms will require the enforcement of more
conservative capital and leverage requirements on the
activities, whether on or off balance sheet, of all
major financial institutions. A company like AIG or
Lehman Brothers will not be able to escape
consolidated supervision by virtue of its corporate
form, and will have to operate on a level playing
field with large commercial banks and traditionally
regulated financial institutions. • Repo Markets. These
reforms will give the Federal Reserve the authority to
build a more stable funding system, take action to
address the unstable aspects of the short-term repo
markets, and ensure that these markets are used much
more conservatively in the future. These steps will
give clear authority to set risk management
requirements for these markets, including capital
standards, set standards for collateral requirements,
and to help ensure that settlement procedures are
robust. They will also create
enforcement authority to compel corrective actions as
risks build up, or when risk-management is inadequate. These authorities
will also reinforce stability and liquidity even in
times of market stress such as a terrorist attack or
acute financial crisis. • Higher Standards for Money
Market Mutual Funds. The SEC recently enacted
new rules to strengthen liquidity, credit standards
and disclosure in the money fund industry. More work remains to
be done in this area, and the President’s Working
Group on Financial Markets is preparing a report
setting forth options to reduce the susceptibility of
money funds to runs. • Rating Agencies, Disclosure,
and Accounting. These reforms will provide the
SEC with authority to limit conflicts of interest,
require greater disclosure to ensure more diversity in
ratings, and require regulators to reduce the overall
reliance on ratings throughout the supervisory system. The SEC will require
more extensive disclosure, including loanlevel data
for asset-back securities, to ensure that investors
have the information they need to make informed
decisions. Changes underway to
accounting standards will result in greater
transparency for a firm’s off-balance sheet
commitments, improve standards, and move forward
international accounting convergence. • Derivatives. These
reforms will bring comprehensive oversight and
transparency to the OTC derivatives markets. These
markets have proved to be a major source of
uncertainty and risk during periods of financial
disruption. The proposed reforms
will bring the bulk of these trades into central
clearing arrangements, ensuring full transparency and
reducing the degree to which financial contagion can
spread due to real or perceived counterparty credit
exposures. All dealers and major
market participants will be subject to tough
prudential standards, including margin and capital
requirements. And the SEC and CFTC
will have full enforcement authority to set position
limits and address fraud, manipulation, and abuse.• Resolution Authority.
These reforms will establish a resolution regime that
will give the government the necessary tools to safely
put failing financial institutions out of existence
without causing a panic or destabilizing credit
markets, and without exposing the tax payer to the
risk of loss. Conclusion When people look
back at this crisis, when they
look at the excessive risks taken by large financial
institutions, the natural inclination is to move those
risky activities elsewhere. To create stability,
some argue, we should just separate banks from “risk.” But, in important
ways, that is exactly what caused this crisis. The lesson of this crisis, and
of the parallel financial system, is that we
cannot make the economy safe by taking functions
central to the business of banking, functions
necessary to help raise capital for businesses and
help businesses hedge risk, and move them outside
banks, and outside the reach of
strong regulation. Download the 190 pages e-book: Discover
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important for professionals working in multinational or large
financial organizations.
These presentations are:
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Regulatory Arbitrage after Basel ii (233 slides)
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The Capital Requirements Directive (CRD) is
the common framework for the implementation of Basel ii in
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only for the implementation of the Basel ii framework in the 30
countries of the European Economic Area, but also around the world
for multinational banks and financial
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The presentations not only cover the European directives, but also
include topics like: Hedge Funds and the
Capital Requirements Directive, Securitization and the Capital
Requirements Directive.
QUESTION:
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ANSWER:
Because we have a very different Basel ii implementation in
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A. The bank is the regulated entity at the
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online certification programA.
The official presentations we use in our
instructor-led classes (700
slides)The presentations
have been updated after the Basel ii Amendment (July 2009,
Enhancements to the Basel II framework, Supplemental Guidance) - 100
additional slidesYou
can find the course synopsis at www.basel-ii-association.com/Certified_Pillar_2_Expert.htmB.
Up to 3 Online ExamsThere is only one exam you need to pass, in order to
become a Certified Pillar 2 Expert
(CP2E).If you fail, you must
study again the official presentations we have sent you (paragraph A
above), but you do not need to spend money to
try again. Up to 3 exams are included in the
price.To learn
more you may visit:
www.basel-ii-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf
www.basel-ii-association.com/Certification_Steps_CP2E_1.pdfC. Examples and Case Studies
You will be able to download examples and Pillar 2 supervisory
guidelines from countries around the world.
D.
Personalized
Certificate printed in full colorProcessing, printing,
packing and posting to your office or home3. Certified Pillar 3 Expert (CP3E) -
Distance learning and
online certification program
What is included in this
price:
A.
The official presentations we use in our
instructor-led classes (550
slides)The
presentations have been updated after the Basel ii Amendment (July
2009, Enhancements to the Basel II framework, Supplemental Guidance)
- 38 additional slidesYou
can find the course synopsis at www.basel-ii-association.com/Certified_Pillar_3_Expert.htmB.
Up to 3 Online ExamsThere is only one exam you need to pass, in order to
become a Certified Pillar 3 Expert
(CP3E).If you fail, you must
study again the official presentations, but you do not need to spend money to
try again. Up to 3 exams are included in the
price.To learn
more you may visit:
www.basel-ii-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf
www.basel-ii-association.com/Certification_Steps_CP3E_1.pdfC. Examples and Case Studies You will be able to download 18
Pillar 3 disclosures from banks around the world.D.
Personalized
Certificate printed in full colorProcessing, printing,
packing and posting to your office or home. 4.
Certified Stress Testing Expert (CSTE) -
Distance learning and
online certification program
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