Solvency Issues : Solvency II

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

There are three challenges to regulating systematic risk: 1) Identifying and measuring the systemic risk of financial firms 2) Developing, based on systemic risk measures, an optimal policy whose

First, high capital requirements could enable institutions to be more flexible facing financial stress and crises. Second, the CFPB strengthens the oversight responsibilities, lessens the regulatory infrastructure risky gaps, and improves the protection for consumers. Third, the Federal Deposit Insurance Corporation’s (FDIC) single-point-of-entry strategy installs standard procedures to wind down failed financial institutions,

Kaufman (2014) explains that the concept “too big to fail” is one that is complex to warrant regulation to prevent it from failing. Due to its influence, the government must intervene to prevent it from becoming insolvent. The special regulation to prevent failure includes a requirement for higher capital, putting in place measures such as increased liquidity. Besides, frequent supervision by regulatory bodies like the Basel Committee, the Federal Reserve, or the Federal Deposit Insurance Corporation (FDIC) are necessary to prevent the collapse of “too big to

The post-crisis regulatory framework has shifted from a framework which was centred on a single regulatory constraint – the risk-weighted capital ratio – to one with multiple constraints. In addition to the risk-weighted ratio, the post-crisis framework also includes a leverage ratio, large exposure limits and two liquidity standards (ie the Liquidity Coverage Ratio and the Net Stable Funding Ratio). And supervisory stress testing is playing an increasingly important role across a number of jurisdictions. Each regulatory measure has strengths and weakness. The multiple metrics framework is more robust to arbitrage and erosion

In this Essay I will explore the Proposals put forward by the UK government in the 2011 “Vickers Report” as well as exploring the proposals I will then give an in depth analysis in how effective the methods put forward are; in terms of how successful they are in ensuring financial stability within the current economic climate. Furthermore I will examine how these proposals are being enforced by UK law to achieve practical outcomes, as theoretical tools do not always work as imagined in real life scenarios.

There have been a number of proposed and upcoming changes to GAAP and solvency reporting standards in the US, Canada and Europe in recent years. In particular, significant efforts have been made to increase convergence between US GAAP and IFRS. The following report discusses the pros and cons of convergence between standards in different jurisdictions, as well as convergence between GAAP and solvency standards, in relation to insurance contracts. Here, the term ‘GAAP’ refers to financial reporting for investors, shareholders and creditors. Solvency standards refer to the regulatory requirements imposed on insurers. The jurisdictions discussed have been limited to those in which The Greatest Life Insurance Company operates in: namely, the US, Canada and Europe.

The financial crisis that began in 2007 right through to the summer of 2008 was perceived as global crisis that affected various countries including the United Kingdom. It was predominately caused by failure to regulate financial institutions and systems appropriately. (Davies, 2008) The world was shocked and surprised particularly politicians and policymakers. Initially their response was to conduct a crisis management as a solution but later discovered that the crisis was one of the worst in history. As a result reforms on financial regulations had to take place not only nationally but within Europe and on an international level. Gordon (2010) argues that financial crises are nothing new, however they have become more complex over the years and therefore politicians and policy makers face major challenges in implementing the right form of regulation to comply with the complexity of the financial sector. In the UK, at one point in history command and control (CAC) was perceived as the suitable approach to regulate the financial industry; however self-regulation was later introduced as the effective form of regulation based on the neoliberalism concept. After the financial crisis self-regulation was being criticised therefore leaving policy makers, politicians and economists to decide what form of regulation would be appropriate to effectively regulate financial institutions that would avoid and prevent further financial failures. Therefore the purpose of this essay is

This essay will address the question “The sovereign debt crisis shows that any solution to the financial crisis needs to put greater emphasis on the market solutions and less regulation.” It will contain arguments as to why the sovereign debt crisis shows that greater emphasis on market solutions should be made rather than more emphasis on regulations. It will begin with addressing the situation in Europe that is named the sovereign debt crisis. Then it will be followed on by examples of countries that have had hardships with the levels of debts they have accumulated within the euro zone. The flaws and faults in the formation of the European Union via the Maastricht Treaty agreement that where shown in the financial crisis that began in

Returning to the debate on the regulation of the default swaps, I feel the planned regulation that the companies who must act as insurance to participate in the regulation market is not severe enough to help the global economy recover. I feel that as history will eventually repeat itself we must try to update the regulation and observation of these new credit products. Personally I feel that the proposed acts to review all trades both public and private is too complicated and flawed to be put into effect along with it also being an invasion of a person’s privacy.

The area seeks to detect risks to the structure and functioning of the UK financial system and to develop measures to strengthen regulatory systems and infrastructure at home and abroad to reduce those risks. This includes its statutory responsibilities for overseeing UK payments systems. In addition it undertakes work with HM Treasury and the FSA to improve the arrangements for managing a financial crisis. The area also contributes to the monetary policy process, and promotes public understanding of issues relating to financial stability through, for instance, the regular Financial Stability Report.

Presently, the economic atmosphere is not optimal, nonetheless, the EU has attempted to try to find solutions in dealing with these problems. In Europe, banks play the important role of financing both households and small and medium sized enterprises (SME). In summary, the biggest problem area has been the euro banking sector, which has reduced not only financial activity, but numbers of banks. Within the euro sector, the most troubled area has been twofold: (1) loans to businesses and (2) inter-bank lending. This has been labeled “Eurozone crisis.” On the other hand, non-euro banks are doing much better. As a result, there has been increased regulation from the EU financial services division to offer better controls. Therefore, banks are struggling to keep afloat with new

Facing the problems posed by an unstable global financing market, the BCBS set the following intertwined goals: to develop a comprehensive set of standards on capital flows, to implement those standards in the absence of legitimate international treaties or law, and for that to happen, to maximize their own enforcement power through guidance and supervision. It is in the interest of every nation to maintain its own competitiveness while refraining from harming the stability of the global financial system. However, these two goals are not always compatible with one another.

The article highlights the emergence of the Basel Accord in 1998 and how it has evolved over the course of the last 23 years. Contrary to the popular belief capital regulations have been considered the biggest underlying factor of the subprime crisis owing to securitization, the shadow banking system and the flexibility given to banks in risk assessment. The recent Basel III norms though aim to mitigate the already caused damage, the results are still left to be witnessed.

The Basel Committee on Banking Supervision has developed a regulatory capital framework for operational risk measurement and introduced three approaches: the Basic Indicator Approach (BIA), the Standardized Approach (SA) and the Advanced Measurement Approach (AMA).The identification and measurement of operational risk can be viewed as following either the top down approach or the bottom up approach depending on the method used to calculate the risk charge. In the top down approach, the financial data is extracted from the Balance Sheet and Profit and Loss statement. This method may not result in the proper capturing of risks nor does it help in risk mitigation. This approach corresponds with the Basic Indicator Approach and the Standardized Approach of Basel II Accord. The third approach of the Accord i.e. Advanced Measurement Approach, is consistent with bottom up approach in which the regulatory capital requirement will be defined by the estimate generated by the internal operational risk measurement system (Rajeev, 2004).