Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages)


Published on

Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages)

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Monday June 11 2012 - Top 10 Risk Compliance News Events (114 pages)

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 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 IARCPDear Member,We have 3 really important papers that have to do with theimplementation of the Basel iii framework in the USA.The three notices of proposed rulemaking (NPRs), taken together, willrestructure the Board’s current regulatory capital rules into a harmonized,comprehensive framework, and will revise the capital requirements tomake them consistent with the Basel III capital standards established bythe Basel Committee on Banking Supervision (BCBS) and certainprovisions of the Dodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank Act).The proposals are published in separate NPRs to reflect the distinctobjectives of each proposal, to allow interested parties to betterunderstand the various aspects of the overall capital framework, includingwhich aspects of the rule would apply to which banking organizations,and to help interested parties better focus their comments on areas ofparticular interest.The problem is we did not learn more about the quantitative liquidityrequirements and the capital surcharge for global systemically importantbanks (these are not part of this rulemaking). I hope we will have moredetails soon.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  2. 2. Page |2TheNUMBER 1Basel III in the USAProposed Rulemakings for anIntegrated Regulatory CapitalFramework, Questions and AnswersJune 7, 2012Chairman Ben S. BernankeEconomic Outlook and PolicyBefore the Joint Economic Committee,U.S. Congress, Washington, D.C. June 7, 2012Chairman Casey, Vice Chairman Brady, and othermembers of the Committee, I appreciate thisopportunity to discuss the economic outlook andeconomic policy.Consultation paper on DraftImplementing TechnicalStandards on supervisoryreporting requirements forliquidity coverage and stable funding07 June 2012The European Banking Authority (EBA) launched today a consultationon Draft Implementing Technical Standards (ITS) on supervisoryreporting requirements for liquidity coverage and stable funding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  3. 3. Page |3Auditing in the Small Business EnvironmentDATE: June 7, 2012SPEAKER: Jeanette M. Franzel, Board MemberEVENT: PCAOB Forum on Auditing in the Small BusinessEnvironmentLOCATION: Minneapolis, MNAuditing the FutureDATE June 7, 2012SPEAKER(S): Jay D. Hanson, Board MemberEVENT: Fair Value Measurements and Reporting ConferenceLOCATION: National Harbor, MDFASB Board DecisionsSummary of Board decisions are provided for the information andconvenience of constituents who want to follow the Board’s deliberations.Call for evidence on Transaction ReportingFrom The British Bankers’ Association (BBA) tothe European Securities and Markets Authority(ESMA) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  4. 4. Page |4The Next Phase in Islamic FinanceRavi MenonManaging Director, Monetary Authority ofSingaporeOpening Address at the 3rd Annual World IslamicBanking Conference: Asia Summit, Grant HyattSingapore, 5 June 2012Governor Daniel K. TarulloDodd-Frank Act ImplementationBefore the Committee on Banking, Housing, andUrban Affairs, U.S. Senate, Washington, D.C. June 6,2012Mortgage financing: FINMArecognises new minimum standardsThe Swiss Financial Market SupervisoryAuthority FINMA has approved the newminimum re-quirements for mortgage financing drawn up by the SwissBankers Association (SBA) as a minimum regulatory standard. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  5. 5. Page |5NUMBER 1Basel III in the USA _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  6. 6. Page |6 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  7. 7. Page |7Basel III in the USA, Board of Governors of the Federal Reserve3:30 PM, Thursday, June 7, 2012 - Marriner S. Eccles Federal ReserveBoard Building, 20th Street entrance between Constitution Avenue andC Streets, N.W., Washington, D.C.Matters to be Considered:Discussion Agenda:1. Proposed interagency rulemakings: strengthening andharmonizing the regulatory capital framework for banking organizations,including proposed rules for implementing Basel III for bankingorganizations and proposed consolidated capital requirements forsavings and loan holding companies.2. Final interagency rulemaking: market risk capital rule. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  8. 8. Page |8Proposed Rulemakings for an Integrated Regulatory CapitalFramework, Questions and AnswersJune 7, 2012Question 1: What does the package of proposed rulemakingscontain and why is it divided into three parts?The package contains three notices of proposed rulemaking (NPRs) that,taken together, would restructure the Board’s current regulatory capitalrules into a harmonized, comprehensive framework, and would revise thecapital requirements to make them consistent with the Basel III capitalstandards established by the Basel Committee on Banking Supervision(BCBS) and certain provisions of the Dodd-Frank Wall Street Reform andConsumer Protection Act (Dodd-Frank Act).The proposals are published in separate NPRs to reflect the distinctobjectives of each proposal, to allow interested parties to betterunderstand the various aspects of the overall capital framework, includingwhich aspects of the rule would apply to which banking organizations,and to help interested parties better focus their comments on areas ofparticular interest.The BCBS quantitative liquidity requirements and the BCBS capitalsurcharge for global systemically important banks are not part of thisrulemaking.First Paper: The Basel III NPR1. The first NPR, Regulatory Capital Rules: Regulatory Capital,Implementation of Basel III, Minimum Regulatory Capital Ratios,Capital Adequacy, Transition Provisions, and Prompt Corrective Action(Basel III NPR), is primarily focused on proposed reforms that wouldimprove the overall quality and quantity of banking organizations’capital.The NPR would revise the Board’s risk-based and leverage capitalrequirements, consistent with the Dodd-Frank Act and with agreementsreached by the BCBS in Basel III: A Global Regulatory Framework forMore Resilient Banks and Banking Systems (Basel III). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  9. 9. Page |9The proposal includes transition provisions designed to provide sufficienttime for banking organizations to meet the new capital standards whilesupporting lending to the economy.Second Paper: The Standardized Approach NPR2. The second NPR, Regulatory Capital Rules: Standardized Approachfor Risk-weighted Assets; Market Discipline and DisclosureRequirements (Standardized Approach NPR), would revise andharmonize the Board’s rules for calculating risk-weighted assets toenhance their risk sensitivity and address weaknesses identified overrecent years.It would incorporate aspects of the BCBS’s Basel II standardizedframework in the International Convergence of Capital Measurement andCapital Standards: A Revised Framework (Basel II), Basel III, andalternatives to credit ratings for the treatment of certain exposures,consistent with the Dodd-Frank Act.Third Paper: The Advanced Approaches and Market Risk NPR3. The third NPR, Regulatory Capital Rules: Advanced ApproachesRisk-based Capital Rule; Market Risk Capital Rule (AdvancedApproaches and Market Risk NPR), would revise the advancedapproaches risk-based capital rule (in a manner consistent with theDodd-Frank Act) and incorporate certain aspects of Basel III that theBoard would apply only to advanced approaches banking organizations(generally, the largest, most complex banking organizations).This NPR would also codify the Board’s market risk capital rule and, incombination with the other components described above, would applyconsolidated capital requirements to savings and loan holding companies(SLHCs).Question 2: Which banking organizations are covered by theproposed rulemakings?The Basel III NPR and the Standardized Approach NPR would apply tostate member banks, bank holding companies domiciled in the UnitedStates not subject to the Board’s Small Bank Holding Company Policy _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  10. 10. P a g e | 10Statement (generally, bank holding companies with less than $500 millionin consolidated assets), and SLHCs domiciled in the United States.Consistent with Section 171 of the Dodd- Frank Act, the proposedrulemakings would apply to all SLHCs regardless of asset size.The Advanced Approaches and Market Risk NPR would generally applyto banking organizations meeting specified thresholds.In general, the advanced approaches risk based capital rule applies tothose banking organizations with consolidated total assets of at least $250billion or consolidated total on-balance sheet foreign exposures of at least$10 billion (excluding insurance underwriting assets) and their depositoryinstitution subsidiaries.The market risk capital rule generally applies to those bankingorganizations with aggregate trading assets and trading liabilities equalto at least 10 percent of quarter-end total assets or $1 billion.Question 3: How are these proposed rulemakings related to theDodd-Frank Act?The NPRs are consistent with statutory requirements in the Dodd-FrankAct.For example, pursuant to section 171 of the Act, the NPRs would establishminimum riskbased and leverage capital requirements for SLHCs, phaseout certain capital instruments over a three-year period, and establish newminimum generally applicable capital requirements.In addition, pursuant to section 939A of the act, the NPRs removereferences to, or requirements of reliance on, credit ratings in the Board’scapital rules and replace them with alternative standards ofcreditworthiness.Question 4: What are the main changes to the minimum capitalrequirements?The proposal includes a new common equity tier 1 minimum capitalrequirement of 4.5 percent of risk-weighted assets and a common equitytier 1 capital conservation buffer of 2.5 percent of risk-weighted assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  11. 11. P a g e | 11The proposal also increases the minimum tier 1 capital requirement from4 to 6 percent of risk-weighted assets.The minimum total riskbased capital requirement would remainunchanged at 8 percent.The proposal introduces a supplementary leverage ratio that incorporatesa broader set of exposures in the denominator measure of the ratio forbanking organizations subject to the advanced approaches capital rule.This supplementary leverage ratio is based on the international leverageratio in Basel III.Question 5: What are the main changes related to the definitionof capital being proposed?Capital instruments issued by banking organizations would be subject toa set of strict eligibility criteria that would prohibit, for example, theinclusion in tier 1 capital of instruments that are not perpetual or thatpermit the accumulation of unpaid dividends or interest.Trust preferred securities, for example, would be excluded from tier 1capital, consistent with both Basel III and the Dodd-Frank Act.Under the Basel III NPR, banking organizations would be subject togenerally stricter regulatory capital deductions (the majority of whichwould be taken from common equity tier 1 capital).For example, deductions related to mortgage servicing assets, deferredtax assets, and certain investments in the capital of unconsolidatedfinancial institutions would generally be more stringent than those underthe current rules.Question 6: What is the capital conservation buffer and howwould it work?In order to avoid limitations on capital distributions (including dividendpayments, discretionary payments on tier 1 instruments, and sharebuybacks) and certain discretionary bonus payments, under the proposalbanking organizations would need to hold a specific amount of commonequity tier 1 capital in excess of their minimum risk based capital ratios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  12. 12. P a g e | 12The fully phased-in buffer amount would be equal to 2.5 percent ofrisk-weighted assets.Question 7: Will the new capital requirements and capitalconservation buffer be imposed immediately or will there be atransition period?The Basel III NPR contains transition provisions designed to give ampletime to adjust to the new capital requirements, consistent with theagreement in Basel.The new minimum regulatory capital ratios and changes to thecalculation of risk weighted assets would be fully implemented January 1,2015.The capital conservation buffer framework would phase-in between 2016and 2018, with full implementation January 1, 2019.Question 8: What is common equity tier 1 capital and why areyou proposing a new common equity tier 1 requirement?Common equity tier 1 capital is a new regulatory capital component thatis predominantly made up of retained earnings and common stockinstruments (that comply with a series of strict eligibility criteria), net oftreasury stock, and net of a series of regulatory capital deductions andadjustments.Common equity tier 1 capital may also include limited amounts ofcommon stock issued by consolidated subsidiaries to third parties(minority interest). Common equity tier 1 capital is the highest qualityform of regulatory capital because of its superior ability to absorb lossesin times of market and economic stress.Question 9: What are the main elements of the StandardizedApproach NPR?It would increase the risk sensitivity of the Board’s general risk-basedcapital requirements for determining risk-weighted assets (that is, thecalculation of the denominator of a banking organization’s risk-based _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  13. 13. P a g e | 13capital ratios) by proposing revised methodologies for determiningrisk-weighted assets for:- Residential mortgage exposures by applying a more risk-sensitive treatment that would risk-weight an exposure based on certain loan characteristics and its loan-tovalue ratio;- Certain commercial real estate credit facilities that finance the acquisition, development, or construction of real property by assigning a higher risk weight;- Exposures that are more than 90 days past due or on nonaccrual (excluding sovereign and residential mortgage exposures) by assigning a higher risk weight; and- Exposures to foreign sovereigns, foreign banks, and foreign public sector entities by basing the risk weight for each exposure type on the country risk classification of the sovereign entity.The NPR would also replace the use of credit ratings for securitizationexposures with a formula-based approach.Additionally, the NPR would provide greater recognition of collateral andguarantees.However, for most exposures, no changes are being proposed in theNPR.More specifically, the treatment of exposures to the U.S. government,government-sponsored entities, U.S. states and municipalities, mostcorporations, and most consumer loans would remain unchanged.It would introduce disclosure requirements that would apply to bankingorganizations domiciled in the United States with $50 billion or more intotal assets, including disclosures related to regulatory capital.The changes in the Standardized Approach NPR are proposed to takeeffect January 1, 2015.Banking organizations may choose to comply with the proposedrequirements prior to that date. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  14. 14. P a g e | 14Question 10: What are the primary objectives of the AdvancedApproaches and Market Risk NPR?It would revise the advanced approaches risk-based capital rule in amanner consistent with the Dodd-Frank Act by removing references tocredit ratings from the securitization framework, requiring an enhancedset of quantitative and qualitative disclosures (especially in regard todefinition of capital and securitization exposures), implement a highercounterparty credit risk capital requirement to account for creditvaluation adjustments, and propose capital requirements for clearedtransactions with central counterparties.The NPR would incorporate the market risk capital rules into theintegrated regulatory capital framework and propose its application tosavings and loan holding companies that meet the trading thresholds.Question 11: How will the Prompt Corrective Action (PCA)framework change as a result of the proposed rulemakings?Under the proposal, the capital thresholds for the different PCAcategories would be updated to reflect the proposed changes to thedefinition of capital and the regulatory capital minimum ratios.Likewise, the proposal would augment the PCA capital categories byincorporating a common equity tier 1 capital measure.In addition, the proposal would include in the PCA framework theproposed supplementary leverage ratio for advanced approaches bankingorganizations.Note that the new PCA framework would take effect starting on January 1,2015, consistent with the full transition of the minimum capitalrequirements and the Standardized Approach for the calculation of riskweighted assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  15. 15. P a g e | 15NUMBER 2Chairman Ben S. BernankeEconomic Outlook and PolicyBefore the Joint Economic Committee,U.S. Congress, Washington, D.C. June 7, 2012Chairman Casey, Vice Chairman Brady, and othermembers of the Committee, I appreciate thisopportunity to discuss the economic outlook andeconomic policy.Economic growth has continued at a moderate rate so far this year.Real gross domestic product (GDP) rose at an annual rate of about 2percent in the first quarter after increasing at a 3 percent pace in thefourth quarter of 2011.Growth last quarter was supported by further gains in private domesticdemand, which more than offset a drag from a decline in governmentspending.Labor market conditions improved in the latter part of 2011 and earlierthis year.The unemployment rate has fallen about 1 percentage point since lastAugust; and payroll employment increased 225,000 per month, onaverage, during the first three months of this year, up from about 150,000jobs added per month in 2011.In April and May, however, the reported pace of job gains slowed to anaverage of 75,000 per month, and the unemployment rate ticked up to 8.2percent.This apparent slowing in the labor market may have been exaggerated byissues related to seasonal adjustment and the unusually warm weatherthis past winter.But it may also be the case that the larger gains seen late last year andearly this year were associated with some catch-up in hiring on the part of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  16. 16. P a g e | 16employers who had pared their workforces aggressively during and justafter the recession.If so, the deceleration in employment in recent months may indicate thatthis catch-up has largely been completed, and, consequently, thatmore-rapid gains in economic activity will be required to achievesignificant further improvement in labor market conditions.Economic growth appears poised to continue at a moderate pace overcoming quarters, supported in part by accommodative monetary policy.In particular, increases in household spending have been relatively wellsustained.Income growth has remained quite modest, but the recent declines inenergy prices should provide some offsetting lift to real purchasingpower.While the most recent readings have been mixed, consumer sentiment isnonetheless up noticeably from its levels late last year.And, despite economic difficulties in Europe, the demand for U.S.exports has held up well.The U.S. business sector is profitable and has become more competitivein international markets.However, some of the factors that have restrained the recovery persist.Notably, households and businesses still appear quite cautious about theeconomy.For example, according to surveys, households continue to rate theirincome prospects as relatively poor and do not expect economicconditions to improve significantly.Similarly, concerns about developments in Europe, U.S. fiscal policy, andthe strength and sustainability of the recovery have left some firmshesitant to expand capacity.The depressed housing market has also been an important drag on therecovery. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  17. 17. P a g e | 17Despite historically low mortgage rates and high levels of affordability,many prospective homebuyers cannot obtain mortgages, as lendingstandards have tightened and the creditworthiness of many potentialborrowers has been impaired.At the same time, a large stock of vacant houses continues to limitincentives for the construction of new homes, and a substantial backlog offoreclosures will likely add further to the supply of vacant homes.However, a few encouraging signs in housing have appeared recently,including some pickup in sales and construction, improvements inhomebuilder sentiment, and the apparent stabilization of home prices insome areas.Banking and financial conditions in the United States have improvedsignificantly since the depths of the crisis.Notably, recent stress tests conducted by the Federal Reserve of thebalance sheets of the 19 largest U.S. bank holding companies showed thatthose firms have added about $300 billion to their capital since 2009; thetests also showed that, even in an extremely adverse hypotheticaleconomic scenario, most of those firms would remain able to providecredit to U.S. households and businesses.Lending terms and standards have generally become less restrictive inrecent quarters, although some borrowers, such as small businesses and(as already noted) potential homebuyers with less-than-perfect credit, stillreport difficulties in obtaining loans.Concerns about sovereign debt and the health of banks in a number ofeuro-area countries continue to create strains in global financial markets.The crisis in Europe has affected the U.S. economy by acting as a drag onour exports, weighing on business and consumer confidence, andpressuring U.S. financial markets and institutions.European policymakers have taken a number of actions to address thecrisis, but more will likely be needed to stabilize euro-area banks, calmmarket fears about sovereign finances, achieve a workable fiscalframework for the euro area, and lay the foundations for long-termeconomic growth. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  18. 18. P a g e | 18U.S. banks have greatly improved their financial strength in recent years,as I noted earlier.Nevertheless, the situation in Europe poses significant risks to the system and economy and must be monitored closely.As always, the Federal Reserve remains prepared to take action as neededto protect the U.S. financial system and economy in the event thatfinancial stresses escalate.Another factor likely to weigh on the U.S. recovery is the drag beingexerted by fiscal policy.Reflecting ongoing budgetary pressures, real spending by state and localgovernments has continued to decline.Real federal government spending has also declined, on net, since thethird quarter of last year, and the future course of federal fiscal policiesremains quite uncertain, as I will discuss shortly.With regard to inflation, large increases in energy prices earlier this yearcaused the price index for personal consumption expenditures to rise atan annual rate of about 3 percent over the first three months of this year.However, oil prices and retail gasoline prices have since retraced thoseearlier increases.In any case, increases in the prices of oil or other commodities areunlikely to result in persistent increases in overall inflation so long ashousehold and business expectations of future price changes remainstable.Longer-term inflation expectations have, indeed, been quite wellanchored, according to surveys of households and economic forecastersand as derived from financial market information.For example, the five-year-forward measure of inflation compensationderived from yields on nominal and inflation-protected Treasurysecurities suggests that inflation expectations among investors havechanged little, on net, since last fall and are lower than a year ago. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  19. 19. P a g e | 19Meanwhile, the substantial resource slack in U.S. labor and productmarkets should continue to restrain inflationary pressures.Given these conditions, inflation is expected to remain at or slightly belowthe 2 percent rate that the Federal Open Market Committee (FOMC)judges consistent with our statutory mandate to foster maximumemployment and stable prices.With unemployment still quite high and the outlook for inflationsubdued, and in the presence of significant downside risks to the outlookposed by strains in global financial markets, the FOMC has continued tomaintain a highly accommodative stance of monetary policy.The target range for the federal funds rate remains at 0 to 1/4 percent, andthe Committee has indicated in its recent statements that it anticipatesthat economic conditions are likely to warrant exceptionally low levels ofthe federal funds rate at least through late 2014.In addition, the Federal Reserve has been conducting a program,announced last September, to lengthen the average maturity of itssecurities holdings by purchasing $400 billion of longer-term Treasurysecurities and selling an equal amount of shorter-term Treasurysecurities.The Committee also continues to reinvest principal received from itsholdings of agency debt and agency mortgage-backed securities (MBS)in agency MBS and to roll over its maturing Treasury holdings at auction.These policies have supported the economic recovery by puttingdownward pressure on longer-term interest rates, including mortgagerates, and by making broader financial conditions more accommodative.The Committee reviews the size and composition of its securitiesholdings regularly and is prepared to adjust those holdings as appropriateto promote a stronger economic recovery in a context of price stability.The economys performance over the medium and longer term also willdepend importantly on the course of fiscal policy.Fiscal policymakers confront daunting challenges. As they do so, theyshould keep three objectives in mind. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  20. 20. P a g e | 20First, to promote economic growth and stability, the federal budget mustbe put on a sustainable long-run path.The federal budget deficit, which averaged about 9 percent of GDPduring the past three fiscal years, is likely to narrow in coming years asthe economic recovery leads to higher tax revenues and lower incomesupport payments.Nevertheless, the Congressional Budget Office (CBO) projects that, ifcurrent policies continue, the budget deficit would be close to 5 percent ofGDP in 2017 when the economy is expected to be near full employment.Moreover, under current policies and reasonable economic assumptions,the CBO projects that the structural budget gap and the ratio of federaldebt to GDP will trend upward thereafter, in large part reflecting rapidlyescalating health expenditures and the aging of the population.This dynamic is clearly unsustainable.At best, rapidly rising levels of debt will lead to reduced rates of capitalformation, slower economic growth, and increased foreign indebtedness.At worst, they will provoke a fiscal crisis that could have severeconsequences for the economy.To avoid such outcomes, fiscal policy must be placed on a sustainablepath that eventually results in a stable or declining ratio of federal debt toGDP.Even as fiscal policymakers address the urgent issue of fiscalsustainability, a second objective should be to avoid unnecessarilyimpeding the current economic recovery.Indeed, a severe tightening of fiscal policy at the beginning of next yearthat is built into current law--the so-called fiscal cliff--would, if allowed tooccur, pose a significant threat to the recovery.Moreover, uncertainty about the resolution of these fiscal issues coulditself undermine business and household confidence.Fortunately, avoiding the fiscal cliff and achieving long-term fiscalsustainability are fully compatible and mutually reinforcing objectives. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  21. 21. P a g e | 21Preventing a sudden and severe contraction in fiscal policy will supportthe transition back to full employment, which should aid long-term fiscalsustainability.At the same time, a credible fiscal plan to put the federal budget on alonger-run sustainable path could help keep longer-term interest rateslow and improve household and business confidence, thereby supportingimproved economic performance today.A third objective for fiscal policy is to promote a stronger economy in themedium and long term through the careful design of tax policies andspending programs.To the fullest extent possible, federal tax and spending policies shouldincrease incentives to work and save, encourage investments in workforceskills, stimulate private capital formation, promote research anddevelopment, and provide necessary public infrastructure.Although we cannot expect our economy to grow its way out of federalbudget imbalances without significant adjustment in fiscal policies, amore productive economy will ease the tradeoffs faced by fiscalpolicymakers.Thank you. I would be glad to take your questions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  22. 22. P a g e | 22NUMBER 3Consultation paper on Draft Implementing Technical Standardson supervisory reporting requirements for liquidity coverage andstable funding07 June 2012The European Banking Authority (EBA) launched today a consultationon Draft Implementing Technical Standards (ITS) on supervisoryreporting requirements for liquidity coverage and stable funding.These ITS, which will be part of the EU single rulebook, intend to specifythe main features (formats, frequencies, IT solutions) of prudentialreporting to be applied by financial institutions in Europe.The consultation runs until 27 August 2012.These ITS will become part of the general supervisory reportingframework.In this respect, they are an addition to the draft ITS text proposed in theConsultation Paper on supervisory reporting for institutions (CP50)published on 20 December 2011 and need to be read in conjunction withthem.Main features of the ITSThese ITS aim at providing national authorities with harmonizedinformation on their liquid assets, inflows and outflows and their stable _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  23. 23. P a g e | 23sources of funding using uniform reporting formats developed by theEBA.Against this background, this consultation paper puts forward proposalsregarding the reporting requirements for both liquidity coverage andstable funding.The purpose of this monitoring is two-fold:(i) To inform the economic impact assessment of the liquidityrequirements the EBA is asked to perform during the monitoring period,and(ii) To enable competent authorities to monitor institutions’ compliancewith the liquidity requirements once they have been introduced asbinding minimum standards.The scope and level of application of these ITS are in line with the CapitalRequirements Regulation (CRR) text.The latter provides for the liquidity coverage reporting to be done at leastmonthly and the stable funding reporting at least quarterly.These ITS have been developed on the basis of the templates for liquidityreporting used by the EBA in compiling the Basel III monitoring exerciseas well as on the COREP and FINREP guidelines.They also build on voluntary reporting exercises conductedpredominantly by larger institutions.Next stepsThese draft ITS have been developed on the basis of the EuropeanCommission’s legislative proposals for the CRR/CRD IV.Following the end of the consultation period, and to the extent that thefinal text of the CRR changes before the adoption of the ITS, the EBA willadapt its draft ITS accordingly to reflect any developments.The CRR also mandates the EBA to develop additional liquiditymonitoring metrics to provide competent authorities with acomprehensive view of institutions’ liquidity risk profiles. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  24. 24. P a g e | 24The EBA is currently working on these metrics and will launch a publicconsultation in due course, depending on the timeline that will beadopted in the CRR.As stated above, the information collected under these ITS will be used toinform the EBA’s impact assessment on the introduction of the liquidityrequirements.The EBA will disclose the methodology it intends to use for thisassessment later this year.A separate consultation on a data point model containing all the relevanttechnical specifications necessary for developing an IT reporting formatwill be published in the second half of 2012.Based on the CRR proposals and these ITS, institutions are required tocomply with the new reporting requirements as of 1 January 2013.In the current timeline for the implementation of the CRR/CRD IV, thefirst regular reporting period is expected to be January 2013.Notes to editors 1. The CRR/CRD IV package (the so-called Capital Requirements Regulation - ‘CRR’- and the so-called Capital Requirements Directive – ‘CRD’) sets out prudential requirements which are expected to be applicable as of 1 January 2013. The package translates in European law international standards on bank capital agreed at the G20 level (most commonly known as the Basel III agreement). One of the major achievements will be the creation of a Single Rule Book - a set of rules directly applicable in all EU member states - that will improve both transparency and enforcement in the EU banking sector. 2. Draft ITS are produced in accordance with Article 15 of EBA regulation which provides for their adoption by means of regulations or decisions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  25. 25. P a g e | 25 According to EU law, EU regulations are binding in their entirety and directly applicable in all Member States. This means that, on the date of their entry into force, they become part of the national law of the Member States and that their implementation into national law is not only unnecessary but also prohibited by EU law, except in so far as this is expressly required by them.EBA Consultation Paper on Draft Implementing TechnicalStandards on Supervisory reporting requirements for liquiditycoverage and stable funding, London, 07 June 2012I. Responding to this ConsultationEBA invites comments on all matters in this paperComments are most helpful if they:- respond to the question stated;- indicate the specific question to which the comments relates;- contain a clear rationale;- provide evidence to support the views expressed /rationale proposed; and- describe any alternative regulatory choices EBA should considerPlease send your comments to the EBA by 27 August 2012Publication of responsesAll contributions received will be published following the close of theconsultation, unless you request otherwise. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  26. 26. P a g e | 26Please indicate clearly and prominently in your submission any part youdo not wish to be publically disclosed.A standard confidentiality statement in an e-mail message will not betreated as a request for non-disclosure.A confidential response may be requested from us in accordance with theEBA’s rules on public access to documents.We may consult you if we receive such a request. Any decision we makenot to disclose the response is reviewable by the EBA’s Board of Appealand the European Ombudsman.II Executive SummaryThe CRD IV proposals which are expected to be applicable as of 1.1.2013,set out prudential requirements for EEA institutions.The CRR contains, in a number of Articles, specific mandates whichrequire the EBA to develop draft Implementing Technical Standards(henceforth ITS) related to supervisory reporting requirements (Articles95, 96, 383, 403 and 417 of CRR).These ITS will be part of the single rulebook enhancing regulatoryharmonisation in Europe with the particular aim of specifying uniformformats, frequencies and dates of prudential reporting as well as ITsolutions to be applied by institutions and, as the case may be, investmentfirms in Europe.The draft ITS are intended to be put forward as one integrated draftRegulation and this consultation paper consequently supplements EBAConsultation Paper CP50 on supervisory reporting for institutions,published on 20 December 20112.The draft ITS text proposed in the present document is an addition to thedraft ITS text proposed in that CP and needs to be read in conjunctionwith it. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  27. 27. P a g e | 27The rationale behind a single draft Regulation is that it is beneficial thatreporting requirements are grouped together in one legal act to facilitate acomprehensive view, improved understanding and compact access tothem by legal or natural persons subject to the obligations laid downherein.In the case of monitoring the implementation of new standards, thebenefits of standardised data collection and IT solutions will reduce theburden on institutions and allow a more accurate examination of theimpact of such standards.This consultation paper puts forward proposals regarding the reportingrequirements according to the mandate of the EBA provided in Article481 of the CRR to monitor and evaluate the liquidity reportingrequirements made in accordance with Article 403(1).This CP is not consulting on a number of items not specified in the CRR.Such matters include, but are not limited to, the calibration of theliquidity standards, the definition of liquid assets, the scope of applicationand frequency of reporting.Please note that the EBA has developed the present draft ITS based onthe European Commission’s legislative proposals for the CRR/CRD IV.Following the end of the consultation period, and to the extent that thefinal text of the CRR changes before the adoption of the ITS, the EBA willadapt its draft ITS accordingly to reflect any developments.Following the close of the consultation on, the EBA will assessthe responses received, along with any relevant changes in the final CRRlegislative text.Main features of this ITSThe CRR specifies a new liquidity coverage requirement that would beapplicable to all credit institutions no earlier than 1.1.2015, following adelegated act by the EC. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  28. 28. P a g e | 28Article 481 requires the EBA to, amongst other things, monitor andevaluate the reports submitted in accordance with this ITS and to reportto the EC whether a specification of the general liquidity requirementwould “have a material detrimental impact on the business and riskprofile of Union institutions or on financial markets or the economy andbank lending....”.With regard to a stable funding requirement, the article requires the EBAto submit a report to the EC on whether and how a stable fundingrequirement would be appropriate, together with a similar assessment onthe impact on Union institutions, financial markets and bank lending.The ITS has been developed on the basis of templates for liquidityreporting used by the EBA in compiling its “Report on the Basel IIImonitoring exercise” which were in turn based on those in theQuantitative Impact Study (QIS) carried out by the Basel Committee onBanking Supervision (BCBS), adapted for the purposes of therequirements put forward by the CRR.The template consequently builds on the experience gained in a numberof Member States with voluntary reporting predominantly by largerinstitutions.In addition the EBA has conducted a small number of voluntary reportingexercises for a broader range of institutions to increase familiarity withthe liquidity coverage requirement and to improve data quality.The ITS has been developed, as much as possible, on the basis of theCOREP and FINREP guidelines, given that these have beenimplemented already in various Members States and have been proved inpractice to improve convergence in the field of supervisory reporting.However, there is a very limited overlap of data requirements withexisting data collected, as is commonly the case with liquidity reporting.The scope and level of application of this ITS follows the scope and levelof application of the CRR. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  29. 29. P a g e | 29As mentioned above, the EBA is mandated to follow the legislative text.The reporting frequency will be not less than monthly for the liquiditycoverage reporting and not less than quarterly for the reporting of thestable funding as required by the CRR.Timing of ITS development and application dateBased on the EC proposals and this ITS, institutions are required tocomply with new reporting requirements according to Titles II and III asof 1 January 2013.From this date onwards competent authorities will have to checkinstitutions‟ compliance with the afore-mentioned regular reportingrequirements and reporting instructions belonging to the reportingtemplates.The first regular reporting period for the liquidity reporting according toTitle II is expected to be January 2013, with the first reporting referencedate being end January 2013The reporting of the stable funding according to Title III is expected tocommence in the quarter of 2013 with the first reporting reference datebeing end-March 2013 2012.Q1: Are the proposed dates for first remittance of data, i.e. end ofJanuary and end of March 2013, feasible?The EBA intends to finalise the draft ITS and endorse it for submission tothe EC by November 2012.The proposed submission dates assume that a final CRR will be availablebeforehand.While this is a very short period of time before reporting is legally required,in the case of many large institutions, they will have been reporting on avoluntary basis for an extended period of time, and other institutions can _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  30. 30. P a g e | 30plan on the basis of final legislative text which should be available at amuch earlier date.It is important to keep in mind that timelines contained in the CRR mightchange which may impact the above dates related to the ITS.In any case, EBA will adapt its draft ITS according to the final version ofthe CRR text before submitting it to the EC for adoption.III. Background and rationaleDraft ITS on Liquidity reportingOn July 20th 2011, the EC published legislative proposals on a revision ofthe CRD which seeks to apply the Basel III framework in the EU.These proposals have recast the contents of the CRD into a revised CRDand a new CRR - which are colloquially referred to as the CRR proposals.These are currently being finalised by EU legislators (Council andEuropean Parliament) in the framework of the co-decision procedure.In anticipation of the finalisation of the legislative texts for the CRR, theEBA has developed the draft ITS in accordance with the mandatecontained in Article 403.1 (a) of the draft CRR endorsed by the EC in July2011.This approach, to draft the ITS on the basis of the EC’s endorsed text wasdeemed a more efficient way forward, as it will allow banks to startevaluating the potential challenges of the new liquidity reportingframework (introduced as a legal requirement for the first time in theCRR proposals) pending finalisation of the co-decision process.In any case, the EBA will adapt its draft ITS according to the final versionof the CRR text before submitting them to the EC for adoption.The final ITS on liquidity reporting and reporting on stable funding willbe included in the ITS on supervisory reporting requirements forinstitutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  31. 31. P a g e | 31The nature of ITS under EU lawThese draft ITS are produced in accordance with Article 15 of EBAregulation.According to Article 15(4) of EBA regulation, they shall be adopted bymeans of regulations.According to EU law, EU regulations are binding in their entirety anddirectly applicable in all Member States.This means that, on the date of their entry into force, they become part ofthe national law of the Member States and that their implementation intonational law is not only unnecessary but also prohibited by EU law,except in so far as this is expressly required by them.Shaping these rules in the form of a Regulation would ensure alevel-playing field by preventing diverging national requirements andwould ease the cross-border provision of services.Background and regulatory approach followed in the draft ITSIn the context of domestic-based liquidity regimes within the EuropeanUnion, liquidity risk regulatory and reporting frameworks currently in usein the variousMember States are heterogeneous. This led to inefficient outcomes andincreased costs for cross-border institutions and national supervisoryauthorities, especially during the events of the 2007-2008.To tackle such regulatory shortcomings which emerged during the crisisand taking account of the new liquidity regulatory framework proposedby the BCBS in December 20106, the EC’s proposed CRR envisagesintroducing a liquidity coverage requirement from 1.1.2015 following anobservation and a review period.Such a requirement aims to improve short term resilience of the liquidityrisk profile of institutions. According to the proposed CRR, the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  32. 32. P a g e | 32Commission will also consider introducing a stable funding requirementin 2018 following an observation and review period, to address fundingproblems arising from maturity mismatches.To this aim, institutions are requested to report to national authorities theelements needed to monitor their liquid assets, inflows and outflows andtheir stable sources of funding according to Title II (Liquidity Reporting),Annex III (Items subject to supplementary reporting of liquid assets) andTitle III (Reporting on stable funding) of the CRR, using uniformreporting formats developed by EBA.With that in mind, the present ITS has been developed to provide nationalauthorities with harmonised information on institution’s liquidity riskprofile, taking into account the nature, scale and complexity ofinstitutions activities.As the ITS on liquidity reporting will become part of the generalsupervisory reporting framework requirements, following theintroduction of liquidity requirements, formats have been developed withthe aim to ensure consistency where allowed by the CRR proposed text.Under the proposed CRR text, EBA is also requested to monitor andevaluate the reports made by institutions and, after consulting the ESRB,to report annually and for the first time by 31 December 2013 to theCommission on the following issues:(a) Whether the general liquidity coverage requirement in Article 401 CRRis likely to have a detrimental impact on the business and risk profile ofUnion institutions or on financial markets or then economy and banklending (Article 481(1) CRR);(b) Appropriate uniform definitions of high and extremely high liquid andcredit quality of transferable assets for the purposes of Article 404 CRR.By 31 December 2015, EBA is also requested to report to the Commissionwhether and how it would be appropriate to ensure that institutions usestable sources of funding, including an assessment of impact on thebusiness and risk profile of Union institutions or on financial markets or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  33. 33. P a g e | 33the economy and bank lending (Art. 481(3) CRR).Therefore, information included in the ITS on liquidity reporting will alsobe useful to EBA in reporting on the impact of the general liquiditycoverage requirement and the appropriateness of a stable fundingrequirement.However, this draft ITS will not help the EBA determine whether certaintransferable assets are of high or extremely high liquidity and creditquality, as this an assessment independent of whether individualinstitutions are holding such assets.Level of application and frequency of liquidity coveragereporting and the reporting on stable fundingThe scope and level of application of the ITS follows the scope and levelof application of the CRR, i.e. it applies- on a consolidated basis (Article 10(3) CRR): to EU parent creditinstitutions and investment firms and to credit institutions andinvestment firms controlled by an EU parent financial holding companyor by an EU parent mixed financial holding company;- on an individual basis (Article 5(4)) : to all credit institutions andinvestment firms that are authorised to provide the investment serviceslisted in points 3 and 6 of section A of Annex I to Directive 2004/39/EC.However, according to Article 7 of the proposed CRR text, competentauthorities will be allowed to waive in full or in part the application ofArticle 401 (Liquidity Coverage Requirement) to a parent institution andto all or some of its subsidiaries, if they fulfil a set a predefined conditions,including if the parent institution complies on a consolidated basis withthe obligation set forth in Article 401 and 403 (Article 7(1) (a)).The frequency of the reporting requirements are aligned with thoseenvisaged in the draft CRR text: not less than monthly for the liquidityreporting and not less than quarterly for the reporting on stable funding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  34. 34. P a g e | 34Both the frequency and the scope of application of the ITS will be revisedto be aligned to final text of the CRR, especially regarding the applicationof liquidity requirements to investment firms (Article 480(2) of CRR).IV. Draft Implementing Technical Standards on Supervisoryreporting requirements for liquidity coverage reporting andreporting on stable fundingIn between the text of the draft ITS that follows, further explanations onspecific aspects of the proposed text are occasionally provided, whicheither offer examples or provide the rationale behind a provision, and/orset out specific questions for the consultation process.Where this is the case, this explanatory text appears in a framed text box.Structure of the draft ITSCHAPTER 1 Subject matter, Scope and DefinitionsCHAPTER 2 Reporting reference and remittance datesCHAPTER 3 Format and frequency of reporting on liquidity and onstable fundingSection 1 Format and frequency of reporting on liquiditySection 2 Format and frequency of reporting on stable fundingCHAPTER 4 IT solutions for the submission of data from institutions tocompetent authoritiesCHAPTER 5 Final provisionsAnnex I Liquidity coverage reporting templateAnnex II Stable funding reporting templateAnnex III Instructions liquid assets _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  35. 35. P a g e | 35Annex IV Instructions inflowsAnnex V Instructions outflowsAnnex VI Instructions Stable fundingDraft Commission Implementing Regulation (EU) No XX/2012of XX Month 2012 laying down implementing technical standards withregard to supervisory reporting of institutions according to the (proposalfor a ) European Parliament and Council Regulation (EU) No [xx] of[date] on prudential requirements for credit institutions and investmentfirms.CHAPTER 1Subject matter, Scope and DefinitionsArticle 1Subject matter and scope1. This Regulation lays down uniform requirements that all institutionssubject to the Regulation of the European Parliament and of the Councilon prudential requirements for credit institutions and investment firms(hereinafter “CRR”) must meet relating to the submission of supervisorydata to competent authorities for the following areas:a) liquidity reporting requirements as defined in Part III, Title II ofRegulation xx/xx ;b) supplementary reporting of liquid assets as defined in Annex III ofRegulation xx/xx ;c) stable funding reporting requirements as defined in Part III, Title III ofRegulation xx/xx ;d) additional liquidity monitoring metrics as defined in Part III, Title IIof Regulation xx/xx ;e) IT solutions as defined in Part III, Title II of Regulation xx/xx . _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  36. 36. P a g e | 36Explanatory text for consultation purposesThe draft CRR also requires the EBA to develop a draft ITS to coveradditional monitoring metrics by Jan 1, 2013.The EBA intends to launch a separate consultation on this matter inautumn 2012.The data point model will be published for consultation in the thirdquarter of 2012.2. The liquidity reporting requirements and the supplementary reportingof liquid assets specified in this regulation apply until the delegated actfor a liquidity coverage requirement as referred to in Article 444 ofRegulation xx/xx has entered in force.Some supplementary information is asked in the template to increasedata coverage.At certain times the EBA may propose to change, amend or alter thereporting specified in this Regulation in order to inform the reportrequired by Article 481.This does not prejudge the future calibration of the ratio.3. The stable funding reporting requirements specified in this regulationapply until a legislative proposal for a stable funding requirement asreferred to in Article 481 (3) of Regulation xx/xx would enter in force.4. The reporting shall be done on an individual basis (Article 5) and on aconsolidated basis (Article 10) as defined in Regulation xx/xx.Individual reporting may only be waived according to the proceduresoutlined in Articles 7 and 19.These Articles make clear the respective roles of the EBA and the relevantcompetent authorities in granting any such waivers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  37. 37. P a g e | 37Article 2Definitions1. For the purpose of this Regulation, the definitions provided byRegulation xx/xx shall apply, in particular those included in Article 4 and400 of the CRR shall apply.2. For the purpose of this Regulation, the scope and level of applicationaccording to Part 1, Title II of Regulation xx/xx shall apply.Explanatory text for consultation purposesIn addition, according to Article 403.2, institutions are required to reportitems separately if they are indexed to a currency where the institution hassignificant liquidity risk or such currency is the lawful currency of ajurisdiction where they have a significant branch.For the purposes of harmonising the definition of a currency where aninstitution has significant liquidity risk the EBA proposes that this shouldbe limited to those currencies which comprise more than 5% of aninstitution’s liabilities.Q2: Do respondents agree with this proposal for definingsignificant currency?The reporting for investment firms should be done following therequirements of Part 1, Title II until the eventual implementation of anylegislative proposal referred to in Article 480(2) of CRR.CHAPTER 2Reporting reference and remittance datesArticle 31. The reporting reference dates shall be:- Monthly reporting: on the last day of each month; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  38. 38. P a g e | 38- Quarterly reporting: 31 March, 30 June, 30 September and 31 December.Article 4Reports shall be submitted by institutions to competent authorities byclose of business on the 15th calendar day after the reporting referencedate specified in Article 3.1. If the remittance day is a public holiday, Saturday or Sunday, reportingrequirement shall be transmitted on the following working day.2. The above remittance dates concern the submission of unauditedfigures which are figures that have not been assessed by external auditors.Where applicable, audited figures implying changes in already reporteddata shall be submitted as soon as available.In addition, any errors in the submitted reports shall be corrected by thereporting institution by submitting the necessary revisions to the relevantcompetent authority as soon as possible.Explanatory text for consultation purposesThe proposed remittance period is 15 days for the monthly reporting and15 days for the quarterly reporting.Q3: Is the proposed remittance period of 15 days feasible?CHAPTER 3Format and frequency of reporting on liquidity and on stablefundingSection 1Format and frequency of reporting on liquidity coveragerequirementArticle 5 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  39. 39. P a g e | 391. Information submitted pursuant to the templates set out in Annex I(liquidity coverage reporting template) and according to the instructionsin Annex III, IV and V shall be reported on a monthly basis.2. Institutions shall have the operational capacity to increase thefrequency to weekly or even daily in stressed situations at the discretion ofthe competent authorities.The items listed for reporting in the template include all the necessaryitems specified in Articles 400 to 415 of the CRR. Certain additional itemsare included to help institutions and supervisors check data quality and toinform other relevant policy options, such as intra-group treatments.Q4: Are there additional sub-categories of inflows and outflowsthat are consistent with the specification of the liquiditycoverage requirement in the CRR and would inform policyoptions that should be included in the template and accordinglyreported?With respect to the reporting of liquid assets according to Annex III andArticle 404, in the absence of a harmonised definition, institutions arepermitted to use internal definitions for the purposes of liquidityreporting.The CRR also permits competent authorities to give guidanceinstitutions shall follow in identifying assets of high and extremely highliquidity and credit quality.It is not practical in the context of a harmonized reporting framework forinstitutions to have complete freedom to define such assets, both from thepoint of view of having common IT solutions and data comparabilityacross submissions.Therefore the EBA is using this consultation to ask institutions whatadditional data on asset class holdings should be collected. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  40. 40. P a g e | 40The most significant amendments to the CRR in respect of liquidityreporting proposed by the co-decision bodies are to include equities, goldand high-quality residential mortgage-backed securities orstate-guaranteed bank debt.It should be noted that collecting data on additional assets does increasethe complexity of the template given that the inflow and outflow rates onrepo and reverse repo transactions are varied according to the liquiditycategory which each asset belongs to in accordance with Articles 410 and413.The responses to the following question will be taken into accounttogether with any mandated inclusions or exclusions of assets in the finalversion of the CRR for the purposes of giving the guidance to institutionspermitted in Article 404.Q5: Fur the purposes of providing guidance as to transferrablesecurities of high and extremely high credit and liquidity quality,what additional assets, if any, should the ITS collect?Section 2Format and frequency of reporting on stable fundingArticle 5Format and frequency of reporting on stable funding1. Information submitted pursuant to the template set out in Annex II(Stable funding reporting requirement) and according to the instructionsin Annex VI shall be reported on a quarterly basis.Explanatory text for consultation purposesThe scope, definitions, reporting reference and remittance dates as setout in Chapters X and X apply.2. The information to be reported are the following: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  41. 41. P a g e | 41a) information on items providing stable funding according to Article414(1) of Regulation xx/xx ;b) information on items requiring stable funding according to Article415(1) of Regulation xx/xx .Explanatory text for consultation purposesThe information gathered will help to compile the report to theCommission on whether and how it would be appropriate to ensure thatinstitutions use stable sources of funding according to the Article 481§3 ofthe CRR in order to promote more medium and long-term funding of theassets and activities of banking organisations.The amount of stable funding required of a specific institution should bea function of the liquidity characteristics of various types of assets held,off-balance sheet contingent exposures incurred and/or activitiespursued by the institution.Q6: Do respondents agree that the template captures therequirement of the draft CRR on reporting of stable funding?Where applicable, the information required on stable funding will have tobe presented in five buckets (within 3 months, between 3 and 6 months,between 6 and 9 months, between 9 and 12 months and after 12 months).V. Accompanying documentsa. Draft Impact AssessmentIntroductionArticle 403(3)(a) of the CRR requires the EBA to develop draftImplementing Technical Standards (ITS) relating to the reporting onliquidity coverage and stable funding.As per Article 15(1) second subparagraph of the EBA Regulation(Regulation (EU) No 1093/2010of the European Parliament and of theCouncil), any draft technical standards developed by the EBA will have tobe accompanied by a separate note on Impact Assessment (IA) which _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  42. 42. P a g e | 42analyses the „the potential related costs and benefits (unless suchanalyses are disproportionate in relation to the scope and impact of thedraft ITS concerned or in relation to the particular urgency of the matter).This IA aims to provide the reader with an overview of findings as regardsthe problems and options identified and their potential impact.This IA deals with the incremental impact of the EBA’s draft ITS todetermine the uniform templates, the instructions on how to use thistemplate, the frequencies and remittance days for reporting.Throughout the project the EBA has closely followed the work ofinternational organisations dealing with related topics, in particular theBasel Committee on Banking Supervision in charge of monitoring BaselIII requirements.Problem definitionArticle 403(3)(a) CRR mandates the EBA to develop draft implementingtechnical standards to specify uniform formats with associatedinstructions, frequencies, dates and delays for reporting of the liquiditycoverage and stable funding requirements.These reports will enable authorities to monitor institutions compliancewith the two requirements once they have become binding.During the monitoring period, the collected information will inform theeconomic impact assessment the EBA is mandated to perform underArticle 481(1), as well as the report on appropriate uniform definitions ofliquid assets according to Article 481(2).Article 403 CRR requires institutions to report items for the purpose ofmonitoring compliance with the liquidity requirements and alsostipulates that the reporting frequency shall not be less than monthly forthe liquidity coverage requirement and quarterly for reporting on stablefunding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  43. 43. P a g e | 43On the contrary, the CRR gives discretion for the EBA to propose optionson(i) whether to integrate liquidity reporting in the common reportingframework (COREP),(ii) the level of detail for some of the reporting items,(iii) remittance dates and(iv) reporting of significant currencies.Timing of ITS development and application dateInstitutions are expected to comply with the new CRR Requirementsfrom January 2013.Sufficient time for implementing ITS requirements is essential to ensuredata availability and quality in order for competent authorities to performtheir tasks.The CRR applies to institutions regardless of their size, risk profile, etc.The appropriate balance between the required level of detail of thesubmitted information and the nature, scale and complexity ofinstitutions activities is imperative in the consideration of reportingformats and frequencies.Objectives of the technical standardsThe objective of the draft ITS is to determine uniform templates andinstructions on how to use this template, the frequencies and dates ofreporting as well as IT solutions for the purposes of liquidity reportingrequirements.This draft ITS will assist institutions in fulfilling their reportingrequirements under Article 403(1) CRR. Additional liquidity monitoring _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  44. 44. P a g e | 44metrics according to Article 403(3)(b) CRR will be consulted at a laterstage.It is important that the relevant data is available for the review of theappropriateness of the liquidity coverage and stable fundingrequirements in 2015 and 2018, respectively.Policy proposalsGiven that the uniform liquidity reporting requirements are beingintroduced for the first time in the EU, an appropriate reporting templateneeds to be developed.I. Including the ITS as an Annex to the COREP reporting standardAt this stage reporting is for the observation period for the liquiditystandards, rather than a final standard. In this light, two alternatives havebeen considered:(i) Following an approach chosen for the QIS based on a stand-aloneExcel template, or(ii) including liquidity risk reporting in the common reportingframework.Option IAdvantages:- Keeping full flexibility for future adaptions after the ratios have beenfinally calibrated.Disadvantages:-No established reporting infrastructure,-No link to bank identifiers and other data which would be useful for theeconomic impact assessment to be performed under Article 481 (1).Option 2 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  45. 45. P a g e | 45Advantages:- Harmonised methodology to collect the data,- the ability to cross-reference to other metrics,- stablished infrastructure to analyse and manipulate the data.Disadvantages:-Any changes to the template as a result of the observation period wouldneed to take place within the COREP timetable.Based on the above reasoning it is concluded that option 2 is morebeneficial and hence integration into COREP is proposed.II. Submission timeThe time between reporting date and submission is not specified in CRR.The CP proposes as a baseline that reporting dates should be at monthend for LCR and quarter end for NSFR, and that the submission timeshould be 15 calendar days.This would take into consideration that the LCR incorporates a 30 daysforward looking stress scenario, i.e. ideally remittance should occurbefore this period ends.EBA encourages stakeholders to comment on the feasibility of theproposed submission time.III. Level of detail for certain reporting items for the liquiditycoverage requirementIn the absence of an adopted CRR there has been no finalized list ofliquid assets to be reported yet.Moreover, according to positions of both the ECOFIN and the EuropeanParliament, the EBA shall collect information on certain assets for the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  46. 46. P a g e | 46purpose of its economic impact assessment even in cases where theywould not meet certain criteria, e.g. central bank eligibility.For the purposes of this consultation, the EBA proposes the following:The template includes those assets that were specifically listed in theCommission proposal.Respondents are explicitly asked to suggest additional asset classes to beincluded in the reporting for the purpose of the economic impactassessment, and without prejudice to their eligibility after final calibrationof the LCR.IV. Reporting in significant currenciesArticle 405(g) CRR on the operational requirements for holdings of liquidassets requires that „the denomination of the liquid assets is consistentwith the distribution by currency of liquidity outflows after the deductionof capped inflows.Without collecting information on collecting the liquidity coveragerequirement by currency, the EBA could not measure the impact of thisproposal.Likely economic impactsIt is recognised that the reporting of liquidity requirements will incuroperational and compliance costs for institutions and competentauthorities.It is not envisaged that these costs would be over and above thoseincurred if the liquidity reporting requirements were constructed in analternative manner.In fact, if it was proposed to require reporting outside the scope ofCOREP, presumably this would increase operational costs in thelong-term. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  47. 47. P a g e | 47The proposal to rely on the COREP reporting framework is aimed atminimising the incremental economic impact of the liquidity reportingrequirements for institutions and competent authorities.b. Overview of questions for public consultationQ1: Are the proposed dates for first remittance of data, i.e. end of Januaryand end of March2013 feasible?Q2: Do respondents agree with this proposal for defining significantcurrency?Q3: Is the proposed remittance period of 15 days feasible?Q4: Are there additional sub-categories of inflows and outflows that areconsistent with the specification of the liquidity coverage requirement inthe CRR and would inform policy options that should be reported?Q5: Fur the purposes of providing guidance as to transferrable securitiesof high and extremely high credit and liquidity quality, what additionalassets, if any, should the ITS collect?Q6: Do respondents agree that the template captures the requirement ofthe draft CRR on reporting of stable funding? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  48. 48. P a g e | 48NUMBER 4Opening RemarksDATE: June 7, 2012SPEAKER: Jeanette M. Franzel, Board MemberEVENT: PCAOB Forum on Auditing in the Small BusinessEnvironmentLOCATION: Minneapolis, MNWelcome to the PCAOB Forum on Auditing in the Small BusinessEnvironment.I am Jeanette Franzel, Board Member at the Public Company AccountingOversight Board.I will be the host and moderator today. Before I go further, I must tell youthat the views I express today are my personal views and do notnecessarily reflect the views of the Board, any other Board member, or thestaff of the PCAOB.This is our eighth year of holding forums in cities across the United Stateson auditing in the small business environment.During 2011, the Board held seven of these forums across the U.S.,reaching more than 750 participants.The goal of these meetings is to create an opportunity for discussion anddialogue between PCAOB and auditors in smaller firms by providingopportunities for auditors to learn about the PCAOBs work, and toprovide feedback and ask questions about PCAOB activities-- includinginspections, auditing standards and guidance, and current projects andpriorities of the Board.So please participate. We welcome your input and questions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  49. 49. P a g e | 49The statutory mission of the PCAOB is to oversee audits of publiccompanies in order to protect the interests of investors and further thepublic interest in the preparation of informative, accurate, andindependent audit reports.The PCAOB is also charged with overseeing the audits of broker-dealercompliance reports under federal securities laws to promote investorprotection.We fulfill our mission through our inspections, our authority to setauditing standards, and our enforcement efforts.We are going to be talking today about those programs throughpresentations and case studies, with special emphasis on some of theissues facing smaller firms.Today, we will cover a number of updates on the auditing environment,audit standard-setting activities, related SEC activities, and a review ofcommon financial reporting issues facing smaller issuers.In addition, we will spend a considerable amount of time discussingpractical aspects of auditing through our case studies involving the topten inspection findings and the relevant auditing standards.Finally, we will cover the process for remediation of deficiencies detectedduring PCAOB inspections.In 2011, there were 476 domestic firms that issued audit opinions on thefinancial statements of 100 or fewer issuers, making them subject toPCAOB inspections every three years, which is why we sometimes referto these firms as "triennial firms."Of those firms, 287, or 60 percent, issued audit opinions on between 1 and5 issuers.The triennial firms include a broad range of firm size, structure, andpractice, including sole proprietorships with small staffs to large networkfirms with dozens of partners and multiple offices.These firms audit public companies of all types and sizes, including shellcompanies, small manufacturing and financial services companies, andnew startups, with market caps in the tens of millions of dollars, and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  50. 50. P a g e | 50larger companies that encompass multiple industries with market caps inthe billions of dollars.In the aggregate, triennial firms audit the financial statements of issuersthat represent $110 billion to $120 billion in U.S. market capitalization(based on data as of December 31, 2011).Ensuring that these firms consistently perform high quality audits isimportant to the Board as well as the investing public.Auditors have been given an important and trusted role in the capitalmarkets, and, from time to time, that role has been re-examined by thegovernment and the profession itself.Such examination is appropriate, given the auditors role of providingassurance to investors, lenders and others that an audited companysfinancial statements and related disclosures fairly present the institutionsfinancial results in conformity with applicable accounting and disclosurestandards and rules.Clearly, reliable financial statements with auditor assurance are importantto your clients, their investors, and the broader financial markets.A strong, high quality audit function is essential to the effectivefunctioning of the capital markets, which in turn, affects the well-being ofAmerican families.More than half of American households invest their savings in securitiesto provide for retirement, education, and other goals.It is encouraging that we have heard from many stakeholders who believethat audit quality has improved since the passage of the Sarbanes-OxleyAct and the establishment of the PCAOB.But there is still more that needs to be done.The Board is concerned by the number of serious deficiencies found inour 2010and 2011 inspections.Our inspection findings spiked in the 2010 inspections for the annuallyand triennially inspected firms. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  51. 51. P a g e | 51Those inspections generally looked at audits of 2009 financial statements.Inspection findings have remained at a relatively high level for the 2011inspections.Later this morning, we will discuss our "Top 10 Common InspectionFindings."It is interesting to note that there is a high degree of overlap with the top10 accounting matters identified by the SEC.These include matters that are relatively basic as well as issues that arevery complex.Our case studies today will specifically focus on several of these areas.Also, in our inspections, we have noted that the following situations tendto increase the likelihood that findings will be identified:- a significant increase in a firms issuer audit practice and/or expansion into new industries;- a recently executed firm merger or acquisition; and- a significant increase in the number of issuers audited per partner.Our inspections staff devote considerable attention and time during theinspection process to encourage firms to evaluate possible root causes fordeficiencies within the firms structure, operations, processes or otherareas that detract from audit quality.Today we will discuss the inspection procedures relating to firmsremediation plans and actions.In general, firms have taken appropriate steps to remediate identifiedquality control findings. Remediation remains an area of strong focus ofthe Board and staff.***Clearly, audit quality requires constant attention and work.Auditing is difficult and filled with competing tensions, and we can andshould continue to learn from years of experience. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  52. 52. P a g e | 52I hope that you find todays program useful and that you will activelyparticipate in todays discussions and take this information back to yourfirms.We also welcome your input and feedback throughout the program. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  53. 53. P a g e | 53NUMBER 5Auditing the FutureDATE June 7, 2012SPEAKER(S): Jay D. Hanson, Board MemberEVENT: Fair Value Measurements and Reporting ConferenceLOCATION: National Harbor, MDGood Morning,I am very honored to be here this morning to address the Fair ValueMeasurements and Reporting Conference.I was a presenter at the first AICPA Fair Value conference in 2009 when Iwas a partner at McGladrey & Pullen LLP.Since then, I have moved on to my new role as a Board member of thePublic Company Accounting Oversight Board, where I am dealing withmany of the same issues I encountered during my years as a publicaccountant, but from a different perspective.I am encouraged that you have all joined this event to explore issuesrelated to fair value measurements.I am going to discuss today some of the Boards activities that may be ofconsequence to your work and will share with you some of my views frommy new perspective as an audit regulator and standard setter.Before I go further, however, I must tell you that the views I express todayare my personal views and do not necessarily reflect the views of theBoard, any other Board member, or the staff of the PCAOB. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  54. 54. P a g e | 54Introduction – Creation of the PCAOB and its ActivitiesHistorically, basic accounting concepts have not changed often orquickly.The past decade, however, has been a period of unprecedented changesin the areas of accounting and auditing.The collapse of Enron, the bankruptcy of WorldCom and the subsequentpassage of the Sarbanes-Oxley Act of 2002, as well as the increasing use offair value measurements and the financial crisis, all contributed to anenvironment that drove these changes."SOX," as so many affectionately call the landmark legislation, was theresult of investor losses from financial reporting and auditing deficienciesearly in this century at some of the largest public companies in the UnitedStates: Enron, Global Crossing, Adelphia, Tyco, Qwest Communications,Xerox and WorldCom.The events involving these companies shook the confidence in theintegrity and reliability of public company financial reporting anddemonstrated a need for enhancements in internal controls over financialreporting and corporate governance.Ten years ago next month, Congress passed the Sarbanes-Oxley Actalmost unanimously, resulting in the most significant legislation relatingto the federal securities laws since 1934.The Sarbanes-Oxley Act created the PCAOB, which commencedoperations in 2003.The Boards mission – as set forth in the Act – is "to protect the interestsof investors and further the public interest in the preparation ofinformative, accurate and independent audit reports."As you may know, the PCAOB has four main responsibilities under theAct:1. Registration of public accounting firms that audit public companies orbroker-dealers;2. Standard Setting; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  55. 55. P a g e | 553. Inspections of registered public accounting firms; and4. Investigations and disciplinary proceedings in cases where auditorsmay have violated certain provisions of the securities laws or applicablestandards or rules.Currently, over 2400 firms, including over 900 foreign firms from 88jurisdictions, are registered with the PCAOB.The PCAOB has built an inspection program comprising over 440inspection staff members.Of all registered firms, 9 currently are subject to annual inspectionbecause they issue over 100 audit reports each year, while approximately850 are subject to inspection at least every three years because they issue100 or fewer audit reports each year.Our Office of the Chief Auditor is responsible for leading the Boardsstandard setting activities.When it commenced operations, the Board adopted as its interimauditing standards those standards promulgated by the AICPAsAuditing Standards Board before April 16, 2003.Since then, the Board has issued 15 of its own auditing standards —including, for example, on audit documentation, internal controls, auditplanning, engagement quality review, and risk assessment — and hassubstantially amended a number of interim standards.More recently, the Board issued concept releases or proposals to triggerwide-ranging discussions about potential changes to certain fundamentalaspects of auditing, including the contents of the auditors report,transparency relating to participants in the audit, audit committeecommunications, and auditor independence, objectivity, and skepticism.Since it began operations, the PCAOB has conducted over 1800inspections, including inspections in 38 jurisdictions outside the UnitedStates.Our enforcement program has sanctioned 39 firms and 52 individuals todate, including imposing censures, temporary and permanent practice _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  56. 56. P a g e | 56bars, revocations of firm registrations, and civil money penalties up to $2Million.In pursuing its mission during the last nine years, the Board has evolvedfrom a start-up institution focused on establishing a comprehensive,consistent oversight system to a maturing regulatory organization withthe experience and resources to adapt to changing times and newchallenges.Changes in the Accounting and Auditing Professions and theIncrease in Fair Value MeasurementsThe accounting and auditing professions as a whole are facing difficultquestions as a result of the increasing complexity of business transactionsand cutting edge financial instruments which are appearing morefrequently not only in the financial statements of financial institutions butmany other types of companies as well.Thirty years ago, financial statements were dominated by tangible assetsand historical cost accounting.Today, after rapid advances in technology and the development ofinnovative business models, the balance sheets of an increasing numberof companies are dominated by valuation estimates, rather than "solidnumbers," and it is much more difficult for accountants, auditors andinvestors to understand the transactions and products that must becaptured in financial statements.Management and their accountants increasingly must tackle fair valuemeasurements and management estimates, consistent with newaccounting standards in connection with derivatives, securitizations,consolidations, debt/equity issues, revenue recognition, leases and otherissues.As a result, the valuation process used by management, and the auditorsreview thereof, have had to evolve during the last several decades.What may have begun as a calculation on a scrap piece of paper – perhapsa simple multiple of EBITDA – evolved into management memosdocumenting valuation processes; auditors becoming aware of potentialpitfalls and increasing their review of managements valuations and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)