Monday April 9 2012 - Top 10 risk and compliance management related news stories and world events
International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Monday, April 9, 2012 - Top 10 risk and compliance management related news stories and world events that (forbetter or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,In the States, President Obama signed the Jumpstart Our Business Startups(JOBS) Act, a bipartisan bill that encourages startups and support smallbusinesses.In the world, we will have interesting changes in risk management andcorporate governance, as the Financial Stability Board finds that the globalfinancial crisis highlighted a number of corporate governance failures andweaknesses in financial institutions, including inappropriate Board structuresand processes, weak risk governance systems, and unduly complex or opaquefirm organisational structures and activities.In Europe, we have a very important development.The impact of the new Basel III framework is monitored semi-annually by boththe Basel Committee at a global level and the European Banking Authority(EBA, formerly CEBS) at the European level, using data provided byparticipating banks on a voluntary and confidential basis.Well, in Europe, the aggregate Group 1 and Group 2 shortfall of liquid assets isat approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion totalassets of the aggregate sample. [Group 1 banks are those with Tier 1 capital inexcess of €3 bn and internationally active. All other banks are categorized asGroup 2 banks]A total of 158 banks submitted data for this exercise, consisting of 48 Group 1banks and 110 Group 2 banks.For the banks in the sample, monitoring results show a shortfall of liquidassets of €1.15 trillion (which represents 3.7% of the €31 trillion totalassets of the aggregate sample) as of 30 June 2011, if banks were to makeno changes whatsoever to their liquidity risk profile.Welcome to the Top 10 list.
Number 1 (Page 4)April 2012 - Results of the Basel IIImonitoring exercise as of 30 June 2011.Since the beginning of 2011, the impact of thenew requirements related to the Basel iiireforms is monitored and evaluated by theBasel Committee on Banking Supervision ona semi-annual basis for its memberjurisdictions.At European level, this analysis is conducted by the European BankingAuthority (EBA), also based on the Basel III reform package as the CRD IV, theEuropean equivalent to the Basel III framework, has not yet been finalised.Number 2 (Page 33)The Financial Industry Regulatory Authority(FINRA) issued a new Investor Alert called It Paysto Understand Your Brokerage Account Statementsand Trade Confirmations to help guide investors through the keyelements of their account statements and trade confirmations.Number 3 (Page 43)President Obama signed the Jumpstart OurBusiness Startups (JOBS) Act, a bipartisan bill thatenacts many of the President’s proposals toencourage startups and support small businesses.Number 4 (Page 48)Learning more about Supervisory Agencies: BaFinSince it was established in May 2002, the FederalFinancial Supervisory Authority (Bundesanstalt fürFinanzdienstleistungsaufsicht - known as BaFin for short) has broughtthe supervision of banks and financial services providers, insuranceundertakings and securities trading under one roof.Number 5 (Page 56)Federal Reserve Policy Statementon Rental of Residential Other RealEstate Owned PropertiesIn light of the large volume of distressed residential properties and theindications of higher demand for rental housing in many markets, somebanking organizations may choose to make greater use of rentalactivities in their disposition strategies than in the past.
Number 6 (Page 64)We have access to the minutes ofthe Federal Open MarketCommittee. Developments inFinancial Markets and the Federal Reserves Balance Sheet- Staff Review of the Economic SituationNumber 7 (Page 88)Final rule and interpretive guidance.Section 113 of the Dodd-Frank Act authorizesthe Financial Stability Oversight Council to determine that a nonbankfinancial company shall be supervised by the Board of Governors of theFederal Reserve System and shall be subject to prudential standardsNumber 8 (Page 91)The Alternative InvestmentManagement Association (AIMA), theglobal hedge fund trade association, has expressed concern about theEuropean Commission’s new draft text for the implementation of theAlternative Investment Fund Managers Directive (AIFMD).Number 9 (Page 94)Thematic review on risk governanceQuestionnaire for national authoritiesThe global financial crisis highlighted a number of corporategovernance failures and weaknesses in financial institutions, includinginappropriate Board structures and processes, weak risk governancesystems, and unduly complex or opaque firm organisational structuresand activities.Number 10 (Page 105)The White House BlogHow Your Tax Dollars Are SpentOn Wednesday, the updatedFederal Taxpayer Receipt wasreleased, which lets you enter a fewpieces of information about thetaxes you paid last year andcalculates how much of your moneywent toward different nationalpriorities like education, defense, and health care.
NUMBER 1April 2012Results of the Basel III monitoring exercise as of 30 June 2011To assess the impact of the new capital and liquidity requirements set out in theconsultative documents of June and December 2009, both the Basel Committeeon Banking Supervision and the Committee of European Banking Supervisors(CEBS) conducted a so-called comprehensive quantitative impact study(C-QIS) for their member jurisdictions based on data as of 31 December 2009.The main results of both impact studies have been published in December 2010.After finalisation of the regulatory framework (referred to as “Basel III”) inDecember 2010, the impact of this new framework is monitored semi-annuallyby both the Basel Committee at a global level and the European BankingAuthority (EBA, formerly CEBS) at the European level, using data provided byparticipating banks on a voluntary and confidential basis.This report summarises the results of the latest monitoring exercise usingconsolidated data of European banks as of 30 June 2011. A total of 158 bankssubmitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2banks.[Group 1 banks are those with Tier 1 capital in excess of €3 bn andinternationally active. All other banks are categorised as Group 2 banks]Member countries’ coverage of their banking system was very high for Group 1banks, reaching 100% coverage for many jurisdictions (aggregate coverage interms of Basel II risk-weighted assets: 98.5%), while for Group 2 banks it waslower with a larger variation across jurisdictions (aggregate coverage: 35.8%).Furthermore, Group 2 bank results are driven by a relatively small number oflarge but non-internationally active banks, ie the results presented in this reportmay not be as representative as it is the case for Group 1 banks.[There are 19 Group 2 banks that have Tier 1 capital in excess of €3 billion.These banks account for 64.3% of total Group 2 RWA.]
Since the new EU directive and regulation are not finalised yet, no EU specificrules are analysed in this report.Accordingly, this monitoring exercise is carried out assuming fullimplementation of the Basel III framework, ie transitional arrangements such asphase-in of deductions and grandfathering arrangements are not taken intoaccount.The results are compared with the respective current national implementation ofthe Basel II framework.In addition, it is important to note that the monitoring exercise is based on staticbalance sheet assumptions, ie capital elements are only included if the eligibilitycriteria have been fulfilled at the reporting date.Planned management actions to increase capital or decrease risk-weightedassets are not taken into account (“static balance sheet assumption”).This allows for identifying effective changes in banks’ capital base instead ofidentifying changes which are solely based on changes in underlying modellingassumptions.As a consequence, monitoring results are not comparable to industry estimatesas the latter usually include assumptions on banks’ future profitability, plannedcapital and/or further management actions that mitigate the impact of Basel III.In addition, monitoring results are not comparable to C-QIS results, whichassessed the impact of policy proposals published in 2009 that differedsignificantly from the final Basel III framework.The actual capital and liquidity shortfalls related to the new requirements by thetime Basel III is fully implemented will differ from those shown in this report asthe banking sector reacts to the changing economic and regulatoryenvironment.The monitoring exercise provides an impact assessment of the followingaspects:- Changes to banks’ capital ratios under Basel III, and estimates of any capital shortfalls. In addition, estimates of capital surcharges for global systemically important banks (G-SIBs) are included, where applicable;- Changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including modified rules on capital deductions, and changes to the eligibility criteria for Tier 1 and total capital;- Changes in the calculation of risk-weighted assets (RWA) resulting from changes to the definition of capital, securitisation, trading book and counterparty credit risk requirements;
- The capital conservation buffer;- The leverage ratio; and- Two liquidity standards – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).Key results - Impact on regulatory capital ratios and estimated capitalshortfallAssuming full implementation of the Basel III framework as of 30 June 2011 (i.e.without taking into account transitional arrangements), the CET1 capital ratiosof Group 1 banks would have declined from an average CET1 ratio of 10.2%(with all country averages above the 7.0% target level) to an average CET1 ratioof 6.5%.80% of Group 1 banks would be at or above the 4.5% minimum while 44% wouldbe at or above 7.0% target level.The CET1 capital shortfall for Group 1 banks is €18 bn at a minimumrequirement of 4.5% and €242 bn at a target level of 7.0% (including the G-SIBsurcharge).As a point of reference, the sum of profits after tax prior to distributions acrossthe Group 1 sample in the second half of 2010 and the first half of 2011 was €102bn.With respect to the average Tier 1 and total capital ratio, monitoring results showa decline from 11.9% to 6.7% and from 14.4% to 7.8%, respectively.Capital shortfalls comparing to the minimum ratios (excl. the capitalconservation buffer) amount for €51 bn (Tier 1 capital) and €128 bn (totalcapital).Taking into account the capital conservation buffer and the surcharge forsystemically important banks, the Group 1 banks’ capital shortfall rises to €361bn (Tier 1 capital) and €485 bn (total capital).For Group 2 banks, the average CET1 ratio declines from 9.8% to 6.8% underBasel III, where 87% of the banks would be at or above the 4.5% minimum and72% would be at or above the 7.0% target level.The respective CET1 shortfall is approx. €11 bn at a minimum requirement of4.5% and €35 bn at a target level of 7.0%.The sum of profits after tax prior to distributions across the Group 2 sample inthe second half of 2010 and the first half of 2011 was €17 bn.
Main drivers of changes in banks’ capital ratiosFor Group 1 banks, the overall impact on the CET1 ratio can be attributed inalmost equal parts to changes in the definition of capital and to changes relatedto the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWAincrease by 21.2%, on average.For Group 2 banks, while the change in the definition of capital results in adecline in CET1 of 25.9%, the new rules on RWA affect Group 2 banks far less(+6.9%), which may be explained by the fact that these banks´ business modelsare less reliant on exposures to counterparty and market risks (which are themain drivers of the RWA increase under the new framework).Reductions in Group 1 and Group 2 banks’ CET1 are mainly driven by goodwill(-17.3% and -14.8%, respectively), followed by deductions for holdings of capitalof other financial companies (-4.4% and -7.0%, respectively).As to the denominator of regulatory capital ratios, the main driver is theintroduction of CVA capital charges which result in an average RWA increase of8.0% and of 2.9% for Group 1 and Group 2 banks, respectively.In addition to CVA capital charges, trading book exposures and the transitionfrom Basel II 50/50 deductions to a 1250% risk weight treatment are the maincontributors to the increase in Group 1 banks’ RWA.As Group 2 banks are in general less affected by the revised counterparty creditrisk rules, these banks show a much lower increase in overall RWA (+6.9%).However, even within this group, the RWA increase is driven by CVA capitalcharges, followed by changes related to the transition from Basel II 50/50 capitaldeductions to a 1250% risk weight treatment, and to the items that fall below the10/15% thresholds.Leverage ratioMonitoring results indicate a positive correlation between bank size and thelevel of leverage, since the average LR is significantly lower for Group 1 banks.Assuming full implementation of Basel III, Group 1 banks show an averageBasel III Tier 1 leverage ratio (LR) of 2.7%, while Group 2 banks’ leverage ratiois 3.4%.41% of participating Group 1 and 72% Group 2 banks would meet the 3% targetlevel as of June 2011.If a hypothetical current leverage ratio was already in place, Group 1 and Group 2banks’ LR would be 4.0% and 4.7%, respectively.
Liquidity standardsA total of 156 Group 1 and Group 2 banks participated in the liquidity monitoringexercise for the end-June 2011 reporting period.Group 1 banks have reported an average LCR of 71% while the average LCR forGroup 2 banks is 70%.The aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2trillion which represents 3.7% of the approx. €31 trillion total assets of theaggregate sample.Group 1 banks reported an average NSFR of 89% (Group 2 banks: 90%).To fullfil the minimum standard of 100% on a total basis, banks need stablefunding of approx. €1.9 trillion.Both liquidity standards are currently subject to an observation period whichincludes a review clause to address any unintended consequences prior to theirrespective implementation dates.1. General remarksIn September 2010, the Group of Governors and Heads of Supervision (GHOS),the Basel Committee on Banking Supervision’s oversight body, announced asubstantial strengthening of existing capital requirements and fully endorsed theagreements reached on 26 July 2010.Since the beginning of 2011, the impact of the new requirements related to thesecapital reforms and the introduction of two international liquidity standards ismonitored and evaluated by the Basel Committee on Banking Supervision on asemi-annual basis for its member jurisdictions.At European level, this analysis is conducted by the European BankingAuthority (EBA), also based on the Basel III reform package as the CRD IV, theEuropean equivalent to the Basel III framework, has not yet been finalised.This report presents the results of the latest monitoring exercise based onconsolidated data of European banks as of 30 June 2011. The monitoringexercise provides an impact assessment of the following aspects:- Changes to banks’ capital ratios under Basel III, and estimates of any capital shortfalls. In addition, estimates of capital surcharges for global systemically important banks (G-SIBs) are included, where applicable;- Changes to the definition of capital that result in a new capital standard, referred to as common equity Tier 1 (CET1), a reallocation of regulatory adjustments to CET1 and changes to the eligibility criteria for Tier 1 and total capital,
- Changes in the calculation of risk-weighted assets due to changes to the definition of capital, trading book, securitisation and counterparty credit risk requirements,- The capital conservation buffer of 2.5%,- The introduction of a leverage ratio and- The introduction of two international liquidity standards – the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR)The related policy documents are:- Revisions to the Basel II market risk framework9 and Guidelines for computing capital for incremental risk in the trading book;- Enhancements to the Basel II framework11 which include the revised risk weights for re-securitisations held in the banking book;- Basel III: A global framework for more resilient banks and the banking system as well as the Committee’s 13 January press release on loss absorbency at the point of non-viability;- International framework for liquidity risk measurement, standards and monitoring; and - Global systemically important banks: Assessment methodology and theadditional loss absorbency requirement.1.1. Sample of participating banksThe report includes an analysis of data submitted by 48 Group 1 banks from 16countries and 110 Group 2 banks from 18 countries.Table 1 shows the distribution of participation by jurisdiction.
Coverage of the banking sector is high, reaching 100% of Group 1 banks in somecountries (aggregate coverage in terms of Basel II risk-weighted assets: 98.5%).Coverage of Group 2 banks is lower and varies across countries (aggregatecoverage: 35.8%).Group 2 results are driven by a relatively small number of banks sufficientlylarge to be classified as Group 1 banks, but that have been classified as Group 2banks by their supervisor because they are not internationally active.1.2. Methodology“Composite bank” weighting schemeAverage amounts in this document have been calculated by creating acomposite bank at a total sample level, which implies that the total sampleaverages are weighted.For example, the average common equity Tier 1 capital ratio is the sum of allbanks’ common equity Tier 1 capital for the total sample divided by the sum ofall banks’ risk-weighted assets for the total sample.
Box plots illustrate the distribution of resultsTo ensure data confidentiality, most charts show box plots which give anindication of the distribution of the results among participating banks.The box plots are defined as follows:1.3. Interpretation of resultsThe impact assessment was carried out by comparing banks’ capital positionsunder Basel III to the current regulatory framework.With the exception of transitional arrangements for non-correlation tradingsecuritisation positions in the trading book, results are calculated assuming fullimplementation of Basel III ie without considering transitional arrangementsrelated to the phase-in of deductions and grandfathering arrangements.This implies that the Basel III capital amounts shown in this report assume thatall common equity deductions are fully phased in and all non-qualifying capitalinstruments are fully phased out.As such, these amounts underestimate the amount of Tier 1 capital and totalcapital held by a bank as they do not give any recognition for non-qualifyinginstruments that are actually phased out over a 10 year horizon.The treatment of deductions and non-qualifying capital instruments under theassumption of full implementation of Basel III also affects figures reported inthe leverage ratio section.The potential underestimation of Tier 1 capital will become less of an issue asthe implementation date of the leverage ratio approaches.In particular, in 2013, the capital amounts based on the capital requirements inplace on the Basel III implementation monitoring reporting date will reflect theamount of non-qualifying capital instruments included in capital at that time.These amounts will therefore be more representative of the capital held by
banks at the implementation date of the leverage ratio (for more detail seesection 5).In addition, it is important to note that the monitoring exercise is based onstatic balance sheet assumptions, ie capital elements are only included if theeligibility criteria have been fulfilled at the reporting date.Planned bank measures to increase capital or decrease risk-weighted assets arenot taken into account.This allows for identifying effective changes in bank capital instead ofidentifying changes which are simply based on changes in underlyingmodelling assumptions.As a consequence, monitoring results are not comparable to industry estimatesas the latter usually include assumptions on banks’ future profitability, plannedcapital and/or management actions that mitigate the impact of Basel III.In addition, monitoring results are not comparable to prior C-QIS results, whichassessed the impact of policy proposals published in 2009 that differedsignificantly from the final Basel III framework.As one example, the C-QIS did not consider the impact of capital surcharges forG-SIBs based on the initial list of G-SIBs announced by the Financial StabilityBoard in November 2011.To enable comparisons between the current regulatory regime and Basel III,common equity Tier 1 elements according to the current regulatory frameworkare defined as those elements of current Tier 1 capital which are not subject to alimit under the respective national implementation of Basel II.1.4. Data qualityFor this monitoring exercise, participating banks submitted comprehensive anddetailed non-public data on a voluntary and best-efforts basis.National supervisors worked extensively with banks to ensure data quality,completeness and consistency with the published reporting instructions.Banks are included in the various analyses that follow only to the extent theywere able to provide data of sufficient quality to complete the analyses.
2. Overall impact on regulatory capital ratios and estimated capitalshortfallOne of the core intentions of the Basel III framework is to increase theresilience of the banking sector by strengthening both the quantity and qualityof regulatory capital.Therefore, higher minimum requirements have to be met and stricter rules forthe definition of capital and the calculation of risk weighted assets apply.As the Basel III monitoring exercise assumes full implementation of Basel III(without taking into account any transitional arrangements), it comparescapital ratios under current rules with capital ratios that banks would show ifBasel III were already fully in force at the reporting date.In this context, it is important to elaborate on the implications the assumptionof full implementation of Basel III has on the monitoring results.The Basel III capital amounts reported in this exercise assume that all commonequity deductions are fully phased in and all non-qualifying capital instrumentsare fully phased out.Thus, these amounts may underestimate the amount of Tier 1 capital and totalcapital under current rules held by banks as they do not give any recognition fornon-qualifying instruments which are actually phased out over a 10 yearhorizon.Table 2 shows the overall change in common equity Tier 1 (CET1), Tier 1 andtotal capital if Basel III were fully implemented, as of 30 June 2011.For Group 1 banks, the impact on the average CET1 ratio is a reduction from10.2% to 6.5% (a decline of 3.7 percentage points) while the average Tier 1 andtotal capital ratio would decline from 11.9% to 6.7% and from 14.4% to 7.8%respectively.Contrary to the current framework, for Group 2 banks average capital ratios arehigher than for Group 1.The following chart gives an indication of the distribution of results amongparticipating banks.
It includes the respective regulatory minimum requirement (thick red line), theweighted average (depicted as “x”) and the median (thin red line), ie the valueseparating the higher half of a sample from the lower half (that means that 50%of all observations are below this value, 50% are above).80% of Group 1 banks would be at or above the 4.5% minimum requirementwhile 44% would be at or above the 7.0% target level, ie it is expected that in thenext years banks will put in place several measures to increase high qualitycapital.With respect to Group 2 banks, 87% reported CET1 ratios at or above 4.5% while72% would be at or above the 7.0% target level.The reduction in CET1 ratios is driven both by a new definition of capitaldeductions (numerator) and by increases in risk-weighted assets(denominator).Banks engaged heavily in trading or in activities subject to counterparty creditrisk tend to show the largest denominator effects as these activities attractsubstantially higher capital charges under the new framework.For Group 1 banks, the aggregate impact on the CET1 ratio can be attributed inalmost equal parts to changes in the definition of capital and to changes relatedto the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWAincrease by 21.2%, on average.
For Group 2 banks, while the change in the definition of capital resultsin a decline in CET1 of 25.9%, the new rules on RWA affect Group 2banks far less (+6.9%), which may be explained by the fact that thesebanks´ business models are less reliant on exposures subject tocounterparty credit risk and market risk (which are the main drivers ofthe RWA increase under the new framework).The Basel III framework includes the following phase-in arrangementsfor capital ratios:- For CET1, the highest form of loss absorbing capital, the minimum requirement will be raised to 4.5% and will be phased in by 1 January 2015. Deductions from CET1 will be fully phased in by 1 January 2018;- For Tier 1 capital, the minimum requirement will be raised to 6.0% and will be phased in by 1 January 2015;- An additional 2.5% capital conservation buffer above the regulatory minimum capital ratios, which must be met with common equity, after the application of deductions, will be phased in by 1 January 2019; and- The additional loss absorbency requirement for G-SIBs, which ranges from 1.0% to 2.5% and must be met with common equity, after the application of deductions and as an extension of the capital conservation buffer, will be phased in by 1 January 2019.Table 3 and Chart 2 provide estimates of the additional amount of capital thatGroup 1 and Group 2 banks would need between 30 June 2011 and 1 January 2022to meet the target CET1, Tier 1 and total capital ratios under Basel III assumingfully phased-in target requirements and deductions as of 30 June 2011.For Group 1 banks, the CET1 capital shortfall is €18 bn at a minimumrequirement of 4.5% and €242 bn at a target level of 7.0%.With respect to the Tier 1 and total capital ratios, the capital shortfall comparingto the minimum ratios amount for €51 bn and €128 bn respectively.For Group 2 banks, the CET1 capital shortfall is €11 bn at a minimumrequirement of 4.5% and €35 bn at a target level of 7.0%.The Tier 1 and total capital shortfall calculated relative to the 4.5% minimumamount for €18 and €22 bn, respectively.The surcharges for G-SIBs are a binding constraint for 12 of the 13 G-SIBsincluded in this monitoring exercise.It should be mentioned, that the shortfall figures are not comparable to those of
the EBA recapitalisation exercise since the capital definitions and thecalculation of the risk-weighted assets differ.Given these results, a significant effort by banks to fulfil the risk-based capitalrequirements is expected.
3. Impact of the new definition of capital on Common EquityTier 1As noted above, reductions in capital ratios under the Basel III framework areattributed in part to capital deductions previously not applied at the commonequity level of Tier 1 capital.Table 4 shows the impact of various deduction categories on the gross CET1capital (i.e. CET1 before applying deductions) of Group 1 and Group 2 banks.In the aggregate, deductions reduce gross CET1 of Group 1 banks by 37.2%with goodwill being the most important driver, followed by holdings of capitalof other financial companies.Deductions for defined benefit pension obligations and provisioning shortfallsrelative to expected losses tend to be the largest contributors to otherdeductions across most countries.For Group 2 banks, average results are similar: CET1 deductions reduce grossCET1 by 37.4% due in particular to goodwill, and again followed by holdings ofcapital of other financial companies as the second most important driver.However, it should be noted that these results are driven by large Group 2 banks(defined as those with Tier1 capital in excess of €3 billion). Without consideringthese banks, the overall decline of gross CET1 due to deductions would be22.6%.Mortgage servicing rights related deductions have no impact, for both groups.
4. Changes in risk-weighted assetsReductions in capital ratios under Basel III are also attributed to increases inrisk-weighted assets as shown in Table 5 for the following four categories:Definition of capital:Here we distinguish three effects: The column heading “50/50” measures theincrease in risk-weighted assets applied to securitisation exposures currentlydeducted under the Basel II framework that are risk-weighted at 1250% underBasel III.The negative sign in column “other” indicates that this effect reduces the RWA.This relief in RWA is mainly technical since it is compensated by deductionsfrom capital.The column heading “threshold” measures the increase in risk-weighted assetsfor exposures that fall below the 10% and 15% limits for CET1 deduction;Counterparty credit risk (CCR):This column measures the increased capital charge for counterparty credit riskand the higher capital charge that results from applying a higher assetcorrelation parameter against exposures to financial institutions under the IRBapproaches to credit risk.The effects of capital charges for exposures to central counterparties (CCPs) orany impact of incorporating stressed parameters for effective expected positiveexposure (EEPE) are not included;Securitisation in the banking book:This column measures the increase in the capital charges for certain types ofsecuritisations (e.g. resecuritisations) in the banking book; andTrading book:This column measures the increased capital charges for exposures held in thetrading book to include capital requirements against stressed value-at-risk,incremental risk capital charge, and securitisation exposures in the tradingbook (see section 4.2 for more details).4.1. Overall resultsRisk-weighted assets for Group 1 banks increase overall by 21.2% which can bemainly attributed to higher risk-weighted assets for counterparty credit riskexposures (+8.0%), followed by changes due to the new RWA treatment of
current Basel II 50/50 capital deductions (+5.9%) and the new trading bookrules (+4.2%).The main driver behind the capital charges for counterparty credit risk is thecharge for credit valulation adjustments (CVA) while the higher assetcorrelation parameter results in an increase in overall risk-weighted assets ofonly 1.2%.For Group 2 banks, aggregate RWA increase overall by 6.9%. The smallerincrease relative to Group 1 banks is as expected since Group 2 banks tend tohave less exposure to market risk and counterparty exposures.However, even for Group 2 banks, CCR capital charges (2.9%) are the maincontributor to the change in RWA for Group 2 banks.Moving Basel II 50/50 deductions to a 1250% risk weight treatment andincreases in RWA attributable to items that fall below the 10/15% thresholdsaffect RWA by 2.2% each.Chart 3 gives an indication of the distribution of the results acrossparticipating banks and illustrates that the dispersion is much higherwithin the Group 1 bank sample as compared to Group 2 banks.
4.2. Market risk-related capital chargesTable 6 presents details on the impact of the revised trading book capitalcharges on overall risk-weighted assets for Group 1 banks.Group 2 banks are not presented separately because the market riskrequirements have a very minor influence on overall Group 2 bankrisk-weighted assets. Some of these banks do not have any tradingbooks at all and are therefore not subject to any related capital charges.Stressed VaR (2.1%), the incremental risk capital charge or “IRC”(1.2%), and the capital charge for non-correlation trading securitisationexposures under the standardised measurement method or “SMMnon-CTP” (0.7%) are the three most relevant drivers behind theincrease.Increases in risk-weighted assets are partially offset by effects related toprevious capital charges (resulting from the event risk surcharge andprevious standardised or VaR-based charges for the specific risk capitalrequirements of securitisations), and the changes to positions treatedwith standardised measurement methods (column “SMM”).
4.3. Impact of the rules on counterparty credit risk (CVA only)Credit valuation adjustment (CVA) risk capital charges lead to a 7.8%increase in total RWA for the subsample of 36 banks which provided therelevant data (6.8% for the full Group 1 sample).A larger fraction of the total effect is attributable to the application of thestandardised method than to the advanced method.The impacts on Group 2 banks are smaller but still significant, addingup to an overall 3.5% increase in RWA over a subsample of 57 banks(2.3% for the full Group 2 sample), totally attributable to thestandardised method.Further details are provided in Table 7.5. Leverage RatioA simple, transparent, non-risk based leverage ratio has been introducedin the Basel III framework in order to act as a credible supplementarymeasure to the risk based capital requirements.It is intended to constrain the build-up of leverage in the banking sectorand to complement the risk based capital requirements with a non-riskbased “backstop” measure.For the interpretation of the results of the leverage ratio section it is important tounderstand the terminology used to describe a bank’s leverage.
Generally, when a bank is referred to as having more leverage, or being moreleveraged, this refers to a multiple of exposures to capital (i.e. 50 times) asopposed to a ratio (i.e. 2.0%).Therefore, a bank with a high level of leverage will have a low leverage ratio.155 Group 1 and Group 2 banks provided sufficient data to calculate the leverageratio according to the Basel III framework.In total, aggregate Tier 1 capital according to Basel III (numerator of theleverage ratio) is €0.76 trillion for Group 1 banks while the total aggregateexposure according to the definition of the denominator of the leverage ratio is€27.69 trillion.For Group 2 banks, the corresponding figures are €0.16 trillion (Tier 1 capital)and €4.59 trillion (total exposure).To illustrate the impact of the new capital framework, a hypothetical currentleverage ratio is shown assuming the leverage ratio was already in place.This hypothetical ratio is based on the current definition of Tier 1 capital.It is important to recognize that the monitoring results may underestimate theamount of capital that will actually be held by the bank over the next few years.The reason is as follows. The Basel III capital amounts reported in thismonitoring exercise assume that all common equity deductions are fully phasedin and all non-qualifying capital instruments are fully phased out.Thus, these amounts ceteris paribus underestimate the amount of Tier 1 capitaland total capital under current rules held by banks as they do not give anyrecognition for non-qualifying instruments which are actually phased out over anine year horizon.In this exercise, Common Equity Tier 1, Tier 1 capital and total capital could bevery similar if all (or most) of the banks’ Additional Tier 1 and Tier 2instruments are considered non-qualifying under Basel III.As the implementation date of the leverage ratio approaches, this will becomeless of an issue.With respect to the total sample of banks, the average Basel III Tier 1 leverageratio is 2.8%.Group 1 banks’ average Basel III LR is 2.7% while for Group 2 banks theleverage ratio is significantly higher at 3.4%.Assuming full implementation of Basel III at 30 June 2011, 41.3% of Group 1banks would meet the calibration target of 3% for the leverage ratio while 80%
would be at or above the 4.5% minimum requirement for the risk-based CET1ratio.Regarding Group 2 banks, 71.6% show a leverage ratio at or above the targetlevel while 87% reported CET1 ratios at or above the CET1 minimumrequirement of 4.5%.Using Tier 1 capital according to current rules in the numerator, the leverageratio is 4.1% for the total sample.For Group 1 banks it is 4.0% (Group 2: 4.7%).Comparing the average results for Group 1 and Group 2 banks, monitoringresults indicate a positive correlation between bank size and the level ofleverage, since the average LR is significantly lower for Group 1 banks.Chart 4 gives an indication of the distribution of the results across participatingbanks.The thick red lines show the calibration target of 3% while the thin red linesrepresent the 50th percentile19 (the “median”), ie the value separating thehigher half of a sample from the lower half (it means that 50% of all observationsfall below this value, 50% are above this value).The weighted average is shown as “x”. For further information on themethodology see section 1.2.Table 8 shows the average Basel III leverage ratios and the capital shortfallunder the assumption that banks already fulfill the risk-based capitalrequirements for the Tier 1 ratio of 6% and 8.5%, respectively.
The shortfall is the additional amount of Tier 1 capital that banks would need toraise in order to meet the target level of 3% for the leverage ratio (i.e. after therisk-based minimum requirements have been met).Assuming that banks with a risk-based Tier 1 ratio below 6% would have raisedcapital to fulfill the minimum requirement of 6%, 52% of Group 1 banks and21% of Group 2 banks would not meet the calibration target of 3% for theleverage ratio.The additional shortfall related to the leverage ratio requirement would be €95bn (Group 1) and €12 bn (Group 2), respectively.Assuming that banks with a risk-based Tier 1 ratio below 8.5% would haveraised capital to meet the minimum requirement of 8.5%, 17% of both Group 1and Group 2 banks would show a leverage ratio below the 3% target level.The additional shortfall would be €17 bn and €10 bn for Group 1 and Group 2banks, respectively.6. Liquidity6.1. Liquidity Coverage RatioOne of the new minimum standards is a 30-day liquidity coverage ratio (LCR)which is intended to promote short-term resilience to potential liquiditydisruptions.The LCR has been designed to require banks to have sufficient high-qualityliquid assets to withstand a stressed 30-day funding scenario specified bysupervisors.The LCR numerator consists of a stock of unencumbered, high quality liquidassets that must be available to cover any net outflow, while the denominator iscomprised of cash outflows less cash inflows (subject to a cap at 75% of totaloutflows) that are expected to occur in a severe stress scenario.157 Group 1 and Group 2 banks provided sufficient data in the mid-2011 BaselIII implementation monitoring exercise to calculate the LCR according to theBasel III liquidity framework.The average LCR is 71% for Group 1 banks and 70% for Group 2 banks.
These aggregate numbers do not speak of the range of results across the banks.Chart 5 below gives an indication of the distribution of bank results; the thickred line indicates the 100% minimum requirement, the thin red horizontal linesindicate the median for the respective bank group while the mean value isshown as “x”.34% of the banks in the sample already meet or exceed the minimum LCRrequirement and 39% have LCRs that are at or above 85%.For the banks in the sample, monitoring results show a shortfall of liquid assetsof €1.15 trillion (which represents 3.7% of the €31 trillion total assets of theaggregate sample) as of 30 June 2011, if banks were to make no changeswhatsoever to their liquidity risk profile.This number is only reflective of the aggregate shortfall for banks that arebelow the 100% requirement and does not reflect surplus liquid assets at banksabove the 100% requirement.
Banks that are below the 100% required minimum have until 2015 to meet theminimum standard by scaling back business activities which are mostvulnerable to a significant short-term liquidity shock or by lengthening theterm of their funding beyond 30 days.Banks may also increase their holdings of liquid assets.The key components of outflows and inflows are presented in Table 9.Group 1 banks show a notably larger percentage of total outflows, whencompared to balance sheet liabilities, than Group 2 banks.This can be explained by the relatively greater contribution of wholesalefunding activities and commitments within the Group 1 sample, whereas, forGroup 2 banks, retail activities, which attract much lower stress factors,comprise a greater share of funding activities.
Cap on inflowsTwo Group 1 and 21 Group 2 banks reported inflows that exceeded thecap. Of these, 7 fail to meet the LCR, so the cap is binding on them.Composition of highly liquid assetsThe composition of high quality liquid assets currently held at banks isdepicted in Chart 6.The majority of Group 1 and Group 2 banks’ holdings, in aggregate, arecomprised of Level 1 assets; however the sample, on the whole, showsdiversity in their holdings of eligible liquid assets.Within Level 1 assets, 0% risk-weighted securities issued or guaranteedby sovereigns, central banks and PSEs, and cash and central bankreserves comprise significant portions of the qualifying pool.Comparatively, within the Level 2 asset class, the majority of holdings iscomprised of 20% risk-weighted securities issued or guaranteed bysovereigns, central banks or PSEs, and qualifying covered bonds.Cap on Level 2 assets€53 billion of Level 2 liquid assets were excluded because reported Level2 assets were in excess of the 40% cap.40 banks currently reported assets excluded, of which 80.0% (20.4% ofthe total sample) had LCRs below 100%.
Chart 7 combines the above LCR components by comparing liquidityresources (buffer assets and inflows) to outflows.Note that the €900 billion difference between the amount of liquid assetsand inflows and the amount of outflows and impact of the cap displayedin the chart is smaller than the €1.15 trillion gross shortfall noted aboveas it is assumed here that surpluses at one bank can offset shortfalls atother banks.In practice the aggregate shortfall in the industry is likely to liesomewhere between these two numbers depending on how efficientlybanks redistribute liquidity around the system.6.2. Net Stable Funding RatioThe second standard is the net stable funding ratio (NSFR), a longer-termstructural ratio to address liquidity mismatches and to provide incentives forbanks to use stable sources to fund their activities.156 Group 1 and Group 2 banks provided sufficient data in the mid-2011 BaselIII implementation monitoring exercise to calculate the NSFR according to theBasel III liquidity framework.37% of these banks already meet or exceed the minimum NSFR requirement,with 70% at an NSFR of 85% or higher.
The average NSFR for each of the Group 1 bank and Group 2 samples is89% and 90%, respectively.Chart 8 shows the distribution of results for Group 1 and Group 2 banks;the thick red line indicates the 100% minimum requirement, the thin redhorizontal lines indicate the median for the respective bank group.The results show that banks in the sample had a shortfall of stable funding of€1.93 trillion at the end of June 2011, if banks were to make no changeswhatsoever to their funding structure.[The shortfall in stable funding measures the difference between balance sheetpositions after the application of available stable funding factors and theapplication of required stable funding factors for banks where the former is lessthan the latter. ]This number is only reflective of the aggregate shortfall for banks that are belowthe 100% NSFR requirement and does not reflect any surplus stable funding atbanks above the 100% requirement.
Banks that are below the 100% required minimum have until 2018 to meet thestandard and can take a number of measures to do so, including by lengtheningthe term of their funding or reducing maturity mismatch.It should be noted that the shortfalls in the LCR and the NSFR are notnecessarily additive, as decreasing the shortfall in one standard may result in asimilar decrease in the shortfall of the other standard, depending on the stepstaken to decrease the shortfall
P a g e | 31AbbreviationsC-QIS quantitative impact studyCCPs central counterpartiesCCR counterparty credit riskCET1 common equity tier 1CRD capital requirements directiveCRM comprehensive risk modelCTP correlation trading portfolioCVA credit value adjustmentDTA deffered tax assetsEBA European Banking AuthorityEEPE effective expected positive exposureGHOS Group of Governors and Heads of SupervisionG-SIB global systemically important banksISG Impact Study GroupIRC incremental risk chargeLCR liquidity coverage ratioLR leverage ratioMSR mortgage servicing rightsNSFR net stable funding ratioOBS off-balance sheetPFE potential future exposure_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 32PSE public sector entitiesRWA risk-weighted assetsSMM standardised measurement-methodVaR value at risk_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 33NUMBER 2FINRA Issues New Investor Alert to Help Investors UnderstandTheir Brokerage Account StatementsWASHINGTON — The Financial Industry Regulatory Authority(FINRA) issued a new Investor Alert called It Pays to Understand YourBrokerage Account Statements and Trade Confirmations to help guideinvestors through the key elements of their account statements and tradeconfirmations.FINRA is reminding investors that reviewing their account statementsnot only helps them stay on top of their holdings, but also alerts them toerrors or broker or firm misconduct, such as unauthorized trading orovercharging customers for handling transactions."Investors whose portfolios have taken a hit might not be keen to opentheir account statements, but investors should review their statementscarefully—and immediately call the firm that issued the statement aboutany fee they do not understand or transaction they did not authorize,"said Gerri Walsh, FINRAs Vice President for Investor Education."Investors should also review trade confirmations as soon as they receivethem because a single keystroke can make the difference between 100 and1,000 shares."In most cases, brokerage firms are required to provide customers withquarterly account statements and written notification of tradeconfirmations at or before completion of a transaction._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 34It Pays to Understand Your Brokerage Account Statements details inplain language the key elements of account statements and "red flags"that can help investors spot and avert problems.Many account statements include an investment objective thatcharacterizes an investors strategy, such as "growth" or "conservative."Investors should ensure that this description, as well as the accountactivity, accurately reflects their goals.Consolidated account statements, which provide customers with a singledocument that combines information on most or all of their financialholdings regardless of where those assets are held, are growing inpopularity.Investors should understand that these consolidated statementssupplement, but do not replace, the required brokerage accountstatement.Investors who receive both kinds of statements should keep in mind thatthe official brokerage statement is used in case of a dispute with thebroker or firm.It Pays to Understand Your Brokerage Account Statements explains thattrade confirmations disclose whether your broker acted as an agent foryou or whether the firm acted as a principal for its own account.In equity transactions, if the firm acts as an agent, then the firm mustdisclose the commission you were charged either on the confirmation orupon request by you.If the firm acts as principal, it is acting for its own benefit, and anymarkup or markdown or commission-equivalent must be disclosed on theconfirmation.Investors who find inaccuracies or discrepancies on any of theirstatements should contact their broker or firm as soon as possible, and ifthe problem is not resolved, FINRA urges investors to file a complaintusing FINRAs online Complaint Center._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 35FINRA, the Financial Industry Regulatory Authority, is the largestindependent regulator for all securities firms doing business in the UnitedStates.FINRA is dedicated to investor protection and market integrity througheffective and efficient regulation and complementary compliance andtechnology-based services.FINRA touches virtually every aspect of the securities business – fromregistering and educating all industry participants to examiningsecurities firms, writing rules, enforcing those rules and the federalsecurities laws, informing and educating the investing public, providingtrade reporting and other industry utilities, and administering the largestdispute resolution forum for investors and firms.It Pays to Understand Your Brokerage Account Statements andTrade ConfirmationsFINRA often reminds investors to review their brokerage accountstatements and trade confirmations—with good reason.Not only do these documents help you stay on top of your investmentholdings, but they also provide valuable information that can alert you toerrors, or even misconduct by your broker or brokerage firm such asunauthorized trading or overcharging customers for handlingtransactions.The accuracy of statements and trade confirmations is somethingsecurities regulators take very seriously.FINRA is issuing this alert to guide investors through the key elements oftheir brokerage account statements and trade confirmations and toprovide tips that can help avoid problems.Investors should review their statements carefully—and immediately callthe firm that issued the statement or confirmation about any transactionor entry they do not understand or did not authorize, and re-confirm anyoral communication in writing with the firm. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 36In most cases, brokerage firms are required to provide customers withquarterly account statements and written notification of tradeconfirmations at or before completion of a transaction.Be aware that the brokerage firm you opened an account with may not bethe one that sends you your account statements and trade confirmations.Introducing firms generally make recommendations, take orders andhave an arrangement with clearing and carrying firms, which are the onesthat finalize ("settle" or "clear") trades and hold the funds or securities.If you work with an introducing firm, your statements most likely comefrom the clearing firm.Spotting Fraud: Appearance CountsKeep an eye peeled for statements that look unprofessional, crooked oraltered in any way.This may signal fraud. Check graphic elements such as logos—if a logohas poor resolution or is inconsistent with other statements orcommunications from the firm, it is a red flag.In some cases, fraudsters simply cut and paste the logo of a legitimatefirm onto their own bogus statement.Many account statements include an investment objective thatcharacterizes your investment strategy—for example "growth,""speculative" or "conservative."Make sure this description accurately describes your financial goals, andthat the activity in your account reflects these goals.Keep in mind that your financial objectives may change over time andshould be updated accordingly.Consolidated Account StatementsConsolidated account statements are growing in popularity as a way toprovide customers with a single document that combines information_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 37regarding most or all of the customer’s financial holdings, regardless ofwhere those assets are held.These consolidated reports offer a broad view of customers’ investments,and may provide not only account balances and valuations, but alsoperformance data.In many cases, these consolidated reports are prepared at the request ofthe customer, who may also direct which of his or her accounts to includeand provide access to data for accounts not held by their brokerage firm.Investors should understand that these communications supplement,but do not replace, the required brokerage account statement.If you receive consolidated statements—read them carefully.Many of the red flags cited above also apply to consolidated statements.But you shouldn’t substitute the reading of your brokerage statementwith reading only the consolidated one.If you get both—read, compare and understand both—but keep in mindthat it is the official brokerage statement which is used in case of adispute with your broker or brokerage firm.Carefully Review Your Trade ConfirmationsTrade confirmations contain key trade details.These include the date and time of the transaction, price at which youbought or sold a security and the quantity of shares bought or sold.When a single keystroke can make the difference between 100 and 1,000shares, it is important to review this information carefully—and as soon asyou receive a confirmation. Confirmations also inform you of whetheryour broker acted as an agent for you or another customer, or whether thebroker or brokerage firm acted as a principal for its own account._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 38In equity transactions, if the firm acts as agent, that means the firm actson your behalf to buy or sell a security.In this capacity, the firm must disclose the amount of the commissionyou were charged either on the confirmation, or upon request by you.If the firm acts as principal, it is acting for its own benefit, and anymarkup, markdown or commission-equivalent must be disclosed on theconfirmation.In bond transactions, if the firm acts as agent, it must disclose the amountof the commission you were charged either on the confirmation, or uponrequest by you, just as with equity transactions.However, where the firm acts as principal and executes trades from itsown account at net prices the price you pay (or receive) for the bondincludes the firm’s markup or markdown.The firm is not required to disclose this amount to you.Don’t Be ShyDon’t hesitate to ask your broker to provide the details about mark-up,mark-downs or any fees or commissions associated with your investment.These costs ultimately impact the overall return on your investment andyou have a right to know this information.If you feel that these costs are excessive, you may file a complaint usingFINRA’s online Complaint Center.As with account statements, trade confirmations also include the clearingfirm and its contact information, which may be extremely helpful shouldyou have trouble tracking down your investments, or in the event yourbrokerage firm closes its doors._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 39 Many of the tips and red flags associated with account statements alsoapply to trade confirmations.In addition, the following checklist can help you avoid problems:Check your trade confirmation against the information in your brokeragestatement for the period in which the trade took place.Confirm the date and transaction amount. Contact the firm about anytrade you did not authorize, and re-confirm any oral communication inwriting with the firm.Confirmations might indicate whether trades are unsolicited or solicited.Check to be sure trades are properly categorized.Treat as a red flag an investment that was the broker’s idea, but reflectedon the confirmation as an unsolicited trade.Scrutinize any fees that might have been added—for example, handlingfees or mailing charges—and be sure to ask for an explanation for anyfees you had not expected or that seem unreasonable.For example, FINRA recently took enforcement actions against fivebrokerage firms that mischaracterized commissions on tradeconfirmations and fee schedules to look like handling services andpostage charges.Bottom LineAlways check to see if there are inaccuracies or discrepancies in any ofyour statements—and, if so, contact your broker or firm as soon aspossible.If the problem is not resolved, file a complaint using FINRAs onlineComplaint Center._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 40_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 41_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 42_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 43NUMBER 3President Obama signed the JOBS Act - April 5, 2012.Will Announce New Steps to Promote Access to Capital forEntrepreneurs and Protections for InvestorsWASHINGTON, DC – President Obama signed the Jumpstart OurBusiness Startups (JOBS) Act, a bipartisan bill that enacts many of thePresident’s proposals to encourage startups and support our nation’ssmall businesses. The President believes that our small businesses and startups are drivingthe recovery and job creation.That’s why he put forward a number of specific ways to encourage smallbusiness and startup investment in the American Jobs Act last fall, andworked with members on both sides of the aisle to sign thesecommon-sense measures into law today.The JOBS Act will allow Main Street small businesses and high-growthenterprises to raise capital from investors more efficiently, allowing smalland young firms across the country to grow and hire faster. “America’s high-growth entrepreneurs and small businesses play a vitalrole in creating jobs and growing the economy,” said President Obama._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 44“I’m pleased Congress took bipartisan action to pass this bill. Theseproposals will help entrepreneurs raise the capital they need to putAmericans back to work and create an economy that’s built to last.” Throughout this effort, the President has maintained a strong focus onensuring that we expand access to capital for young firms in a way that isconsistent with sound investor protections.To that end, the President today will call on the Treasury, Small BusinessAdministration and Department of Justice to closely monitor thislegislation and report regularly to him with its findings.In addition, major crowfunding organizations sent a letter to thePresident today committing to core investor protections, including a newcode of conduct for crowdfunding platforms. In March of last year, the President directed his Administration to host aconference titled “Access to Capital: Fostering Growth and Innovation forSmall Companies.”The conference brought together policymakers and key stakeholderswhose ideas directly led to many of the proposals contained in the JOBSAct.A primary takeaway from the conference was that capital from public andprivate investors helps entrepreneurs achieve their dreams and turn ideasinto startups that create jobs and fuel sustainable economic growth.Key Elements of the JOBS ActThe JOBS Act includes all three of the capital formation priorities that thePresident first raised in his September 2011 address to a Joint Session ofCongress, and outlined in more detail in his Startup America LegislativeAgenda to Congress in January 2012: allowing “crowdfunding,”expanding “mini-public offerings,” and creating an “IPO on-ramp”consistent with investor protections._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 45The JOBS Act is a product of bipartisan cooperation, with the Presidentand Congress working together to promote American entrepreneurshipand innovation while maintaining important protections for Americaninvestors.It will help growing businesses access financing while maintaininginvestor protections, in several ways:• Allowing Small Businesses to Harness “Crowdfunding”:The Internet already has been a tool for fundraising from many thousandsof donors.Subject to rulemaking by the U.S. Securities and Exchange Commission(SEC), startups and small businesses will be allowed to raise up to $1million annually from many small-dollar investors through web-basedplatforms, democratizing access to capital.Because the Senate acted on a bipartisan amendment, the bill includeskey investor protections the President called for, including a requirementthat all crowdfunding must occur through platforms that are registeredwith a self-regulatory organization and regulated by the SEC.In addition, investors’ annual combined investments in crowdfundedsecurities will be limited based on an income and net worth test.• Expanding “Mini Public Offerings”:Prior to this legislation, the existing “Regulation A” exemption fromcertain SEC requirements for small businesses seeking to raise less than$5 million in a public offering was seldom used.The JOBS Act will raise this threshold to $50 million, streamlining theprocess for smaller innovative companies to raise capital consistent withinvestor protections._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 46• Creating an “IPO On-Ramp”:The JOBS Act makes it easier for young, high-growth firms to go publicby providing an incubator period for a new class of “Emerging GrowthCompanies.”During this period, qualifying companies will have time to reachcompliance with certain public company disclosure and auditingrequirements after their initial public offering (IPO).Any firm that goes public already has up to two years after its IPO tocomply with certain Sarbanes-Oxley auditing requirements.The JOBS Act extends that period to a maximum of five years, or less ifduring the on-ramp period a company achieves $1 billion in grossrevenue, $700 million in public float, or issues more than $1 billion innon-convertible debt in the previous three years. Additionally, the JOBS Act changes some existing limitations on howcompanies can solicit private investments from “accredited investors,”tasks the SEC with ensuring that companies take reasonable steps toverify that such investors are accredited, and gives companies moreflexibility to plan their access to public markets and incentivizeemployees.Additional Initiatives Announced Today to Promote Capital Access andInvestor Protection• Monitoring of JOBS Act Implementation:The President is directing the Treasury Department, Small BusinessAdministration and Department of Justice to closely monitor theimplementation of this legislation to ensure that it is achieving its goals ofenhancing access capital while maintaining appropriate investorprotections._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 47These agencies, consulting closely with the SEC and keynon-governmental stakeholders, will report their findings to the Presidenton a biannual basis, and will include recommendations for additionalnecessary steps to ensure that the legislation achieves its goals.• Crowdfunding Platforms Commit to Investor Protections:In a letter to President Obama, a consortium of crowdfunding companiesare committing to work with the SEC to develop appropriate regulation ofthe industry, as required by the JOBS Act.Members of this leadership group are committing to establish coreinvestor protections, including an enforceable code of conduct forcrowdfunding platforms, standardized methods to ensure that investorsdo not exceed statutory limits, thorough vetting of companies raisingfunds through crowdfunding, and an industry standard “Investors’ Bill ofRights.”_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 48NUMBER 4Learning more about Supervisory AgenciesBaFin - Bundesanstalt für FinanzdienstleistungsaufsichtBundesrepublik Deutschland (Federal Republic of Germany)Since it was established in May 2002, the Federal Financial SupervisoryAuthority (Bundesanstalt für Finanzdienstleistungsaufsicht - knownas BaFin for short) has brought the supervision of banks and financialservices providers, insurance undertakings and securities trading underone roof.BaFin is an independent public-law institution and is subject to the legaland technical oversight of the Federal Ministry of Finance.It is funded by fees and contributions from the institutions andundertakings that it supervises.It is therefore independent of the Federal Budget.OrganisationBanking Supervision, Insurance Supervision and SecuritiesSupervision/Asset Management are three different organisational unitswithin BaFin – the so-called Directorates._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 49InternationalThe large number of players operating on the global financial markets hasbeen increasing steadily for many years now.Even though there is no legal framework that is binding internationally,markets are still expanding across borders.Financial supervision, however, is still largely inward-looking, sincesovereign powers usually end at the national border.FunctionsBaFin operates in the public interest. Its primary objective is to ensure theproper functioning, stability and integrity of the German financial system.Bank customers, insurance policyholders and investors ought to be ableto trust the financial system.BaFin has over 1,900 employees working in Bonn and Frankfurt am Main.They supervise around 1,900 banks, 717 financial services institutions,approximately 600 insurance undertakings and 30 pension funds as wellas around 6,000 domestic investment funds and 73 asset managementcompanies (as of March 2011).Under its solvency supervision, BaFin ensures the ability of banks,financial services institutions and insurance undertakings to meet theirpayment obligations.Through its market supervision, BaFin also enforces standards ofprofessional conduct which preserve investors trust in the financialmarkets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 50As part of its investor protection, BaFin also seeks to preventunauthorised financial business.Legal basisBaFin’s By-Laws represent a major set of precepts for how it acts.They contain regulations governing its structure and organisation and itsrights and obligations.They also govern the functions and powers of BaFin’s supervisory body,its Administrative Council (Verwaltungsrat), and details of its budget.BaFin also bases the way in which it carries out its supervisory activitieson the Mission Statement it gave itself shortly after it was established.According to this Mission Statement, BaFin’s function is to limit risks tothe German financial system at both the national and international leveland to ensure that Germany as a financial centre continues to functionproperly and that its integrity is preserved.As part of the Federal administration, BaFin is subject to the legal andtechnical oversight of the Federal Ministry of Finance, with theframework of which the legality and fitness for purpose of BaFinsadministrative actions are monitored.BaFin TextSolvency IIAmong other things, Solvency II – the project to reform the Europeanlegal framework for insurance supervision – harmonises the solvencycapital requirements for insurance firms and groups.Following the adoption of the Solvency II Directive in November 2009,the focus in 2010 was on developing the implementing measures that are_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 51to be adopted and on performing the fifth quantitative impact study(QIS5).It is currently planned to make the initial amendments to the Solvency IIDirective at the end of 2011 by way of the Omnibus II Directive, for whichthe European Commission presented a proposal on 19 January 2011.This contains amendments to two key areas of legislation.Firstly, it amends directives governing insurance and securitiesprospectuses to reflect the new EU rules on financial market supervisionand in particular the new EU financial supervisory authorities that beganwork on 1 January 2011.For example, EIOPA is incorporated into the Solvency II Directive as thesuccessor to CEIOPS.Provision is also made for the binding settlement of disputes by EIOPA.Secondly, the proposal contains amendments to the Solvency II Directive.For example, the Directive provides for the implementation of Solvency IIto be postponed by two months until 1 January 2013.The Omnibus II Directive also enables the European Commission tospecify transitional requirements for individual elements of theFramework Directive, with different maximum transition periods beingset for each area.The Omnibus II Directive is of considerable significance for thecontinuing evolution of Solvency II.For technical reasons, the European Commission cannot present theofficial draft of the Solvency II implementing measures until after theOmnibus II Directive has been adopted._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 52The Omnibus II Directive will therefore have a significant influence onthe ongoing work on the implementing measures.Implementing measuresThe Solvency II Directive gives the European Commission the authorityto adopt implementing measures for particular areas.These are intended to add detail to the Directive and hence improve theharmonisation and consistency of supervision in Europe.In spring 2010, CEIOPS submitted its proposals in this area to theCommission, which at the end of 2010 presented an initial informal fulldraft of the implementing measures based on the proposals.In 2011, this draft will be discussed further with the member states, withspecific consideration being given to the findings of QIS5.The official draft of the Solvency II implementing measures will not bepresented by the Commission and discussed with the Council and theParliament until after the Omnibus II Directive has been adopted.Impact studiesThe QIS5 study conducted by the Commission in the year under review isbased on the Solvency II Directive and reflects the implementingmeasures developed up until that time.The objective was to test the quantitative impact of Solvency II in detail.European insurance firms and groups were asked to take part in the studybetween July and November 2010.The results received from solo firms were initially evaluated by thenational supervisory authorities, while the data received from groups wereanalysed by CEIOPS or EIOPA._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 53All results and findings were incorporated into a European report, whichEIOPA presented to the Commission in March 2011.In addition, BaFin published a national report.The results of the study will have a major influence on the discussionregarding the Solvency II implementing measuresGuidelines for supervisorsIn future, the provisions of the Directive and the implementing measuresadopted by the European Council and the European Parliament will becomplemented by guidelines for supervisors adopted by EIPOA, with theaim being to further harmonise supervisory practice in Europe.The four existing CEIOPS and EIOPA working groups began work onthese guidelines in the year under review.In addition, EIOPA will develop binding standards (on the design of theyield curve, for example).One of the working groups, the Financial Requirements Expert Group(FinReq), has three areas of work: capital requirements (SCR/MCR), thestatement of technical provisions and own funds.Among other things, it has drawn up initial proposals for guidelinesrelated to the procedure to be followed for the approval ofundertaking-specific parameters for use in calculating the solvencycapital requirement and the recognition of ancillary own funds.In cooperation with the Groupe Consultatif, a forum of Europeanactuarial associations, it is also developing actuarial standards forcalculating technical provisions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 54The Internal Governance, Supervisory Review and Reporting ExpertGroup (IGSRR) is responsible for the requirements for public disclosureand supervisory reporting by undertakings, capital addons and thevaluation of assets and liabilities, and is developing guidance forsupervisors on what the supervisory process may look like under SolvencyII.In doing so, it is focusing specifically on the evaluation of the own riskand solvency assessment (ORSA) and the templates for future reportingto supervisors.On a closely related topic, consideration is being given to how and whichdata may in future be exchanged electronically between nationalsupervisory authorities and with EIOPA.In 2010, the Internal Models Expert Group (IntMod) developed guidanceon the use test and on calibration, showing supervisors and the insuranceindustry how they can fulfil the future requirements.The Group also drew up general guidelines on hitherto less-discussedtopics, such as the inclusion of profit and loss attribution in the internalmodel.The fourth CEIOPS/EIOPA working group, the Insurance GroupsSupervision Committee (IGSC), is drawing up guidance on practicalcooperation in the colleges and in coordinating measures.The working group is also developing harmonised approaches foridentifying, reporting and assessing risk concentrations and intragrouptransactions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 55_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 56NUMBER 5Federal Reserve Policy Statement onRental of Residential Other Real Estate Owned PropertiesApril 5, 2012In light of the large volume of distressed residential properties and theindications of higher demand for rental housing in many markets, somebanking organizations may choose to make greater use of rental activitiesin their disposition strategies than in the past.This policy statement reminds banking organizations and examiners thatthe Federal Reserve’s regulations and policies permit the rental ofresidential other real estate owned (OREO) properties to third partytenants as part of an orderly disposition strategy within statutory andregulatory limits.[The term “residential properties” in this policy statement encompassesall one-to-four family properties and does not include multi-familyresidential or commercial properties.]This policy statement applies to state member banks, bank holdingcompanies, nonbank subsidiaries of bank holding companies, savingsand loan holding companies, non-thrift subsidiaries of savings and loanholding companies, and U.S. branches and agencies of foreign bankingorganizations (collectively, banking organizations).The general policy of the Federal Reserve is that banking organizationsshould make good-faith efforts to dispose of OREO properties at theearliest practicable date.Consistent with this policy, in light of the extraordinary marketconditions that currently prevail, banking organizations may rentresidential OREO properties (within statutory and regulatory holding_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 57period limits) without having to demonstrate continuous activemarketing of the property, provided that suitable policies and proceduresare followed.Under these conditions and circumstances, banking organizations wouldnot contravene supervisory expectations that they show “good-faithefforts” to dispose of OREO by renting the property within the applicableholding period.Moreover, to the extent that OREO rental properties meet the definitionof community development under the Community Reinvestment Act(CRA) regulations, they would receive favorable CRA consideration.In all respects, banking organizations that rent OREO properties areexpected to comply with all applicable federal, state, and local statutesand regulations.BackgroundHome prices have been under considerable downward pressure since thefinancial crisis began, in part due to the large volume of houses for sale bycreditors, whether acquired through foreclosure or voluntary surrender ofthe property by a seriously delinquent borrower (distressed sales).Creditors, in turn, often seek to liquidate their inventories of suchproperties quickly.Since 2008, it is estimated that millions of residential properties havepassed through lender inventories.These distressed sales represent a significant proportion of all home salestransactions, despite some ebb and flow, and thus are a contributingelement to the downward pressure on home prices.With mortgage delinquency rates remaining stubbornly high, thecontinued inflow of new real estate owned properties to the market_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 58--expected to be millions more over the coming years-- will continue toweigh on house prices for some time.Banking organizations include their holdings of such properties inOREO on regulatory reports and other financial statements.Existing federal and state laws and regulations limit the amount of timebanking organizations may hold OREO property.In addition, there are established supervisory expectations formanagement of OREO properties and the nature of the efforts bankingorganizations should make to dispose of these properties during thatperiod.Risk Management Considerations for Residential OREOProperty RentalsIn all circumstances, the Federal Reserve expects a banking organizationconsidering such rentals to evaluate the overall costs, benefits, and risksof renting.The banking organization’s decision to rent OREO might dependsignificantly on the condition of individual properties, local marketconditions for rental and owner-occupied housing, and its capacity toengage in rental activity in a safe and sound manner and consistent withapplicable laws and regulations.Banking organizations should have an operational framework for theirresidential OREO rental activities that is appropriate to the extent towhich they rent OREO properties.In general, banking organizations with relatively small holdings ofresidential OREO properties--fewer than 50 individual properties rentedor available for rent--should use a framework that appropriately recordsthe organizations’ rental decisions and transactions as they take place,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 59preserves key documents, and is otherwise sufficient to safeguard andmanage the individual OREO assets.In contrast, banking organizations with large inventories of residentialOREO properties-- 50 or more individual properties available for rent orrented--should utilize a framework that systematically documents howthey meet the supervisory expectations described in the next section.All banking organizations that rent OREO properties, irrespective of thesize of their holdings, should adhere to the guidance set forth in thissection.Compliance with maximum OREO holding-periodrequirementsBanking organizations should pursue a clear and credible approach forultimate sale of the rental OREO property within the applicableholding-period limitations.Exit strategies in some cases may include special transaction features tofacilitate the sale of OREO, potentially including prudent use ofseller-assisted financing or rent-to-own arrangements with tenants.Compliance with landlord-tenant and other associatedrequirementsBanking organizations’ residential property rental activities are expectedto comply with all applicable federal, state, and local laws andregulations, including:- landlord-tenant laws;- landlord licensing or registration requirements; property maintenance standards;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 60- eviction protections (such as under the Protecting Tenants at Foreclosure Act);- protections under the Servicemembers Civil Relief Act; and- anti-discrimination laws, including the applicable provisions of the Fair Housing Act and the Americans with Disabilities Act.Prior to undertaking the rental of OREO properties, bankingorganizations should determine whether such activities are legallypermissible under applicable laws, including state laws.When applicable, banking organizations should review homeowner andcondominium association bylaws and local zoning laws for prohibitionson renting a property.Banking organizations may use third-party vendors to manage propertiesbut should provide necessary oversight to ensure that property managersfully understand and comply with these federal, state, and localrequirements.Other considerationsBanking organizations should account for OREO assets in accordancewith generally accepted accounting principles and applicable regulatoryreporting instructions.Banking organizations should also provide the appropriate classificationtreatment for their residential OREO holdings.Residential OREO is typically treated as a substandard asset, as definedby the interagency classification guidelines.However, residential properties with leases in place and demonstratedcash flow from rental operations sufficient to generate a reasonable rate ofreturn should generally not be classified._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 61Specific Expectations for Large-Scale Residential OREORentalsBanking organizations with large inventories of residential OREOproperties that decide to engage in rental activities should have in place adocumented rental strategy, including formal policies and procedures forOREO rental activities, and a documented operational framework.Policies and procedures should clearly describe how the bankingorganization will comply with all applicable laws and regulations.Policies and procedures should include processes for determiningwhether the properties meet local building code requirements and areotherwise habitable, and whether improvements to the properties areneeded in order to market them for rent.In addition, policies and procedures should establish operationalstandards for the banking organization’s rental activities, including thatadequate insurance policies are in place, that property and other taxobligations are met on a timely basis, and that expenditures onimprovements are appropriate to the value of the property and toprevailing norms in the local market.Policies and procedures should also require plans for rental of residentialOREO properties, down to the individual property level, that cover thefull holding period from the time the bank received title to ultimate saleby the bank.Plans should identify which properties would be eligible for rental.Plans also should establish criteria by which properties are chosenfor marketing as rental properties, and the process by which rentaldecisions should be made and implemented.Plans should describe the general conditions under which theorganization believes a rental approach is likely to be successful,_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 62including appropriate consideration of rental market and economicconditions in respective local markets.Finally, policies and procedures should address all risk managementissues that arise in renting residential OREO properties.Some risk elements parallel those found in other banking activities, forexample, the credit risk associated with tenants’ potential failure to maketimely rent payments, or potential conflict of interest issues such as theuse of a firm by a banking organization to both provide information on aproperty’s value and list that property for sale on behalf of the bankingorganization.Other risks unique to such rental include: Dealing with vacancy, marketing, and re-rental of previously occupiedproperties; Liability risk arising from rental activities, along with the use andmanagement of liability insurance or other approaches to mitigate thatliability and risk; and Legal requirements arising from the potential need to take actionagainst tenants for rent delinquency, potentially including eviction. Suchrequirements may include notice periods.Banking organizations may need to develop new policies and riskmanagement processes to address properly these categories of risk.In many cases, banking organizations will use third-party vendors (forexample, real estate agents or professional property managers) to managetheir OREO properties.Policies and procedures should provide that such individuals ororganizations have appropriate expertise in property management, be insound financial condition, and have a good track record in managing_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 63similar properties.Policies and procedures should also call for contracts with such vendorsto carry appropriate terms and provide, among other key elements, foradequate management information systems and reporting to the bankingorganization, including rent rolls (along with actual lease agreements),maintenance logs, and security deposits and charges to these deposits.Banking organizations should provide for adequate oversight of vendors._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 64NUMBER 6We have access to the minutes of the Federal Open MarketCommitteeDevelopments in Financial Markets and the Federal ReservesBalance SheetStaff Review of the Economic SituationThe information reviewed at the March 13 meeting suggested thateconomic activity was expanding moderately.Labor market conditions continued to improve and the unemploymentrate declined further, although it remained elevated.Overall consumer price inflation was relatively subdued in recent months.More recently, prices of crude oil and gasoline increased substantially.Measures of long-run inflation expectations remained stable.Private nonfarm employment rose at an appreciably faster average pace inJanuary and February than in the fourth quarter of last year, and declinesin total government employment slowed in recent months.The unemployment rate decreased to 8.3 percent in January and stayed atthat level in February.Both the rate of long-duration unemployment and the share of workersemployed part time for economic reasons continued to be high._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
P a g e | 65Initial claims for unemployment insurance trended lower over theintermeeting period and were at a level consistent with further moderatejob gains.Manufacturing production increased considerably in January, and therate of manufacturing capacity utilization stepped up.Factory output was boosted by a sizable expansion in the production ofmotor vehicles, but there also were solid and widespread gains in otherindustries.In February, motor vehicle assemblies remained near the strong pacerecorded in January; they were scheduled to edge up, on net, through thesecond quarter.Broader indicators of manufacturing activity, such as the diffusionindexes of new orders from the national and regional manufacturingsurveys, were at levels suggesting moderate increases in factoryproduction in the coming months. Households real disposable income increased, on balance, in Decemberand January as labor earnings rose solidly.Moreover, households net worth grew in the fourth quarter of last yearand likely was boosted further by gains in equity values thus far this year.Nevertheless, real personal consumption expenditures (PCE) werereported to have been flat in December and January.Although households purchases of motor vehicles rose briskly, spendingfor other consumer goods and services was weak.In February, nominal retail sales excluding purchases at motor vehicleand parts outlets increased moderately, while motor vehicle salescontinued to climb.Consumer sentiment was little changed in February, and households_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com