The global economic and financial crisis showed the limits faced by the international financial system. International financial regulations in general, and especially the banking sector regulations, should be refined and adapted to build a stronger and stable international financial system. We analyze the main trends in international regulations: the proposed amendments on capital requirements, the introduction of a global standard for liquidity and indebtedness, the winding-up directive, as well as their impact on the Romanian financial system.international regulations, global standard, winding-up directive

Cociuba Mihail Ioan

Cojocari Anatol

Marian Dan Sebastian

Zapodeanu Daniela

English

Research Papers in Economics

456 
 
 NEW INTERNATIONAL FINANCIAL REGULATION: NECESSITY OR 
REQUIRED BY CRISIS 
Zăpodeanu Daniela 
University of Oradea, Faculty of Economics 
Cociuba Mihail-Ioan 
University of Oradea, Faculty of Economics 
Cojocari Anatol 
University of Oradea, Faculty of Economics 
Marian Dan Sebastian 
University of Oradea, Faculty of Economics 
 
The global economic and financial crisis showed the limits faced by the international financial 
system.  International  financial  regulations  in  general,  and  especially  the  banking  sector 
regulations, should be refined and adapted to build a stronger and stable international financial 
system. We analyze the main trends in international regulations: the proposed amendments on 
capital requirements, the introduction of a global standard for liquidity and indebtedness, the 
winding-up directive, as well as their impact on the Romanian financial system. 
 
Keywords: international regulations, global standard, winding-up directive 
 
JEL classification:  G01, G21 
 
Introduction 
The  actual  economic  crisis  made  it  clear  that  the  way  markets,  financial  institutions  and 
international  financial  agents  function  needs  reanalyzing,  which  led  to  a  different  level  of 
understanding the way these institutions function but also to realizing the need to establish new 
rules, regulations and procedures.  Due to the fact that the crisis is constructed as following: 
banking crisis àfinancial crisis àeconomic crisis, it becomes stringent the need to establish the 
rules on financial and bank markets; so the concept of financial stability exceeds reporting on 
country level, a certain financial stability on international markets level is needed. What began as 
a banking crisis on the American market has all the chances to become countries’ crises (the 
example of Greece). Romania was affected by the international crisis, first through the banking 
and financial channel, and then through the commercial channel; none the less the problems out 
country is facing are not due exclusively to the international situation but more to great existing 
unbalances: rapid growth of income as opposed to the level of productivity, the current account 
deficit of over 10% before the crisis, a oversized state apparatus etc. It is necessary to understand 
the concept of financial stability, so according to The National Bank of Romania, stability is : 
“…a financial system, indifferent to the its size or complexity, is stable when it has the capacity 
to facilitate economic performances and to correct eventual unbalances that could happen as a 
result  of  adverse  shocks
394”  or  in  Cerna(2008)  “financial  stability  is  a  characteristic  of  the 
financial system, which is the ability to absorb financial unbalances that can emerge as a result of 
endogenous or exogenous factors of relevant size and unanticipated, by this reaching specific 
performance
395”. On an international level there are different organisms, governmental and non-
governmental, that trace, recommend or implement different actions regarding the stability of 
                                                       
394 Raport privind stabilitatea financiara, 2006 , http://www.bnro.ro . 
395 Cerna Silviu &altii in Stabilitatea financiara, pg.12, Editura Universitatii de Vest, 2008. 457 
 
financial  systems  like:  The  Bank  of  International  Regulations  through  Basel  I  and  Basel 
programs,  Financial  Stability  Board,  International  Association  of  Insurance  Supervisors, 
International  Association  of  Deposit  Insurers,  together  with  different  commercial  banks.  In 
Romania, the Romanian National Bank writes, beginning 2006, “Reports on financial stability”, a 
document that is interested in : the international economic and financial context, the financial 
market  and  its  risks,  the  infrastructure  of  financial  markets,  the  institutions  of  the  financial 
markets. The main indicators used in analyzing the financial stability are
396: 
-the  system  of  indicators  proposed  by  the  International  Monetary  Fund  (financial  soundness 
indicator); 
-stress-testing, that means a series of response tests of the financial system, to the factors of 
speculative pressure; 
-early warning systems; 
-other methods of analyzing and evaluating financial stability. 
Even though there is large number of indicators at the disposal of the national and supra-national 
surveillance  authorities,  the  world  economic  crisis  has  showed  that  new  regulations  are 
necessary.  Implementing  the  Basel  II  recommendations  in  the  EU  has  been  realized  by
397  : 
Banking Consolidation Directive 2006/48/EC (BCD), Capital Adequacy Directive 2006/49/EC 
(CAD), which together have constituted the Capital Requirements Directive (CRD). CRD aims to 
ensure the financial soundness of credit institutions (banks, investment forms, etc) the Directive 
stipulates how much of their own financial resources such institutions must have in order to cover 
their risks and protect their depositors
398. Basel II implemented through CRD, begining January 
1st 2007, is based on 3 pillars
399: 
1.  Minimum  Capital  Requirements.  That  aims  minimum  capital  levels,  credit  risk, 
operational risk and market risk. 
2.  Supervisory Review.  Regarding management risk and transparence of surveillance. 
3.  Market  discipline.    Completes  the  first  two  pillars  by  developing  means  of 
disseminating  information  to  market  participants  giving  them  the  necessary 
information regarding the level of capital, risk exposure and risk management. 
Evolution of the world economy, the rise of interconnectivity at a global level, development of 
security and especially the economic crisis has made CRD out of date, new instruments and 
regulations being necessary in order to face the current challenges. So, beginning 2011, two new 
amendments, CRD 2 and CRD 3 will become effective, completing and bringing up to date 
CRD/Basel II, and also another amendment, CRD 4 is taken into consideration for the future. 
 
Table 1. Capital Requirements Directive
400: 
CRD 2  CRD 3  CRD 4 
quality of firms capital 
 
higher capital requirements for re-
securitisations 
further counter-cyclical measures;  
                                                       
396 Dupa Cerna Silviu &altii in Stabilitatea financiara, pg.79, Editura Universitatii de Vest, 2008. 
397 Strengthening Capital Standards 3, Financial Services Authority, December 2009, pg.3, 
http://www.fsa.gov.uk/ 
398 Ibidem. 
399 International Convergence of Capital Measurement and Capital Standards, A Revised Framework, June 
2004, pg. 6, http://www.bis.org/publ/bcbs107.htm 
400 Strengthening Capital Standards 3, Financial Services Authority, December 2009, pg.7, 
http://www.fsa.gov.uk/ 458 
 
CRD 2  CRD 3  CRD 4 
management  of  large 
exposures 
upgrading disclosure standards for 
securitisation exposures 
dynamic ‘buffering’ of loans;  
supervision  of  cross-
border banking groups 
strengthening capital requirements 
for the trading book 
liquidity standards  
CRD 2  CRD 3  CRD 4 
risk  management  of 
securisations 
  foreign currency mortgages;  
different  operation  on 
the  CRD  hybrid 
capital instruments 
  supplementary  measures  ( 
possible leverage ratio) 
 
CRD 2 & 3 
Improving the quality of firms capital will be made by establishing criteria for assessing the 
eligibility of hybrid capital to be counted as part of a firm’s overall capital. The proposals specify 
the features that hybrid capital must have regarding permanence, flexibility of payments and loss 
absorbency to be eligible as Tier 1 capital. Hybrid capital is define as being “ … a form of debt 
that has been substituted for equity.  This type of capital has both debt and equity features. This 
covers a variety of instruments, such as preference shares, that are not pure equity but have 
traditionally been deemed close enough to it to count towards a bank's tier one capital ratio - the 
key measure of financial strength”
401  
Table 2
402: Characteristics of hybrid capital  
Type of instrument  Permitted features 
Undated  Cannot have an option to redeem in 
 the first five years 
  No incentives to redeem allowed 
 within first ten years 
  Can be included within any bucket 
 depending on features 
  Calls allowed in 35% and 15% buckets 
Dated  Must have an original maturity of at 
 least 30 years 
  No incentive to redeem allowed 
  Must have a ‘lock-in’ feature (eg. may not be repaid if in breach of 
 capital requirements at maturity) and 
 supervisors may stop repayment 
  Calls allowed after five years 
  Included within the 15% bucket 
                                                       
401 According with http://lexicon.ft.com/term.asp?t=hybrid-capital 
402 Strengthening Capital Standards 3, Financial Services Authority, December 2009, pg.27, 
http://www.fsa.gov.uk/ 459 
 
Effects of this measure: rise in the capital cost for affected companies, but also they will lead to a 
rise  in  companies’  capitalization,  lower  bankruptcy  risk,  reduces  contagion  risk,  lowers  the 
impact of future financial crises (reduces moral hazard).  
Large exposures management regime will applies to exposures to counterparty or a group of 
connected clients.  The  basic limit is  set to  25%  of  the  company  capital resources,  but isn’t 
considered that this limit could equal up to 50% of the TIER 1 (and up to 100% of the CORE 
TIER 1) CRD 3 will enhance CRD by adding higher capital requirements for re-securitisations 
(the  5%  skin  proposal),  upgrading  disclosure  standards  for  securitisation  exposures  and 
strengthening capital requirements for the trading book. 
 
CRD 4 
If CRD 2 and 3 continue to base themselves on the Basel II paradigm, CRD 4 aims the strong 
reformation    of  the  financial  system,  but  especially  the  banking  system,  by  introducing  new 
requirements  and  measures  like:  counter-cyclical  measures,  dynamic  buffering  of  loans, 
quantitative  liquidity  standards  and  systemically  important  financial  institutions.  foreign 
currency mortgages and possible an leverage ratio. One of the most important one is the liquidity 
standard which is set to be implemented with CRD 4. It will two components: liquidity coverage 
ratio  and  net  stable  funding  ratio.  The  liquidity  coverage  ratio  “identifies  the  amount  of 
unencumbered, high quality liquid assets an institutions holds that can be used to offset the net 
cash outflows it would encounter under an acute short-term stress scenario”
403, so it will will 
deal with the liquid assets on the short-term. The net stable funding ratio measures “ the amount 
of longer-term,  stable  sources  of  funding  employed by  an  institution  relative  to  the  liquidity 
profiles of the assets”
404. 
Dynamic buffering loans (dynamic provisioning) will help to deal with the pro-cyclical in the 
banking sector, allowing early detection of credit losses in loan portfolios, enabling bank to build 
up a buffer in good times that can be used in bad times. They have an anti-cyclical nature that 
enhances the stability of the banking system as a whole. 
  Table 3
405 
Historic cost accounting  Dynamic provisioning 
Balance sheet  1  2  3  4  5  Balance sheet  1  2  3  4  5 
Loans  balance 
sheet value 
100  100  100  100  100  Loans  balance 
sheet value 
100  100  100  100  100 
Stock  of  specific 
provisions 
0  0  1  4  5  Stock  of  specific 
provisions 
0  0  1  4  5 
Loans  balance 
sheet value net 
100  100  99  96  95  Stock of expected 
loss provisions 
1  2  2  0  0 
            Stock  of  total 
provisions 
1  2  3  4  5 
            Loans  balance 
sheet value net 
99  98  97  96  95 
                                                       
403 International framework for liquidity risk measurement, standards and monitoring, BIS, December 
2009,pg. 11, http://www.bis.org/publ/bcbs165.htm  
404 ibidem 
405 Exemple After Financial Stability Review- Dynamic provisioning: issues and application, pg 131, 
www.bankofengland.co.uk  460 
 
Income statement            Income 
statement 
         
Net  interest 
income 
2  2  2  2  2  Net  interest 
income 
2  2  2  2  2 
Specific  provision 
charge 
0  0  1  3  1  Expected  loss 
provision charge 
1  1  1  1  1 
Total P&L  2  2  1  -1  1  Total P&L  1  1  1  1  1 
Dynamic  provisions  are  being  already  applied  in  Spain  since  2000.  The  mechanics  is  as 
follows406:  -the  total  provisions  are  the  sum  of  specific  (dot.espe)  and  general  (dot.gen) 
provisions.  
Where  Ct    is  the  stock  of  loans  and  its 
variation (positive in a  
lending  expansion,  negative  in  a  credit 
crunch), covers the latent loss, and beta is the 
average specific provision for a full lending or 
business cycle. There are 6 risk buckets, each with a different alpha and beta, they are: 
  Alpha 
% 
Beta % 
Negligible risk, represented by cash and public sector exposures.  0  0 
Low risk – mortgages with a loan-to-value ratio below 80% and exposures 
to corporations with A rating or above. 
0.6  0.11 
Medium-low risk, mortgages with a ratio above 70% and other collateral 
loans. 
1.5  0.44 
Medium risk, other loans (corporate exposures below A rating, SME)  1.8  0.65 
Medium-high risk, consumer durables financing.  2  1.1 
High risk, credit card and overdrafts.  2.5  1.64 
While there levels may not be able to cover the all losses in case of an economic crisis they have 
proved useful in Spain. In 2007 the level of accumulated provisions was407 1.3 % of the total 
consolidated assets, while the capital and reserve represented 5.8 %. 
 
Fig. 1
408The evolution of traditional versus dynamic provisions 
                                                       
406 Dynamic Provisioning,  The experience of Spain, pg. 2, www.rru.worldbank.org 
407 Ibidem, pg. 6 
408 Ibidem, pg 4. 461 
 
 
It can be observed that using the dynamic provisions the banks exposures is not so pro-cyclical, 
and it offers them a buffer to use in moments of stress. The experience of Spain is very important 
for implementing such a method throw CRD 4, even if know Spain has a level of unemployment 
close to 20% it's banking system is stable.  
 
Conclusions 
The global economic crisis has shown that current systems, especially Basel II, are no longer 
sufficient to cope with new type of challenges of global and financial type, even though Basel II 
was not the best safety net  for the financial sector (or to the banking sector in particular) it was 
still  better  than  the  lack  of  any  legislation.  Thus  the  new  rules  and  regulations  issued  by 
international supervisors are develop on the skeleton of Basel 2; CRD 2 & 3 & 4 will improve the 
current system, specifically  by an increase in the stability of the financial sector. The CRD 2  
directives which included proposals to be implemented by the end of 2010, but especially in 
discussions CRD 3 & 4, shows that we are heading towards a new approach both at micro as 
macro stability, 
 
Bibliography 
1. Cerna Silviu &others in Stabilitatea financiara, Editura Universitatii de Vest, 2008. 
2. Dynamic Provisioning,  The experience of Spain,rru.worldbank.org  
3.  International  Convergence  of  Capital  Measurement  and  Capital  Standards,  A  Revised 
Framework, June 2004, http://www.bis.org/publ/bcbs107.htm 
4.  International  framework  for  liquidity  risk  measurement,  standards  and  monitoring,  BIS, 
December 2009, http://www.bis.org/publ/bcbs165.htm  
5.  Financial  Stability  Review-  Dynamic  provisioning:  issues  and  application, 
www.bankofengland.co.uk  
6. Raport privind stabilitatea financiara, 2006 , http://www.bnro.ro . 
7.  Strengthening  Capital  Standards  3,  Financial  Services  Authority,  December  2009, 
http://www.fsa.gov.uk/ 
8.  Strengthening  Capital  Standards  3,  Financial  Services  Authority,  December  2009,pg.7, 
http://www.fsa.gov.uk/ 
9. http://en.wikipedia.org/wiki/Basel_II 
10. http://lexicon.ft.com/term.asp?t=hybrid-capital 
11. http://www.financialstabilityboard.org/ 
12. www.bis.org 
13. www.bnro.ro 
 462 
 
 
 
 
 
   

NEW INTERNATIONAL FINANCIAL REGULATION: NECESSITY OR REQUIRED BY CRISIS

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics