Bank of Tanzania joins mobile payment supervision

The unexpected strong growth of mobile payment services in Africa due to limited access to formal banking services has led the Bank of Tanzania and the Tanzania Communication Regulatory Authority to join forces and provide joint supervision of mobile money services in the country.

Many other central banks in Africa are expected to assume a supervisory role of money transfer services to ensure they are secure for customers.

Africa is experiencing an explosion in mobile money transfer services as banks and mobile providers compete for customers who would otherwise not have a bank account. The service provides an avenue for linking bank account holders to those without accounts, according to a new report by the Bank of Tanzania.

The Bank of Tanzania estimates that 9.2 million subscribers are registered for mobile payment services in Tanzania alone. Unlike Zambia, which has only two service provider providing mobile transaction, Tanzania has Vodacom, Airtel, Zantel and Tigo offering such services.

In Zambia, regional mobile operator MTN has partnered with Standard Chartered Bank to roll out mobile banking services in the country using an Unstructured Supplementary Service Data (USSD) platform.

"The roll-out will provide the bank's customers on the MTN network with access to mobile phone top-up throughout the world," said Standard Chartered bank managing director Mizinga Melu.

In addition to allowing both rural and urban users to have access to financial services without having bank accounts, the services have also minimized the risks of moving around with cash. However, the question of security and how subscribers can be assured that their money will not be siphoned from accounts has not sufficiently been addressed. Some people are still skeptical about the security of mobile commerce.

Many Africans, however, are now using mobile financial services to buy good, pay utility bills, buy mobile airtime as well as receive funds from abroad. Generally, most Africans do not have bank accounts and customers typically have to travel long distances to access traditional bank facilities.

Supervisory effectiveness – New report by Financial Stability Board

The Financial Stability Board (FSB) has just published a new report setting out recommendations for strengthening the Intensity and Effectiveness of Systemically Important Financial Institution (SIFI) Supervision. The report is based on an internationally coordinated assessment of lessons from the current financial crisis, and its key findings form part of the FSB’s overall recommendations on reducing moral hazard risk associated with SIFIs, which will be published following the Seoul Summit.

The report on “Intensity and Effectiveness of Systemically Important Financial Institution (SIFI) Supervision”, which has been prepared in consultation with the IMF, was endorsed by G20 Finance Ministers and Central Bank Governors at their meeting in Gyeongju, Korea, on 22-23 October.

The financial crisis revealed that certain national supervisory regimes failed to detect problems proactively and/or to intervene early enough to reduce the impact of stresses on large systemically important firms and ultimately on the financial system as a whole.

This happened for different reasons in different jurisdictions but generally included weaknesses in:

• the directives that drive the work of these organizations; 
• the powers and resources given to these organizations to deliver effective consolidated oversight and to address potential problems; 
• the strength of the supervisory methods used and the standards against which these authorities are judged in international assessments; and 
• the frequency with which self assessments are made of the methods deployed by supervisory authorities.

The goal of the new recommendations is to strengthen the intensity and effectiveness of supervision, particularly as it relates to systemically important firms.

Every jurisdiction must have a supervisory system that is up to the task of ensuring strict compliance with new regulations, delivering high quality risk assessments through the use of leading-edge risk detection methods, and intervening early to address problems in firms before those problems become too large to address in an orderly way.

The report contains 32 recommendations which focus on achieving four key outcomes:

1. Unambiguous mandates, independence and appropriate resources: All supervisory authorities must take steps to ensure that their supervisory authorities have unambiguous mandates, are free to act independently, and have access to the resources (quality and quantity) required to be effective.
2. Full suite of powers: Where supervisory authorities lack a full suite of powers to carry out early intervention, actions must be taken to correct those shortcomings.
3. Improved set of standards and methods: The expectations placed on supervisors must be higher. The standards against which supervisors are judged will be enhanced to reflect the higher complexity of the financial system and the firms that comprise it. The higher standards will also underscore the need to apply more intense supervisory techniques to SIFIs.
4. Stricter assessment regime: Assessors should have stricter and more relevant criteria against which they can assess to drive supervisors to high quality work, alert authorities to potential weaknesses in their oversight processes, and ultimately raise the effectiveness of supervision internationally.

While the recommendations are primarily aimed at making SIFIs less susceptible to failure, there are also lessons for the supervision of financial institutions more generally.

The FSB has asked standard setters and national authorities to follow up on these recommendations as they incorporate them into supervisory core principles and national supervisory frameworks respectively. For several key recommendations, standard setters and national authorities have been asked to report their progress to the FSB. FSB thematic peer reviews and IMF/World Bank FSAP assessments will assess national implementation and ongoing conformity with these higher standards.

Snap analysis by the experts: Implementation is key to Basel III success

The global "Basel III" deal on bank capital standards was reached at lightning speed by the usually slow moving regulators - substantive negotiations took about a year, compared to a decade for the current Basel II rules.

But implementing the new standards consistently over the lengthy phase-in period will be a headache for national regulators, and determine whether Basel III succeeds better than its predecessor in reducing bank sector risk.

• The Basel III rules are much tougher than Basel II, which failed to ensure banks held enough capital to withstand the worst financial crisis since the Great Depression.
• Although Basel III more than triples the amount of top-quality capital that banks will have to hold in reserve, there are several potential pitfalls in timing and content that could undermine the reform's effectiveness.
• The key aspects of the completed package will not all be phased in until the start of 2019, presenting a challenge for supervisors and their political masters to maintain momentum in their supervision of the sector. Lobbying by banks or an eventual return to boom times could blunt the will to enforce Basel III, as memories of the global credit crisis fade.
• The new capital conservation buffer of 2.5 percent, which is lower than some banks had feared, will not be fully in place until the start of 2019. At this time, the buffer plus the Tier 1 capital requirement will total 7 percent; in practice this is likely to become a solid floor for banks, because they will not want to face curbs on payouts such as bonuses, dividends and share buybacks. Falling below 7 percent could damage a bank's reputation among investors and in the money markets.
• The new capital rules are not the only fresh burden on banks; they should be seen in conjunction with a range of regulatory initiatives that together could have large and unpredictable effects on banks.

Banks will have to comply with the first new global liquidity standard from January 2015; this will increase pressure to build up reserves of cash-like assets.

Separately, regulators will introduce far tougher capital requirements on bank trading books from the end of 2011, and these will force some institutions to rethink whether they want to continue financial market trading.

Also, national regulators may still impose other surcharges on big, systemically important banks as they grapple with the "too big to fail" problem; this prospect could cause large banks to build up more capital than the Basel III rules, taken in isolation, appear to imply.

But there are doubts about how effective the new countercyclical buffer will be, if and when it kicks in.

"You have a bald number to protect against excess credit but bubbles tend to affect individual asset classes at different points in time so it's a blunt instrument. To manage risk you have to be more targeted," said Richard Barfield, director at PriceWaterhouseCoopers.

It will be up to each national supervisor to determine when banks on its turf should start building up a countercyclical buffer; in the past, this has been a recipe for widely different approaches by regulators.

• Implementation is likely to be more universal than it was under Basel II; this time the United States appears fully on board, after it failed to implement all of Basel II. However, the lengthy transition period means political and economic changes may have altered the intentions of U.S. regulators by the time compliance becomes mandatory.
• Some top banks already hold more high-quality capital than Basel III will require. But many banks may feel pressure to show investors they can comply with the new package sooner rather than later, in order to ensure they are not be lumped in with the stragglers in raising capital.

"I expect that what will happen is that the larger banks will move toward these figures ahead of the timetable," said Barfield at PricewaterhouseCoopers.

There are still controversial loose ends for regulators to tie up to make the Basel III package fully effective.

The announcement of full details of a planned cap on leverage and new liquidity requirements were delayed in July this year; their implementation is not due until 2018 once full details have been fleshed out, which will not be easy.

The consensus on Basel III could start to fall apart if unforeseen impacts or foot-dragging by some countries starts to give banks in certain places competitive advantages over peers elsewhere.

"There has been a tremendous focus on getting this done quickly and it has been done to the G20 timeframe, which is why we need this ongoing monitoring and ability for mid-course corrections," said Simon Hills, a director at the British Bankers' Association.

Basel III is at the core of the G20's efforts to apply lessons from the global financial crisis, and Sunday's agreement will allow G20 leaders meeting in Seoul in November to congratulate themselves by endorsing a major reform of banks.

But there is a risk that the G20 could put too much reliance on higher bank capital levels and not focus enough on strengthening other aspects of the financial system that were found wanting in the crisis.

"Apart from a consistent worldwide application, it's important that capital is just part of the process of improving financial stability. The other key factors are improved supervision, improved risk management and making those things happen as well is the difficult challenge," Barfield said.

For full details on what has been agreed by the Basle Committee please CLICK HERE to go to our “BASEL III” page.

Broad agreement reached on Basel Committee capital and liquidity reform package

The Group of Governors and Heads of Supervision (Group), the oversight body of the Basel Committee on Banking Supervision, met on 26 July 2010 to review the Basel Committee's capital and liquidity reform package. The Group is deeply committed to increase the quality, quantity, and international consistency of capital, to strengthen liquidity standards, to discourage excessive leverage and risk taking, and reduce procyclicality. The Group reached broad agreement on the overall design of the capital and liquidity reform package. In particular, this includes the definition of capital, the treatment of counterparty credit risk, the leverage ratio, and the global liquidity standard. The Committee will finalize the regulatory buffers before the end of 2010. The Group also agreed to finalize the calibration and phase-in arrangements at their meeting in September.

Mr Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group, said that "the agreements reached today are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis." He emphasized that "the Group of Governors and Heads of Supervision have ensured that the reforms are rigorous and promote the long term stability of the banking system. We will put in place transition arrangements that ensure the banking sector is able to support the economic recovery."



Mr Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank added that "a strong banking sector is a necessary condition for sustainable economic growth." He added that the announcements today should provide additional transparency about the design of the Basel Committee reforms, thus reducing market uncertainty and further supporting the economic recovery. Mr Wellink underscored that "many banks have already made substantial strides in strengthening their capital and liquidity base. The phase-in arrangements will enable the banking sector to meet the new standards through reasonable earnings retention and capital raising."

In reaching their broad agreement, the Group considered the comments received during the public consultation on the Basel Committee's proposed reforms, which were published in December 2009. They also took account of the results of the Quantitative Impact Study, the assessments of the economic impact over the transition and the long run economic benefits and costs. The Basel Committee will issue publicly its economic impact assessment in August. It will issue the details of the capital and liquidity reforms later this year, together with a summary of the results of the Quantitative Impact Study.

The key broad agreements of the Governors and Heads of Supervision are summarized in the “Annex” which may be downloaded from the BIS by clicking HERE.

Bank of England to take on a greater regulatory role

The Bank of England (BoE) may control a new regulatory committee as part of a number of proposals to change the way in which the financial services industry is supervised. A consultation document from the UK’s Coalition government outlines a strategy to set up a new Financial Policy Committee (FPC) in the autumn of 2010.

The creation of the FPC would provide the BoE with powers of macro prudential regulation. It will be headed up by the BoE’s new deputy governor with Hector Sant, the current chief executive of the Financial Services Authority (FSA), to be the first to take up the position.

Mark Hoban, financial secretary to the Treasury, said: “The Coalition government is delivering on its commitment to reform the financial system, to avoid repeating the mistakes of the recent financial crisis and to ensure that taxpayers are protected. “

He added that the launch of the consultation is a “crucial milestone” in its attempts to reform the industry.

The document also includes plans to create a Consumer Protection and Markets Authority, which would police conduct within the financial markets.

Bank of England publishes Financial Stability Report

The Bank of England published its bi-annual Financial Stability Report on 25 June. The Report is part of the delivery of the Bank’s strategy for its financial stability work, as set out in the Bank’s Annual Report 2010. The Report concentrates on the Bank’s assessment of conjunctural risks to financial stability. It was largely prepared ahead of the recent announcement by the Chancellor of the Exchequer of the Government’s plans to change the UK’s system of financial regulation.

The Financial Stability Report aims to identify key risks to UK financial stability and to stimulate debate on policies needed to manage and prepare for these risks. The Report is produced half-yearly by Bank staff under the guidance of the Bank's Financial Stability Executive Board, whose best collective judgment it represents, and following review by the Financial Stability Committee of the Court of Directors of the Bank of England.

Under the Banking Act, 2009 the Bank's financial stability objective is 'to contribute to protecting and enhancing the stability of the financial systems of the United Kingdom'. The Report is one vehicle to help it meet that objective.

In relation to current conditions, the Report notes that since December markets have focused increasingly on strains placed on sovereign balance sheets. In April, concerns over Greek sovereign risk spilled over to other European countries and developed rapidly into a generalized retreat from risk-taking. Inadequate transparency about sovereign exposures led to counterparty concerns and renewed strains in bank funding markets. In response, the IMF and European authorities put in place a substantial package of support. While these measures helped to stabilize conditions, market pressures have not yet abated. EU leaders also recently announced plans to publish the results of stress tests conducted on the largest European banks; this will be another important step.

In terms of resilience, the Report says that UK banks have raised their capital and liquidity buffers substantially, which has helped them weather recent tensions. But, in common with their peers, they face a number of challenges in the period ahead. UK banks need to maintain resilience in a difficult environment, while refinancing substantial sums of funding; they have a collective interest in providing sufficient lending to support economic recovery; and they will need over time to build larger buffers of capital and liquidity to meet more demanding future regulatory requirements. The new Basel regulatory regime will be agreed in the autumn. An extended transition to this new regime would enable banks to build resilience through greater retention of earnings, while sustaining lending. The new regime should include a buffer of capital which banks can use to absorb stresses, as well as a hard minimum. That buffer might need to vary over the cycle.

You can download the report at; http://www.bankofengland.co.uk/publications/fsr/2010/fsrfull1006.pdf

FSA chairman welcomes chancellor’s plans for regulatory reform

The Chairman of the Financial Services Authority (FSA), Lord Turner, has welcomed the changes to financial regulation outlined by the Chancellor of the Exchequer in his Mansion House speech and Hector Sants’ agreement to remain as Chief Executive of the FSA, leading the transition and the creation of a new prudential authority.

Lord Turner said: "The FSA now has the clarity of direction and timescale as well as the leadership that we need to meet the challenges ahead.

"In particular I am delighted that Hector, who has done so much to transform the FSA during the past few years, has agreed to lead the transition to the new structure in 2012, and to become the first Chief Executive of the Prudential Authority and a Deputy Governor of the Bank of England."

"The crisis demonstrated the need for new regulatory approaches and more intense supervision, and the FSA has already implemented major change. But it also demonstrated the need to bridge the gap between macro-prudential policy and the supervision of individual firms. The Chancellor's proposals for prudential regulation will enable us to do that, while building on the major changes we have made over the last few years. The timescale will enable us to manage the transition in a smooth and orderly way.

"On retail customer protection, the FSA has recognized the need for a shift in our past approach, moving to the more interventionist approach which we set out in our recently published Retail Conduct Strategy. The new Consumer Protection and Markets Authority will have a strong focus on this challenge, while also maintaining strong focus on conduct issues in wholesale products.

"There are important issues still to be resolved – in particular the arrangements for our Enforcement activities and for those Markets activities which relate to exchanges, clearing infrastructure and prudential issues – and we look forward to working closely with the government in considering the relative merits of different possible arrangements for these. But the overall future shape of financial regulation is now much clearer and we are in a strong position to create a future regulatory system which builds on the FSA's achievements over the last few years of major change."