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Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages)
 

Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages)

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Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages)

Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages)

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    Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages) Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages) Document Transcript

    • 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 storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCP“Our lives are defined by opportunities, even the ones we miss.”― F. Scott Fitzgerald, The Curious Case of Benjamin ButtonDear Member,They missed it! Countries “missed” Basel 2 and Basel 2.5 (forget Basel 3).No, they did not choose to ignore it, to minimize the cost for their banksor to play the regulatory arbitrage game… they just missed it.Don’t be so polite Basel Committee! According to their report to the G20Leaders on Basel III implementation, June 2012:“There are jurisdictions which have missed the globally-agreedimplementation dates for Basel II and 2.5”“As of end-May 2012, 21 of 27 Basel member countries have implementedBasel II, which had been due to come into force from end-2006”“Among the 29 global systemically important banks (G-SIBs) identifiedin November 2011, nine are headquartered in jurisdictions that have notyet fully implemented Basel II and/or Basel 2.5”Read more at No 1 (page 5). Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |2Basel Committee on Banking SupervisionReport to G20 Leaders on Basel III implementation,June 2012There are jurisdictions which have missed theglobally-agreed implementation dates for Basel IIand 2.5.There are also jurisdictions that have not madeenough progress to date on Basel III and thus poseconcern as to their ability to meet the agreed BaselIII implementation date.As of end-May 2012, 21 of 27 Basel member countries have implementedBasel II, which had been due to come into force from end-2006.Status of Basel II, Basel 2.5 and Basel III adoptionFinancial Stability Report 2012First half year reportEIOPA’s Financial Stability Committee(FSC) has updated its report on financialstability in relation to the insurance andoccupational pension fund sectors in theEU/EEA. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |3The translation (Japanese to English)is ready!Insurance Inspection Manual(Inspection Manual for InsuranceCompanies)The Thermal Management BarrierNew DARPA program seeks to cool chips, chip stacksfrom withinThe continued miniaturization and the increased density of componentsin today’s electronics have pushed heat generation and power dissipationto unprecedented levels.UCITS Management CompaniesThe Omnibus Directive requires ESMA toestablish a list all authorisations granted to UCITSmanagement companies in the European Union.ESMA is currently working on the IT solution to establish this list on itswebsite. The list will centralise all the relevant information in this regardreceived from all national competent authorities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |4PCAOB to Host Public Meeting on AuditorIndependence and Audit Firm Rotation in SanFranciscoThe Public Company Accounting OversightBoard announced today that it will host itssecond public meeting to discuss ways toenhance auditor independence, objectivity, and professional skepticism,including through mandatory rotation, or term limits, for audit firms.Subject: LiquidityComptroller’s Handbook Revisions and RescissionsThe Office of the Comptroller of the Currency (OCC) recently revised the“Liquidity” booklet of the Comptroller’s Handbook, which replaces asimilarly titled booklet issued in February 2001.Interview with Gabriel Bernardino, Chairman ofEIOPA, conducted by Silke Wettach,WirtschaftsWoche (Germany)Speech by the Financial Secretary to the Treasury, MarkHoban MP; the CityUK Debate 2012-2020 and beyond:financial services _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |5NUMBER 1Basel Committee on Banking SupervisionReport to G20 Leaders on Basel IIIimplementationJune 2012Introduction and summaryAt their 2010 summit in Seoul, the G20Leaders endorsed the Basel III regulatoryframework as follows:“We endorsed the landmark agreementreached by the BCBS on the new bankcapital and liquidity framework, whichincreases the resilience of the global bankingsystem by raising the quality, quantity and international consistency ofbank capital and liquidity, constrains the build-up of leverage andmaturity mismatches, and introduces capital buffers above the minimumrequirements that can be drawn upon in bad times.”In November 2011, the Leaders, at their summit in Cannes, emphasisedthe importance of implementing Basel III:“We are committed to improve banks resilience to financial andeconomic shocks. Building on progress made to date, we call onjurisdictions to meet their commitment to implement fully andconsistently the Basel II risk-based framework as well as the Basel IIadditional requirements on market activities and securitisation by end2011 and the Basel III capital and liquidity standards, while respectingobservation periods and review clauses, starting in 2013 and completingfull implementation by 1 January 2019.”This interim report details the progress the members of the BaselCommittee on Banking Supervision have made to date in implementingthe Basel III regulatory framework (including Basel II and Basel 2.5,which now form integral parts of Basel III). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |6The report also describes various implementation issues identifiedthrough the comprehensive process the Committee has adopted tomonitor members’ implementation of Basel III.Compared to the status at end-September 2011 and end-March 2012, whenthe Committee published previous reports, significant progress has beenobserved.However, there are jurisdictions which have missed the globally-agreedimplementation dates for Basel II and 2.5.There are also jurisdictions that have not made enough progress to dateon Basel III and thus pose concern as to their ability to meet the agreedBasel III implementation date.As of end-May 2012, 21 of 27 Basel member countries have implementedBasel II, which had been due to come into force from end-2006.In addition, Indonesia and Russia have implemented Basel II’s Pillar 1(minimum capital requirements).Argentina, China, Turkey and the United States are in the process ofimplementing Basel II.With regard to Basel 2.5, which was due to be implemented from end2011, 20 member countries have final rules that are in force.Argentina, Indonesia, Mexico, Russia, Turkey and the United States havenot issued final regulations.Russia and the United States have issued draft regulations which partiallycover Basel 2.5.Saudi Arabia has issued final regulations but these have not yet come intoforce.Among the 29 global systemically important banks (G-SIBs) identified inNovember 2011, nine are headquartered in jurisdictions that have not yetfully implemented Basel II and/or Basel 2.5. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |7Draft Basel III regulations have not yet been issued by seven BaselCommittee member jurisdictions: Argentina, Hong Kong SAR,Indonesia, Korea, Russia, Turkey and the United States.The majority of these jurisdictions believe they can issue final regulationsin time to implement by the deadline of 1 January 2013.However, for others, depending on their domestic rule-making process,meeting the deadline could be a significant challenge.In addition to monitoring whether its members have issued regulations toimplement the Basel III rules, the Basel Committee has established aprocess to review the content of the new rules.This second level of review is meant to ensure that the nationaladaptations of Basel III are consistent with the minimum standardsagreed to under Basel III.The Basel Committee has initiated peer reviews of the domesticregulations of the European Union, Japan and the United States to assesstheir consistency with the globally agreed standards.The findings of these reviews are preliminary since the formulation ofnational standards is still ongoing and the analysis is not yet completed.Nevertheless, there is a possibility that national implementation will beweaker than the globally-agreed standards in some key areas.The Basel Committee urges G20 Leaders to call on jurisdictions to meettheir commitments made in Cannes to implement Basel III fully andconsistently, and within the agreed timetable.A third level of implementation review conducted by the Basel Committeeexamines whether there are unjustifiable inconsistencies in riskmeasurement approaches across banks and jurisdictions and theimplications these might have for the calculation of regulatory capital.This review of banks’ risk-weighting practices includes the use of testportfolio exercises, horizontal reviews of practices across banks andjurisdictions, and joint on-site visits to large, internationally-active banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |8The Basel Committee firmly believes that full, timely and consistentimplementation of Basel III among its members is essential for restoringconfidence in the regulatory framework for banks and to help ensure asafe and stable global banking system.The Committee will provide an updated progress report to G20 FinanceMinisters and central bank governors at their meeting in November 2012.That report will provide(i) An update on Basel Committee members’ domestic rule-making,(ii) The final outcome of the regulatory consistency assessment of theEuropean Union, Japan and the United States, and(iii) Preliminary findings from the Committee’s deeper analysis on banks’risk measurement approaches and regulatory capital calculations.This interim report is based on the information that was available to theBasel Committee on 31 May 2012.Subsequent to this date, further information has become available in boththe EU and US but there has been insufficient time to assess whetherthese latest developments are compliant with the Basel text for thisinterim report.Basel standardsIn June 2004, a package of reforms known as Basel II introduced morerisk-sensitive minimum capital requirements for banks, including anenhanced measurement of credit risk, and capture of operational risk.Basel II also reinforced the requirements by setting out principles forbanks to assess the adequacy of their capital and for supervisors to reviewsuch assessments to ensure banks have the necessary capital to supporttheir risks.It also strengthened market discipline by enhancing transparency inbanks’ financial reporting.The deadline for implementation of the Basel II framework by memberjurisdictions was the end of 2006. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • Page |9In July 2009, enhancements to the measurement of risks related tosecuritisation and trading book exposures were agreed in response toearly lessons from the 2007/08 crisis.An implementation deadline of the end of 2011 was set for these reforms,referred to as Basel 2.5.In December 2010, the Basel Committee published Basel III, acomprehensive set of reforms to raise the resilience of banks. Basel IIIaddresses both firm-specific and broader, systemic risks by:- Raising the quality of capital, with a focus on common equity, and the quantity to ensure banks are better able to absorb losses;- Enhancing the coverage of risk, in particular for capital market activities;- Introducing additional capital buffers for the most systemically important institutions to address the issue of “too big to fail”;- Introducing an internationally harmonised leverage ratio to serve as a backstop to the risk-based capital measure and to contain the build-up of excessive leverage in the system;- Stronger standards for supervision (Pillar 2), public disclosures (Pillar 3), and risk management;- Introducing minimum global liquidity standards to improve banks’ resilience to acute short term stress and to improve longer term funding; and- Introducing capital buffers which should be built up in good times so that they can be drawn down during periods of stress.The implementation period starts from 1 January 2013 and includestransitional arrangements until 1 January 2019.The transitional arrangements are available to give banks time to meetthe higher standards, while still supporting lending to the economy. Theliquidity requirements, leverage ratio and systemic surcharges come intoforce on a phased approach starting from 2015 and will, therefore, beassessed later and are not covered in this report. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 10Design of the Committee’s Basel III Implementation ReviewProgrammeIn January 2012, the Group of Central Bank Governors and Heads ofSupervision (GHOS), the Basel Committee’s oversight body, endorsedthe comprehensive process proposed by the Committee to monitormembers’ implementation of Basel III.The process consists of the following three levels of review:- Level 1: ensuring the timely adoption of Basel III;- Level 2: ensuring regulatory consistency with Basel III; and- Level 3: ensuring consistency of outcomes (initially focusing on risk-weighted assets).The Basel Committee has published two “Level 1” progress reports. Ithas agreed on a detailed “Level 2” assessment process and startedreviews of the European Union, Japan and the United States.Its “Level 3” reviews analyse existing data on risk measured by banks’models and are designing processes for deeper analysis.The Basel Committee has worked in close collaboration with theFinancial Stability Board (FSB) given the FSB’s role in coordinating themonitoring of implementation of regulatory reforms.The Committee designed its programme to be consistent with the FSB’sCoordination Framework for Monitoring the Implementation ofFinancial Reforms (CFIM) agreed by the G20.The objectives and the process of each of the three levels of review are asfollows.Level 1: Timely adoption of Basel IIIThe objective of the “Level 1” assessment is to ensure that Basel III istransformed into domestic regulations according to the agreedinternational timelines. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 11It does not include the review of the content or substance of the domesticrules. Each Basel Committee member jurisdiction’s status is reported in asimple table.Separately, the Financial Stability Institute (FSI) of the Bank forInternational Settlements is surveying non-Basel Committee membercountries.The outcome of this work will be published by the FSI in the comingmonths.Level 2: Regulatory consistencyThe objective of the “Level 2” assessments is to ensure compliance ofdomestic regulations with the international minimum requirements.Delays or failures to adopt domestic regulations identified by the Level 1review will feed into the Level 2 assessment.All Level 2 assessments will be summarised using the followingfour-grade scale: compliant, largely compliant, materially non-compliantand non-compliant.The Committee intends to produce an overall assessment, as well asassessments of the main components of Basel III.All Basel Committee member countries will be assessed over time.The Committee decided to prioritise its reviews, focusing first on thehome jurisdictions of global systemically important banks (G-SIBs).The first reviews commenced in February 2012 with the European Union,Japan and the United States.A summary of the process for the Level 2 reviews is included in appendix2 of this report.Level 3: Risk-weighted assets consistencyThe objective of the “Level 3” assessments is to ensure that the outcomesof the new rules are consistent in practice across banks and jurisdictions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 12It extends the findings of Levels 1 and 2, both of which focus on nationalrules and regulations, to supervisory implementation at the bank level.The Committee has established two expert groups, one on the bankingbook and the other on the trading book.These groups will identify areas of material inconsistencies in thecalculation of risk-weighted assets (RWAs, or the denominator of theBasel capital ratio).Depending on the outcome, the work may result in policyrecommendations to address identified inconsistencies.Preliminary findingsLevel 1The tables in appendix 1 show member countries’ implementation statusas of end-May 2012. The tables use the following number codes:- “1” for draft regulation not published,- “2” for draft regulation published,- “3” for final rule published, and- “4” for final rule in force.Summary information about the next steps and the implementation plansbeing considered by members are also provided for each jurisdiction.Separate tables are produced for each of Basel II, Basel 2.5 and Basel III.For Basel II and 2.5, which should be implemented already according tothe agreed timetable, countries that have fully implemented are shown ingreen; those in the process of implementing are shown in yellow; andthose that have not yet issued draft regulations are shown in red.Compared to the status at end-September 2011 and end-March 2012, whenthe Committee published previous reports, significant progress has beenobserved. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 13However, there are jurisdictions which have missed the globally-agreedimplementation dates for Basel II and2.5. There are also jurisdictions that have not made enough progress todate on Basel III and thus pose concern as to their ability to meet theagreed Basel III implementation date.Basel IIThree-quarters of member countries have implemented the Basel IIrequirements.Of the remaining six countries, Indonesia and Russia have implementedPillar 1 (minimum capital requirements) but not Pillar 2 (supervisoryreview process) or Pillar 3 (disclosure and market discipline).Turkey expects to be fully compliant by July 2012. China has issued finalregulations and is currently assessing applications for advancedapproaches submitted by large banks.The United States is in “parallel run” (ie running both Basel I and BaselII calculation for its largest banks), although Basel I rules remain thelegal minimum.Argentina implemented rules on operational risk in April 2012.Basel 2.5Again, a majority of Basel Committee member countries (20 out of 27Basel Committee members) have implemented the requirements, but asignificant minority are either still in the process of implementation orhave not started the process for implementation.Russia and the United States have issued draft regulations covering themarket risk elements of the enhancements.The US regulations were modified in December 2011 to incorporaterestrictions on the use of credit ratings as set forth in the Dodd-Frankregulatory reform legislation.Other member countries which have not implemented Basel 2.5 areArgentina, Indonesia, Mexico, Saudi Arabia and Turkey. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 14Basel IIIThree countries – India, Japan and Saudi Arabia – have published finalregulations necessary for implementing the Basel III package from 1January 2013.Full application starts in Japan at the end of March 2013 to matchJapanese banks’ fiscal year end.The European Union has published several rounds of draft directives andregulations (CRD4/CRR) and is expecting to have final rules by the endof June.The EU level regulations implement most elements of the Basel IIIpackage directly.This means there is no need for national regulations to transpose theregulations into their domestic legislation.The following seven member jurisdictions have not issued draftregulations: Argentina, Hong Kong SAR, Indonesia, Korea, Russia,Turkey and the United States.The majority of these countries believe they can finalise regulations intime for the agreed start date of 1 January 2013.However, for others, depending on the domestic rule-making process,meeting the deadline could be a significant challenge.Level 2The first three Basel III regulatory consistency assessments are currentlyunder way for the European Union, Japan and the United States, whichare being conducted in parallel.In the initial phase of the Level 2 assessment process, the jurisdictionshave been asked to complete a detailed self-assessment questionnaireand to provide all components of the regulations that implement Basel IIIat the domestic level. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 15After receiving the completed questionnaires, peer review teams ofsupervisors have reviewed the completed self assessment and drafted aninitial list of preliminary findings.The European Union, Japan and the United States are at different stagesof Basel III implementation.Given these differences, the depth of the preliminary Level 2 findingsdiffers.The reviews are still work in progress and this interim report is basedsolely on preliminary findings that are subject to further review as theanalysis progresses.Currently, the peer review teams are in the process of further analysingthe preliminary findings based on additional clarifications that werereceived from the jurisdictions concerned.The review teams are also working on the assessment of the potentialmateriality of their findings, using quantitative bank-specific data thatwas provided by the authorities.An important element in the second phase of the assessment will be anon-site visit where the teams will discuss their findings with theauthorities to further narrow down the materiality of the findings to arriveat a final assessment.The on-site visits are tentatively scheduled in June and July. The finalreport is expected to be submitted to the Basel Committee in September2012, and will be published shortly thereafter.The absence of any item among the topics mentioned above does notnecessarily mean that the review team will not add new items to the list ofissues for further investigation during the progress towards the finalreport.European UnionThe review of the European Union (EU) rules related to Basel III hasbeen complicated by the absence of a stable EU text implementing BaselIII. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 16As a pragmatic choice, the review team selected the Third DanishPresidency Compromise proposals for the basis of this interim report.This choice does not imply any endorsement by the assessment team ofthese proposals, but simply responds to the need to use the most recentdraft such that the text remains stable for the time required to completethe interim review.At the time this interim report was prepared, the final version ofCRD4/CRR – the rules for implementing Basel III in the EuropeanUnion – were not yet published.Therefore the number and nature of the findings set out in the BaselCommittee’s final report may change substantially from those containedin this interim report to the extent that the final CRD4/CRR rules differfrom the Third Danish Compromise proposals.Besides the changing nature of the EU proposals, the assessment has alsobeen difficult due to the particularities of the EU rule-making process.This meant that the European Commission (EC) was unable to completethe requested self-assessment questionnaire, beyond mapping the Baselframework to the July 2011 EC proposals and providing explanatory noteson the compliance of key areas of the EU regulation with Basel III.Unlike the other assessments, which have benefited from countryself-assessments, the EU review team has not been able to draw on acomprehensive self-assessment from which to begin its assessmentprocess.Despite these difficulties, the review team conducted a detailedpreliminary assessment of the EU framework.This assessment benefited from face-to-face discussions between theleader of the review team and EC staff as well as with representatives fromthe European Banking Authority, the European Central Bank, the DanishPresidency, and the nine EU countries which are also BCBS members. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 17Preliminary findingsThe initial assessment process has identified a large number of features ofthe current EU Basel III proposals that will require further investigation.Most of these issues will probably prove either consistent with the Baselframework, or immaterial in practice.There seems to be a small number of issues, however, that are potentiallymaterial and will need to be subject to a detailed assessment by the reviewteam.The EU framework has been developed with the principle of “maximumharmonisation.”This is designed with the aim of achieving a high level of harmonisationof banking rules and limiting divergence between the approaches takenby individual national authorities.While not a matter of direct relevance to the assessment in the firstinstance, the ability for an individual national regulator to comply withBasel III where EU regulation is found to be inconsistent will depend onthe degree of “maximum harmonisation” at the EU level.In this case, it may work to limit the room an individual regulator has toadopt compliant regulations on its own.The review team has identified the following specific areas of potentialdifference. These areas require further review and/or an assessment oftheir potential materiality before definitive conclusions can be drawn:Definition of CapitalThere are three specific issues that warrant particular attention:The Basel III rules require banks to deduct significant investments inunconsolidated financial entities, including insurance entities, from thehighest quality form of capital (Common Equity Tier 1 – CET1).The CRD IV/CRR proposals give competent authorities the possibility topermit banks not to deduct insurance holdings under certain conditions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 18The review team will need to assess whether the CRD IV/CRR proposalsare consistent with the Basel requirements that only permit approachesother than deduction where it can be demonstrated that these are moreconservative (ie would produce higher capital requirements) than thededuction approach.The Basel III rules are explicit that for joint stock companies, onlycommon shares, which comply with a list of substantive criteria, can beincluded in CET1.However, the CRD IV/CRR proposals recognise any capital instrument,which satisfies a list of substantive criteria in line with Basel III, as part ofCET1 even if they might not be common shares.The review team will need to evaluate whether this deviation from BaselIII has the potential to undermine the quality of capital that banks shouldhave to absorb losses.Basel III requires that all classes of capital instruments fully absorb lossesat the point of non-viability before taxpayers are exposed to loss.This requirement has been acknowledged in the CRD IV/CRR proposalsbut not reflected according to the Basel rules.Going forward, the review team will closely monitor how this requirementis being reflected in the EU regulations, including within the forthcomingEU resolution and crisis management rules.Pillar 1: Credit Risk – Internal Ratings-Based (IRB) ApproachUnder the Basel rules, a bank electing to use an internal model tocalculate its regulatory capital requirements for credit risk (IRB Bank)may only permanently apply the standardised approach for non -significant or immaterial business units or asset classes (referred to as the“partial use exemption”).The CRD IV/CRR framework allows IRB banks to permanently use thestandardised approach for some exposures under certain conditions thatmight not appear to be related to the immateriality or non-significancedescribed above.In particular, an IRB Bank in the EU is able to permanently apply a zerorisk weight to EU sovereign exposures after receiving the permission ofthe competent authorities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 19The review team will need to further analyse the consistency of the CRDIV/CRR framework with the Basel rules regarding the permanent partialuse available to IRB Banks, with special focus on internationally activebanks’ sovereign exposures.Next stepsThe review team’s key focus going forward will be to resolve consistencyissues, and assess the materiality of any inconsistency.The latter will be mainly based on bank-specific data.The nine EU member countries of the Basel Committee have undertakento assist with securing the data that will be needed for the materialityassessment.Response from the European CommissionTwo preliminary points need to be made. First, from the point of view ofbanking regulation, the European Union (EU) is a single jurisdiction:laws adopted at EU level are agreed by, and apply to, all EU MemberStates.Second, the EU has chosen to apply the Basel rules to all its banks (aswell to investment firms), not just large, internationally active banks; thelaw therefore needs to allow national authorities to exercise a certain levelof proportionality in applying the rules.The first point is particularly important with respect to the “maximumharmonisation” principle referred to in the report.In this context, the assessment fails to provide valid arguments on whythe degree of harmonisation pursued in the EU could be considered anissue for any of the specific areas of potential difference mentioned in thereport.The second point is relevant to all the specific issues listed in the report.For example, the possibility for IRB banks to permanently use thestandardised approach for certain exposures was never meant to be usedfor internationally active banks and supervisors were (and will continue tobe) expected not to approve it for those banks.Concerning the specific issues, there are some additional points. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 20Firstly, the proposed approach on significant investments in insurancereflects the existence of strict and harmonised rules for insurance andfinancial conglomerates at EU level, takes into account the recentlyrevised Joint Forums principles for financial conglomerates supervision,provides appropriate incentives for insurance companies capitalisationand prevents double counting of capital.The assessment should take these facts into account.Secondly, the concept of common shares does not exist in a large numberof EU Member States, which explains the choice of approach based onthe characteristics of capital instruments, rather than their form.Nevertheless, publicly listed banks are expected to meet their CET1requirement only with shares meeting the 14 criteria.Furthermore, specific monitoring powers have been conferred upon theEuropean Banking Authority in order to identify any misuse of thisapproach by banks.Lastly, the European Commission expects to adopt legislationimplementing the point-of-non-viability requirement before summer ofthis year.JapanBy end March 2012, the Japanese authorities published final rulesimplementing Basel III with respect to the definition of capital andrisk-weighted assets (RWA), while the Basel II and Basel 2.5 regulationhad already been transposed into domestic rules previously.The documents for the Japan Level 2 review include notices, supervisoryguidelines, inspection manuals and Qs and As issued by the FSA to spellout the detailed interpretation, all of which are binding.Where applicable, the Japanese authorities have provided data for 16internationally active banks, which account for more than 50% of theJapanese banking assets.Japan has issued final Basel III regulations.This means that the review of Japan is more detailed than the reviews ofthe European Union and United States where the assessments are basedon drafts. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 21The review is based on the English translation of the Japanese rules, mostof which have been translated into English.In specific cases, the review team compared the English translation of thedocuments with the original Japanese text to verify the translation.A final judgment of the potential discrepancies in the translation will besubject to further analysis.The Japanese authorities also have provided supplemental informationrequested by the team.Preliminary findingsOverall, the preliminary analysis of Japan’s Basel II/III frameworksuggests broad consistency with the majority of the sections of the Baselrules.The analysis, however, revealed certain differences that will be the focusof further review by the assessment team:(I) The Basel III capital rules are not fully implemented (additionalguidance is under preparation) and deviate in specific areas, while therules for capital buffers are planned to be published only in 2015, one yearahead of the Basel III schedule for the implementation;(II) Most Pillar 2 rules are not in place; and(III) There are a number of issues in certain aspects of risk measurement,both in terms of Pillar 1 and 2, for which the review team will seek furtherclarification.Definition of Capital and Capital BuffersWhile the Japanese authorities have already finalised the rules concerningthe definition of capital and RWA, more detailed guidance to ensureconsistency with the Basel III text is not yet established.This is particularly relevant in the areas concerning the recognition ofstock acquisition rights as common equity Tier 1 capital and thededuction of deferred tax assets.The implementation team has also identified potential deviations in theareas of the recognition criteria for additional Tier 1 instruments as wellas with respect to the cut-off date for the grandfathering of state aid _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 22instruments, which need to be investigated further in order to understandthe potential impact.For the capital buffers (capital conservation, countercyclical), thedomestic rules are not yet in place.The Japanese authorities plan to issue the rules by 2015, ie, one yearahead of the international schedule for implementation (2016).Loss absorbency at the point of non-viability (PON) is partiallyimplemented, such as the resolution scheme in Japan’s deposit insurancelaw.The authorities are currently analysing how to organise the linkagebetween PON requirements and the domestic resolution scheme andplan to finalise the details of the framework by the end of 2012.Pillar 1 - Minimum Capital RequirementFor securitisation, several areas of deviation have been identified, such asin terms of re-securitisation, for ABCP exposures under the StandardisedApproach and specific aspects in terms of the Internal AssessmentApproach (IAA) and the Supervisory Formula Approach (SFA).Other areas of credit risk will also be subject to further analysis.In terms of counterparty credit risk and cross-product netting, theInternal Model Method (IMM) is not yet implemented.While in practice no bank has adopted the IMM, implementation intodomestic regulation is still desirable.Concerning market risk, the team has identified areas of non-compliancewith respect to the treatment of smaller trading books (<100 billion JPYand no larger than 10% of the bank’s total assets) and the treatment ofcommodity risk, where Japanese legislation only allows banks to use thesimplified approach (for those banks that choose the StandardisedMeasurement Method, SMM).In the former case, banks with trading activities slightly below themateriality threshold would benefit from this exception.While this issue is unlikely to have systemic implications, capitaladequacy could be slightly overstated. Banks’ commodity risk is limited, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 23but the ultimate judgement of materiality will be subject to additionalanalysis.With regard to operational risk, some of the detailed requirements withregard to the Advanced Measurement Approach (AMA) are not specifiedin the notice.Japan indicates that each of the detailed requirements in the Basel Accordis validated in the process of assessment as necessary.Pillar 2 – Supervisory Review ProcessIn terms of Pillar 2, most of the rules are currently not implemented inJapan.While there is a lack of implementation, the authorities seem to be in aposition to impose additional capital charges by the Banking Act.In practice, however, the FSA does not generally appear to take such anapproach.Rather the FSA examines the appropriateness of banks comprehensiverisk management and, if necessary, the FSA requires banks to takeremedial action to mitigate the risks instead of requiring an additionalcapital charge.Next stepsThe team will follow-up with the Japanese authorities to seek clarificationand data with a view towards completing a preliminary final assessmentof compliance and materiality in June.These findings will then be further discussed and assessed during theon-site visit scheduled for early July in order to determine a finalassessment and drafting of the final report, to be shared with theauthorities in the second half of July.The final report will be delivered to the Basel Committee in September.Response from the Japanese authoritiesThe Japanese authorities appreciate the detailed analysis done by theassessment team to date. In particular, the authorities welcome theacknowledgement of broad consistency with the majority of the sectionsof the Basel rules. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 24The FSA is in the process of developing Qs and As and supervisoryguidelines which will supplement the notices, and once they arepublished, issues identified as lack of implementation rules in this reportwill be rectified.We disagree with the report’s assertion that our rules on the recognition ofadditional Tier 1 instruments deviate from Basel III.The cut-off date for the grandfathering of state aid instruments is set on31 March 2013 instead of 1 January 2013 merely reflecting the fact that theJapan’s fiscal year starts in April and ends in March.With regard to the credit and securitisation parts of Pillar 1, someadditional rules need to be incorporated into our domestic rules, and theFSA intends to develop necessary notices and guidelines in the comingperiod.However, the current rules do not result in any material overstatement ofcapital ratios.Most of the additional elements needed are only relevant to advancedmodel methods such as IMM and IAA, which no Japanese bank hasadopted yet.Regarding the market risk exception for banks with small trading book,our impact analysis shows that the impact is very limited and is at most0.34% of total RWA.As for commodity risk, banks are allowed to choose between the IMA andsimplified SMM, which are both fully compliant with the Basel text.Banks with material commodity exposures use IMA.In terms of Pillar 2, the overall process and framework is provided in thesupervisory guidelines and inspection manuals and forms the basis foron-site and off-site review by the FSA.There are, however, some specific areas where details are not welldocumented yet (eg those related to IMM, residual risk and implicitsupport).The FSA intends to develop domestic rules on those elements in the nearfuture. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 25United StatesAs noted above, at the time of this interim assessment, the US authoritieshad not published the final rule to implement the improvements to theBasel II market risk framework (Basel 2.5), nor had they published theproposed regulations to implement Basel III.[On 7 June, the Federal Reserve’s Board of Governors published finalBasel 2.5 and draft Basel III rules. The review team has not had time toassess whether these latest developments are compliant with the Baseltext for the interim report, rather these and/or any subsequent texts willform part of the final assessment.]These are major components of the Basel Committee’s reformprogramme.Therefore, the number and nature of findings set out in the final reportmay change substantially from those contained in this interim report ifthe United States makes progress in its rulemaking process prior to thefinalisation of this report.Preliminary findingsThe review team has identified a number of overarching issues related tothe US implementation of the Basel standards:Adoption of Basel 2.5 and Basel III regulationsThe absence of the final rule on Basel 2.5 and the proposed rule on BaselIII represents a potentially significant gap in US implementation and hasthus far limited the assessment conducted by the review team to the USadoption of Basel II and to the proposed US rules for Basel 2.5.Scope of applicationUS core banks are required to adopt the advanced Basel II standards,while all other banks remain subject to the Basel I standards, unless theyelect to be subject to Basel II standards (these are referred to as opt-inbanks). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 26The Basel Framework is explicitly directed at “internationally active”banks – though this expression has not been defined.Basel Committee member countries are not required, therefore, to applythe framework to all their banks.However, the review team intends to assess whether the US definition ofcore banks inadvertently results in any non-core US bank with substantialinternational activities not being subject to Basel II standards.US authorities’ selection of Basel II approachesThe US agencies have implemented the advanced Basel II approaches,but not the less advanced Basel II approaches.While jurisdictions are not required to implement the less advanced BaselII approaches, the manner in which the US agencies have implementedBasel II implies that US core banks that do not comply – or cease tocomply – with the requirements of the advanced approaches are subjectto approaches that differ from those contemplated in the Basel IIframework for banks that do not qualify for the advanced approaches.In the United States, the advanced Basel II approaches applicable to corebanks are complemented by three other capital requirements, which theUS authorities have asserted result in higher minimum capitalrequirements:(i) A permanent floor calculated under the agencies’ general risk-basedcapital rules (which currently implement Basel I);(ii) The non-risk-weighted US leverage ratio; and(iii) The Pillar 2 requirements, including those under the Federal ReserveBoard’s “capital plan rule”.However, a core bank that does not satisfy the conditions for theadvanced Basel II approaches remains subject to a Basel I-basedcalculation of risk-weighted assets, thus not being subject to Basel IIminimum capital requirements.For example, Basel I does not include a charge for operational risk. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 27The review team intends to discuss with the US authorities the basis fortheir applying a Basel I-based approach for the calculation ofrisk-weighted assets to core banks that do not qualify for the advancedapproaches rather than the options provided by the simplified,standardised and foundation approaches under Basel II.NotesThe Level 2 assessment team of the United States is being conducted by ateam of experts led by Mr Arthur Yuen (Hong Kong Monetary Authority).The full review team comprises: Mr Thierry Bayle (Banque de France),Mr Pierpaolo Grippa (Banca d’Italia), Mr Sebastijan Hrovatin (EuropeanCommission), Mr Carlos Luna (National Banking and SecuritiesCommission of Mexico) and Mr Naruki Mori (Bank of Japan). The teamis supported by Mr Maarten Hendrikx of the Basel CommitteeSecretariat.The definition of core banks includes any depository institution (ie bankor savings association) meeting either of the following two criteria:(i) Consolidated total assets of $250 billion or more; or(ii) Consolidated total on-balance sheet foreign exposure of $10 billion ormore;or any US-chartered bank holding company (BHC) meeting any of thefollowing three criteria:(i) Consolidated total assets (excluding assets held by an insuranceunderwriting subsidiary) of $250 billion or more;(ii) Consolidated total on-balance sheet foreign exposure of $10 billion ormore; or(iii) Having a subsidiary depository institution that is a core bank oropt-in bank.Finally, any depository institution that is a subsidiary of a core or opt-inbank is also a core bank.Under the “capital plan rule”, based on the Comprehensive CapitalAnalysis and Review (CCAR) framework using stress tests, bank holdingcompanies with consolidated assets of greater than $50 billion mustdemonstrate their ability to maintain capital above existing minimum _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 28regulatory capital ratios and above a tier 1 common ratio of 5 percentunder both expected and stressed conditions over a minimumnine-quarter planning horizon.Basel II parallel runAt the time this interim report was prepared, none of the core US bankshad received permission to exit the transitional parallel run, which wouldrequire a bank to base its capital requirements on the advanced Basel IIapproaches (supplemented by the additional requirements discussedabove).The regulatory capital ratios of the core US banks continue to be based onrisk-weighted assets calculated according to the general (Basel I)risk-based capital rules, and there is no rule requiring banks to hold morecapital as a consequence of higher risk-weighted assets as calculatedunder the advanced Basel II approaches.The review team will assess the consistency of US transitionalarrangements with the corresponding Basel II standards and whether thismay lead to a situation in which core banks that are not allowed to leavethe parallel run over an indeterminate period are effectively subject tolower capital requirements than those provided for by Basel II for banksthat do not qualify for the advanced approaches.Elimination of references to external credit ratingsThe Dodd-Frank Wall Street Reform and Consumer Protection Act (theDodd-Frank Act) mandates the US agencies to remove references to andrequirements of reliance on external credit ratings from regulations and toreplace them with appropriate alternatives for evaluatingcreditworthiness.As a first step in this context, in December 2011 the US agencies issued anotice of proposed rulemaking (NPR) that contains alternativemethodologies for calculating specific risk capital requirements for debt,securitisation and equity positions under the market risk capital rules. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 29The review team will engage with the US agencies to assess – both inqualitative and quantitative terms – whether the proposed rulemaking isat least as robust as the corresponding Basel requirements.In addition to the overarching issues, the review team has identified anumber of specific areas of potential difference based on its assessment ofthe components of Basel II rules and the proposed rules for Basel 2.5.These areas require further review and/or an assessment of their potentialmateriality – taking into account that their relevance may be diminishedonce Basel III is implemented. So far, the main areas identified include:Definition of capitalThe current US capital treatment of insurance subsidiaries of bankholding companies differs from the Basel II full deconsolidation anddeduction approach.This could result in a potential overstatement of capital ratios.The Basel II treatment is however superseded by Basel III, and the issuemay turn out to be irrelevant if the United States alters its treatment toalign with Basel III.Pillar 1 – Minimum capital requirementsThe Basel criteria for credit risk mitigation – such as requirements forcollateral management, operational procedures, legal certainty and riskmanagement processes – appear absent from the current US regulations,while the scope of eligible collateral and guarantors seems to be largerthan those specified by the Basel Framework.Differences have also been identified in the definitions and/or treatmentof specific asset classes (eg credit card exposures and leasing).Further, certain overarching principles, such as the IRB approaches’minimum requirements’ “use test”, appear not to be explicitly enshrinedin regulation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 30Concerning the treatment of securitisation exposures, the main area ofdifference relates to the removal of references to external credit ratingsand the consistency with the Basel requirements.Another area relates to the treatment of securitisations containing earlyamortisation features which appears to deviate from the Basel treatment.With regard to operational risk, the main area of difference relates to thepossibility as permitted in the US rules of using risk mitigants other thaninsurance to hedge operational risk.This contrasts with the Basel Framework, which only allows insurance asa risk mitigant.Concerning market risk, the proposed replacement of external creditratings with new creditworthiness metrics for specific risk poses an issueof alignment with the Basel standards.It also raises the question of whether the resulting capital charges wouldbe equally or comparably robust.Pillar 2 – Supervisory review processRegarding securitisations, potential significant differences have beenidentified for the treatment of provision of implicit support and of therecognition of protection against first loss credit enhancements andrelated supervisory actions.Next stepsThe first stage of the assessment – the qualitative review of the USself-assessment – has progressed according to schedule.However, due to the delay in publishing the final Basel 2.5 rule and theproposed Basel III rule, the review team’s completion of the US reviewwithin the agreed timelines has become increasingly challenging.The on-site component of the review, in which the review team will meetface-to-face with the US agencies, is currently scheduled for 25 – 29 June2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 31Response from the US authorities:The US agencies welcome the opportunity to respond to the interimreport on the US banking agencies’ implementation of the Baselframework.We wish to comment on three of the overarching issues raised in thereport.First is the scope of application, where a question is raised, does the USapplication of Basel II standards to “core banks,” as they are called in thereport, cover all banks with significant international activities?The US agencies are confident that it does.The second issue is the selection of Basel II approaches.The interim report notes that the United States has implemented theadvanced approaches, but has not offered any of the less advancedapproaches as options for core banks, as allowed by the Basel framework.The report goes to suggest that, in this regard, the US implementationmay fall short.The possible implication is that jurisdictions that only adopt theadvanced approaches ought to develop their own versions of lessadvanced approaches that are close to the Basel II options and applythese to non-qualifying internationally active banks.The US agencies do not see any requirement for this in the Baselframework and, indeed, we would note that using Basel I is specificallypermitted.The third issue is related and concerns the Basel II parallel run process.Here, the review team say that they want to look into whether “core”banks not allowed to leave the parallel run ... are effectively subject tolower capital requirements [than the Basel II less advanced approaches].”This is a fair question. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 32However, as noted in the report, the US Basel I implementation iscomplemented by a leverage ratio requirement and the Federal ReserveBoard’s capital plan rule, which covers all “core” holding companies.Unsatisfactory capital plans have severe and specific regulatoryconsequences.Moreover, the Board’s 2012 Comprehensive Capital Analysis and Reviewframework required enough capital to meet the Basel III transitionschedule.Taken together, these and other US requirements such as the promptcorrective action regime are both demanding and effective relative toBasel standards.The US agencies fully support the efforts of the Basel Committee tomonitor progress in implementing the Basel capital framework indifferent jurisdictions and look forward to working with the US Level 2review team in the months ahead as they complete their work. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 33Level 3Analysis of risk-weighted assets in the banking bookIn December 2011, the Basel Committee approved a work plan to evaluatesources of material differences in risk-weighted assets (RWAs) acrossbanks using the Internal Ratings-Based (IRB) approach for credit risk inthe banking book, and assess the extent to which RWA calculations areconsistent with relevant Basel standards.The work, conducted by representatives of 30 regulatory agencies from 23countries, relies on a combination of top-down analysis of data asreported by banks, bottom-up portfolio benchmarking, observation of therange of practices across banks and supervisors, and on-site work atbanks as appropriate.The work distinguishes between variations in RWAs that are risk-based(those due to differences in underlying risk at the exposure/portfoliolevel) and those that are practice-based (eg those due to model selectionor calibration of model parameters, exercise of judgement, application ofnational discretion, etc).Practice-based variations can be further subdivided into differences thatare specifically provided for under the Basel Framework (eg IRB rollout,national discretions), and others that arise more from differences ininterpretation of standards in the framework or from specific practicessuch as those related to calibration of risk parameters.Recommendations to narrow the variation in RWAs are appropriateprimarily for practice-based RWA variation.To date, work has considered and assessed a wide range of existinganalyses of RWAs across banks and countries.Most studies acknowledge that underlying differences in risk are likely tobe a key driver in variations in RWA; these include differences in riskarising from differences in business model and portfolio mix.However, most studies also conclude that at least some of the variation inRWAs could be attributable to practice-based factors. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 34For example, several studies from the regulatory community raise modelcalibration (particularly PD and LGD estimation) and the stage of IRBadoption as potential drivers of RWA variation.On the other hand, external analysts have focused more on differences inthe application of supervisory principles, with regulatory and accountingapproaches being frequently cited as reasons for differences in RWAmeasurement.Existing studies reveal that, while there are many potential candidates,there is no definitive consensus on the true sources of RWA differencesacross banks, or on the extent to which differences are due to differencesin risks or differences in practices.Thus, additional work is clearly necessary, and is being pursued.To extend existing analyses and determine an appropriate focus forregulatory efforts to enhance convergence, the group is undertakingadditional high-level analyses of RWA variation using supervisory datafrom the Basel Committee’s Capital Monitoring Group (CMG).- The CMG has collected information on Basel II RWA, capital requirements, and risk parameters semi-annually since end-June 2008. The data are extracted from national reporting frameworks of member countries, and submitted to the Basel Committee Secretariat in standardised reporting templates.- The analytical framework that will be applied to the CMG data combines existing methods with additional approaches being developed as part of this project.- The sources and materiality of RWA differences will be assessed across portfolios, across banks, and across countries, with a focus on particular drivers believed to play a material role in RWA dispersion.- To safeguard data confidentiality, results will be presented in anonymised or aggregated form. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 35Conclusions based on top-down analysis of aggregated data as describedabove are necessarily limited.Thus, that analysis is being supplemented with bottom-up analysis usingtest portfolios, in which the risk parameters banks assign to groups ofcommon exposures are compared and analysed.The portfolio exercise is currently in development.- Informed by a comprehensive stock-take of similar exercises conducted by the industry and by various regulatory authorities, the initial focus has been narrowed to wholesale credit. Similar analysis can be extended to other types of credit at a later stage based on the lessons and conclusions of the initial exercise.- A data collection template has been developed, together with instructions for completion of the template.- A list of exposures is being developed to be provided to participating banks; banks will be asked to respond with PD and LGD estimates for each exposure.- The composition of the hypothetical portfolio has not been finalised, but is being designed to ensure maximum overlap across participating banks, and includes large sovereign borrowers, large financial institutions, and large non-financial corporate borrowers.Output from this work will include various benchmark analyses,including pair-wise rank-ordering analysis, analysis of the distribution ofPD and LGD estimates across banks, and assessment of how the impactof the observed parameter estimates on RWAs depends on different riskprofiles or business strategies.Quantitative analysis using either aggregated data or hypotheticalportfolio results can highlight sources of RWA variation, but will notnecessarily pinpoint the reasons for that variation.Therefore, work is also under way to identify the specific practices thatmight underlie differences in RWAs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 36- In a first phase, an extensive list of potential drivers of RWA differences has been developed, drawing on existing supervisory knowledge and judgement and informed by analysis of existing studies. The list of drivers has been divided into those related to underlying risk or risk profile, and those related to practices.- The potential significance of the drivers has been assessed based on both magnitude and prevalence; the assessments of significance currently are being refined.- Further analyses will be conducted to assess the materiality and the nature of a selected number of drivers.The work described here – combining top-down data analysis, bottom-upportfolio benchmarking, and supervisory evaluation of the range ofpractice in specific areas – will extend the preliminary conclusions fromprior analyses by identifying selected industry and supervisory practicesthat appear likely to be causing differences in RWA and capital acrossinstitutions and countries that are not reflective of underlying risk.Specific recommendations for narrowing of the range of practice will beprovided to the Basel Committee for consideration and possible action asappropriate.The analytical framework developed for analysing RWA differences canalso serve as an approach for ongoing monitoring of RWA differences.Analysis of risk-weighted assets in the trading bookThis interim report contains the initial findings of the potential drivers ofdifferences in market risk-related risk-weighted assets (mRWA) usingdata that is publicly disclosed by banks in financial and regulatoryreports.The scope of these initial findings is therefore limited, since the analysisapplies to public data prior to the implementation of Basel 2.5 and is _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 37based only on those banks for which sufficient data was available to makemeaningful comparisons.The Committee’s task force is currently working on completing thepublic data analysis by, among others, evaluating the utility of non-publicsupervisory data.In addition, it is performing a test portfolio exercise in which the mRWAcalculations of banks are compared on a common set of positions, withthe results to be further investigated by means of on-site visits.A number of banks have volunteered to be included in the test portfolioexercise, which is well under way and the first results are expected in thesecond half of this year.The task force will include the findings of this complementary work in afinal report that is expected by the end of this year.Based on public disclosures by a sample of 17 large banks with significanttrading activities, the analysis reveals considerable differences in mRWAas a ratio to total trading assets reported in financial disclosures.Such variation can be justified when it reflects the varying risk profile oftrading activities, given the differences in trading strategies and businessmodels among the banks.In this regard, a preliminary analysis of the public disclosures on a subsetof banks in the sample suggests that those banks that trade risky assets,such as distressed loans or less liquid equities, exhibit a higher ratio ofmRWA to total trading asset.However, the results are not conclusive, as there remains substantialunexplained variation, and in many instances public disclosures areinsufficient to explain the observed variation in mRWA ratios acrossbanks.One potential policy response is therefore to investigate furtherimprovements in public disclosures for market risk, for instance, byincluding more information about mRWA and its components andproviding more direction to banks regarding Pillar 3 disclosure. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 38These policy options will be investigated further.Notes: This graphic presents banks in increasing order of average marketrisk weighted assets (mRWA) calculated as the ratio of mRWA to TradingAssets, showing the substantial variation, from below 5% to about 45%.Trading Assets is defined as the value of all instruments in the tradingaccount, including securities, traded loans, and net derivatives with apositive replacement value.To put banks on a comparable basis the measurement of total tradingassets has been adjusted for the effect of different accounting regimes.In particular, the data has been adjusted to take into account the differentapproaches to netting of derivatives.Source: public information based on banks’ financial and publicregulatory reporting.For bank A data is based on Q4 2010 for all other banks data is from Q22011. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 39The preliminary analysis shows a number of potential reasons forvariation in mRWA (the list does not reflect a ranking in order ofimportance as the analysis does not allow for that at this stage):- Differences due to variation in the composition of trading assets as evident to some extent in public disclosures.- Differences in the way that banks apply accounting requirements to their business model in allocating assets between the trading and banking books, for example, the treatment of securities financing transactions and loans.- Differences in methodology and inputs for market risk models used for regulatory capital calculations.- Differences in supervisory approaches, with some jurisdictions relying more heavily on the internal models approach and integrated VaR models while others continue to use the standardised approach selectively for some debt and equity positions.- Differences in regulatory add-ons and notably the use of VaR multipliers higher than the minimum of 3 to account for model uncertainty.With regard to the last two points, the analysis indicates that some of thevariation in mRWA as a percentage of total trading assets may be relatedto the degree of reliance on internal models based on Value-at-Risk(VaR).Banks for which internal models have a more important role indetermining mRWA tend to show a lower average ratio of mRWA to totaltrading assets compared to banks for which models have a lesser role,with standardised approaches more important.This is in line with expectations as the standardised approach providesfor less hedging and diversification benefits and is therefore generallymore conservative than the internal models approach.At the same time, however, there remains substantial unexplainedvariation, as there is a wide range of mRWA ratios for banks with similar _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 40reliance on models and also banks with similar mRWA ratios but varyingdegrees of reliance on internal models.This variation will be examined further by means of the test portfolioexercise that is currently under way.It should be noted that the relationship between the degree of reliance oninternal models and the ratio of mRWA as percentage of total RWA maychange in the future.Basel 2.5 implementation (from end-2011) is expected to raise the capitalcharge for banks using internal models approaches for market risk andthe fundamental review of the trading book aims to strengthen therelationship between the models-based and standardised approaches byestablishing a closer link between the calibration of the two approaches.This may reduce the importance of the degree of reliance on internalmodels as an explanatory factor behind the observed differences amongbanks.Notes: The horizontal axis shows mRWA from internal models approach(IMA) as percentage of total mRWA.The vertical axis shows total mRWA as a percentage of total tradingassets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 41The sizes of the circles in the figure indicate the size of trading assets (inUSD) for each bank.It should be noted that the ratio of IMA as percentage of total mRWA isan imperfect proxy for degree of reliance on internal models as for somebanks a low ratio may still imply a high degree of reliance on internalmodels, for instance, when the internal model produces a very low mRWAcompared to total mRWA.Source: public information based on banks’ financial and publicregulatory reporting. Of the 17 banks in the sample, sufficient disclosurewas only available for 14 banks in quarter 4, 2010 and for only 7 banks inquarter 2, 2011.The task force has a work programme in place to further analyse thedrivers of difference in mRWA across global banks.This includes:- Completing the analysis of public data to test, refine, and extend these initial findings;- Evaluating the utility of internal supervisory data to better understand the drivers of observed differences;- Identifying key drivers of IRC (Incremental Risk Charge), VaR and stressed VaR based on existing domestic supervisory knowledge of bank’s models (and at a later stage CRM, Comprehensive Risk Measure). The objectives of this work are to identify the key aspects of model methodology that drive the differences in internal models based approaches and to assess the materiality of these drivers at a high-level. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 42 This work will support the test portfolio exercise and help to focus attention to those areas of the internal models that most likely contribute to differences;Performing a test portfolio exercise to compare and assess the mRWAcalculations by a sample of large, internationally-active banks for a set ofhypothetical trading portfolios.The aim of the exercise is to measure potential mRWA variability due tothe implementation of VaR, stressed VaR and IRC models. In addition,banks are being requested to complete questionnaires to specify theworkings of their internal models;Carrying out selected on-site visits to some participating banks to allowfor a deeper investigation of the sources of variability in the calculatedmRWA.It should be stressed that the on-site visits will not be model-validationexercises, but are meant to provide further information about theworkings of the banks’ internal models and the resulting mRWA numbersfrom the test portfolio exercise.This exercise will help to identify the major sources of mRWA variabilitydue to modelling choices in large banks.However, as it is a hypothetical portfolio exercise it will not be able toexplain mRWA variability due to the differing business strategies of largetrading banks.Further workThe Basel Committee will continue to work to attain the full, timely andconsistent implementation among its members.The Committee will update G20 in November on its work on all of thethree levels. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 43Level 1The Level 1 reports will continue to be published until all BaselCommittee members have fully implemented the requirements.The next publication of the tables in appendix 1 will reflect the position asat end September 2012.Level 2Final reports for the three Level 2 assessments of the European Union,Japan and the United States are expected to be published in September.Some follow-up work may be required after September depending on thefindings of the reviews.Additional work will also include the new liquidity requirements, theleverage ratio, and the surcharges for systemically important banks, oncethe Committee concludes its review on any revision or final adjustmentsfor these elements of the framework.In line with the three current reviews, the review of liquidityrequirements, the leverage ratio and systemic surcharges will take placeahead of the deadline and assess draft regulations where appropriateaccording to the staggered implementation dates.A review of Singapore will commence later in 2012, and reviews of Chinaand Switzerland in 2013.This schedule will mean that all countries which are home of G-SIBs willhave been reviewed before the middle of 2013.Reviews of Australia and Brazil will take place during the second half of2013.The Basel Committee is collaborating with the IMF and World Bank toensure that its schedule is complementary and non-duplicative to theIMF and World Bank’s FSAP review process. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 44Level 3The two Level 3 groups assessing the consistency of risk-weighted assetsin the banking book and trading book will continue their detailedanalyses, including hypothetical portfolio exercises, questionnaireshorizontally reviewing practices across banks and jurisdictions andon-site visits to banks.Preliminary conclusions from the detailed analyses should be available inthe fourth quarter of 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 45NUMBER 2Status of Basel II, Basel 2.5 and Basel III adoption:Number code:1 = draft regulation not published;2 = draft regulation published;3 = final rule published;4 = final rule in force.Country Basel Next steps - Implementation plans IIIArgentina 1 On-going work to draft preliminary documents.Australia 2 Draft rules for capital requirements issued on 30 March 2012. Draft rules to implement liquidity requirements issued in November 2011 for public consultation until 17 February 2012.Belgium (2) (Follow EU process - third compromise text published)Brazil 2 Draft regulation published for public consultation on 17 February 2012.Canada 2 On 1 February 2011, banks were directed to meet the 7% CET1 standard as of January 2013. Regulations for (i) non-viability contingent capital and (ii) transitioning for non-qualifying instruments published August and October 2011 respectively. Draft regulation for definition of capital and counterparty credit risk issued to banks in March 2012.China 2 Draft regulation combines BII, B2.5 and BIII. Public consultation ended in 2011. Final rule expected to come into force in Q3 2012. Will be applied to all banking institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 46France (2) (Follow EU process - third compromise text published)Germany (2) (Follow EU process - third compromise text published)Hong Kong 1, 3 (3) Bill passed by the Legislative Council on 29 February 2012 and published for the purpose of creating rule-making powers for the implementation of Basel III. (1) Industry consultation underway on policy proposals for inclusion in rules. Consultation on draft text of rules scheduled for second half of 2012.India 2 Draft regulation released for comments on 30 December 2011.Indonesia 1 Draft regulation to be released for consultation with industry in Q2 2012.Italy (2) (Follow EU process - third compromise text published)Japan 3 Draft regulation published on 7 February 2012 - Final rules published on 30 March 2012 - Implementation of final rules (end of March 2013 - In Japan, the fiscal year for banks starts in April and ends in March).Korea 1 Draft regulation to be published in the first half of 2012.Luxembourg (2) (Follow EU process - third compromise text published)Mexico 1 Final rule expected in Q2 2012.The (2) (Follow EU process - third compromise textNetherlands published)Russia 1 Draft regulations under development.Saudi Arabia 3 Final regulation issued to banks.Singapore 2 Public consultation on draft ended in February 2012. Final rule is expected to be published in mid-2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 47South Africa 1 Draft amendments to legislation issued on 30 March 2012 for consultation.Spain (2) (Follow EU process - third compromise text published)Sweden (2) (Follow EU process - third compromise text published)Switzerland 2 Public consultation on draft regulation on Basel III has been finished in January 2012. Decision on final rules text expected until mid-2012. Final SIFI regulation (level: Banking Act) adopted by Parliament on 30 September 2011 - Draft SIFI regulation (level: accompanying ordinances) was published in December 2011; decision on final rule text expected before end-2012.Turkey 1 Draft regulation expected to be published in mid-2012.United (2) (Follow EU process - third compromise textKingdom published)United States 1 Draft regulation for consultation planned during Q2 2012. Basel 2.5 and Basel III rulemakings in the United States must be coordinated with applicable work on implementation of the Dodd-Frank regulatory reform legislation.European 2 Third compromise text (directive and regulation)Union published by the Danish Presidency on 28 March 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 48NUMBER 3Financial Stability Report 2012First half year reportIntroductionEIOPA’s Financial Stability Committee (FSC) has updated its report onfinancial stability in relation to the insurance and occupational pensionfund sectors in the EU/EEA.The current report covers developments in financial markets, themacroeconomic environment, and the insurance, reinsurance andoccupational pension fund sectors as of 4 May 2012 unless otherwiseindicated.Summary of main issues and conclusionsINSURANCE SECTORLately, the relatively positive development of insurers experienced inrecent years, has started to reverse.This has shown in solvency ratios as well as profitability and to an extentalso premium growth.Though the solvency situation of insurers is only reflected on a Solvency Ibasis1 in this report right now, the development of key value drivers (e.g.low yield environment in a number of currency zones in Europe)indicates that the situation also puts significant pressure on marketvalues. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 49Nevertheless, Solvency I ratios for insurers are still at a comfortable levelwith ~200% at the end of 2011.Following up on last report’s risk perception, EIOPA has analysed thesector’s resilience to a possible longer lasting low interest rateenvironment as well.Although the sector overall seems to be capable of coping with thesechallenges for some time, EIOPA continues to monitor the situationclosely.However, if accompanied by other potential threats materialising, thesituation might look different, e.g. in case of renewed turmoil due to thefailure of governments to stabilise fiscal situations, a strong weighing ofthese developments on economic growth, or a disruptive unwinding ofcurrency risk (e.g. as a consequence of developments in Greece).While first order effects of such an event on the European insurancesector as a whole seem limited (according to EIOPA analysis conducted),local insurers are likely to suffer and second order effects might also hitother European insurers, though mainly through the potentially triggereddisruption of financial markets (e.g. sovereigns, banks and equities).REINSURANCE SECTORIn 2011, a large number of very severe natural catastrophes occurred,making 2011 the costliest year ever for the reinsurance sector.The natural catastrophe losses exceeded by far the heavy losses of theprevious record year 2005 (with hurricanes Katrina, Rita, Wilma).At the same time, the financial crisis worsened, with interest rate levelsgenerally remaining low.As a consequence the reinsurance undertakings were confronted withhuge challenges regarding both the liability side and the asset side of thebalance sheet. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 50However, at the beginning of 2011 the overall reinsurance industry wasvery well capitalised.As a consequence the reinsurers dealt well with the challengingenvironment; the capital reduction was only very modest.Several years of relatively benign payouts as well as the recovery of thefinancial markets had led to reinsurance capacities substantially in excessof demand.Altogether, the international reinsurance market remained relativelystable in 2011 and saw only modest price increases at the beginning of2012.Raising prices largely could not yet be seen in spite of the many naturalcatastrophes in 2011.The renewals at the beginning of 2012 as well as at April 1 led to somemarked increases in reinsurance prices in the regions and segmentsaffected by losses.But overall the rates have gone up only modestly, last but not least due tothe extensive absence of major loss events in Europe and North America.Furthermore, there is an increased capital flow into the reinsurancemarket.In the background of the financial crisis investors are searching forrelatively safe investments, exerting a moderating effect on the rates.OCCUPATIONAL PENSION FUNDS SECTORThe members and beneficiaries of Institutions for OccupationalRetirement Provisions (IORPs) are currently concentrated mainly in afew Member States, but continue to grow in importance across Europe; insome Member States reforms are in place to foster this growth in thefuture. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 51A trend is observed towards defined contribution schemes, which leavesponsors less vulnerable to market downturns as risks are borne mainlyby members and beneficiaries.Data for 2011 (provided by supervisors on a best effort basis) document agrave evolution in the funding positions of IORPs, especially for thelarger defined benefit (DB) systems such as UK and NL, where levels in2011 seem to have declined below 100%.The low yield environment in both countries is a key driver behind thisdevelopment, as it forces the market value of liabilities up.At the same time both systems also result in low expected future assetreturns given the dominance of debt investments for most occupationalpensions in most countries.Supervisors have taken actions to address these low funding levels.In NL funds are obliged to participate in a recovery programme as theircoverage ratio (assets divided by technical provisions) drops below therequired level (on average 120%).The UK pensions regulator is also running recovery programmes and haspublished a statement in April setting out expectations of trustees of DBIORPs starting valuations under the current conditions.Other recent trends include an increase in sovereign debt exposures ofIORPs in 2011 with respect to 2010.At least in high yield countries this is focussing on shorter maturities.Given current turbulent market conditions, a number of regulators haveemphasised the increasing importance of proper governance processesand increasing reporting requirements, also including regular scenarioanalyses and stress tests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 52Recent developmentsFINANCIAL MARKET DEVELOPMENTSThe macroeconomic environment is still challenging in many Europeancountries and thus a main source of concern for financial stability.Unease over government debt levels remains and political uncertaintycontinues to influence markets also after the relatively strong policyresponses at the European level.Overall, the political and economic climate continues to weigh on growthprospects in Europe, although there are regional differences.Figure 1 shows the evolution of two leading European business cycleindicators for the economic cycles six months ahead.The OECD index shows a somewhat declining trend in macroeconomicoutput, although possibly at a slower pace than in previous months.The ZEW Eurozone indicator had improved at the beginning of 2012 afterhaving reached levels comparable with those observed during thefinancial crisis in 2008.The latest figure, however, indicates that the sentiment is againdeteriorating slightly. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 53Note: The figure shows leading indicators for the economic cycle sixmonths ahead.Two indicators are depicted. One derives from the ZEW (Zentrum fürEuropäische Wirtschaftsforschung) Eurozone expectation of economicgrowth and the other from OECD.The former is plotted in blue on the left hand axis and the latter is plottedin green on the right hand axis.The OECD updated its methodology for the calculation of the indicatorin April 2012 to use GDP as a reference series.Several European countries are facing continued economic downturn.Figure 2 shows the development in GDP in several large Europeancountries.Only in a few countries is the GDP back to pre crisis levels. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 54In several countries, GDP seems to be sloping downwards. Combinedwith deleveraging by the banking sector in Europe and the fiscalconsolidation path followed by major governments, growth prospects forseveral countries seem dim, at least in the short term.The fact that fiscal consolidation and bank deleveraging is occurring inmany countries at the same time increases the disruptive potential of thesituation.At the same time, there is little evidence of inflationary tendencies whichmight have been expected given the debates at the political level ongrowth oriented instruments and global fiscal expansionary policies.Figure 3 shows that overall inflation expectations are well anchored ataround 2% at a five year horizon. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 55Note: The figure shows the evolution of the rate of the 5 year EURinflation swap.It is noted that the swap rate is not adjusted for any inflation or other riskpremia.Combined with high levels of Government debt following the bankingcrisis which started in 2008, this situation has led European governmentbond yields to diverge further.Government bond yields are high compared to the last few years for manyEuropean countries and several currently show an increasing trend.LEGISLATIVE AND REGULATORY DEVELOPMENTSA number of legislative and regulatory developments have been reportedby 29 Members and Observers on the basis of an EIOPA survey onnational regulatory reforms which have been adopted in the second half of2011 and the first part of 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 56The volatility in the capital market and the turbulence experienced in theEurozone sovereign debt market are perceived as the major thrust of theregulatory and legislative changes reported by most of the respondingcountries.As a reaction to the impact of sovereign risk on the solvency positionof the insurance undertakings, in several countries changes were made inthe valuation approach to sovereign bonds (DE, DK, GR, IT).Supervisory engagement also included increasing the required frequencyof reporting of sovereign, banking and other asset class exposures byinsurance undertakings and groups (IE, LU, SI).To deeply explore potential risk concentration areas and marketvulnerabilities ad hoc risk analyses, legislative amendments and reportingrequests have been made (BE, FR, IT, PL).The composition of the asset portfolios held by insurance undertakingsand the asset allocation policies are closely monitored in many territories(BE, DE, EE, FR, GR, IE, IT, PL, RO) as well as the liquidity position(BE, CY, PT, PL, RO) as a consequence of higher lapse rates.Likewise in house Stress Test exercises were widely performed, or areplanned to be conducted in 2012, to assess the insurers’ ability to absorbadditional shocks as well as the impacts of relatively large movements inrisk factors using new stress test calculations, methodologies oradditional adverse financial contexts (EE, FR, FI, LU, NO, PL, CZ).Low yield valuation exercises are also considered to be a key instrumentto be further used to investigate financial weaknesses of the domesticmarket players.In this context, and in preparation of 2012 European stress testing, severalcountries have already launched or are planning to conduct a QIS5bisexercise over the current year.Following up on the regular and ad hoc monitoring of the solvency andcapital positions of undertakings, more than half of the responding _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 57countries reported the need to adopt additional supervisory measures toprevent or solve solvency strains.In few countries a need was seen to put in place targeted actions or torequest ad hoc data (EE, MT, SE) on the basis of concern over the highrisk profile of individual companies.This has broadly led to a review of the annual, quarterly or monthlyreporting packages (LU, LI, SE) which in some cases have also beenamended or newly implemented to allow an impact assessment of thenew prudential requirements to be adopted under the Solvency IIframework.Action plans to gradually implement the new prudential requirementshave already been initiated in the observed period (second half 2011 firsthalf 2012) and will be carried out over the year 2012 (DE, LI, MT, FR).These mainly consist in exercises for evaluating the preparedness andaffectedness of the industry by SII requirements, supported in somecountries by dedicated meetings and by on site visits carried out as part ofthe Internal Model pre application process and of the Solvency IIimplementation process.Similar programs, started before the observed period, are ongoing andbroadly performed in many other European jurisdictions.Developments in the European insurance sectorINSURANCE SECTOR DEVELOPMENTSOverall, the reported data from a sample of large European insurersindicates a slight worsening in profitability and solvency levels while newbusiness is quite sluggish for a significant number of reporting groups.Life insurance premiums have increased by only 3% on average thoughmore than half of the participating groups reported declining premiums.While in traditional life insurance, with a guarantee component,premiums declined by around 10% on average, unit linked life insurance _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 58recorded higher premiums (+3%).In non life business, premiums decreased on average by 2% while morethan half of the sample experienced higher premiums.The highest increases in premiums have been seen in marine / aviation /transport (+24%), while in credit /suretyship premiums shrank by 17%.Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 24 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (22 groups for 2011 data). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 59Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 24 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (22 groups for 2011 data).Overall profits of surveyed groups decreased from 2010 to 2011 – whenconsidering the median group, profits were some 17% lower.Return on equity also decreased (from 9.6% to 7.8% for the mediangroup) though the dispersion especially on the lower end of thedistribution was significantly lower in 2011 than in 2010. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 60Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 28 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (25 groups for 2011 data).Though 2011 was characterised by a large number of unusually costlynatural catastrophes, profitability of the large non life insurance groupsdid not deteriorate: Net claims incurred grew less than net premiums socombined ratios were quite stable.Overall, it declined from 99% to 97%. Also this trend was observed for amajority of surveyed groups. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 61Source: EIOPA, based on worldwide consolidated financial informationreceived from a sample of 22 large European insurance groups from AT,CH, DE, ES, FR, IT, NL, SE and UK (18 groups for 2011 data).LOCAL MARKET DEVELOPMENTSIn addition to the quantitative answers based on the fast track reportingsummarised above, members have provided qualitative assessments ofmarket conditions, key aspects of the life and non life insurance sectors,and the main risks and challenges as they are observed in local markets.In EIOPA’s view the insurance sector across Member States appears tobe generally resilient.In spite of adverse market conditions and sluggish economy, life and nonlife companies are sufficiently capitalised in terms of solvency ratiosfollowing the current regime.A large group of Members reported that solvency ratios in their nationalmarkets suffered end 2011 from decreases in market valuation andsovereign debt crisis, however, some insurers have already recapitalisedand others announce to do it during the year 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 62Overall, in the majority of the Member States (DE, DK, ES, FR, IT,UK) a stabilisation in the upcoming 6 to 12 months is expected.In a significant number of Member States a decline in gross premiums inthe life sector has been observed recently, primarily due to the sluggisheconomic activity in some countries.Continued high unemployment also makes it difficult financially formany individuals to purchase new products.In addition, in some Member States the demand for classical lifeinsurance products decreased slightly compared to last year which maybe somehow related to the trend in many Member States to marketingtowards unit linked or zero guarantee products.While a few Member States report slight improvements in financial resultsof life and non life companies, in most Member States, insurers wereaffected by adverse market conditions, low interest rates and by thesovereign debt crisis.Hence, lower returns on assets due to volatile financial markets, lowinterest rates, the sovereign debt crisis and the macroeconomicdownturn, are highlighted as the main causes for the mixed financialresults of the European life and non life sectors.In particular, the currently available information pointed out thatfinancial market developments during the second half of 2011 contributedto a deterioration of the solvency situation of the insurers in Europe,however, the sectors are reported to remain well capitalised.A number of key aspects and developments in the European life and nonlife insurance sectors have been reported by Members.As life insurers examine how to reduce the capital strains caused byguaranteed products, the prolonged low interest rate environment willdepress the yields for new cash flow and maturing bonds. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 63Therefore there is an increased trend in many Member States (DE, FI,NO, SE, UK) towards marketing unit linked or zero guarantee products.A particular issue pertains to the lapse rates which deteriorate in some ofthe Member States (AT, BE, FR, IT) which may be somehow related toweak macroeconomic environment.In particular in some Member States were observed higher lapse ratesduring the last quarter of 2011 but latest information available point out toa decrease (FR) or a stabilisation in 2012 (AT, BE, IT, SE).In terms of assets held by insurance companies, in a few Member States,insurers determined concentration limits for asset management, reducingexposures to or even banning euro peripheral sovereign.Furthermore, in the majority of Member States most insurers wrote downthe value of Greek government bonds in the second quarter.In a large group of Member States there has also been an allocation fromperipheral low graded government bonds to higher graded governmentbonds, equity and high graded non financial corporate bonds (DE, FR,UK, FI, NO). Moreover, in a few Member States it is expected thatinsurers shorten maturities, hold cash and favour liquid assets (FR, IT).Risk and ChallengesThe overarching and somewhat interconnected risk themes, which havebeen on the economic agenda for some time now, remain mainlyunchanged:(i) sovereign risk;(ii) the low yield environment, and the risk of not meeting issued interestrate guarantees; and(iii) the search for yield and the additional risk assumed in this process. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 64Emerging themes may well follow on the back of these three well knownrisk factors.The list could contain events such as further developments in thesovereign bond markets in Europe, renewed strains on the bankingsector, further deterioration of the US economy and fiscal budget,imbalances and further uneven growth rates within the euro areaeconomies and following political and macroeconomic risks.SUPERVISORY RISK ASSESSMENT FOR THEINSURANCE SECTORAs regards the risk themes highlighted by Members, some of the riskfactors which are affected more for adverse financial markets conditionsand a weaker economic environment are seen now to be more relevant.The risks expected to increase: sovereign, property and credit tocorporates and households emerge simultaneously in a sluggisheconomic environment such as Europe experienced in the past months.Moreover, in an environment where government yields are located at lowlevels, interest rate guarantees become hard to fulfil.Furthermore, as a result of a weak economic recovery, the remainingeconomy and industrial enterprises face difficulties, and the averagecredit rating of governments and industrial corporations would thereforedeteriorate.Hence, investment opportunities in lower rated investment vehicles, suchas, for example, sub investment grade bonds, increase in supply, makingit relatively easier for insurance companies to engage in suchinvestments.As highlighted by several Members, it is important to be vigilant and tocontain and monitor these risks described above.Otherwise, it can be envisaged that weaker capitalised insurancecompanies could suffer unsustainable losses from their investmentactivities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 65Indeed, macroeconomic conditions indicate that 2012 will likely beanother year in Europe of low GDP growth, low interest rates andmoderate equity market performance.Even if the economic recovery continues, insurers may find that the assetsunderpinning their balance sheets have decreased in value.EIOPA Members and Observers have been asked to assess risks andchallenges according to the probability of a materialisation and theimpact on the national insurance markets.While for the Autumn 2011 EIOPA Financial Stability Report a morecomprehensive list of 45 risks and challenges is used as the basis for therisk assessment, many of them being of a structural nature, the list used inthe this Spring Report is primarily focussed on market and credit risks.Based on the responses from 29 Member States4, the following risks andchallenges are classified as the most imminent, ranked by the product ofthe scores for probability and potential impact.Sovereign risk, equity risk, low interest rates as well as credit risk of banksare the risks with highest overall rankings.Especially the first of these items is considered to have an increasedprobability of materialisation and also the impact of such a scenario isexpected to be significant. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 66Over the last six months eight of the 10 risks mentioned above haveincreased according to the feedback of national supervisors.The highest increases are reported with regard to equity risk, propertyrisk and liquidity risk.On the contrary, natural catastrophes and currency risk are consideredto be stabilised compared with data from six months ago.For the next six months three risks are expected to increase further, dueto turbulences in the financial markets and as a consequence of a sluggisheconomy, e.g. credit risk on sovereigns, property risk and credit risk tocorporates and households.Conversely, interest rate risk related to aprolonged period of low interest rates is expected to decrease slightly. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 67Developments in the European reinsurance sectorMAJOR LOSS EVENTS IN 2011 AND AT THE BEGINNINGOF 2012The year 2011 has set new records.At about USD 380bn, global economic losses far surpassed 2005, theprevious record year with losses of USD 220bn and make 2011 a year ofunprecedented losses.Original insured losses totalled USD 105bn, slightly more than 2005´sUSD 101bn (in original values).The most destructive loss event of the year 2011 was the devastatingearthquake of 11 March in Tohoku, Japan, which alone (including thetsunami and without considering the consequences of the nuclearaccident) accounted for overall losses of USD 210bn and insured losses ofabout USD 35bn - 40bn.It was the costliest natural catastrophe of all times and the strongestearthquake (magnitude of 9.0) ever recorded in Japan.The earthquake was also the most severe natural catastrophe in 2011relating to fatalities: 15,840 people were killed, roughly more than the halfof all people who have been victims of natural catastrophes in 2011.However, the figure does not include the countless people who died as aresult of the famine following the worst drought in decades on the Hornof Africa, which was the greatest humanitarian catastrophe of the year2011.The second most expensive natural catastrophe in 2011 for the insuranceindustry was again a very severe earthquake.On 22 February, New Zealand´s second largest town, Christchurch, waspartly destroyed by an earthquake with a magnitude of 6.3, which causedinsured losses of about USD 13bn and overall losses of roughly USD 16bn. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 68These two large earthquakes were responsible for making geophysicalevents the dominant loss drivers in 2011.Nearly two thirds of economic losses and about half the insured lossesstemmed from geophysical events.The long term average contribution of geophysical events has been just22% of the economic losses and only 10% of the insured losses.So 2011 was exceptional not only due to its extraordinarily high losses, butalso because of significant deviations of the distribution of the losses tothe different perils.Since the hurricane season was relatively harmless the storm relatedinsured losses reached only 37% of all insured losses in 2011 comparedwith 76% in the long term average.Again, untypically, more than 50% of all insured storm losses stemmedfrom devastating thunderstorms and tornado outbreaks in the USA whichaccounted for an absolute record of insured losses of about USD 26bn.A further record in 2011 represents the flooding in Thailand.With overall losses of about USD 40bn and insured losses of about USD10bn the flooding in Thailand was not only by far the country´s mostexpensive catastrophe to date, but also the world´s most expensive flooddisaster. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 69A prominent role played the increased importance of Thailand regardingthe global manufacturing supply chains.A large number of key component manufacturers were affected by theflooding, leading to production delays and disruptions at clientbusinesses.As a consequence insured losses caused by production disruptions soaredup.So, despite the dominant geophysical events in 2011, the weather relatedevents in total were also very severe, leading to the second highest valuesrecorded since 1980 in terms of overall and insured losses (in 2011currency units).Even without the earthquakes, 2011 would have been an extremenatural catastrophe year.Moreover, the distribution of insured losses between the continents in2011 was also exceptional.Asia accounted for 44% of all insured losses, whereas North America andEurope together accounted for fewer than 40% in 2011 contrary to the longterm average of more than 85% of all insured losses.The absence of major loss events in the Western developed countries witha high insurance density left the insured losses in relation to the overalllosses at a low level and is one major reason why overall the rates onlyincreased relatively modest in spite of the heavy losses in 2011.By contrast, loss activity during the first three months of 2012 has beenrelatively light.Insured losses during the quarter are expected to be less than USD 5bn,significantly lower than losses of over USD 50bn in the first three monthsof 2011. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 70The sinking of the cruise ship Costa Concordia, regional tornadooutbreaks in the US and earthquakes in Mexico and Chile were the mostsignificant losses that occurred in the first quarter of 2012.Despite the heavy losses of 2011, the reinsurance market continues tofunction normally and has sufficient capital.At the end of 2011, the reinsurance capacity was only three percent underthe level of 2010.The renewals in January and April reveal that sufficient capacity wasavailable in the market in spite of the heavy losses and the challengingmacroeconomic environment (particular low investment yields andincreased investment volatility).Several years of relatively benign payouts as well as the recovery offinancial markets had led to reinsurance capacities substantially over thedemand, which depressed the prices.Consequently the rates did not riselargely, which is very different from other post loss markets.There are, of course, some marked increases in reinsurance prices in theregions and segments affected by losses, especially regarding the AsiaPacific region.But overall the rates have gone up only modestly, last but not least due tothe extensive absence of major loss events in Europe and North America.Particularly the demand for reinsurance in the US, where reinsurancedemand far exceeds that of any other region, continues to be verysensitive to price.The 2011 hurricane season was relatively harmless.The model version changes (RMS v.11) were often already reflected inunderwriting processes to varying degrees based on previous lossexperience with the result of a less increased demand for reinsurance thanexpected earlier.Annex 1: Country abbreviations _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 71AT AustriaBE BelgiumBG BulgariaCY CyprusCZ Czech RepublicDE GermanyDK DenmarkEE EstoniaES SpainFI FinlandFR FranceGR GreeceHU HungaryIE IrelandIS IcelandIT ItalyLI LiechtensteinLT LithuaniaLU LuxembourgLV LatviaMT MaltaNL NetherlandsNO NorwayPL PolandPT PortugalRO RomaniaSE SwedenSI SloveniaSK SlovakiaUK United KingdomCH Switzerland _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 72NUMBER 4The translation (Japanese to English) is ready!Insurance Inspection Manual(Inspection Manual for Insurance Companies)Points of Attention for Inspections with Use of This Manual(1) This inspection manual shall apply to all insurance companies,including the overseas offices of Japanese insurance companies (overseasbranches, locally incorporated entities, representative offices, etc.provided however, that the determination of whether to include theseoffices in the inspection subject to this manual shall be judged in view ofapplicable laws and regulations, including the local regulatoryframework), as well as Japanese branches of foreign insurancecompanies, etc. and specified corporations.(2) When the insurance company is a company with a committee system,inspections shall be conducted from the viewpoint of whether the Boardof Directors, committees (such as the nomination, compensation, andaudit committees), executive officers, and other corporate structuresexercise their empowered authority, etc., paying attention to the followingpoints:- 1) The authority to execute business is bestowed on executive officers, and in principle, directors do not have the authority to execute business.- 2) The Board of Directors may delegate, by resolution, the authority to make business decisions to executive officers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 73- 3) The purpose of the Board of Directors is to supervise the execution of the respective duties performed by directors and executive officers.- 4) Auditing authority is bestowed on the audit committee, and not on individual audit committee members. (Audit committee members appointed by the audit committee may exercise the authority of the audit committee.)(3) In the case where an executive director (non-director) assumes theroles and responsibilities that would normally be assumed by a director incharge of a specific business operation, it is necessary to conduct acomprehensive review as to whether the Board of Directors has assignedthe officer authority similar in effect to that which would be granted to adirector in charge, whether the focus of the responsibility is made clear,and whether the Board of Directors sufficiently monitors the execution ofthe relevant business operation.Based on the findings thereof, the inspector should determine whetherthe executive officer is performing the roles and responsibilities requiredfor a director in charge, as specified in the checklists of this manual.(4) Furthermore, when due to certain special reasons, it is necessary toconduct an inspection of subsidiaries, etc., of insurance companies orparties conducting business on their behalf, examinations as may berequired shall be conducted in accordance with the applicable sectionsof this manual.(5) Unless specified otherwise, items expressed in the question form suchas “does the company…” or “is the company…” refer to requirementsthat must be met by insurance companies.Meanwhile, items preceded by “It is desirable…” refer to best practicesrecommended for insurance companies, unless specified otherwise.With regard to items accompanied by “for example,” insurancecompanies are not required to fully comply letter-by-letter with thecriteria and requirements specified therein. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 74They are merely examples of items that may be useful for checkingwhether insurance companies are meeting certain criteria andrequirements, in a manner befitting the scale and nature of their business.(6) The following are definitions and uses of some of the key terms in thismanual- 1) Items that are defined as roles of “the Board of Directors” are items for which the Board of Directors itself needs to determine substantial matters related thereto. However, this shall not preclude another deliberative body, division or department from discussing draft proposals for decision.- 2) The “Board of Directors or organization equivalent to the Board of Directors” includes, in addition to the Board of Directors, other entities that decide matters concerning corporate management, with the participation of senior managers such as a council of managing directors and a corporate management council (hereinafter referred to as the “Council of Managing Directors, etc.”). It is desirable that decisions concerning items specified as the prerogatives of the Board of Directors or organization equivalent to the Board of Directors be made by the Board of Directors itself. In the case where the decision - making authority is delegated to the Council of Managing Directors, etc., it is necessary to make sure that the delegation has been made in a clear manner, that a follow-up review is provided for through the compilation of the minutes of meetings of the Council of Managing Directors, etc., and that a sufficient check-and-balance system is ensured, through arrangements such as requiring reports to be made to the Board of Directors, and allowing corporate auditors to attend meetings of the Council of Managing Directors, etc.- 3) The “business locations” refers to organizations, other than the head office, which includes branches, regional offices, business line _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 75 headquarters, business offices, overseas branches, and overseas corporations. The term “business locations, etc.” refers to business locations, and also includes service centers (including loss investigation operations), overseas representative offices and other locations that are not engaged in sales activities, and business locations other than the head office.- 4) The “manager” refers to persons in senior managerial positions in management divisions (including directors). Furthermore, the term also refers to the head of a business location, or senior managers thereof (including directors) with levels of responsibility equivalent to or higher than the head of a business location.- 5) The “employees, etc.” refers to employees, sales representatives, and insurance agents of insurance companies.- 6) The “insurance sales representatives” refers to sales representatives and insurance agents, but does not include insurance brokers.- 7) The “policyholders” refers to persons who are parties to insurance contracts with insurance companies.- 8) The “policyholders, etc.” refers to policyholders, insured persons, and beneficiaries.- 9) “Internal rules” are rules that specify arrangements on an insurance company’s business in accordance with its corporate management policy, etc. that are applicable within the company. It should be noted that internal rules do not necessarily have to specify detailed procedures.- 10) The “marketing and sales division” refers to a division, department, or business location engaged in sales business. For _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 76 example, a division involved directly or indirectly in sales or engaged in sales promotion planning is a marketing and sales division.- 11) The “legal checks, etc.,” which includes a compliance check, means, for example, a validation of the consistency and compatibility of internal rules and the legality of transactions and business operations by personnel in charge of legal affairs, a division in charge thereof, personnel in charge of compliance, the compliance control division, and in-house or outside lawyers and other experts.- 12) “Monitoring” refers to not only surveillance but also implementation of specific pre-emptive measures such as issuing warnings.- 13) The “risk profile” of a financial institution refers to the sum of features of various risks to which the institution is exposed.Checklist for Business Management (Governance) (for BasicElements)Checkpoints- In order to protect customers by ensuring the sound and appropriatemanagement of business and fairness of insurance solicitation of aninsurance company, under appropriate governance, thoroughimplementation of legal compliance, proper insurance solicitation andcustomer protection, and accurate management of various risks across allbusinesses of the insurance company are needed.- In order to enable an insurance company to conduct businessmanagement (governance) effectively, officers and employees, as well asorganizations within the company must perform their respective roles andresponsibilities.To be more specific, directors and other executives are responsible fornurturing work ethics and cultivating a company-wide culture thatattaches importance to internal control. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 77The representative directors, non-representative directors and corporateauditors must understand their own roles in the various processes ofinternal control and fully involve themselves in the processes.Also, it is important that the Board of Directors and the Board of Auditorsfunction effectively and that the functions of a check-and-balance systemamong divisions and departments, and the functions of internal audits bythe Internal Audit Division are executed appropriately.- The inspector should determine whether the insurance company’sbusiness management (governance) system is functioning effectivelythroughout the institution and whether the management is performing itsroles and responsibilities appropriately by way of reviewing, with the useof the check items listed in this checklist, the effectiveness of thefunctions of five basic elements, namely a system of(1) Business management (governance) by the representative directors,non-representative directors and the Board of Directors,(2) Internal audits,(3) Audits by corporate auditors,(4) External audits, and(5) Checking by actuaries.- If the insurance company’s management fails to recognize weaknessesor problems recognized by the inspector, it is also necessary to explore, inparticular, the possibility that the Internal Control System is notfunctioning effectively, and review the findings thereof through dialogue.- The inspector should review the status of improvements with regard tothe major issues pointed out on the occasion of the last inspection anddetermine whether or not effective improvement measures have beendeveloped and implemented.Checklist for Legal ComplianceCheckpoints _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 78- The development and establishment of a legal compliance system is oneof the most important tasks for an insurance company in order to securethe sound and appropriate management of its business.Therefore, the company’s management is charged with and responsiblefor taking the initiative in developing and establishing the legalcompliance system that covers the company’s entire business by decidinga basic policy on legal compliance and developing an organizationalframework, etc..- The inspector should determine whether the legal compliance system isfunctioning effectively and whether the roles and responsibilities of theinsurance company’s Board of Directors are being appropriatelyperformed by way of reviewing, with the use of check items listed inChapter I., whether the management is appropriately implementing(1) Policy development,(2) Development of internal rules and organizational frameworks and(3) Assessment and improvement activities.- If any problem is recognized as a result of reviews conducted with theuse of the check items listed in Chapter II and later in this checklist, it isnecessary to exhaustively examine which of the elements listed inChapter I are absent or insufficient, thus causing the said problem, andreview findings thereof through dialogue between the inspector and theinsurance company.- If the company’s management fails to recognize weaknesses orproblems recognized by the inspector, it is also necessary to explore inparticular the possibility that the Internal ControlSystem is not functioning effectively and review findings thereof throughdialogue.- The inspector should review the status of improvements with regard tothe issues pointed out on the occasion of the last inspection that are notminor and determine whether or not effective improvement measureshave been developed and implemented. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 79To read morehttp://www.fsa.go.jp/en/refer/manual/hoken_e/h-all.pdf _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 80NUMBER 5ICECOOL TO CRACK THERMAL MANAGEMENTBARRIER, ENABLE BREAKTHROUGH ELECTRONICSJune 07, 2012New DARPA program seeks to cool chips, chip stacks fromwithinThe continued miniaturization and the increased density of componentsin today’s electronics have pushed heat generation and power dissipationto unprecedented levels.Current thermal management solutions, usually involving remotecooling, are unable to limit the temperature rise of today’s complexelectronic components.Such remote cooling solutions, where heat must be conducted away fromcomponents before rejection to the air, add considerable weight andvolume to electronic systems.The result is complex military systems that continue to grow in size andweight due to the inefficiencies of existing thermal managementhardware.Recent advances of the DARPA Thermal ManagementTechnologies (TMT) program enable a paradigm shift — better thermalmanagement.DARPA’s Intrachip/Interchip Enhanced Cooling (ICECool) programseeks to crack the thermal management barrier and overcome thelimitations of remote cooling. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 81ICECool will explore ‘embedded’ thermal management by bringingmicrofluidic cooling inside the substrate, chip or package by includingthermal management in the earliest stages of electronics design.“Think of current electronics thermal management methods as thecooling system in your car,” said Avram Bar-Cohen, DARPA programmanager.“Water is pumped directly through the engine block and carries theabsorbed heat through hoses back to the radiator to be cooled.By analogy, ICECool seeks technologies that would put the cooling fluiddirectly into the electronic ‘engine’.In DARPA’s case this embedded cooling comes in the form ofmicrochannels designed and built directly into chips, substrates and/orpackages as well as research into the thermal and fluid flowcharacteristics of such systems at both small and large scales.”The ICECool Fundamentals solicitation released today seeks proposalsto research and demonstrate the microfabrication and evaporative coolingtechniques needed to implement embedded cooling.Proposals are sought for intrachip/interchip solutions that bringmicrochannels, micropores, etc. into the design and fabrication of chips.Interchip solutions for chip stacks are also sought.“Thermal management is key for advancing Defense electronics,”said Thomas Lee, director, Microsystems Technology Office.“Embedded cooling may allow for smaller electronics, enabling a moremobile, versatile force.Reduced thermal resistance would improve performance of DoDelectronics and may result in breakthrough capabilities we cannot yetenvision.”THERMAL MANAGEMENT TECHNOLOGIES (TMT)Significant enhancements in fundamental device materials, technologiesand system integration have led to rapid increases in the total powerconsumption of DoD systems. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 82In many cases, power consumption has increased while system size hasdecreased, leading to an even greater problem with heat density.Thermal management of DoD systems often imposes the main obstacleto further enhancements.The overarching goal of the DARPA Thermal Management Technologies(TMT) Program is to explore and optimize new nanostructured materialsand other recent advances for use in thermal management systems.The program is divided into five technical efforts:o Thermal Ground Plane (TGP)o Microtechnologies for Air-Cooled Exchangers (MACE)o NanoThermal Interfaces (NTI)o Active Cooling Modules (ACM)o Near Junction Thermal Transport (NJTT)The TGP effort is focused on high-performance heat spreaders which usetwo-phase cooling to replace the copper alloy spreaders in conventionalsystems.The goal of the MACE effort is to enhance air-cooled exchangers byreducing the thermal resistance through the heat sink to the ambient,increasing convection through the system, improving heat sink finthermal conductivity, optimizing and/or redesigning the complimentaryheat sink blower, and increasing the overall system (heat sink and blower)coefficient of performance.The NTI effort is focused on novel materials and structures that canprovide significant reductions in the thermal resistance of the thermalinterface layer between the backside of an electronic device and the nextlayer of the package, which might be a spreader or a heatsink. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 83ACM will investigate active cooling of electronic devices usingtechniques such as thermoelectric coolers, sterling engines, etc.The goal of the Near Junction Thermal Transport (NJTT) effort of theTMT program is to achieve a 3x or greater improvement in powerhandling from GaN power amplifiers through improved thermalmanagement of the near junction region.Collectively, research in these areas will improve thermal resistancebarriers at all layers of all DoD systems.At the completion of these efforts, targeted insertions of specific TMTstructures into DoD platforms will lead to further developments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 84NUMBER 6UCITS Management CompaniesThe Omnibus Directive requires ESMA to establish a list allauthorisations granted to UCITS management companies in theEuropean Union.ESMA is currently working on the IT solution to establish this list on itswebsite. The list will centralise all the relevant information in this regardreceived from all national competent authorities.As a temporary solution, the list below contains hyperlinks to thewebpages of the EU countries and their national competent authoritiesgiving access to national registers that contain the list of authorisedUCITS management companies.ESMA draws users attention to the fact that some hyperlinks do not givedirect access to the list of UCITS management companies authorised.Also, investors should note that for some competent authorities theinformation is only available in the national language.Austria (Finanzmarktaufsicht – FMA)German link:http://www.fma.gv.at/de/unternehmen/suche-unternehmensdatenbank.htmlEnglish link:http://www.fma.gv.at/en/companies/search-companies.html _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 85Belgium (FSMA)Dutch link:http://www.fsma.be/nl/Supervision/finbem/bhv/Article/lijsten/bhv1.aspxFrench link:http://www.fsma.be/fr/Supervision/finbem/bhv/Article/lijsten/bhv1.aspxBulgaria (Financial Supervision Commission)http://www3.fsc.bg/ERiK/runner?lang=BGCyprus (Cysec)Non applicableCzech Republic (Czech National Bank – CNB)Czech link:https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_l...English link:https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_l...Denmark (Finanstilsynet)Danish link:http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-...English link:http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-... _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 86Estonia (Estonian Financial Supervision Authority)http://www.fi.ee/index.php?id=1784Finland (Finanssivalvonta)Finish link:http://www.finanssivalvonta.fi/fi/Fiva/Valvottavat/Pages/Valvottavat.aspxSwedish link:http://www.finanssivalvonta.fi/se/FI/Tillsynsobjekt/Pages/Tilsynsobjekt....English link:http://www.finanssivalvonta.fi/en/About_us/Supervised/Pages/superviseden...France (Autorité des marchés financiers – AMF)http://www.amf-france.org/bio/default.aspx?lang=fr&Id_Tab=0Germany (BaFin)http://www.bafin.de/cln_117/nn_724052/DE/Unternehmen/Fonds/Investmentfon...Greece (Hellenic Capital Market Commission)http://www.hcmc.gr/pages/aedak.asp?catID=113Hungary (Hungarian Financial Supervisory Commission)http://www.pszaf.hu/data/cms547573/hataronatnyulo_bef_alapkezelok_2012_0... _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 87Iceland (Financial Supervisory Authority – Fjármálaeftirlitið)http://fmeenvefur.eplica.is/supervision/supervised-entities/Ireland (Central Bank of Ireland)http://registers.financialregulator.ie/DownloadsPage.aspxItaly (Consob)http://siotec.bancaditalia.it/sportelli/jsp/layout/home.jsp?detail=inter.Latvia (Financial and Capital Market Commission)Latvian link:http://www.fktk.lv/lv/tirgus_dalibnieki/ieguldijumu_parvaldes_sabiedri/English link:http://www.fktk.lv/en/market/investment_management_companie/investment_m...Liechtensteinhttp://register.fma-li.li/fileadmin/user_upload/dokumente/publikationen/...Lithuania (Central Bank of Lithuania)Lithuanian link:http://www.lb.lt/valdymo_imones?pg=valdymo_imones_licencijuotos_lietuvojeEnglish link: http://www.lb.lt/management_companiesLuxembourg (CSSF) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 88http://www.cssf.lu/entites-surveillees/Malta (Financial Services Authority)http://mfsa.com.mt/pages/licenceholders.aspxNetherlands (AFM)Dutch link:http://www.afm.nl/nl/professionals/registers/alle-huidige-registers.aspx?type={883BCFF1-0F26-442F-9FAF-A39FF911B109}&amp;filter1=1English link:http://www.afm.nl/en/professionals/registers/alle-huidige-registers.aspx?type={883BCFF1-0F26-442F-9FAF-A39FF911B109}&filter1=1Norway (Finanstilsynet)Norwegian link:http://www.finanstilsynet.no/no/Venstremeny/Konsesjonsregister/English link:http://www.finanstilsynet.no/en/Secondary-menu/Finanstilsynet-registry/Poland (Polish Financial Supervision Authority)Polish:http://www.knf.gov.pl/dla_rynku/PODMIOTY_rynku/Podmioty_rynku_kapitalowe...English:http://www.knf.gov.pl/en/about_the_market/Capital_market/entities/Invest...Portugal (Comissão do Mercado de Valores Mobiliários –CMVM) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 89http://web3.cmvm.pt/english/sdi2004/IFs/app/ifs_por_tipo.cfm?gr_tab_cod=...Romania (Romanian National Securities Commission –CNVM)http://www.cnvmr.ro/RCNVM/index.htmSlovak Republic (Central Bank of Slovakia)Slovak link:http://www.nbs.sk/sk/dohlad-nad-financnym-trhom/dohlad-nad-trhom-cennych...English link:http://www.nbs.sk/en/financial-market-supervision/securities-market-supe...Slovenia (Securities Market Agency – Agencija za trgvrednostnih papirjev)Slovenian link:http://www.a-tvp.si/Default.aspx?id=101English link:http://www.a-tvp.si/Eng/Default.aspx?id=101Spain (Comisión Nacional del Mercado de Valores - CNMV)www.cnmv.es/Portal/Consultas/Busqueda.aspx?id=23Sweden (Finansinspektionen)Swedish link:http://www.fi.se/Tillstand/Foretagsregistret/Foretagsregistret-Foretag-per-kategori/?typ=FONDBO _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 90English link:http://www.fi.se/Folder-EN/Startpage/Authorisation/Company-register/Company-register-Company-per-category/?typ=%27FONDBO%27United Kingdom (Financial Services Authority – FSA)http://www.fsa.gov.uk/register/home.do _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 91NUMBER 7PCAOB to Host Public Meeting on Auditor Independence andAudit Firm Rotation in San FranciscoWashington, D.C., June 12, 2012The Public Company Accounting Oversight Board announced today thatit will host its second public meeting to discuss ways to enhance auditorindependence, objectivity, and professional skepticism, includingthrough mandatory rotation, or term limits, for audit firms.The meeting will be held ***Thursday, June 28, 2012, in San Francisco,CA***.The Board issued a concept release on Aug. 16, 2011, thatinvited commenters to discuss measures that might meaningfullyenhance auditor independence, objectivity and professional skepticism.The release included a number of questions related to mandatory auditfirm term limits, such as whether the PCAOB should consider a firmrotation requirement for audit tenures of more than 10 years, or for thelargest issuer audits only."This is a complex subject that raises important issues about how tofulfill the audits core purpose," said PCAOB Chairman James R. Doty."I look forward to building upon the constructive discussion started withthe comments received on the PCAOB concept release and the publicmeeting in Washington earlier this year." _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 92The first public meeting on auditor independence and audit firm rotationwas held March 21-22, 2012 in Washington, D.C., and a webcast can beviewed on the PCAOB website.The San Francisco meeting will consist of panel discussions, duringwhich panelists will be invited to present their views on the matters raisedin the concept release and board members will have the opportunity toask panelists follow-up questions.The schedule and list of panelists will be made available closer to themeeting date.The meeting will be held at the Hilton San Francisco Financial District,750 Kearny Street, San Francisco, CA 94108.It will be open to the public, and also available via webcast on the PCAOBwebsite. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 93NUMBER 8Subject: LiquidityDate: June 8, 2012Description: Comptroller’s Handbook Revisions andRescissionsThe Office of the Comptroller of the Currency (OCC) recently revised the“Liquidity” booklet of the Comptroller’s Handbook, which replaces asimilarly titled booklet issued in February 2001.This revised booklet provides updated guidance to examiners andbankers on assessing the quantity of liquidity risk exposure and thequality of liquidity risk management.The major revisions to this booklet include the following:  Narrative more heavily focused on management of liquidity, including o Emphasis on the importance of maintaining appropriate levels of highly liquid assets, and o Enhanced discussion regarding the importance of a well-developed planning process for contingency funding.  Additional guidance—particularly for those examiners responsible for examining large and internationally active banks—from the September 2008 “Principles for Sound Liquidity Risk Management and Supervision,” issued by the Basel Committee on Bank Supervision and formally adopted by the OCC and other U.S. banking regulatory agencies.  Addition of eight appendixes providing specific guidance to examiners and bankers on a variety of topics and examples of fundamental liquidity management reports. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 94In accordance with the OCC’s supervision-by-risk approach, examinerswill generally use the liquidity core examination procedures, which canbe found in the 2010 “Community Bank Supervision” booklet and the2010 “Large Bank Supervision” booklet in the Comptroller’s Handbook.Examiners will supplement the procedures listed in these booklets, asappropriate, with the updated procedures detailed in the “Liquidity”booklet, for additional analysis of liquidity risk.With the issuance of this guidance, the following Office of ThriftSupervision guidance pertaining to liquidity risk is hereby rescinded:  Examination Handbook: Liquidity o Section 510, “Funds Management” (and related program) o Section 530, “Liquidity Risk Management” (and related program and appendixes) o Section 560, “Deposits/Borrowed Funds” (and related program and questionnaire)  Chief Executive Officer Memo #295, “Monitoring and Documenting the Use of Funds from Federal Financial Stability and Guaranty Programs”The OCC’s “Funds Management” booklet of the Comptroller’sHandbook has also been rescinded, effective immediately.OCC Advisory Letter 2001-5, “Brokered and Rate-Sensitive Deposits,”has been rescinded, while the “Joint Agency Advisory on Brokered andRate-Sensitive Deposits” has been incorporated into the “Liquidity”booklet as an appendix. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 95LiquidityComptroller’s HandbookJune 2012This booklet provides guidance to examiners and bankers on assessingthe quantity of liquidity risk exposure and the quality of liquidity riskmanagement.The sophistication of a bank’s liquidity management process depends onits business activities and appetite for risk, as well as the overall level ofliquidity risk.A well-managed bank, regardless of size and complexity, must be able toidentify, measure, monitor, and control its exposure to liquidity risk in atimely and comprehensive manner.Liquidity core procedures can be found in the Community BankSupervision Handbook (January 2010) and in Examiner View (EV).This handbook provides examiners with supplemental procedures forfurther analyzing the quantity and quality of liquidity risk.Examiners should refer to the Bank Supervision Process Handbook forfurther guidance on CAMELS Rating System.Additional guidance, particularly for those examiners responsible forexamining large and internationally active banks, is provided in theSeptember 2008 “Principles for Sound Liquidity Risk Management andSupervision,“ issued by the Basel Committee on Banking Supervision(BCBS) and formally adopted by the OCC and other U.S. bankingregulatory agencies in that same year.BackgroundTraditionally, banks have relied on local retail deposits (transaction andsavings accounts) to support asset growth. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 96Most retail deposit balances are federally insured, stable, and relativelyinexpensive. Funding dynamics at community, midsize, and large banks,however, have evolved over time.Technological advances in the delivery of financial products and services,the removal of interstate banking restrictions, and the deregulation ofinterest rates paid on deposit accounts changed both depositor andbanker behavior.Legislative reforms were intended to give depository institutions the toolsto compete with other market participants for deposits, but they alsoincreased competition among the banks themselves.The combination of these reforms and technological advances also madeit easier for depositors, looking for better returns on their money, to leavetheir local markets.Consequently, in some cases, retail bank deposit growth did not keeppace with asset growth.Some banks became reliant on alternative deposit, nondeposit, andoffbalance-sheet funding sources to cover the shortfall in traditional retaildeposit funding.Changes in technology, product innovation, and funding dynamics createnew challenges for liquidity managers.Intense competition and declining customer loyalty increase the ratesensitivity of traditional retail deposits.As banking customers are now using deposit accounts more astransaction vehicles than savings vehicles, thereby maintaining loweraverage excess balances, bankers can no longer rely upon historicallyinelastic depositor behavior.Thus, the reliance on alternative sources of funding from the wholesaleand brokered markets exposes banks to more rate and liquidity sensitivitythan the reliance on traditional retail deposits did. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 97Moreover, many banks have increased their use of products withembedded optionality on both sides of the balance sheet, which makes itmore challenging to manage the corresponding cash flows.Liquidity risk management systems and controls must keep pace withthese changes and added complexities.Given these changes in funding dynamics, liquidity management is morecomplex and requires a more robust risk management process.To effectively identify, measure, monitor, and control liquidity riskexposure, well-managed banks supplement traditional liquidity riskmeasures like static-balance-sheet ratios with more prospective analyses.Bankers and examiners should have, at a minimum, a soundunderstanding of a bank’s projected funding sources and needs under a variety of marketconditions. net cash flow and liquid asset positions given planned and unplannedbalance sheet changes. projected borrowing capacity under stable conditions and underadverse scenarios of varying severity and duration. highly liquid asset and collateral position, including the eligibility andmarketability of such assets under a variety of market environments. vulnerability to rollover risk. funding requirements for unfunded commitments over various timehorizons. projected funding costs, as well as earnings and capital positionsunder varying rate scenarios and market conditions.DefinitionLiquidity is a financial institution’s capacity to readily meet its cash andcollateral obligations at a reasonable cost. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 98Maintaining an adequate level of liquidity depends on the institution’sability to efficiently meet both expected and unexpected cash flows andcollateral needs without adversely affecting either daily operations or thefinancial condition of the institution.A bank’s liquidity exists in its assets readily convertible to cash, netoperating cash flows, and its ability to acquire funding through deposits,borrowings, and capital injections.By definition, liquidity risk is the risk that an institution’s financialcondition or overall safety and soundness is adversely affected by aninability (or perceived inability) to meet its obligations.An institution’s obligations, and the funding sources used to meet them,depend significantly on its business mix, its balance sheet structure, andthe cash flow profiles of its on- and off-balance sheet obligations.In managing its cash flows, an institution confronts various situationsthat can give rise to increased liquidity risk.These include funding mismatches, market constraints on the ability toconvert assets into cash or in accessing sources of funds (i.e., marketliquidity), and contingent liquidity events.Changes in economic conditions or exposure to credit, market,operational, legal, and reputation risks also can affect an institution’sliquidity risk profile and should be considered in the assessment ofliquidity and asset or liability management.In assessing a bank’s liquidity position, examiners should consider abank’s access to funds as well as its cost of funding.Depending on the current interest rate and competitive environments,undue reliance on wholesale or market based funding may increase abank’s cost structure.The cost of acquiring or renewing such funding is purely market driven,as opposed to rates paid on retail deposits, which may be set at _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 99management’s discretion within the parameters of local and nationalmarket conditions. Rising or high funding costs, especially in comparisonto peer and market rates, is a sign of potential liquidity problems.Importance of Liquidity ManagementLiquidity is the lifeblood of any institution, but it is particularly crucial tohighly leveraged entities such as banks.More broadly, the financial crisis beginning in 2008 demonstrated howliquidity problems and risks can be transmitted throughout the entirefinancial system.For all banks, the immediate and dire repercussions of insufficientliquidity makes liquidity risk management a key element in a bank’soverall risk management structure.The OCC expects all banks to manage liquidity risk with sophisticationequal to the risks undertaken and complexity of exposures.Critical elements of a sound liquidity risk management processestablished by the board include appropriate corporate governance and active involvement bymanagement. appropriate strategies, policies, procedures, and limits used to manageand control liquidity risk, even in stressed conditions. appropriate liquidity risk measurement and monitoring systems. active management of intraday liquidity and collateral. maintaining an appropriately diverse mix of existing and potentialfuture funding sources. adequate levels of highly liquid marketable securities, with no legal, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 100regulatory, or operational impediments, that can be used to meetliquidity needs in stressful situations. comprehensive contingency funding plans (CFP) sufficient to addresspotential adverse liquidity events and emergency cash flow needs. adequate internal controls surrounding all aspects of liquidity riskmanagement.Sources of LiquidityStructural changes in banks’ deposit bases have prompted banks to takeadvantage of improved access to wholesale and market-based fundingsources.Examples of alternative funding sources include federal funds lines,repurchase agreements (repos), correspondent bank lines, Federal HomeLoan Bank (FHLB) advances, Internet deposits, deposit-sharingarrangements, and brokered deposits.Access to these funds providers enables banks to meet fundingrequirements while still maintaining adequate funding diversification.Funds from the wholesale markets can be accessed at a variety of tenorsthat provide bankers with greater flexibility to manage their cash flowsand liquidity needs.On the other hand, too much reliance on wholesale and market-basedfunding sources elevates a bank’s liquidity risk profile.Bankers who are unfamiliar with wholesale funding markets may becomeoverly complacent during stable economic times.Funding through alternative sources exposes banks to the heightenedinterest-rate and credit sensitivity of these funds providers.Providers of wholesale funding often require a bank’s more liquid _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 101assets as collateral, which may impair the overall liquidity of a bank’sasset base.Further, if that collateral becomes less liquid, or its value becomesuncertain, wholesale funds providers may be unwilling to extend or rollover funding at maturity.A bank’s financial condition as well as market or systemic eventsunrelated to the institution may adversely affect the cost to a bank toacquire funds or its ability to access the wholesale markets.As a bank’s reliance on wholesale and market-based funding increases, soshould the quality of liquidity risk-management processes.These processes should include periodic assessments of a bank’sexposure to changes in market conditions, and a bank should developcorresponding risk control systems to accompany these assessments.Asset sales and securitization are also important sources of bank liquidity.Banks of all sizes have increased the use of asset sales and securitizationto access alternative funding sources, manage concentrations, improvefinancial performance ratios, and more efficiently meet customer needs.Some of these transactions, however, carry explicit recourse provisionswithin contractual documents, as well as the potential implied recourseassociated with a bank’s desire to maintain access to future funding byrepurchasing or otherwise supporting securitizations that exhibitperformance problems.As a result, examiners should be aware of situations in which banks mightoverestimate the risk transfer of sales and securitization or mayunderestimate the commitment and resources required to manage thisprocess effectively.Such mistakes may lead to highly visible problems during the life of atransaction that could impair future access to the secondary markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 102A bank’s role and level of involvement in asset sales and securitizationactivities determine the degree of risk to which it is exposed.Off-balance-sheet positions can serve as both a source of liquidity and apotential, sometimes unexpected, drain on liquidity.Banks with a substantial amount of unfunded loan commitments may berequired to fund such obligations unexpectedly and on short notice.Other off-balance-sheet commitments, such as legally binding andnonlegally binding support for securitizations, asset-backed commercialpaper conduits, and other market based funding vehicles, can affect abank’s liquidity position.In addition, collateral required for covering adverse mark-to-marketchanges in derivative hedging and trading activities may reduce the stockof liquid assets.Often, the fulfillment of nonlegally binding off-balance-sheetcommitments is necessary to preserve the reputation of the institution, aswell as to allow a bank continued access to that segment of the financialmarkets.On the other hand, off-balance-sheet activities may provide additionalsources for liquidity.Banks can supplement their liquidity position by maintaining lines ofcredit with correspondent banks or their respective FHLB.Sound liquidity management includes the analysis of and planning for theoperational and contingent sources and uses of funds associated withoff-balance-sheet activities.Relationship of Liquidity Risk to Other Banking RisksBankers and examiners must understand and assess how a bank’sexposure to other risks may affect its liquidity.The OCC defines and assesses eight categories of risk. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 103In addition to liquidity, these risk types include credit, interest rate, price,operational, compliance, strategic, and reputation.These categories are not mutually exclusive—any product or service mayexpose a bank to multiple risks—and a real or perceived problem in anyarea can erode a bank’s liquidity position or affect its funding costs,thereby increasing its liquidity risk.If a bank does not properly manage these exposures, the risks eventuallyundermine the institution’s liquidity position.Both the “Community Bank Supervision” and the “Large BankSupervision” booklets of the Comptroller’s Handbook discuss in detailthe OCC’s risk definitions and risk assessment process.To read more:http://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/liquidity.pdf _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 104 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 105 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 106NUMBER 9Interview with Gabriel Bernardino, Chairman of EIOPA,conducted by Silke Wettach, WirtschaftsWoche (Germany)Mr Bernardino, how much does EIOPA currently know aboutoccupational pensions in the EU?Bernardino: We currently have very little data from pension funds at theEuropean level.We don’t have a common language and national regimes considerablyvary from each other, which makes it even more difficult to havecomparable data for different countries.We cannot easily assess the sustainability of the funds and the soundnessof their promises.A common and transparent framework that ensures comparable datawould be extremely useful in this case.So how are you going to proceed with it?Bernardino: If we had comparable data we could conduct stress tests theway we already do for insurers.We have no scheduled date, but this is in our plans in the near future.What do you expect from the IORPs stress test? After the stress tests inthe banking sector the picture was insufficient.Bernardino: European pension funds manage in total 3 trillion EUR inassets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 107They are represented in assets everywhere which makes them relevant forthe economy and for the stability of our financial system.That is why EIOPA proposes to conduct annual stress tests for the bigpension funds at the European level.At the same time supervisory authorities should perform stress tests at thenational level.Smaller IORPs can be tested on a less frequent basis.What we want to know while conducting stress tests is where the futurevulnerabilities are? But here we are talking about a very long termperspective.With the banking stress tests there were a lot of national reflections.Nobody wanted to see national champions failing. Will the situation inoccupational pensions be different?Bernardino: We have now a very sensitive discussion on the pensions sideand it was expected.The truth must finally be put on the table.And how exactly does the truth look like?Bernardino: Occupational pensions are now under a great pressure.Everywhere be it Germany, the Netherlands or the UK population andlabour force are contracting.At the same time stock markets become very volatile and have a tendencyto go down.The long term interest rates are also decreasing. All this threatens thosepension promises that were made in the past.But if we deny the reality, we will not take any action. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 108And I am afraid that on the occupational pensions if we don’t act, wemight be heading towards an inter-generational conflict, when thepensions of future generations might be significantly reduced.What are policy holders going to face?Bernardino: It is quite simple: if I make a promise to pay based on acertain assumption and this assumption changes, then either I can payless or I request higher contribution.In the Netherlands we already witness the consequences: occupationalpension funds cut their payments because market interest rates are lowerthan it was originally anticipated.Are the Netherlands smarter than the others?Bernardino: Some countries are more transparent. And this is exactlywhat we require from others when we suggest a “holistic balance sheet”or an extended solvency balance sheet.Each employee will exactly know the risks he bears and which paymentshe will get. So such a reality+driven check+up would be beneficial foreverybody.Perhaps some funds are absolutely not interested that their true conditioncomes to light?Bernardino: Some funds discount long term liabilities with too highinterest rates.If you use more prudent and real discount rates they will report hugeunderfunding. And of course companies do not want that it comes out,but it is not a secret.How good are the funds’ managers?Bernardino: The quality varies and in any case it must be improved. Thecurrent low interest rates make IORPs search for interesting investments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 109And this makes it very important for fund managers not just to outsourceasset management.Those who, however, instruct a third party to invest in derivatives orstructured financial instruments, should at least have a thoroughunderstanding of the possible consequences.The industry expects that the EU is going to set up the same capitalrequirement for the IORPs as for the insurers. Is that correct?Bernardino: We do not want just to copy the requirements for insurers.However, let’s take a situation when a company has a pension plan andtransfers the risk to the IORP like it used to do with an insurancecompany.In this situation why can’t the same regulation be applied to the IORP?.But this should not be the case if pension funds act as investment vehiclesand their risk is taken by the company or a protection fund.Some German critics fear that the Commission´s plans could destroy theGerman system. Do you understand their fears?Bernardino: It is not our intention to destroy any kind of systems and ourgoal is not to design a perfect regulation, which makes occupationalpensions so expensive that nobody can afford them.But the worst scenario would be if those pension promises on whicheverybody counted, fail. This is why we must act. Ultimately, it is like thedebt crisis: it emerged not because people know little about economics,but because they were denying the reality. And this is always expensive. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 110NUMBER 1012 June 2012Speech by the Financial Secretary to the Treasury, Mark HobanMP; the CityUK Debate 2012-2020 and beyond: financialservicesGood morning and thank you for inviting me tospeak here today. It’s a pleasure to speak with, andalongside, so many leading policy makers andindustry leaders, and I’d like to thank CityUK fororganising this debate.At a time of such unprecedented change for thefinancial system, it is absolutely vital thatGovernments, regulators and companies continue towork together through these challenging times.We face the substantial, long term task ofstrengthening the financial system for the future, learning the lessonsfrom the recent years of financial and economic instability that haveaffected economies around the world.It’s only by doing so that we can ensure we build a platform from whichthe UK can build on its world leading strengths in financial services.Strengths which include London consistently ranking first in the GlobalFinancial Centres Index.Ranking as the most attractive destination in Europe for investmentaccording to Ernst & Young.A financial services sector that originates more cross-border bank lendingthan any other country, home to Europe’s largest Insurance and assetmanagement industries, and the world’s largest foreign exchange market. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 111And a sector that is home to over 250 branches and subsidiaries of foreignbanks, channelling more investment into the UK than any other sector.We are committed to maintaining and strengthening the UK’s role as theleading global financial centre because we know the vital role the sectorplays in our economy.Contributing one in every seven pounds of GDP.Employing over two million people in financial and related professionalservices firms across the UK.And helping UK companies raise almost £450 billion in funding since2005.The strength of the UK’s financial sector and our dependence upon itpresents us with a challenge which the Chancellor has called the Britishdilemma.How can we create a successful but stable financial services sector? Howcan we preserve the innovation that fuels the sector’s success withoutputting the wider economy at risk?Our answer to the British dilemma is to build a strong and proportionateregulatory regime.Safeguarding the stability of our financial sector as a foundation forsustainable growth, and protecting the competition and innovation thatdrives its success.I do not believe that strong and proportionate regulation is a hindrance tothe success of financial services in the UK, rather I think it is an essentialplatform for a successful global financial centre, ensuring that the UKremains an attractive destination for international business, a place wherebusinesses can trade with each other with confidence.So we are pursuing an ambitious programme of reforms to address thelessons of the financial crisis to safeguard London as a global financialsector.Central to this programme is reform of the regulatory architecture –abolishing the failed and discredited tripartite system of supervision. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 112In its place, a new Prudential Regulatory Authority, an independentsubsidiary of the Bank, will take responsibility for micro-prudentialregulation.And a new Financial Policy Committee, sitting within the Bank, willmonitor risks across the financial system. Its purpose will be to identifybubbles as they develop, spot dangerous interconnections across thesystem, and stop excessive levels of leverage before it’s too late.Together, these bodies will bring judgement and foresight to the task ofsupervision, rather than mere box ticking.At the same time it will also take into consideration the impact oneconomic growth when pursuing financial stability … not neglecting thefact that stability is itself a vital precondition of growth.The legislation to achieve this critical change in the way British bankingoperates had its second reading in the House of Lords yesterday and wehope to receive Royal Assent by the end of this year.And as well as ensuring the UK’s regulatory institutions are fit forpurpose, we are addressing the structural problems with the sector itselfthat caused so much trouble when the crisis hit.The UK is taking significant steps to improve bank resolvability andaddress the ‘too big to fail’ issue through the Independent Commissionon Banking, reforms that are ambitious in their scope and proportionatein their impact.We have already committed to implement the Commission’srecommendation to ring fence investment banking practices from retailbanking.Ensuring that when a bank does fail, services that are vital to families,businesses and the whole economy continue without resorting totaxpayer money.We have already committed to introduce additional loss absorbencyrequirements on ring fenced retail banks.Ensuring that large retail banks hold equity capital of at least 10 per cent,with minimum a loss absorbing capacity for the bigger banks of at least 17 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 113per cent. To ensure that shareholders and bondholders bear the costs offailure, not taxpayers.And later this week, the Government will publish its White Paper settingout its final proposals for further reforms to the UK banking sector, basedon the ICB’s recommendations.Of course, financial services are an international industry, and regulationhas to reflect that reality.So it is right that much of the debate on regulatory reform is being drivenat the international level.Against the backdrop of continuing instability in Europe, it is critical thatwe seek regulatory reform that ensures stability, creates opportunities forsustainable growth in the future, and removes the distorting effect ofarbitrage.Abroad, as at home, we need to tackle the issue of ‘too big to fail’ and theperceived implicit guarantee of financial institutions that continues todistort fair and open competition globally.Through the G20, we have agreed that supervisors need to be able to gofurther to address the risks posed by the largest and most interconnectedbanks.This means applying additional loss absorbency requirements to furtherreduce the risk that these high impact banks fail...... developing internationally consistent Recovery and Resolution Plansthat will require firms to take early action to generate capital and liquidityin stress......and ensuring that supervisors have the tools and powers to interveneearly and ensure an orderly resolution where a bank does fail.The UK is leading the development of these new toolkits. On RRPs, wehave already started a pilot project with the six of the largest UK banks,and we expect all banks to develop their own plans by the end of the year.Reforms to tackle inter connectedness between banks are therefore vital. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 114We only need to look across the channel to understand the magnitude ofthe inter connectedness not just between banks, but between banks andpublic finances and between public finances and monetary union.The Eurozone crisis needs a response that deals with specific weaknessesin the governance of the single currency. We have, for some time, arguedthat the “remorseless logic” of monetary union requires closer fiscalintegration in the eurozone.As the Chancellor wrote this weekend, we chose not to join the europrecisely because we would lose national sovereignty and control of ourmonetary policy.A banking union is a necessary part of the fiscal and monetary union thatthe Eurozone is committed to. That is why we will not be taking part inthe banking union.Britain’s place is in the internal market, not the Eurozone block. As theEurozone integrates, so Europe will have to ensure that it does not do soat the expense of the single market – one of Europe’s greatestachievements.A Europe that achieved Eurozone stability at the cost of the single marketwould undermine the benefits that have been achieved through a diverseand ever widening market that promotes competition, offers choice andprovides opportunities for growth, investment and jobsBut abroad, as at home, we must also be mindful of the impact thatinconsistent, discriminatory and disproportionate regulation can have:stifling growth, restricting investment, lowering business returns,imposing higher costs on investors.That means ensuring that regulation is based on evidence and rigorousanalysis.Ensuring that internationally agreed regulatory standards areimplemented fully and consistently at national level.And ensuring that regulation protects the open and competitive marketsthat are critical to fostering renewed growth across all our economies andvital to London’s continuing success as a global financial centre. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 115That is why the UK is taking on a lead role on financial servicesinternationally and in Europe.Full, consistent and non-discriminatory implementation of theseagreements is essential to ensure the stability of the internationalfinancial system, but also to protect free and open competition that allowsall our sectors to thrive.And it is not just here that we are safeguarding the Single Market.Through our negotiations on the array of European regulatory reforms,we are securing agreement and supporting the Commission in its duty touphold single market principles that are vital to support growth.For example, it is vital that derivatives in any currency can be cleared inany country so on EMIR we have worked hard to ensure a clearrecognition of the principle of non-discrimination in the Council.That is also why we are challenging the ECB’s location policy in the ECJ.And on MiFID, we continue to make the case against unnecessarybarriers to trade within the EU and between the EU and third countries.London thrives not just through trade within Europe’s borders, but alsothrough trade outside those borders.On the basis of the current proposals, it seems that no third countrywould meet EU rules, so from the moment that MiFID is passed and untilequivalence decisions are taken, it would close the EU market entirely toany new third country firm, as well as choking off opportunities for ourfirms in some of the strongest and fastest growing emerging economies.So we couldn’t trade with a new Japanese securities house; seek capitalfrom China or invest in Africa.It’s worth reminding ourselves that EU financial services are a powerfulforce in the international market, accounting for about a quarter offinancial services exports worldwide, and responsible for managing justunder half of global bank assets.At a time when we have to do everything we can to attract investment tosupport the economic recovery we cannot cut ourselves off from the restof the world. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 116Of course this works both ways. We have to resist proposals that seek toraise barriers to UK or European investment in the rest of the world.Which is why we are concerned, along with many other countries, aboutthe extra-territorial application of the Volcker Rule as currently drafted.There is a significant risk that the Rule will restrict US banks from tradingin non-US sovereign debt, and a risk that non-US banks may be restrictedin their ability to transact with US investors.It is absolutely vital that, as we strengthen the global regulatoryframework, we do so in a way that balances stability with the maintenanceof global markets, sustaining economic growth.And it is equally important that we protect UK financial services as we doso – protecting that pole position that I mentioned at the beginning of myspeech.Protecting the Businesses and families that rely on the vast range ofservices and expertise it provides: foreign exchange and commoditymarkets; maritime and trade finance; insurance and reinsurance; andmany more besides.And protecting UK financial services’ ability to access markets beyondEurope – when around half of the UK’s financial services trade is withcountries outside Europe, we must ensure that European regulation doesnot risk the opportunities we enjoy from key international growth marketsat a time when we so vitally need inward investment.As I said at the outset, London is a leading global financial centre and weare committed to supporting and maintaining the UK’s position as theworld’s leading financial services centre.And we remain committed to attracting the world’s most ambitious andinnovative financial services companies to the UK.I believe that to achieve this it is essential that we reform regulation toremedy the failures of the last decade, safeguarding an innovative andsuccessful financial services sector, without putting the wider economy atrisk. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 117We will continue to work with all of you here today, to ensure that werealise that ambition, embedding proportionate, consistent andnon-discriminatory regulation, to promote a competitive, stable andsuccessful financial services sector.NotesMark Hoban was appointed Financial Secretary to the Treasury in May2010.Mark was appointed the Shadow Financial Secretary to the Treasury inDecember 2005. Between November 2003 and December 2005 he wasShadow Minister for Schools. Prior to November 2003, he was anOpposition Whip. Between 2001 and 2003 Mark was a member of theSelect Committee on Science and Technology.Mark was born in 1964. He has an economics degree from the LondonSchool of Economics. After graduating he qualified as a CharteredAccountant, and went on to work for PricewaterhouseCoopers between1985 and 2001. Mark has been the MP for Fareham since June 2001. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 118Certified Risk and Compliance Management Professional(CRCMP) Distance learning and online certification program.Companies like IBM, Accenture etc.consider the CRCMP a preferredcertificate. You may find more if yousearch (CRCMP preferred certificate)using any search engine.The all-inclusive cost is $297.What is included in the price:A. The official presentations we use in our instructor-led classes(3285 slides)The 2309 slides are needed for the exam, as all the questions are based onthese slides. The remaining 976 slides are for reference.You can find the course synopsis at:www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htmB. Up to 3 Online ExamsYou have to pass one exam.If you fail, you must study the official presentations and try again, but youdo not need to spend money. Up to 3 exams are included in the price.To learn more you may visit:www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 119C. Personalized Certificate printed in full color.Processing, printing, packing and posting to your office or home.D. The Dodd Frank Act and the newRisk Management Standards (976slides, included in the 3285 slides)The US Dodd-Frank Wall Street Reformand Consumer Protection Act is the mostsignificant piece of legislation concerningthe financial services industry in about 80years.What does it mean for risk andcompliance management professionals? Itmeans new challenges, new jobs, newcareers, and new opportunities.The bill establishes new risk management and corporate governanceprinciples, sets up an early warning system to protect the economy fromfuture threats, and brings more transparency and accountability.It also amends important sections of the Sarbanes Oxley Act. Forexample, it significantly expands whistleblower protections under theSarbanes Oxley Act and creates additional anti-retaliation requirements.You will find more information at:www.risk-compliance-association.com/Distance_Learning_and_Certification.htm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 120Visit our Risk and Compliance Management Speakers BureauThe International Association of Risk and Compliance Professionals(IARCP) has established the Speakers Bureau for firms and organizationsthat want to access the expertise of Certified Risk and ComplianceManagement Professionals (CRCPMs) and Certified InformationSystems Risk and Compliance Professionals (CISRCPs).The IARCP will be the liaison between our certified professionals andthese organizations, at no cost. We strongly believe that this can be agreat opportunity for both, our certified professionals and the organizers.To learn more:www.risk-compliance-association.com/Risk_Management_Compliance_Speakers_Bureau.html _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
    • P a g e | 121 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com