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Governance & Regulation

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"Profit is the reward for taking risk". Frank Wright, Economist 1921

"In the future we will seek to make judgements on the judgements of senior management and take actions if in our view those actions will lead to risks to our statutory objectives. This is a fundamental change. It is moving from regulation based only on observable facts to regulation based on judgements about the future." Hector Sants, Chief Executive FSA 2009

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Payment RequiredThe Prudential Regulatory Authority

26th February 2013

This explains the role of the PRA in the regulatory regime. The approach is clear. Systemic stability and depositor’s protection is crucial. But this is not a zero failure regime. Boards should note the focus on the governance of risk.


Registration RequiredConsultation Paper 12 31

11th January 2013

Removing the simplified ILAS BIPRU firm automatic scalar increase and other minor changes to BIPRU 12. Although a consultation paper this will provide some comfort to simplified firms. The relevant parts are:


Free to ViewTreasury for NEDs

18th December 2012

The following explains five board presentations that are available from Barbican Consulting. Use them for guidance. They are about Treasury, Markets and Governance and are for NEDs. Presentations can be tailored to fit your business and the risks you manage. References are available. More detail is below.


Free to ViewFunding For Lending

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The following explanation is about The Funding for Lending Scheme. It contains the main content of the The Bank of England's Explanatory Note of 13th July 2012 together with additional comments.


Registration RequiredRecovery & Resolution Plans

24th May 2012

During the financial crisis we learnt that banks of all sizes can and do fail. What's more disentangling the business in an orderly and timely fashion was made difficult by complexity. What was the conclusion? Having plans to deal with failure would help in a restructuring without creating undue systemic risk and taxpayer funded support. With this in mind the FSA produced consultation paper 11/16, feedback statement 12/1 and draft changes to the Financial Stability and Market Confidence Sourcebook.


Free to ViewMortgages - is the FTP the cost of one year money?

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Should a long dated mortgage asset be priced off the long dated cost of money? Or should it be priced off a shorter rate reflecting the fact that firms finance by borrowing short term and rolling this over?


Free to ViewFTP Discussion Group

7th February 2012

The presentation for the discussion group held at Mutual One on 25/1/12 and 3/2/12.


Free to ViewFunds Transfer Pricing

17th January 2012

Summary: For banks and societies FTP is not an option it's mandatory. Pooled funding is insufficiently granular for the risks that are now apparent. For most firms some type of matched maturity method either using market yields, derived yields or retail funding costs provides the base cost of funding. This needs to be adjusted to include the additional costs you have identified, for example the buffer cost. Each product will have a different set of costs based on the risks that it creates and the costs associated with hedging those risks. Embedding FTP is as important as calculating it. It's an area that's open to regulatory challenge and you need the evidence to back you up. More...


Free to ViewDear CEO letters

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On several occasions I have been asked about Dear CEO letters. These letters normally focus on a theme where the regulator has found weaknesses in the way firms manage their business. A formal response is often required. How seriously should you take these letters and your response?


Payment RequiredBasel III

12th August 2011

Basel III is about tightening up the capital and liquidity requirements for financial institutions. Whilst regulators and politicians want to avoid further bails outs there is a danger that the new rules could add further disruption to the credit system. It therefore follows that the new legislation will take at least a decade to be applied and in the process it will be subject to alteration. To be clear bank regulation is very much in the "melting pot". For many firms Basel III will increase the costs of doing business. Banks that find ways to change what they do or the way they do it will use their capital more effectively (aka leverage). This quick guide considers tiers 1, 2 and 3, the credit value adjustment, the liquidity coverage ratio, the net stable funding ratio and the possible effect on firms.


Free to ViewLiquidity Swaps

4th August 2011

Put a bank that has difficulty in raising liquidity in a room with an insurance company that's looking for yield and what do you get?


Free to ViewUnderstanding Risk

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Presentation Treasury Audit Group 25th May 2011


Registration RequiredILSA Final Guidance

29th April 2011

It's the 5th May 2011 and I've just received an email from the FSA reminding me that the Individual Liquidity Systems Assessment (ILSA) Finalised Guidance is now available. This may not mean much to you. That's unless you fall under the simplified liquidity regime in the UK. The FSA's guidance is about what they expect to see and the good news is it's a far better document than its predecessors. So what does the FSA expect?


Free to ViewBasis risk

16th March 2011

Basis risk - an update It's a salutary fact that the regulator has identified that firms that run relatively large basis risks are more prone to margin compression. That's because excessive basis risk reduces your control over the balance sheet and calls into question your risk management and governance. Ask a trader about basis risk and they will tell you it is to do with ineffective hedging. You may think of it as the risk between Libor and Bank rate. The fact is basis risk means different things to different people. So let's define it. In the following article basis risk is "the degree of control you have over the margins in your balance sheet". This may seem an unusual definition but all will become apparent.


Registration RequiredReverse stress testing is not stress testing

9th March 2011

The FSA has issued guidance consultation on reverse stress testing (Reverse stress-testing surgeries - FAQ). Some firms will fear that because reverse stress testing is relatively new the regulatory process will involve trial and error. So how can you undertake reverse stress testing and have a good chance of doing it well first time round? Using the maxim of KISS here are 24 FAQ.


Free to ViewAsset Liability Management CEO Letter

2nd February 2011

On 17th January 2011 the FSA released a "Dear CEO letter" on Asset & Liability Management. So what are the "good practices" that are recommended in order to make your ALM function more effective? Here are 20 of the main points.


Free to ViewTransitional Provisions

20th January 2011

Just in case you missed it consultation paper 11/1 now extends the time simplified ILAS BIPRU firms have to reach their buffer requirement. The relevant points are below.


Free to ViewIs it in your your ILAA?

6th January 2011

The FSA's proposed Dear CEO letter (Review of implementation of systems and controls requirements in liquidity regime dated December 2010) tells you that if it's not in writing it doesn't exist.


Free to ViewAsset Liabilty Management

24th December 2010

In the proposed "Dear CEO letter" on Senior Asset & Liability Management Committee Practices (November 2010) the FSA picks up on ALM. Why is the FSA addressing this topic?


Free to ViewLiquidity How It's Shaking Down-presentation

27th November 2010

Presentation to The Local and Regional Building Societies Conference, Ettington Chase, 25th November 2010. The presentation is here. The content of the speech is in the previous article.


Free to ViewLiquidity How It's Shaking Down-speech

27th November 2010

Speech to The Local and Regional Building Societies Conference, Ettington Chase, 25th November 2010. This is about liquidity.


Free to ViewLiquidity Calibration

23rd November 2010

Is a two tier liquidity regime in place? At a conference in January 2010 I warned that firms on the simplified ILAS regime could find it worked against them. My premise was as follows.


Free to ViewILSA Guidance Consultation

19th November 2010

Letter 17th November 2010 to the FSA regarding Guidance consultation Individual Liquidity Systems Assessment (ILSA) - Simplified ILAS BIPRU Firms November 2010.


Free to ViewILSA Submission Information

16th November 2010

On 9th November 2010 the FSA issued proposed guidance on Individual Liquidity Systems Assessment (ILSA) Submission Information. It is a revised version of a document released earlier this year and attempts to clarify what's required. If you are putting together your ILSA the following may help:


Free to ViewTelephone Taping

15th November 2010

Dealers are human and they do make mistakes. These can come to light quickly or later during the confirmation process. Classic errors include rates, amounts, maturities and even what has been bought or sold.


Free to ViewSuppose big banks move their HQs out of the UK

5th September 2010

Now we are examining the entrails of the crisis one potential outcome is to break up the largest banks. The Commission on Banking will take evidence and decide whether this is a "good thing". No doubt concerted lobbying will occur. This makes the veiled threats to move "offshore" by some of the largest UK banks puzzling. Bank CEOs clearly aren't comfortable with the prospect of separating investment and retail banking apparently one can't work without the other. But if investment banking is so profitable why can't it do without the stolid retail business? It's straight forward. Investment banking gets two huge benefits from being wrapped up with retail banking. Let's see why.


Free to ViewDiscussion Paper 10/4

3rd September 2010

This DP raises questions about the capital charge for trading books. Look more closely and you will find that the regulation of investment banking by the FSA is ineffective. Furthermore there is no reason to think that in the future it will improve. Investment banks will continue to run risks that periodically threaten their solvency. Their current interconnection with the retail deposit business means government support is guaranteed. A pragmatic solution would be to disentangle investment banking from the retail business. This free market approach is much favoured by investment bankers for other industries. Good business flourishes and bad ones die without placing a burden on the taxpayer. Now let's see why regulation won't protect us.


Free to ViewReverse stress testing

20th August 2010

What is reverse stress testing? It is the process of uncovering events that, should they occur, have the potential to make your business unviable. Such events can cover credit, market and liquidity risk. It's important to remember that business failure occurs before you run out of capital. It's when counterparties are unwilling to deal with you.


Free to ViewLiquidity policy - quick guide

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Building societies are expected to have an up to date liquidity policy statement. This will need board approval. What should your liquidity policy contain? NEDs may find this guide helpful.


Free to ViewFunding policy - quick guide

30th July 2010

Building societies are expected to have an up to date funding policy statement. This will need board approval. What should your funding policy contain? NEDs may find this guide helpful.


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