Maja Kadievska-Vojnovik: Rules and regulation update
Speech by Ms Maja Kadievska-Vojnovik, Vice-Governor of the National Bank of the Republic
of Macedonia, at the Erste Group Bank workshop "Rules and regulation update", Skopje,
1 December 2014.
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Dear Governor Bogov,
Dear Guest Speakers from Erste Group Bank,
Dear representatives from financial regulatory agencies,
Dear colleagues,
Please, let me thank you Governor Bogov for supporting the idea of organizing such an
event that summarizes financial regulatory reform after six years of the global financial crisis
and also I would like to give my appreciation to the guest lecturers from Erste Group Bank for
their quick response to help us to better understand it.
This workshop is distinctive, in my opinion, as it will point at numerous regulatory changes
aimed at supporting the vision of a financial system that would be both globally integrated
and adequately regulated over the medium-to-long-term.
Why we are here today?
Probably, some of you have already asked this question. Why?
The subject and the presentations of today's workshop are of great importance, having in
mind that, we, the Central Bank with its unique foreign reserves management function, and
other institutional investors (banks, pension funds, insurance companies) that are supervised
by the regulators participating in this workshop, all of us, are investors on the European and
global financial markets. In that regard, understanding of the regulations that are changing
the financial markets landscape is of greatest significance for each market participant.
The second question raised today is:
What were the reasons for undertaking steps for financial sector reform?
The recent financial crisis served as a reminder that the impaired financial system can have
a significant impact on the functioning of the overall economy. Moreover, the 2007-08
financial crises was, to a great extent, a result of the failure of public authorities in the United
States and Europe to adequately monitor and address systemic risk. By comparison, Asia
and other parts of the world where memories of systemic financial crises were still fresh, had
adopted more prudent policies and practices, and were less impacted by the
subprimetriggered financial shockwaves. In order to make global finance more stable, the 2009
G20 summits in London and Pittsburg listed commitments on financial regulatory reform,
pushing the financial regulation to the forefront of the global economic cooperation agenda at
the level of political principles, which had until then, been mainly focused on trade and
macroeconomic policy.
The items on regulation can themselves be divided into two subgroups.
On the one hand, the G20 decided to tighten or strengthen the regulatory framework
applying to entities or activities that had already been regulated before the crisis. Examples
include:
• A more demanding framework for the capital, leverage, and liquidity of banks, prepared by
the Basel Committee on Banking Supervision (BCBS) and known as the Basel III Accord
since its initial exposition in 2010;
• Special regulatory treatment of systemically important financial institutions (SIFIs), such as
additional capital (or in the Basel jargon, "loss absorbency") requirements; and
• Additional disclosure obligations for banks.
On the other hand, entities or activities that until 2008 were mostly outside of the scope of
regulators were made subject to a comprehensive regulatory framework:
• Over-The-Counter (OTC) Derivatives,
• Executive compensation,
• Credit rating agencies,
• Hedge funds, "shadow banking" (i.e. entities and activities that are not regulated as banks,
but present bank-like systemic risk profiles) and, more recently,
• Financial benchmarks (following the detecting of fraud in the setting of LIBOR, the London
Interbank Offered Rate, and other similar reference rates).
All those initiatives that were envisaged by the G20 are translated into regulatory changes in
US and Europe.
In the US, Dodd-Frank Wall Street Reform and Consumer Protection Act (or known as
Dodd-Frank Act) implements changes that, among other things, affect the oversight and
supervision of financial institutions. The Dodd-Frank Act creates the Financial Stability
Oversight Council to oversee financial institutions. Additionally, it provides for a new
resolution procedure for large financial companies, a creation of a new agency responsible
for implementing and enforcing compliance with consumer financial laws, introduces more
rigorous regulatory capital requirements, affects significant changes in the regulation of OTC
derivatives, includes reform of the regulation of credit rating agencies, implements changes
to corporate governance and executive compensation practices, incorporates the Volcker
Rule, requires registration of advisers to certain private funds, and affects significant changes
in the securitization market.
In the EU, Markets in Financial Instruments Directive MiFID is an important step in the
biggest overhaul of financial markets regulation in the EU for a decade. However, the new
regulatory framework consists of Directive (MiFID 2) and Regulation on markets in financial
instruments (MiFIR). It is an integral part of the EU's strategy to address the effects of the
financial crisis, but at the same time aims to bring greater transparency to markets and to
strengthen investor protection. These changes are a key for restoring the trust in the EU
financial markets. In reaction to the global financial crisis, the EU has also introduced the
European Market Infrastructure Regulation (EMIR) that initiates a reporting obligation for
OTC derivatives, a clearing obligation for eligible OTC derivatives, measures to reduce
counterparty credit risk and operational risk for bilaterally cleared OTC derivatives, common
rules for central counterparties (CCPs) and trade repositories (TRs), and rules on the
establishment of interoperability between CCPs. MiFID 2 and EMIR are causing many
changes in the financial market infrastructure, but changes are also happening as a result of
other regulations such as the Central Securities Depositories Regulation and Target 2
Securities project. Some of them will change market practices as well, not only financial
infrastructure.
To conclude, excessive risk taking and leveraging have been one of the main causes of the
financial crisis. As we are all aware, various policy initiatives are on the policy agenda to
enable effective financial services reform. A sound, stable and resilient financial sector
capable of providing funding to the real economy is of major importance for growth in the
medium and long term. Both the financial reform agenda (internationally coordinated by G20)
and the unique project of creating a Banking Union with Single Supervisory and Resolution
Mechanisms (SSM, SRM) and a single rulebook will change the set-up of financial markets.
The implementation of the financial sector reforms will also necessitate a vast amount of
secondary legislation that may have a sizeable impact on the funding of the real economy.
I hope that you will enjoy the workshop and that we will all learn much from the very
impressive array of speakers.
Thank you.