Cebs Risk Management Consultation Paper 2009 Text

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Start date: deadline: the committee of european banking supervisors cebs today publishes its revised consultation paper cp35rev on its draft guidelines on the management of operational risk in market related activities. The consultation is open to all interested parties, including supervised institutions and other market participants. In december 2009, cebs published its draft principles cp35 for a public consultation that ended on 31 march 2010. Cebs received written contributions from a broad range of market participants, most of which were supportive of the guidelines objective to achieve greater convergence of supervisory practices and enhance the operational risk management in market related activities by strengthening the internal governance, the internal controls and reporting systems of institutions.

Addressing the comments received led to a significant number of changes in the draft principles. Thus, cebs sees a benefit in a second consultation period so as to ensure that the principles and explanatory note are sufficiently clear. cebs submits its revised consultation paper for a second public consultation in line with cebs consultation practices published 5 august 2008 which starts today and runs until 23 july 2010. Comments received will be published on cebs's website unless respondents request otherwise.

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As the publication of the final guidelines would be later than originally planned, cebs now expects its members to implement the guidelines till june 2011. An implementation study will be done by cebs secretariat in the fourth quarter 2011. Start date: deadline: the committee of european banking supervisors cebs today publishes a consultation paper cp26 on draft implementation guidelines for three aspects of the revised large exposures regime. Following cebs's second advice delivered to the european commission in april 2008, a revised large exposures regime is now included in an amendment to the capital requirements directive crd.

The amended provisions need to be transposed into member states' national law by 31 october 2010 and will then be applied from 31 december 2010. Cebs has previously identified areas in which further guidance is needed in order to achieve convergent implementation and application of the amended provisions. Thus, the draft guidelines focus on three aspects of the revised large exposures regime: definition of ‘connected clients', and in particular the concept of ‘interconnectedness'. The last of these links into the corep framework to ensure a unified european reporting system. The draft guidelines set out in cp26 build on cebs's earlier advice to the commission. In addition, in elaborating this document, cebs has benefited from input provided by industry experts nominated by members and observers of cebs's consultative panel industry experts group on large exposures.

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cebs submits its draft proposals for a public consultation which starts today and runs until 11 september 2009. comments received will be published on cebs's website unless respondents request otherwise. a public hearing will be held on monday 7 september 2009 at cebs's premises in london, from 1 to 1 to allow interested parties to share their views with cebs. The recommendations on liquidity risk management of the cebs, drafted in september 2008 and extended with a follow up consultation paper in july 2009, are primarily focused on enhancing banks' internal risk management processes. More specifically, the cebs provided a conceptual framework to protect financial institutions against the threats of sudden market liquidity dry ups, as experienced in the autumn of 2008. According to the target of the committee of european banking supervisors cebs , european banks were devoted to build up their liquidity reserves before this summer.

The main goal: give credit institutions the means to face liquidity shocks without resorting to drastic adjustments of their business models. By constructing these safety perimeters, the cebs aims to protect the banking sector in times of extreme market stress, like it was observed after the bankruptcy of lehman brothers in september 2008. Before 30 june 2010, european banks were devoted to set up two types of buffers, aiming to withstand a liquidity stress over two time horizons: at least for one week and at least for one month. Regarding the appropriate composition of these liquidity cushions, the cebs called banks to be very selective, focusing on the safest and most liquid assets such as government bonds, cash and other highly liquid unencumbered assets. As has been demonstrated by the recent crisis, liquidity can fade away very quickly when a financial turmoil threatens to come to surface.

This is why the cushions have to be composed in such a way that they ensure the generation of liquidity within a short time and at a predictable value. In addition, the level of these liquidity buffers do not have to be harmonized, but have to remain tailored to the liquidity management strategy, the business model, and the risk tolerance of each bank. Giovanni carosio, chairman of the cebs, explained that these guidelines address the flaws in the liquidity risk management practices that were revealed during the subprime crisis. More specifically, the experience of the last three years has shown that liquidity and leverage, vastly overlooked by basel ii, are more important than capital. The basel ii standards proved to be largely irrelevant to the factors that caused the autumn 2008 near meltdown of global finance: lehman brothers had close to triple the core capital required by the basel ii standards when it crashed.

Sia partners points out that the risk profile of a bank, subject to supervisory control, was too often limited by analyzing accounting statements. Now, due to the cebs' guidelines, credit institutions are obliged to perform several simulations of financial shocks focusing on idiosyncratic, market wide stress and a combination of the two. However, this does not mean that it will be easy to implement in reality since no pre defined parameters were proposed by the cebs. On the other hand, inducing credit institutions to use similar stress scenarios bear the threat to pose systemic risks by causing them to trigger the buffers in similar market conditions. This is why the cebs dictated that each institution must engineer its own individual counterbalancing framework in accordance with its own exposure, the exposure of its clients and the nature of its business. The counterbalancing framework has to be seen as a derived plan to ensure the necessary funding for the execution of the planned business activity and the strategy over a longer term.

This capacity should enable to generate excess liquidity over and above a business as usual scenario in response to stress scenarios as well as for further liquidity generation. Oversea, the uk has been the frontrunner regarding some of the liquidity issues in the banking sector, laying the first milestones towards the strengthening of liquidity standards. The regulator of the british financial markets, the financial services authority fsa , has published the final details of its own rules in october 2009 based on the initial recommendations of the cebs in july 2009.

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