Secretary General of the Financial Stability Board (FSB) Svein Andersen, First Deputy Chair of the Bank of Russia Ksenia Yudaeva and Russian Deputy Finance Minister Sergei Storchak speak about the results of the recent FSB Plenary Meeting in Moscow.
* * *
Transcript of the news conference:
Ksenia Yudaeva: So, the last major event of Russia's G20 Presidency has concluded. Australia will assume the Presidency on December 1.
It is symbolic that participants in this meeting discussed financial reforms. They have been on the agenda of the G20 from the very start, and it is already possible to sum up some results of the performance of the G20 and the Financial Stability Board.
Today we reviewed several major areas of focus, and decided to complete these reforms in 2014. I will mention them briefly. I believe Svein Andersen (Secretary General of the Financial Stability Board) will describe the issues that were discussed today in more detail.
We reviewed issues pertaining to the stability of the financial system, in particular, the stability of its systematically important institutions that are 'too big to fail.' We discussed two major issues - methods of choosing non-banking and non-insurance global systematically important companies and the elaboration of international rules for the resolution of global financial institutions.
The participants paid special attention to the shadow banking sector, particularly in Asia and primarily in China, where this is a huge problem.
We discussed in detail the OTC derivatives market. As you know, one of the G20 goals is to shift derivatives into organized exchange-traded financial markets. I'd like to point out that Russia has made substantial progress in this area. Recently we have tested our national counterparty, having thereby reduced risks involved in transactions with it.
We've also analyzed auditing and accounting issues. The participants also listened to the reports of regional consultative groups, and Sergei Storchak (Deputy Finance Minister) will tell you about the work done in Russia some time ago by the RCGs for the CIS countries.
In keeping with tradition, we discussed the financial risks on which financial regulators should focus their attention. We spoke about the current position of the financial system, potential risks and new institutions, for instance, ETF, that may become sources of risk. The financial system is much more stable now, but considerable volatility risks are still present. In this context all regulators were advised to conduct regular stress tests with severe scenarios in order to maintain stability of the financial system.
Let me emphasize once again that participation in the Financial Stability Board is very important for Russia. We are actively implementing the reforms suggested by the FSB. You know that we are vigorously introducing the Basel III elements, developing the market of exchange-traded derivatives and their repository, collecting information on derivatives. The Bank of Russia is compiling a list of systemically important national institutions. Not a single Russian financial institution has been included into a list of globally important ones, but Russia is working on a list of such institutions and measures on their regulation.
We are actively supporting the entire FSB agenda on financial stability. Consideration of interests and specific features of the developing markets by the FSB is of major importance to us. Naturally, we can introduce many recommendations only taking into account our specific features.
Now I'd like to give the floor to Mr. Andersen. He will tell you about the work of the FSB and the current meeting in more detail.
Svein Andersen: Thank you very much, Ksenia.
So, maybe I can flesh out a little bit more of the details on the work that we discussed on completing financial reforms in core areas following the large financial crisis that we have had.
Firstly, we divided things into four big areas. One of them is building resilient financial institutions. The second big area for us is ending the idea of institutions being ‘too big to fail.' Third is strengthening oversight of the regulation of shadow banking, appropriately. And the fourth area is over-the-counter derivatives reforms.
With regard to strengthening financial institutions, we are looking forward to the Basel Committee on banking supervision finishing up the definition of the leverage ratio. This is a piece of the Basel III framework that is to be completed in 2014, together with a proposal on the net stable funding ratio, the point of which is to ensure that the maturity structure of bank assets and liabilities are better aligned on the two sides of the balance sheet, which is something that provides for more stable banks.
We also discussed the work that the Basel Committee is doing to dampen variation in the risk weights that banks use in calculating their capital requirements, which is an area that is important for the comparability of capital standards and levels across countries.
With regard to ending 'too big to fail', the priorities of the FSB that were being discussed today will ensure that banks that are systemically important on a global scale have an adequate loss absorbing capacity when they fail. And the point here is to ensure that when these financial institutions have exhausted their own equity capital, it is not the public purse that pays for saving systemically important banks, it is the creditors and other investors in these banks. And in this area we will have a proposal developed by the next G20 Summit in Brisbane.
We are also working to address the fact that all of these institutions operate in many countries but, as they say, they die at home. And that means there needs to be coordination arrangements across many countries to deal with problems in these kinds of institutions. And we have agreed to make progress on this work, to ensure that authorities can recognize each other's resolutions, actions across borders.
Today we also approved the annual update of the list of global systemic banks. We will publish this list shortly, that is, next week.
We did a few more things. We approved work plans by the International Association of Insurance Supervisors to develop a comprehensive regulatory framework for internationally active insurance groups. And we agreed to release for consultation a methodology to identify non-bank, non-insurance G-SIFIs, and we will shortly publish a consultative report here.
Turning to the third area, shadow banking, I think Ksenia covered this well. Here we simply took stock of the policy development that remains to be done next year. They have to do with finalizing proposals on haircuts in securities financing transactions. This is a measure that will help to contain excessive build-up of leverage in some part of the non-bank, non-insurance sector.
On making derivatives markets safer, we are very encouraged that there's progress in implementing the regulations. There needs to be more progress in some countries to encourage a move to exchanges of derivatives trading, and there are still important cross-border coordination problems to resolve. Counties have not developed exactly the same rules, and these are global markets with global participation in virtually every important market. And the national rules need to be better aligned for this work, as well as we have intended.
So I think I will stop there for a second, and I can speak a little bit more about the volatility we discussed, and mention the fact that we did have a discussion on the bout of volatility in asset prices and capital flows earlier this summer. And the fact is that system has withstood that volatility well. We have every reason to believe that we are not finished with bouts of volatility of this sort. Therefore we recognize the importance of stress-testing, both for interest rate risk scenarios that are quite severe, and that stress-testing is a tool that could also very usefully be used to communicate about the resilience of the financial system to investors and the markets alike.
So, I will stop there. Thank you.
Sergei Storchak: Now all that I could say is to thank you all for gathering for this event - the Financial Stability Board Plenary Meeting - a highly technical although an international event, and a very important one. This is the governing body of our club or I should say an international organization.
Interestingly, within this meeting there was an intense discussion on the Financial Stability Board's future. The body as itself has been operating for five years now, and in hindsight we can say that, as compared with the achievements and progress in work for other international organizations, this club could give them a start, as here we made a global significant solutions in financial reforms "Globally important" and "globally significant" are descriptions we use here quite often.
I'd like to take this opportunity to highlight the role played in this process by the Secretary General, Mr. Andersen. Without his energy and enthusiasm (he has a handful of people under him), such great achievements would not have been achieved.
Press release will be given out a bit later. English-language readers will come across a host of curious phrases hard to translate into Russian - this is something we are working to improve in our club.
From the Finance Ministry side, the most important issue in the agenda was, of course: volatility in capital markets and its implications; possible policy measures to be undertake for disposing any abrupt change in the market situation. For emerging markets, this may be cohere with an abrupt shift in capital flows in any directions, with money flowing in and then out of economies, and then back into developed economies. This was the issue of a rather lengthy discussion today, although the results covered in press release - in keeping with tradition - were in a very neutral way. This will likely catch your eye in the press release. But believe me, the discussion was a quite active.
We had another equally intense discussion was held in late of October, when we organized RCG for the Commonwealth of Independent States meeting. The discussion was focused on financial system vulnerabilities in national economies. The most time during the meeting was devoted to the issue on the impact of euro zone crisis on the CIS countries and their possible policy responses. Russian experts had prepared a keynote report, which, actually, has become the foundation for the CIS Regional Advisory Group's work within the Financial Stability Board.
Today, as I've heard many of my colleagues stress the need to further enhancing the role of regional consultative groups. By extension, their close links and interaction with the Financial Stability Board could be a natural way for the Board to enlarge its scope for the different jurisdictions and national financial markets.
The issue of enlarging the Financial Stability Board always discuss in the FSB meetings. Looking at the FSB structure, you will see that the regional and country representation is disproportionate. Naturally, some of our counterparts are worrying about this situation. So we've agreed to launch the process for preparing solutions to make more balanced and more wide-ranging scope in the FSB from the global financial markets side.
That concludes my introduction. Thank you.
Question: You will publish a new list of systemically important financial institutions. Will it be longer or shorter? It's just for specification.
And now the question: We know that the European Central Bank acted unexpectedly yesterday. This and the statement made in Washington D.C. indicate that the global financial policy will be much softer than was predicted a few months ago. Did you discuss this at the meeting, and do you think that a softer policy could increase the risk of volatility, thereby creating bubbles in the bond, stock and real estate markets? Do you think the situation is more volatile after yesterday's announcement?
Svein Andersen: I haven't seen what happened yesterday, so I can't answer your last question. The FSB will publish a new shorter list of G-SIFIs next week and you'll be able to see it.
Question: Can we ask Ms. Yudayeva and Mr. Storchak to answer the question about the ECB's decision? Did they offer any recommendations regarding Russia's credit and monetary policy?
Second question: You mentioned the possibility of dramatic market changes that could affect the National Wealth Fund. How do you think it should be used?
Ksenia Yudayeva: Regarding the ECB decision, I don't think it was completely unexpected. After all, given low inflation rates and recent developments in Europe - actually, a decrease in the use of long-term refinancing operations (LTROs) has strengthened the euro - it was clear that Europe's monetary policy would be most likely moderated. After all, the actual 0.7% inflation rate is too far from the target of 2%, and so something had to be done. As for predictability or unpredictability, the Europeans have for a long time announced that they would use a softer policy for a long time, and there are no economic signs to indicate that the region's credit and monetary policy should be strengthened.
So I don't think it was a very serious decision. The decision itself and the anticipation before it was taken provoked a degree of volatility of the euro compared to other currencies. On the other hand, we believe that this volatility hasn't achieved a critical level. At least we don't see any major consequences of this in any markets, so the situation has not changed much in this regard.
As for volatility in general, we need to understand the following: on the one hand, we say that volatility now is currently high for a number of reasons, but in terms of the financial markets, they live in anticipation of something and they invent theories, both reasonable and unreasonable. And this certainly increases volatility. We are in a period of increased volatility now. As a rule, financial market volatility depends on the expectations of a regulator's decisions. In the past, it was the expectation of a decision to raise or lower interest rates, and the markets wait for a decision to cut back on or expand the number of non-standard monetary and credit transactions. But generally speaking, this is a common situation, and I don't think that volatility will increase considerably. The bank's decisions will have the standard results that we've grown used to in recent years.
With regard to the Russian economy, we see ruble/euro fluctuations that are typical and were to be expected following the ECB decision.
Sergei Storchak: Still, the first question concerned about the statement, that certain "bubbles" have appeared at the bond market. It's rather difficult to accept this point.
Loans actually have increased much lately. An interesting point: issuing bonds by the emerging markets are carried out of the balance. For example, there were few issues in May and June, but the number soared in September-October. According to the latest estimates, emerging markets will issue approximately $300 billion worth of bonds this year, just as they did the year before.
What does this mean? In 2002, the emerging markets raised the capital at about $10 billion. Just compare it: $300 billion and $10 billion. But the situation has recently radically changed. In the system there is money, and the emerging markets are successfully using this opportunity. I said successfully because the overwhelming majority of emerging markets have relatively low debt level. We have today some countries, whose debt level is reaching the dangerous level, but there is still a substantial distance to this.
In addition, they are working to modernize their government borrowing and public debt management policies. We successfully implement one of the G20's initiative, connected with adapting the Guidelines for Public Debt Management to new conditions. These guidelines were adopted more than ten years ago, but over the past year the countries that have been working to implement them introduced approximately 50 improvements and amendments. As a result, about 20 new articles can be added to the guidelines.
So on the one hand, borrowing has been increasing, but on the other hand, the national public debt management potential has recently improved a lot.
Regarding the management of the National Wealth Fund and the issue of sovereign funds in general, I can only say that I sighed in relief after it was announced at the highest level that the fund is our safety cushion.
This is exactly how we acted when creating the Stabilization Fund in the early 2000s. It was Mr. Kurdin's idea (Alexei Kudrin - Former Minister of Finance of the Russian Federation), this safety cushion. We used that cushion very actively during the crisis, which seems to have affected some of my colleagues, who now have a big desire not only to manage funds but also to spend them. Debates show that opinions on this issue differ, and the advocacy of a sparing approach to the managing the Reserve Fund and the National Wealth Fund is a solid stand that is based not only on the need to stimulate economic growth but also has political reasons.
Question: A question about shadow banking and specifically about the problem of shadow banking in China.
Just a few days ago there was a Regional Consultative Group Meeting in Asia, where the shadow banking issue was discussed. Shadow banking problems differ from country to country. My question is: can you estimate the size of the shadow banking problem in China in terms of GDP because there are varying numbers. Credit Suisse says it's about 40% if I'm not mistaken, and J.P. Morgan says 70% of GDP. What are your estimates and what are your proposals to battle with this problem?
Svein Andersen: We are about to release a global shadow banking monitoring report that shows aggregate numbers for shadow banking globally as well as individual countries and shows the composition as far as we understand it of those types of activities from country to country.
It is very important that we understand - all of us - that under the heading of shadow banking we include basically everything that is not banks, not insurance, not pension funds and bond markets which are activities that we all understand and are familiar with. And much of what happens in that sector is not a problem, not a financial stability issue. So there're parts of what's happening in shadow banking that can be a problem and we have experienced some problems during the post-crisis and in quite a number of countries. It becomes a big problem if shadow banking includes leverage and involves extending credit that is financed by very short-term money but extended to a further horizon. And it can be a problem if it is closely connected with the rest of the banking system but not capitalized for these banks.
China is in the process of undertaking a very thorough examination of shadow banking activity in China, but their results were not available in time for us to include them in this year's shadow banking monitoring report. They did speak to the preliminary findings of that research in the meeting today, and they will release a comprehensive report and assessment towards the end of this year. So given that, I won't offer any opinions on this until more is known about it, and whether and what types of problems might potentially result from it. But shadow banking has grown very rapidly and the issue remains on the agenda.
Sergei Storchak: I'd like to say a few words too. Journalists may like these figures. Personally, I was impressed by them. My colleague from Mexico, who spoke about shadow banking in some countries and the importance of cooperation with regional consultative groups, cited the following fact: he said that there were 11,000 hedge funds in one of the island states, probably a very small one, whereas there were only few hedge funds in his very large country. These figures show that the Financial Stability Board started acting to resolve the issue in the right direction. Hedge funds are small financial institutions, but if there are many of them, they can create huge problems. You probably know that during the St.Petersburg G20 Leaders' Summit the FSB adopted a roadmap towards strengthened oversight and regulation in the non-banking sector.
Question: The FSB plans to prepare a country report on Russia next year. Can you say when they will start working on it, and which elements will it highlight?
Svein Andersen: The FSB is undertaking an assessment of member-countries and a number of other countries that are averse to international cooperation and international information exchange standards. And there is a team that is looking into Russian compliance with these standards. They have just met and we expect that report to be concluded, at least in terms of being submitted to the FSB, sometime in the first half of next year.
Question: Mr. Storchak, Ms. Yudayeva said that one of the issues discussed by the FSB was regular stress tests. Did you discuss the possibility of synchronizing these stress tests and their parameters? Have you exchanged any data on this?
Sergei Storchak: Well, this is a question to the regulator body rather than the Finance Ministry. However, I'd like to say that there are certain methodologies. Countries, or rather jurisdictions and regulators, exchange information, in as far as they can, about the methods they use and the results of stress tests. If memory serves, the possibility of adjusting this work regarding global financial markets has not been in the agenda. On the other hand, the work of different jurisdictions in the European markets is coordinated automatically due to the structure of that market. But the FSB Secretary General knows this issue better than I do.
Question: Mr. Storchak, I remember what you said this summer, before the St.Petersburg G20 Summit. You said that the phrase ‘too big to fail' must be withdrawn that there should be no banks that the government is obliged to save, and that the Basel III principles are aimed at that too. And Ms. Yudayeva said these reforms should be completed in 2014.
Does this mean that a decision will be taken within the next few years according to which the government will not be obliged to save even systemically important banks, or will there be some criteria for preserving the ‘too big to fail' institutions?
Sergei Storchak: You definitely know that TBTF is a slang term, and that there is a reverse side to the issue. The TBTFs are a country's most powerful institutions that can attract huge amounts of capital funds to the markets and hence ensure the financing on the large construction or infrastructure projects. So I wouldn't say that the TBTF issue will dissipate. But the old approaches that made these institutions more loosely regulated and managed than medium- and small-sized national institutions will be abandoned. We must really deal with this issue. Many of my colleagues told today that this is an important issue for the Financial Stability Board and that we need to ensure the result in this sphere showing us that confirmed by the FSB Board decisions about its modernization, expanding its membership, the range of tasks were sound decisions. I believe that my colleagues in central banks will succeed. Thank you.