Salzburg Global Forum on Finance in a Changing World » Overview

The Salzburg Global Forum on Finance in a Changing World is an annual high-level program convened by Salzburg Global Seminar that addresses issues critical to the future of financial markets and global economy in the context of key global trends.

Established in 2011, the Forum offers senior and rising leaders from the financial industry and public sector an opportunity for in-depth, off-the-record conversations on how to build inclusive, open and resilient financial systems and set an agenda for the future.

The Forum’s overarching goal is to facilitate critical analysis of the changing financial landscape and regulatory environment, comparison of practical experience around the world, understanding of technology-driven transformations, and open dialogue on issues of trust and ethics. Each summer, it convenes an internationally representative group of leaders from financial services firms, supervisory and regulatory authorities, consultancies, auditors, law firms and other professional service providers who share a belief that inclusive, efficient and stable financial systems are essential for sustainable growth, shared economic opportunities and prosperity. Going forward, the Forum will continue to explore key developments, strategic shifts and tipping points in global finance, and to help participants learn practical lessons and share international insights.


Andreas Dombret "The Bail-In is 'In' and the Bail-Out is 'Out'"
Andreas Dombret "The Bail-In is 'In' and the Bail-Out is 'Out'"
Andreas Dombret 
This speech was given at the Salzburg Global Seminar session 'Out of the Shadows: Regulation for the Non-Banking Financial Sector'. Mr. Dombret is a Member of the Executive Board of the Deutsche Bundesbank. Good afternoon, ladies and gentlemen, It’s a great pleasure to take part in this Salzburg Global Seminar. Many thanks for inviting me back. Over the next twenty minutes, I would like to share my views on how to deal with systemic risk and moral hazard. While concepts have been developed to initiate regulatory reforms, it troubles me tremendously to have to state that the “too-big-to-fail” problem still remains unresolved. Market participants continue to anticipate that governments will rescue systemically important financial institutions – or SIFIs – in the event of their failure. The resulting refinancing advantage is reflected in so-called rating “uplifts”. Rating agencies usually calculate two different ratings for banks. One is a “stand-alone” rating that measures a bank’s genuine creditworthiness. The other is the “all-in” rating which includes the likelihood and extent of external support available for the bank’s debt. The difference between these two ratings is the “uplift”. It delivers a proxy for funding subsidies, which are benefiting SIFIs. Although these uplift factors have recently shrunk to some degree, they unfortunately remain substantial. This could be taken as an indicator supporting my claim that the “too-big-to-fail” problem remains unresolved. However, in this regard we need to achieve two objectives at the same time. First, taxpayers should not have to foot the bill for bank failures and, second, systemic disruptions must be avoided. The experiences following the Lehman collapse five years ago show how important financial stability is – and how fragile. So, what can we do about the “too-big-to-fail” problem? Solving the “too-big-to-fail” problem
How to make bank failures less likely
I am convinced that overcoming the “too-big-to-fail” problem will require a multi-track approach. The main goal is to make SIFIs less likely to fail by increasing their loss-absorbing capacity. Basel III represents a landmark change in this respect. These rules are much more rigorous than any previous regulation, both in quantitative and qualitative terms. On top of this, global SIFIs face additional capital requirements, known as SIFI surcharges. Combined with other measures, such as more intensive supervision, these changes will enable banks to better cope with stress situations. I am aware of a somewhat disconcerting discussion about the perceived shortcomings of the new capital standards. Some argue that they are still not rigorous enough. Others argue that they are too complex. Yet neither of these criticisms is convincing. Basel III substantially raises capital requirements, and impact studies were carried out before the rules were finally endorsed. Now we should let Basel III take effect. Looking at the issue of complexity, it is true that risk measurement will never be perfect and that relying on internal models hampers comparability, among other things. However, simplicity can come at a cost, too, as it disregards the overarching need for risk sensitivity. Therefore, we need to strike a balance between risk sensitivity, simplicity and comparability. But the spirit of the Basel rules, particularly regarding risk sensitivity, should not be compromised, nor must their full implementation be called into question. How to make bank failures less systemic
While it is necessary to increase banks’ resilience, that alone is not enough to solve the problem. There is a second broad goal which is now increasingly recognized: we have to ensure that SIFIs can be resolved without disrupting the financial markets.But before discussing more specifically how to create effective resolution regimes, let me briefly touch on some suggestions for separating commercial from investment banking. As you know, the main argument in favor of such proposals is to avoid or restrict contagion. Proponents of this approach believe that separating deposit-taking and lending from investment banking would prevent spill-over effects. The idea is to create a category of rather traditional banks whose customers would be protected by deposit insurance schemes. On the other hand, those banks engaged in riskier and more volatile business could not rely on deposits, nor would they be rescued at the taxpayers’ expense. In addition, the separation could simplify group structures. This would facilitate risk management and supervisory scrutiny as well as resolution, if need be. However, as the boundaries between various banking activities are fluid it is difficult to draw a clear line between them. Consequently, structural interventions in banks’ business models must be carefully designed. They might help to solve the too-big-to-fail problem, but they are by no means a magic bullet. How to resolve a SIFI
Key Attributes of Effective Resolution Regimes for Financial Institutions
Without any doubt, we need effective resolution regimes for financial institutions. Unfortunately, the crisis has revealed a significant lack of suitable resolution instruments, especially in a cross-border context. This is why the G20 leaders, back in 2011, endorsed the Financial Stability Board’s “Key At-tributes of Effective Resolution Regimes for Financial Institutions” as a reference point for national resolution regimes. They set out core elements of national resolution regimes on a global level. For instance, in future every G20 country is to entrust restructuring and resolution functions to appointed authorities. Recovery and resolution planning will become mandatory in every resolution regime. Jurisdictions around the globe are currently contemplating their preferred resolution strategy for systemically important banks. Two stylized models have recently been set out by the Financial Stability Board: a Single Point of Entry- and a Multiple Point of Entry-strategy. The question behind these strategies is whether resolution tools will be applied by a single authority at the top level of a failing bank or whether they will be applied in a coordinated manner by more than one authority at the level of regional or national units of the bank. Another matter of priority is that resolution instruments, including the bail-in tool, have to be codified in national laws. The Key Attributes are quite a step forward. Implementing them will gradually align national resolution regimes. I am hopeful that this will significantly cur-tail the ability of financial institutions to hold taxpayers to ransom. It is now up to governments to transpose the Key Attributes into national legislation. The Financial Stability Board is closely monitoring this process. A recent peer review by the Financial Stability Board showed that implementation is still at an early stage in many G20 countries. Implementation efforts therefore have to be treated as an urgent matter in all jurisdictions. We would have to pay dearly for any delay. To summarize, we cannot accept any excuse for deviations from timely implementation. Europe’s implementation of resolution rules: key issues
In Europe, the implementation of resolution rules has been carried out through ECOFIN’s agreement of 27 June 2013.5 The Council adopted its general approach on the draft directive for the recovery and resolution of credit institutions and investment firms. I welcome the general thrust of the Recovery and Resolution Directive – or RRD. And I hope that the trilogue process with the European Parliament can be completed swiftly, as planned. Please allow me to look in more detail at three key issues relating to the RRD. First, the bail-in tool: this enables resolution authorities to write down the claims of shareholders and write down, or convert into equity, the claims of creditors of institutions which are failing or likely to fail. As predictability is crucial when it comes to allocating losses, I very much agree with the Council’s general approach stipulating a clear pecking order. Shareholders will be the first in line to bear losses, followed by clearly de-fined classes of creditors. Very few classes of liabilities are permanently exempted from any bail-in, with covered deposits being the most important category. I also broadly agree with the Council’s list of permanent exemptions – with only one reservation. Excluding all inter-bank liabilities with an original maturity of fewer than seven days could have far-reaching consequences, as it may well foster an unwanted bias towards short-termism. I would therefore argue that these liabilities should be shifted from the permanent to the discretionary category of exemptions. In general, the bail-in tool should enter into force in parallel with the other resolution tools, that is, in 2015. Second, I welcome the minimum requirement for own funds and so-called eligible liabilities. This will ensure that each institution has sufficient loss-absorbing capacity based on its size, risk and business model. Third, I wish to comment on resolution funds. As a general rule, the draft RRD requires member states to set up resolution funds, which are to be funded ex-ante by banks. Within ten years they should reach a target level of 0.8% of covered deposits. For the sake of compromise, the draft directive contains an exemption to the mandatory creation of a separate resolution fund. In this case the member state would have to raise at least the same amount of financing from mandatory contributions and make it available to the resolution authority upon its request. In my view, this mixing of public and private funds for resolution funding purposes is against the spirit of the RRD. Moreover, and to be frank, I wonder how this exemption can be applied in practice. All in all, the draft RRD is quite close to striking a sound balance between the conflicting objectives of harmonization and flexible rule-making. A high degree of harmonization is needed to ensure both predictability and a level playing field. However, a certain degree of flexibility is necessary in order to tailor resolution measures to the specific crisis situation. Where do we go from here? On 10 July 2013, the European Commission presented its proposal for a single resolution mechanism for the banking union. I firmly believe we should entrust a newly established European institution with resolution powers as laid out in the RRD. It must become a strong and independent body with full decision-making powers. If we agree this to be the objective, let’s find constructive ways to bridge an interim period until this can be realized. A transitional phase is probably inevitable, so as to allow the SRM to become effective more or less in parallel with the Single Supervisory Mechanism. This is essential, as the SSM and the SRM will be highly inter-twined and we should not launch the banking union half-heartedly. Concluding remarks
In summary, effective resolution regimes which also work in cross-border crises are crucial for solving the still unresolved too-big-to-fail problem. This will require international cooperation and adherence to standards. The fragmentation of markets and regulation under protectionist pressure must be re-versed. Although we have made some progress, especially conceptually, much more remains to be done, in particular in terms of implementation. Incentives and expectations are mutually reinforcing. Markets must be convinced that even a large, internationally active bank that runs into trouble can and will be resolved should there be a need to do so. Markets must be convinced that shareholders, creditors and the banking industry will pick up the bill and not the taxpayer. In short: the bail-in is “in” and the bail-out is “out”! I am aware that this is easier said than done. It will require firm political will. But it is very much worth the effort.Thank you very much for your attention.
Deutsche Bundesbank, Communications Department Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany, Tel: +49 (0)69 9566 3511 oder 3512, Fax: +49 (0)69 9566 3077 presse@bundesbank.de, www.bundesbank.de Reproduction permitted only if source is stated.
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Out of the Shadows
Out of the Shadows
Louise Hallman 
Next month will mark five years since what many regard as the start of the financial crisis—the collapse of the investment bank, Lehman Brothers. Since that fateful day in September 2008, those working in the banking industry have “learnt lessons the hard way”. Much progress has been made in establishing greater financial stability since then, but much still remains to be done. It is against this backdrop of stilted progress that this week 53 central, commercial and investment bankers, regulators, academics and other finance experts came to Salzburg Global Seminar for the session ‘Out of the Shadows: Regulation of the Non-Banking Financial Sector’. The session is being chaired by Sarah Dahlgren, Head of the Bank Supervision Group at Federal Reserve Bank of New York, and returning Fellow, Douglas Flint, Group Chairman of HSBC Bank Plc in London. Following on from last year’s session ‘Financial Regulation: Bridging Global Differences’, the three-day program opened with a progress review and an update on implementation and implications of regulatory reforms, in particular with regard to systemically important financial institutions and their cross-border operations. Over the next two days, participants will focus on this year’s special topic—the risks posed to financial markets by the non-bank financial sector, or “shadow banking”. According to the Financial Times, shadow banking is: “The system of non-deposit taking financial intermediaries including investment banks, hedge funds, monoline insurance firms and other securities operators.” But shadow banking remains a much-disputed term. Those working in the non-banking financial sector view the term as pejorative, preferring the terms “parallel banking” or “market-based banking”. They insist that there is nothing that the sector does which is “shadowy” or “obscure”, or even novel. There is even dispute as to what institutions the term covers. In addition to establishing exactly what they mean when discussing shadow banking, the participants, many of whom are returning Fellows from previous finance and economics session, will explore the following questions:
  1. Should banks be able to conduct operations in the shadows?
  2. Should non-bank institutions be able to operate as if they were banks?
  3. How systemically relevant are shadow banking institutions?
  4. How much non-bank credit intermediation do we want or need?
  5. What are the main trade-offs that need to be addressed in the regulation of non-bank institutions?
In typical Salzburg Global fashion, the session brings together a wide range of participants from the banking sector and those interacting with it. As well as very senior, established leaders in the industry—such as returning Fellows Flint; Andreas Dombret, Member of the Executive Board, Deutsche Bundesbank; and David Wright, Secretary General, International Organization of Securities Commissions in Madrid; and other session Faculty members, such as Steven Maijoor, Chairman, European Securities and Markets Authority (ESMA) in Paris; Joanna Cound, Managing Director for EMEA Government Affairs & Public Policy at BlackRock, the world’s largest money manager, based in London; and MEP Sharon Bowles—participants in the session also include much more junior, emerging leaders, who will be the decision-makers in years to come. This session is the third in Salzburg Forum on Finance in Changing World, which was launched in 2011 with the session ‘New Rules for Global Finance: Which kinds of regulation are useful and which are counterproductive?’. The report from the second session, held last August, ‘Financial Regulation: Bridging Global Differences’ is now available in our
Issuu library for easy online reading. A full report from this year’s session will be published in due course.
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Capturing Value vs. Profit
Capturing Value vs. Profit
Linda Mohapel 
Day 1: Reviewing The Landscape: The Business of Producing Social Good
 Sustainability is a trend word originally stemming from an environmental context. The nowadays much-used term “the triple bottom line” expanded the focus of financial returns to environmental and social concerns. Nevertheless, the three pillars are not yet equally weighted. Although accounting concepts are being adapted to explore the wider effects a company has on its surroundings (e.g. GRI, ESG standards…), we find ourselves in the incremental phase of changing a system which has worked for centuries. How is the concept of sustainability understood by society?
 Value is created by every market participant, and value goes beyond monetary results. In fact, it is much debated what impact corporations really have on society and the environment. The many inconsistencies in terminology about value and sustainability pictured sustainability more recently as new disciplines such as Corporate Social Responsibility (CSR), Philanthropy, or Environmental Management. But is sustainability really a discipline? The environmental challenges that we are facing concern ‘the one planet we have’, and can only be effective if countries collaborate across borders. Also, the escalating inequalities of life between the rich and the poor, and the increasing connectivity of global businesses appear to make sustainability rather a macroeconomic topic than an isolated discipline of one department in a company. Who is responsible for what?
 The question of responsibility and action taking is key position in this debate. The corporate world, governments, NGOs and independent research bodies, universities and entrepreneurs all have a part to play. Some questions were raised in addressing the issue of value versus profit:
•How can we move away from short-termism and promote long-term perspectives in investing and operations?
•Can new incentive structures bridge the way to producing increased social good?
•Does the agent theory distort the idea of responsibility and induce risk adversity?
•Is the informal economy key to change?
•Is our focus on metrics blinding our understanding of complex processes?
•Which role does education play in an era of change and how can we agree on which values to follow in an ever more globalized world?
•How can we change deeply-rooted behavior (leadership and enablers)?
•Should we start questioning the basis of doing business - the concept of capitalism? Day 2: Business as a Driver of Social Good
 There is no doubt that social good is created on different levels. But of all market actors, what role do companies play in the creation of social good? And do companies realize that public good is one of the biggest potentials for growth? The idea of shared value is one concept companies are starting to pursue. The central premise behind creating shared value is that the competitiveness of a company and the health of the communities around it are mutually dependent. Compliance and ecological sustainability can be seen as immediate risk mitigation. Shared value, in contrast, builds on long-term security of business activity by sustaining the health of the company and the surroundings it operates in. Nestlé, for example, focuses their shared value creation on Nutrition, Water, and Rural Development, as these reflect their core competencies focusing on operational improvements i.e. the supply chain.
 Importantly, shared value can be created intentionally and unintentionally. Though it seems to be a natural concept that companies provide products society desires, the traditional way of doing business has ignored its harmful externalities for ages and presents no longer a win-win situation. And yet there is no doubt that business growth happens in line with social value creation. The Western Union Company recognizes every social problem as a business opportunity. There is no trade-off between profit and social good, they announce. To anchor this vision within the company, employee´s performance is linked to sustainability metrics and so is the incentive scheme. Customer focus was also pointed out as being critical for producing social good. Placing the creation of social good at the heart of business operations is proclaimed to work for some companies. But what are some of the trade-offs between investment decisions and sustainable development? Should companies be obliged to off-set unsustainable practices in the future?
 More transparency in business operations, risk mitigation, and investment portfolios would help to better understand the real effects a business has on society and the environment. PHINEO, a German not-for-profit corporation, aims to strengthen the social sector by building bridges between social investors and nonprofit organizations. As a service agent it offers a unique concept of impact analysis to improve the reporting and legitimacy of NGOs/NPOs, which is not only in the interest of donors, but also creates essential learning capacity for the organization. The real impact of a business can only be determined by its net impact, which can only be assessed by a holistic analysis of all effects the business has on its surroundings; positive and negative, direct and indirect, short-term and long-term, intended and unintended. To assess ever more complex and far-reaching impacts we need to have the right information at the right place. There is certainly no shortage of information: 90% of the world´s data was created in the past two years. We now need technology to structure these data to supply meaningful information to diverse user groups. Markets For Good is an example initiative which aims at improving the system for generating, sharing, and acting upon data and information to strengthen the social sector. Day 3: The Power of Investors & Policy – Lengthening Investment Horizons
 Investors do not yet understand the additional value of impact investments and struggle to position the new products in their investment portfolios, panelist suggested yesterday. Despite the strong Environmental, Social, and Corporate Governance (ESG) movement, impact investing and investments in sustainability are not yet regarded as secure and profitable as traditional investment options. Impact investments are capital ventures with the intention to generate measurable social and environmental impact alongside a financial return. This may require longer investment horizons as impacts are longer-term outcomes. The investment community, however, is propelled by a short-term return cycle and increasing returns. That return is fundamental to an investment is out of question (else it would be classified as donation), but the timeframe from the initial investment to first returns may deserve more attention. Following a trend in the food industry, labeling of sustainable investments could help to provide more clarity and to build trust within the investment community. But does impact investing have the potential to become a mainstream product? And if so, how can we accelerate the share of impact investments on the market?
 New policies are demanded, e.g. an obligation to carry a certain amount of impact investments in the portfolio, to leverage the development of ‘social good’. Simultaneously calls are being made that only a change in attitudes, stimulated by good leadership, can continually drive sustainable development. Although the current investment landscape often seeks the ‘quick-back recipe’, impact investing is no longer unknown and becoming more transparent. New forms of impact investment may delay returns, but similarly to a venture capital firm assisting a start-up in the early-stages of growth, the corresponding upside through growth and further spin-offs is enormous.
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Crossing the mountains and building the bridges between NGOlandia and Bizworld
Crossing the mountains and building the bridges between NGOlandia and Bizworld
Louise Hallman 
Although Salzburg Global Seminar likes to do things a little differently to most convening spaces – bringing together “all of the pieces of the jigsaw” to solve “globally interactive problems” creatively, as Program Director for Gender and Philanthropy, Nancy Smith explained in her opening remarks – most of the participants of the seminar ‘Value vs. Profit: Recalculating the Return on Investment in Financial and Social Terms’ probably weren’t expecting to be quite so creative in the very first session. Eschewing the usual approach of opening a seminar by giving a lecture, Smith decided instead to draw a map – a map of the landscape of producing “social good” and addressing social challenges. The two sectors of business and non-profit, non-governmental organizations are like two lands – Bizworld and NGOlandia – separated by a seemingly impassable mountain range, Smith explained.  The mountains are starting to give way smaller hills and in the lower plains, small “hybrid” settlements are starting to spring up, such as ‘benefit corporations’ – businesses required by law to create general benefit for society as well as for shareholders.  In these two lands, they speak a similar language, using terms like ‘value’, ‘profit’, ‘investment’ and ‘return on investment’ – but that doesn’t necessarily mean that the two lands fully understand each other. (Another map was drawn by one group of Fellows depicting the two lands as islands, with the rough yet fertile isle of NGOlandia in the process of building a bridge to the heavily built up but increasingly resource-scarce Bizworld preferring the less permanent crossing of an airplane.) Despite the wry smiles and chuckles in Parker Hall, the visual (and in some cases even aural) metaphors proved a serious point – these two sectors are often acting separately and their differences need to be bridged if society’s “wicked problems” are to be tackled effectively. Over the course of the three days at Schloss Leopoldskron, Fellows will reconsider this landscape, to look at how business can work together with non-profits to create social good, whilst still satisfying their business needs – the creation of “shared value”. Shared value goes beyond traditional ideas of corporate social responsibility – which has long meant businesses “earning money over here in Bizworld and giving it away over there in NGOlandia,” as one Fellow articulated. As explained by the prominent sector publication, the Stanford Social Innovation Review,“shared value is created when companies generate economic value for themselves [profit] in a way that simultaneously produces value for society by addressing social and environmental challenges. Companies can create shared value in three distinct ways: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations.” From Saturday, October 13 to Tuesday, October 17, 42 Fellows from 16 countries, led by speakers from organizations including Nestlé SA, Western Union Company, UBS, FSG, PHINEO, the F.B. Heron Foundation, and Preventable Surprises, will consider their own visions of this landscape, looking at how best to use business as a driver of social good, improve the social sector business, harness the power of investors and better develop policy tools and other mechanisms to identify the most important “levers and actions” for change and deal with these acute societal needs and wicked problems. By her own admission, Smith’s map of the shared value landscape is far from perfect; ‘where do governments, the “bottom of the pyramid” – the 4 billion people who live on less than $2 per day – and society as a whole fit in?’ were just some of the omissions pointed out by Fellows. The main challenge for Fellows in the days to come calls for them redraw their own maps, establish where in the landscape their own organization is located and eventually better navigate this changing environment.
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Michael Bradfield and the "Bradfield Plan"
Michael Bradfield and the "Bradfield Plan"
Louise Hallman 

Following the intense three days of presentations, debates and group discussions, there were some murmurings that little had been achieved during the Salzburg Global Seminar session on ‘Financial Regulation: Bridging Global Differences’ – not so says Michael Bradfield, Salzburg Global faculty member and former general counsel of the US Federal Reserve Board and Federal Deposit Insurance Corporation.

Over the course of the session, numerous suggestions had been made as to how to regulate the banks in order to avert another crisis as seen in 2008; splitting the banks up along host countries’ GDP, separating certain commercial and investment banking practices, encouraging banks to operate as subsidiaries instead of large international corporations. Bradfield, however, has an alternative suggestion.

Taking inspiration from the “very influential and very useful” debates during the session, on the final afternoon, Bradfield presented his (soon-to-be-re-named) ‘Bradfield Plan’ – separating the international and domestic banking activities of banks under different regulatory regimes.

Speaking later in the evening in the Max Reinhardt Library at Schloss Leopoldskron, home to Salzburg Global, Bradfield explains his proposal in more detail.

“The Bradfield Plan is an attempt, in the light of the very interesting and comprehensive discussions we’ve had about the possibilities establishing a legal framework – a treaty or other international agreement framework,” explains the American lawyer, “for the conduct of financial supervision of banking organizations.

“It appeared to me from the conversations [during the session] that it would not be feasible to establish such an arrangement for a very substantial time in the future...I was seeking to find a way of establishing a framework that could be established more quickly than one that applied across the board to all banks in really all countries; so what I suggested was that the supervisory regime would apply only to the international operations, international business activities of banks, and thereby leave to domestic authorities full jurisdiction and no limitation on their application of their supervisory responsibilities with respect to the domestic activities of the banks.”

He continues: “You have to have an enforcement mechanism for this and what my suggestion...is that the International Monetary Fund (IMF) would have the responsibility for certifying the international activities of banks, conducted within the parameters decided in accordance with the rules and regulations adopted by the governing mechanism. 

“In addition to the specifics in the treaty as to what would be covered, in terms of supervisory responsibilities, I would leave open the ability of the governing body to adopt new terms and conditions so that it could respond to changes in markets as markets evolve and the international activities of banks evolve with it.

“And to provide some discipline, the Fund would bi-annually assess compliance. If a bank was not in compliance it would lose the ability to engage in international financial transactions, and all other banks would be obligated to block their transactions.”

But would this be enough? Given the recent case against Standard Chartered Bank, which saw it accused of enabling Iranian transactions banned under international sanctions, and the scandal concerning the fixing of the inter-bank lending rate (LIBOR), how would the enforcement mechanism ensure that all banks would comply and actually stop theirs and each others’ international financial activities?

“Well, they’re parties to the agreement, and will have agreed to do so,” states Bradfield, matter-of-factly.But what would be the consequence for the banks’ non-compliance?

“I didn’t go so far as to assume that that would happen,” admits Bradfield, who acknowledges his plan is still in its early days.

“I would think that banks would be willing to do that because that protects the international environment in which they operated and they would be running counter to that. 

“Now, it’s possible that someone would be doing it for the money and I don’t see any problem with developing sanctions,” he hastens to add.

“If they engaged in that activity, they too would lose their authority to deal and engage in international activities, which is terrible for a bank which is substantially engaged in that – to suddenly be inhibited would be a significant disaster.  Its stock would plummet. The fear of the consequences would force banks to comply.”

Improving banking regulation is something Bradfield feels strongly about, calling it “a very important, useful, desirable objective.” His experience in the field is extensive, with his resumé not only including time as general counsel of the Federal Reserve Board and later the Federal Deposit Insurance Corporation, overseeing the legal division, responsible for legal work on regulatory issues, but also assistant general counsel for the US Treasury Department, and as senior partner for prominent law firm Jones Day

Explaining the reasoning behind his plan, the now 78-year-old Bradfield says: “We had terrible things happen in the international financial system; people suffered very substantial financial losses, high levels of unemployment, riots in countries like Greece... What is something we can do about it?

“So I said, let’s try to narrow the scope of application and still have an enforcement mechanism and a system that protected the intervention of the international financial environment, but left a big chuck of responsibility to domestic regulators. That’s the motivating force and rationale.”

Whilst Bradfield’s Plan – which he modestly intends to rename – is still in need of further fleshing out, he believes he’s found a lot of like-minded people in his fellow faculty members and Fellows in Salzburg.

“I think there was a lot of interest,” he beams. “All that I could expect was that there’s interest and that it’s worth exploring, and I heard that from a number of people...

“There’s a lot of details that need be explored and accounted for and modifications made to deal with problems.  That’s as far as we can go at the present moment. And we’ll meet again next May to sign the agreement!” he adds optimistically.

Perhaps the plan or agreement can be re-named the ‘Salzburg Plan’?

“A very good suggestion!” exclaims Bradfield with a nod and a smile.

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“The surest solution to ‘too big to fail’ is to break up the banks”
“The surest solution to ‘too big to fail’ is to break up the banks”
Louise Hallman 
In the balmy surroundings of the Robison Gallery, on the top floor of Schloss Leopoldskron, looking out the wide-open windows across to the Festung Hohensalzburg, 38 central and private bankers, regulators, financial experts, academics and journalists gathered on a Friday night to debate the motion: “The surest solution to ‘too big to fail’ is to break up the banks”. Chaired by Secretary General, International Organization of Securities Commissions, David Wright, and held as part of the program of the session ‘Financial Regulation: Bridging Global Differences’, the two teams* gave their for and opposing arguments before the debate was opened to the floor and eventually a vote was taken.  Despite the late night fixture and the warm venue, the debate was lively and fierce as participants hankered for the microphone to make their case. Below are some of the quotes presented in the main cases for and against the motion.   *Please note that as the debate was held under Chatham House Rules, no names of team members or audience speakers will be published. All participants were speaking in a personal capacity and do not represent the views of their respective organizations. For
“If banks are to live in the market, they need to be able to die in the market.” “Capitalism needs to apply to the banks, just like it does to their customers.” “We need to introduce resolution reform that will make banks safe to fail.” “If you make banks too small to save, it will be the surest solution to ‘too big to fail’.” Banks can be broken up in ways that are not defined by size. “What is the line between big [banks] and small [banks]?” Separating banks along commercial and investment lines “doesn’t necessarily save against ‘too big to fail’... Banks need to be smaller, not just simpler.” Banks would be safer if they were made to give up their foreign activities.“Big banks are a luxury that countries cannot afford.” “Banks need to adopt a Hippocratic-like oath of ‘do no harm’... ‘Heal thyself or we’ll do it for you!’” “Do you really want to work in a system where you have these monsters with access to unlimited amounts of money?” Always having the option of being bailed out by public money will not force banks to act more responsibly.“Can banks be made safe to fail?... Is there any other choice but to make them smaller?” “Banks are becoming so big that they can’t even manage themselves and are now beyond anyone’s control.” Banks should be broken up along lines according to the size of the GDP of the country in which their headquarters are based. “Put the method of division up to the banks’ own boards; they can decide how they want to divide. But they must divide.” “Banks aren’t too big to fail – now they’re too big to save!” Banks vis-à-vis other businesses isn’t like a big car versus a small car; it’s a jumbo jet versus a small car. If either crashed on the highway the jumbo jet/bank would take out a lot more people with it than would a small car. We have to consider bank failures in the wider market context. Against
“Society wants predictability... and society feels let down when things don’t turn out how it expects it to be... We don’t want to put public money at risk again... but does smaller really mean safer? ... Is there evidence that size is a deciding factor? This wasn’t the case for Dunfermline [Building Society] or Northern Rock... Big banks can absorb big losses more easily, such as JPMorgan [Chase].” “Is it easier to deal with five to six large banks or 50 to 100 small banks?” “Wouldn’t ending ‘too big to fail’ make these past six years seem like a waste of time?” “What do you do with the big banks that are behaving well? ...Forcing banks to split up could be a seizure that would get you in trouble with human rights!” “Our task is to stop these guys running into complexity they can’t manage, not just split them up.” How would you break them up? Size? Size according to GDP? Business or foreign lines? “It could cause another crisis by encouraging a break up as it could cause a lack of confidence in the market... Psychology plays an important role in a crisis... If no one trusts anyone, how can we get over that?” “It’s not a free market anymore if you tell banks to break up!” “If there are banks that have been deemed systemically important [29 banks have been given the status of "global systemically important financial institutions" or "global SIFI"] then they will get bigger because they will inevitably attract more capital because they are deemed more safe.” “No bank should ever be too small to save... Would we really rather tell people they have lost all their savings?” “If you decide banks should be made smaller in countries with a smaller GDP, banks will simply move their headquarters to countries with a larger GDP – looking for a ‘bigger uncle’.” “If we break up the banks, we go back 30 years – is that really what we want?” “We need to end the fallacy of never using taxpayers’ money again... If there are failures in the banking system, society still pays... We have to avoid failure, not find new, clever ways of funding it.” Large global banks like HSBC that operate on a subsidiary basis have avoided failure and remained “safe because of diversification”. HSBC has not received any government bailout money. “Every institution has the right to fail.” Result
For: 11 votes
Against: 26 votes
The nays have it. The motion falls.
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Andreas Dombret: Financial sector reform – time to slow down or too little, too late?
Andreas Dombret: Financial sector reform – time to slow down or too little, too late?
Andreas Dombret 
Andreas Dombret was speaking at the Salzburg Global Seminar session 'Financial Regulation: Bridging Global Differences'. Ladies and gentlemen, To cut to the chase: International collaboration between regulators has never been so challenging – and yet never has collaboration been so important.   Let me explain. Financial sector reform – time to slow down?
The regulatory community is currently facing enormous pressures. The sovereign debt crisis has given a fresh impetus to calls to water down or delay regulatory reform. Some argue that the ongoing uncertainty in financial markets and the weak global economy are good reasons to ease up on regulatory pressure. They say the financial sector is being asked to do too much too soon, and regulators should slow the speed of adjustment.  Yet I see it as more a case of “too little, too late”: If there is a reproach to be made, it is that regulatory progress has not been faster. The sovereign debt crisis, which is not least driven by systemic problems in some countries’ banking systems, underscores the urgent need to make the financial system more resilient. Relying on financial markets’ self-regulation will not do, I am afraid. We must deliver on our promise and extend regulation and oversight to all systemically important financial institutions, instruments and markets. To deliver this promise, close international collaboration is essential. Given the truly global financial system, “going it alone” is no longer a viable option.  It will only lead to the migration of business and to regulatory arbitrage, undermining not only the integrity, efficiency and orderly functioning of financial markets, but ultimately undermining financial stability. International consistency versus one-size-fits-all
The crisis has clearly demonstrated that countries cannot successfully regulate their financial markets and firms in isolation. Capital flows do not stop at geographical borders; quite a number of financial institutions operate globally. Therefore, an internationally coordinated regulatory response is imperative. To be successful, reforms must be implemented at least at the major financial centers.  International cooperation is not an end in itself, however. Instead, I suggest to measure its value by the extent to which it provides financial stability. While adopting a robust, common set of rules is essential, it is neither practical nor desirable to fine-tune all details of financial regulation internationally. As the characteristics of each country’s financial system differ, sometimes significantly, I do not think it to be appropriate to apply completely identical rules to every country or region. We must strike the right balance between providing a workable level playing field and at the same time providing sufficient flexibility for the peculiarities of national financial systems. The leitmotif for financial regulation ought to be international consistency, not one-size-fits-all.  A uniform set of rules and regulations would deprive us of the benefits of international regulatory competition. By this, I do not mean competition where countries are undercutting each other with ever laxer, but also ever more risky regulation. This would be equivalent to a race to the bottom as we would invite market players to arbitrage across divergent national regimes.  By regulatory competition, I mean assessing the merits of regulatory approaches and measures undertaken by other countries and, if deemed appropriate, adopting these approaches and measures. In short – learning from one another. For instance, in the USA, the Federal Deposit Insurance Corporation, FDIC for short, has gained an extensive wealth of experience in resolving failing financial institutions. In my opinion it would be careless for European authorities not to draw on the knowledge of their US colleagues when implementing their own resolution regimes. Need for international co-operation 
The work to develop a new regulatory framework for the international financial system is slowly but surely nearing completion. An example of what has been achieved through intensive cooperation is the new regulatory standard for bank capital and liquidity, commonly known as “Basel III”, or the comprehensive policy framework for dealing with systemically important financial institutions, SIFIs for short. Yet, we can not at all be satisfied with what has been achieved. While rule-making at the global level is a necessary condition for financial stability, it is by no means a sufficient condition. Rather, for the agreed reforms to be effective, they have to be translated into national laws and regulations. This must be done in a globally consistent manner and according to agreed time-lines. Here, we must significantly step up our efforts and cooperate as closely as possible. Otherwise, we risk failing. Let me illustrate this with three examples.  Solving the too-big-to-fail problem
Solving the too-big-to-fail problem will, without a doubt, constitute the litmus test of financial sector reform. The aim is clear: Taxpayers should not again be stuck with the tab for financial institutions’ failures. To achieve this, we must return to a founding principle of social market economy: individual responsibility. Those who take risks must also face the consequences. The possibility of losses and even default is a constitutive element of any functioning market – and financial markets cannot and must not be an exception to this.  Therefore, we have to find ways of resolving financial institutions, however large, complex, interconnected or internationally active, without causing systemic disruptions. Obviously this demands international co-operation.  National resolution regimes are stretched to their limits when it comes to globally operating SIFIs. To borrow the well-known line from Mervyn King, the Governor of the Bank of England: “Global banking institutions are global in life but national in death”. In the past, if internationally active banks ran into trouble, national supervisors regularly ring-fenced their assets. Banking groups were broken up or rescued as separate entities along national boundaries. This led to systemic distortions and considerable costs to taxpayers.  Against this background, the Financial Stability Board has developed, and the G20 have adopted, a new international standard for resolution regimes, known as the Key Attributes of Effective Resolution Regimes for Financial Institutions.  I very much welcome this development. The Key Attributes represent a major step forward, for the first time stipulating at the global level main features that national resolution regimes should include. Yet, following their adoption by the G20, the Key Attributes must now be implemented consistently across borders. Here, a great deal of work remains to be done. The Key Attributes have to be transposed into legislation which, naturally, has to be much more concrete than the international standard. The necessity of close cooperation is further underscored by the fact that the European Commission has recently published its legislative proposal for an EU framework for bank recovery and resolution. It is of utmost importance to ensure consistency between the two frameworks. Otherwise we risk unnecessary inconsistencies and, consequently, new problems in the event of financial institutions becoming distressed.   Monitoring and regulating the shadow banking system
The so-called shadow banking system can serve as another prime example for the need for close cooperation. Firstly, there is the immediate threat of regulatory arbitrage, as stricter rules imposed on banks via Basel III as well as the rules for SIFIs set incentives for activities and risks to be pushed from the core of the financial system outward to the periphery. Secondly, the fluid, evolutionary nature of the shadow banking system is a reminder to us not to focus solely on risks which have come to light during the current crisis. We have to be flexible enough to capture future developments as well. To ensure this, exchanging information across jurisdictions on a regular basis is crucial. Regarding better monitoring, a lot has already been achieved. The FSB set out recommendations which now have to be implemented by national authorities. Additionally, the FSB has committed to conduct annual global monitoring exercises to assess global trends and risks in the shadow banking system.  Regarding better regulation, work at the international level is ongoing to examine potential gaps and inconsistencies of the existing framework. Several working groups are currently developing proposals on possible regulatory measures. An integrated set of policy recommendations will be presented by the end of this year. These recommendations will then have to be implemented at national level, calling, once again, for close international co-operation to ensure consistency. Enhancing compensation practices 
Reforming compensation practices in the financial sector shall serve as my final example. Asymmetries in remuneration systems in terms of risk and reward led to short-termism and excessive risk-taking. They also contributed to the large, in some cases extreme absolute levels of compensation, leaving firms with less capacity to absorb losses as risks materialized.  Good work should be rewarded with good money. Yet to be good, work has to be sustainable and responsible. To safeguard financial stability, remuneration systems in the financial sector must be better aligned to long-term value creation as well as prudent risk-taking, including through malus or clawback arrangements. The Principles for Sound Compensation Practices and their Implementation Standards developed by the FSB are both helpful and welcomed guidelines to this effect. To address the concerns of firms and improve cross-border supervisory cooperation, the FSB established its Bilateral Complaint Handling Process in early 2012. This mechanism enables national supervisors to bilaterally report, verify and, if necessary, address specific compensation-related complaints by financial institutions that derive from level playing field concerns.  Yet, it will take a lot of stamina and endurance to achieve lasting change in behavior and culture within the financial sector. The organized manipulation of LIBOR is just one cautionary example for this. While progress has been made in implementing the FSB Principles and Standards, more work is necessary to ensure a level playing field in the market for highly skilled employees. Sustained commitment and close cooperation of supervisory authorities therefore remain essential.  Intensified implementation monitoring
The success of financial sector reform crucially depends on the timely and globally consistent implementation of agreed policies. As major reforms to address risks and strengthen regulation across the financial system have been adopted, it is becoming increasingly important to ensure that countries live up to their commitments. By means of peer pressure and transparency, we have to make sure that the measures necessary to improve the stability of the financial system are actually put into practice.  A number of steps to ensure effective and timely implementation of internationally agreed reforms have already been taken. The results of numerous monitoring exercises are summarized by the FSB in regular scoreboards and public progress reports to the G20. In order to enhance the effectiveness of implementation monitoring, the FSB and important standard setting bodies have jointly established a Coordination Framework for Implementation Monitoring. In addition, the FSB monitors the implementation and effectiveness of international financial standards and policies via its peer review program. Peer reviews are an important tool to promote consistency, enabling FSB members to engage in dialogue with peers and share lessons and experiences. It is necessary to continue on this path. Closing remarks
Allow me to summarize: Firstly, ongoing stress in the financial system and a weak economic recovery in many countries is no excuse to weaken our commitment to financial sector reform.  Secondly, today’s interconnected financial markets cannot effectively be regulated nationally. Close international cooperation is warranted. Thirdly, we must strike the right balance between achieving a level playing field and providing sufficient flexibility for the peculiarities of national financial systems. Finally, rigorous implementation monitoring will be indispensable. As the old saying goes: Trust, but verify.
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