Council of Financial Regulators Annual Report – 1999 3. Major Issues for the Council in 1999

Year 2000 Problem

The ‘Year 2000 problem’ – the possibility that computer systems would be unable to deal correctly with dates beyond 31 December 1999 – posed unique challenges, in both the breadth of its potential impact across institutions, industries and countries and its fixed deadline. For the financial system, the threat was one of disruption to individual institutions and payments mechanisms, and a loss of public confidence more generally. The problem touched each Council member – the RBA because of its responsibilities for the payments system and overall financial system stability, as well as for Australia's currency note issue; APRA as part of its prudential oversight of the risk management of individual financial institutions; and ASIC because of its responsibilities for regulating securities markets and for consumer protection in the financial sector.

For these reasons, the Year 2000 problem was a major focus of co-operation between Council members during 1999, especially in the latter months. Recognising the overlapping interests, the Council had earlier established a Year 2000 ‘co-ordinators group’ of relevant staff from each member, which aimed to:

• share information on Year 2000 developments between Council members;
• encourage a consistent approach to supervising Year 2000 preparations across the financial sector;
• co-ordinate the regulators' involvement with domestic financial industry groups and participation in international regulatory groups; and
• co-ordinate the disclosure of Year 2000 preparations in the financial sector.

The group met formally on a regular basis throughout 1999 and were also in frequent contact to share information and co-ordinate activities. An APRA representative on the Council participated in the group and reported to the Council at its meetings.

The group worked closely with industry bodies, including the Interbank Working Group established by the four major banks and the RBA to address Year 2000 issues affecting the banking community. The APRA (and Council) representative was also an active participant in the Joint Year 2000 Council. This gathering consisted of representatives from the Basel Committee on Banking Supervision, the Committee on Payment and Settlement Systems, the International Association of Insurance Supervisors (IAIS) and the International Organisation of Securities Commissions (IOSCO). It met regularly prior to the date change to develop a co-ordinated approach to Year 2000 regulation, by international financial supervisors, to discuss possible contingency measures and to serve as a point of contact with national and international private-sector initiatives.

The Council of Financial Regulators took a number of initiatives to deal with the potential impacts of the Year 2000 problem. It gave priority to encouraging financial institutions to disclose their progress towards achieving Year 2000 readiness and ADIs, in particular, to reassure customers in plain language that their deposits were safe. As part of this process, the Council in January 1999 published a booklet, Year 2000 Preparations in the Australian Banking and Financial System, which outlined the activities of Council members and the Year 2000 preparations being undertaken by regulated institutions and within the payments system. The booklet was updated in April and September 1999. The Council, together with the Australian Bankers' Association (ABA) and representatives from individual banks, also participated in a series of Infrastructure Forums in capital cities around Australia, organised throughout July and August 1999 by the year2k Industry Program of the Commonwealth Government. Their aim was to advise Australian industry and the media of the Year 2000 readiness of key infrastructure and service providers such as banking and finance, electricity, gas/fuel, telecommunications, water, aviation, rail and road transport, ports and shipping.

In addition, the Council prepared contingency plans to deal with problems that might have impacted on individual institutions or had broader systemic implications. The RBA, for example, augmented its holdings of currency notes to meet a potential increase in the public's demand for currency as the Year 2000 approached. The RBA and APRA worked closely with banks and other financial institutions to ensure that they had adequate liquidity over the New Year period. In June 1999, the RBA announced that if need be it would be more flexible in its domestic market operations as the New Year approached, for example, by broadening the range of eligible securities.

The Council's Year 2000 preparations culminated in the establishment of an RBA/APRA communications centre in the RBA's Head Office in Sydney. The centre operated from 1 December until 5 January and on a 24-hour basis over the New Year weekend, when ASIC staff were also in attendance. Its purpose was to monitor the activities of individual financial institutions, the operational status of the payments system and key infrastructure sectors more generally, and to co-ordinate briefings for Government, the media and overseas regulatory agencies. Financial institutions were required to report any disruptions to their operations, unusual changes in customer behaviour or adverse media reports, whether or not they were Year 2000-related. Card companies such as Visa International and MasterCard and payments service providers also submitted reports. Reporting was initially on a weekly basis but was stepped up to four-times daily over the critical period.

Over the New Year weekend, the communications centre maintained close contact with the Commonwealth Government's National Co-ordination Centre and provided briefings to overseas regulators through conference calls and status reports. At a press conference early on 1 January, the Governor of the RBA confirmed that the Australian financial system had made a smooth transition to the Year 2000, and updated media releases were issued over following days.

The Council is pleased that the arrival of the Year 2000 was trouble-free in Australia, and elsewhere. Only a couple of Year 2000-related ‘incidents’ were reported to the communications centre during the whole period of its operation and these did not prove significant. The public's demand for cash was only a little above the usual seasonal demand around Christmas and New Year, and financial institutions did not require any additional liquidity support. In all, the substantial commitment made by financial institutions and Council members alike to meet the technical and other challenges of the Year 2000 problem, and to sustain public confidence, paid valuable dividends.

Reform of the International Financial System

The financial crises of 1997 and 1998, which began in the emerging market economies of Asia but later enveloped other regions, have prompted a major re-evaluation of the architecture of the international financial system. In traditional financial fora (such as the G7 and G10) and several ad hoc international gatherings, the search began for ways to promote greater financial stability. Proposals were developed to limit the volatility of international capital flows; improve supervisory regimes and the risk management practices of financial institutions; promote transparency and disclosure by governments and private agents; involve the private sector more fully in crisis resolution; and improve the performance of the International Monetary Fund and World Bank.

The various multilateral initiatives spawned by this search for reform bear directly on the responsibilities of each Council member, and all have been active in bringing an Australian perspective to the issues. The Council itself provides a forum for sharing information on, and co-ordinating Australian participation in, international financial reform. To assist in this process, the Council has an ‘international officers group’ of staff from each member whose task it is to keep the Council up-to-date on the activities of the main international bodies.

Calm returned to international financial markets throughout 1999 and into 2000 and economic conditions have recovered in most emerging market economies. In such an environment, complacency can become a risk to the momentum of reform. Although a number of key proposals have won broad support from the international community, the Council acknowledges that the reform agenda is far from finished and that complex and detailed work lies ahead. Much of this work will be undertaken under the aegis of two new formal international groupings – the Financial Stability Forum and the G20 – on which Australia is represented. The involvement of Council members in these groupings and in other multilateral initiatives is summarised below.

The Financial Stability Forum was created in February 1999 by G7 Finance Ministers and Central Bank Governors to promote international financial stability through enhanced information exchange and international co-operation in financial market supervision and surveillance. It brings together on a regular basis national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. In June 1999, Australia was invited to join the Forum, together with Hong Kong SAR, the Netherlands and Singapore. Australia is represented by the Governor of the RBA.

At its first meeting in April 1999, the Forum established three working groups to evaluate some specific issues of policy concern; the groups have now submitted their reports and recommendations. The one of particular interest to Australia, and on which the RBA was represented, was the working group on highly leveraged institutions (HLIs), which was asked to assess the challenges posed by such institutions to financial stability and to achieve consensus on the appropriate supervisory and regulatory response. The potential impact of HLIs on financial markets, and on system stability more generally, became the focus of public authorities following the near-collapse of Long Term Capital Management in August 1998 and the destabilising effects of HLIs on markets in some small and medium-sized open economies; the Australian dollar market was one of those subject to this source of speculative attack. The working group has recommended a package of measures to address both systemic risk and market dynamic concerns arising from the activities of HLIs. These include:

• stronger risk management practices by financial institutions acting as counterparties to HLIs, and by HLIs themselves;
• enhanced regulatory and supervisory oversight of credit providers to HLIs;
• enhanced public disclosure by HLIs, through both regulation and legislation; and
• enhanced national surveillance of financial market activity, especially in identifying and taking appropriate preventative measures against rising leverage.

The working party did not recommend direct regulation of currently unregulated HLIs at this stage but has left this option on the table.

The Forum's other two working groups addressed concerns related to capital flows and offshore financial centres. The Forum also established a task force on implementation of standards, on which Australia was represented by the Treasury, to consider the role of international standards in strengthening domestic financial systems. The task force identified 12 key international standards, covering matters such as monetary and fiscal policy transparency, corporate governance and prudential supervision, and proposed a five-stage strategy to encourage their implementation.

The G20 was formed in December 1999 to broaden the dialogue on major economic and financial policy issues among systemically significant economies and to promote co-operation so as to achieve stable and sustainable world economic growth.^[1] Australia is represented by the Treasurer and the Governor of the RBA; the G20 also meets at Deputies level. Although its role is still in the developmental stage, the G20 is intended to be an informal forum for discussion that is not tied to a specific international institution. It is expected to assist in identifying emerging policy challenges for the global community and the obstacles to reaching a consensus on appropriate policy responses. Its initial focus has been exchange rate regimes; capital controls and domestic financial systems; liability management; and private sector involvement in crisis prevention and resolution. The RBA has helped prepare a discussion paper for G20 Deputies on the lessons and policy implications of recent exchange rate crises in emerging markets.

The promotion of greater disclosure by financial institutions has also been a priority for the Committee on the Global Financial System at the Bank for International Settlements (BIS). Separate working groups, both of which have had RBA representation, have been reviewing disclosure regimes from institutional and market perspectives. One group, which worked jointly with representatives of the Technical Committee of IOSCO, was charged with identifying information suitable for public disclosure that would provide an accurate picture of a financial institution's exposure to market and credit risks. The group developed a disclosure template which is being trialed and evaluated by a successor multi-disciplinary grouping; a pilot disclosure regime is expected to be in place for large financial institutions by mid 2000. The second BIS group has made a number of preliminary recommendations on improving aggregate market information, particularly the transparency of aggregate foreign exchange positions, but the work is not being pursued further at this time.

APRA also participates actively in a number of international fora and in regional supervisory gatherings. It takes the view that its regulatory framework and supervisory approach should stay within the international mainstream, and that it has a role to play in contributing to the international debate on new trends and developments in regulation.

APRA is a member of the Core Principles Liaison Group of the Basel Committee on Banking Supervision. This Group is responsible for developing strategies to encourage countries to embrace the Core Principles for Effective Banking Supervision, promulgated by the Basel Committee in 1997. APRA is also participating in the Basel Committee's review of the 1988 Capital Accord and has made a detailed submission in response to initial proposals by the Committee.

APRA is represented on the Executive and Technical Committees and the Solvency Subcommittee of IAIS; the OECD Insurance Committee; and the Joint Forum and its Working Group 3 on capital and risk assessment.

In May 1999, APRA hosted an international conference of integrated financial supervisors in Sydney, which brought together representatives from eight overseas agencies with similar responsibilities to those of APRA. The first of its kind, the conference provided a forum to foster the sharing of ideas and experiences among agencies that straddle traditional industry boundaries. Issues discussed included the organisation and management structures for regulatory agencies; legislative frameworks; relationships with governments and other bodies; and ways of supervising conglomerates. APRA will participate in the second international conference of integrated financial supervisors in Canada in May 2000.

ASIC continued its membership of the Executive and Technical Committees of IOSCO and played an active role in the latter Committee's five working groups. It hosted the 25th Annual Conference of IOSCO in Sydney in May, 2000. The IOSCO working group on multinational accounting and disclosure continued its assessment of the core standards of the International Accounting Standards Committee to determine whether they should be recommended for use for cross-border offerings and listings. Other IOSCO working groups also dealt with issues such as electronic trading systems; operational and credit risk in securities firms; enforcement of market manipulation provisions; and the valuation and pricing of collective investment schemes.

In November 1999, IOSCO released the report of its task force on HLIs. This dealt with risk management practices in regulated securities firms dealing with HLIs; the reduction of systemic risk and the potential for market instability through additional transparency about HLI activities; and issues involved in greater public disclosures by HLIs.

Both APRA and ASIC are members of the Joint Forum (previously the Joint Forum on Financial Conglomerates), which was established in 1996 by the Basel Committee, IOSCO and IAIS to develop principles and techniques for the supervision of internationally active financial conglomerates. These parent bodies have approved new mandates for the Joint Forum in the areas of comparison of core principles; corporate governance and transparency; and risk assessment and capital. The Chairman of ASIC concluded his term as chair of the Joint Forum in December 1999.

Council members contributed actively over 1999 to technical assistance programs for the International Monetary Fund and World Bank, and to various regional training initiatives. As examples, the RBA is a member of the Independent Review Committee, which was established by the Indonesian Bank Restructuring Agency to review and verify its activities and to publish its findings. The RBA has also assisted the Bank of Thailand in the information technology and payments settlement areas. In addition, the RBA regularly provides training attachments for staff from other central banks and official agencies in the region.

APRA became involved in a two-year assistance program to the Bank of Thailand, funded by AusAID. APRA staff conducted training courses at the Bank of Thailand for supervisory staff on topics such as capital markets and market risk management; these will be followed up by secondments to APRA by Bank of Thailand officials to enable them to gain a first-hand understanding of Australian supervisory techniques and practices. The program will conclude with a re-run of the initial training courses, but conducted largely by the seconded Bank of Thailand staff. APRA has also provided assistance to Malaysia, Vietnam and China, amongst others.

The fourth ASIC Summer School, held in Melbourne in February 1999, brought together representatives from 16 different jurisdictions, as well as from the Australian industry and regulatory community. The School's theme was strengthening the architecture of the financial system and the week-long program focussed on local, national and global measures for establishing and maintaining a strong financial system. An ASIC officer was one of two key facilitators at a course on ‘Strengthening Training Programs and Processes’ held in Kuala Lumpur in September 1999. The course was organised as part of the APEC/Asian Development Bank Securities Regulators Training Initiative and was attended by both bank supervisory and securities regulatory organisations from 15 countries. In December 1999, ASIC was the principal presenter at the Enforcement Training Institute run by the Asia-Pacific Regional Committee of IOSCO, together with the World Bank, in Korea. That same month, ASIC also organised a workshop in Sydney for directors of enforcement. Representatives from the United States, United Kingdom, Canada, Singapore, Malaysia, Hong Kong and New Zealand discussed a number of operational issues such as delivering enforcement programs; establishing a new enforcement regime; project management; investigating market manipulation; and document control systems.