IIIIBB Institute of International Bankers Global Survey 2005 Regulatory and Market Developments Banking - Securities - Insurance Covering 38 Countries and the EU September 2005 Institute of International Bankers Global Survey 2005 OVERVIEW The Institute of International Bankers represents internationally headquartered banking/financial institutions from over 30 countries that engage in banking, securities, insurance and other financial activities in the United States. The combined banking and non-banking assets of the U.S. operations of international banks total over $4 trillion. This 18th annual Global Survey of Regulatory and Market Developments in Banking, Securities and Insurance is part of the Institute’s efforts to contribute to the understanding of the trends toward globalization of financial markets and convergence of regulatory systems around the world. This year’s Global Survey covers developments during the period from July 1, 2004 to June 30, 2005 in 38 countries and the European Union (EU). We are very grateful to the banking associations and financial services supervisory authorities from those countries and the EU that have contributed to this year’s Survey and without whose participation this publication would not be possible. We are also grateful to Connie M. Friesen, Partner at the law firm of Sidley Austin Brown & Wood LLP, and her colleagues in New York for assisting the Institute in the preparation of this year’s Survey. As discussed in a number of the individual country chapters, the period under review saw continued developments in such areas as implementation of Basel II, corporate governance and efforts to combat money laundering and the financing of terrorism. In the United States, the federal banking agencies concluded their fourth Quantitative Impact Study (“QIS4”) in the spring of 2005. In a statement issued on April 29th, the banking agencies indicated that the minimum regulatory capital charges resulting from QIS4 were more variable across financial institutions and these capital charges dropped more, in the aggregate, than the federal banking agencies had expected. This was the impetus for their decision to delay issuance of a next round of proposals for Basel II while they review the QIS4 results. At the same time, the federal banking agencies have emphasized that they remain committed to moving forward with the implementation of Basel II. The delay in issuing a notice of proposed rule making is intended to ensure that any proposed changes to the risk-based capital framework to be implemented in the United States are consistent with safety and soundness, good risk management practices, and the continued competitive strength of the U.S. banking system. It was anticipated that representatives of the U.S. federal banking agencies would meet in the early fall of 2005 to prepare for presentations on Basel II implementation at the quarterly meeting of the Basel Committee on Banking Supervision in October 2005. Meanwhile, the European Commission published in July 2004 the Capital Requirements Directive which will implement Basel II in the EU member states. The Directive will apply to all banks and investment firms in the EU and will become effective on January 1, 2007, although banks following the Advanced Approaches will have an additional year. The complexity of the Directive (which is nearly 500 pages long), and the lack of certainty have resulted in delays for European banks and investment firms in their implementation processes. In the wake of the Sarbanes-Oxley Act in 2002, corporate governance issues continued to be a major focus of attention during the period under review. In Germany, for example, the summer of 2005 saw the passage of the Act on Corporate Integrity and Modernization of the Right of Rescission, which will become effective in November 2005. The Act implements a catalogue of measures presented by the German government in early 2003 to strengthen investor confidence i Institute of International Bankers Global Survey 2005 in the integrity, stability and transparency of the financial markets, particularly by reforming the system of corporate governance. Meanwhile, the Basel Committee on July 29, 2005 issued a revised guidance, entitled Enhancing Corporate Governance for Banking Organizations (the “Bank Corporate Governance Document”), to help promote the adoption of sound corporate governance practices by banking organizations. In its current form, the Bank Corporate Governance Document is a draft and public comment has been invited prior to October 31, 2005. The draft highlights (a) the importance of effective management of conflicts of interest; (b) the role of internal and external auditors and other control functions; (c) the important role of boards of directors in promoting transparency in corporate governance; and (d) the role of bank supervisory agencies in promoting sound corporate governance. The Bank Corporate Governance Document has been cited in several speeches of various Governors of the U.S. Federal Reserve Board and is likely to influence directly both bank regulations and “sound practices” in the United States. As indicated above, many of the chapters deal with ongoing efforts to combat money laundering and terrorist financing. In the European Union, the EU Council of Ministers approved a third Anti-Money Laundering Directive, which is to be implemented in member states by early 2007. The new directive aims to ensure consistent application in all member states of FATF’s revised 40 Recommendations. In a long-awaited development in the U.S., the federal banking agencies and the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published on June 30, 2005 a comprehensive Bank Secrecy Act/Anti-Money Laundering Examination Manual designed to promote greater consistency and clarity in the application of the BSA to banking organizations. In Bermuda, the introduction of a new Anti-Terrorism Act provides a framework for dealing with any terrorist financing concerns, consistent with the requirements of the standards agreed by the Financial Action Task Force (FATF). At the same time, the Bermuda Monetary Authority continued to work closely with the National Anti-Money Laundering Committee in an ongoing review of current provisions of Bermuda’s anti-money laundering arrangements, with a view to ensuring full consistency with the revised recommendations adopted by the FATF in late 2003. Elsewhere, Australia is consulting broadly on the implementation of the FATF’s revised 40 Recommendations, which the Government accepted in December 2003. The Philippines, meanwhile, was removed from the list of Non-Cooperative Countries and Territories (NCCTs) during a meeting of FATF on February 11, 2005. In other notable developments during the period under review, Bank of America agreed to invest $2.5 billion in China Construction Bank. The deal, finalized on June 17, 2005, marked the largest single investment to date by an overseas firm in a Chinese company. And in another development that gained widespread attention, Japan’s Financial Services Agency announced an administrative judgment relating to Citibank, N.A. in Japan on September 17, 2004. The decision was based on findings of material legal violations, improper transactions and other incidents, particularly with respect to private banking operations. Operational licenses for all four Citibank offices in Japan involved in private banking activities will be revoked on September 30th. As in past years, the Survey includes an updated table on permissible securities, insurance and real estate activities of banking organizations in various countries. In addition, this year’s Survey includes updated tables on the approach countries take to funding the activities of their bank supervisory authorities, implementation of Basel II, market risk capital requirements, consolidated supervision, host country supervision of branches of non-domestic banks, ii Institute of International Bankers Global Survey 2005 applicability of host country endowment/dotational capital requirements for branches of non-domestic banking organizations, the applicability of asset pledge requirements to branches of non-domestic banking organizations, availability of central bank “daylight overdraft” credit for both domestic and non-domestic banking organizations, and permissibility of merchant banking activities. Lawrence R. Uhlick Executive Director and General Counsel For further information contact: Institute of International Bankers 299 Park Avenue New York, New York 10171 Tel: (212) 421-1611 Fax: (212) 421-1119 E-Mail: [email protected] iii Institute of International Bankers Global Survey 2005 TABLE OF CONTENTS TABLE: THE APPROACH COUNTRIES TAKE TO FUNDING THE ACTIVITIES OF THEIR BANK SUPERVISORY AUTHORITIES……………………………….1 TABLE: THE APPROACH COUNTRIES ARE EXPECTED TO TAKE TO IMPLEMENTATION OF BASEL II…………………….……………..……….…….6 TABLE: MARKET RISK CAPITAL REQUIREMENTS……………………………….……...8 TABLE: THE APPROACH COUNTRIES TAKE TO CONSOLIDATED SUPERVISION OF THE OPERATIONS OF DOMESTIC AND NON-DOMESTIC FINANCIAL GROUPS ……………………………………………………..….……………….……10 TABLE: HOST COUNTRY SUPERVISION OF BRANCHES OF NON-DOMESTIC BANKS…………………………………………………………..12 TABLE: APPLICABILITY OF HOST COUNTRY ENDOWMENT/DOTATIONAL CAPITAL REQUIREMENTS FOR BRANCHES OF NON-DOMESTIC BANKING ORGANIZATIONS……………………………………………………………….…...13 TABLE: APPLICABILITY OF ASSET PLEDGE REQUIREMENTS TO BRANCHES OF NON-DOMESTIC BANKING ORGANIZATIONS OPERATING IN A HOST COUNTRY……………………………………………………………………………15