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    IFSB Paper Explores Inter-Sectoral Linkages in Islamic Finance

    May 31, 2019

    IFSB published, as part of its working paper series, a paper (WP-11) that explores the inter-sectoral linkages within the Islamic financial services industry and between the industry and the real sector via a financial network analysis. The results of WP-11 indicate a reduced likelihood of the Islamic banking sector creating a devastating effect on the financial network in the event that a systemic risk originated from it. Another IFSB-published working paper (WP-10) explores risk-sharing practices in the Islamic banking sector. WP-10 indicates that Islamic banks mostly comply with the disclosure requirements and, except in a few jurisdictions, engage in smoothing both of investment returns and of losses.

  • The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

    • To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
    • To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
    • To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
    • To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

    The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

     

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    Effective Date: June 18, 2019

    Press Release
  • Proposed Rule 1
  • Proposed Rule 2
  • Proposed Rule 3
  • Presentation on Regulatory Framework (PDF)
  • Presentation on Resolution Plan Rules (PDF)
  • Paper on Inter-Sectoral Linkages—This working paper is intended to prepare ground for the future work of IFSB on developing macro-prudential guidelines. The paper extracted Islamic banking balance sheet data covering the fourth quarter of 2013 to fourth quarter of 2017 from the IFSB Prudential and Structural Islamic Financial Indicators database for generating a bilateral exposure adjacency matrix that indicates assets and liabilities across sectors of the the Islamic financial services industry and the real economy. The results obtained did not show the anticipated significant commonality across countries that would enable a strong (albeit descriptive) conclusion to be drawn. The results did, however, indicate what financial network analysis could be done if the requisite data were available. While some inexplicable results were noticed, in general, all seven sectors studied across the four selected jurisdictions have increased in inter-connectivity over time. Both the other financial institutions and household sectors recorded increased bilateral exposure in terms of obligations to other sectors. Notwithstanding, the results indicated a reduced likelihood of the Islamic banking sector creating a devastating effect on the financial network in the event that a systemic risk originated from it.

    Paper on Risk-Sharing Practices—This working paper describes the views of both Islamic banks and regulatory and supervisory authorities on the practices of Islamic banks in the IFSB member jurisdictions. This is in relation to the governance rights of unrestricted profit-sharing investment account holder as well as the likely reasons that may account for a limited usage of equity-based contracts (such as muḍārabah and mushārakah), especially on the asset side of the balance sheet of Islamic banks. The study reveals that the capital treatment of the unrestricted profit-sharing investment account in general varies across different jurisdictions and Islamic banking type. In most of the jurisdictions unrestricted profit-sharing investment accounts are considered to be investments exposed to losses rather than deposits with capital certainty. Furthermore, the paper indicates that Islamic banks comply mostly with the disclosure requirements for the utilization of profit equalization reserve and/or investment risk reserve and consider the basis of allocation of profits between the Islamic banks’ shareholders and unrestricted profit-sharing investment account holders.

     

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    Keywords: International, Banking, Insurance, Securities, Islamic Banking, Inter-Sectoral Linkages, WP-11, WP-10, Research, Risk Management, Systemic Risk, IFSI, IFSB

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