Fourth Annual Meeting
INTOSAI Working Group on Financial Modernization and Regulatory Reform
May 9-10, 2017
U.S. Government Accountability Office, Washington, D.C.

Minutes and Proceedings

The fourth in-person meeting of the INTOSAI Working Group on Financial Modernization and Regulatory Reform (the working group) took place on May 9-10, 2017, in Washington, D.C., United States, at the headquarters of the U.S. Government Accountability Office (GAO). The meeting was opened at 9:30 a.m. on May 9 and continued through the morning of May 10, adjourning at 12:30 p.m.
A list of the attendees, as well as the full set of meeting materials, is included separately.

Introduction and Welcoming Remarks

Gene L. Dodaro, Comptroller General of the United States and Chair of the working group, convened the meeting. Mr. Dodaro welcomed the attendees to GAO, and noted that he was pleased that over half of the 26 working group members were participating in the meeting. He noted that over the last year the working group has worked hard to advance its strategic goals, focusing on 1) collecting in-depth information on members’ financial sector audit work; 2) furthering relationships with organizations such as the International Monetary Fund (IMF), the Basel Committee on Banking Supervision, and the Financial Stability Board; and 3) continuing to monitor international financial reform developments. Mr. Dodaro expressed appreciation for the subgroup leaders who have worked to facilitate the work of their subgroups: China (subgroup 1), Canada (subgroup 2), and GAO (subgroup 3). He also welcomed the newest members of the working group: Germany and Pakistan.

Presentations by Supreme Audit Institutions (SAIs) on Recent European Union (EU) Bank Supervision Audits and Recent Parallel Audits

May 9, 2017, 10:00 a.m. – 11:15 a.m.
Presenters: Austria
European Court of Auditors (ECA)
Germany
Netherlands

Background

Four European SAIs conducted audits on the bank supervision of European Union countries. In 2014, banking supervision was transferred within the Eurozone from the national central bank to the European level, European Central Bank (ECB). The four SAIs discussed their methodologies and findings.

• Austria —Audit on the Austria Banking Supervision
• European Court of Auditors (ECA) —Audit on the Single Supervisory Mechanism (SSM)
• Germany — Parallel Audit of Banking Supervision Post-SSM
• Netherlands —Experiences with Parallel Audits

Austria Court of Auditors — Audit of Austrian Banking Supervision Post-SSM

The audit was published in April 2017 with about 40 recommendations. The scope of the audit focused on less significant institutions that the Austrian Central Bank is responsible for supervising. They reviewed how the Austrian Central Bank carried out its legal responsibilities. The Austrian Court of Auditors was not authorized to review ECB documentation and supervisory manual for their audits, but ultimately they developed a memorandum of understanding with ECB and were able to review the manual. The auditors saw a gap in their audit methodology resulting from the lack of authority. Before the SSM, the SAI had authority to review ECB documentation, but recently the policy has changed.

ECA—Audit on the ECB’s SSM
The ECA Audit covered the following areas:
• Governance
• Accountability arrangements.
• Joint Supervisory Teams — Organization and resource allocation
• On-site supervision

Mr. Mates, ECA, focused on the organizational and resource allocation part of the audit in his presentation. ECB was unable to provide the data on ECB staff resources for bank supervision to ECA.

• ECB provides no more than 8 percent of the total staff performing on-site inspections, and has led only 12 percent of inspection visits.
• ECB depended more on national bank resources and less on ECB resources.

The audit included on-site inspections that would be similar to ones allowed by the national central banks.

Among the findings of the audit were that ECB did not have a formal mechanism for identifying which staff can participate in the supervision of financial institutions, and ECB did not have authority over the supervisory function’s budget or staff. ECA staff recommended that the shared services for monetary and supervisory functions be separated. They were optimistic that the issue will be addressed and there will be more clarity on separating the two functions.

The German SAI

The German SAI presented an “Overview of the Parallel Audit of Banking Supervision.” The audit is conducted in five EU member states – Austria, Cyprus, Finland, Germany, and the Netherlands – based on a common audit plan. It focuses on three aspects of how less significant financial institutions (LSIs) are supervised:

• the regulatory framework,
• the design of prudential supervision, and
• the application of prudential supervisory standards in practice.

Comparative results will be published by end of year 2017.

The main driver for initiating the audit was the introduction of the Single Supervisory Mechanism (SSM) in the Eurozone: On the 4th of November 2014 banking supervision within the Eurozone was transferred from the national to the European level. The ECB assumed responsibility for the supervision of significant institutions. The LSIs on the other hand continue to be supervised by the National Competent Authorities (NCAs).

The ECB is audited by ECA. Its audit activity is however limited in the EU-Treaties to an examination of the operational efficiency of the management of the ECB. The parallel audit shows – among other things – that the ECA’s mandate is limited compared to what several SAIs – including the German SAI – had over the supervision of significant banks prior to the SSM. The Bundesrechnungshof was able to audit the financial management of its NCAs (Bundesanstalt für Finanzdienstleistungsaufsicht and Deutsche Bundesbank), including the supervisory review and evaluation process and it continues to do so with respect to LSI-supervision.

The auditors discussed some issues they confronted. They wanted to review the ECB bank supervision manual, but ECB stalled providing the manual. They worked out an agreement with ECB to gain access to the documentation they needed for the parallel audit even though they are a national SAI, not ECA.

The Netherlands Court of Auditors

Mr. Kempkes (Netherlands) discussed the Dutch SAI’s experience with two parallel audits: the Structural Funds for the Europe 2020 Strategy and Underlying Risks for Sustainability of Public Finances.

For the second audit, the Dutch SAI audit focused on fiscal matters relating to bank supervisions, specifically the aligned risk of public finances. They noted that their audit was similar to the German audit in terms of objectives and scope. Both SAIs have similar audit mandates for reviewing prudential bank supervisors. He noted key factors of conducting parallel audits, including defining a common interest for participating SAIs, forming a core group of SAIs, and deciding on the audit design to follow. He noted that the two previously mentioned parallel audits had different audit approaches and different reporting mechanisms. He did not discuss the findings or conclusion of these audits.

Questions and Answers

Some SAI members asked questions on the specific mandate or authorities of other SAIs to audit the prudential bank supervisors in their countries. A member of the Finnish SAI noted that their SAI does not have authority to audit the prudential bank supervisory authority in terms of their public finances. They are trying to secure this type of authority. They are currently working on a parallel audit; however, the audit will discuss its limitations as a result of their lack of mandate or authority. It was suggested that the working group should devise approved standards for the audits involving ECB and the European SAIs. Mr. Dodaro noted that setting standards would require the approval of INCOSAI and noted that most countries have their own standards that are consistent with INTOSAI standards.

The SAI members suggested that the ECA and other European SAI parallel audits should be reviewed for potential overlap. These audits should be able to comply with the performance audit standards already established rather than creating new standards. For example, GAO uses performance audit standards for audits relating to regulatory financial reform. GAO officials explained that when reviewing supervisory material at the U.S. federal financial regulators, GAO cannot disclose information on open banks and must treat the supervisory bank information in the same manner as the prudential supervisors do.

Subgroup 1 Breakout Session

May 9, 2017, 11:45 a.m. – 12:45 p.m.

Countries represented in the session were Brazil, China, ECA, Pakistan, Russia, Saudi Arabia, Sweden and United States.

Mr. Tsuhara (GAO) said that every 4 years the group revisits its terms of reference, and that there would be a discussion on the terms of reference later in the day. He encouraged participants to start thinking about the revisions that they would like to make to those terms, and in particular, whether there was an opportunity to have a greater effect on knowledge sharing efforts.

Mr. Chen (China) opened the session and said the focus of the discussion would be on two topics: share recent SAI developments related to financial reform and audits and review sub-group work plans and short- and long-term goals.

The delegate from Saudi Arabia said that the General Auditing Bureau (GAB) is preparing performance indicators to help government agencies evaluate performance, particularly in regards to electronic bookkeeping. They are in the process of establishing a financial audit training center within the GAB for government workers in the financial field. They have finalized the National Transformation Program involving 24 government budgets in the economic and governance sector. As part of the program’s first phase, the GAB is monitoring financial reforms across the government, observing measures taken to increase oil revenue, and monitoring the commitment of government agencies to financial reform. Auditing the oil industry is included under this program.

Mr. Hansen (Sweden) said that one challenge faced by his SAI is recruiting people with the right knowledge. He is only 1 of 10 analysts working in the SAI’s public finance division with experience in financial sector regulation. Another challenge is that they are not able to audit all government institutions. In regards to a financial stability audit, they face difficulties in interpreting the Swedish Parliament’s overall goal for the financial sector and how to take into account international standards in the assessment context. They plan to report on the audit next year.

Mr. Zaytsev (Russia) said that the macroeconomic situation there is difficult. They conducted an audit on how commercial banks used funds disseminated from the Russian central bank. As part of the audit, they looked at the profitability of banks and ratios. They found that sometimes funds helped to capitalize the banking system, but that they were not always disseminated to the commercial sector. Mr. Zaytsev said that they have also conducted performance audits that look at whether the central bank and other government agencies met their goals and if they encountered any drawbacks or obstacles in doing so. One participant commented on the breadth of the SAI’s mandate. Another participant asked if there were any reactions by Parliament related to the politics of the audit. Mr. Zaytsev said that in conducting these types of audits, they do not discuss the merits of a particular policy but focus on the audit results, which has seemed to satisfy Parliament.

Mr. Ansari (Pakistan) said that they have a limited mandate to audit Pakistan’s central bank and that they can only conduct compliance audits. He said they are in the process of developing a strategic plan for the Islamic Banking sector that includes operational procedures and mechanisms for oversight. Mr. Ansari said that it would be useful if their mandate could be expanded to other aspects of the financial sector such as insurance companies.

Mr. Mates (ECA) said that ECA is conducting audits on banking resolution and macroeconomic policies, including an audit of EUROPEC. He said that ECA is working on an audit of banking resolution but has not yet met with the banking authorities. He said one challenge for his institution is skills and staff. They typically hire people right out of university but have difficulties hiring at a higher level. It is not difficult to find people with the right skills for conducting financial and compliance audits, but performance audits are more complicated. For these types of audits, ECA needs staff with skills in economics and econometrics as well as those with experience in the financial sector. Other participants noted the difficulty in recruiting and keeping staff with the right skills, particularly as there are higher paying jobs in the financial sector.

Mr. Hansen (Sweden) asked about overlap between the role of the International Monetary Fund (IMF) and SAIs. He said that in Sweden, they try to evaluate the system based on their own regulations, but they also have to take into account international standards because that is what the IMF will evaluate them against. He said it is a significant challenge when country practices differ from international standards. Participants acknowledged that in some cases a country’s laws are not consistent with international standards. Other participants said that the IMF has a different purpose than the SAIs and that it does not have access to as much information. They noted that the working group has encouraged the IMF to meet with SAIs when conducting its assessments.

One of the delegates from China noted that China has many state-owned financial institutions including banks and insurance companies. They have a mandate to audit these and the central bank. Last year they audited eight major commercial banks to determine their compliance with national laws and to evaluate their overall management and risk management strategies. They also conducted performance audits of three regulatory institutions and looked at whether markets were operating and if any institutions had violated laws or operations requirements.

Mr. Hildebrand (Brazil) said that since their last presidency, the biggest challenge has been transparency and accuracy of numbers provided by the government. They have conducted financial system audits and compliance audits. They are starting an analytics group on the payment of social benefits that will involve several agencies.

Other topics discussed included the transfer of money to smart phones and whether these payments can be audited. Mr. Tsuhara said that GAO has looked at the financial payments system. Other delegates noted that this was a gray area and it is not always clear who should be responsible for oversight.

Participants agreed to discuss subgroup work plans later in the afternoon. Several participants seemed interested in the idea of trying to publish as much work as possible in English, to make it more accessible for other SAIs. Some thought this might be more relevant for subgroups 2 and 3.

Subgroups 2/3 Breakout Session

May 9, 2017, 11:45 a.m. – 12:45 p.m.

Countries represented in the session were Canada, Estonia, Finland, Germany, Italy, Russia, South Korea, and the United States.

Introductions

Ms. Gelb (GAO) began with an overview of the focus of the two subgroups. The focus of subgroup 2 is to establish relationships with outside organizations, while subgroup 3 is responsible for synthesizing the Governing Board Report, summarizing work group matters, and surveying other analyses of financial stability and related risks. This report serves as an outreach tool to establish relations with outside groups. The goal of the breakout session is to brainstorm ideas and discuss future work.

Subgroup 2 Discussion

Mr. Domingue (Canada) discussed the focus of subgroup 2, which is to establish and maintain contact with international bodies. The subgroup began a few years ago and initially established contact with the International Monetary Fund (IMF) and later established relations with other key organizations, including the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (Basel), but has had challenges coordinating with other organizations. Going forward, he would like the subgroup to consider the benefits of establishing contact and relationships with the International Organization of Securities Commissions (IOSCO) and other international supervisory bodies. He noted that Mr. Dodaro has previously sent two letters to IOSCO on behalf of the working group. Recently, the subgroup has discussed developing a relationship with the European Central Bank (ECB), and the group should decide whether the existing relationships are enough or whether the subgroup should pursue additional ones. Ms. Gorse (GAO) noted that officials from the Finnish SAI provided a point of contact for ECB and the working group invited ECB to present at this year’s annual meeting. ECB was unable to present, but expressed interest in working group.

Mr. Domingue said the second step should be to maintain the existing relationships and helping ensure the subgroup is maximizing information sharing as it is important for the subgroup to demonstrate value for the work it produces. Going forward the subgroup should expand information sharing with those organizations and establish a calendar for regular contact and potentially better market current work to demonstrate value.

Subgroup 2 Next Steps

South Korea representatives asked about the types of information that can be shared with IMF and other organizations. Mr. Domingue responded that the Governing Board Report has served as the key information-sharing tool but that SAIs could share more information or establish additional points of contact. He noted that the working group can decide how much information to share with international organizations. Ms. Gelb noted that the subgroup could identify common issues across banking supervisors and that Mr. Dodaro previously mentioned having a delegation from the working group visit Basel. GAO has ongoing work on bank supervision and could leverage work on European audits or ECA work.

Mr. Okko and Mr. Männikkö (Finland) noted the discussion taking place in parliaments as a result of their work that may increase value with those organizations.

Germany representatives noted that ECB does not talk with SAIs and has not shown much interest outside of the Ministers of Finance. Finland representatives echoed Germany’s experience. The subgroup could establish a relationship with ECB with a different set of objectives than other key organizations, such as educating ECB on the role that central banks play in other jurisdictions and the role of size on a global scale.

The subgroup discussed updating the working group’s terms of reference and how outreach to ECB and IOSCO would be a good topic for a future work plan. Germany representatives asked about specific office branches to contact and that supervision is an area of interest. Germany representatives also asked about contacting private organizations. Ms. Gelb responded that for resource purposes the subgroup prioritized international organizations that had a clear nexus.

Subgroup 3 Discussion

Format of the Annual Report

The subgroup discussed the format of the annual report and whether there are ways to improve monitoring of financial stability and emerging risks as they prepare the next report. Mr. Domingue agreed with the current format of the report and stated that there is no need to overhaul it unless there are other concerns. Ms. Gelb mentioned that GAO can summarize FSB consolidation of international reforms and GAO’s identification of financial indicators.

INTOSAI website

The subgroup discussed the website and Ms. Gorse mentioned the survey Chile sent about experiences using the website. Germany and Finland representatives noted they had difficulties accessing the members section. Ms. Gorse said she would reach out to Chile about these issues. The subgroup agreed that the ability to host documents on the website would be useful.

Parallel Audits

The subgroup discussed parallel and cooperative audits. Germany representatives discussed future work on the resolution of banks and Ms. Gelb mentioned that GAO has conducted audits of U.S. resolution plans. Mr. Kempkes (Netherlands) asked about steps the subgroup can prepare for a parallel audit so that Europe and other countries can learn from one another. For example, it raises questions about the consequences of a new government and the financial system. There have been many changes globally since the financial crisis and some rules have loosened. For example, with the United Kingdom leaving the EU, it raises questions about what it means for Europe and, more specifically, financial institutions.

Ms. Gelb mentioned that other working groups have objectives to undertake a parallel audit. Finland representatives noted that a parallel audit on banking resolutions would be interesting as well as reviewing the mandates of SAIs and determining whether the audit could be carried out. Ms. Gelb mentioned that deposit insurance is a controversial issue in the EU and could be a potential topic for a European parallel audit.

Sustainable Development Goals

Ms. Zibo (Estonia) noted there are a lot of Sustainable Development Goals and some of the goals related to financial stability may be of interest to this working group. Mr. Männikkö (Finland) stated that of the 17 goals there is one goal that covers oversight entities and how the structure is working. He sees a link with oversight of the financial sector in different countries (in Finland there is no mandate to audit the Bank of Finland).

Mr. Domingue stated it may be a forced fit and he was not sure which goal was relevant to the working group. Ms. Gelb noted the subgroup can keep track of concrete projects from other organizations. Ms. Gorse mentioned that Mr. Lee from Estonia previously discussed reaching out to the UN development program to see how the goals relate.

Ms. Sultan (Germany) noted that the SAI of United Arab Emirates (UAE) is conducting work on Sustainable Development Goals, which may be a resource to consider.

Next Steps

Mr. Domingue asked if the subgroup is looking for help with the Governing Board Report and Ms. Gelb mentioned that GAO issues a help wanted for GAO colleagues but to the extent SAIs can assist it would be appreciated.

Germany representatives asked whether there is room for improvement for subgroup 2 to maintain and nurture contact with key organizations, including asking whether we should we be doing more than having them deliver presentations and whether we should consider more in-depth exchanges and face-to-face meetings. Contact should be driven by the SAIs’ work schedules – for example, the ECA audit on the SSM could be an interesting report to share with the organizations. Because of SAIs’ authorities and privileged access, it would be beneficial to these organizations that we maintain frequent contact.

Lunch Presentation – Xavier-Yves Zanota, Basel Committee
May 9, 2017, 12:45 p.m. – 2:00 p.m.

Mr. Zanota provided an overview of the Basel Committee’s mandate. The Basel Committee is the primary standard setter for the regulation of banks and the forum for cooperation for central banks and supervisory agencies. The Basel Committee’s mandate is to strengthen regulation, supervision, and practices of banks to enhance stability. The committee sets minimum standards that can be converted to law or regulation. In the absence of such standards, fragmentation occurs. The committee consults with central banks and bank supervisory authorities that are not members. For members, the Basel Committee provides reports to central bank governors and heads of supervision. The committee comprises 53 institutional members covering 30 jurisdictions. The committee reports to the IMF and G20 leaders.

The committee has sought to strengthen global standards since the crisis by implementing a rigorous framework. The committee is aware there are a number of things that still need to be fixed and would like to conduct more work at the macro level for monitoring emerging risks and assessing the impact of post-crisis reforms.

Finishing Basel III reforms is the committee’s main priority. The committee failed to agree on Basel III reforms as of December 2016. Output floor calibration (a bank’s internal model for calculating risk-weighted assets that in turn helps regulate bank capital) is at the heart of disagreement on Basel III. The Basel II framework needed structural changes to remove advanced internal model approaches. The Basel III framework seeks to give more balance to the standardized approach.

Questions and Answers

Mr. Mates (ECA) asked about the current state of sovereign debt exposures. Mr. Zanota responded that the committee has been consulting on the risk weighting of sovereign risk exposures and at this time cannot anticipate where it will lead them but that it is important to have resources for sufficient analyses.

Mr. Alfonso (Italy) noted the capital provision by banks and the controversy between European and American banks. In Europe, credit through enterprises is bank centric, whereas in the US it is more market-based. He asked whether this runs the risk of pro-cyclical action. The risk at the moment is that there is not enough credit for enterprises because credit is crowded out by capital provisioning and Basel action is pro-cyclical, which could worsen the enterprise system. Mr. Zanota responded that he takes the criticism seriously and that the committee is trying to address the pro-cyclicality in rulemaking through phasing arrangements. There is a long transition period to get to full implementation particularly for the leverage ratio and liquidity framework. The committee will not deviate from G20 mandate. Mr. Zanota has observed that banks that have more capital tend to lend more and while regulation has a cost in the long run it pays off.

Mr. Dodaro asked about the major sticking points in finalizing Basel III. Mr. Zanota responded that it has to do with the calibration of output floor. These output floors would restrict the use of banks’ internal model and move away from a bank parameter model to a foundation where regulators make inputs. The committee believes that the output floor percentage should be 80 percent while others think it should be 70 percent or lower. With the output floor percentage of 80 percent, there is a lower chance of using an internal approach. The Basel Committee tried to propose 75 percent, but it would not be as effective. They want to make it more granular. The regulatory uncertainty that this creates is not good.

Mr. Tsuhara (GAO) discussed promoting strong supervision and that the three pillars of Basel III (Minimum Capital Requirement, Supervisory Review Process and Market Discipline) are not assessing supervision. He questioned whether rules implemented locally be assessed or is it an exercise of box-checking. Mr. Zanota responded that they are looking into how minimum requirements are implemented but that the committee does not anticipate reviewing supervision. He referenced a shared paper on impact supervision discussing how supervisory agencies are organized to self-assess and how their accountability framework works. The committee has tried to identify the leading practices of this area.

Mr. Dodaro asked if there is a sovereign exposure working definition. Mr. Zanota responded that in the framework there is a particular treatment favorable for investing in sovereign debt, imposed locally by zero-risk weight.

Mr. Hansen (Sweden) asked how the committee seeks to achieve financial stability and whether there is a benchmark to achieve financial stability. Mr. Zanota responded that the committee does not define financial stability and it is hard to say whether they achieve it. However, they define public instability of market infrastructures and participants based on academic research. The Basel Committee does not have indicators for a financial stability framework because it is not in their mandate. Institutions like his and others are the best place to develop metrics to identify instability—metrics decide when they move, and what is stable and what is not. Mr. Zanota added that sometimes instability is good because it corrects problems, but not automatically, which is why you need regulation. He suggests utilizing the long-term impact report. The macroeconomic assessment report and long-term investment (LTI) report help others understand work proposals. The Basel Committee is not planning another LTI report. They are now engaging in more work on those aspects.

Mr. Tsuhara asked about complementary audit work, particularly what GAO is finding at the international level. Mr. Zanota stated that respective jurisdictions’ supervisory authorities receive audit reports, but it would be useful to identify if there are common themes that the committee could work on as well. International coordination should not wait.

Mr. Zanota clarified that Basel IV does not exist and wants to avoid using the terminology. Going forward the committee will rely on a web-based tool with the complete current framework to update modules in the framework.

Panel Discussion – Emerging Trends and What They Mean for Financial Markets

May 9, 2017, 2:30 p.m. – 3:30 p.m.

Thaya Brook Knight: Associate Director of Financial Regulation Studies at the Cato Institute

Increased regulation and a decline in company offerings in the public market

Thaya Brook Knight identified the decrease of company offerings in the public market as one of the most significant and troubling trends in capital markets, partially because the issue has not received attention and is not well known to many Americans. Ms. Knight stated that increased regulations and disclosure requirements have increased the risk of litigation and have made the process of going public more complex and expensive for companies. For these reasons, fewer companies are choosing to go public or are waiting longer to do so. Ms. Knight said that companies used to go public after 5-6 years and now are waiting as long as 9-10 years, meaning that their early period of explosive growth tends to be over by the time they enter the public markets. As a result, public markets are more stable but less dynamic and smaller than one would expect. Ms. Knight said that it was not surprising to see a decrease in public offerings after the financial crisis, but noted that there has not been a recovery.

Markets have become less accessible to average investors

Ms. Knight said that although public markets are smaller, companies are still raising money in the private market. Private securities markets now dwarf public markets, which Ms. Knight said is a problem, because private markets are often closed to the average investor. They are also less accessible to the retail investors who make up 95 percent of the U.S. population and who are limited in what types of investments they can make for liquidity reasons. Private markets are less transparent and liquid than public markets and require savvy investors who are knowledgeable about money and able to sustain greater losses. As such, gains in these markets are going primarily to the wealthiest 5 percent of Americans.

Americans depend on the stock market for their retirement

Americans have greater participation in capital markets than residents do of most other nations, largely because many of them depend on investments for retirement income. As a result, growth in capital markets is essential to many people and the health of the economy as a whole. This will become increasingly apparent as more and more members of post-pension generations approach retirement age.

Regulatory reform is necessary to restore public offerings

Ms. Knight stated that regulations must be reformed so they do not stand as a barrier to companies going public. This is critical because the investment-driven retirement security of many Americans is critical to the stability of the global economy. She also said that people tend to focus on reigning in Wall Street and issues with public markets. However, these issues should be discussed along with what is happening in private markets, where gains in the economy are concentrated, and factors that have, or have not, allowed most Americans to realize growth.

Donald Kohn: The Robert S. Kerr Senior Fellow and Senior Fellow of Economic Studies at Brookings Institution

Major risks and drivers of instability in the market

Donald Kohn identified two major risks in the financial system:

(1) the disconnect between socio-political risks and market prices, and (2) the growing interest in establishing barriers to the free flow of capital, goods and services, and people across borders and the resulting fragmentation of financial markets. In addressing this second issue, Mr. Kohn said that free flow of capital is a major accomplishment of the post-WWII world order that increases both efficiency and living standards. However, some people have been left behind in this process and that has led to resentment and an erosion of confidence in the system. He believes economic history is at a crossroads where the world will have to determine whether to continue forward under this post-WWII model or push back against it, creating an uncertainty that is not reflected in market prices.

Mr. Kohn identified two drivers of instability that are not well priced in private markets:

(1) externalities, or costs and benefits to society as a whole, outside of the market transaction, and (2) tail risk, an event that is unlikely to occur when markets do not know how to price or insure against it, such as the housing crisis. Regulations must determine what the relevant externalities and risks are and cause private market actors to include them in their determination of prices.

As banks reconsider their business models, regulators must monitor the situation

Banks and other financial institutions make money by borrowing short and lending long. Mr. Kohn stated that the current combination of low interest rates and low marginal growth will likely persist for some time and will probably lead many banks to alter their business models in the long-term. Regulators will need to monitor these changes, asking what services will be provided and at what cost, and consider whether businesses are resilient enough to recover from shocks.

It is necessary to take stock of post-recession regulations

Mr. Kohn said that now is the time to examine the complex and interrelated regulatory changes that have taken place in reaction to the financial crisis and to determine what their consequences have been. He stated that it is important to consider the benefits of regulations as well as their costs. Neither markets nor regulators were prepared for the 35 percent decline in housing prices that sparked the financial crisis and ensuing recession, and some of the regulations put in place in its wake will help guard against another crisis that requires an infusion of public dollars. Mr. Kohn considers public stress tests that require systemically important institutions to assess their readiness to deal with potential shocks, oversight of nonbank institutions, and orderly liquidation developments that will allow enterprises to go bankrupt without endangering the entire financial system to be positive results of regulations and elements of Dodd-Frank that the United States should consider keeping in place.

Mr. Kohn also recognized that regulations have a cost. For example, liquidity requirements can constrain the ability of banks to leverage capital and some of the Dodd-Frank regulations have had high compliance costs for small and medium banks with small systemic benefits.

International standards are critical

Mr. Kohn stated that the financial stability of individual countries is dependent on the stability of the other financial markets in which that country participates. As such, all countries should be involved in setting minimum international standards and meeting them. He expressed concern that recent U.S. interest in exiting various international agreements will intensify market fragmentation (for example, U.S. banks in other countries could be asked to hold more capital than other banks) in those markets. As such, he said that countries must be careful when backing away from reforms and agreements.

Discussion with working group members

Mr. Zaytsev (Russia) asked what indicators suggest an approaching crisis in an environment with low interest rates and risk spreads. Mr. Kohn said that the rapid growth of credit in a particular market with regard to GDP is probably the most important sign. Other indicators include loan-to-value and loan-to-income ratios rising significantly and the financial sector increasing rapidly compared to the capital base. The benefit of stress tests is that they consider the ability of banks to meet a wide array of risk factors.

Mr. Alfonso (Italy) asked what traditional banks will do to adapt to the changing climate and what might happen to employees who lose their jobs as a result of these changes.

Ms. Knight and Mr. Kohn agreed that as financial markets shift and traditional institutions are disrupted, regulators must look at the function of various entities more than their titles. Mr. Kohn suggested identifying specific risks and tracking them to see where they are in the market and then focusing regulatory actions there. The two panelists also agreed that standing in the way of technological progress is usually not successful. Mr. Kohn said that education and programs for unemployed workers must help those left behind by these changes adapt to the new economy.

Mr. Alwahby (Saudi Arabia) asked the panelists about the optimal roles of SAIs in ensuring the safety of the financial system.

Mr. Kohn advocated for watching the work of lawmakers and regulators to ensure their consideration of successes, failures, costs, and benefits when writing and implementing laws and regulations. Ms. Knight pointed to an unwillingness to undo regulations once they are in place, even if they are not functioning as intended. She said input from SAIs pointing out problems can help lawmakers build a case for repealing or altering counterproductive regulation.

Mr. Hansen (Sweden) pointed out it can be difficult to introduce financial regulations suggested by international organizations in a specific country because the internal governmental discussions that usually go into making laws have not taken place. Ms. Knight agreed and noted that the absence of the familiar notice and comment period that accompanies American rulemaking is sometimes the source of U.S. reluctance to enter into international agreements.

Mr. Kohn said that to gain legitimacy in individual countries, ideas generated internationally must go through the necessary processes specific to those countries, but advocated for establishing certain floors and standards internationally. Once those are established, countries should use their processes and make rules that are in line with those agreed upon standards.

Full Working Group Session – 2018 Terms of Reference

May 9, 2017, 3:45 p.m. – 4:30 p.m.

Mr. Tsuhara (GAO) began the session by suggesting that the working group leverage international relationships and have international organizations experienced in audit work conduct workshops on what they do and the knowledge, skills, and abilities involved, and consider how individual SAIs can apply those principles to their own work. For example, the group could learn more about desktop audits and how they might use those. Mr. Tsuhara also suggested surveying SAIs outside of the working group as a way to share knowledge, skills and abilities; ensure visibility, and identify knowledge gaps that need to be addressed.

Mr. Hildebrand (Brazil) said that he thought developing standards is a good starting point and voiced support for a proposal to expand and reach out to as many SAIs as possible.

Mr. Wang (China) supported identifying necessary principles and said that only writing reports are not sufficient for the working group. He suggested trying to develop a framework that would help establish the goals of financial system audits. Since every country is different with different mandates for its SAI, the framework could provide a direction based on agreed upon core principles that individual SAIs could apply in their own unique situations. Mr. Wang also discussed focusing on training, mentioning the INTOSAI Development Initiative (IDI) in Norway and saying he thought participating in that would be beneficial to all members. He also said he would like to further discuss rotation of the host country for meetings.

Mr. Mates (ECA) said he thought it was important to look for priorities and noted that as financial markets change, the skill sets needed by SAIs are changing and a policy is needed for developing those new skills that will be required in the future.

Ms. Zibo (Estonia) noted that the working group was established to share information and suggested deciding how to take the next step in sharing knowledge, skills, and abilities.

Mr. Männikkö (Finland) said that in the future, SAIs will have to devote more efforts toward evaluating the potential future outputs of current trends, something that will require additional skills among auditors. He also noted that as banks have become increasingly regulated, some of the risks they had once taken had moved to the public sector and the central government. He also suggested trying to assess the impacts of INTOSAI’s reports in governments around the world, examining whether they have informed discussions in the legislatures of world governments.

Mr. Okko (Finland) said that collecting information on SAIs’ mandates and the impact of their audit work in their respective countries was a very concrete and good idea and that he looked forward to working on it.

Mr. Wenz (Germany) said that if the group decides to develop something concerning a resolution, the approach should be simple, narrow, and achievable in the short term.

Ms. Sultan (Germany) agreed with China that utilizing IDI would be a good way to think of capacity building and SAI guidance in that area. She also suggested moving beyond alerting SAIs to new developments in the annual report to establishing an early warning mechanism to alert SAI’s to new developments in areas that might affect their audit work.

Mr. Alfonso (Italy) said he thinks that the structure of the subgroups is appropriate to monitor developments.

Mr. Bae (Korea) said he would like to hear perspectives directly from the market and suggested inviting market players to future meetings, if possible. He said this perspective would provide an idea of what is going on in the market in reality, helping the group think about what kind of framework is needed to audit a rapidly changing market. He also suggested conducting joint meetings with other working groups, noting for example that information technology is involved in financial markets.

Mr. Park (Korea) said that the working group must demonstrate its value to international bodies and share its resources.

Mr. Kempkes (Netherlands) said that since the working group has compiled a lot of valuable information, it should take the next step by converting conversations into action. To do that, he suggested that SAIs with more experience could set up parallel audits with less experienced organizations to share knowledge, skills, and abilities. He suggested involving more SAIs in parallel audits.

Mr. Ansari (Pakistan) suggested that SAIs with expertise in financial sector audits could take the lead on designing a manual and start training sessions to share skills and to train other trainers.

Mr. Zaytsev (Russia) also mentioned that SAIs have different practices and mandates and recommended identifying standard practices for SAIs to use as standards in international audits. He said that such a review could also identify the main gaps in staff knowledge, skills, and abilities. Mr. Mikhaylova (Russia) also supported Mr. Park’s point that the relationships and collaboration between working groups need to be strengthened, particularly efforts to monitor emerging trends and risks.

Mr. Hansen (Sweden) agreed with Finland about the difficulty of evaluating future outcomes, especially in the financial sector and advocated determining how to proceed. He also suggested publishing reports in English.

Mr. Alwahby (Saudi Arabia) asked in regards to objective 1, how the group would ensure the quality of a guide. With respect to objective 2, he suggested determining what kind of relationship to establish between groups and how to increase communication between subgroup members.

Officials from Mexico said they would share the proceedings with their technical group and send feedback at a later date.

Before adjourning the meeting Mr. Tsuhara noted that updating our Terms of Reference is an iterative process. To that end, we will summarize these ideas for potential future work streams and hold a subsequent meeting to refine and prioritize them.

Presentations by SAIs on Recent Audit Work
May 10, 2017, 9:30 a.m. – 10:15 a.m.

Presenters: China
United States

China Presentation

Mr. Chen (China) provided an overview of the areas that the China National Audit Office (CNAO) audits related to the working group’s mission and policies they promote.

• Financial regulators
• Financial institutions
• Economic responsibility – CNAO is a leader in this area
• Financial markets – CNAO conducts special risk audits of aspects of financial markets (stocks, bonds, securities)

Mr. Chen’s presentation focused on three key areas CNAO plays a role in:

• promoting and pushing forward financial reforms
• fighting against violations of law and regulation
• enhancing IT applications

Financial Reforms: With respect to helping China move forward on financial reforms (slide 3), CNAO’s authority is a key force in promoting key reforms. CNAO operates independently and not only audits financial regulators and institutions, but also reviews and make recommendations concerning policy. CNAO seeks to facilitate reform and prevent any problems in the field by reviewing both policies and the executors of these policies and making recommendations for any improvements. Within China, there have been a series of “supply-side structural” reforms in the following areas:

• cutting overcapacity (e.g. shutting down excessive amounts/outdated companies – “zombie companies”);
• de-stocking in real estate (to avoid huge fluctuations in price);
• de-leveraging debt financing; reducing costs (e.g., taxes and fees); and
• compensating for any weaknesses (for example, in how the financial sector serves the real economy).

Real estate market case (slide 4) – As an example of CNAO’s role in financial reforms, he discussed the results of CNAO’s special audit of real estate market fluctuations and their impact on the real economy, which CNAO began in 2016 and focuses on major cities in China. China’s policy is that housing should be used for residential purposes rather than for speculation. They had the following findings:

• some companies are involved speculative activities (which are forbidden);
• some individuals were making use of the names of enterprises;
• personal loans were not taken into account; and
• housing agencies were providing financing without permission.

Fighting against violations of law and regulation

China has a separated financial supervision system (slide 5); for example, they have separate banking, securities and insurance regulatory commissions over which CNAO has auditing authority. There are many participants in China’s financial market—banks, insurance companies, bonds, foreign exchanges, futures, and securities.

Mr. Chen also discussed an internet finance case. Each year CNAO transfers tips to regulators of potential violations. CNAO identified an internet finance pyramid scheme via their data analysis unit and was able to shut down this group (see slide 6).

Enhance IT application

CNAO has been working on enhancing IT applications for audits for a long time. They’ve had basic data collection since 2005, including collecting data from financial institutions and regulators. In 2008, they established a data analysis platform for several financial institutions and then in 2016 a cloud platform for a larger number of financial institutions. CNAO has used this enhanced data analysis in cases discussed previously and to perform analysis of loan concentrations and performance in various markets.

Question and Answers

Mr. Tsuhara (GAO) asked whether CNAO conducted interviews in the field for the real estate audit. Mr. Chen noted that CNAO did not conduct field interviews because they do not audit individuals. Their data analysis unit conducted most of the work. The audit took about a month and involved 10 staff people.

Mr. Zaytsev (Russia) asked how CNAO defined speculation in the real estate audit.

Mr. Chen stated that in China there are strict limitations on how many homes a person can own depending on the locality. For example, in Beijing a person may own two homes but any more than two is considered speculation and is prohibited. In smaller cities, residents may own more homes.

Regarding access to financial data, CNAO’s mandate gives them access to financial regulatory data. In addition, most financial institutions in China are state owned and auditees of CNAO; therefore, CNAO has access to that data. CNAO uses a cloud system for data analysis, which has been efficient and does not create additional work for them. CNAO can use the cloud system to produce forms and reports. Authorization to access the data, and how much, varies by CNAO staff level.

United States Presentation

Mr. Kevin Averyt (GAO) presented on a recent GAO report on the Federal Reserve Stress Tests. His presentation included discussions of the study’s origin and scope, key objectives, methodology, and findings and recommendations. In conducting this work, the GAO team also examined other federal agencies’ stress testing.

Questions and Answers

Members had several questions on the GAO audit and its recommendations. Mr. Avert explained that this initial report will set the foundation for future work. GAO evaluated the Federal Reserve’s stress test model, but did not independently validate the model. He noted that recommendation follow-up is part of the GAO auditing process.

Presentation: Tara Rice, Financial Stability Board (FSB)
May 10, 2017, 10:15 a.m. – 11:00 a.m.

Introduction

Ms. Rice stated the FSB was established to address financial system vulnerabilities and coordinate the development and implementation of strong regulatory, supervisory, and other policies. The Financial Stability Forum (FSF) was created by G7 in 1999 following the Asian Crisis. Ms. Rice’s presentation focused on the following issues:

G20 Financial Regulatory Reforms

• The goals of the reforms are to make financial institutions more resilient, make derivatives markets safer, and transform shadow banking into stronger market-based finance.

• Reforms were needed because the financial crisis imposed tremendous costs on the global economy.

Policy Evaluation Framework (PEF) and its objectives

• The Policy Evaluation Framework is a broad guidance on conducting sound policy analysis that considers ex post and ex ante analysis, social and private benefits, and costs of reforms.

• PEF goals are to assess whether the goals of the reforms have been achieved and address challenges of evaluation.

• Evaluations should assess the effectiveness of individual reforms, overall effects and interaction, and coherence among reforms.
Challenges implementing the reforms

• A structured framework can help address some challenges such as the incomplete conceptual framework for financial intermediation, confounding factors (region-specific, market), and limited data.

Tools for evaluations: methods

• Possible methods to use include qualitative analysis, descriptive statistics, and partial equilibrium.

• Evaluations will benefit from the use of multiple methods as they complement each other.
Prioritization and reporting

• Because policy evaluations are a resource intensive exercise, prioritization is the most important consideration

• FSB in collaboration with other stakeholders will discuss results of evaluations and determine issues to highlight and relevant information for the G20 annual report

Questions and Answers

Several SAI representatives asked about a variety of issues, such as the status of the liquidity study, methodology, timeline for the consultation process, prioritization, and source of data, among other issues.

Ms. Rice stated that there were a few approaches to the methodology. For instance, previously analysts looked at trends and extrapolated growth. One criticism of that approach is that we were on an unsustainable growth path. There has been some work to look at ranges in that trend line. Recently, some conservative estimates still found large impacts. Ms. Rice said she will send a link to this work. FSB is not starting from this hypothesis and will not be reinventing the wheel. It is not necessarily true that the same models will be used. Each time there are different people, different data, and more lessons learned. FSB uses different tools and different studies and has made strides in empirical analysis to evaluate policies. Currently, they are trying to think about processes to ensure objectivity and quality control, as well as independence. At the interim evaluation stage, there should be engagement with the academic community and SAI community to incorporate feedback before finalizing a study.

On the status of the liquidity study, the Capital Growth Fund (CGF) status on the markets and market liquidity saw that there was not significant time and data available to make a specific policy recommendation. Meanwhile FSB is conducting work on market liquidity that will be included in the annual report, taking a broader view. It is not an easily solved issue and is not likely to go away. It is likely that the work will be ongoing for a couple years, and it makes sense to look at market liquidity across a number of markets and even segments of markets.

Ms. Rice stated that the timeline of the consultation process closes on May 11; it started on April 11, 2017. FSB has received several comments already from the private sector and academic community. Academic comments had to do with the thinking on empirical methods and models that academics are teaching. From the private sector, they received suggestions for good topics to think about, both in the short- and long-term on specific issues related to institutions that may not have been on the radar.

Ms. Rice discussed the primary source of data and how is it comparable across financial institutions. Data that are needed differ for each evaluation. FSB and the Basel Committee have created a working group with member authorities, national central banks of 12-15 jurisdictions, which is beneficial since they have access to their own data. The Basel Committee also has access to rich data from their institutions. The working group needs to decide on data before completing their Terms of Reference to understand if the study will be limited by data availability. FSB is thinking about ways to organize the data. GAO suggested that there is a tendency to go where there are data that can be viewed and evaluated easily, but sometimes that data have to be created first by communities.

Ms. Rice described other regulations and policies that may be prioritized. The framework is intended to be specific to the G20 regulatory reforms. FSB tried to develop it to be more general and more applicable, even at individual jurisdiction levels. Ms. Rice said that market liquidity is a cross-sectoral issue and if material on unintended consequences is perceived, it would be prioritized on the list. Rather than starting from the reform and its evaluation effect and then proceeding with market liquidity, FSB identified the problem and is working to discover how to implement reforms.

In summary, Ms. Rice stated that there will be some evaluations that will likely be more general in scope, meaning that FSB could look at some aggregate data cross-country. Other elements may be more important when a reform is implemented differently across countries, and when the data available are different across countries. One possible solution is the banking network model.

Presentation: Nigel Jenkinson, International Monetary Fund (IMF)
May 10, 2017, 11:45 a.m. – 12:30 p.m.

Background on FSAP

Mr. Jenkinson provided an overview of IMF’s Financial Sector Assessment Program (FSAP). FSAP was created in 1999 to provide a comprehensive and in-depth assessment of a country’s financial sector. It is a joint program of the IMF and the World Bank. FSAP analyzes the resilience of the financial sector, quality of regulations and supervisory framework, and capacity to manage and resolve financial crises. It produces recommendations on a country-specific basis.

FSAP has two components: the FSAP Content Stability Assessment and the FSAP Content Develop Assessment. The FSAP Content Stability Assessment includes in stability module such as risk assessment, financial safety nets, and financial stability framework. The FSAP Content Development Assessment includes a development module such as public policy, financial sector infrastructure, access to finance, development and growth. FSAPs can include a Full Standards Assessment such as financial regulation and supervision, macroeconomic policy and data transparency and institutional and market infrastructure

Objectives of FSAP

• Strengthening financial systems by identifying risks to financial stability and systemic factors.

• Transferring know-how and good practices by sharing financial surveillances and stress test methodologies.

• Catalyzing financial reforms by strengthening contributions to the financial sector to enhance growth and development.

• Mitigating financial crises and contagion by facilitation intra-agency and cross boarder coordination.

Assessing the effectiveness of banking supervisions: Basel Core Principles (BCP) assessment

Banks are supervised because they play a key role in all economies, and to prevent to the extent possible a single bank failure that may have serious consequences. Additionally, bank supervision aims to ensure that banks operate in a safe and sound manner, comply with applicable laws and regulations and promote stability in the financial system in an efficient and cost-effective manner without stifling market innovations.

The Basel Committee, International Association of Insurance Supervisors (IAIS), and International Organization of Securities Commission (IOSCO) have developed principles for a comprehensive framework of supervision and regulation. These core principles are to be used as a yardstick by national authorities, IMF, and World Bank in evaluating the quality of supervision and regulation of individual countries’ financial systems.

IMF and World Bank took responsibility for conducting the assessment as part of FSAP or Report on the Observance of Standards and Codes (ROSC) process because the initial self- assessments were unsatisfactory, the Basel Committee lacked willingness and resources to do assessments, and private consultants could not be strictly objective.

BCP recommends a variety of preconditions for effective banking supervision such as a framework for financial stability policy formulation, framework for crisis management, recovery, and resolution, effective market discipline, and well-developed public infrastructure.

Characteristics of BCP

• BCP is a joint G10 standard that is the first comprehensive supervisory standard that addresses the core aspects of supervision such as risk, data, legislative framework and supervisory approach.

• It is designed to be applicable to all countries at all levels of development. BCP covers a broad range of topics (for example, powers, accountability, sanctioning powers of supervisors, regulations, corporate governance, and internal controls).

• It is also designed to be applicable to a wide variety of banking institutions.
What BCP are not:

• A guarantee that no bank will fail.

• A rigid set of standards.

• A remedy for economic mismanagement.
The FSAP assessment methodology

Mr. Jenkinson discussed the objectives of the assessment methodology:
• To determine whether banking supervisions are able to supervise the banking industry in an adequate and effective manner.

• To propose a course of action to address identified weaknesses or even enhance compliance with standards.
He also described the FSAP process:

• 29 principles and 231 criteria

• Detailed assessment by FSAP team of 2-3 people for up to 3 weeks in the field

• Draft assessment report which is reviewed by authorities, IMF, and World Bank

• Final detailed assessment report that includes comments from authorities

• Report on Observance published as part of FSAP

FSAP has five assessment outcomes: Compliant, Largely Compliant, Materially Non-Compliant, Non-Compliant, and Not Applicable.

Challenges for conducting FSAPs include resourcing, accountability, and risk management.

Questions and Answers

Mr. Jenkinson responded to questions on the processes to formalize coordination with the SAIs, training opportunities for SAI staff, and value of FSAP for SAIs.

The audit function has high value to IMF and financial markets, including following-up on work and reviewing particular elements of the supervisory framework. It might be duplicative for auditors to try to recreate IMF’s effort or goal, though there is an element of judgment in IMF’s work. At most, IMF and World Bank are conducting these assessments once every 5 years for systemically important countries and are doing them for other countries on a less frequent basis. As such, there is a lot of value in having SAIs further review targeted areas judged to be important to determine how a supervisor may be improving or responding to recommendations. IMF receives good information from countries and cooperation is high. However, there are still challenges—language, time, complexity, and the expertise of assessors. There is still a strong role for national auditors. SAIs know their countries better than IMF or World Bank, so it depends on each circumstance.

In terms of emerging economies, there are challenges in terms of the frameworks for supervision, resources, and their ability to assess. In some countries, political interference is a challenge. A new focus is on risk-based supervision and working with supervisors on how they develop their approaches to use their resources in the most effective way targeted at the most serious risks of the financial system. In some emerging markets, there is a compliance-based approach (e.g., Does the financial institution check the appropriate box?). However, there is a shift to move away from that approach and incorporate some element of risk and having supervisors challenge the financial institution to explain their decision-making.

Mr. Jenkinson stated that he is not sure of a systematic basis for these particular assessments to formalize coordination with the national audit institution. It is something that could be incorporated. These are very labor-intensive exercises, so access to more information or reviews is always helpful for FSAP teams.

Training opportunities for SAI staff would be quite challenging. It might be possible from the perspective of IMF. In order to undertake an FSAP, IMF works closely with the authorities in the country. There is nothing stopping the country’s authorities from bringing in anyone they want to liaise on the process. For example, the US FSAP was a 2-year process with staff from the Department of the Treasury and other U.S. agencies. The SAIs could contact the national authorities to become involved. From the IMF perspective, we would be cautious about loading up our teams with nonexperts.

Plenary Session – Full Working Group

May 10, 2017, 11:45 a.m. – 12:30 p.m.

The Plenary Session included reports from the chairs of the three subgroups and related discussions.

• Mr. Alfonso (Italy) stated that the 2017 annual meeting was particularly relevant for the working group, and so far, it had been the best annual meeting.

• Officials from South Korea noted that the annual meeting was interesting and that they would like to learn more information on financial markets auditing issues. They look forward to contributing to the working group over the next year.

• Mr. Kempkes (Netherlands) appreciated the opportunity to share experiences and knowledge among member SAIs. He stated that he enjoyed the IMF presentation and learning more about IMF’s evaluation framework.

• Mr. Ansari (Pakistan) stated that he learned a lot from the annual meeting and enjoyed sharing ideas with colleagues. He looks forward to presenting in next year’s annual meeting.

• Mr. Zaytsev (Russia) stated that the annual meeting was valuable and he and his colleague obtained a wealth of information and enjoyed the discussions. They look forward to continuing discussions with international standard setting bodies. They also are interested in learning more about different audit mandate authorities, especially in the context of applicability to Russia. As part of the broader outreach, he suggested involving other SAIs that are not members of the working group.

• Mr. Hansen (Sweden) stated that he obtained very valuable information from the annual meeting. He noted that the SAIs also have a role in monitoring financial markets in addition to work by the international standard-setting bodies.

• Officials from Saudi Arabia stated that they would like to formulate a strategy for monitoring financial markets that can be broadly implemented, so there may be shared global priorities.

• Mr. Hildebrand (Brazil) stated that he appreciated the opportunity to participate in the annual meeting and expressed appreciation to GAO for organizing the meeting.

• Mr. Chen (China) stated that he and Dr. Wang enjoyed the opportunity to share their experience with other member SAIs and learning from each other. The representatives are interested in further exploration on ways for making financial-market audits more effective and efficient, including best practices in conducting audits for financial markets.

• Mr. Mates (ECA) stated that he appreciated the interesting discussions, obtaining greater expertise, and expanding the knowledge base of financial sector audits.

• Ms. Zibo (Estonia) stated that she enjoyed sharing information and learning from member SAIs and other international organizations. She would be interested in exploring ways to do more work on financial markets and how that work can better contribute to the stability of the financial markets in the future.

• Officials from Finland stated that they were pleased with the discussions and the presentations. They would like to continue to learn more about the work of member SAIs outside of Europe. Representatives look forward to the possibility of jointly conducting parallel audits with member SAIs, including evaluation of resolution schemes.

• Officials from Germany stated that they found IMF’s work to be especially interesting and inspiring in looking for synergy between the work of the SAIs and IMF. Referring to IMF’s core principle concerning supervisory independence, they also reinforced the importance of maintaining independence in the SAIs’ audit work. They look forward to continuing efforts in broadening relations with international organizations.

Appendix Documents: Handouts

• Presentation by Austria on Audit on the Austria Banking Supervision
• Presentation by ECA on Audit on the Single Supervisory Mechanism (SSM)
• Presentation by Germany on Parallel Audit of Banking Supervision Post-SSM
• Presentation by Netherlands on Experiences with Parallel Audits
• Presentation by the Basel Committee
• Presentation by CNAO on Recent Developments of China’s Financial System Audits
• Presentation by GAO on Audit on the Federal Reserve Stress Tests
• Presentation by FSB
• Presentation by IMF