Sixth Annual Meeting

INTOSAI Working Group on Financial Modernization and Regulatory Reform

May 15–16, 2019

U.S. Government Accountability Office, Washington, D.C.

Minutes and Proceedings

The sixth in-person meeting of the INTOSAI Working Group on Financial Modernization and Regulatory Reform took place from May 15–16, 2019, at the headquarters of the U.S. Government Accountability Office (GAO) in Washington, D.C. The meeting was opened at 9:30 a.m. on May 15 and adjourned at 5:00 p.m. on May 16.

A list of the attendees, as well as the full set of meeting materials, is included separately.

Introduction and Welcoming Remarks

May 15, 2019, 9:30 a.m. – 10:00 a.m.

Gene L. Dodaro, Comptroller General of the United States and Chair of the working group, convened the meeting. He welcomed the attendees to GAO and said that he was pleased that more than half of the 28 working group members were participating in the meeting. He noted that the working group has made progress in developing and maintaining its relationships with international organizations including the International Monetary Fund (IMF) and Financial Stability Board (FSB). He also noted the importance of Supreme Audit Institutions (SAI) in identifying current and emerging risks to the financial sector. Moreover, he thanked working group members for continuing to communicate and share information within the group and externally with international organizations.

SAI Summaries on the Organization of Financial Sector Supervision and Status of Modernization Efforts

May 15, 2019, 10:00 a.m. – 11:30 a.m.

Presenters: China, Estonia, European Court of Auditors (ECA), Finland, Germany, India, Italy, Qatar, South Korea, Spain, Sweden, and the United States

SAIs presented on handouts prepared in advance on their respective country’s 1) financial sector supervisory structure; 2) key modernization efforts since 2009; and 3) emerging risks facing the financial sector.

China: National Audit Office

Regulatory and supervisory framework. China has been moving toward a sector-based model. The Central Bank is responsible for monetary policy and the stability of the financial system. Each sector is represented by its own commission: the Banking Regulatory Commission, the Securities Regulatory Commission, or the Insurance Regulatory Commission. China implemented large scale reforms in 2018 when it established the Financial Stability and Development Committee (FSDC) to manage financial risks and coordination across all of the financial regulatory agencies. The banking and insurance commissions were combined into one regulatory body, the China Banking and Insurance Regulatory Commission (CBIRC), and the FSDC and Central Bank were both given responsibilities for financial market regulation. FSDC coordinates financial regulation and supervision, while the Central Bank conducts monetary policy and regulates financial markets. The Central Bank also adopted the Macroprudential Assessment Framework to assess key macroprudential indicators in a rule-based manner.

Key modernization efforts. Modernization efforts in China include prudent monetary policy and using market-based indicators to control the overall flow of money in the economy. Other actions include the implementation of asset management product standards, strengthened prudential regulation, enhancing disclosures, and the monitoring of systemic risk (including promoting on-site inspections and stress tests). The Central Bank, CBIRC and Securities Regulatory Commission also took steps to strengthen microprudential supervision. Enhanced coordination and information sharing mechanism with the Joint Ministerial Conference on Financial Regulatory Coordination was also implemented.

Emerging risks. Emerging risks to the financial sector identified by China include a GDP growth rate that remains above target, but is below its 2017 level. China is currently in a period of economic structural adjustment and upgrading. The growth model needs to shift from investment-and-export-driven to a more sustainable style. Additional risks to the financial sector include inefficiency in the current credit supply/financing system, instabilities in liquidity, non-financial enterprises, complex linkages across financial intermediaries, off-balance sheet business, internet finance, and indirect financing from local governments.

SAI oversight role. Performance audits of financial regulators have been part of the National Audit Office’s mandate since 2014. Three Financial System Audit Bureaus were established to conduct financial and performance audits on the Central Bank and regulatory agencies to better supervise the regulatory system.

Estonia: National Audit Office

Regulatory and supervisory framework. The Central Bank oversees financial markets as a whole, but individual financial markets are supervised by the Estonian Financial Supervision Authority. The Central Bank is responsible for macroprudential supervision, assessing risks, designing policies, and securing the safety net of the financial sector. The Estonian Financial Supervision Authority is responsible for financial supervision and crisis resolution, including supervision of markets and services. Estonia is a member of Eurosystem and the Financial Supervision Authority is part of the European Single Supervisory Mechanism.

Emerging risks. Funding for Estonian banks could become more expensive if financing conditions for Swedish banking groups worsen. In addition, rapid growth in wages and strong confidence may increase demand for housing and accelerate growth in housing loans above manageable levels and make the real estate market difficult to manage.

SAI oversight role. The Estonian National Audit Office has a small oversight role and there are questions about its rights to audit supervisory authorities, which it is in the process of trying to resolve.

European Union: European Court of Auditors (ECA)

Regulatory and supervisory framework. The EU system is complex. It developed out of the last financial crisis and has taken time to settle because of some tensions between what is legislated and what is put into practice. There is direct supervision of financial sectors, but decisions are made by the Single Supervisory Board. The board has five representatives from the European Central Bank (ECB), a chairman that is appointed by the EU, and 19 representatives that are appointed by member states. Limited resources exist throughout the framework. For example, the ECB has little management control over staff allocated to Joint Supervisory Teams; only 10 percent of onsite inspectors are led by ECB staff. Further, regulation requires the European Banking Authority (EBA) to ensure consistency and quality of inspections, but they have extremely limited resources for onsite inspections. Further, the chairman of EBA said that while the EBA’s role is to initiate stress tests, it does not have much authority to do so. Other concerns about the regulatory and supervisory framework include that the EBA is only run by national authorities who are not appointed at the EU level (except for the Chairman). This governance structure issue was evaluated in 2017 and is currently being reconsidered.

Emerging risks. There are high levels of non-performing loans in some EU countries that may present financial stability risks and reduced levels of new lending.

SAI oversight role. ECA has experienced issues with accessing data and information from the ECB. The EU parliament requested that ECA provide an update when the issue is resolved; however, ECA has not issued any progress reports since 2018.

Finland: National Audit Office

Regulatory and supervisory framework. The Financial Supervisory Authority supervises the financial and insurance sectors and is responsible for prudential supervision of the credit institutions sector. The Bank of Finland contributes to maintaining the reliability and efficiency of the payment system and overall financial system.

Key modernization efforts. The Financial Stability Authority is a new independent agency that operates as the national resolution authority.

Emerging risks. Consumer loans are a risk and the level of private bankruptcies is high. The provision of payday loans has increased rapidly and legislators have set an interest rate cap on loans below 2,000 euros. Preparations are underway for extending the interest rate cap to cover all consumer loans, except housing loans.

SAI oversight role. The National Audit Office’s mandate covers the Ministry of Finance, but not the Bank of Finland.

Germany: Bundesrechnungshof

Regulatory and supervisory framework. The Single Supervisory Mechanism is in place in Germany. ECB directly supervises significant institutions. The national supervisory authority oversees smaller ones. The insurance market is supervised by both the federal government and states. The federal supervisor is responsible for overseeing economically significant insurance companies and those that operate across state lines. The stock exchanges and securities markets are supervised by states, and their authorities monitor the pricing process, trading, and registration of trading systems.

Key modernization efforts. In 2018, the Markets in Financial Instruments Directive gave supervisors transparency and consumer protection tasks. Also in 2018, the Payment Services Directive II changed the EU payments market and provided new payment options and methods (such as E-wallet). In 2019, a banking package was implemented, which required a mandatory minimum leverage ratio and net stable funding ratio. The package also contained new rules for calculations of counterparty risks, new reporting requirements on market risks, and reduced disclosure and reporting requirements for small banks.

Emerging risks. One risk is that the likelihood of an economic downturn is increasing. Ongoing economic growth and low interest rates are also leading to vulnerabilities and there is a trend of underestimation of credit risks. A decline in borrower bankruptcies can be positive but the decline is also dependent upon bank customer ratings and risk programs.

SAI oversight role. The SAI audits supervisory issues, but not decisions.

India: National Audit Office

Regulatory and supervisory framework. Various financial regulatory entities exist in India including Reserve Bank of India, Securities and Exchange Board, Pension Fund Regulatory and Development Authority, and Insurance Regulatory and Development Authority. The Insolvency and Bankruptcy Board enacts regulations on processes and professionals and writes and enforces rules.

Key modernization efforts. In 2017, India’s biggest indirect tax reform—the Goods and Services Tax—was introduced, which replaced many indirect tax laws and has led to a decrease in goods. Basel III has also been implemented in India.

Emerging risks. The biggest risk is the rising non-performing assets in banks. Thirty-seven percent of the total debt in India is at risk.

SAI oversight role. The Reserve Bank of India is outside of the SAI’s audit jurisdiction.

Italy: Corte dei conti

Regulatory and supervisory framework. The Bank of Italy and the National Commission for Companies and Stock Exchange are the national supervisory authorities. The Bank of Italy conducts supervision for all banks and is given significant powers and authorities for transparency and consumer protection. The Commission for Companies and Stock Exchange conducts financial market supervision. Financial institutions are supervised by both entities. National supervisory authorities are responsible for sanctions and, at the European Union level, the main prudential rules and requirements for credit institutions are set by the Capital Requirements Regulation/Capital Requirements Directive IV package.

Key modernization efforts. Italy has adopted the Single Supervisory Mechanism. The Parliament and government have aimed to modernize financial banking regulations and have also focused on alternative financial intermediation, microcredit, and ethical banking. In 2015, reforms required Italian banks to change to joint stock companies. Basel III rules have been fully implemented in Italy and they have also updated their regulations to address financial technologies.

Emerging risks. Low-growth and a high national debt-to-GDP ratio are risks, although Italy’s ability to handle financial shocks is supported by the low private sector debt and trade surplus. Additional risks include a negative credit-to-GDP gap, a poor nonperforming loan ratio, and declining house prices.

Qatar: State Audit Bureau

Regulatory and supervisory framework. The Qatar Central Bank is the umbrella regulator of banks, investment companies, and insurance companies. The Qatar Financial Markets Authority regulates financial markets and the Qatar Financial Center Regulatory Authority regulates financial institutions in the Qatar Financial Center. The banking sector is subject to supervision through on-site inspection and off-site surveillance.

Key modernization efforts. There have been a number of recent modernization efforts, including the implementation of Basel III. Qatar created the Qatar Financial Center, which functions similarly to a central bank, but for offshore financial institutions and companies and includes all entities (such as banks, insurance, fund management, brokerages, custodians, etc.)

SAI oversight role. The State Audit Bureau historically conducted only financial exams, but it recently restructured and now conducts performance audits.

South Korea: Board of Audit and Inspection of Korea

Regulatory and supervisory framework. There are two main supervisory institutions. The Financial Services Commission (FSC) is a government entity responsible for financial sector supervision, including soundness of financial markets, prudential credit matters, and fair trading. The Financial Supervisory Service (FSS) is a non-government public institution that conducts licensing, prudential regulation, examinations, and sanctions. In 2005, South Korea created a macroprudential supervision department to prevent systemic risks and to enhance monitoring.

Emerging risks. One main risk is the growth rate of household debt. The rate of growth has decreased slightly, but it varies according to the type of debt. FSS has been helping financial technology startups grow, but it is also making efforts to try to manage the financial regulatory sandbox in this respect.

Spain: Spanish Court of Audit

Regulatory and supervisory framework. Since 2014, the Single Supervisory Mechanism headed by the European Central Bank (ECB) has been in charge of the supervision of Eurozone institutions. This model is aimed at guaranteeing the effectiveness and efficiency of supervision and controlling risks. The ECB may issue guidelines to ensure consistent directions across countries. The ECB oversees the Single Supervisory Mechanism in coordination with national banks. Joint Supervisory Teams (JST) conduct day-to-day supervision of significant financial institutions within the Eurozone and include staff from the ECB and the National Competent Authorities (NCA). NCAs supervise the Eurozone’s less-significant financial institutions directly. Bank of Spain is the national designated authority on macroprudential policy in accordance with its national legislation, which elaborates on EU rules.

Sweden: National Audit Office

Regulatory and supervisory framework. The Financial Supervisory Authority (FSA) conducts both macro- and micro-supervision. The Swedish Central Bank is responsible for monetary policy and financial stability, including ensuring a safe and efficient payment system. The Swedish National Debt Office is responsible for handling banks in crisis as well as the deposit insurance system. The Ministry of Finance is responsible for creating laws and regulations for the financial system. All four entities are involved in the Financial Stability Council, which is a forum that meets twice a year to discuss financial stability issues and to coordinate policy.

Key modernization efforts. To address underfinanced banks and liquidity risks, there is new legislation and requirement for banks to have higher quality capital. FSA is now responsible for macro-supervision and Sweden has implemented a new regulatory framework for managing failing banks.

Emerging risks. There is a risk of high and growing household debts. While state debt is low, household debt has a debt-to-income ratio of 185 percent. Other risks include rising interest rates and housing prices. In addition, while banks have taken some steps to make the banking system more secure, cyberattacks still present a risk.

SAI oversight role. The National Audit Office has a strong mandate to audit activities by the government and authorities, with the exception of Central Bank Monetary Policy.

United States: Government Accountability Office (GAO)

Regulatory and supervisory framework. The U.S. has a complex regulatory structure that has evolved piecemeal over 100 plus years in response to different crises, both financial and political. The structure consists of a patchwork of federal and state regulators as well as self-regulatory organizations. The securities and futures markets are regulated separately by two regulators and the insurance industry has a largely state-based regulatory system with no federal regulator. The structure creates inefficiencies and needs significant information sharing and collaboration to make it work.

Key modernization efforts. The United States is more resilient post-crisis and has made significant progress in heightened prudential standards. For example, both the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System have new tools and authorities in place to resolve a failing systemically important financial institution outside of the bankruptcy process. The United States is also in better shape because of new capital and liquidity regulations and limits.

Emerging risks. GAO has designated the U.S. financial regulatory system as a high risk area in need of modernization. GAO has looked at the banking system and the securities market, but risk might be migrating to other areas of economy. GAO utilizes an Emerging Risk Monitoring Framework to see how regulators are responding. While technology can have benefits, it can also be disruptive and while the United States does want to suppress innovation, it also wants robust consumer protection.

SAI oversight role. Most of GAO’s work stems from congressional requests and legislative mandates, although about 5 percent of its work conducted under the authority of the Comptroller General, which allows GAO to conduct more forward-looking work on critical or strategic issues. GAO has audit authority over federal financial regulators, excluding over monetary policy.

Financial Stability Board Priorities and Recent Work

May 15, 2019, 12:00 p.m. – 1:30 p.m.

Presenter: Costas Stephanou, Acting Head of Financial Stability Analysis

Background

Mr. Stephanou said the Financial Stability Board’s (FSB) work program is pivoting from the financial crisis and the implementation of post-crisis corrective regulations to a more forward-looking strategy focused on potential new risks and vulnerabilities to the global financial system.

Mr. Stephanou’s presentation focused on FSB’s work program for 2019 and beyond, and the deliverables FSB will produce for the June G20 meetings in Japan.

FSB’s Work Program

The 2019 work program and priorities intend to focus on the following issues:

1. Addressing new emerging vulnerabilities
2. Finalizing and operationalizing post-crisis reforms
3. Evaluating the effects of reforms
4. Reinforcing outreach to stakeholders

Addressing New and Emerging Vulnerabilities

Mr. Stephanou discussed the new and emerging vulnerabilities that may affect the global financial system.

Market fragmentation – One of FSB’s goals is to continue the global cooperation across international regulators that resulted from the financial crisis. It is important that global cooperation continues to reduce the impact market fragmentation has along jurisdictional lines and to maintain market stability. Mr. Stephanou noted that not all market fragmentation is bad, but the global markets must have the right balance between fragmentation and financial stability. FSB is trying to identify instances where regulations may have contributed to market fragmentation, such as trading derivatives across borders and global capital and liquidity management.

Fintech and cyber resilience – Mr. Stephanou noted that, recently, the big tech firms have been entering into an area of financial services that could cause additional risk to the global financial system. Fintech companies, which have entered the area of financial services in last couple of years, are generally small companies, so they are not considered as much of a risk to the financial system. However, the big tech companies are much larger and can handle a much higher volume of financial transactions. Because of these developments, FSB is producing written products on three topics in this area: (1) market structure, (2) crypto-assets, and (3) decentralized financial technologies. New financial technologies can present a risk if transactions are conducted over new platforms and financial intermediaries are bypassed. The challenges presented by these decentralized technologies are: (1) new forms of concentration and operational risks, (2) the recovery and resolution of payments, and (3) greater pro-cyclicality. FSB is working on developing a toolkit of good practices for assisting banks to respond to and recover from cyber incidents across borders. One of the goals of the toolkit is developing a common terminology and methodology for country regulators to use when they are creating regulations in the area of cyber.

Finalizing and Operationalizing Post-Crisis Reforms

A lot of post-crisis reforms have been implemented, but there are a few remaining areas where policy work is still being done.

Central Counterparty Clearing (CCP) Resolution: CCPs had a much smaller role before the crisis, but because of post-crisis reforms, derivatives contracts are now cleared though CCPs making them a potential source of a systemic risk. FSB’s ongoing work on CCP Resolution aims to produce a framework that, among other things, clarifies resolution arrangements and responsibilities.

Addressing Risks in Non-Bank Financial Intermediation: FSB now refers to “shadow banking” as non-bank financial intermediation, because some felt “shadow banking” had a negative connotation. FSB monitors the systemic risk of non-banks and is developing practices to address these risks.

Evaluating the effects of reforms

FSB has developed thematic peer reviews (1) on bank resolution planning in which it tried to ascertain the remaining gaps in bank resolution planning, (2) on the legal entity identifier (LEI) with the objective of evaluating FSB members’ progress in global adoption of LEIs, (3) for its second round of country reviews starting with South Africa and Mexico, and (4) on the implementation of the total loss absorbing capacity (TLAC). FSB also developed an implementation dashboard which shows a snapshot of the status of implementation progress by FSB jurisdiction across priority reform areas. The dashboard is a tool for transparency and is used to encourage compliance among jurisdictions. FSB’s Annual Report will come out in October 2019 and include the implementation dashboard.

FSB’s evaluation framework was published in July 2017. Its purpose was to assess whether the goals of the reforms have been achieved and also on whether there have been any unintended material consequences of reforms. The Framework contains specific guidance on relevant concepts and terms, adequate tools for robust analysis, and process- and reporting-related items for operationalizing evaluations. FSB completed two evaluations for the 2018 G20 Summit: (1) incentives to centrally clear over-the-counter derivatives and (2) impact of financial reforms on infrastructure finance .In 2019, one evaluation is expected to be completed on small- to medium-sized enterprise (SME) financing. For 2020, FSB recently announced that it plans to evaluate too-big-to-fail policies for banks.

FSB will deliver the following items at the June 2019 meetings: report on market fragmentation, consultative evaluation report on SME financing, report on decentralized financial technologies, update on correspondent banking (including remittances), update report on crypto assets, and a progress report on cyber incident response and recovery.

Discussion

Mr. Stephanou responded to a number of questions from working group members:

Mr. Evans (United States) asked about market fragmentation and concerns related to risk migration. Mr. Stephanou said that entities in jurisdictions that delay implementing reforms may have a competitive advantage; however, fragmentation may not be bad thing if it allows jurisdictions to calibrate policies to their most relevant risks. Fragmentation should not create cross-border concerns and competitive advantages and FSB’s objective with its report is to provide a conceptual framework with approaches on how to consult, discuss, and resolve such issues.

Mr. Le Goff (Canada) asked if FSB has any insights into data reliability related to non-banks. In particular, he said Canada is currently experiencing a rise in alternative lenders in the mortgage market and the government wants to strengthen regulation to prevent a bubble. Mr. Stephanou said that data availability and reliability is a perennial issue in this area, but that data collection is costly, so there needs to be a consideration of the benefits of data availability compared to the costs on market participants. Another complication is that nonbanks are in diverse sectors—insurance, mortgages, and so forth—which may have implications for terminology and data collection.

Mr. Wenz (Germany) explained that the supervisor in Germany receives information from supervised financial institutions on classification of their partner institutions as non-banks, or not. This accumulation of information on the supervisor’s side could be helpful for supervised institutions to access but it would not be shared with them. Thus a mutual reporting between financial institutions and the supervisor should be considered. He asked for thoughts on this issue. Mr. Stephanou was not familiar with the proposal, but thought institutions themselves would be reluctant to disclose this information. He thought that perhaps such information could be disclosed at an aggregate level. He noted that one of the principles of the FSB framework is to enhance disclosures, but it is not clear who should do so. He explained that some disclosures need to be made by the firms themselves; however, disclosures can also vary by sectors or risk-levels.

Mr. Danielsson (Sweden) asked which cyber incidents are most common and most threatening to the financial system. Mr. Stephanou explained that he was not directly involved in this work and could not comment on the most common types of cyber incidents. Regarding risks to the financial system, he noted that the information in the public domain might not necessarily reflect the biggest risks. There are reports on various cyber incidents and critical financial infrastructure (such as clearinghouses and stock exchanges) that must be protected. There is also growing attention to risks related to cloud computing, which is increasingly used by financial institutions.

Mr. Evans (United States) asked what FSB will look for to ensure compliance with the spirit of the reform with respect to the upcoming review on SMEs, especially given the issue of proportionality of regulations related to institution size. Mr. Stephanou said regulatory proportionality (or tiering with institutions of different sizes facing different levels of regulation) can be considered in terms of the scope of the institutions covered and the intensity of requirements. A number of reforms have tiering (for example, Basel III), but not all reforms have it. It is a hot topic in the European Union. There is no single path and there is a concern that proportionality could lead to risk migration.

Mr. Mates (ECA) had a question about the minimal activities of banks. Mr. Stephanou said that the TLAC standard issued by FSB in 2015 only applies to Global Systemically Important Banks. The implementation of TLAC is proceeding fairly well, but many members have not implemented rules regarding banks buying TLAC holdings of other banks. He explained that to better understand risks associated with a potential bailout, there needs to be more disclosure about how much TLAC debt has been issued and who is holding it.

Mr. Evans (United States) asked if FSB has insights on a macroprudential regime structure or analytical frameworks to examine such regimes. Mr. Stephanou explained that there is a lot of innovation in macroprudential policy across FSB members, which is why it is difficult to develop an international standard or framework. In many countries, the pre-existing institutional structure shaped post-crisis macroprudential oversight, with the oversight body being added on top of the existing structure, with all the limitations that that implies. One counter-example is in the United Kingdom, which completely revamped its policy post-crisis and embedded the Financial Policy Committee in the regulatory structure. Additionally, macroprudential oversight has largely focused on banks, but Mr. Stephanou said that is insufficient given the growth in non-banks. He believes there need to be policies and tools in place to account for emerging risks outside of traditionally regulated financial institutions.

Mr. Evans (United States) also asked Mr. Stephanou if he thinks we are better positioned to identify emerging risks than we were before the crisis. Mr. Stephanou said yes, but not just because of the reforms, but also because the crisis still lingers in countries’ memories. There is less complacency now and new developments and trends that might be risky are picked up more quickly. But there is still the question of if there is the political will to proactively address identified emerging risks.

Mr. Le Goff (Canada) asked if there is a role the FSB has in developing guidance or best practices that will make financial regulations compatible with climate change issues. Mr. Stephanou said that climate change is another long-term structural trend that needs to be monitored. He explained that the emphasis is currently on disclosure instead of prudential rules, but that in the coming years, financial regulators will have to think about how to fit climate change into a prudential framework. The problem is that many financial cycles are short. They do not account for long-term risk and there is no clear consensus among members on the topic. Further, knowledge and available data are still evolving.

Mr. Evans (United States) asked about FSB’s transparency initiatives and how SAIs can get involved in FSB’s engagement with external stakeholders. Mr. Stephanou said that to increase transparency, FSB is publishing more information about its committees and their mandates and it will be more forthcoming in disclosing its views on risks in the public domain. For some evaluations, such as the upcoming Too Big to Fail report, it is requesting input from stakeholders and the public about what to include. He said SAIs are welcome to provide public comments or may consider reaching out if they have done similar work. Mr. Evans said that FSB-SAI engagement is a topic the Working Group could discuss during its meetings.

Panel Discussion: Status of Financial Sector Modernization, Effects on Developed and Emerging Markets, and Emerging Risks to the Financial Sector

May 15, 2019, 12:00 p.m. – 1:30 p.m.

Presenters:    Anna Gelpern, Senior Fellow, Peterson Institute for International Economics

Desmond Lachman, Resident Fellow, American Enterprise Institute

Liliana Rojas-Suarez, Senior Fellow and Director of the Latin America Initiative, Center for Global Development

Anna Gelpern

Anna Gelpern discussed how fragmentation is worse in the supervisory space than in the chartering space, as demonstrated through a U.S.-European comparison. Both the U.S. and the European Union have regulatory regimes with overlapping jurisdictions. The U.S is more fragmented through federal and state chartering, but its safety net is centralized and unified, whereas Europe has more centralized chartering but a fragmented safety net. The U.S. has a more robust financial system with the Federal Reserve as the “lender of last resort,” and a centralized and federal safety net. Ms. Gelpern does not believe in an unequivocal call for centralized chartering, but she said it is difficult to find the upside of a fragmented safety net.

Ms. Gelpern explained that in Europe there is concern that the pendulum has swung too far to flexibility, resulting in loopholes that could be causing different outcomes for similarly situated parties. For example, in response to the financial crisis, Europe made efforts to break up the bank state in 2012. There is concern that if governments, such as Italy, get too distressed, they can bring down the banks, and if banks are distressed and get bailed out, they will bring down the governments. The architecture meant to prevent this loophole is a single resolution fund. In Europe, the experience with banking to date is that the resolution can either resuscitate or liquidate an institution, depending on the case. For example, Ms. Gelpern described several instances where Santander acquired defunct banks: two in Italy that used state aid, and one in Luxembourg that had no public interest that should trigger resolution. The Luxembourg court did not want to support liquidation. Ms. Gelpern stated that this case illustrated the inconsistency and unpredictability in European financial regulatory structure.

Ms. Gelpern said that competing political institutions will always exploit loopholes and the response should not be to close all loopholes, but identify inconsistencies that produce mismatched outcomes, distortions, or differences in distributional outcomes in response to similar problems or similarly situated parties. In other words, policy makers should look for and resolve arbitrages in the system, rather than trying to close loopholes just to close loopholes.

Desmond Lachman

Desmond Lachman presented on global financial market risks, and his perspective that these risks are underestimated in the markets and by policymakers. Dr. Lachman said he believes there will be a global financial crisis. His prediction was based on four major considerations:

• Extraordinarily high debt levels: (1) the central banks have cumulatively increased their balance sheets by 10 trillion dollars by buying up all the government bonds, forcing everyone else to take risks; (2) nonfinancial sector debt globally is close to 250 percent of GDP and, in the US, corporate debt is really high; (3) there have been an increasing number of cross-border loans by developing countries taken out in dollar terms; and (4) Italy’s debt levels are at historic highs.
• Asset price bubbles and major global credit mispricing: (1) access to easy money for a long time has created asset bubbles all over the world (loans have been made to risky buyers at interest rates that don’t compensate for their risk of default); (2) there is major financial market mispricing because the stock market is overvalued; and (3) there are housing bubbles in Australia and China, while the U.S. is back to levels in 2008, prior to the collapse of the housing market. There are also concerns about credit spreads from selling junk bonds.
• Confluence of risks in systematically important economies: (1) there is an unusual confluence of risk in key countries (China, Italy, UK w/ Brexit, Latin America/Brazil); and (2) the Chinese economy is slowing and unbalanced, but it is also getting a shock from US import tariffs. The second largest economy in the world slowing causes problems for the rest of Asia and Germany, which are very exposed. Italy faces financial market instability with high sovereign debt and a banking system that is ill and weak. Additionally, the UK economy could contract if it goes into a hard Brexit, and it is the fifth largest economy in the world, meaning it will have impacts on the global economy. At the same time, the Argentine and Turkish crises are deepening and Brazil has a public finance problem. Usually in a global financial crisis there is something unseen or that people are not paying attention to that brings down the system, and since there are many issues occurring concurrently, a crisis could have major ramifications on the global financial system.
• Limited room for policy response: (1) global interest rates are low; (2) there is strong resistance to more quantitative easing; (3) the U.S. unfunded tax cut leaves little room for a U.S. fiscal policy response; and (4) the capability of the U.S. government to lead an international response is uncertain.

Liliana Rojas Suarez

Ms. Suarez discussed a presentation titled “Making Basel III Work for Emerging Markets: Can It Contain the Risks of Financial Crises?” Ms. Suarez said that the Basel III standards are being implemented in more and more  emerging markets. Her study focused on how Emerging Markets and Developing Economies (EMDEs) are being financed and the extent to which Basel III standards are being implemented in EDMEs.

Ms. Suarez explained that EMDEs are being financed more and more by other emerging market countries, which represents a huge shift in funding sources. For example, China is the largest contributor to emerging market countries when previously it was one of lowest lenders to these countries. This change in funding creates risks because these newer lenders do not have to comply with the same transparency requirements and assessment of risks as northern global banks. In addition, the international lending market is shifting from loans to bonds and this has become an additional source of funding for EMDEs.

Ms. Suarez explained that many emerging markets are in the process of adopting or adapting to new Basel III standards, while others are considering doing so. Basel III can help create financial stability in these countries similarly as they have worked in the advanced countries. However, there are differences in the implementation of Basel III for the EMDEs because of certain characteristics in these financial markets. She explained that EMDEs have variable access conditions to international capital markets, high macroeconomic and financial volatility, less developed domestic financial markets, transparency and data availability limitations, and capacity and governance challenges.

She also discussed some issues related to the implementation of Basel III in EDMEs that have occurred. First, there have been some issues related to capital requirements. Some countries have applied gold plating to the amount of capital institutions are required to hold (requiring much higher capital levels than the Basel III requirements). Gold plating does not take into consideration any risk and requires institutions to hold a lot of capital. Ms. Suarez recommended that a regulatory framework require proper calibration of risk weighting of specific assets rather than gold-plating the level of capital requirements. Second, some issues have developed related to liquidity requirements. For example, the lack of liquidity in EDMEs has been a big problem and the institutions need high quality assets. Third, capital and liquidity requirements and core regulatory toolboxes in advanced countries might not be sufficient to address critical financial stability concerns in many EDMEs.

Ms. Suarez explained that Latin American countries are the most exposed to dollar appreciation. Basel III requirements will not be enough for EDMEs and restrictions beyond Basel III will need to go beyond single exposure limits and could refer to sectoral, geographic, or foreign currency lending exposures. Further, macroprudential tools, such as Basel, III play a critical role in the regulatory toolbox, but there is still limited knowledge of what works under which circumstances for EDMEs. More cooperation among regulatory authorities is needed. She believes that Basel III is insufficient for emerging markets because it was designed for global banks and needs to be complemented with other requirements for EDMEs.

Discussion

The panel addressed two questions from the Working Group:

Mr. Garcia-Diaz (United States) asked how prepared the global financial system is to withstand another financial shock 10 years after the recession. Mr. Lachman said that if problems occur in the financial system, the impact will spill over to the banks, but that the U.S. banking system is in a better position to weather a storm than the European banking system. In Europe, individual countries’ banking systems have too much debt and he is not sure if these banking systems are strong enough to weather another financial shock.

Ms. Li (China) asked what benchmark should be used to compare current risks to historical ones. Mr. Lachman said that the level of Chinese debt compared to GDP could be used as a benchmark. Even though China has been growing rapidly, its debt has been growing faster. In the last 10 years, China’s debt to the non-government sector has increased by 100 percentage points of GDP, something we have not seen in many other countries. Ms. Suarez said that China is not the only country with a large debt and that she is concerned about the debt-to-loan ratio in other countries and believes a benchmark for debt is very important. Ms. Gelpern added that governance is an important benchmark, as well, since it lends credibility.

Presentation: Assessment of Global Economic Prospects and Risks

May 15, 2019, 3:00 p.m. – 3:45 p.m.

Presenter: Marc Stocker, Senior Economist, Macroeconomics, Trade & Investment, World Bank Group

Mr. Stocker’s presentation was based on the World Bank Group’s public release of global growth forecasts in Global Economic Prospects, which is published biannually in January and June, and focused on the following four questions:

1. How is the health of the global economy?
2. What is the status of investment growth in emerging markets and developing economies (EMDEs)?
3. What is the impact of limited fiscal space on fiscal policy?
4. What are the major risks and what policies could help?

How is the health of the global economy?

Mr. Stocker stated that the health of the global economy is deteriorating with weaker-than-expected growth in many economies. With respect to global trade, broad-based slowdown is underway with the current pace of global trade flows consistent with that of global slowdowns experienced in the past. The downturn is concentrated in heavily traded capital goods and Asia has been particularly affected by this slowdown in global trade. In commodity markets, there are large movements in oil prices and much volatility in recent months with downward pressures and trade tensions. Additional concerns exist for exporting economies. He explained that there is slowing in advanced economies and early signs of stabilization in China. Although there was stronger-than-expected growth in the United States during the first quarter, there is clear ongoing weakness in the industrial sector across advanced economies.

Mr. Stocker stated that global financing conditions have been easing since early 2019. Major central banks have shifted their policy stance, becoming more accommodative. For example, the European Bank has delayed negative interest rate policies to stimulate credit. There are also diminishing yields across advanced economies, where German bond yields are negative for the first time, since the end of 2016. There is also robust international bond issuance by emerging markets, supported by a favorable borrowing environment.

Growth forecasts consist of mostly downgrades; weaker-than-expected outcomes with a broad-based slowdown in manufacturing and trade. There is an expectation of growth stabilization next year based on the following assumptions, which could be questioned in the coming months: (1) financial stress in emerging markets will dissipate, (2) stable commodity prices, and (3) no financial stress. There is some recovery projected for emerging markets, but the pace of growth will not narrow the income gap in commodity exporting regions. Latin America, Sub-Saharan Africa, and the Middle East and North Africa have an estimated GDP per capita growth of less than one percent this year. There is insufficient growth to reduce poverty in these regions, where much poverty is concentrated in Sub-Saharan Africa.

What is the status of investment growth in EMDEs?

Mr. Stocker stated that the status of investment growth in EMDEs is slowing. Subdued investment growth is lowering potential growth and putting at risk the ability to meet sustainable development goals (SDGs). Weak investment growth has negative effects on future productivity growth and contributes to an inability to meet SDGs. For example, the already large infrastructure gaps existing in developing countries will not be addressed. The World Bank estimates that investment needs for water, electricity, and sanitation is between 2-8 percent of GDP for developing countries over the next decade. Mr. Stocker highlighted that a challenge in this space is the need for spending efficiency in terms of public sector spending and reforms to bolster private sector investment and productivity.

What is the impact of limited fiscal space on fiscal policy?

Mr. Stocker stated that the impact of limited fiscal space on fiscal policy is making policy less effective, where there are small multipliers with higher government debt because of household and investor responses. EMDEs have a weak fiscal position and less effective fiscal stimulus. When a government stimulates the economy with a weak fiscal position (high debt), then consumption contracts and credit risk increases; the country has a negative fiscal multiplier. Mr. Stocker explained that when a government has a weak fiscal position and institutes a fiscal stimulus, households expect future taxes to increase and cut consumption. Additionally, when public debt is high and there are fiscal measures, there are increased borrowing costs, where investors demand higher interest rates. Mr. Stocker highlighted that both reduced household consumption and higher interest rates are at work in developing countries, reducing the fiscal multiplier. Public debt matters in an economic slowdown and more so in developing countries.

What are the major risks and what policies could help?

Mr. Stocker stated that there are multiple downside risks that are costly. Short-term risks include: (1) bouts of financial market stress, (2) lower-than expected growth in major economies, (3) escalation of trade tensions, (4) elevated policy uncertainties, and geopolitical tensions. Long-term risks include weaker-than-expected potential growth and demographic pressures. Mr. Stocker said that there is a need for strong policy responses by employing country-specific cyclical tools and implementing reforms. To address elevated debt in lower income countries, policy makers need to strengthen debt management practices, improving debt transparency, increase effectiveness of public spending; and improve mobilization of domestic resources.

More generally, policymakers should get ready for the short term, act for the long-term, and collaborate globally. In the short-term, policymakers can save fiscal windfalls (commodity exporters), improve revenue mobilization and spending efficiency (deficit economies), strengthen monetary and financial frameworks (high debt economies), and increase independence and transparency of central banks (high inflation economies). In the long term, policymakers can identify reform priorities, accelerate implementation of reform programs, and support vulnerable groups. To collaborate globally, policymakers can coordinate policies to address global problems, improve multilateral frameworks, and invest with resilience to global shocks in mind.

Discussion

There was further discussion about policy options in light of a deteriorating economic situation. Mr. Stocker explained that some measures are costless to implement. For example, the independence of the central bank is an issue of commitment and communication that can be accomplished without much cost. Mobilizing revenue on the other hand is a longer-term reform, but also crucial at the current juncture. Reforms must be country-specific, so Mr. Stocker highlighted that it is difficult to present a list of options at a general level. There was also discussion on the costs of public debt. Mr. Stocker highlighted how Japan has had a significant increase in public debt, but there have been relatively few negative effects since interest rates are low. He added that debt with deflation is a problem.

Presentation: Current and Emerging Risks to Financial Stability

May 15, 2019, 3:45 p.m. – 4:30 p.m.

Presenter: Michaela Erbenova, Assistant Director, Monetary and Capital Markets Department, International Monetary Fund

Ms. Erbenova’s presentation summarized IMF’s April 2019 Global Financial Stability Report. She stated that global financial stability risks are “delicate,” but also still a bit dark and gloomy. She explained that in the U.S., medium-term growth is expected to decline, in part, because the fiscal stimulus is waning and because of escalating trade tensions. These issues feed into weakening in financial stability. The key vulnerabilities that she identified included rising corporate debt; sovereign-financial sector nexus; maturity and liquidity mismatches of sovereigns, firms, households, banks, insurance companies, and other financial institutions; house-price misalignments; and vulnerabilities in emerging markets. She explained that continued accommodative financial conditions will likely facilitate further buildup of vulnerabilities, which could be exposed in the event of a sharp tightening in financial conditions. Possible risks include global growth slowdown, an unexpected monetary policy shift, trade tensions, and a disorderly Brexit.

Ms. Erbenova explained that most central banks in the United States and Euro Area are expected to deliver less tightening and more easing. For example, the Federal Reserve has downgraded the Federal Funds rate and the European Central Bank has provided guidance that it also expects to keep its current rates through 2019. Emerging markets are expected to have a similar pattern with less tightening and more easing. She stated that in China, authorities are already in the easing phase where they are easing funding to try to meet lending targets.

The International Monetary Fund (IMF) believes that medium-term financial stability risks remain elevated. Ms. Erbenova stated that there seems to be a disconnect between market expectations and volatility. She also said that vulnerabilities in sovereign, corporate, and nonbank financial sectors are elevated in systematically important economies. She said that vulnerabilities in the nonbank financial sector are also fairly elevated because of the prolonged low-interest rate environment.

With respect to corporate debt, the corporate credit cycle is at its highest point in recent history in the United States and it seems to have peaked in the Euro Area. However, at the same time, corporate credit quality has severely weakened, with lower-rated corporate bonds growing quickly since the financial crisis.

IMF also believes that the sovereign-financial sector nexus could reemerge. Fiscal challenges in Italy have created concerns about the sovereign-financial sector nexus. She said that the good news is that even in outlier countries with the worst conditions, bank capital ratios are now higher and banking systems have become more resilient, but there are still some pockets of vulnerability. Ms. Erbenova stated that capital ratios in Italy and Portugal may come under pressure.

With respect to emerging markets, Ms. Erbenova stated that they have been generally resilient. There has been a rising proportion of assets that have flowed into emerging markets from benchmark investors. However, such investors are more sensitive to global conditions than country-specific conditions. She explained that the good news is that investments in these markets have held up, but the bad news is that they are more sensitive to inflows should there be a global economic slowdown.

Ms. Erbenova stated that IMF believes that vulnerabilities in China remain high, particularly outside of the big five banks. Regulatory tightening aimed at curbing nonbank lending appears to have been successful in achieving its policy objective. However, most small and medium-sized banks are not profitable enough to grow their capital and don’t hold adequate capital against their own balance sheet credit. She stated that even if they were able to regrow their capital overtime, it wouldn’t be on track within five years. She said that while the largest Chinese banks are in a good condition, the smaller and medium-sized banks are struggling and, perhaps, more policy actions are needed.

Ms. Erbenova highlighted some of IMF’s policy recommendations, including: (1) enhancing resiliency and raising sustainable, inclusive growth prospects; (2) using more accommodative fiscal policies, if needed, in a more severe and protracted downturn; (3) reducing financial vulnerabilities in emerging markets; (4) safeguarding financial stability, such as more broad-based macroprudential tools, should continue to be implemented where financial vulnerabilities are high; (5) reducing external financial vulnerabilities in emerging markets; and (6) seeking globally cooperative solutions such as preserving and modernizing an open rule-based multilateral trading system.

Discussion

Ms. Erbenova was asked to identify the areas of vulnerabilities in which IMF believes mechanisms exist to withstand a downturn. She stated that in terms of the reforms that have been made since the financial crisis, the banking reforms are largely finalized and have strengthened the global banking system and there are much higher levels of capital now. She thinks more attention is needed in the nonbank area and much more work is needed on developing ways to handle vulnerabilities in the leveraged loan market. She explained that there is not a good understanding of the exposures of banks to this market. Another priority is the functioning of the derivative markets in central clearing and the mandate of the central clearing parties. She said this has created vulnerability in the system and a lot of work needs to be done on cross border resolution and improving their resilience to nonfinancial risks such as cyber risks. She said that in the derivatives space they have decreased the financial risks, but potentially increased operational risks.

Presentation: SAI Presentations: Recently Completed and Ongoing Work

May 16, 2019, 9:15 a.m. – 10:30 a.m.

Presenters: European Court of Auditors, Germany, Sweden, United States

European Court of Auditors (ECA)

Mr. Mates explained that the ECA’s mandate is to carry out performance audits of any European Union (EU) body to evaluate the economy, efficiency, and effectiveness of their activities. He explained that ECA has audited the activities of the new EU bodies in the area of supervision in recent years and that ECA now produces about two special reports on EU supervisory activities per year. He described the findings in four of these recent special reports.

• Special report 29/2016 – set up of the Single Supervisory Mechanism – This was the first audit activity in the area of banking supervision. ECA found that although the governance structure is complex and includes a lot of involvement from national authorities, the set-up from 2014 onward has been good. Mr. Mates explained that the European Central Bank’s (ECB) supervisory board does not exercise control over its budget or human resources, and, as a result, there has never been an assessment of staff needs. The audit found that the internal audit department is under-resourced and that only 10 percent of onsite inspections are led by ECB staff; the rest are led by staff at the national audit authorities.
• Special report 23/2017– set up of the Single Resolution Board (SRB) – The audit found that by mid-2017, many of the legal obligations of SRB were not met. Although there were preliminary versions of resolution plans for most banks, they were not complete and did not meet legislative standards. The plans did not have a clear statement on whether the bank is resolvable nor an assessment of the feasibility and credibility of a resolution strategy.
• Special report 02/1207– crisis management at ECB – The audit found that key internal processes had shortcomings that could create risks if a crisis materialized. The shortcomings included: not having a system in place to assess escalating vulnerability of banks; guidance on “failing or likely to fail” assessments lacked scope and detail; and having limited agreements in place with supervisors outside of the EU; and for the agreements that were in place, they did not include crisis management issues. Mr. Mates stated that ECA had problems accessing data from the ECB for this audit.
• Special report 29/2018 – supervision of the insurance sector by European Insurance and Occupational Pensions Authority (EIOPA) – ECA examined if EIOPA made an effective contribution to supervision, supervisory convergence, and financial stability. They found that it had made good use of a range of tools to support supervisory convergence and financial stability. They also found that EIOPA’s actions to ensure consistent supervision were based on sound analysis, but that it had no systematic arrangement for following up on its recommendations. They also found that the legal framework for supervising cross-border businesses was quite limited in that it created a situation where supervision depends on the legal form of businesses rather than the nature of its business.

Mr. Mates said that ECA has upcoming work on: EU-wide stress tests (these will be publicly available by Summer of 2019), a follow-up audit on the SRB, assessments by the Commission of State aid to the financial sector, plans for a Capital Markets Union, and a landscape review on the EU financial supervisory sector. Mr. Mates clarified that the landscape review on the EU financial supervisory sector is not an audit. They will be assessing progress and summarizing previous audits. A representative from Germany asked if the ECA expects to run into problems with lack of access to evidence and documentation in the follow-up audit of SRB, as it did in the first audit. Mr. Mates explained that the problem is that the SRB gets a lot of data from ECB, which it is reluctant to share with ECA.

Bundesrechnungshof, Germany

The German audit office undertook an audit of a German financial institution’s shadow banking activities. They did not find any objections to the entity’s shadow banking processes and found they had a sound process for managing its exposures to shadow banks. However, the audit office did identify some issues related to shadow banking that needed further discussion. For example, the European Banking Authority (EBA) agrees with the Financial Stability Board’s definition of shadow banking, and the German national supervisory authority (BaFin) implemented the EBA guidelines of the definition. The audit office reviewed the implementation of the EBA/BaFin guidelines by the auditee and found that there were vague requirements for the auditee on the classification of a related entity as a “shadow bank,” because there is no unified classification and the guidelines leave room for interpretation. As a result they recommended that BaFin implement a unified classification of shadow entities. The audit office also identified lack of clarity in setting an appropriate limit of doing business with shadow banks. They identified that both the EBA guidelines and BaFin’s implementation of the guidelines leave room for interpretation and recommended that this be clarified by issuing a Circular.

Swedish National Audit Office (NAO)

The Swedish NAO has a budget of $32 million in general appropriations and 330 employees (120 work on financial audits and 110 work on performance audits). About 220-230 agencies are audited each year; about 30-40 performance audit reports are issued each year; and 1-2 financial audits are conducted per year. The NAO’s strategy for conducting audits of the financial markets is to concentrate resources when they are needed. They determine which audits to conduct based on relevance and they consult with outside experts and stakeholders throughout the audit to bring both external and internal expertise.

Audits recently completed by the Swedish NAO include:

• Maintaining Financial Stability in Sweden (2011). The audit examined what banks did before the financial crisis and how they assessed the situation. The recommendation coming out of the audit was to establish a mechanism for macroprudential supervision.
• Swedish agencies’ preparedness for Brexit (2016)
• Application of fiscal policy framework (2017)
• Investment savings account (2018)
• The Swedish National Debt Office’s use of interest rate swaps (2018)
• Financial stability: macroprudential supervision (2018) – This audit investigated macroprudential instruments for increasing resilience in the banking sector and decreasing risks (for example, loan-to-value caps and loan-to-income requirements). The objectives evaluated (1) if government and Financial Supervisory Authority (FSA) objectives contribute to Parliament’s objectives, (2) FSA’s strategy to determine if available instruments are used transparently and effectively, and (3) how agencies interact. The NAO found that macroprudential supervision is relatively effective, but the government should be clearer with FSA. NAO recommended that FSA’s objectives should be in line with the European Systemic Risk Board’s recommendations, and that FSA should ensure the effectiveness of macroprudential supervision and make it more transparent and predictable.
• Government Activities for Consumer Protection in Financial Markets (ongoing audit) – Parliament wants consumers to have high protection in financial markets. The purpose of the audit is to examine the whole steering and supervision chain from the government to the responsible authorities, such as the pension agency and consumer agency. The audit is evaluating (1) if the government has put agencies in a good position to solve this and provided the best conditions to achieve Parliament’s objectives, and (2) the extent to which the supervision of the authorities involved fulfills the objective and if the authorities coordinate and cooperate effectively to achieve it. The audit is estimated to be completed in November 2019. The representative from Canada asked about the level of ethics in banking industry and the Swedish representatives replied that the ethics of the banking industry is on the FSA’s risk list.

U.S. Government Accountability Office

The US discussed two recent efforts: (1) a report issued in January 2019 (GAO-19-239) on housing finance and (2) outcomes of its efforts to monitor emerging risks to the U.S. banking system and regulatory responses.

• Housing Finance: Prolonged Conservatorships of Fannie Mae and Freddie Mac Prompt Need for Reform – US representatives explained that the Federal Housing Finance Agency (FHFA) regulates Fannie Mae and Freddie Mac (the enterprises) and in September 2008, the agency placed them into conservatorships because of the financial crisis. This resulted in explicit fiscal exposure of the federal government. The objectives of the review were to evaluate (1) recent developments in housing and financial markets that could affect the enterprises, (2) risks and challenges to the conservatorships, and (3) housing finance reform options. Key audit findings include that federal support of the housing finance market remains significant, even though it has recovered since the crisis. There are potential risks, including the loosening of underwriting standards in recent years and that nonbank lenders are not subject to federal safety and soundness regulations. FHFA has taken steps to lessen some enterprise risk exposure. For example, it has reduced the size of retained mortgage portfolios and transferred credit risk on their guaranteed mortgage-backed securities to private investors and insurers. However, federal fiscal exposure remains significant and the duration of the conservatorships raise uncertainty in the market. GAO recommended that Congress consider legislation for the future federal role in housing finance that addresses the structure of the enterprises, establishes clear, specific and prioritized goals, and considers all relevant federal entities. To date, no reform options have been adopted.

The representative from the European Court of Auditors wondered what market failure the US is trying to correct or whether there is a social objective and, if so, is this the best instrument for subsidizing? The GAO team answered that currently there is hesitation among policymakers to answer those questions because they do not want to make massive changes. However, GAO thinks that now is a good time to reform because the market is not in crisis.

• Outcomes of GAO’s Efforts to Monitor Emerging Risks to the U.S. Banking System and Regulatory Responses – GAO monitors emerging risks to the safety and soundness of the banking system and the regulatory responses to these risks. The goal is to flag issues for further review and provide more real time analysis instead of being reactive to risks. On a quarterly basis, the team briefs the Comptroller General and discusses emerging risks and recommendations for proposed audit work. These recommendations contributed to two audits on commercial real estate lending and bank supervision under the CG’s audit authority.
  • Commercial real estate (CRE) lending review (GAO-18-245) – GAO monitoring found that during the crisis federal regulators were not always effective in directing bank management to address underlying problems before bank capital began to decline. Small and medium-size banks were again developing fairly large concentrations in CRE lending post-crisis and regulators noted that risk management practices at some banks were causing concern. Objectives of the audit examined trends in CRE lending markets and actions by federal regulators (Federal Reserve, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation) through their examinations to help ensure banks with CRE concentrations are effectively managing the related risks. The audit found that the CRE sector has recovered since the financial crisis, but risk in CRE lending has increased. Federal bank regulators examine banks with high CRE concentrations with greater scrutiny and regulators generally communicated findings to banks and told them to correct the risk. The representative from Brazil asked if GAO had trouble collecting data because, in Brazil, that is considered private information. GAO answered no: GAO has very broad access authority.
  • Bank supervision review (GAO-19-352) – Prior to the financial crisis, regulators reported that management weaknesses at large financial institutions contributed to the financial crisis and that bank supervision needed to be strengthened. The objectives of the audit were to review the revised policies and procedures for regulators’ supervision of management at large depository institutions and whether they are consistent with leading risk-management practices, and to also review trends in supervisory concern data. The audit found that the updated policies and procedures were generally consistent with leading practices and were generally applied at large depository institutions. However, GAO also found that practices for communicating supervisory concerns varied among regulators and that regulators vary in how they use supervisory concern data and how and what data they collect. GAO recommended that regulators improve communication of supervisory concerns to banks, improve data recording, and update guidelines for escalating supervisory concerns. The representative from Germany expressed surprise that there were problems with escalation of supervisory concerns. GAO answered that the Federal Reserve lacked specific guidelines for escalation and relied on the judgement of examiners. Other regulators had clearly laid out guidelines.

Panel Discussion: Fintech

May 16, 2019, 10:45 a.m. – 12:15 p.m.

Presenters: Jo Ann Barefoot, CEO, BareFoot Innovation Group

Aaron Klein, Policy Director for Center on Regulation and Markets, Brookings Institution

Brian Knight, Director of Innovation and Governance, Mercatus Center at George Mason University

Mr. Knight began the discussion by explaining that there are many definitions of regulatory sandboxes, but he defines them as a temporary and limited scope regulatory environment where a market participant can experiment with new products or services and enjoy some regulatory relief such as waived rules or extra guidance on structuring products to be compliant. In exchange, the firm provides greater disclosures and transparency to the regulator. About 50 jurisdictions worldwide have regulatory sandboxes, not including U.S. states that are starting their own sandboxes, as well. About 100 firms have participated in regulatory sandboxes worldwide since 2016. Generally, regulatory sandboxes have four benefits (1) encourage innovation – sandboxes can result in better products and more choice for consumers; (2) increase competition – sandboxes often target new firms over incumbents, which lowers barriers to entry; (3) increase regulatory knowledge – sandboxes give regulators a seat at the table during product design, which helps them learn firsthand about new technology and services; and (4) economic development – sandboxes provide an easy way for firms to develop new products, which can attract businesses, jobs, and taxes to the jurisdiction. He explained that regulatory sandboxes work differently based on the jurisdiction or regulator, but most involve regular communication between the regulator and the firm to reduce regulatory uncertainty. Some regulators may waive certain rules or requirements as part of their sandbox; however, after exiting the sandbox, firms will need to comply with requirements. In the U.S., the Consumer Financial Protection Bureau (CFPB) issues no action letters and waives certain rules for firms in its sandbox if their product complies with the spirit of the law. Upon exiting the sandbox they will need to comply with the rules. Certain rules, like those on money laundering or terrorist financing, are not waived.

Regulatory sandboxes vary in how firms are admitted to participate. In the U.K., the Financial Conduct Authority (FCA) uses a cohort model where firms must apply during an open season to join a group of 20-30 firms that will move through sandbox together. The Monetary Authority of Singapore takes applications for its sandbox year-round and admits firms on an ad hoc basis. The Australian Securities and Investments Commission (ASIC) does not use an application process, and allows any firm to join its sandbox, so long as they meet certain consumer safeguard requirements. Firms who participate in ASIC’s sandbox must submit a report upon exiting the program that details how their trial worked and how they brought themselves into compliance with financial laws and regulations. In the U.S., the CFPB allows third parties, such as trade associations, to do much of the legwork on behalf of their members to apply for sandbox relief.

Mr. Knight explained that critics of regulatory sandboxes point to weaknesses in consumer protection. However, most agree that sandboxes are not a lawless environment because they introduce an examination regime. Firms who enter sandboxes, however, may not be ready for the market and, as a consequence, consumers get hurt. While limitations on duration in the sandbox and on the number of consumers who can be served also limit potential consumer harm, Mr. Knight said that sandboxes need an adequate compensation scheme for the consumers who are harmed. He added that some critics also point to the harm sandboxes can cause the market environment. Any benefit to firms that participate in sandboxes harms all of the competitors. For example, firms that get learner permits through a sandbox have different compliance standards and can get products to market faster than their competitors with full permits. Further, firms in sandboxes may receive enhanced regulatory guidance akin to consulting services that their competitors outside the sandbox do not benefit from. He said that regulators should make entry into their sandboxes a right for all firms to ensure an even playing field. Further, they should consider consequences to market competition when admitting firms into their sandboxes. When firms exit sandboxes, the regulator should report the results to the marketplace, especially when they involve novel regulatory issues, so that all market participants benefit from the sandbox. Ms. Barefoot asked if there are any cases in which consumer protection rules have been waived and caused consumers harm. Mr. Knight said that he was not aware of any cases and that, for now, regulators have offered few waivers as part of their sandboxes, and those waivers tend to be in areas with low consumer protection risks.

Ms. Barefoot discussed that she has work with regulators in the U.S. and abroad on regulatory sandbox issues. She believes that late last year marked a turning point in the thinking among global regulators about how to regulate fintech and adopt regtech. She believes, despite the risks, that in an environment of rapid change in financial technology, sandboxes can be the answer as to how regulators can gain an understanding of fintech innovations and properly regulate them. Regulatory sandboxes also create an environment where industry is more comfortable to turn to regulators for guidance. She also discussed that, in addition to regulatory sandboxes, regulators should explore other avenues to give industry permission to experiment in view of the regulator outside a formal sandbox environment. For example, the U.K. has held ‘Tech Sprints’—a hackathon format event where coders are invited to solve Regtech problems. Events like Tech Sprints transfer knowledge from regulators to technology practitioners who translate it into code. Some code developed at these events may be developed further and adopted by the regulator.

Mr. Kline stated that fintech is unbundling concepts that had previously been bundled. This is particularly true for payments. In the U.S., there has been a longstanding separation of banking from commerce. Almost all laws define banking as the taking of deposits and making of loans. However, the facilitation of payment between two entities is not a deposit or loan, yet has long been the domain of banks. That was until fintech firms started engaging in payments. The unbundling of payments from the banking space has created problems for regulation. Because payments were the domain of banks, they had been regulated through banking oversight; however, now that fintech has brought payments to the commerce space, there is no inherent regulation for them. He explained that the U.S. has the slowest payment system in world. In most other countries, payments clear instantly, whereas in the U.S. they take 3-5 days to clear. This 3-5 day gap is especially significant for the 40-50 percent of Americans who live paycheck to paycheck. The U.K. developed instant payments in 2007. Since then, American consumers have spent $800 billion dollars in fees for services that bridge the payments gap. For banks, check cashers, and payday lenders to profit on this gap is economic inequality at work. As long as this antiquated system exists, there will be innovations to try to solve this problem. While fintech firms who unbundle payments from banking create a regulatory gap, they are addressing an important consumer need.

Discussion

Mr. Evans (United States) asked if foreign countries are further along than the U.S. in developing and adopting regulatory sandboxes and how they have addressed the issues related to sandboxes. Mr. Knight explained that there are several reasons that other countries have been more aggressive in adopting regulatory sandboxes. First, most counties have only one financial regulator and having fewer regulators makes it easier to implement a regulatory sandbox. Multiple regulators with overlapping regulation, as in the U.S., make sandboxes less useful to market participants. It adds a layer of uncertainty for participating in a sandbox—one regulator providing a waiver does not preclude another regulator from taking enforcement actions. Second, other counties use sandboxes as industrial policy, which is something that makes U.S. regulators uncomfortable. Regulators abroad may use government assistance in the form of a regulatory sandbox to lure firms to locate in their jurisdiction.

Dr. Wenz (Germany) asked if there should be other types of sandbox for non-fintech companies or is the need for a specific fintech sandbox because of greater damage that innovation in finance could cause. Mr. Kline explained that banking is different because the market participants are chartered entities as opposed to licensed entities. A license grants permission based on a firm’s competency or some other lower level test. A charter grants permission to a firm to operate in perpetuity. Banks require charters because they issue money, which is a central role of government. He said that is why they are different and need to be regulated differently, not because of the potential for financial damage. Mr. Knight added that, in the U.S., lenders and money transmitters are licensed. Fintech sandboxes should be broadly available to all actors in the fintech space, because every part of finance is so interconnected.

A representative from China explained that, in China, there are several fintech companies that offer their own real time payments services. They thought these firms would just make transfers between bank accounts and would not cause any regulatory problems; however, now these firms want to know where the money was spent and what consumers will buy in the future. They now make money by recommending financial products to consumers like insurance and wealth management. The information they know about consumers is very valuable and represents a risk. Mr. Kline said that the payment services these Chinese fintech firms provide offer transactions that are cheaper, faster, and better than what is available to U.S. consumers, but that the use of data by fintechs is still deeply debatable. However, it’s not just the fintechs that use this data; banks know a lot about what consumers are buying too.

Presentation: Implementing and Evaluating the Effects of Regulatory Reforms

May 16, 2019, 12:15 p.m. – 1:30 p.m.

Presenter: Heath Tarbert, Acting Under Secretary for International Affairs, U.S. Department of the Treasury

Dr. Tarbert’s presentation focused on: (1) the Department of the Treasury’s (Treasury) activities and regulatory approach since 2017, (2) the Financial Stability Board’s (FSB) domestic and international evaluations, and (3) insights from FSB’s evaluation process.

U.S. Treasury Financial Regulatory Activity Since 2017

After the financial crisis, the Dodd-Frank Act in the U.S. and the 2009 G20 Pittsburgh Summit developed some core principles and post-crisis regulatory reforms. In the U.S., these led to dramatic changes in the financial sector. Upon coming into office in 2017, the Trump Administration decided to focus on assessing the post-crisis reforms and evaluating their effects. By and large, many of the agreed upon reforms from the 2009 G20 Pittsburgh Summit had been implemented. The Administration believes many changes were positive, including new tools to monitor and manage risk (e.g., stress tests and living wills), but concerns also existed that the new rules may have been implemented unevenly and not in a coordinated manner.

Dr. Tarbert worked on a transition team for the new administration that developed seven consensus core principles of financial regulation. In February 2017, the President issued an Executive Order enumerating the seven core principles and tasked the Secretary of the Treasury to develop a report on the extent to which current regulations met the core principles and what could be done to further promote and support them. The core principles are:

• Empower Americans to make independent and informed choices in the marketplace, save for retirement, and build individual wealth.
• Prevent taxpayer-funded bailouts.
• Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry.
• Enable American companies to be competitive with foreign firms in domestic and foreign markets.
• Advance American interests in international financial regulatory negotiations and meetings.
• Make regulation efficient, effective, and appropriately tailored.
• Restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.

Treasury coordinated with the other U.S. financial regulators to develop four reports on the following topics: (1) banks and credit unions, (2) capital markets, (3) asset management and insurance, and (4) nonbank financial firms, fintech, and innovation. The reports contained recommendations to Congress and regulators. Examples of recommendations include having different capital and stress tests requirements for small banks and simplifying the Volcker rule.

Mr. Evans (United States) asked about the role of cost-benefit analysis in the core principles and completing these reports and recommendations. Dr. Tarbert said that cost-benefit analysis is key to the core principles; however, some are concerned that cost-benefit analysis is a euphemism for deregulation. Treasury has tried to encourage cost-benefit analysis domestically and has found that its international counterparts have similar views; however, the U.S. does work with other FSB members to conduct cost-benefit analysis on financial regulatory reforms on an international level.

FSB’s Domestic and International Evaluations

In the past two years, FSB has focused on evaluating the G20 financial regulatory reforms coming out of the financial crisis. It has completed evaluations on derivatives, centralized clearing, and the impact of Basel III on infrastructure financing. FSB also expects to release an additional report on small- and medium-sized enterprise (SME) lending in late May and will have a public comment period. FSB also will have a work stream on too-big-to-fail and the Deutsche Bundesbank will lead this effort.

Dr. Tarbert highlighted two lessons learned from an internal paper discussing lessons learned in FSB’s evaluation efforts. First is that there is a need for increased transparency and external engagement at the FSB. He explained that FSB reviewed why government and non-government officials previously raised concerns about the opacity of FSB’s operations and efforts and determined that FSB must improve its transparency by sharing information regarding its evaluations’ methodologies and by inviting internal and external stakeholder to discuss ongoing FSB work. Second is FSB’s need to understand causal relationships between regulations and economic outcomes. Through its evaluations, FBS learned that it is difficult to determine the causal relationship between regulatory changes and economic outcomes because of the number of exogenous factors. FSB found that surveys assisted FSB’s efforts to determine exogenous factors at an informational level, and provided useful context for the quantitative data used in the evaluations.

Discussion

Mr. Dodaro (United States) asked if FSB and other countries are changing the way they view systemic risk. Dr. Tarbert stated that the Financial Stability Oversight Council (FSOC) has started to review systemic risk of select financial activities, such as tri-party repurchase agreements and systemic liquidity. By reviewing these activities, FSOC should be able to gain a more substantive understanding of systemic risks in financial activities.

Mr. Evans (United States) asked about Dr. Tarbert’s perspectives on the effect of technology on financial regulation, oversight and compliance. Dr. Tarbert stated that technology allows regulators and market participants access to more information than in 2008, which can provide opportunities for better regulation and market participation. For example, using tools such as transaction identifiers helps increase market and regulator knowledge because market participants can see all parties involved in a transaction. Overall, the best type of regulation comes from aligned market and regulatory incentives.

Mr. Mates (ECA) asked about the quality and implementation of resolution plans for systemically important financial institutions (SIFIs). Dr. Tarbert stated that the requirement for SIFI resolution plans has led to better risk management within those entities. However, industry concerns regarding the sufficiency of existing bankruptcy laws exist. Further, in the United States, bankruptcy laws need to improve—potentially through the addition of a specific financial institution bankruptcy chapter—in order to determine how to handle financial institution bankruptcy.

Ms. Zhang (China) asked about FSB’s public disclosures of its evaluations methodologies. Dr. Tarbert stated that FSB internally discloses its methodologies to its members, but does not externally disclose them. Internal disclosure was a recent change at FSB to increase its internal transparency. Mr. Dickson added that upcoming FSB reports will have increased methodological transparency.

Mr. Franzen (Sweden) stated that the banking sector concerns regarding corporate debt are rising outside the Eurozone. While the banking system is much safer and sounder than before the 2009 financial crisis, financial sectors outside the G20 could have a crisis similar to the Asian crisis of the 1990s. To avoid this issue, it would be beneficial to conduct a systematic review of corporate debt.

Mr. Evans (United States) asked about Dr. Tabert’s perspectives on monitoring the non-bank sector including fintech and shadow banking. Dr. Tarbert stated that within shadow banking there is an increase in migration of capital. Risky investments are moving to hedge funds as a way of increasing risk in some situations and offloading risk in other situations. Regarding fintech, crypto-currencies have the potential to change financial institutions; however, FSB does not conduct evaluations of fintech’s systemic risk because it is not large enough to be systemically important. In addition, anti-money laundering efforts are under the jurisdiction of the Financial Action Task Force on Money Laundering, not FSB.

Plenary Discussion: Reflections from Presentations and Implications for Working Group and SAIs

May 16, 2019, 1:45 p.m. – 2:30 p.m.

Mr. Garcia-Diaz (United States) invited SAIs to share their thoughts on the information presented during the annual meeting. In general, SAIs said that they appreciated learning more about the status of the global economy and risks to the financial sector. They also appreciated learning from the experiences of other SAIs, particularly in the areas of fintech and shadow banking. One SAI expressed interest in learning more about how to work with confidential data, and another SAI thought it would be helpful if presenters could provide more detail on the methodologies used for their research.

Breakout Session One – Work Plan Activities 2018–2020

May 16, 2019, 2:30 p.m. – 3:15 p.m.

            Group 1: Relationships with IMF, Basel, and FSB

            Group 2: Information Sharing and Audit Skill Development

Group 1: Relationships with IMF, Basel, and FSB

Representatives from China led the discussion. Representatives from GAO said SAIs seemed to have an appetite for technical assistance, and informal contact with these bodies seemed helpful. Representatives from China suggested that a deliverable could be a detailed description of the group’s needs from these bodies and that GAO and Canada could provide assistance in establishing these contacts. Attendees agreed that a mechanism is needed to gather and disseminate information to IMF and other standard-setting bodies on group members’ needs. A representative from Canada said he would like independence to outreach to these bodies as needed, for example, for more information on the coding of reforms in the IMF’s matrix on the status of financial reforms. Members also agreed that video training—mentioned in the work plan—was not an immediate need.

Another key point of general consensus was the need to brief IMF and the World Bank on recent findings prior to Financial Sector Assessment Program’s (FSAP) country assessments. The group agreed that a deliverable could be reporting back to the group on the effectiveness of initial outreach efforts and brief IMF/World Bank in countries with ongoing or soon-to-start FSAPs. A representative from the European Court of Auditors said he doesn’t keep independent contacts with the IMF. He has offered to give them an informal briefing, but was unsuccessful. So, he thought any coordination with these bodies needed to be formalized. China mentioned that they may be limited in this role because their reports are not public, but they agreed that they could share high-level information.

A representative from Brazil said he needed more concrete information on how to audit financial regulators and financial stability, such as objective criteria.

A representative from Germany said he reached out to IMF about establishing audit authority as FSAP criteria, and he will report back to the group on his efforts.

Group 2: Information Sharing and Audit Skill Development

Attending: Estonia, South Korea, Sweden, and the United States

The United States facilitated the breakout session and began with a recap and update of recent developments. In discussions, the members raised the following proposals and key actions items:

• Explore having member SAIs’ audit reports summaries/highlights page translated to English.
• Follow up with India for a status update on the website for the Working Group on Financial Modernization and Regulatory Reform.
• South Korea offered to reach out to their colleagues to identify contacts in other INTOSAI working groups.
• Explore having periodic follow-ups and status updates before the 2020 annual meeting. For example, organize a teleconference in six months to learn about current and ongoing work.
• Suggestions for the 2020 annual meeting:
  • Given the new members and turnover among SAI staff, suggest offering the criteria workshop training.
  • Dedicate a session for SAIs to share outcomes of recent report recommendations and the effectiveness of actions in addressing SAIs’ recommendations, including whether SAIs track effectiveness of actions in addressing recommendations. As part of the discussion, member SAIs also can share techniques and incentives they have used to encourage implementation of recommendations.
  • Dedicate a session for member SAIs to share emerging risks in their countries, including trends in household debt, housing, fintech, and cyber issues.

 

Breakout Session Two – Work Plan Activities 2018-2020

May 16, 2019, 3:15 p.m. – 4:00 p.m.

Group 3: Contributions to the Sustainable Development Goal on Enhancing Macroeconomic Stability (Target 17.13)

            Group 4: Working Group Parallel Audit

            Group 5: SAI Audit Authority for Financial Sector Oversight

Group 3: Contributions to the Sustainable Development Goal on Enhancing Macroeconomic Stability (Target 17.13)

Attending: Canada, Italy, Sweden, and the European Court of Auditors

Canada facilitated the breakout session, beginning with a discussion of the Government of Canada’s recent interim report on sustainable finance, which is intended to provide policy recommendations for promoting low carbon and environmentally cleaner economic growth in Canada. In Canada, one manifestation of this has included the requirement for an energy declaration, showing the amount of energy typically consumed in a year, when individuals purchase a home. In addition, Canada has appointed a Sustainable Development Commission in its Auditor General’s office.

The participants then discussed ways to share best practices for incorporating Sustainable Development Goals (SDG) into criteria for financial audits. For example, Italy has begun SDG audits this year on topics including costs of climate change and potential damages to the environment. Though Sweden has not used SDGs as criteria for financial audits, the participants discussed ways to oversee financial regulators so that they are holding the financial institutions they regulate accountable for SDG-related standards.

As a next step, the participants agreed to reach out to the Financial Stability Board to discuss ways to incorporate SDGs into their standards and evaluations.

Group 4: Working Group Parallel Audit

Attending: Estonia, Germany, and the United States

The United States facilitated the breakout session. Key points made by members and action items include:

• A parallel audit could increase the legitimacy of the working group with international organizations and help to further those relationships.
• One of the big challenges of conducting a parallel audit will be SAI capacity. In particular, the European SAIs are already doing one on bank resolutions and the participants from Germany and Estonia said that they wouldn’t be able to take on another parallel audit until that one is completed. In Germany, the parallel audits were initiated by a task force. The Netherlands has been a key player in initiating these audits.
• Participants noted that it is also difficult to choose a topic for a parallel audit because SAIs have different mandates. One approach may be to identify a topic where two (or a few more) SAIs have upcoming work. A small topic that is descriptive in nature would be ideal for the first parallel audit. For example, SAIs could do a parallel audit on shadow banking, where the first question describes the size and characteristics of a country’s nonbank sector (with a potential finding about lack of clear definitions or data) and the second question describes the status of efforts to supervise these institutions.
• Participants discussed asking SAIs at the end of the working group meeting if they are interested in participating in a parallel audit. This effort could be supplemented with a more formal email to members asking about upcoming work and potentially suggesting some topics. There were no volunteers to take on the work stream, but participants agreed to stay in touch on the topic.

Group 5: SAI Audit Authority for Financial Sector Oversight

Attending: Brazil, China, Estonia, Sweden, and the United States

The United States facilitated the breakout session and began with the member SAIs in attendance sharing their country’s audit authority, which led to a discussion of actions and next steps:

• Administer China’s prior survey of SAIs audit authorities to new member SAIs. Participants also discussed determining which of the 29 countries that IMF has designated as systemically important are not members of the working group and consider outreach with those non-member SAIs to ascertain their audit authorities.
• Expand on the template questionnaire used for members’ briefings in the opening session of the 2019 annual meeting to include questions about challenges in obtaining data for audits along with any tips or actions taken to overcome challenges.

Concluding Plenary Session and Closing

May 16, 2019, 4:15 p.m. – 5:00 p.m.

Presenter: Daniel Garcia-Diaz, Director, Financial Markets and Community Investment

Gene L. Dodaro, Comptroller General of the United States

Mr. Garcia-Diaz invited each work stream group to report out on the results of the breakout sessions. SAIs in each group discussed the following action items and next steps:

Group 1 discussed connecting SAIs with international organizations so that SAIs can reach out independently for technical assistance or information. In addition, China plans to design a survey to obtain information on SAIs audit authorities.

Group 2 discussed ways to facilitate information sharing between SAIs. Next steps include following up with the Knowledge Sharing Community on the INTOSAI Community Portal; reaching out to other INTOSAI working groups; compiling information on emerging risks discussed at the meeting into one document; and holding a teleconference in six months to discuss SAIs’ current and ongoing work and any other topics of interest to SAIs. In addition, the group discussed holding a criteria workshop at the next annual meeting and a session on following up on recommendations.

Group 3 discussed sustainable finance and using Sustainable Development Goals as criteria for financial audits. As a next step, the group intends to reach out to representatives of the Financial Stability Board to discuss ways to incorporate Sustainable Development Goals into the Board’s standards and for use in their evaluations.

Group 4 discussed potential opportunities for a parallel audit. Dr. Wenz (Germany) asked working groups members if they were interested in participating in a parallel audit or had thoughts on possible audit topics. Mr. Franzen and Mr. Danielsen (Sweden) said they are working on a consumer protection report. Ms. Li (China) said given the connectedness of the global financial markets, audits looking at crypto currency, shadow banking, algorithms, and consumer financial protection would be of interest. A representative from South Korea said they would be interested in looking at consumer protection and household debt. Canada, Estonia, Italy, and the United States also expressed interest in a parallel audit.

To conclude the meeting, Mr. Garcia-Diaz summarized some key takeaways. He noted that from the SAI presentations and discussion it was clear that many countries faced similar risks and challenges to their financial sectors. In addition, as noted by several of the presenters, emerging and developing markets are more susceptible to shocks in the financial system. In regards to the working group’s activities, Mr. Garcia-Diaz noted that the group had discussed building relationships with the IMF, FSB and other international organizations, parallel audits, and enhanced ways to share information among working group members. Mr. Dodaro thanked the participants for attending the meeting and for their continued contributions toward the working group’s goals.

Appendix 1: Participant List

 

Country	Participant	Title	Organization	Email
Brazil	Rafael Jardim	Secretary	Federal Court of Accounts Brazil	[email protected]
Canada	Philippe Le Goff	Principal, Economic Affairs	Office of the Auditor General	[email protected]
Chile	Ignacio Javier Tapia Carmagnani	Area Head, Financial Studies	Comptroller General of Chile	[email protected]
China	Zhao Shengwei	Principal Auditor	China National Audit Office	[email protected]
China	Xue Zhang	Deputy Director General	China National Audit Office	[email protected]
China	Li Haodi	Principal Auditor	China National Audit Office	[email protected]
Estonia	Veikko Kapsta	Financial Manager	National Audit Office of Estonia	[email protected]
Estonia	Merje Kurm	Auditor	National Audit Office of Estonia	[email protected]
European Court of Auditors	Neven Mates	Member of European Court of Auditors	European Court of Auditors	[email protected]
Finland	Matti Okko	Director for Fiscal Policy Audit	National Audit Office of Finland	[email protected]
Finland	Marko Männikkö	Deputy Auditor General	National Audit Office of Finland	[email protected]
Germany	Wolfgang Dehlwisch-Bell	Assistant Audit Director	Bundesrechnungshof (German SAI)	[email protected]
Germany	Jochen Wenz	Audit Director	Bundesrechnungshof (German SAI)	[email protected]
India	Ritika Bhatia	Principal Director	Comptroller and Auditor General of India	[email protected]
Italy	Mauro Orefice	President of Chamber, Chief of Cabinet and Head of International Affairs	Corte Dei Conti	[email protected]
Italy	Erika Guerri	Assistant General Prosecutor and Magistrate of the International Affairs Office	Corte Dei Conti	[email protected]
Korea	Lee Seungkyoo	Auditor	Board of Audit Korea	[email protected]
Korea	Choi Sung Kook	Auditor	Board of Audit Korea	[email protected]
Qatar	Sultan Al-Thani	Director of Risk & Quality Assurance Dept.	Qatar State Audit Bureau	[email protected]
Saudi Arabia	Abdulrahman Alalawi	Financial Controller	General Auditing Bureau	[email protected]
Saudi Arabia	Mohammed Alhabib	Advisor to the President	General Auditing Bureau	[email protected]
Saudi Arabia	Hesham Alsaloum	International Relations Specialist	General Auditing Bureau	[email protected]
Spain	Javier Corral	Technical Director	Spanish Court of Audit	[email protected]
Sweden	Peter Danielsson	Senior International Advisor	Swedish National Audit Office	[email protected]
Sweden	Per Franzen	Audit Director	Swedish National Audit Office	[email protected]
United States	Gene Dodaro	Comptroller General	U.S. Government Accountability Office
United States	Lawrance Evans	Managing Director, Financial Markets and Community Investment (FMCI)	U.S. Government Accountability Office
United States	Daniel Garcia-Diaz	Director, FMCI	U.S. Government Accountability Office	[email protected]
United States	Jill Naamane	Assistant Director, FMCI	U.S. Government Accountability Office	[email protected]
United States	Charlene Calhoon	Senior Analyst, FMCI	U.S. Government Accountability Office	[email protected]
United States	Catherine Gelb	Senior Analyst, FMCI	U.S. Government Accountability Office	[email protected]
United States	Jeff Harner	Senior Analyst, FMCI	U.S. Government Accountability Office	[email protected]
United States	Brandon Kruse	Senior Analyst, FMCI	U.S. Government Accountability Office	[email protected]
United States	K.F. Lee	Senior Analyst, FMCI	U.S. Government Accountability Office	[email protected]
United States	Patricia MacWilliams	Senior Analyst, FMCI	U.S. Government Accountability Office	[email protected]
United States	James-Christian Blockwood	Managing Director, Strategic Planning and External Liaison (SPEL)	U.S. Government Accountability Office	[email protected]
United States	Mike Hix	Director, SPEL	U.S. Government Accountability Office	[email protected]
United States	Brody Garner	Protocol Officer, SPEL	U.S. Government Accountability Office	[email protected]
United States	Paul Miller	International Visitors Coordinator, SPEL	U.S. Government Accountability Office	[email protected]

Appendix 2: Handouts

• FSB Presentation on Priorities and Recent Work
• Presentations on the Status of Financial Sector Modernization, Effects on Developed and Emerging Markets, and Emerging Risks to the Financial Sector
  • Anna Gelpern
  • Desmond Lachman
  • Liliana Rojas-Suarez
• World Bank Presentation on Assessment of Global Economic Prospects and Risks
• IMF Presentation on Current and Emerging Risks to Financial Stability
• SAI Presentations on Recently Completed and Ongoing Work
  • European Court of Auditors
  • Germany
  • Sweden
  • United States