“Những thách thức về Quy chế tài chính thời kỳ hậu khủng hoảng kinh tế” là nghiên cứu Giáo sư Ania Zalewska, Đại học Bath, Anh Quốc, mang tới hội nghị VEAM (Vietnam Economist Annual Meeting ) 2015 "Challenges of financial regulation in the post crisis world" is the study Prof. Ania Zalewska, Bath University, UK, brought to VEAM 2015. Để biết thêm chi tiết về các hoạt động và nghiên cứu của DEPOCEN truy cập Website: http://depocen.org/vn/ LinkedIn: http://linkd.in/1GnHrHB Facebook: DEPOCEN

1. Challenges of financial regulation
in the post crisis world
Ania Zalewska
Centre for Governance and Regulation,
School of Management, University of Bath, UK
CMPO, University of Bristol, UK
9-10 June 2015, VEAM, Hanoi, Vietnam

2. Based on
• A. Zalewska, 2015, A new look at regulating bankers’ remuneration,
WP
• E.Ferrer, J.Salaber, and A. Zalewska, 2015, Consumer confidence
indices and stock markets’ meltdowns, European Journal of Finance,
forthcoming
• A. Zalewska, 2014, Challenges of corporate governance: Twenty
years after Cadbury, ten years after Sarbanes-Oxley, Journal of
Empirical Finance 27, 1-9
• A. Zalewska, 2014, Gentlemen do not talk about money:
Remuneration dispersion and firm performance relationship on
British boards, Journal of Empirical Finance 27, 40-57
• Other papers are referenced when referred to

5. L. Laeven and F. Valencia, 2013, Systemic Banking Crisis Database, IMF Economic Review 61(2), 225-270

7. Understanding the causes
• Financial Crisis Inquiry Commission (FCIC)
– Established: May 2009
– Published a report: January 2011

8. • We conclude widespread failures in financial regulation and supervision
proved devastating to the stability of the nation’s financial markets… we do
not accept the view that regulators lacked the power to protect the financial system.
They had ample power in many arenas and they chose not to use it.
• We conclude dramatic failures of corporate governance and risk management
at many systemically important financial institutions were a key cause of this
crisis.
• We conclude the government was ill prepared for the crisis, and its
inconsistent response added to the uncertainty and panic in the financial
markets.
• We conclude there was a systemic breakdown in accountability and ethics.
• We conclude collapsing mortgage-lending standards and the mortgage
securitization pipeline lit and spread the flame of contagion and crisis.
• We conclude over-the-counter derivatives contributed significantly to this
crisis.
• We conclude the failures of credit rating agencies were essential cogs in the
wheel of financial destruction.
FCIC report (signed by 6 out of 10 members)

10. Global economic forces and failures in U.S. policy and supervision
1. Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe
2. Starting in the late 1990s, there was a sustained housing bubble in the U.S
3. Excess liquidity, combined with rising house prices and an ineffectively regulated
primary mortgage market, led to an increase in nontraditional mortgages
4. Failures in credit-rating and securitization transformed bad mortgages into toxic
financial assets
5. Managers of many large and midsize financial institutions amassed enormous
concentrations of highly correlated housing risk
6. Managers of many large and midsize financial institutions amplified this risk by
holding too little capital relative to the risks and funded these exposures with short-
term debt
7. High risk of contagion .
8. A common shock
9. A rapid succession of 10 firm failures, mergers and restructurings in September 2008
caused a financial shock and panic .
10. Confidence and trust in the financial system evaporated, as the health of almost
every large and midsize financial institution in the U.S. and Europe was questioned.
The financial shock and panic caused a severe contraction in the real economy
According to them

12. According to Peter J. Wallison
• U.S. affordable housing policies of the former government-sponsored enterprises
Fannie Mae and Freddie Mac before they fell into government conservatorship in
2008
“…the Commission’s majority used its extensive statutory investigative authority to
seek only the facts that supported its initial assumptions—that the crisis was caused
by “deregulation” or lax regulation, greed and recklessness on Wall Street, predatory
lending in the mortgage market, unregulated derivatives and a financial system
addicted to excessive risk-taking. The Commission did not seriously investigate any
other cause, and did not effectively connect the factors it investigated to the financial
crisis.”
“why Congress bothered to authorize it at all. Without waiting for the Commission’s
insights into the causes of the financial crisis, Congress passed and the President
signed the Dodd-Frank Act (DFA), far reaching and highly consequential regulatory
legislation.”

15. 0
100
200
300
400
500
600
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Stockmarketindex,Jan1990=100
Belgium Denmark France Netherlands Spain UK
0
200
400
600
800
1000
1200
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Stockmarketindex,January1990=100
S&P500 NASDAQ 6 EU countries

17. “The houses that saved the world”
The Economist, 28 March 2002

21. USA: Remuneration in brief
• Securities Act of 1933 and 1934
– Companies are generally required to describe their executive compensation
programme for most recently competed fiscal year
• Internal Revenue Code of 1993: performance-based compensation is tax
exempt, while ‘fixed’ remuneration in excess of $1mln cannot be treated as
company’s expense
• SOX of 2002
• Prohibits personal loans to directors and executive offices (which were
commonly granted to facilitate conversions of options
• Puts restrictions on stock sales during retirement plan blackout periods
• Compensation Disclosure and Analysis Act of 2006:
– ‘Plain English’ statements on how much and in what form CEO and
CFO are paid
– Companies provide information about remuneration of CEO, CFO, and
three most paid executive and non-executive directors

22. Emergency Economic Stabilisation Act/
Troubled Asset Relief Program (TARP), 2008
• Recipients of financial support provided by TARP must establish (if
they had none prior to entering TARP) and maintain a compensation
committee (CC) during the remainder of the TARP period
• CCs have multiple tasks relating to the form and size of remuneration
offered and paid to SEOs and other employee compensation plans:
– “discuss, evaluate, and review at least every six months with the TARP
recipient's senior risk officers the SEO compensation plans to ensure that
the SEO compensation plans do not encourage SEOs to take unnecessary
and excessive risks that threaten the value of the TARP recipient”
– “do not encourage behaviour focused on short-term results rather than
long-term value creation, the risks posed by employee compensation plans
and how these risks were limited, including how these employee
compensation plans do not encourage behaviour focused on short-term
results rather than long-term value creation”

23. FSF Principles for Sound Compensation Practices,
Financial Stability Forum, 2009
• “Compensation practices at large financial institutions are one factor
among many that contributed to the financial crisis that began in 2007”
• “Multiple surveys find that over 80 percent of market participants believe
that compensation practices played a role in promoting the accumulation of
risks that let to the current crisis. Experts agree.”
• “Compensation must be adjusted for risk”
• “Compensation outcomes must be symmetric with risk outcomes”
• Compensation must be disclosed in “clear, comprehensive and timely”
manner to “facilitate constructive engagement with shareholders”

24. G20 Summits
• April 2009 (London):
– agreed “to endorse and implement the FSF’s tough new principles on
pay and compensation”
• September 2009 (Pittsburgh):
– agreed to the proposal of the FSB to “regulate compensation practices
to support financial stability”
– disclosure of compensation policies and structures
– limitation of “variable compensation as a percentage of total net
revenues when it is inconsistent with the maintenance of a sound
capital base”
– restrictions on granting multi-year guaranteed bonuses, and defer, tie to
performance, impose appropriate clawback and vest in the form of
stock or stock-like instruments a significant part of variable
compensation, as long as these create incentives aligned with long-
term value creation and the time horizon of risk

25. Dodd-Frank Act, 2010
• It is an amendment of the Sarbanes-Oxley Act (2002) and the Emergency
Economic Stabilisation Act (2008)
– 2,319 pages contained the blueprint for 243 rule-makings along with
numerous studies and reports
• Financial institutions are in primary focus, but it has consequences for the
non-financial publicly traded firms:
– Role of shareholders
– Board structure
– Disclosure of remuneration
• Executives, the median annual total compensation of all employees, the ratio of this
median to the total compensation of the CEO
• Disclosure whether any directors/employees were permitted to buy financial
instruments to hedge/offset a potential decline in the value of company’s shares held
as part of compensation
– Enforcement

26. Executive remuneration at the Dodd-Frank Act
Increased role of shareholders in determining remuneration
• Publicly listed firms are required to hold a non-binding shareholder vote:
– at least every three years on the compensation of executives named in the
proxy statement
– no less than once every six years on the frequency of the ‘say on pay’ vote
(should be 1, 2 or 3 years)
– On remuneration arrangements (if not voted on before, as above) that may
have arisen from some corporate transactions (e.g., acquisitions)
• Brokers cannot vote on behalf of their clients (unless specifically given
the authority by customers) to vote on remuneration issues, as well as
appointment of directors
• Shareholders are authorised to propose their own nominees for
directors and these have to be included in proxy materials distributed by
firms.

27. Remuneration at Basel II
Adopted FSF 2009 Principles to develop Pillar 3 Disclosure
Requirements for remuneration (2011)
• Remuneration disclosure (at least once a year & clearly
specified in content and form)
– Support effective market discipline
– Allow market to assess the quality of practices
• Exceptions can be granted
– Low level of risk (there is to be a threshold)
– Information is not important or confidential

28. Corporate governance and the financial crisis:
Conclusions and emerging good practices to enhance
implementation of the Principles, OECD, 2010
• Executive remuneration is a responsibility of the board.
• The boards set the strategic goals of the company and its associated risk
appetite.
– the board needs to establish and oversee enterprise-wide risk management systems
– internal control functions report directly to the audit committee or equivalent,
– it is good practice for the risk management function to be able to report directly to the
board.
• Compensation structure should meet a small number of performance
metrics based on these goals.
• An explicit governance process needs to be established that will also define
the role and duties of compensation consultants who are increasingly
important.
• “Good practice is for the process, remuneration structure and performance
to be made transparent through some form of remuneration report.“

29. European Commission, 2013
• The European Council of Ministers approved the fourth
Capital Requirement Directive (CRD-IV) which regulates
bankers’ variable pay:
– “the variable component shall not exceed 100% of the fixed
component of the total remuneration for each individual”
– Tougher or lighter restrictions can be imposed by individual member
states, but the upper limit of the variable component had not to
exceed 200% unless approved through a specific EU procedure.

30. Bankers’ bonuses
K.J. Murphy, Regulating Banking Bonuses in the European Union: a Case Study in Unintended
Consequences, 2013, EFM 19(4), 631-657

34. A few quotes
• “the government is not stopping RBS handing McEwan £1m a year in
“allowances” – in effect doubling his salary – as a route to sidestep the
EU bonus cap”
• “one shareholder in RBS warned that the bank might now have little
option but to increase salaries”
• “it is not easy to accept, but if RBS is to thrive we must do what it takes
to attract and keep the people who will help us achieve the goals. We
think that the right position of the business is to be commercial. (…) the
ability to pay competitively is fundamental to getting RBS to where we
need it to be”

35. Some regulatory issues
• Shareholders set compensation
– Bebchuk, Cohen and Spamann (2010); Fahlenbrach and Stulz (2011);
DeYoung, Peng and Yan (2013); Beltatti and Stulz (2012) , etc…
• Remuneration of material risk takers (MRTs)
– Capital Requirements Directives (CDR III, 2010): clear requirements
on how much of variable pay should be equity-linked and how much
deferrable, as well as the length of the deferral period.
– If supervisors of a bank feel that an MRT is following a risky strategy,
then the bank will be required to hold a Pillar 2 add-on, i.e., bank
specific extra capital requirement to offset the risk of the activity
• Interaction of regulation of remuneration with the new
regulatory framework

36. Features of banks
• Short term supply/long term demand for funds
– multiple equilibria
• Leverage ratios
• Systemic risk
• Payment systems – large interconnectivity
• Asymmetry of information (particularly smaller depositors)
Significant externalities (divergence between social and private
incentives) - potentially too much risk, too big to fail, etc.
Requires sector specific regulation

37. Capital and Leverage Framework
• Basel II
– Pillar 1 - capital requirements
– Pillar 2 - supervisory
– Pillar 3 - market discipline
• Basel III
– New capital, leverage and liquidity requirements
• Capital Requirements Directive IV (max harm)
• Capital Adequacy Ratio (risk weighted)
– Standardised approach
– Internal rating based approach
• Leverage Ratio

38. Bank Recovery and Resolution Directive
• Financial Institutions must be able to fail and restructure in
orderly fashion – removing barriers to exit - proportionate
• Stabilisation tools:
– private sector purchaser
– bridge bank
– bail-in
• Features:
– MREL (minimum requirements for loss-absorbing capacity)
– ‘No creditor worse off’ safeguard

39. Structural Reform
• Ring fenced banks requirement:
– USA: Dodd Frank Act
– UK: Financial Services (Banking Reform) Act, In force 2019
– EU: under negotiation
• Aims to minimize impact of failure – makes banks more
resolvable
• Separates core activities from trading
• Applies to big banks (£25bn +, UK)

40. Regulatory Challenges
1. Stability v entry: competitors or bedfellows?
• Weak regulation: TBTF can be an equilibrium
solution
• Competition objectives
• Better regulation provides confidence with
regard to quality of entrant

41. Quantity
Price
P

42. Regulatory Challenges
1. Stability v entry: competitors or bedfellows?
• Weak regulation: TBTF can be an equilibrium
solution
• Competition objectives
• Better regulation provides confidence with
regard to quality of entrant

43. Regulatory Challenges
2. Perception
• Understanding of protections and resolution
systems for specific banks
• Understanding of specific and general shocks
(matters for systemic risk)
• Scale or market power?

44. Regulatory Challenges
3. Digital Future
• Digital banks (access to accounts, etc.)
• ‘New’ digital payment systems
• New models: digital currencies, crowd funding,
etc.
Open data and APIs

45. Digital banks
• Often standard banking products but no branches
(telephone support but no telephone transactions) – aimed
at millennials.
• Parallel banks
• Flexible IT systems
• Cost to income ratio for digital bank of 30% compared to
50% for branch based model (Anthony Thompson (Atom)).
• Large banks rapidly moving transactions away from
branches.

46. Large scale innovation in payment systems from non-banks:
• Wrappers
Potentially large scale impact - Google Wallet, Apple
Pay, Paypal – essentially uses existing infrastructure
• Mobile money
M-Pesa (Kenya)
Digital currencies - Distributed ledger technology
Crowd funding, etc.

47. Regulatory issues:
• Will this bring disruptive competition and innovation?
• How much difference will this make to the ‘standard’ model
of regulation in the near medium term?
• IT quality is critical – does this raise concerns and, if so,
what should be done?
• Impact on innovation and entry (culture differences?)
• How does regulation develop over time as parties grow?

48. How much do we learn from history?