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Page |1        International Association of Risk and Compliance                     Professionals (IARCP)    1200 G Street...
Page |2He also remembered Peter Bernstein, the financial historian from the US,that illustrated his point by citing the an...
Page |3Richard W. Fisher, president and CEO of theFederal Reserve Bank of Dallas.Ending Too Big to Fail: A Proposal forRef...
Page |4Comments received on theconsultative report "Recoveryand resolution of financialmarket infrastructuresSouth Africa,...
Page |5FSA UKRisk to Customers from FinancialIncentivesConsumer trust and confidence in financialservices is essential.Ens...
Page |6Understanding the European BankingUnionIn June 2012, EU leaders agreed to deepeneconomic and monetary union as one ...
Page |7Richard W. Fisher, president and CEO of theFederal Reserve Bank of Dallas.Ending Too Big to Fail: A Proposal forRef...
Page |8Tonight, I wish to speak to a different kind of repression—the injustice ofbeing held hostage to large financial in...
Page |9Today, I “speak forth my sentiments freely and without reserve” on theissue of TBTF, while meaning no disrespect to...
P a g e | 10We submit that, in the short run, parts of Dodd–Frank have exacerbatedweak economic growth by increasing regul...
P a g e | 11The reduction of market discipline has been further eroded by implicitextensions of the federal safety net bey...
P a g e | 12The answer is simple.Or rather, it is complexity … complex regulation … might not just becostly and cumbersome...
P a g e | 13amounts of new complexity. The legislation has 16 titles and runs 848pages.It spawns litter upon litter of reg...
P a g e | 14Our proposal would relieve small banks of some unnecessary burdensarising from Dodd–Frank that unfairly penali...
P a g e | 15The 12 institutions that presently account for 69 percent of total industryassets are candidates to be conside...
P a g e | 16To answer this question, it helps to consider the sources of regulatory andmarket discipline imposed on each o...
P a g e | 17Looking across line 1, it is clear that community banks are subject toconsiderable regulatory and shareholder ...
P a g e | 18Community banks often have a few significant shareholders who have aconsiderable portion of their wealth tied ...
P a g e | 19This is unfortunate because their failure, if it were allowed, could disruptfinancial markets and the economy....
P a g e | 20Unfortunately, TBTF banks also do not face much external disciplinefrom unsecured creditors.An important facet...
P a g e | 21thereby lowering average funding costs a full percentage point relative totheir smaller competitors.Our aforem...
P a g e | 22To simplify a complex issue, one might consider all the operations otherthan the commercial banking operation ...
P a g e | 23As of its 10-K regulatory filing in 2007, Lehman operated a mere 209subsidiaries across only 21 countries and ...
P a g e | 24The approach of the Dallas Fed neither expands the reach of governmentnor further handicaps the 99.8 percent o...
P a g e | 25And there will likely have to be additional restrictions (or possiblyprohibitions) on the ability to move asse...
P a g e | 26Reinforced by a New CovenantTo reinforce the statute and its credibility, every customer, creditor andcounterp...
P a g e | 27This two-part step should begin to remove the implicit TBTF subsidyprovided to BHCs and their shadow banking o...
P a g e | 28However, entrenched oligopoly forces, in combination with customerinertia, will likely only be overcome throug...
P a g e | 29There should be more than the present two solutions: bailout or theend-of-the-economic-world-as-we-have-known-...
P a g e | 30Treating the pathology of TBTF now would be a big step toward a morestable and prosperous economic system, one...
P a g e | 31Dr Andreas DombretMember of the Executive Board of theDeutsche BundesbankChallenges for financial stability –p...
P a g e | 32happened in the financial sector in 1992 when the markets forced the UKto leave the European Exchange Rate Mec...
P a g e | 33The fire spread so rapidly due to the city’s narrow streets and the“interconnectedness” of houses.The battle t...
P a g e | 34We need to know how these instruments will work, which is a challengefor the scientific community as well as f...
P a g e | 35The first answer is transparency. At this point, transparency is more easilysaid than done.But we need it, par...
P a g e | 36If regulators and banks essentially use the same models for their riskmanagement, why should we expect a bette...
P a g e | 37Moreover, not much is known about possible time lags.In the worst situation, these buffer effects are not coun...
P a g e | 38Taking this into consideration, the effects and the interdependence ofmacroprudential instruments may turn out...
P a g e | 39I wish you all a very successful conference.Thank you for your attention.      _______________________________...
P a g e | 40Preserving the safety and security ofMalaysia’s banking systemSpeech by Mr Encik Abu Hassan Alshari Yahaya, As...
P a g e | 41electronic channels comprising mainly funds transfers, bill payments,top-up for prepaid cards, purchases of ph...
P a g e | 42While it is good to know that banks have played their roles in investing inrobust security systems, they must ...
P a g e | 43Comments received on theconsultative report "Recoveryand resolution of financialmarket infrastructuresSouth Af...
P a g e | 44SAFEX Clearing Company (Pty) Limited operates as a clearing house forthe Johannesburg Stock Exchange derivativ...
P a g e | 45The consideration as to whether statutory management, administrationor conservatorship would offer the most ap...
P a g e | 467. What qualitative or quantitative indicators of non-viability should beused in determining the trigger for r...
P a g e | 47From a Strate perspective, and given the nature of the risks borne by theCSD, no need for differentiation in t...
P a g e | 4815. Are there any circumstances in which a moratorium with a suspensionof payments to unsecured creditors may ...
P a g e | 49The assessments outlined in Annexure II of the Key Attributes ofEffective Resolution Regimes for Financial Ins...
P a g e | 50Opening Remarks at Investor AdvisoryCommittee MeetingBy Chairman Elisse WalterU.S. Securities and Exchange Com...
P a g e | 51I am currently working with the other Commissioners to prioritize themany agenda items before us and to set a ...
P a g e | 52lives of their families — and the information and advice they receive whenthey make these decisions, are becom...
P a g e | 53You help us keep the playing field level for all investors, including andespecially investors like Aunt Millie...
P a g e | 54Fulfilling the Commission’s Statutory Responsibility to Respondto IAC’s RecommendationsBy Commissioner Luis A....
P a g e | 55It is now incumbent on the Commission to act. As required by Section 911of the Dodd-Frank Act, the Commission ...
P a g e | 56Tougher credit rating rules confirmed by European ParliamentsvoteNew rules on when and how credit rating agenc...
P a g e | 57Set dates for sovereign debt ratingsUnsolicited sovereign ratings could be published at least two but no moret...
P a g e | 58The Domenici report on the regulation was adopted by 579 votes to 58,with 60 abstentions and that on the direc...
P a g e | 59which has the power to exercise dominant influence or control over theregistered credit rating agency, shall b...
P a g e | 60rated entity, unless it is available from generally accessible sources orunless there are no legitimate reason...
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
Monday January 28 2013 Top 10 Risk Compliance News Events
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  1. 1. Page |1 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 Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the weeks agenda, and what is nextDear Member,Which is the difference between gooddeleveraging and bad deleveraging?According to Dr Andreas Dombret, Memberof the Executive Board of the DeutscheBundesbank, good deleveraging means scaling back the exposure toother financial intermediaries, whereas bad deleveraging means thatlending to the real economy is being reduced.Dr Andreas Dombret is one of my favourite speakers. In Number 2 of ourlist he asks the question:Will 2012 go down in history as an “annus horribilis” or rather as an“annus mirabilis”, or neither?He starts from the originator of the “annus horribilis”, Queen Elizabeth,that used the phrase to describe her feelings about the year 1992, and hegoes on with the fire at Windsor Castle. Many people use the metaphor ofa large-scale fire to explain the economic term of a “systemic” event.The fire spread so rapidly due to a city’s narrow streets and the“interconnectedness” of houses.The fire in the financial markets was stopped by the ECB, by the twofirewalls EFSF and ESM as well as by the governments announcing thatthey would improve the financial system.Thus 2012 is an “annus mirabilis”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2He also remembered Peter Bernstein, the financial historian from the US,that illustrated his point by citing the anecdote of a Moscovite professorof statistics, who refused to go to the air-raid shelter during World War IIbomb attacks.The professor argued: “See, Moscow has seven million inhabitants.Why should I expect to be one who will be hit?”His neighbours were astonished, when he came back to the shelter thenext night.Now the professor’s argumentation was:“Moscow has seven million inhabitants and one elephant. Last night theelephant was hit.”More at Number 2 of our list.In Number 1 this week we have the speech of Richard W. Fisher,president and CEO of the Federal Reserve Bank of Dallas.He speaks about the “the injustice of being held hostage to large financialinstitutions considered too big to fail”.I enjoyed what he remembered:One is reminded of the comment French Prime Minister Clemenceaumade about President Wilson’s 14 points:“Why 14?” he asked. “God did it in 10.”Were that we only had 14 points of financial regulation to contend withtoday.Read more at Number 1 below.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Richard W. Fisher, president and CEO of theFederal Reserve Bank of Dallas.Ending Too Big to Fail: A Proposal forReform Before Its Too Late (With Referenceto Patrick Henry, Complexity and Reality)Remarks before the Committee for the RepublicWashington, D.C. · January 16, 2013Dr Andreas DombretMember of the Executive Board of the DeutscheBundesbankChallenges for financial stability – policy andacademic aspectsDinner Speech at the Joint Conference of theDeutsche Bundesbank, the Technical UniversityDresden and the Journal of Financial StabilityPreserving the safety and security ofMalaysia’s banking systemSpeech by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor ofthe Central Bank of Malaysia, at the launch of the e-Banking FraudAwareness Campaign, Kuala Lumpur _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4Comments received on theconsultative report "Recoveryand resolution of financialmarket infrastructuresSouth Africa, Financial Services Board (FSB) has requested the SAFEXClearing Company (Pty) Limited (SAFCOM) and Strate Limited toprovide feedback.Opening Remarks at Investor AdvisoryCommittee MeetingBy Chairman Elisse WalterU.S. Securities and Exchange CommissionWashington, D.C. January 18, 2013Tougher credit ratingrules confirmed byEuropean ParliamentsvoteNew rules on when and how credit rating agencies may rate state debtsand private firms financial health were approved by Parliament onWednesday. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5FSA UKRisk to Customers from FinancialIncentivesConsumer trust and confidence in financialservices is essential.Ensuring the smooth functioning of moneymarketsSpeech by Mr Benoît Coeuré, Member of theExecutive Board of the European Central Bank,at the 17th Global Securities Financing Summit,Luxembourg, 16 January 2013.Michel BARNIERThe European banking union, a preconditionto financial stability and a historical stepforward for European integration _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6Understanding the European BankingUnionIn June 2012, EU leaders agreed to deepeneconomic and monetary union as one of the remedies of the current crisis.At that meeting (European Council of 28/29 June), the leaders discussedthe report entitled Towards a Genuine Economic and Monetary Union,prepared by the President of the European Council in close collaborationwith the President of the European Commission, the Chair of theEurogroup and the President of the European Central Bank. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7Richard W. Fisher, president and CEO of theFederal Reserve Bank of Dallas.Ending Too Big to Fail: A Proposal forReform Before Its Too Late (With Referenceto Patrick Henry, Complexity and Reality)Remarks before the Committee for the RepublicWashington, D.C. · January 16, 2013It is an honor to be introduced by my collegeclassmate, John Henry. John is a descendant of theiconic patriot, Patrick Henry.Most of John’s ancestors were prominent colonialVirginians and many were anti-crown. Patrick,however, was the most outspoken.Ask John why this was so, and he will answer: “Patrick was poor.”However poor he may have been, Patrick Henry was a rich orator.In one of his greatest speeches, he said:“Different men often see the same subject in different lights; andtherefore, I hope that it will not be thought disrespectful to thosegentlemen if, entertaining as I do, opinions of a character very opposite totheirs, I shall speak forth my sentiments freely, and without reserve.This is no time for ceremony … [it] is one of awful moment to thiscountry.”Patrick Henry was addressing the repression of the American colonies bythe British crown. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8Tonight, I wish to speak to a different kind of repression—the injustice ofbeing held hostage to large financial institutions considered “too big tofail,” or TBTF for short.I submit that these institutions, as a result of their privileged status, exactan unfair tax upon the American people.Moreover, they interfere with the transmission of monetary policy andinhibit the advancement of our nation’s economic prosperity.I have spoken of this for several years, beginning with a speech on the“Pathology of Too-Big-to-Fail” in July 2009.My colleague, Harvey Rosenblum—a highly respected economist and theDallas Fed’s director of research—and I and our staff have written aboutit extensively.Tomorrow, we will issue a special report that further elucidates ourproposal for dealing with the pathology of TBTF.It also addresses the superior relative performance of community banksduring the recent crisis and how they are being victimized by excessiveregulation that stems from responses to the sins of their behemothcounterparts.I urge all of you to read that report.Now, Federal Reserve convention requires that I issue a disclaimer here: Ispeak only for the Federal Reserve Bank of Dallas, not for othersassociated with our central bank.That is usually abundantly clear.In many matters, my staff and I entertain opinions that are very differentfrom those of many of our esteemed colleagues elsewhere in the FederalReserve System. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9Today, I “speak forth my sentiments freely and without reserve” on theissue of TBTF, while meaning no disrespect to others who may holddifferent views.The Problem of TBTFEveryone and their sister knows that financial institutions deemed too bigto fail were at the epicenter of the 2007–09 financial crisis.Previously thought of as islands of safety in a sea of risk, they became theenablers of a financial tsunami.Now that the storm has subsided, we submit that they are a key reasonaccommodative monetary policy and government policies have failed toadequately affect the economic recovery.Harvey Rosenblum and I first wrote about this in an article published inthe Wall Street Journal in September 2009, “The Blob That Ate MonetaryPolicy.”Put simply, sick banks don’t lend. Sick—seriously undercapitalized —megabanks stopped their lending and capital market activities during thecrisis and economic recovery.They brought economic growth to a standstill and spread their sicknessto the rest of the banking system.Congress thought it would address the issue of TBTF through theDodd–Frank Wall Street Reform and Consumer Protection Act.Preventing TBTF from ever occurring again is in the very preamble of theact.We contend that Dodd–Frank has not done enough to corral TBTF banksand that, on balance, the act has made things worse, not better. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10We submit that, in the short run, parts of Dodd–Frank have exacerbatedweak economic growth by increasing regulatory uncertainty in keysectors of the U.S. economy.It has clearly benefited many lawyers and created new layers ofbureaucracy.Despite its good intention, it has been counterproductive, workingagainst solving the core problem it seeks to address.Defining TBTFLet me define what we mean when we speak of TBTF.The Dallas Fed’s definition is financial firms whose owners, managersand customers believe themselves to be exempt from the processes ofbankruptcy and creative destruction.Such firms capture the financial upside of their actions but largely avoidpayment—bankruptcy and closure—for actions gone wrong, in violationof one of the basic tenets of market capitalism (at least as it is supposed tobe practiced in the United States).Such firms enjoy subsidies relative to their non-TBTF competitors.They are thus more likely to take greater risks in search of profits,protected by the presumption that bankruptcy is a highly unlikelyoutcome.The phenomenon of TBTF is the result of an implicit but widelytaken-for-granted government-sanctioned policy of coming to the aid ofthe owners, managers and creditors of a financial institution deemed tobe so large, interconnected and/or complex that its failure couldsubstantially damage the financial system.By reducing a TBTF firm’s exposure to losses from excessive risk taking,such policies undermine the discipline that market forces normally asserton management decision making. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11The reduction of market discipline has been further eroded by implicitextensions of the federal safety net beyond commercial banks to theirnonbank affiliates.Moreover, industry consolidation, fostered by subsidized growth (andduring the crisis, encouraged by the federal government in theacquisitions of Merrill Lynch, Bear Stearns, Washington Mutual andWachovia), has perpetuated and enlarged the weight of financial firmsdeemed TBTF.This reduces competition in lending.Dodd–Frank does not do enough to constrain the behemoth banks’advantages. Indeed, given its complexity, it unwittingly exacerbatesthem.Complexity BitesAndrew Haldane, the highly respected member of the Financial PolicyCommittee of the Bank of England, addressed this at last summer’sJackson Hole, Wyo., policymakers’ meeting in witty remarks titled, “TheDog and the Frisbee.”Here are some choice passages from that noteworthy speech.Haldane notes that regulators’ “… efforts to catch the crisis Frisbee havecontinued to escalate.Casual empiricism reveals an ever-growing number of regulators …Ever-larger litters have not, however, obviously improved the watchdogs’Frisbee-catching abilities.[After all,] no regulator had the foresight to predict the financial crisis,although some have since exhibited supernatural powers of hindsight.“So what is the secret of the watchdogs’ failure? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12The answer is simple.Or rather, it is complexity … complex regulation … might not just becostly and cumbersome but sub-optimal. … In financial regulation, lessmay be more.”One is reminded of the comment French Prime Minister Clemenceaumade about President Wilson’s 14 points:“Why 14?” he asked. “God did it in 10.”Were that we only had 14 points of financial regulation to contend withtoday.Haldane notes that Dodd–Frank comes against a background ofever-greater escalation of financial regulation.He points out that nationally chartered banks began to file theantecedents of “call reports” after the formation of the Office of theComptroller of the Currency in 1863.The Federal Reserve Act of 1913 required state-chartered member banksto do the same, having them submitted to the Federal Reserve starting in1917.They were short forms; in 1930, Haldane noted, these reports numbered80 entries.“In 1986, [the ‘call reports’ submitted by bank holding companies]covered 547 columns in Excel, by 1999, 1,208 columns.By 2011 … 2,271 columns.”“Fortunately,” he adds wryly, “Excel had expanded sufficiently to capturethe increase.”Though this growingly complex reporting failed to prevent detection ofthe seeds of the debacle of 2007–09, Dodd–Frank has layered on copious _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13amounts of new complexity. The legislation has 16 titles and runs 848pages.It spawns litter upon litter of regulations: More than 8,800 pages ofregulations have already been proposed, and the process is not yet done.In his speech, Haldane noted—conservatively, in my view—that a surveyof the Federal Register showed that complying with these new ruleswould require 2,260,631 labor hours each year.He added: “Of course, the costs of this regulatory edifice would beconsidered small if they delivered even modest improvements toregulators’ ability to avert future crises.”He then goes on to argue the wick is not worth the candle.And he concludes: “Modern finance is complex, perhaps too complex.Regulation of modern finance is complex, almost certainly too complex.That configuration spells trouble. As you do not fight fire with fire, you donot fight complexity with complexity.[The situation] requires a regulatory response grounded in simplicity, notcomplexity. Delivering that would require an about-turn.”The Dallas Fed’s Proposal: A Reasonable ‘About-Turn’The Dallas Fed’s proposal offers an “about-turn” and a way to mend theflaws in Dodd–Frank. It fights unnecessary complexity with simplicitywhere appropriate.It eliminates much of the mumbo-jumbo, ineffective, costly complexity ofDodd–Frank.Of note, it would be especially helpful to non-TBTF banks that do notpose systemic or broad risk to the economy or the financial system. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14Our proposal would relieve small banks of some unnecessary burdensarising from Dodd–Frank that unfairly penalize them.Our proposal would effectively level the playing field for all bankingorganizations in the country and provide the best protection for taxpayingcitizens.In a nutshell, we recommend that TBTF financial institutions berestructured into multiple business entities.Only the resulting downsized commercial banking operations—and notshadow banking affiliates or the parent company—would benefit fromthe safety net of federal deposit insurance and access to the FederalReserve’s discount window.Defining the LandscapeIt is important to have an accurate view of the landscape of banking todayin order to understand the impact of this proposal.As of third quarter 2012, there were approximately 5,600 commercialbanking organizations in the U.S.The bulk of these—roughly 5,500—were community banks with assets ofless than $10 billion.These community-focused organizations accounted for 98.6 percent of allbanks but only 12 percent of total industry assets.Another group numbering nearly 70 banking organizations—with assetsof between $10 billion and $250 billion—accounted for 1.2 percent ofbanks, while controlling 19 percent of industry assets.The remaining group, the megabanks—with assets of between $250billion and $2.3 trillion—was made up of a mere 12 institutions.These dozen behemoths accounted for roughly 0.2 percent of all banks,but they held 69 percent of industry assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15The 12 institutions that presently account for 69 percent of total industryassets are candidates to be considered TBTF because of the threat theycould pose to the financial system and the economy should one or more ofthem get into trouble.By contrast, should any of the other 99.8 percent of banking institutionsget into trouble, the matter most likely would be settled withprivate-sector ownership changes and minimal governmentalintervention.How and why does this work for 99.8 percent but not the other 0.2percent? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16To answer this question, it helps to consider the sources of regulatory andmarket discipline imposed on each of the three groups of banks.Let’s look at two dimensions of regulatory discipline: Potential closure ofthe institution and the effectiveness of supervisory pressure on bankmanagement practices.Do the owners and managers of a banking institution operate with thebelief that their institution is subject to a bankruptcy process that worksreasonably quickly to transfer ownership and control to another bankingentity or entities?Is there a group of interested and involved shareholders that can exert arestraining force on franchise-threatening risk taking by the bank’s topmanagement team?Can management be replaced and ownership value wiped out? Is the firmcontrolled de facto by its owners, or instead effectivelymanagement-controlled?In addition, we ask: To what extent do uninsured creditors of the bankingentity impose risk-management discipline on management?This analytical framework is summarized in the following slide: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17Looking across line 1, it is clear that community banks are subject toconsiderable regulatory and shareholder discipline.They can and do fail.In the last few years, the Federal Deposit Insurance Corp. (FDIC) hasbuilt a reputation for regulators carrying out Joseph Schumpeter’sconcept of “creative destruction” by taking over small banks on a Fridayevening and reopening them on Monday morning under new ownership.“In on Friday, out by Monday” is the mantra of this process.Knowing the power of banking supervisors to close the institution,owners and managers of community banks heed supervisory suggestionsto limit risk. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18Community banks often have a few significant shareholders who have aconsiderable portion of their wealth tied to the fate of the bank.Consequently, they exert substantial control over the behavior ofmanagement because risk and potential closure matter to them.Since community banks derive the bulk of their funding from federallyinsured deposits, they are simple rather than complex in their capitalstructure and rarely have uninsured and unsecured creditors.“Market discipline” over management practices is primarily exertedthrough shareholders.Of the three groups, the 70 regional and moderate-sized bankingorganizations depicted in line 2 are subject to a broader range of marketdiscipline.Like community banks, these institutions are not exempt from thebankruptcy process; they can and do fail.But given their size, complexity and generally larger geographic footprint,the failure resolution and ownership transfer processes cannot always beaccomplished over a weekend.In practice, owners and managers of mid-sized institutions arenonetheless aware of the downside consequences of the risks taken by theinstitution.Uninsured depositors and unsecured creditors are also aware of theirunprotected status in the event the institution experiences financialdifficulties.Mid-sized banking institutions receive a good dose of external disciplinefrom both supervisors and market-based signals.TBTF megabanks, depicted in line 3, receive far too little regulatory andmarket discipline. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19This is unfortunate because their failure, if it were allowed, could disruptfinancial markets and the economy. For all intents and purposes, webelieve that TBTF banks have not been allowed to fail outright.Knowing this, the management of TBTF banks can, to a large extent,choose to resist the advice and guidance of their bank supervisors’ effortsto impose regulatory discipline. And for TBTF banks, the forces ofmarket discipline from shareholders and unsecured creditors are limited.Let’s first consider discipline from shareholders.Having millions of stockholders has diluted shareholders’ ability toprevent the management of TBTF banks from pursuing corporatestrategies that are profitable for management, though not necessarily forshareholders.As we learned during the crisis, adverse information on poor financialperformance often is available too late for shareholder reaction or creditdefault swap (CDS) spreads to have any impact on managementbehavior.For example, during the financial crisis, shares in two of the largest bankholding companies (BHCs) declined more than 95 percent from theirprior peak prices and their CDS spreads went haywire.The ratings agencies eventually reacted, in keeping with their tendency tobe reactive rather than proactive.But the damage from excessive risk taking had already been done.And after the crisis?Judging from the behavior of many of the largest BHCs, with limitedexception, efforts by shareholders of these institutions to meaningfullyinfluence management compensation practices have been slow incoming.So much for shareholder discipline as a check on TBTF banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20Unfortunately, TBTF banks also do not face much external disciplinefrom unsecured creditors.An important facet of TBTF is that the funding sources for megabanksextend far beyond insured deposits, as referenced by my mention of CDSspreads.The largest banks, not just the TBTF banks, fund themselves with a widerange of liabilities.These include large, negotiable CDs, which often exceed the FDICinsurance limit; federal funds purchased from other banks, all of whichare uninsured, and subordinated notes and bonds, generally unsecured.It is not unusual for such uninsured/unsecured liabilities to account forwell over half the liabilities of TBTF institutions.If market discipline were to be imposed on TBTF institutions, one wouldexpect it to come from uninsured/unsecured depositors, creditors anddebt holders.But TBTF status exerts perverse market discipline on the risk-takingactivities of these banks.Unsecured creditors recognize the implicit government guarantee ofTBTF banks’ liabilities.As a result, unsecured depositors and creditors offer their funds at a lowercost to TBTF banks than to mid-sized and regional banks that face therisk of failure.This TBTF subsidy is quite large and has risen following the financialcrisis.Recent estimates by the Bank for International Settlements, for example,suggest that the implicit government guarantee provides the largest U.S.BHCs with an average credit rating uplift of more than two notches, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21thereby lowering average funding costs a full percentage point relative totheir smaller competitors.Our aforementioned friend from the Bank of England, Andrew Haldane,estimates the current implicit TBTF global subsidy to be roughly $300billion per year for the 29 global institutions identified by the FinancialStability Board (2011) as “systemically important.”To put that $300 billion estimated annual subsidy in perspective, all theU.S. BHCs summed together reported 2011 earnings of $108 billion.Add to that the burdens stemming from the complexity of TBTF banks.Here is the basic organization diagram for a typical complex financialholding company: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22To simplify a complex issue, one might consider all the operations otherthan the commercial banking operation as shadow banking affiliates,including any special investment vehicles—or SIVs—of the commercialbank.Now, consider this table.It gives you a sense of the size and scope of some of the five largestBHCs, noting their nondeposit liabilities in billions of dollars and theirnumber of total subsidiaries and countries of operation (according to theFinancial Stability Oversight Council):For perspective, consider the sad case of Lehman Brothers.More than four years later, the Lehman bankruptcy is still not completelyresolved. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23As of its 10-K regulatory filing in 2007, Lehman operated a mere 209subsidiaries across only 21 countries and had total liabilities of $619billion.By these metrics, Lehman was a small player compared with any of theBig Five.If Lehman Brothers was too big for a private-sector solution while still agoing concern, what can we infer about the Big Five in the table?Correcting for the Drawbacks of Dodd–FrankDodd–Frank addresses this concern. Under the Orderly LiquidationAuthority provisions of Dodd–Frank, a systemically important financialinstitution would receive debtor-in-possession financing from the U.S.Treasury over the period its operations needed to be stabilized. This isquasi-nationalization, just in a new, and untested, format.In Dallas, we consider government ownership of our financialinstitutions, even on a “temporary” basis, to be a clear distortion of ourcapitalist principles.Of course, an alternative would be to have another systemically importantfinancial institution acquire the failing institution.We have been down that road already.All it does is compound the problem, expanding the risk posed by theeven larger surviving behemoth organizations.In addition, perpetuating the practice of arranging shotgun marriagesbetween giants at taxpayer expense worsens the funding disadvantagefaced by the 99.8 percent remaining—small and regional banks.Merging large institutions is a form of discrimination that favors theunwieldy and dangerous TBTF banks over more focused, fit anddisciplined banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24The approach of the Dallas Fed neither expands the reach of governmentnor further handicaps the 99.8 percent of community and regional banks.Nor does it fight complexity with complexity.It calls for reshaping TBTF banking institutions into smaller, less -complex institutions that are: economically viable; profitable;competitively able to attract financial capital and talent; and of a size,complexity and scope that allows both regulatory and market discipline torestrain excessive risk taking.Our proposal is simple and easy to understand. It can be accomplishedwith minimal statutory modification and implemented with as littlegovernment intervention as possible.It calls first for rolling back the federal safety net to apply only to basic,traditional commercial banking.Second, it calls for clarifying, through simple, understandabledisclosures, that the federal safety net applies only to the commercialbank and its customers and never ever to the customers of any otheraffiliated subsidiary or the holding company.The shadow banking activities of financial institutions must not receivetaxpayer support.We recognize that undoing customer inertia and management habits atTBTF banking institutions may take many years.During such a period, TBTF banks could possibly sow the seeds foranother financial crisis. For these reasons, additional action may benecessary.The TBTF BHCs may need to be downsized and restructured so that thesafety-net-supported commercial banking part of the holding companycan be effectively disciplined by regulators and market forces. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25And there will likely have to be additional restrictions (or possiblyprohibitions) on the ability to move assets or liabilities from a shadowbanking affiliate to a banking affiliate within the holding company.To illustrate how the first two points in our plan would work, I come backto the hypothetical structure of a complex financial holding company.Recall that this type of holding company has a commercial banksubsidiary and several subsidiaries that are not traditional commercialbanks: insurance, securities underwriting and brokerage, financecompany and others, many with a vast geographic reach.Where the Government Safety Net Would Begin and EndUnder our proposal, only the commercial bank would have access todeposit insurance provided by the FDIC and discount window loansprovided by the Federal Reserve.These two features of the safety net would explicitly, by statute, becomeunavailable to any shadow banking affiliate, special investment vehicle ofthe commercial bank or any obligations of the parent holding company.This is largely the current case—but in theory, not in practice.And consistent enforcement is viewed as unlikely. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26Reinforced by a New CovenantTo reinforce the statute and its credibility, every customer, creditor andcounterparty of every shadow banking affiliate and of the senior holdingcompany would be required to agree to and sign a new covenant, a simpledisclosure statement that acknowledges their unprotected status.A sample disclosure need be no more complex than this: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27This two-part step should begin to remove the implicit TBTF subsidyprovided to BHCs and their shadow banking operations.Entities other than commercial banks have inappropriately benefitedfrom an implicit safety net.Our proposal promotes competition in light of market and regulatorydiscipline, replacing the status quo of subsidized and perverse incentivesto take excessive risk.As indicated earlier, some government intervention may be necessary toaccelerate the imposition of effective market discipline.We believe that market forces should be relied upon as much aspracticable. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28However, entrenched oligopoly forces, in combination with customerinertia, will likely only be overcome through government-sanctionedreorganization and restructuring of the TBTF BHCs.A subsidy once given is nearly impossible to take away.Thus, it appears we may need a push, using as little governmentintervention as possible to realign incentives, reestablish a competitivelandscape and level the playing field.Why Protect the 0.2 Percent?My team at the Dallas Fed and I are confident this simple treatment to thecomplex problem and risks posed by TBTF institutions would be themost effective treatment.Think about it this way: At present, 99.8 percent of the bankingorganizations in America are subject to sufficient regulatory orshareholder/market discipline to contain the risk of misbehavior thatcould threaten the stability of the financial system.Zero-point-two percent are not.Their very existence threatens both economic and financial stability.Furthermore, to contain that risk, regulators and many small banks aretied up in regulatory and legal knots at an enormous direct cost to themand a large indirect cost to our economy. Zero-point-two percent.If the administration and the Congress could agree as recently as twoweeks ago on legislation that affects 1 percent of taxpayers, surely it canprocess a solution that affects 0.2 percent of the nation’s banks and is lesscomplex and far more effective than Dodd–Frank.Making a Time of ‘Awful Moment’ a Time of PromiseThe time has come to change the decision making paradigm. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29There should be more than the present two solutions: bailout or theend-of-the-economic-world-as-we-have-known-it.Both choices are unacceptable.The next financial crisis could cost more than two years of economicoutput, borne by millions of U.S. taxpayers.That horrendous cost must be weighed against the supposed benefits ofmaintaining the TBTF status quo.To us, the remedy is obvious: end TBTF now. End TBTF byreintroducing market forces instead of complex rules, and in so doing,level the playing field for all banking institutions.I return to Patrick Henry. He noted that “it is natural to man to indulge inthe illusions of hope.We are apt to shut our eyes against a painful truth, and listen to the songof that siren till she transforms us.”We labor under the siren song of Dodd–Frank and the recent run-up inthe pricing of TBTF bank stocks and credit, indulging in the illusion ofhope that this complex legislation will end too big to fail and right thebanking system.We shut our eyes to the painful truth that TBTF represents an ongoingdanger not just to financial stability, but also to fair competition.The Dallas Fed offers a modest but, we believe, far more effective fix toDodd–Frank. This plan is not without its costs.But it is less costly than all the alternatives put forward and it seriouslyreduces the likelihood of another horrendous and costly financial crisis.This need not be a time of “awful moment.” It should instead be a time ofpromise. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30Treating the pathology of TBTF now would be a big step toward a morestable and prosperous economic system, one that relies on fundamentalprinciples of capitalism rather than regulatory complexity and increasinggovernment intervention.Thank you. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31Dr Andreas DombretMember of the Executive Board of theDeutsche BundesbankChallenges for financial stability –policy and academic aspectsDinner Speech at the Joint Conference of theDeutsche Bundesbank, the TechnicalUniversity Dresden and the Journal ofFinancial Stability2012: An “annus horribilis” or an “annus mirabilis” or neither?Your Magnificence Professor Müller-Steinhagen,Mister State Minister Doctor Beermann,Ladies and Gentlemen:The turn of the year gives me the chance to relatemy discussion of some of the future challengesfor financial stability to a résumé of the previousyear.Please allow me to do this from a European perspective and let me startwith a seemingly innocent question:Will 2012 go down in history as an “annus horribilis” or rather as an“annus mirabilis”, or neither?The answer to this question is less trivial than it appears at first. Let’s lookto the origins of the words “annus horribilis” and “annus mirabilis”.To see this please note that the originator of the “annus horribilis”,Queen Elizabeth, used it to describe her feelings about the year 1992.At the time, her Majesty was talking about, among others, the fire atWindsor Castle, but one might also read it as a comment about what _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32happened in the financial sector in 1992 when the markets forced the UKto leave the European Exchange Rate Mechanism.More recently, the Queen’s remarks sound as a comment about thefinancial and economic development of 2012.Please also note that many people use the metaphor of a large-scale fire toexplain the economic term of a “systemic” event.Thus her Majesty is worth quoting in more length: “1992 is not a year onwhich I shall look with undiluted pleasure.In the words of one of my more sympathetic commentators it has turnedto be an “annus horribilis”.I suspect that I am not alone in thinking it so. Indeed I suspect that thereare very few people or institutions unaffected by the last months ofworldwide turmoil and uncertainty.”According to various measures 2012 was a year of considerable systemictensions.Indeed, the indicators were approaching - but did not quite reach - thesad levels seen in the second half of 2008 and in the first half of 2009 -which was without doubts a very difficult period in the financial andeconomic history.Therefore, one might be tempted to classify 2012 as an “annus horribilis”.I wish to challenge this view.Will 2012, with hindsight, possibly go down in history as an “annusmirabilis”? Absurd, you may think.But on second thought this notion seems less absurd than it first appears.Let us not forget that the famous poem of John Dryden entitled “annusmirabilis” was inspired from major events in the year 1666.A very difficult year, to put it mildly, a year in which the Great Firedestroyed 80% of the city of London. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33The fire spread so rapidly due to the city’s narrow streets and the“interconnectedness” of houses.The battle to stop the fire was considered to have been won by twofactors: the strong east winds died down, and the Tower of Londongarrison used gunpowder to create effective firebreaks to stop the firefrom spreading further eastwards.Dryden’s view was that God had performed miracles for England.The King promised to improve the streets.Well, some may say, so it is in 2012.The fire in the financial markets was stopped by the ECB, by the twofirewalls EFSF and ESM as well as by the governments announcing thatthey would improve the financial system.Thus 2012 is an “annus mirabilis”.But as you know, miracles need to be acknowledged either by the pope orby the scientific community.So let us check whether a miracle was at work in 1666.And what I am going to say now about 1666 can be understood as ametaphorical warning about what could happen if we do not draw theright policy conclusion from the events of 2012.Despite numerous radical proposals, London was rebuilt using essentiallythe same street plan which was in use before the fire.So the miracle is that nothing similar to the Great Fire has happened inthe following years.The lesson of this story is quite clear.The financial system needs better rules than in the years preceding thecrisis.We need a resilient financial system.We need a strong supervision. We need effective macroprudentialinstruments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34We need to know how these instruments will work, which is a challengefor the scientific community as well as for macroprudential policy makers.Otherwise, we would be putting our trust in a miracle.And we need to understand the complicated interactions between thefinancial and the real economy, which is the topic of your conference.Links between the Financial System and the Real EconomyTake, for example, the LTROs which provided banks with liquidity for aperiod of three years.These LTROs have made the links between the public and the bankingsector in some countries closer, not wider meaning that the system is evenmore vulnerable to systemic contagion than before.Another example is the issue of deleveraging and forbearance.In Europe, many banks’ balance sheets are too large.Most of you probably agree that it is necessary for these banks to shrinktheir balance sheets.At the same time, some fear that deleveraging cuts off corporations fromtheir financing sources.From a theoretical viewpoint, however, a distinction needs to be madebetween good and bad deleveraging.Good deleveraging, for instance, means scaling back the exposure toother financial intermediaries whereas bad deleveraging means thatlending to the real economy is being reduced.The problem with this view is that, in practice, the distinction is not at allso clear-cut.The issue becomes even more complicated, when we additionallyintroduce the concept of forbearance, i.e. postponing the act of declaringa doubtful loan to be a doubtful loan.What is the best response to this issue? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35The first answer is transparency. At this point, transparency is more easilysaid than done.But we need it, particularly in the context of a banking union and possiblebank recapitalisations.And transparency is especially important with a view to legacy assets andforbearance of the problem banks.How do we proceed further?Repairing the banks’ balances sheets and injecting capital is one answer.However, some fear that repairing balance sheets has procyclical effectsand could damage the availability of credit for the real economy.In my view, however, repairing balance sheets will have a long-termpositive impact on potential output growth more than offsetting thepossible short-term cyclical effects.The Limits of State InterventionsI often hear that the banks were responsible for the crisis. But cangovernments do better?As you know, one reason for the financial crisis was the use of risk modelsbased on assumptions, which concentrated on expected values ratherthan tails.Peter Bernstein, the financial historian from the US, illustrated this pointby citing the anecdote of a Moscovite professor of statistics, who refusedto go to the air-raid shelter during World War II bomb attacks.The professor argued: “See, Moscow has seven million inhabitants.Why should I expect to be one who will be hit?”His neighbours were astonished, when he came back to the shelter thenext night.Now the professor’s argumentation was:“Moscow has seven million inhabitants and one elephant. Last night theelephant was hit.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36If regulators and banks essentially use the same models for their riskmanagement, why should we expect a better financial stability outcome?Of course, one solution is to improve our models.But I do not think that this is the end of the story.I rather believe that regulators can do better if they acknowledge theirown limitations.Regulators should employ the market mechanism to find the best riskmanagement tools.In an ideal world the market is a discovery process.First, each individual agent knows better what is good for him.But at the end of the discovery process – in theory – we will get the bestrisk management tools, if – and this “if” is the decisive word here – ifbanks with weak risk management processes are allowed to fail, having toleave the market.This is one reason why resolving the “too-big-to-fail”-problem needs tobe a top priority on the regulatory agenda.As far as I can judge, we are only beginning to understand howwell-established instruments like the capital ratio work and what effectthey have on the banks’ behaviour.And there are other new macroprudential instruments where ourknowledge is even more limited.Take the counter-cyclical buffer.The idea is simple and compelling. When the regulators identify a bubbledeveloping, this buffer is activated, thereby leading banks to reduce theirlending.If all works well, this buffer prevents the exuberances altogether, or atleast mitigates it.However, it is not clear how the buffers should be calibrated in order toachieve better financial stability. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37Moreover, not much is known about possible time lags.In the worst situation, these buffer effects are not counter- butpro-cyclical.Things become even more complicated if different instruments areapplied at the same time.As you can easily see, there are many questions waiting to be answered,many problems waiting to be resolved.When I think about what we know how macroprudential instrumentswork, traffic lights come to my mind.To prevent pedestrians from crossing the street when the traffic light isred the authorities actually installed buttons that pedestrians could pressto shorten the red phase.And it turned out to be a success: fewer pedestrians crossed the streetwhen the lights were red.However, what the pedestrians did not know was that pushing thebuttons had no effect on the duration of the red phase.Please do not misunderstand me: I do not believe that macroprudentialinstruments are useless. Quite the contrary is true.What I want to highlight is that we cannot expect to prevent all futurecrises from happening.It is an illusion to believe that we can finetune our instruments such thatthey have exactly the effect we want them to have.Recently, Otmar Issing wrote in the Frankfurter Allgemeine Zeitung:“The attempt to prevent each kind of crisis is just as hopeless as harmful.… The guiding principle of the market paradigm of action and liabilityfor the consequences (of these actions) should be valid withoutexemption.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38Taking this into consideration, the effects and the interdependence ofmacroprudential instruments may turn out to be a very fruitful researcharea.To sum up, every intervention in the market needs to be justified bymarket failures, something that, unfortunately, is not hard to find in manyareas of the financial system.There is no guarantee, however, that governments can do a better job.But at least the state has an incentive taking into account the negativeexternalities of banks’ decisions and thus to minimise tax payers’ losses.When the state is aware of its own limitations there is a good chance thatthe outcome will be better than one in which the financial system is left toits own devices.Newton’s “annus mirabilis”There was one famous scientist for whom 1666 was indeed an “annusmirabilis”.Isaac Newton made revolutionary inventions and discoveries in calculus,motion, optics and gravitation.As such, 1666 was later referred to Isaac Newtons “annus mirabilis”.It is the year when Isaac Newton was said to have observed an applefalling from a tree and hit upon gravitation.He afforded the time to work on his theories due to the closure ofCambridge University.In his own words: “All this was in the two years 1665 and 1666, for in thosedays I was in the prime of my age of invention, and minded mathematicsand philosophy more than at any time since.”Nowadays, Newton’s experience might inspire you to invent and discovermacroprudential mechanisms which policy makers could put toappropriate use in practice.Then the year 2012 might, in hindsight, turn out to have been a genuine“annus mirabilis”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39I wish you all a very successful conference.Thank you for your attention. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40Preserving the safety and security ofMalaysia’s banking systemSpeech by Mr Encik Abu Hassan Alshari Yahaya, Assistant Governor ofthe Central Bank of Malaysia, at the launch of the e-Banking FraudAwareness Campaign, Kuala LumpurIt is my pleasure and honour to be invited to launch this joint e-Bankingfraud awareness campaign.I would like to thank the Association of Banks in Malaysia for thisinvitation and the coordinated efforts in undertaking this importantawareness campaign.A significant initiativeThis campaign is indeed a very important initiative for the bankingindustry in Malaysia.This is the first time that all banks have come together in a concertedeffort to help create greater awareness of online fraud with thecooperation of CyberSecurity and the Police Force.This is to be lauded as all stakeholders have a role to play in preservingthe safety and security of the banking system.Maintaining confidence in online banking servicesOnline transactions have been growing at a rapid pace over the years.Over the last decade, the use of electronic payments has increased at anaverage annual growth of 23.4%.In 2012, Malaysian households and businesses performed more than 300million financial transactions with a value close to RM15 trillion via _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41electronic channels comprising mainly funds transfers, bill payments,top-up for prepaid cards, purchases of phone cards and payments forinvestments in the capital market.Among the electronic channels, internet banking is the most popular.Fundamental to the growth of internet banking over the years is theconfidence which the public has in its convenience and security.This is something that we cannot take for granted and must becontinuously preserved.Advancement in technology and innovation has resulted in greaterconsumer convenience and enhanced efficiency.However, the same technology and innovation have also created newmethods of perpetrating fraud that could be executed faster and withgreater reach.Cyber criminals have been active ever since the advent of the internet, andare constantly finding new ways to defraud innocent victims.Safety and security of transactions in the banking system is fundamentalin ensuring consumer confidence.Hence, an important function and responsibility of the Central Bank isto ensure online transactions can be made in a safe and efficient mannerin the economy, in the pursuit of monetary and financial stabilityobjectives.The need for constant vigilance & cooperationThis fight that the banks are launching today is something that requiresthe support of all parties.We are aware of the creative ways in which criminals have attempted todeceive customers over the years and measures were required to be takenby the banks to protect the customers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42While it is good to know that banks have played their roles in investing inrobust security systems, they must also ensure that customers play theirpart in protecting their own assets and savings.The reminder and greater awareness from the Banks through thiscampaign is timely.It will not only reinforce the need for constant vigilance from all parties,but also help create an environment where everyone is risk conscious andresponsible in protecting the interests of each other.These initiatives would not achieve the desired outcomes withouteffective communication, and the media has a critical role to play inconveying the message from the banks.We have always acknowledged the importance of the media and I wouldlike to record Bank Negara Malaysia’s appreciation for the assistancerendered by the media in creating awareness of this issue in the past.We hope that with the support of the media on this occasion too, thiscampaign will be a success, and the public will have heightened levels ofunderstanding and vigilance over this issue.On behalf of Bank Negara Malaysia, I would like to thank all the banksfor taking this initiative to undertake this joint e-banking awarenesscampaign.Our thanks also to Cyber Security and the Police Force for your ongoingefforts to collaborate with the banking industry.I wish all of you the best and assure you that Bank Negara Malaysia willcontinuously support you in this noble effort. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43Comments received on theconsultative report "Recoveryand resolution of financialmarket infrastructuresSouth Africa, Financial ServicesBoard (FSB) has requested theSAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limitedto provide feedback.IntroductionOn the 31st of July 2012, a consultative report on the Recovery andResolution of Financial Market Infrastructures was issued by theCommittee on Payment and Settlement Systems (CPSS) and theInternational Organization of Securities Commissions (IOSCO).Subsequently the Financial Services Board (FSB) has requested theSAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limitedto provide feedback and commentary on the report.This report serves as a consolidation of Strate Limited’s and SAFCOM’sviews on the contents of the document.BackgroundStrate Limited is a licensed Central Securities Depository (CSD) for theelectronic settlement of financial instruments in South Africa.Strate handles the settlement of a number of securities including equitiesand bonds for the Johannesburg Stock Exchange (JSE) as well as a rangeof derivative products such as warrants, Exchange Traded Funds (ETFs),retail notes and tracker funds.It is also responsible for the settlement of money market securities to itsportfolio of services. It provides services to issuers for their investors interms of the Companies Act and Securities Services Act (SSA), 2004. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44SAFEX Clearing Company (Pty) Limited operates as a clearing house forthe Johannesburg Stock Exchange derivatives markets. It wasincorporated in 1987 and is based in South Africa.As of October 2008, SAFEX Clearing Company (Pty) Limited operates asa subsidiary of the JSE.General CommentIn compiling a response to the request for comment by CPSS-IOSCO,Strate has reviewed the Consultative Report, the Key Attributes ofEffective Resolution Regimes for Financial Institutions (issued by theFinancial Stability Board) as well as the Principles for Financial MarketInfrastructure and the associated recommendations for Regulators.Strate believes that the Consultative Report has been generally wellthought out and represents a comprehensive assessment of the likelyimpacts in the event of FMI default or failure as well as an effectiveguideline to assist individual FMI’s in the development of an appropriateand effective Recovery and Resolution plan.The broad differentiation between those FMI’s that assume credit riskand those that do not is also considered most appropriate to take intoaccount the different roles and responsibilities of individual FMI’s.It is, however, very clear from this exercise that a comprehensive review ofthe Resolution Regimes contained in current and proposed futurelegislation will need to be undertaken to ensure that the ideals containedin the referenced documents are suitably entrenched and understood.Specific responses to questions raised:The following responses and comments have been put forward for each ofthe specific questions raised in the Recovery and Resolution of FinancialMarket Infrastructures report.1. In what circumstances, and for what types of FMI, can a statutorymanagement, administration or conservatorship offer an appropriateprocess within which to ensure a continuity of critical services? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45The consideration as to whether statutory management, administrationor conservatorship would offer the most appropriate process within whichto ensure the continuity of critical services is, in our opinion, directlylinked to the speed with which such an arrangement could be effectivelyimplemented within the framework provided in local legislation ratherthan the type of FMI.This does, however, also link to question 2 below.2. Are there powers beyond those of a standard insolvency practitionerthat a statutory manager, administrator or conservator would require inthese circumstances?Potentially, yes.This assessment can, however, only be completed with a full legislativereview in the particular jurisdiction to ensure that the appointed authorityhas the necessary authorities already outlined in the Consultative Paper.Key to this assessment will be the ability to ensure the speedy assumptionof control by the appointed authority.3. Is tear-up an appropriate loss allocation arrangement prior to resolutionof a CCP?If so, in what circumstances?Unable to comment – not applicable to Strate4. To what extent should the possibility of a tear-up in recovery bearticulated in ex ante rules?Unable to comment – not applicable to Strate.5. Should there be a limit to the number of contracts that are eligible fortear-up?Unable to comment – not applicable to Strate.6. How should the appropriate haircuts be determined?Unable to comment – not applicable to Strate. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 467. What qualitative or quantitative indicators of non-viability should beused in determining the trigger for resolution for different types of FMI?Key to this decision is the role of the particular FMI. In the case ofnon-credit risk bearing FMI’s the indicators would tend to be qualitativerather than quantitative once the primary measurement of adequatereserves has been addressed.In the case of Strate, this would include many elements assessed by itslead regulator in terms of the annual licence renewal process (includingsuch things as competencies, quality of service delivery, operationalcapacities, robustness of existing technology etc.).8. What loss allocation methods must be available to a resolutionauthority, and for which types of FMI?Could or should these resolution powers include tear-up, cash calls or amandatory replenishment of default fund contributions by an FMI’sdirect participants?Does it make a difference if the losses are from a defaulting member orare made up of other losses (e.g. losses in investments made by the FMI)?In what circumstances, and by what methods, should losses be passed onbeyond the direct participants – e.g. to the clients or FMI shareholders –in resolution?To the extend applicable to Strate, losses in investments made by the FMIwould be allocated directly to its shareholders rather than to itsparticipants in any way.9. What, if any, special considerations or methods should be applied whenallocating losses whose maximum value cannot be capped (e.g. whenallocating potential losses that might arise from open and uncappedpositions at a CCP)?Unable to comment – not applicable to Strate.10. How should equity in FMIs be treated in resolution scenarios: shouldit be written down in all circumstances? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47From a Strate perspective, and given the nature of the risks borne by theCSD, no need for differentiation in the treatment of equity write-downscould be identified.11. Are there circumstances in which loss allocation in resolution shouldresult in a different distribution of losses to losses borne in insolvency?Does it make a difference if the losses stem from a defaulting member orare made up of other losses (e.g. losses in investments made by the FMIor resulting from operational risks)?Given the profile of Strate it is not envisaged that there should be anydifference in the loss allocation regardless of whether by resolution orinsolvency.12. Should an FMI’s rules for addressing uncovered losses be taken intoaccount when calculating whether creditors are no worse off in resolutionthan in liquidation?Unable to comment – not applicable to Strate.13. Are there any circumstances in which the ability to exercisetermination rights as a result of the use of resolution powers shouldoutweigh the objective of ensuring continuity?Given the profile of Strate this would only apply to contracts for servicesfrom third parties and to the extent that the ability to exercise terminationrights relates to non-core services, this may assist in minimizing theimmediate negative financial impacts on the FMI.It is unlikely that one would wish to invoke the early termination of coreservices as part of a resolution process.14. Are there any circumstances in which a temporary stay on exercisingtermination rights should apply for any event of default and not just wheretriggered by the resolution measures?As with 13. above, the profile of Strate reduces the need to exercise, orindeed temporarily stay, termination rights whether as a result of defaultor resolution. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 4815. Are there any circumstances in which a moratorium with a suspensionof payments to unsecured creditors may be appropriate when resolving anFMI? Should this be limited to certain types of FMI and/or certain typesof payment?The benefit of introducing a suspension of payments to unsecuredcreditors to assist in the resolution of an FMI such as Strate would beminimal and, given the specific nature of the role that Strate plays in themarket, is unlikely to affect (either positively or negatively) its ability tocontinue settling or processing transactions which are processed directlybetween counterparties through the Central Bank payment system or, asis the case with Corporate Events processing, through Trust accountswhich could effectively be ring-fenced from the FMI itself.16. If so, should resolution authorities retain the discretion to apply amoratorium and, if so, what restrictions (if any) on its use would beappropriate (e.g. scope, duration or purpose)?Given the response to 15 above, this is not considered relevant to Strateother than to the extent that the Resolution Authority may wish to deferpayment on non-core services in terms of existing powers.No special powers are considered necessary.17. Should the bail-in tool be available to collateral, margin (includinginitial margin) and other sources of funds if they would bear losses ininsolvency?Unable to comment – not applicable to Strate.18. In what circumstances and for what types of FMI should wider lossrecovery arrangements exist beyond the FMI’s own rules and theresolution powers of the resolution authority?Not applicable to Strate as it does not assume principal risk in any of thetransactions it processes. The CSD Rules already cover the CSDadequately in this respect.19. In conducting a resolvability assessment of an FMI, what factorsshould authorities pay particular attention to? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49The assessments outlined in Annexure II of the Key Attributes ofEffective Resolution Regimes for Financial Institutions issued by theFinancial Stability Board are considered sufficiently comprehensive toconduct a resolvability assessment.20. In addition, is the summary of the application of the Key Attributes toFMIs provided in the annex sufficiently detailed to support thedevelopment of recovery and resolution regimes for FMIs?Are there specific areas where more detail could be provided?If so, which areas and what additional detail should be provided?Are any of the key attributes not applicable to a particular type of FMI?If so, which key attribute(s) and why not?Other than those areas already identified in the Annex as being notapplicable to an FMI like Strate, no additional areas could be identifiedand no additional detail is considered necessary to assist Strate, inconsultation with its Lead Regulator, in the development of anappropriate Resolution Plan. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50Opening Remarks at Investor AdvisoryCommittee MeetingBy Chairman Elisse WalterU.S. Securities and Exchange CommissionWashington, D.C. January 18, 2013Good morning. It is a pleasure to be with youtoday, and to make my first public appearance asSEC Chairman with you, a group who haschosen to dedicate yourselves to looking at theissues we face through the eyes of the investors we are dedicated toprotect.As you know, although I am new to the role ofChairman, I am proud to have worked at the SEC bothas a staff member and a Commissioner for a total ofmore than two decades.I have made the SEC the cornerstone, and the heart, of my career becauseI strongly believe that the SEC’s mission of investor protection andmarket stability is critical to the function of and confidence in thefinancial system as a whole…and especially because I believe thatinvestors need and deserve an effective advocate within the Federalgovernment.Today, thanks to our exceptional staff and strong leadership team, Ibelieve that we are executing our role as the investor’s advocate boldlyand effectively, at a time when our role has become more important thanever.This is a challenging and exciting time for the Commission.Commissioners and the staff are considering a number of complex andimportant issues and working hard on rules that will have a profound andpositive impact on investors and our markets for years to come. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51I am currently working with the other Commissioners to prioritize themany agenda items before us and to set a realistic timetable for executingon those priorities.With these discussions still under way, I can’t yet give you too manydetails.I will say, though, that I am confident that completing the remainingrulemakings and other projects mandated by the Dodd-Frank Act and theJOBS Act will be at the top of the list.And despite the often-mentioned 2-2 divide, I find that my fellowcommissioners — as well as Commission staff — are eager to findcommon ground and move forward in a practical and effective manner.I’m also on something of a listening tour -- clarifying my own thoughtsand keeping an appropriate perspective by listening to ideas, questionsand complaints from people in and out of the agency.And, that is why I am here today — to listen to you.The Investor Advisory Committee is the right idea, and particularly at thiscritical juncture in the history of our markets.Over the last decade, the retail investing landscape has becomeincreasingly complex, populated by products, strategies, technologies,opportunities, and risks that simply didn’t exist just a short time ago.And, on top of the changes that arise more or less organically from in themarketplace, important new legislation is reshaping the terrain, as well.Just 21 months after Dodd Frank, the most significant financial reformbill in decades, was enacted — and created this committee — the JOBSAct brought another seismic shift in the way companies, particularlysmall and emerging ones, raise capital and how individual investorsparticipate in that process.Against this backdrop, the decisions confronted by individual investors— decisions that are absolutely critical to the course of their lives and the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52lives of their families — and the information and advice they receive whenthey make these decisions, are becoming more complex even as thestakes grow higher.As some of you may know, when I think about the SEC’s role at a timelike this, I like to think of my very dear — if completely imaginary — AuntMillie, a retail investor with a modest portfolio, looking towards a secureretirement — hopefully in the near term — and some fun with her familyduring her golden years.Now, as dear to me as she is, Aunt Millie is no hedge fund manager.So when she sits down with her financial professional, and the talk turnsto ETFs and target date funds, crowdfunding or her professional’s fees, Iwant the SEC’s presence to be felt there in that office — whether or notshe even knows anything about the SEC (although MY Aunt Millie is, ofcourse, qvelling at her niece’s recent promotion), I want the SEC to bethere looking out for her, helping her make sense of the environment inwhich she is investing her future security.Aunt Millie and her fellow retail investors are unique among the majorstakeholders in the financial system: they aren’t members of a tradeassociation, and they don’t exactly spend a lot of time (or any time for thatmatter) following the Federal Register, monitoring the SEC, or —although I am trying to improve this — submitting substantive commentson proposed rules and concept releases.Like most retail investors, Aunt Millie is under-informed andunderrepresented in the regulatory process.That is why, in the midst of continuing and significant changes in themarkets, your work is so important.You help represent these retail investors with a visibility andsophistication that ensures that their needs and interests are carefullyconsidered. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53You help us keep the playing field level for all investors, including andespecially investors like Aunt Millie and her compatriots.Your first set of recommendations to the Commission, on proposed rulesthat would lift the restriction on general solicitation in certain privateplacements, reflects your commitment to that task.I deeply appreciate the effort and thoughtfulness that went into craftingthe recommendations.In addition, your ability to work together and provide recommendationsthat were unanimously supported by the Committee is heartening to meand serves as an example to us all.In a short time, you have established yourselves as an effectiveorganization and a critical component of the ongoing regulatory dialoguethat affects every American investor.I look forward to our continuing collaboration as you address othermatters of critical importance in a relentlessly evolving financial world.Thank you for what you have accomplished already and for what I knowyou will continue to do. I said earlier that we were still sorting out all ofour priorities for the days ahead, but one of them is certainly this:continuing the close relationship that I believe we already have.And, since I’m here as part of my listening tour and not my talking tour,it’s probably time for me to stop talking and start listening to anyquestions and comments you may have. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54Fulfilling the Commission’s Statutory Responsibility to Respondto IAC’s RecommendationsBy Commissioner Luis A. Aguilar, U.S. Securities and ExchangeCommission, Investor Advisory Committee MeetingWashington, D.C., January 18, 2013I want to welcome the members of the Investor Advisory Committee tothe Committee’s third in-person meeting. I also want to thank you foryour continuing focus on the many issues confronting investors.Your input to the Commission is vital to highlight the initiatives that serveto benefit and protect investors, as well as to deter the Commission fromundertaking initiatives that undercut or dismantle existing investorprotections.It is critical that initiatives undertaken by the Commission fulfill itsmission of protecting investors.As the Investor Advisory Committee, you are the Committee focused onthe needs of investors and your recommendations are critical tofacilitating that the Commission is operating to fulfill its mission.Congress clearly had this in mind when it codified this Committee inSection 911 of the Dodd-Frank Act and mandated how the Committeewould operate.This Committee has already demonstrated that it takes its responsibilitiesseriously.For example, on October 12, 2012, the Committee sent the Commissionseven unanimous recommendations regarding the SEC Rulemaking toLift the Ban on General Solicitation and Advertising in Rule 506Offerings.I commend you for the hard work that you have undertaken, as reflectedin the recommendations we received and which are available on the SECwebsite. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55It is now incumbent on the Commission to act. As required by Section 911of the Dodd-Frank Act, the Commission is required to “review thefindings and recommendations of the Committee.”In particular, the statute specifies that, “each time the Committeesubmits a finding or recommendation to the Commission,” theCommission is required to“… promptly issue a public statement –(A) assessing the finding or recommendation of the Committee; and(B) disclosing the action, if any, the Commission intends to take withrespect to the finding or recommendation.”The importance of this obligation is underscored by the fact that the lawrequires that the Commission itself assess the Committee’srecommendations and determine how best to respond to them.This is a responsibility of the Commission – not one that has beendelegated to the staff.To that end, I look forward to the Commission issuing the requiredresponse assessing your October 2012 recommendations.It is imperative that this Committee’s recommendations be treated withthe serious consideration that the law mandates.I look forward to the Committee’s on-going efforts and to what theCommittee has to say.Thank you. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56Tougher credit rating rules confirmed by European ParliamentsvoteNew rules on when and how credit rating agencies may rate state debtsand private firms financial health were approved by Parliament onWednesday.They will allow agencies to issue unsolicited sovereign debt ratings onlyon set dates, and enable private investors to sue them for negligence.Agencies shareholdings in rated firms will be capped, to reduce conflictsof interest.MEPs also ensured that the ratings are clearer by requiring agencies toexplain the key factors underlying them.Ratings must not seek to influence state policies, and agenciesthemselves must not advocate any policy changes, adds the text.The rules have already been provisionally agreed with the Council."We are taking some steps forward with this new regulation, fully in linewith its basic spirit, which is to enable firms to do their own internalratings.These should provide viable, comparable and reliable alternatives tothose of the rating oligopoly", said lead MEP Leonardo Domenici (S&D,IT). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. P a g e | 57Set dates for sovereign debt ratingsUnsolicited sovereign ratings could be published at least two but no morethan three times a year, on dates published by the rating agency at the endof the previous year.Furthermore, these ratings could be published only after markets in theEU have closed and at least one hour before they reopen.Agencies to be liable for ratingsInvestors who rely on a credit rating could sue the agency that issued itfor damages if it breaches the rules set out in this legislation eitherintentionally or by gross negligence, regardless whether there is anycontractual relationship between the parties.Such breaches would include, for example, issuing a rating compromisedby a conflict of interests or outside the published calendar.Reducing over-reliance on ratingsTo reduce over-reliance on ratings, MEPs urge credit institutions andinvestment firms to develop their own rating capacities, to enable them toprepare their own risk assessments.The European Commission should also consider developing a Europeancreditworthiness assessment, adds the text.By 2020 no EU legislation should directly refer to external ratings, andfinancial institutions must not be any more obliged to automatically sellassets in the event of a downgrade.Capping shareholdingsA credit rating agency will have to refrain from issuing ratings, or disclosethat its ratings may be affected, if a shareholder or member holding 10 %of the voting rights in that agency has invested in the rated entity.The new rules will also bar anyone from simultaneously holding stakes ofmore than 5% in more than one credit rating agency, unless the agenciesconcerned belong to the same group. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  58. 58. P a g e | 58The Domenici report on the regulation was adopted by 579 votes to 58,with 60 abstentions and that on the directive by 599 votes to 27, with 68abstentions.Article 1Subject matterThis Regulation introduces a common regulatory approach in order toenhance the integrity, transparency, responsibility, good governance andindependence of credit rating activities, contributing to the quality ofcredit ratings issued in the Union, thereby contributing to the smoothfunctioning of the internal market while achieving a high level ofconsumer and investor protection.It lays down conditions for the issuing of credit ratings and rules on theorganisation and conduct of credit rating agencies, including theirshareholders and members, to promote credit rating agenciesindependence, the avoidance of conflicts of interest and the enhancementof consumer and investor protection.This Regulation also lays down obligations for issuers, originators andsponsors established in the Union regarding structured financeinstruments.Article 5baOver-reliance on credit ratings in Union lawWithout prejudice to its right of initiative, the Commission shall continueto review references to credit ratings in Union law which trigger or havethe potential to trigger sole or mechanistic reliance on credit ratings bycompetent authorities or financial market participants, with a view toeliminating all references to ratings in Union law by 1 January 2020,provided that appropriate alternatives to credit risk assessment have beenidentified and implemented.Article 6aConflicts of interest concerning investments in credit ratingagencies1. A shareholder or a member of a credit rating agency holding at least 5 %of the capital or the voting rights in a credit rating agency or in a company _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  59. 59. P a g e | 59which has the power to exercise dominant influence or control over theregistered credit rating agency, shall be prohibited from:(a) holding 5 % or more of the capital of any other credit rating agency;(b) having the right or the power to exercise 5 % or more of the voting rights in any other credit rating agency;(c) having the right or the power to appoint or remove members of the administrative, management or supervisory body of any other credit rating agency;(d) being member of the administrative, management or supervisory body of any other credit rating agency;(e) exercising or having the power to exercise dominant influence or control over any other credit rating agency.The prohibition referred to in point (a) of the first subparagraph does notapply to holdings in diversified collective investment schemes, includingmanaged funds such as pension funds or life insurance, provided that theholdings in diversified collective investment schemes do not put him orher in a position to exercise significant influence on the businessactivities of those schemes.Article -8aSovereign debt ratings1. Sovereign debt ratings shall be issued in a manner, which ensures thatthe individual specificity of a particular Member State has been analysed.A statement announcing revision of a given group of countries shall beprohibited, if not accompanied by individual country reports.Those reports shall be made publicly available.2. Public communications other than credit ratings, rating outlooks oraccompanying press releases, as referred to in point 5 of Part I of SectionD of Annex I, which relate to potential changes of sovereign ratings shallnot be based on information stemming from the sphere of the rated entity,where such information has been released without the consent of the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  60. 60. P a g e | 60rated entity, unless it is available from generally accessible sources orunless there are no legitimate reasons for the rated entity not to give itsconsent to the release of the information.3. A credit rating agency shall, taking into consideration the provisions insecond subparagraph of Article 8(5), publish on its website and send toESMA on an annual basis, in accordance with point 3 of Part III ofSection D of Annex I, a calendar at the end of the month of December forthe next 12 months, setting a maximum of three dates for the publicationof unsolicited sovereign ratings and related outlooks and setting the datesfor the publication of solicited sovereign ratings and related outlooks.Such dates shall be set on a Friday.4. Deviation of the publication of sovereign rating or related ratingoutlooks from the calendar shall only be possible in as much as this isnecessary for the credit rating agency to comply with its obligations underArticle 8(2), Article 10(1) and Article 11(1) and shall be accompanied by adetailed explanation of the reasons for the deviation from the announcedcalendar.Article 8cUse of multiple credit rating agencies1. Where an issuer or a related third party intends to mandate at least twocredit rating agencies for the credit rating of the same issuance or entity,the issuer shall consider the possibility to mandate at least one creditrating agency which does not have more than 10 % of the total marketshare and which can be evaluated by the issuer as capable for rating therelevant issuance or entity, provided that, based on the list of ESMAmentioned in paragraph 2, there is a credit rating agency available forrating the specific issuance or entity.Where the issuer does not mandate at least one credit rating agencywhich does not have more than 10 % of the total market share, this shallbe recorded.2. With a view to facilitating the evaluation by the issuer under paragraph1, ESMA shall annually publish on its website a list of registered creditrating agencies, indicating their total market share and the types ofratings issued, which can be used by the issuer as a starting point for itsevaluation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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