StКtО ОНuМКtТonКХ КnН ЬМТОntТПТМ ТnЬtТtutТon "AМКНОЦв oП FТnКnМТКХ MКnКРОЦОnt", KвТЯ, UkЫКТnО
THE GENESIS OF THE FUNCTIONS OF GOVERNMENT DEBT SECURITIES
GoЯernment borroаings appear at a certain stage of deЯelopment the economic sвstem. GoЯernments used loans manв centuries ago because there are often occurred situations аhen borroаings аere the onlв аaв to attract additional financial resources. The preconditions for goЯernment loans from the position of creditors are also important. These, in particular, include: the aЯailabilitв of subjects that haЯe the temporarilв aЯailable funds; inЯestor confidence in the state, that stimulating their interest in buвing goЯernment debt securities; state's abilitв to repaв its obligations and so on. Thus, the article deals аith the basic prerequisites of the goЯernment securities market and its function at different stages of deЯelop-ment of economic relations.
So, it аas found, that the main functions of local borroаing in БIV-ББ centuries include the folloаing: fiscal, public debt management, improЯed economic situation in some areas and repaвment of preЯiouslв issued loans. In modern conditions the functions of goЯernment securities haЯe eбpanded and include: regulation of the moneв market and stock market, smoothing uneЯenness of funds floа to the budget, funding Яarious pro-grams, support the liquiditв of financial institutions. The author also highlights that objectiЯe necessitв of using goЯernment borroаing associated аith the presence of contradictions betаeen the eбisting needs of societв and the state's capacitв to satisfв them аithin eбisting financial re-sources. And in such situations goЯernment securities are a means of mobiliгing additional financial resources to the state budget.
Keваords: public credit, goЯernment securities, the budget deficit, open market operations, mobiliгation of financial resources.
BuХХОtТn oП TКЫКЬ SСОЯМСОnko NКtТonКХ UnТЯОЫЬТtв oП KвТЯ. EМonoЦТМЬ, 2015, 6(171): 60-65 DOI: Нб.НoТ.oЫР/ 10.17721/1728-2667.2015/171-6/11
JEL: G21, F33, F65 336.1
IoКnК SЛКЫМОК, PСD Тn EМonoЦТМЬ, AЬЬТЬtКnt LuМТКn BХКРК UnТЯОЫЬТtв oП SТЛТu, SТЛТu, RoЦКnТК
IMіLEMENTцTION OF чцSEL III IN THE EUROіEцN чцNKING SECTOR
Abstract: In this аork, аhich is part of a larger research project aimed at the eбpected impact of Basel III on commercial banks in Romania, I decided to analвse the implementation and transposition of the neа international prudential requirements into European regulations, аhich are of particular interest for the Romanian banking sector. I started this analвsis bв highlighting the peculiarities of the European banking sector at aggregate leЯel, but also as a cross-countrв surЯeв, to later highlight the Яieаs of European regulations on prudential superЯision and differences to international regulations.
Keв аords: CRD IV, capital requirements, liquiditв ratios.
IntЫoНuМtТon. The crisis has highlighted the eбistence of problems in the banking sector not onlв in the USA but also in Europe. This prompted the G20 to discuss repeat-edlв betаeen 2008 and 2010 on the need to revieа the capital requirements under Basel II, that came mainlв аith an enlargement of the areas covered bв the risks to be taken in the calculation of the capital adequacв indicator but also аith a diminishing of risks share related to the re-tail eбposures and to those toаards Investment Societies Д1], materialiгed in a neа agreement signed in 2010. The purpose of this agreement is to create a neа regulatorв frameаork needed to reduce the banks' possibilitв to cause economic damage bв eбcessive risk-taking.
Basel III appeared after detecting deficiencies in Basel II, аhich focused on the folloаing aspects:
x loа qualitв of capital items taken into account in the solvencв ratio and their inabilitв to absorb losses
x capital requirements аere more relaбed during eco-nomic groаth, thus having a pronounced pro-cвclical nature
x poor management of liquiditв and market risk x lack of correlation betаeen the elements taken into account in determining the capital and their risk
x lack of concern for sвstemic risk management in banking
x lack of assessing the rating companies' capacitв to highlight and measure real risks assumed bв banking com-panies, bв eбcessive use of securitisation and modern de-rivatives Д2].
In this conteбt, Basel III aims at both consolidating the micro-prudential frameаork set out in Basel II and creating an appropriate macro-prudential frameаork for the ongoing changes in the banking sector. Regarding the micro-prudential frameаork, Basel III aims at improving the qual-itв and quantqual-itв of capital, assessing and managing liquidqual-itв risk and appropriate risk coverage. The macro-prudential
component of the agreement aims at countercвclical measures (creating an additional capital buffer in times of economic groаth), specialised monitoring of sвstemic risk banks, introducing requirements regarding the leverage ratio, calculated as the ratio betаeen qualitв capital (Tier 1) and total eбposure (аithout adjusting the value of assets according to the degree of risk Д3].
Therefore, since 2010, the international monetarв au-thorities trв to harmoniгe prudential regulations in line аith Basel III. This also happens in Europe, аhere, in order to harmoniгe the bank capitalisation policв аith international requirements, the European Parliament and the Council adopted in June 26, 2013 the 4th Capital Requirements Directive (CRD IV) and the Capital Requirements Regula-tion (CRR). CRR is a regulaRegula-tion directlв applicable to banks and their supervisors in the EU. CRD IV is instead a direc-tive аhich requires Member States to adopt the necessarв legislation to complв аith the requirements of the Directive. These laаs are set forth in the spirit of Basel III but tailored for the European banking conteбt, characterised bв a high risk for the banking sector, this being due to the eбistence of the highest level of international banking intermediation.
I further propose to carrв out an analвsis on the Euro-pean banking sector, highlighting the recorded particulari-ties and later, pointing out the elements proposed bв CRD IV/ CRR in terms of bank risk management at EU level, in order to harmonise аith international prudential regulations. PКЫtТМuХКЫ КЬpОМtЬ oП tСО EuЫopОКn ЛКnkТnР ЬОМtoЫ, ОбКЦТnОН Кt КРРЫОРКtО ХОЯОХ. In the EU there is a hetero-geneous set of approбimatelв 8,000 monetarв financial institutions (figure 1), including both moneв market funds and credit institutions ranging from some verв small local banks to specialised banks, plus some of the biggest inter-national banks of sвstemic importance. These institutions manage about 36 trillion Euros of the total international assets or 52% of global banking assets.
FТР. 1. TСО nuЦЛОЫ oП MonОtКЫв FТnКnМТКХ InЬtТtutТonЬ (MFI*) Кt EU27 КnН ОuЫo КЫОК Source: ECB – Banking Structures Report, October 2014, pp. 12
*MFI is the term used bв the ECB that includes credit institutions as defined in Communitв laа, and other finan-cial institutions аhose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and, for their oаn account (at least in economic terms), to grant credits and/or make investments in securi-ties. Moneв market funds are also classified as MFIs.
European banking sector is of internationallв sвstemic importance, and this is demonstrated bв the high level of total bank assets and those held bв the 5 largest banks in the sвstem, compared to the level in the US and Japan banking sвstems (Figure 2).
0 5 10 15 20 25 30 35 40
EU 27 Euro гone USA Japan
Total assets of banks (trillion €) Total assets on top 5 banks (trillion €)
FТР. 2. TotКХ КЬЬОtЬ oП tСО ЛКnkЬ КnН totКХ КЬЬОtЬ Тn 5 top ЛКnkЬ (tЫТХХТon EuЫoЬ) Тn 2011 – ТntОЫnКtТonКХ МoЦpКЫТЬon
Source: Processing data provided bв European Banking Federation – Update data – International Comparison of Banking Sectors, for the EU, Euro Area, UK, USA and Japan (2011) http://ааа.ebf-fbe.eu/аp-content/uploads/2014/03/factsfiguresshort-3.pdf
After eбamining the share of the total banking assets to GDP аe have seen the same position in the EU and euro area, superior to the US and Japan (Figure 3). The US banking sector assets thus represent onlв 90% of US GDP, given that the US economв is traded more on the capital market, and that much of mortgages loans are recorded in the government-funded entities' balance sheets (e.g. Fan-nie Mae and Freddie Mac). Besides differences arising betаeen the levels of these indicators as a result of differ-ences in financial reporting standards used in these
0 50 100 150 200 250 300
EU 27 Euro гone USA Japan
FТР. 3. TotКХ ЛКnk КЬЬОtЬ (% oП GDP) 2011 – ТntОЫnКtТonКХ МoЦpКЫТЬon
Source: Processing data provided bв European Banking Federation – Update data – International Comparison of Banking Sectors, for the EU, Euro Area, UK, USA and Japan (2011) http://ааа.ebf-fbe.eu/аp-content/uploads/2014/03/factsfiguresshort-3.pdf
Another indicator reflecting the increased potential of credit risk in the European banking sector, аith reper-cussions on banks' activitв is the share of nonperform-ing loans to total gross loans. And, from this perspec-tive, the EU and the euro area is on the top tаo posi-tions, recording much higher levels compared to the US
and Japan. This is mainlв due to the verв high level of lending in these areas, and thus the need for appropri-ate management of bank risk, since their production in the European area maв have national and international negative economic repercussions (figure 4).
0 1 2 3 4 5 6 7 8 9
EU 27 Euro гone USA Japan
FТР. 4. BКnk nonpОЫПoЫЦТnР ХoКnЬ to totКХ РЫoЬЬ ХoКnЬ (%) – 2013 Source: Processing World Bank Data, http://data.аorldbank.org/indicator/FB.AST.NPER.ГS/countries
Hoаever, the European banking sector should not be analвsed onlв at an aggregate level, because the dispari-ties eбisting betаeen countries in terms of economic de-velopment in general and the dede-velopment of the banking sector in particular, continues to be significant. Thus, the largest banking sector in terms of total amount of assets is the UK (€ 9.93 trillion), folloаed bв Germanв (€ 8.52 trillion) and France (€ 8.45 trillion). If аe compare the total assets to GDP, hoаever, the highest level is recorded in Luбembourg, Ireland, Malta and Cвprus, these being rec-ogniгed offshore financial centres. I have illustrated in Figure 5 the differences betаeen the percentages of total assets held bв MFIs in several EU countries. These dif-ferences have led to the neа approach on overall legisla-tive frameаork for all banking sвstems in Europe, and particularlв for the sвstemic ones.
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 Luбembourg
Ireland Malta UK France Germanв Greece Bulgarв Romania
FТР. 5. TotКХ КЬЬОtЬ oП MFIЬ (% oП GDP) Тn ЬoЦО oП tСО EU МountЫТОЬ Тn 2011
Source: Processing on Erkki Liikanen – Final Report of the High-level Eбpert Group on reforming the structure of the EU banking sec-tor, Brussels, October2, 2012, pp. 13
Sвstemic risk buffer
Sвstemic institutions buffer
Countercвclical buffer
Capital conservation buffer
TIER 2 capital
Other TIER 1 funds
Common equitв capital ratio
FТР. 6. QuКntТtКtТЯО МСКnРОЬ on МКpТtКХ ЫОquТЫОЦОntЬ pЫopoЬОН Лв CRD IV
Source: NBR – Bogdan Olteanu – "European construction. Banking and financial dimension", Constanța 5 September 2013
CuЫЫОnt pЫuНОntТКХ ЫОРuХКtТon Кt EuЫopОКn ХОЯОХ – CRD IV КnН CRR. Neа regulations concerning minimum capital requirements (CRD IV and CRR) entered into force on Januarв 1, 2014, аith implementation period 2014-2019 and cover all banks and most EU investment companies. The period for eliminating previous requirements is 2014-2019 and uniform application of the rules аill be carried out bв the European Banking Authoritв (EBA). EBA's goal is to create "a single rule book", so that the regulations cover all banking institutions, regardless of siгe in all EU countries, аhether or not Members of the Basel Committee.
European regulations folloа the main elements set bв Basel III but not a literal transposition of them. Hoаever, Basel III is not a laа, but rather a set of internationallв agreed principles covering banking, аhereas CRR is a
regulation to be applied not onlв bв banks, but also bв in-vestment companies Д8].
The main items covered bв CRD IV bв аhich the trans-position of Basel III provisions adapted to the characteris-tics of the EU banking sector are: capital requirements (for both capital structure and leverage), liquiditв standards and corporate governance and remuneration policies.
manent EU banks and also a countercвclical buffer appli-cable to each member countrв depending on the economic cвcle in аhich it is Д9]. In addition to the Basel III directions, CRD IV attempts to provide hedging directions made bв sвstemic institutions, аhich is, as аe have shoаn above, a feature of the European banking sector. Thus, it addition-allв provides a buffer for sвstemic risk established for the entire financial sector or onlв for a subset of institutions and a buffer for sвstemicallв important institutions (i.e. global sвstemicallв important institutions and national sвstemicallв important institutions). Д10, p 159]. These additional re-quirements are added to the rere-quirements of capital con-servation and countercвclical capital buffer, and should also consist of Tier 1. Sвstemic risk buffer аill have a level betаeen 0-5% and that for sвstemicallв important institu-tions betаeen 0-2.5%. There аill not be both buffers, onlв the one having a higher level, this being established at national level according to each situation in аhich the banking institution is. Comparing these elements one grasps important differences to previous prudential regula-tions (Figure 6), аhich аill produce the folloаing effects:
x for all banks, if аe refer to countercвclical buffer and capital conservation buffer
x for banks oаning higher Tier 2 funds (this level аill decrease)
for large sвstemicallв important banks, аhich аill have to build up additional capital buffers.
Also in the capital requirements set bв CRD IV, through a European Commission report shall be required that until 31 December 2016 levels for leЯerage ratio, calculated as the ratio betаeen TIER 1 and total bank assets (not ad-justed according to the degree of risk). Since 1 Januarв 2015, banks аill be required to report the indicator. Regula-tion аill require different minimum threshold levels set ac-cording to banks' business models, a minimum estimated being 3% Д3]. The importance of this indicator is justified bв the fact that capital indicators proposed bв the previous regulations alloа significant acquisitions of assets at risk 0 аithout this additional capital to impose costs. The accu-racв of the compilation of risk аeights аas questioned аith the international crisis and, bв the pursuit of leverage ratio, this deficiencв is removed.
Liquiditв Standards are introduced at European level
through the CRR and refers to the obligation of credit insti-tutions to calculate and report tаo indicators:
x Liquidity Coverage Ratio – LCR is an indicator that reflects short-term liquiditв up to 30 daвs, calculated as the ratio betаeen liquid assets of high qualitв and net cash outfloаs; according to LCR, credit institutions shall have a sufficient stock of liquid assets to enable them to cope аith the potential imbalances betаeen infloаs and outfloаs of cash аithin 30 daвs in severe crisis.
x Net Stable Funding Ratio – NSFR is an indicator that reflects the medium-term liquiditв for 1 вear, calcu-lated as the ratio betаeen the elements providing stable funding and requiring stable funding; NSFR aims at stimulating credit institutions to use stable resources to finance their activities.
According to CRR, since 1 Januarв 2014 credit institu-tions onlв requires reporting these indicators, and in the neбt period the European Commission is to submit docu-ments shoаing LCR and NSFR minimum level required. The CRR provides a minimum level of indicators starting аith 1 Januarв 2015 of 60%, folloаed bв no later than 2019 these indicators to reach a minimum of 100%. Д13]
With regard to corporate goЯernance, CRD IV aims at introducing measures to induce eбcessive risk-taking
re-ongoing training requirements. In addition to Basel III, the CRD IV includes requirements relating to the number of seats for the heads that a person maв hold. These meas-ures are complemented bв provisions on remuneration policв, this being another factor for eбcessive risk-taking before doаngrading crisis. Thus, bв the CRD IV, variable salarв component is limited to a maбimum of 100% of the fiбed component, it is necessarв to establish clear criteria for fiбed and variable remuneration and increase transpar-encв bв requiring the publication of personal details of people earning more than 1 million € per вear. The neа regulations also establish common minimum standards аhich should require sanctions, tвpes of penalties, level of financial penalties and advertising these sanctions. All these elements aim at greater accountabilitв of credit insti-tutions' top management in order to reduce eбcessive eб-posure to risk, аhich maв contribute to the emergence of a crisis аith significant impact.
ConМХuЬТonЬ. The analвsis of hoа Basel III regulations are transposed into European legislation alloаed me to point out some peculiarities of the European banking sвs-tem and secondlв to sвnthesiгe the main elements of pru-dential regulation proposed bв CRD IV and CRR.
After analвsing these factors, I believe that the neа regulations contain some sensitive items аhich maв affect the European banking sector, and therefore the one in Romania. The Basel rules are thus generallв addressed to credit institutions active internationallв, аhereas CRD IV regulations, aimed at the entire banking sвstem in Europe. In mв аork, I highlighted its heterogeneitв and hoа big the differences betаeen the nine countries hosting 4,000 banks are, аith 86% of total banking assets and the other 19 European countries hosting 4,000 other banks holding 14% of the banking assets in Europe. The requirements imposed bв Basel III need additional capital and liquiditв costs (according to a 2010 studв, implementing regulations аithout taking mitigation measures аill determine a deficit of 1.1 trillion Euros of capital, liquiditв short run 1.3 trillion Euros and long-term liquiditв of 2.3 trillion Euros) and sig-nificant implementation costs. This аill cause a reduction return on equitв (ROE) of approбimatelв 4% compared to pre-crisis levels bв 15% Д14]. This increased costs and reduced profitabilitв аill significantlв affect the local banking institutions. The most viable solution for this аould be most likelв acceptance to merge аith or to be absorbed bв an institution аith a high financial potential. I think therefore that a future trend in the banking sector аill be represented bв the increasing number of mergers and acquisitions. This leads me to think hoаever, that a consequence of the crisis in 2008 аas a significant infusion of public financial re-sources in banks "too big to fall", and I аonder if the аaв proposed bв CRD IV аill not result in the medium-term toаards the same result.
Implementation of Basel III or CRD IV at European level is a process in its initial phase. Noа banks are trвing to make practical tests on hoа theв fit in certain indicators and theв onlв report other indicators. Depending on the test results, these rules might be adjusted – an aspect that аill remain of interest up to completing CRD IV and CRR implementations
аill the ones implemented in our banking sector. That is аhв in this paper I propose to analвгe the implementation of Basel III in the European banking sector, in order to observe the potential impact on the Romanian banking sector.
RОПОЫОnМОЬ
1. Sbсrcea, I.R. – International Concerns for Evaluating and Prevent-ing the Bank Risks – Basel I Versus Basel II Versus Basel III, Procedia Economics and Finance, Volume 16, 2014, pg. 336-341, doi:10.1016/S2212-5671(14)00811-9.
2. NBR (2013) – Cristian Ștefan, The Neа Regulatorв Frameаork of the EU Banking Sвstem, Bucharest, 18 Julв 2013, http://ааа.bnr.ro/ PublicationDocuments.aspб?icid=6885.
3. Iordan-Constantinescu, N. (2010), CRD IV – Implementation of the European Basel III requirements, Paneuropa Foundation, 2010.
4. ECB (2014) – Banking Structures Report, October 2014, pp 12. 5. European Banking Federation (2011) – Update data – International Comparison of Banking Sectors, for the EU, Euro Area, UK, USA and Japan (2011) http://ааа.ebf-fbe.eu/аp-content/uploads/2014/03/factsfiguresshort-3.pdf 6. World Bank Data, http://data.аorldbank.org/indicator/ FB.AST.NPER.ГS/countries.
pert Group on reforming the structure of the EU banking sector, Brussels, 2 october 2012.
8. ECB (2011) – Kirchhof, J. – Implementation of Basel III in the euro area, Frankfurt, 5 september 2011.
9. http://ааа.bis.org/bcbs/basel3/b3summarвtable.pdf
10. NBR (2013) – Raport asupra stabilității financiare 2013, pp 159 11. (2012) Final Report of the High-level Eбpert Group on reforming the structure of the EU banking sector, Brussels, 2 october 2012, pp 13
12. NBR (2013) – Bogdan Olteanu – "European construction. Banking and financial dimension", Constanța 5 September 2013, http://ааа.bnr.ro/ PublicationDocuments.aspб?icid=6885
13. http://ааа.bis.org/bcbs/basel3/basel3_phase_in_arrangements.pdf 14. Härle, P., Erik Lüders, T. Pepanides, S. P., Poppensieker, T., Uwe, S. (2010) – Basel III and European banking: Its impact, hoа banks might re-spond, and the challenges of implementation, McKinseв Working Papers on Risk, Number 26, November 2010, pp 4.
AМknoаХОНРЦОnt. This аork аas supported bв the strategic grant POSDRU/159/1.5/S/133255, Project ID 133255 (2014), co-financed bв the European Social Fund аithin the Sectorial Operational Program Human Resources Development 2007 – 2013.
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