Fifth Annual Meeting
INTOSAI Working Group on Financial Modernization and Regulatory Reform
March 28-29, 2018
Beijing, China
Minutes and Proceedings
The fifth in-person meeting of the INTOSAI Working Group on Financial Modernization and Regulatory Reform (the working group) took place on March 28-29, 2018, in Beijing, China, at the headquarters of China National Audit Office (CNAO). The meeting was opened at 9:00 a.m. on March 28 and continued through the morning of March 29, adjourning at 12:00 p.m.
A list of the attendees, as well as the full set of meeting materials, is included separately.
Introductions and Welcoming Remarks
1. Welcoming Address by Ms. Qin Boyong, Deputy Auditor General of China National Audit Office
Ms. Qin Boyong, Deputy Auditor General of China National Audit Office, welcomed the attendees to CNAO and said that CNAO was privileged to host the fifth meeting of the working group.
She noted that over the past five years, under the leadership of the United States Government Accountability Office (GAO), the working group has fulfilled its mid- to long-term work plan as expected through the efforts of three groups focusing on three strategic goals. She greatly appreciated the hard work of the working group for enhancing the capabilities of SAIs in dealing with challenges faced by national and global financial systems.
She also noted achievements made by China during the past five years. China has withstood downward pressure, prevented a “hard landing”, maintained mid- to high-speed growth, optimized economic structure, and consolidated some good economic fundamentals in the long run. With respect to the financial sector, the monetary policy of China has remained stable and neutral, the growth of M2 has slowed down, and the scale of credit and social financing has grown moderately, therefore China has forestalled systemic risks and safeguarded financial and economic security.
She said that CNAO has been paying high attention to audits of the financial system, playing a key role in maintaining stability of financial markets and guarding against financial risks. She said that CNAO would continue to make full use of the advantages of government audits such as professionalism, extensive outreach, and fast responses, so as to detect well-hidden risks and provide early warnings in time.
2. Video Message from Gene L. Dodaro, Comptroller General of the United States and Chair of the Working Group
Gene L. Dodaro, Comptroller General of the United States and Chair of the working group, welcomed by video message all attendees present at the fifth annual conference of the working group. He thanked CNAO’s hard work as host of the meeting, as well as the leadership of Ms. Hu. He noted that he was pleased to see so many working group members participating, including new members, demonstrating their collective commitment to reaching the working group’s three strategic goals.
He noted that the group has made progress over the last year on a number of fronts including collecting and sharing in-depth information on members’ financial sector audit work, furthering relationships with organizations such as the Financial Stability Board (FSB), Basel Committee, and the International Monetary Fund (IMF), and monitoring international financial reforms. Mr. Dodaro expressed thanks for the group’s hard work over the past 5 years, which has enabled the group to enhance its capabilities and develop the tools necessary to analyze emerging risks to global financial stability.
He hoped that participants would have concrete plans for progress, gain a renewed sense of purpose for the group, and learn useful insights from guest speakers at this meeting.
3. Keynote Speech by Ms. Qin Boyong, Deputy Auditor General of China National Audit Office
Ms. Qin Boyong: Playing the Key Role of Audit in Forestalling and Defusing Financial Risks
Ms. Qin Boyong, Deputy Auditor General of the CNAO, shared with attendees some ideas on the outlook of national audits in light of financial regulatory reform and modernization.
Ms. Qin noted that the working group has made many achievements by promoting experience-sharing in the fields of financial regulation, financial modernization, and financial risks among supreme audit institutions (SAIs) and international organizations. The working group has also put in place sound internal mechanisms which are essential to its operation. Over the past 10 years, economies influenced by the crisis have managed much preparatory work, aimed at strengthening and optimizing financial regulation as well as forestalling and defusing risks, and revitalizing the market at the same time.
Ms. Qin talked about what China has done to forestall and defuse financial risks. Forestalling and defusing major risks, financial risks in particular, is one of top national priorities in the period to come for China. A top level design made at the National Financial Work Meeting in 2017 has proposed to deleverage its economy and maintain prudent monetary policy, strictly control new government debts and regulate local government financing and to improve financial regulation. China established the Financial Stability and Development Commission of the State Council to strengthen comprehensive supervision. The effects of financial regulation have improved and great headway has been made in defusing risks. They will continue to pursing progress while maintaining stability, avoiding the “risk incurred in dealing with risks”. Meanwhile, they will attach greater importance to the prevention of risks.
Ms. Qin noted that globalization is an irreversible trend, so prevention and defusing of financial risks calls for deeper international cooperation. China will further open up its financial sector and create sound policy environment, both facilitating orderly financial competition and guarding against financial risks.
Ms. Qin also talked about the role of government audits in forestalling and defusing risks. The fruitful results achieved by explorations made by CNAO demonstrated the importance of forestalling and defusing risks and the efforts of SAIs in this work. For instance, after CNAO found problems such as arbitrage between housing credit and non-housing credit as well as payday loans, CNAO timely referred such problems to lawmakers, which helped effectively guide and regulate the leverage of citizens, fix loopholes, and tackle problems. CNAO also helped relevant authorities push forward standardizing the market order and improve supervision in the field, so as to encourage block chain technology to play a positive role.
Ms. Qin said that the specific opinion on policy implementation issued at the beginning of this year will guide government audit institutions in China to do a better job.
External Presentation, Jose De Luna Martinez, World Bank
March 28, 2018, 11:00 a.m. – 12:00 p.m.
Jose De Luna Martinez: Potential Impact of G-20 Regulatory Reform in Selected Emerging and Developing Economies.
Mr. Martinez said that financial sector reform is an important area where the World Bank has been working with developing countries across the world. He said that promoting a more inclusive financial system has been a part of the World Bank’s work for years because, in some developing countries, financial services are still unavailable for individuals, companies and households. He noted that the ongoing G-20 and Basel Committee regulatory reforms may help to improve stability and efficiency of the domestic financial systems of advanced economics, but at the same time reforms may also have some spillovers to less developed economies, so G-20 members and the Basel Committee need to understand what these spillovers are.
Background Information
The number of banking crises that have taken place around the world from 1970 to 2011 suggests that banking crises are very common. These banking crises could be very costly from fiscal and economic points of view considering the fiscal cost and economic recession and unemployment in the aftermath of these crises. So preventing banking crises is part of their major work. The causes of bank solvency can be divided into macro, micro, and other factors.
Main Findings of Country Regulatory Assessments
The World Bank, together with the IMF, is working on the Financial Sector Assessment Program (FSAP). Together they try to see whether countries are prepared to handle problems in the financial sector by looking at the compliance with international regulatory standards, financial markets, the macroeconomic environment, and financial intermediaries. For years of work, the Work Bank has identified major weaknesses in the banking regulatory and supervisory framework in emerging market and developing economies (EMDEs) that can be summarized into five factors:
1) limited institutional capacity (independence and legal protection of supervisors;
2) shadow banking;
3) capital (consolidated supervision) and rules for asset classification and provision;
4) corrective measures and resolution of weak banking institutions; and 5) anti-money laundering.
International standards require supervisors to have adequate remedial measures for banks which do not meet prudential requirements or are otherwise threatened, but in practice it may not be that simple for supervisors to do the job due to various reasons.
Effects of the G20 Financial Regulatory Reforms in EMDEs：(Results from a Pilot Survey)
Mr. Martinez said that they carried out the survey due to the absence of survey data on the impact of these reforms outside G20 countries or non-FSB members.
1. The G20 Financial Regulatory Reform Agenda
Aimed at making the global financial system more resilient that serves the real economy while preserving its integrated structure, the G20 financial regulatory reform agenda incorporates new standards and practices. For instance, Basel III has been endorsed by the G20 and is expected to see its full implementation by 2022. The World Bank believes that, along with these reforms, costs and benefits may accrue differently across countries. For some countries it is impractical to just follow these reformed standards, considering their complex domestic situation; yet even implementation in one jurisdiction can trigger cross-border spillover effects.
2. Reasons to worry about non-FSB EDMEs
1) Effects could be disproportionate in these countries considering factors like the lack of credit ratings for borrowers, treatment of sovereign exposures, and that foreign-owned banks as major market players might pull out due to de-risking; 2) non-FSB EDMEs may be vulnerable even to intended consequences considering factors like their less liquid debt market, sizeable financing gaps, limited space, and weak institutional and supervisory capacity; 3) little is known about combined effects on non-FSB EMDEs.
3. World Bank Survey on the Cross Border Spillover Effects of the G20 Financial Regulatory Reforms
The objective is to fill the gap on monitoring the impact of regulatory reforms on EMDEs, particularly non-FSB EMDEs. Typical economies include Bangladesh, Colombia, Kenya, Morocco, Peru, Romania, and Tanzania. The scope covers: 1) risk-based capital reforms; 2) the leverage ratio; 3）liquidity reforms; 4) additional requirements for G-SIBs; and 5) OTC derivatives.
4. World Bank Survey-Key findings
These findings are based on a diverse but small country sample and these findings are based on qualitative responses rather than what quantitative data suggests.
The survey shows that the view of regulators is neutral to fairly optimistic; few point to higher costs for corporates, trade credit, or cross-border lending, but they emphasize the need for stronger home-host coordination. They also say regulatory reforms might lead to higher supervisory burden but they are confident to be able to face adverse spillovers and welcome international support.
The view of banks seems very pessimistic because they will face tighter conditions mostly driven by capital and liquidity reforms, and higher costs of risk management and doing business in EMDEs.
The respondents emphasized the need for regulatory consistency and suggest that more work is needed to understand impacts and channels.
Conclusion
1) More work is needed to understand impacts and channels including closer monitoring on impact of the regulatory reforms on non-member EMDEs. 2) EMDEs should continue to strengthen supervisory Independence, resources and capacity to match the pace of implementation of the reforms. 3) Stronger home-host coordination is needed. (sharing of information particularly for banks that are systemically important in the host jurisdiction). 4) Regulatory consistency is needed.
Questions and answers
1. Dr. Jochen Wenz (Germany) asked about the fact that there is no quantitative evidence from respondent countries. Mr. Martinez said that they did not expect quantitative data from those countries when they sent out the questionnaires. They want to get a sense of what their views are. In order to study what is really happening, they have to do analysis to understand the impacts of economic regulatory reforms. However, for some areas, they do have evidence such as evidence related to the de-risking of foreign banks and other negative impacts of regulatory reforms. Some consequences might be seen in the long run, but surely EDMEs will be affected by the regulatory reforms.
2. Mr. Helmut Kern (ECA) noticed that developed countries were not included. He hopes to see EU member countries will be included. He then asked about a guarantee mechanism related to banking system. Mr. Martinez said that they did exclude deposit insurance scheme, which is very important. They will consider it in the future.
3. Mr. Wang Yanjun’s (CNAO) asked about recent financial regulatory reform and macro prudential supervision in China. Mr. Shao Changyi noted that the China Banking Regulatory Commission (CBRC) and the China Securities Regulatory Commission (CSRC) would be merged. As for the macro prudential regulations, he suggested more attention on systemic risks monitoring and surveillance. And think-tank companies should look into particular perspectives. And the goals of opening markets wider and financial stability should be consolidated. The merger of CBRC and CSRC helps clearly define the macro and micro regulations, which is a very important improvement.
Presentations by Supreme Audit Institutions (SAIs)
March 28, 2018, 1:00 p.m. – 2:30 p.m.
Presenters: Brazil
China
European Court of Auditors (ECA)
Germany
United States (USA)
Brazil’s Federal Court of Accounts (TCU) – Perpetual Bonds, the attempt of capitalization of Caixa Economica Federal with resources of the Labor Fund (FGTS).
Mr. Eduardo Favero (Brazil) began his speech with a brief introduction of the Brazilian financial system. The Brazilian financial system is a big system, the credit operations involve about US$815 billion, which is 75 percent of the country’s GDP. The financial system is also very concentrated, as 4 banks account for 75 percent of all credit operations.
The approach of TCU for Brazil’s financial system is that 1) it audits the central bank, and its audit report show that the central bank has a good governance, it is improving the quality of its work processes, and it does a good supervision of the public banks; 2) it also performs audits in the public banks to see if they comply with rules and regulations. In Brazil, the National Bank of development (BNDES) is responsible for providing funds for infrastructure projects, and Bank of Brazil (BB) is responsible for agriculture projects, and Caixa is a public bank that belongs entirely to the Brazilian government.
Mr. Favero then explained Caixa and the Severance Indemnity Fund. Caixa’s mission is to implement many public policies in Brazil. And FGTS is a national fund. Because Caixa’s ratio of Level I is slightly higher than the requirements of Basel III in terms of Level I, the Brazilian government had to propose some solutions. The solution chosen is that Caixa issues perpetual bonds to FGTS and the latter give R$10 billion to Caixa. The Act 8036/1990 has some requirements for FGTS which makes it impossible for FGTS to give money to Caixa. After analyzing the situation, the auditors in TCU produced a report, and using the report, the federal court of accounts of Brazil made a final decision.
Questions and Answers
1. A member of CNAO explained that the Chinese social security fund invests mostly in low-risk bonds and long-term bank deposits. She then asked whether TCU conducted a performance audit or risk analysis on Caixa, rather than a compliance audit? If TCU has conducted this type of audit, what was the principal focus?
Mr. Favero replied that Caixa has many problems of compliance, and in many ways Caixa was used for political purposes. TCU still has not conducted a performance audit especially on Caixa.
2. Mr. Baudilio Tome Mugurza (ECA) asked why a social fund like FGTS would provide financial assistance to Caixa instead of the government.
Mr. Favero answered that nowadays the Brazilian government faces fiscal problems and does not have the capacity to rescue Caixa. Besides, the Brazilians cannot accept if the government openly gives financial assistance to a public bank.
3. Mr. Daniel Garcia-Diaz (GAO-USA) asked if there exists a bank guarantee when Caixa is not able to get the return.
Mr. Favero pointed out that if Caixa provided some credits to housing projects and sanitation projects and cannot get the return, the government will always be there to repay the bank.
4. Mr. Wang Jiahua (Nanjing Audit University) asked if there exists illegal trading in Brazilian bond markets, such as transfer of benefits.
Mr. Favero responded that TCU possesses many tools to conduct the audit, and every time they find an illegal trading of money, the relevant person will be thrown into jail.
China National Audit Office (CNAO) – The Application of Big Data technology in Financial System Audit.
Ms. Su Boyuan (China) talked about two things. First, she provided CNAO’s exploration in the application of big data analytics. At the first stage, the data used in a financial system audit was limited to commercial banks (which refers to the commercial banks), and the analytical techniques were relatively simple, mainly in the basic structured query language (SQL). At the second stage, the scope of data sources was expanded from state-owned commercial banks to other state-owned financial institutions as well as the financial regulatory agencies. She gave an example of implicit repo commitments under the counter. At the third stage, the data source is no longer limited to the financial sector but multiple sources. Big data has a profound impact on every aspect of financial system audit, especially on the reform of financial system audit.
Second, she gave an introduction of the financial system reform. From the traditional project planning, project organization and project outcomes to conduct a full-coverage audit with big data techniques.
Questions and Answers
1. Ms. Stephanie Schloegl (Austria) asked if CNAO faces any problems of reliability of data from different kinds of sources.
Ms. Su responded that the audit is an indispensable part of the Chinese oversight system. In fact, CNAO has the authority to use and analyze the data just in the financial institutions and not to bring them back and do the analysis.
2. Mr. Baudilio Tome Mugurza (ECA) asked which the fields of audit work CNAO plans to use big data.
Ms. Su, in her response, mentioned that CNAO made use of data (traditional financial data, interbank data) from different sources to conduct audits of full-coverage in commercial banks.
European Court of Auditors (ECA) – The European Court of Auditors: the auditors’ response to the financial crisis.
Mr. Baudilio Tome Mugurza gave a brief introduction of the ECA. Then he pointed out that since the financial crisis of 2008, the EU and its member states have devoted considerable resources to building a new framework to prepare for and prevent future crises, including measures of financial assistance programs, new supervising authorities, and a banking union, among others. He said that ECA have conducted a series of audits in financial and economic governance.
Mr. Mugurza explained an audit report on the European Commission’s Financial Assistance to Greece. The audit questions were: Was the Commission’s management of the Economic Adjustment Programs (EAPs) for Greece appropriate? Did the Commission have appropriate arrangements in place for managing the programs? Were the policy conditions appropriately designed and effectively implemented? Did the adjustment programs meet their main objectives? The main conclusions of the audit concern management of the EAPs, design and implementation of the reforms and achievement of program Objectives. The recommendations are on three aspects: 7 recommendations in terms of management of the EAPs, 2 recommendations as to design and implementation of the reforms and 2 recommendations in the domain of achievement of program objectives.
ECA – Performance Audits of Single Resolution Board and the ECB’s crisis management function.
Mr. Helmut Kern (ECA) presented the European Banking Union which is composed of three pillars: 1st pillar (Single Supervisory Mechanism together with the National Competent Authorities), 2nd pillar (Single Resolution Mechanism together with the National Resolution Authorities) and 3rd pillar (European Deposit Insurance Scheme, which is still under construction) and the Union’s member states. The three phases of a crisis management are recovery, early intervention, and resolution.
He then explained 3 performance audits:
1) The first is a performance audit on the Banking Union, and the relevant audit report can be downloaded on the official site.
2) The second is a performance audit of crisis management division in the ECB, but there are some limitations in terms of evidence including redaction of key documents and non-provision of other documents. The observation is that the ECB has established a substantial framework for crisis management procedures; however, significant improvements are needed. The recommendation is that ECB should do more on early intervention assessments and crisis identification and have better communication with the SRB and other bodies.
3) The third is a performance audit of the Single Resolution Board (SRB). The audit focused on the SRB’s readiness for resolution. The SRB provided some, but not all, of the requested evidence. Key policy documents were not provided even in draft form. The observations are the SRB’s resolution planning has shortcomings in many respects, and the SRB faced challenges from the outset in recruiting staff with the appropriate mix of skills. Delays in staffing impacted all aspects of its work, but not least resolution planning. The audit report recommends SRB focus more efforts on recruitment, internal guidance for resolution plans, and more information sharing between ECB and SRB.
Questions and Answers
1. Ms. Nancy Cheng (Canada) asked about the date of the resolution plan and what ECA did when it encountered some problems during the audit activities, such as non-provision of certain documents.
Mr. Helmut Kern replied that as to the SRB, it should determine a date of every single resolution plan. And for the second question, he said that even though the ECB restricted access to audit evidence in two ways (redaction of key documents and non-provision of other documents), there has a marked improvement from the first audit of the ECB in 2016. They can make conclusions on the design of the system, but not about the implementation in practice, and they described the fact of non-provision of some documents in detail in the audit report.
2. Mr. Matti Okko (Finland) asked if there should be further cooperation between ECB and ECA to solve the problems encountered.
Mr. Helmut Kern replied that ECB and ECA were considering reaching an agreement for their cooperation.
Supreme Audit Institutions – Bank Resolution in Eurozone Countries: Activities of the EU Contact Committee’s Task Force on European Banking Union
Ms. Nadiya Sultan presented on the European Banking Union, which is based on 3 pillars. Then she gave some examples of recent bank failures: 3 Italian banks and 1 Spanish bank in 2017 and ABLV bank in 2018. In the audit scope, she mentioned that 1) the SRB is responsible for significant institutions and cross-border groups in Euro-area countries and in opt-in non-Eurozone EU states; 2) The less significant banks fall under the remit of the national regulatory authority (NRA) of the member states; 3) SRM and NRAs work together and cooperate closely with banking supervisors. Then she mentioned the planned activities of the Task Force, a mapping survey on Bank Resolution (2018) and a parallel audit on Bank Resolution (2019). The aims of the mapping survey are as follows: map SAIs’ audit rights and rights to access information; understand the set-up and tasks of the national resolution authorities and identify areas for audit focus. Last, she gave some more detailed dates for the next steps to conclude the audit.
Supreme Audit Institutions – Task Force on EU Banking Union, Parallel Audit of Banking Supervision Post SSM
Mr. Jochen Wenz (Germany) presented an overview of the parallel audit of Banking Supervision Post SSM. The Task Force focuses on prudential supervision of medium-sized and small institutions in the EU. As to the elaboration of LSI supervision post SSM, there are some differences in three domains: regulatory transposition, design, and practice of banking supervision. SAIs also face some severe audit gaps: they do not have access to 1) the SSM supervisory manual which includes the processes, procedures, and methodology for the supervision of Significant and Less Significant Institutions (LSIs); 2) to the ECB’s Information Management System to which documents concerning LSIs are submitted; and 3) to the ECB’s annual report on the SSM supervision of LSIs. The report was submitted to the Contact Committee of EU SAIs.
U.S. Government Accountability Office (GAO) – GAO Work on Financial Regulatory Reform
Ms. Jill Naamane (USA) presented an overview of work on financial regulation which includes three aspects:
1) Describing and evaluating implementation and impact of different regulatory reforms;
2) Monitoring the unfinished business of reforms;
3) Identifying emerging risks to financial regulatory efforts.
She discussed several examples of recent audits in the areas mentioned above: Mortgage-Related Assets: Varying Capital Requirements Depending on Type of Asset; Mortgage Servicing: Community Lenders Remain Active Under New Rules, but CFPB Needs More Complete Plans for Reviewing Rules; Community Banks and Credit Unions: Regulators Could Take Additional Steps to Address Compliance Burdens; Federal Housing Finance Agency: Objectives Needed for the Future of Fannie Mae and Freddie Mac After Conservatorship; Financial Technology: Information on Subsectors and Regulatory Oversight; and Virtual Currencies: Emerging Regulatory, Law Enforcement, and Customer Protection Challenges.
Given the fact that time was limited, she focused on some examples.
The first example is the capital rule impact on mortgage servicing rights, 1) Objective: Evaluate potential effects of the risk-based capital treatment of mortgage servicing rights (MSR) on community banks’ decisions about MSRs; 2) Methodology: Determined whether community banks’ capital ratios met regulatory minimum amounts; Estimated community banks’ capital ratios without MSR deductions; Interviewed community lenders of a range of sizes and different levels of experience with mortgage servicing and MSRs; 3) Findings: MSR capital treatment likely would not have a material effect on most community banks; and the regulator’s plan to conduct a required study of the impact of mortgage servicing rules was incomplete; 4) Recommendations: Regulator should finalize a plan to conduct a required study.
The second example is GAO’s Monitoring Framework, 1) Objective: conduct a continual assessment of regulators’ efforts to help identify oversight weaknesses and ways to enhance their effectiveness; 2) Methodology: use quantitative and qualitative financial indicators to understand emerging risks. And GAO has initiated two studies as result of its monitoring efforts.
Finally, Ms. Jill Naamane talked about some emerging risks to financial regulatory efforts by explaining a descriptive analysis of financial technologies and virtual currencies. She highlighted the findings of the latter audit: Emerging challenges include consumer and investor protection issues, detecting money laundering and other crimes, and differing regulatory and legal regimes.
External Presentation, Guofeng Sun, People’s Bank of China (Central Bank)
March 28, 2018, 2:45 p.m. – 3:25 p.m.
Sun Guofeng: Money Creation, Financial Risk, and Financial Regulatory Reforms
Mr. Sun Guofeng, Director General of Research Institute of People’s Bank of China talked about financial regulatory reforms from the perspective of money creation. From this perspective, he said that deposits of money and the expansion of bank’s assets creates money, thus external limits on commercial banks are needed.
He noted that in the banking credit money system, commercial banks are responsible for money creation, so it makes endogenous financial risks including: 1) liquidity crisis and solvency crisis resulting from the vulnerability of banks’ liquidity; 2) moral hazards caused by the overexpansion of banks; and 3) asset bubbles triggered by the phenomenon that banks create money for media in exchange for stock assets.
He talked about some difficulties. He said it is not that easy for the central bank to distinguish between liquidity crises and solvency crises. He also said that implicit government guarantee and potential subsidy from government is also difficult to figure out.
He took the 1929 Great Depression and the 2008 Global Financial Crisis as examples to elaborate on equity bubbles and shadow banking problems. He said that in China, shadow banking includes interbank payments, lending to nonbanking financial institutions, investment, entrusted loans and trusted loans. So macro and micro prudential policies are necessary.
He then talked about the revolution of regulatory principles in China, where regulation evolved from institution-based regulation to objective-based regulation. This is good for solving problems including regulatory arbitrage, regulatory capture, conflict of regulatory objectives and problems in accountability mechanisms. He also talked about the central bank and financial regulation emphasis on distinguishing liquidity crisis and solvency crisis, maintaining central bank asset security and enhancing the efficiency of the monetary policy transmission mechanism.
As for the objective-based regulation, the three objectives are:
• Objective I: the stability of financial system
Macro-prudential policy
• Objective II: the soundness of single financial institution
Micro-prudential regulation
• Objective III: the protection of financial consumers and investors
Conduct regulation
He used a twin-peaks regulatory model in the UK as an example to explain the objective-based regulation. With respect to China’s financial regulatory reforms, PBC focuses on monetary policy, macro prudential policy and systemically important financial institution regulation; CBIRC focuses on objective II and CSRC focuses on objective III. He said that these regulatory reforms will help China to better deal with financial risks in the future.
Full Working Group Session
March 28, 2018, 3:25 p.m. – 4:25 p.m.
Introduction by Mr. Jeffrey Harner (GAO) about Terms of Reference (TOR) and the survey.
He said GAO started the survey based on three strategic objectives and within the objectives they set up short-term and long-term goals that used to the drive work of the working group. From last years’ meeting, the working group realized there is no document to guide the work within the three strategic objectives. Twenty-one priorities came up from last year’s meeting and GAO developed a survey to solicit ideas on how to rank these priorities to inform the new TOR. The goal of the survey is to identify themes and new goals to amend the TOR. He briefly introduced the results of the survey which can be read from the diagram. He believed it is necessary to update everyone this year because new members are coming in.
He pointed out three issues. First is what do we expect the working group to use the TOR for? Another question is about collaboration between subgroups. There might be slight differences between different subgroups to address the TOR. The third one is where do we draw a line as to what to be included in the TOR. Are the 21 priorities all needed to be included in the future TOR? Or probably there is a blending between different goals and responsibilities, but do we still want them to be separated by subgroups. These issues can be left to subgroup discussion to talk about and finalize the TOR for the next few years.
Questions and answers
1. Nancy Cheng (Canada) asked whether the TOR is like a 5-year strategic plan. She thought the TOR would include the objectives, the ways to achieve the objectives and continuous review of what have been achieved. She asked Jeff to further elaborate the role of TOR.
Mr. Harner responded that GAO still does not have a clear idea of what the TOR can and should be. From last year’s meeting, the TOR was set both as strategic objectives and a more specific work plan. So this should also be part of the discussion as to how do we define the TOR.
2. Nancy Cheng also asked how to guarantee the input of members who were not at the meeting.
Daniel Garcia-Diaz (GAO) responded that GAO will have communication with them, and share with them all the information and documents. The TOR will continue to grow and change until they finally reach a consensus. They will try to make sure the voice of those not here today will be included in the final version of TOR.
Introduction of the meeting memo by Liu Si’en (CNAO).
Mr. Liu introduced the background of the memo. As the leader of subgroup one, CNAO took the differences in countries’ audit scenarios into consideration and made surveys in previous meetings to try to find out what to do in the future. CNAO also made suggestions to GAO. With the help of GAO, CNAO developed the survey. The purpose of conducting the survey is to learn about the progress in the working group. He said so far CNAO received responses from eleven members.
Ms. Su Boyuan (CNAO) introduced the results of the survey and content of the draft memo. The results can be seen from the diagram and the results are all reflected in the draft meeting memo. She said that since 2015, developments had been made in areas like oversight of derivatives markets, fintech, and deposit insurance, so these areas are added into the selection. She introduced the content of the meeting memo. The first part is the background information, the second part is the main part of the memo, the third part is the proposal of what all members should do.
Questions and answers
1. Ms. Nadiya Sultan (Germany) asked about when CNAO expected feedback of the memo and what kind of feedback is expected.
Ms. Su Boyuan (CNAO) responded that they formed this memo on the basis of the survey. If you have any feedback such as taking away some part from the memo, please tell CNAO.
Mr. Liu Si’en also responded it’s completely fine to have comments and feedback on the draft version of memo. Comments and feedback can be made in this meeting or during the subgroup discussion or even after the meeting, all files will be sent to all of you including those not presented today. Maybe you need more time to think about this memo.
2. Mr. Baudilio Tome Mugurza (ECA) said many issues in the memo are new to them and they need more time to learn about them. Also, he found this work interesting but didn’t know the purpose of this work. He said probably he could not commit themselves into the 6 points presented. He had doubt, because for them, some of the points are under the range of other institutions. So, they cannot commit themselves to some points.
3. Mr. Jochen Wenz (Germany) said he appreciated the draft, he did not see many potential risks in this draft. He thinks it is a reasonable draft that demonstrated the working group is moving forward.
4. Mr. Sarfraz Hussain Ansari (Pakistan) asked whether all members of SAIs could have access to big data on finance and whether CNAO had any proposals in helping all members accessing big data. For developing countries, technology may not be advanced enough for the financial sector. In the memo, the fifth point is about financial technology and the second proposal is about the utilization of new technologies. He asked whether there is a specific SAI group to focus on or all SAI members should access big data.
Ms. Su (CNAO) responded that China has a successful experience in using big data technology in auditing the financial system, so this point is a future guidance for others and suggested others to use or try to use technology in the future.
5. Mr. Baudillo Tome Mugurza (ECA) suggested not giving new standards, suggestions rather than mandate should be given.
6. Mr. Helmut Kern (ECA) suggested the memo take into consideration FSB’s standards, because the G20 are committed to FSB standards.
Subgroup 1 Breakout Session
March 28, 2018, 4:30 p.m. – 5:30 p.m.
Countries represented in the session were Brazil, China, ECA, Pakistan, Saudi Arabia and the United States.
Ms. Su Boyuan (CNAO) began the session by suggesting each and every SAI representative make comments or suggestions on the Terms of Reference and the Meeting Memo.
Mr. Sarfraz Hussain Ansari (Pakistan) mentioned mandate and capacity issues in Pakistan. He said that in order to better perform audit work, they would need a broader mandate. With respect to big data finance, they still need to enhance their capacity of applying big data technology to audit work.
Mr. Eduardo Favero (Brazil) talked about the aspect of monetary policy in the meeting memo. He shared the auditing practice related to monetary policy, the internal process of the government accounts that Brazil has already analyzed. He said that clear guidelines are important and give a direction for SAIs to perform audits.
Ms. Su Boyuan (CNAO) said that CNAO thinks that the Terms of Reference as well as long-term and short-term goals can give guidance for the future work of the working group and CNAO is willing to take the tasks of forming the guidance for the SAIs’ future audit related to financial modernization and regulatory reform.
Mr. Baudilio Tome Mugurza (ECA) said that auditing regulatory and supervisory agencies, auditing processes, and how they are implemented would invite many cases. And actual power is needed to complete auditing. Auditing institutions do not do the work of supervisors or regulators. The work is to report whether supervisors or regulators are doing their job in appropriate ways.
Mr. Helmut Kern (ECA) suggested modifying the wording in some parts of the memo.
Ms. Jill Naamane (GAO) explained the two goals of the workstream survey. One is to inform what will be included in the next Terms of Reference, and the other is to identify countries participating and leading those activities. As for the next steps of the Terms of Reference, she said that it would be better to leave time for SAI representatives to discuss with other colleagues. She appreciated Nancy’s comment in the previous session about the organization of the documents and whether there is a more general way to identify the role of the working group and its objectives. She appreciated the priorities such as the short term versus the long term goals. With respect to the memo, she suggested summarizing the results of the survey and including some examples so as to recognize differences in authorities across SAIs.
Dr. Wolfgang Dehlwisch-Bell (Germany) said that this time audit resolution is the focus and that more can be done.
Subgroup 2/3 Breakout Session
March 28, 2018, 4:30 p.m. – 5:30 p.m.
Countries represented in the session were Germany, Austria, Finland, Canada, and United States.
Mr. Daniel Garcia-Diaz (GAO) introduced the session. He said they want to use this session to follow up on the TOR and the meeting memo and bring up considerations for next year. This annual meeting has been done in the United States for many years and now starts to rotate with China.
Mr. Jeffrey Harner (GAO) firstly asked whether everyone has access to the INTOSAI website, or whether the password still works for everyone. Because many people complain about accessing the website. He mentioned the survey Chile sent about experiences using the website. GAO is waiting for feedback on the website. Many participants from this subgroup expressed problems in accessing it. Jeffrey said they will definitely follow up on that and will send more passwords because the website is one way to share documents and surveys. Also, he said he saw their role as a collector of input from the group and made sure every member’s input was incorporated into a final document. He believes one result of the meeting is to solicit opinions from the members.
Also, Ms. Nancy Cheng asked to whom the members report about the TOR. Jeffrey answered their US group is accountable. They will prepare the annual meeting report and report to the board and it will be a condensed version.
Ms. Nancy Cheng (Canada) suggested we move forward on what we have achieved in the past. She said the world changes so fast, it’s not meaningful to plan out very long term. For example, three years ago we did not talk about Fintech or blockchain, but now these are hot topics. As for the TOR, she said the name doesn’t matter, the substance matters. They need to see what’s most meaningful to do in the next 3-5 years that benefits all sides. They need to renew the ideas that are meaningful. Probably if they keep people in a working group longer, they can find out what the meaningful things would be. Also she suggested they should have something respectable to produce. These two are the purposes. She suggested setting up a frame that includes the regulation part and the supervision part. Also they need to reconcile differences among countries at working group level, for example between China and Canada.
Ms. Nancy also introduced things in Canada that is meaningful to take notice of. One is in the recently published 2018 budget. A large section talks about regulatory reform for the financial area. Modernizing existing regulation seems to be important to do. Another thing is the importance of deposit insurance. The deposit insurance mechanism in Canada is very strong and they don’t have many failures in large institutions. But Canada needs to conduct reforms on trust accounts. The third thing is the reform of macro and micro regulation to keep the economy stable. The price is relatively stable in Canada, but price stability does not guarantee financial stability. So they need to identify the risks, then know what’s meaningful to do and then they need to have a framework. Canada also puts lot of emphasis on the response area. That’s why she put much emphasis on the resolution area. Canada also talks about Canadian Systemically Important Financial Market Infrastructure (SIFMI), the payment system, and the whole clearing mechanism, because these areas have a contingent effect on the financial sector.
Mr. Daniel Garcia-Diaz (GAO) said about the mandate issue and the capacity for each individual area is incredibly complex, the scope is massive and there are other parties too so we really have a lot of issues to think about so we have to be practical.
Mr. Matti Okko (Finland) said the situation for them is they have a mandate to audit the national resolution authority, but the challenge is the resolution authority and the financial supervision authority are very much integrated, so the supervisor is involved in resolution. So it’s a challenge for them to start auditing the resolution. That’s the situation in Finland.
Ms. Stefanie Schloegl (Austria) said they agreed with all the topics Nancy brought up. But since Austria is a European country, a lot of the topics are tied to the EU. As for the memo, she suggested making a recommendation because everything is simply suggestions and not formal enough. Because as a department in an institution, they cannot influence how big data is used. As for the survey, priorities are quite difficult to find, a score of 29 and 23 is not a big difference, and she wondered what the possible ways to categorize different work streams are to identify priorities. She thinks the TOR is like the way they communicate, and it can include open topics.
Mr. Jeffrey Harner (GAO) answered Stefanie’s question that at the beginning of developing the survey, they found it difficult to determine which work stream priorities would fit under which objective, and finally they organized them based on strategic objectives. But he agrees there is not a clean separation both within the different objectives and among the top two or three per-objective. They’ll reconcile that. He also thought they should focus on practical measures.
Mr. Jochen Wenz (Germany) said as for the TOR or memo, three to five years’ of interval is ok for them to include latest developments. There are already many good frameworks for what they are trying to do. For the drafts of the TOR and memo, they need to reconcile a lot with the framework.
Ms. Nadiya Sultan (Germany) summarized the respective role of the TOR and Memo. She said the TOR described what they do in a working group with three goals including sharing knowledge, enhancing understanding and cooperating with institutions. The memo is the themes that they should do in the future. She wondered whether the Memo is going to be published or just used as a guidance document. She suggested the working group SAIs work in a common way for a common topic, e.g. cyber security.
External Presentation: Yann Marin, Financial Stability Board (FSB)
March 29, 2018, 9:00a.m. – 9:40 a.m.
Yann Marin: FSB and financial reforms: Vulnerabilities in the global financial system and how they have been addressed since the crisis
Overview of the FSB history
Mr. Yann Marin described the history of the FSB. In 1999 the Financial Stability Forum was created by the G7 Finance Ministers and Central Bank Governors following recommendations from Dr. Hans Tietmeyer, President of the Deutsche Bundesbank. In April 2009, the Financial Stability Board was created as a successor to the Financial Stability Forum. The mandate and structure was adopted in September 2009 at the G20 summit in Pittsburgh.
Members of the Financial Stability Board comprise: Ministries of Finance, Central Banks and Supervisory Authorities from G20 countries and The Netherlands, Singapore, Switzerland, Hong Kong and Spain. International Financial Institutions: BIS, IMF, OECD, World Bank. International Standard-Setting Bodies: BCBS, CGFS, CPMI, IAIS, IASB, IOSCO.
The Plenary is the sole decision-making body of the FSB.
Structure of FSB standing committees
• Standing Committee on Assessment of Vulnerabilities (SCAV)
• Standing Committee on Supervisory and Regulatory Cooperation (SRC)
• Standing Committee on Standards Implementation (SCSI)
• 6 Regional Consultative Groups
Current vulnerabilities and work plan
Current vulnerabilities are snap-back risks in a rising rate, risks from high and rising debt, non-bank financial intermediation, and other areas of concern.
The main vulnerabilities identified after the crisis were addressed with relevant policy measures.
Early Warning Exercise (EWE)
• Twice per year, at IMF/WB Annual and Spring Meetings
• Less likely, more disruptive forward-looking risk scenarios
• Scenarios selected based on vulnerability, probability and impact
Work in financial technology
•Scope: classification of FinTech by primary economic functions
•Drivers of innovation and considerations for market structure
•Potential benefits and risks of FinTech innovations
Work on operational risks
• Internal analysis from a financial stability angle
• Focus on macro-financial vulnerabilities
Questions and answers
1. Mr. Baudilio Tome Mugurza (ECA): He wondered if there is any analysis or ranking of more risky jurisdictions, because now there is a ranking of institutions.
Mr. Yann Marin responded to the question with, No. Members don’t like to be pointed out as being risky. That is the jurisdiction and work of the IMF’s financial stability program. If you want to find the access to one specific institution or jurisdiction, go to the IMF website. FSB looks at the global financial system, and goes from risk to risk, and is more specific.
2. Mr. Helmut Kern (ECA) asked about the assessment of the role of central banks (e.g. interest rate risks had a sharp rise in the past several months) because the central banks are also members of FSB?
Mr. Yann Marin responded that they don’t assess the central bank themselves. Financial stability and monetary policy are difficult relationships. They are the mandates of the central banks. But if financial stability and monetary policy are convergent, risks will be mitigated. But because of the current monetary policy, financial stability risks are accumulating. The central banks have used all their tools to maintain financial stability such as macro prudential policy. The central banks don’t announce what they do, they provide guidance and take moderate actions to try not to cause disturbance in the market. The central banks will try to mitigate the risks. But it’s still a risk. Considering the current situation, it’s not likely to happen.
External Presentation: Alfred Schipke, IMF
March 29, 2018, 9:40 a.m. – 10:20 am.
Alfred Schipke: Fintech and Financial Services: Some Considerations
Mr. Alfred Schipke introduced the IMF’s main work and initial considerations about “Fintech and Financial Services”.
• Provides a general framework to analyze the potential impact of Fintech on the organization of financial services
• Examines regulatory implications arising from Fintech innovations
• Focuses on cross-border payments
Fintech innovations
• Exponential pace of financial innovation
• Investment and spike in Fintech interest
• Fintech innovations are far reaching
Framework of analysis
• Technology can affect market structure
Implications for cross-border payments
• Evolving landscape for cross-border payments
• New global networks using virtual currencies
• Introduction of central bank digital currencies
Regulation and financial stability:
• Technology and financial Regulation
• Objectives and principles of financial regulation: Strike a balance between promoting innovation and preserving financial stability and consumer protection
• The role of regulation in supporting trust
Implications
• Regulators may need to complement their focus on entities with increasing attention to activities.
V
• Governance needs to be strengthened.
• Policy options to support open networks could be considered.
• Legal principles need to be modernized.
Questions and answers
1. Mr. Baudilio Tome Mugurza (ECA): What are the challenges for regulators, supervisors and auditors?
Mr. Alfred Schipke responded with three challenges for regulators. The first thing is the speed of which things are changing. Regulators are not good at identifying things that they don’t fully understand or what they don’t know. The second challenge for regulators is that they are usually constrained by their own institutional set-up. Usually they have a segmented regulatory system, and some of the new technologies and services fall in-between segments of the traditional system and might involve different agencies. So sometimes regulators need to discuss whether the current regulatory structure of the country is still appropriate and sometimes they need to adjust it. A country needs to make sure the perimeter keeps up to date. The third big challenge for regulators is information, because most of the high-tech companies are small companies, and sometimes it’s difficult to find out what they have done before they have grown too big to fail.
Mr. Alfred Schipke gave a Chinese example that demonstrates the challenges the regulators may have. In 2013, ALIBABA came out with a financial product that looked like a checking account. It was a money market account in principle. It had the element of a payment system and payment platform, but the payment platform did not only do payment transactions. It was not purely a platform for a payment system. Within one year, the number of customers of this product, named YU EBAO, increased from zero to 85 million. This product is now too big to fail. It is a good example of how a product suddenly falls between the central bank payment system and the ALIBABA payment system. ALIBABA is a payment system the central bank regulated, but in reality, the checking account is the security regulation issue.
External Presentation: Ms. Yang JIANG, Tencent
March 29, 2018, 10:20 a.m. – 11:00 a.m.
Ms. Yang JIANG: Tencent and Its FinTech Business
About Tencent
Although Tencent is already one of the biggest internet companies in the world, it is less known to foreigners because its market is mainly in China.
Tencent has two and a half strategic business areas. One is a social network. The other one is content, and the remaining half is financial services (Fintech). Under the social network category, it has WeChat and QQ. For content, it has gaming, an online news portal, online videos, and online literature.
Mobile payment
The rapid growth of mobile payments in China was a miracle, and Tencent is proud to be part of this exciting process. The two major players in China’s mobile payment market are WeChat pay and Alipay. WeChat red packets are very popular among Chinese people. China now is ahead of the developed countries in mobile payments.
Other financial services
Starting from mobile payments, Tencent also extended their financial services to wealth management and personal loans, etc.
The advantages of Tencent in delivering financial services
• First and foremost is the broad coverage.
• The center of Fintech innovation is data and the ability to analyze data.
• Strong technical capability
Plenary Session – Full Working Group
March 29, 2018, 11:20 a.m. – 12:00 p.m.
The Plenary Session included reports from the chairs of the three subgroups, the closing remarks from Mr. Daniel Garcia-Diaz, and related discussions.
Ms. Su Boyuan (China) briefly reported the discussion results of subgroup 1, including the review on recent work, as well as the discussion on the TOR and meeting memo. Regarding the TOR, the representatives in subgroup 1 suggested to identify the role of the working group, objectives and differences, and asked for more time to do the decision-making. As to the meeting memo, the opinion was related to the lack of mandates, the importance of clear guidelines, as well as paying attention to the differences in auditing regulatory and supervisory agencies, auditing processes and how they were implemented. Some of the representatives suggested summarizing the results of survey, including some examples, and doing some changes on wordings. The representatives agreed to keep this issue open, and suggested more work to be done after the meeting.
Mr. Jeffrey Harner (GAO) briefly summarized the discussion results of subgroups 2 and 3. First, they talked about the website, and the way to make the website more accessible and interactive, and to make some of the documents more publishable. Secondly, they talked about the TOR. It’s important to remember that the Working Group was established in the context of financial market regulatory reforms, and it was established to better manage risks to the financial system. They suggested figuring out the Working Group’s role to play in addressing the risks in the financial system. There are 21 priorities in the survey, and it is not appropriate to put all 21 priorities in the TOR. They suggested keeping the document condensed, meaningful, flexible, inclusive and practical, and figuring out the top priorities that are of the most value to the group. It’s an iterative process that includes incorporating feedback from all members, as well as a lot of steps such as the survey. The next step is to develop a new TOR with further cooperation from the members.
Mr. Daniel Garcia-Diaz (GAO) expressed thanks to CNAO for volunteering to be the host for this year’s meeting. He appreciated the great steps of CNAO’s financial system audit and international operation departments in organizing the meeting and providing generous hospitality, which made this year’s meeting special and successful. He stated that the representatives shared their perspectives and different experiences, and learned more about their mandates and work priorities through the survey. The majority of the group members agreed that it was a high priority to continue collaborating with international organizations like IMF, World Bank and FSB, and to learn more about the methodology for evaluating financial regulatory reforms. It helps to better understand the mandates, not only of members of the working group, but also INTOSAI members more generally, particularly those jurisdictions identified as having significantly important financial sectors. In addition, the working group members assisted the United Nations to support sustainable goals and enhance global macro stability. In the coming weeks, a summary of the meeting and the meeting minutes will be developed, and the TOR will be revised. The input and the discussion from the meeting will be documented. Implementing suggestions to improve access to the INTOSAI website to document the activities was also observed as a resource for learning and maintaining relationships. Finally, he talked about identifying the host for next year’s Working Group annual meeting, and suggested fostering the relationships, discussing how to address challenges in designing audit engagements and monitoring emerging risks, and continuing beneficial interactions among members.
Ms. Stefanie Schloegl (Austria) expressed appreciation to CNAO for hosting the 5th meeting, and giving them the opportunity to visit Beijing and learn a lot from the speeches. She also wanted to thank GAO, for choosing the excellent speakers and topics. She noted that she learned a lot especially from the speeches of the representatives from small countries.
Mr. Eduardo Favero (Brazil) stated that the meeting gave them a lot of knowledge about financial regulatory reforms. And they were available to contribute to the group and wanted to participate, because in Brazil they face many challenges in this area. They try to keep up with everything in the world and manage their own jobs.
Ms. Nancy Cheng (Canada) stated that the external presentations were very good, and it’s a feature which the group should attempt to keep. We need to find out what the newest developments are, and it is an important source that we can share with organizations like IMF. She also appreciated the colleagues around the table putting their time and efforts in providing their presentations on the issues they face and the work they have done. She considered it as another feature which the group should keep moving forward. The discussion on the potential things which could be done together was meaningful, and she hoped to have more time to talk about it in the future.
Mr. WANG Zhicheng (China) appreciated all the delegates for participating the meeting, and Mr. Daniel Garcia-Diaz and the team from GAO for their excellent job. He talked about the bad weather jokingly, and finally hoped that all the delegates had a good stay and experience in China.
Mr. Baudilio Tome Mugurza (ECA) stated that the meeting’s arrangement by CNAO and GAO was very successful, and it was very useful to share experiences and get the input from international organizations and experts, because the environment was challenging not only for regulators, but also for the auditors.
Mr. Marko Mannikko (Finland) noted that it was a great meeting which was hosted by CNAO and supported by GAO. He said that these kinds of opportunities were important, which let us know what was happening in the world.
Dr. Jochen Wenz (Germany) appreciated his Chinese colleagues and GAO arranging everything in such a perfect way. As a relatively new member here, he was pleased to share experiences with all representatives and is willing to continue to contribute.
Mr. Sarfraz Hussain Ansari (Pakistan) noted that this meeting was very important and wonderful, and was meaningful for his country’s financial system reforms. He said that the banking system and online payment was developing very quickly, and the mandates for auditing these issues should be discussed. He suggested the memo be based on how to conduct the financial regulatory reforms, and served as a traditional audit performance indicator, which would be useful for the audit of financial institutions. He also suggested developing other new indicators to assess performance.