Page |1        International Association of Risk and Compliance                      Professionals (IARCP)      1200 G Str...
Page |2The Relevance of Audits and the Needs of InvestorsMay 31, 2012James R. Doty, Chairman, 31st Annual SEC andFinancial...
Page |3Hearing on the ESRB beforethe Committee on Economicand Monetary Affairs of theEuropean ParliamentIntroductory state...
Page |4Commodity Futures Trading Commission(CFTC)“Smart Regulatory Reform and the Perils ofHigh-Frequency Regulation” –Rem...
Page |5NUMBER 1The Relevance of Audits and the Needs of InvestorsMay 31, 2012James R. Doty, Chairman, 31st Annual SEC and ...
Page |6How will the U.S. be affected?Looking toward China, many say that that nations economic growthcannot continue witho...
Page |7And he was a good Trojan. Although a graduate of UCLA, he became anactive and generous USC supporter after UCLA end...
Page |8That is where he met his wife and future business partner, Elaine OtterLeventhal. After they finished school in 194...
Page |9The Leventhal firm specialized and trained its professionals in being ableto discern, in simple terms, the economic...
P a g e | 10II. An Audit Establishes Its Relevance on a Foundation ofSkeptical Inquiry.An audit that is merely confirmator...
P a g e | 11In July 1989, the firm produced a report for the Federal Home Loan BankBoard of San Francisco on Irvine-based ...
P a g e | 12These matters were complex, and judgmental decisions were sometimesnecessary to determine which accounting rul...
P a g e | 13Based on what the Leventhal firm had uncovered, in 1989 the Chairman ofthe FDIC said that the government shoul...
P a g e | 14This includes some very large non-U.S. firms that are affiliated with thelarge U.S. firms, as well as many sma...
P a g e | 15But the explicit acknowledgement that the test was designed to supportmanagements number — the "pin" — calls i...
P a g e | 16so, legal or illegal, whether such goals undermine the appropriate state ofmind for auditors.This is the unfin...
P a g e | 17The PCAOB has also recently proposed, for a second exposure, a newauditing standard on what the auditor should...
P a g e | 18In this regard, as with the revisions of the auditors reporting model, thefocus of the European Union and its ...
P a g e | 19In the S&L crisis, the U.S. government turned to the profession to sort outthe facts and provide reliable valu...
P a g e | 20We are drawing as broad and as clear a picture as we can about howauditors meet the challenges of understandin...
P a g e | 21like this one that you provide professionals, will make a difference as tothe choices your progeny make.      ...
P a g e | 22NUMBER 2May 30, 2012The Federal Reserve Board on Wednesday announced the approval of afinal rule outlining the...
P a g e | 23The final rule specifies the information that an SHC will need to provideto the Board as part of registration ...
P a g e | 24DATES: The rule is effective [30 days after date of publication in theFederal Register].Important partsSUPPLEM...
P a g e | 25Section 618 makes a registered securities holding company subject to allof the provisions of the Bank Holding ...
P a g e | 26This commenter argued that such foreign companies should be subject tosupervision by the Board as supervised s...
P a g e | 27Under the final rule, terms such as “affiliate,” “bank,” “bank holdingcompany,” “control,” and “subsidiary” ar...
P a g e | 284. For the senior officers and directors with decision-making authority forthe securities holding company, the...
P a g e | 29f. Remedial authority of the home country supervisor;g. Prior approval requirements; and,h. Any applicable reg...
P a g e | 30The final rule provides the Board with flexibility to adjust theserequirements as appropriate to ensure that s...
P a g e | 31   The Supplement to the Consolidated Financial Statements for Bank    Holding Companies (FR Y-9CS),   The F...
P a g e | 32NUMBER 3IntroductionLast year, the UK financial services industry faced regulatory change on asweeping scale.A...
P a g e | 33The European Union (EU), meanwhile, created three pan-Europeanagencies to address the risk of regulatory arbit...
P a g e | 34The Act gave us a new financial stability objective to contribute toprotecting and enhancing UK financial stab...
P a g e | 35• suspend or impose restrictions on an approved person for up to twoyears;• impose a financial penalty at the ...
P a g e | 36Business Unit, which broadly aligns with the regulatory activities of thePRA, other than enforcement. Central ...
P a g e | 37• The Committee of European Securities Regulators (CESR).The ESAs are responsible for developing a large propo...
P a g e | 38• retaining responsibility for day-to-day supervision at the national level.Once the ESA legislative package w...
P a g e | 39This approach has demanded quality staff, industry knowledge and thewill to challenge the industry robustly wh...
P a g e | 40Chart 3: Cost of creditChart 4: FSA firm cancellationsChart 5: Major UK banks – CDS spreads, five-year senior ...
P a g e | 41The proportion of high-risk issues closed was slightly higher than otherissues at 18%, reflecting us prioritis...
P a g e | 42The current cost of interbank borrowing (measured by the Libor-OISspread) – in a context and relative to the e...
P a g e | 43This chart shows the number of authorised firms this year that havecancelled their authorisation with the FSA....
P a g e | 44UK banks’ credit default swaps (CDS) spreads are a measure of howinvestors perceive the default risk posed by ...
P a g e | 45Solvency IIAs we said in our Business Plan for 2010/11, Solvency II is a fundamentalchange of the prudential r...
P a g e | 46We gave briefings and ran workshops to educate firms about theimportance of taking part in QIS5.We encouraged ...
P a g e | 47We will review the European policy timelines regularly, and publish ourown consultation timeline on our websit...
P a g e | 48We published an overall update on Solvency II in June 2010 on all pillarsof the Directive to inform and motiva...
P a g e | 49NUMBER 4Interview with Gabriel Bernardino,Chairman of EIOPA, conducted by JanWagner, Versicherungsmagazin(Germ...
P a g e | 50This has negative consequences for protection and pricing.To illustrate this, let us take two insurance firms ...
P a g e | 51Isn’t it true though that big listed insurers have an advantageover mutuals, as they will be able to raise the...
P a g e | 52In a low interest rate environment insurers have to find ways of boostingreturns.No one is saying that with So...
P a g e | 53For assets which are more volatile like shares and real estate, a further riskcharge applies.Will the reportin...
P a g e | 54There are elements of Solvency II that make lots of sense for pensionfunds, such as governance, transparency a...
P a g e | 55NUMBER 5Hearing on the ESRB before the Committee on Economic andMonetary Affairs of the European ParliamentInt...
P a g e | 56After a period of stabilisation on the back of actions by central banks andother institutions earlier this yea...
P a g e | 57EU reforms, designed to improve their resilience, are fully implementedand adhered to – an issue that I will r...
P a g e | 58While the launch of the ESRB was a first, and necessary, step in thisrespect, it is vital to develop a sound a...
P a g e | 59i) A draft directive and regulation on capital requirements for creditinstitutions (the “CRD/CRR”);ii) The pro...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for w...
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Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

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Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

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Monday June 4 2012 - Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,Today we can start from No. 10 of the list, where we discusscyber-attacks. According to Mark G. Clancy, Managing Director andCorporate Information Security Officer, The Depository Trust & ClearingCorporation:“Cyber-attacks on the financial services sector represent a significant risknot just to industry participants but to the stability and integrity of theglobal financial system itself.”“The global financial system is an enormous, interconnected system ofsystems.In other words, while individual institutions operate different parts of thecritical infrastructure, the financial system itself is a product of theinteractions of all these discrete actions.”It is an interesting speech, you must read it.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2The Relevance of Audits and the Needs of InvestorsMay 31, 2012James R. Doty, Chairman, 31st Annual SEC andFinancial Reporting Institute Conference, Pasadena, CAMay 30, 2012The Federal Reserve Board announced theapproval of a final rule outlining the proceduresfor securities holding companies (SHCs) to electto be supervised by the Federal Reserve.An SHC is a nonbank company that owns at least one registered broker ordealer.Last year, the UK financial services industry facedregulatory change on a sweeping scale.At the national level the last UK governmentintroduced the Financial Services Act 2010, whichresulted in a number of changes.Interview with Gabriel Bernardino, Chairman ofEIOPA, conducted by Jan Wagner,Versicherungsmagazin (Germany) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Hearing on the ESRB beforethe Committee on Economicand Monetary Affairs of theEuropean ParliamentIntroductory statement by Mario Draghi, Chair of the ESRBBrussels, 31 May 2012Meeting of the Financial Stability Board in HongKong on 29-30 MayAt its meeting in Hong Kong, the Financial Stability Board (FSB)discussed vulnerabilities currently affecting the global financial systemand the progress in authorities’ ongoing work to strengthen globalfinancial regulation.Publication of the first regulatory technicalstandards on credit rating agencies (CRAs) -30/05/2012Four European Commission DelegatedRegulations establishing regulatory technical standards for credit ratingagencies have been published in the Official Journal of the EuropeanUnion. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4Commodity Futures Trading Commission(CFTC)“Smart Regulatory Reform and the Perils ofHigh-Frequency Regulation” –Remarks by Commissioner Scott D. O’MaliaMay 31, 2012Commodity Futures Trading Commission(CFTC)Statement Regarding Public Roundtable toDiscuss the Proposed Volcker Rule,Chairman Gary Gensler,May 31, 2012Hearing entitled “Cyber Threats toCapital Markets and CorporateAccounts”Friday, June 1, 2012House Committee on Financial Services, Subcommittee on CapitalMarkets and Government Sponsored Enterprises Hearing on “CyberThreats to Capital Markets and Corporate Accounts”Mark G. Clancy, Managing Director and Corporate Information SecurityOfficer, The Depository Trust & Clearing Corporation _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5NUMBER 1The Relevance of Audits and the Needs of InvestorsMay 31, 2012James R. Doty, Chairman, 31st Annual SEC and FinancialReporting Institute Conference, Pasadena, CAGood Afternoon,I am pleased to be back this year to join you in this conference again. Imust tell you that the views I express today are my own and do notnecessarily reflect the views of the Board, any other Board member, or thestaff of the PCAOB.This is a special year in many respects. We have our own concerns athome. But those of us who find our work on financial terrain have oursights trained east, toward Europe, and west, toward China, more than inpast years.In the broader population, there is new apprehension for effects we dontknow but must nevertheless judge.Will European states muster a defense to the behavioral contagion offinancial panic?Will they find a way to use their inter-dependence to make Europefinancially stronger?Or will they find that too many divergent interests must agree to save theEuropean experiment? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6How will the U.S. be affected?Looking toward China, many say that that nations economic growthcannot continue without structural changes.Can China instill its new, investing middle-class with confidence thatfinancial markets will provide for its future?From our larger companies to our smaller entrepreneurs, we are doingbusiness in China.Can we have confidence that China isnt the latest iteration of — pickyour era — the Tulip Scandal, the silver-mine frauds of the Old West, theS&L bust? And how should we deal with these risks in a global economy?These are questions that require that admirable quality we often callvision. When we speak of vision, we speak of visionaries.That is, people who have stepped out from the crowd and revealedsomething that the rest of us could not see.There are false visionaries, who inspire us to act based on what we or theywish might be. But the true ones give us honesty, and invaluableleadership.I. Ken Leventhal Exemplified the Expertise and Integrity that isNeeded to Make Accounting and Auditing Relevant to the 21stCentury.Earlier this month, the University of Southern California, the accountingprofession and the public more generally lost a true visionary.I refer to the passing from our scene of Kenneth Leventhal earlier thismonth, at the age of 90.Ken Leventhal, throughout his career, gave us clear ideas about how thepractice of accounting can and should give society the tools necessary toreduce complicated circumstances to simple, actionable facts. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7And he was a good Trojan. Although a graduate of UCLA, he became anactive and generous USC supporter after UCLA ended its accountingmajor.He believed in the future of the accounting profession.He wanted to train the new generation of accountants to use the tools hehad developed in practice to help the profession thrive as a vital force forsocial good.He helped build and maintain a first-rate accounting program at USC,which among other things brings the faculty, policy-makers inaccounting, auditing and securities regulation, as well as leaders in theprofession together each year at this first-rate conference.Beyond his work here at USC, his professional life leaves a great a legacyand, if we heed his lessons, perhaps a chance to see our confusingfinancial world with his clarity.He was born in 1921.As he told his own story, he got the idea for his career when he was apaper boy for the Herald-Express newspaper.His boss was planning to take a correspondence accounting course andgo into business for himself, because — as many faculty members willlikely recall Mr. Leventhal recounting — "all it took to get started inaccounting was a pencil."Mr. Leventhal said that "for a nickel," he figured he could be his ownboss, and he never changed his mind.Mr. Leventhals plan was interrupted in 1939, after high school, by WWII.When he returned from the war, he enrolled at UCLA on the GI Bill. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8That is where he met his wife and future business partner, Elaine OtterLeventhal. After they finished school in 1949, they started the accountingfirm Kenneth Leventhal & Co. in Los Angeles.They focused on real estate accounting, and grew the firm into thepremier real estate specialty firm in the country, at one point the ninthlargest firm in the country.Their clients included the top real estate developers in the post-warperiod — Ray Watt, Trammell Crow, Donald Trump, and Donald Bren toname a few. Mr. Leventhal made his mark guiding those clients "throughtimes of expansion and financial distress."To give you a sense of that mark, let me read a passage from aWashington Post article in 1990.It said, "When Donald J. Trump, the flamboyant real estate tycoon, foundhis business empire in disarray, he could have called on any of WallStreets top investment bankers to help him out of his troubles.Instead, he turned to an accountant in Los Angeles," Kenneth Leventhal.The Post called him "no run-of-the-mill" accountant. Rather, it reported,"[a]t a time when the world of accountants and their firms is undergoingwrenching changes, besieged by government lawsuits and cutthroatcompetition for clients" — sound familiar? — "the 70-year-old Leventhalis running ahead of the pack and, so far, ahead of his professionsproblems."The Post went on to explain the source of his worth: his skill and integrity.As one person put it at the time, "If Trump said his properties were worthsuch and such, the bankers might not believe him. But if Ken Leventhalsays they were worth it, nobody would challenge his word."For decades, the firm had enjoyed high regard in accounting and realestate circles. Forbes magazine noted in a 1979 article on the firm that,through its expertise, "Leventhal . . . made a name for itself by helpingover a score of troubled real estate companies keep out of the courts. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9The Leventhal firm specialized and trained its professionals in being ableto discern, in simple terms, the economics of transactions.In putting together a debt-restructuring plan, for example, the firm "firsthad to cut through what Leventhal call[ed] ‘the accounting hogwash."As a long-time partner explained it: "What we do is analyze theunderlying real estate in terms of a range of values, under differenteconomic circumstances. And we look at the probable streams of cashflow."In other words, he eschewed over-reliance on manuals and complexprograms that tried to anticipate everything, but, in the end, could beused to excuse a failure to find the proverbial needle in a haystack.This is not to say that the global audit firm can do without structure andmanuals, or that our economy can dispense with the global audit firm.But Mr. Leventhals career exemplifies confidence in a guiding principle— one that encourages staff to simplify, to understand the economics of atransaction before attempting to apply the accounting requirements.Doing so requires a deep understanding of the prevailing circumstances,awareness of trends, acute sensitivity to the fact that even the bestmanagements have an inherent bias toward self-protection.As he said, it can be done with a pencil, and the will to be skeptical of falsevisions. That is, the will to get it right.The approach an accountant chooses makes an enormous difference, tothe investors that rely on his work, to his firms integrity and reputation,and even his own career.One of the most exciting things about a career in the accountingprofession is that, no matter where you are in the country, your work —and your choices in how to perform that work — can make an immensedifference to an enormous number of people. Thats also, of course, adaunting responsibility. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10II. An Audit Establishes Its Relevance on a Foundation ofSkeptical Inquiry.An audit that is merely confirmatory, that supports managements visionwithout sufficiently testing it, promotes commoditization of the audit,and it does worse.From the halls of the great marble buildings in Washington, from theskyscrapers of Manhattan, from the sunny gardens here in Pasadena, onehears the same refrain: the complexity of financial reporting makes itdifficult for management to report, auditors to audit, and investors tounderstand the economic substance of a transaction or event.This tropism — our inexorable tendency toward the complex — threatensto crush auditor, preparer and investor alike.But the truth is that, by their conduct, auditors may encouragecomplexity by failing to simplify transactions to their economics, byapproaching their task as steps in a corroboration, by failing to speak tothe realities and relying on the formalities.Leventhals accountants saw this first hand in a classic instance of Mr.Leventhals so-called "hogwash."This example started out in a little known savings and loan association inIrvine, California, which was acquired by a hungry and ambitious realestate investor in Phoenix.It burst onto the public stage when the Leventhal firms work was pittedagainst the work of three major accounting firms.Leventhal had been engaged by the federal government to examinetransactions in which thrift regulators paid certain bankers to take onailing institutions in exchange for more than $50 billion in federalsubsidies.The firm helped the government determine which transactions shouldhave been reopened or renegotiated to win better terms for taxpayers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11In July 1989, the firm produced a report for the Federal Home Loan BankBoard of San Francisco on Irvine-based Lincoln Savings and LoanAssociation.The Leventhal report studied 15 transactions undertaken by Lincoln in1986 and 1987.The report stated that —The transactions . . . analyzed were accounting-driven "deals" created forthe appearance of profits.In economic reality the transactions provided no profit, but insteadexposed the Association to huge economic losses from other linkedtransactions or side deals, which the Association entered into for noapparent reason other than to induce purchases of its real estate at pricesfar in excess of appraised value.The report concluded, Lincoln was manufacturing profits by giving itsmoney away.The report ignited a political and public firestorm.It was the basis for federal regulators decision to put Lincoln intoreceivership in August 1989, costing taxpayers more than $2 billion — stilla large sum today.It was also submitted to the House Banking Committee, which hadcommenced an investigation of Lincoln, its parent American Continental,and Charles Keating, who headed them.At the Banking Committees hearing on the matter, representatives fromone of the three national accounting firms that had audited and signed offon Lincolns accounts in recent years challenged the conclusions of theLeventhal report — _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12These matters were complex, and judgmental decisions were sometimesnecessary to determine which accounting rules applied and how to applythem.We strongly disagree with Kenneth Leventhals sweeping generalizationthat we elevated form over substance. In its review of just 15 Lincoln andAmerican Continental transactions, out of hundreds of transactions,Kenneth Leventhal has made some serious mistakes.The Leventhal representative responded that "by properly reversing [thefifteen transactions they studied], over half of Lincolns reported profitssince Mr. Keating acquired the association disappeared."Many of the deals included related party transactions, in which Lincoln orits parent, American Continental, provided the needed cash downpayment to purchasers of Lincoln real estate either through a circuitousloan or by buying other real estate from the purchaser.The arrangements allowed Lincoln to report taxable income thatexceeded the consolidated taxable income of the parent, allowing Lincolnto make cash payments to the parent, American Continental, in the guiseof the subsidiarys portion of American Continentals tax obligation.To keep all this going, Keating exerted extreme pressure on Lincolns andAmerican Continentals auditors, the banking regulators, and even theCongress, which produced its own scandal in the Keating Five.Meanwhile, Lincoln, the regulated savings and loan, was drained.Contrast the paradigm offered by the Lincoln auditor —complexities andthe need for "judgmental decisions" — with the Leventhal approach:relevance achieved not by accepting complexity but by pursuing clarity,for its unwillingness to accept form over substance.The Leventhal approach made accountants work useful for clients,pertinent to the economic environment, and beneficial to the public. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13Based on what the Leventhal firm had uncovered, in 1989 the Chairman ofthe FDIC said that the government should have moved three years soonerto take disciplinary action against Lincoln.III. Indications of Future Challenges and a Path ForwardUntil his death, Ken Leventhal exhorted the profession to excel in quality,integrity and expertise.He believed those are the ingredients that, if championed, will make theprofession vibrant and successful in the 21st century.In 2010, after the most recent financial crisis, he said, "The thing thatbothers me nowadays is reading about all these accounting problems and‘irregularities. Im worried about the standards of our profession thatwould allow all these ‘irregularities to occur.I think we need to teach accounting students and younger staff a greaterobligation to integrity."A. Inspections Continue to Reveal an Unacceptable Number ofDeficiencies.Ken Leventhal was right to recognize that, notwithstanding his optimismfor the new generation of accountants and his belief in the importance ofaccountants work to the success of our capital markets, there isunfinished business to resolve the contradiction between the audit as aconfirming exercise and the audit as an inquiry to arrive at the truth — thecontradiction between the corporate client the auditor sees (and whoseview may determine the success of the individuals career) and theinvestor client (whose view determines the success and continuedrelevance of the profession as a whole).The PCAOB has conducted annual inspections of the largest firms for thelast nine years. We also conduct inspections at least once every threeyears of other firms that audit, or play a substantial role in auditing,companies that are considered issuers in the United States. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14This includes some very large non-U.S. firms that are affiliated with thelarge U.S. firms, as well as many smaller firms, both U.S. and non-U.S.Each year, we have deepened our understanding of the firms issuer auditpractices. From the beginning, inspectors have identified numerousdeficiencies.These are situations where inspectors believe, after considerable dialoguewith the firm to agree on the facts, that the firm has failed to obtainsufficient audit evidence to provide a basis for an audit opinion.In such cases, the financial statements may well be fairly presented inconformity with GAAP, but the audit work was not sufficient to obtainreasonable assurance that they are.I believe the rigor of inspections has improved the quality of auditing.Our inspectors have noted some significant improvements, such as morecare in certain areas and clearer thought-processes as reflected in auditplans and audit conclusion memos.Yet, in recent years, we have seen an equally significant spike indeficiencies.Year in, year out, inspectors find deference to management in keyreporting areas.For example, in the critical area of fair value reporting of financialinstruments, instead of skeptically testing the reasonableness ofmanagements assumptions and resulting assertions, one firms methodinvolved obtaining valuations from a number of external parties andpicking the one that is, "closest to the pin" — the pin beingmanagements claimed value.The work and expense to obtain the various outside valuations may havecreated an appearance of rigor. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15But the explicit acknowledgement that the test was designed to supportmanagements number — the "pin" — calls into question whether theauditor approached the audit with appropriate skepticism.What about evaluating managements estimate in light of theenvironment and prevailing trends? What about looking for the value thatis probable in light of those trends?It is the rare case in which an auditor knowingly acknowledges ordocuments the conflict between maintaining objectivity and maintaininga good client relationship.Indeed, the auditors who explicitly aimed for the number closest tomanagements claimed value may not have consciously sought to obscurevaluation errors.Nor am I suggesting that Lincolns auditors colluded with managementto mislead. But they did allow themselves to be mere corroborators of astory that became thinner with each transaction.Lincoln stands as a vivid reminder that auditors who merely confirmmanagements estimates and dont challenge them with the basic tools attheir disposal may have squandered a chance to avert later investor ruin:they run the risk that the companys estimate was unreasonable whenmade.Auditors have clients to keep and practices to grow. Recall the pitchessome auditors have made to win audit clients.For example, commitments by the engagement team to "support thedesired outcome" when matters need to be vetted with the firmsNational Office. Or to offer "a reduced footprint in the organization,lessening audit fatigue."Recall, also, the troubling notes in some auditors personnel files, inwhich the reviewed auditors claim to have advanced cross-selling ofnon-audit services, raising the question whether firms cultures stillimpliedly encourage auditors to sell services to their audit clients and, if _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16so, legal or illegal, whether such goals undermine the appropriate state ofmind for auditors.This is the unfinished business that occupies the PCAOB, and occupiesaudit regulators around the world who have also identified a gap betweenthe purpose of the audit and its fulfillment.These concerns have been expressed by regulators in Canada, Germany,the U.K., the Netherlands, Australia and elsewhere.The gap threatens the future relevance of the professions work, as well aspublic confidence in its credibility.B. The PCAOBs Initiatives Aim to Help the Profession RealizeIts Potential by Enhancing the Relevance, Credibility andTransparency of the Audit for the Sake of Investor Protection.The PCAOB is deeply engaged in examining ways to enhance therelevance, credibility and transparency of the audit to better serveinvestors.Our projects include improvements in basic auditing areas, such as whatto look for in transactions involving related parties, including corporateexecutives.The PCAOB proposed a new auditing standard on related partytransactions on February 28. Comments are requested by today.This standard describes basic tools that good auditors have used for yearsto identify financial reporting risks.Among other things, it requires auditors to understand managementscompensation as a way to understand managements motivations.Indeed, changes in performance metrics may well be an important clue tounderstand areas where managements story is weak.They offer the auditor insights that may not be gleaned otherwise. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17The PCAOB has also recently proposed, for a second exposure, a newauditing standard on what the auditor should communicate to auditcommittees in order to protect the publics interest in keeping auditcommittees informed of important audit matters.In addition to receiving written comment, the Board has held aproductive public roundtable discussion on auditors responsibilities toaudit committees.I expect the Board soon to adopt a final standard that reflects the publicadvice and comment.The PCAOB standards-setting work also includes more broad-rangingprojects, commenced not with concrete proposals but with conceptreleases, to examine ways to enhance the relevance, reliability andindependence of audits in todays world, and in light of lessons bothauditors and investors have learned in the recent financial crisis, not tomention past crises that like Banquos ghost haunt us still.These projects involve consideration of changes to the form and contentof the standard audit report, as well as a deep examination of thebehavioral patterns that the current audit model imposes.I am not here today to tell you where the PCAOB should come out on thequestion of what is the most relevant information auditors should providethe investing public. But I do believe that the investing public can andshould benefit from the wisdom of auditors like Ken Leventhal.I am interested in a better, more transparent reporting model, that willalign auditors with investors, that will make the audit more relevant,de-commoditized, and that will function to more consistently requireauditors to demonstrate the requisite skepticism and provide true insight.The project on independence invites discussion on ways to relieveauditors of the pressure both to foster and maintain a long-termrelationship with the audit client when making tough decisions on anaudit — to relieve auditors of the tie between their engagements and theircareers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18In this regard, as with the revisions of the auditors reporting model, thefocus of the European Union and its member states becomes a factor inour own process.There, the perception grows that something is likely to change.The EU and its member states are engaged in a process that, I suspect,will take them through 2013 and into 2014.What we are learning through roundtables and public meetings on ourconcept releases is highly relevant to their process.How we internalize, how we digest, what we hear in our debate, willinform the debate and process of policy development in Europe.This is not an easy subject. Some form of term limits may or may notprovide more independence: but I believe we must explore the possibilitythat they would help and the feasibility of the range of approachesavailable to free the auditor to think and act more independently.C. The Global Nature of Auditing Today Requires EnhancedAttention to Address Risks to Investor Protection.I could not close a discussion on the future of auditing without reflectingon some other aspects of the international dimension.All of the challenges and initiatives I have described must be understoodagainst the backdrop that auditing today is a global endeavor.Firms large and small have chased, and then fled, the plethora of potentialChinese and other non-U.S. clients seeking to draw from the wellspring ofU.S. capital markets.There are lessons that could be learned, that should have been learned,from the S&L crisis and the internet bubble.Auditors choices are the same, but the outcome could be even worse. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19In the S&L crisis, the U.S. government turned to the profession to sort outthe facts and provide reliable valuations of assets.Who will be the Ken Leventhals of today?Last week, faced with a similar task, the Spanish government announcedthat it had chosen a different path.It has eschewed the work of auditors in favor of a different kind of analyst.The financial statements the government questioned were audited. Is theauditors work not relevant today?The only thing worse for the profession than being involved in the nextbanking crisis may be not being involved in it.Through their networks, audit firms reach everywhere. Localenvironments and trends are within their long reach. Engagementpartners supervise audits that span continents and oceans.But the reader of an audit report may not know how much of the actualwork was done by the firm signing the report.Participating audit firms practice in markets that exhibit markedlydifferent business cultures, with divergent patterns of transparency.Small U.S. firms around the country are also engaged in audits of foreignprivate issuers, or U.S. companies that operate, in Asia, Latin America,Africa and elsewhere.The PCAOB is focusing on the effect of these various business models onthe protection of investors.In any given week, PCAOB inspectors are working in numerouscountries, often side-by-side with local audit oversight authorities in jointinspections. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20We are drawing as broad and as clear a picture as we can about howauditors meet the challenges of understanding different environmentsand coordinating with other auditors to obtain a full grasp of a companystrue results and financial position.We have identified a number of deficiencies in multi-nationalengagements.Some of the auditing issues have been related to particular areas such asrevenue and fair value.Others seem to be attributed to a failure to adhere to the instructionsprovided by the principal auditor.The director of our inspection force is here today to discuss them.I am also concerned that the public knows little about how audits areconducted.In this regard, the PCAOB proposed last fall new requirements to discloseto investors how a multi-firm audit was accomplished.I expect to ask the Board to act on it in the near future.With sunlight on how the audits are done, they may improve incoordination and quality as well.If darkness persists, I fear some auditors will find themselves on thewrong side of the debate when the lights go on and they are called toaccount for how a fraud could have eluded a vast network of soldiers inwhat is supposed to be a fight for truth.These are choices we make today, but will need to explain tomorrow.* * *I want to thank the Leventhal School for inviting me again. Theeducational opportunities you provide to students, and the conferences _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21like this one that you provide professionals, will make a difference as tothe choices your progeny make. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22NUMBER 2May 30, 2012The Federal Reserve Board on Wednesday announced the approval of afinal rule outlining the procedures for securities holding companies(SHCs) to elect to be supervised by the Federal Reserve.An SHC is a nonbank company that owns at least one registered broker ordealer.The Dodd-Frank Wall Street Reform and Consumer Protection Acteliminated the previous supervision framework that applied to SHCsunder the Securities and Exchange Commission and permitted SHCs tobe supervised by the Federal Reserve.An SHC may seek supervision by the Federal Reserve to meetrequirements by a regulator in another country that the firm be subject tocomprehensive, consolidated supervision in the United States in order tooperate in the country. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23The final rule specifies the information that an SHC will need to provideto the Board as part of registration for supervision, including informationrelated to organizational structure, capital, and financial condition.Under the final rule, an SHCs registration becomes effective no later than45 days from the date the Board receives all required information.The final rule provides that upon an effective registration, an SHC wouldbe supervised and regulated as if it were a bank holding company.However, consistent with the Dodd-Frank Act, the restrictions onnonbanking activities in the Bank Holding Company Act would not applyto a supervised SHC.FEDERAL RESERVE SYSTEM12 CFR Part 241Regulation OO; Docket No. R-1430RIN 7100 –AD 81Supervised Securities Holding Company RegistrationAGENCY: Board of Governors of the Federal Reserve System (“Board”).ACTION: Final RuleSUMMARY: The Board is adopting this final rule to implement section618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act(“Dodd-Frank Act” or “Act”), which permits nonbank companies thatown at least one registered securities broker or dealer, and that arerequired by a foreign regulator or provision of foreign law to be subject tocomprehensive consolidated supervision, to register with the Board andsubject themselves to supervision by the Board.The final rule outlines the requirements that a securities holdingcompany must satisfy to make an effective election, including filing theappropriate form with the responsible Reserve Bank, providing alladditional required information, and satisfying the statutory waitingperiod of 45 days or such shorter period the Board determinesappropriate. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24DATES: The rule is effective [30 days after date of publication in theFederal Register].Important partsSUPPLEMENTARY INFORMATION:I. BackgroundSection 618 of the Dodd-Frank Act permits a company that owns at leastone registered securities broker or dealer (a “nonbank securitiescompany”), and that is required by a foreign regulator or provision offoreign law to be subject to comprehensive consolidated supervision, toregister with the Board as a securities holding company and becomesubject to supervision and regulation by the Board.A securities holding company that registers with the Board under section618 is subject to the full examination, supervision, and enforcementregime applicable to a registered bank holding company, includingcapital requirements set by the Board (although the statute allows theBoard to modify its capital rules to account for differences in activitiesand structure of securities holding companies and bank holdingcompanies).The primary difference in regulatory frameworks between securitiesholding companies and bank holding companies is that the restrictionson nonbanking activities that apply to bank holding companies do notapply to securities holding companies.Under section 618 of the Act, a securities holding company that elects tobe subject to supervision by the Board must submit a registration formthat includes all such information and documents the Board, byregulation, deems necessary or appropriate.The statute also specifies that registration as a supervised securitiesholding company becomes effective 45 days after the date the Boardreceives all required information, or within such shorter period as theBoard, by rule or order, may determine. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25Section 618 makes a registered securities holding company subject to allof the provisions of the Bank Holding Company Act of 1956 (12 U.S.C.1841 et seq.) (“BHC Act”) in the same manner as a bank holdingcompany, other than the restrictions on nonbanking activities containedin section 4 of the BHC Act.Consistent with the Dodd-Frank Act, the Board anticipates applying thesame supervisory program, including examination procedures, reportingrequirements, supervisory guidance, and capital standards, to supervisedsecurities holding companies that the Board currently applies to bankholding companies.However, the Board may, based on experience gained during thesupervision of supervised securities holding companies, modify theserequirements as appropriate and consistent with section 618.II. Notice of Proposed Rulemaking: Summary of Comments.On September 2, 2011, the Board invited public comment on a proposedrule implementing the registration requirements and procedures forsecurities holding companies pursuant to section 618 of the Act.The Board received three comments, none of which addressed anysubstantive aspect of the proposed rule.One commenter expressed the view that firms should not elect to besupervised by the Federal Reserve because of a “lack of leadership at theFED Districts.”Another commenter included the phrase “supervised securities holdingcompanies registration” in the subject line of the comment letter butprovided no comment.The third commenter mistakenly believed that section 618 of theDodd-Frank Act and the Board’s proposed Regulation OO apply toforeign companies that own national banks in the United States. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26This commenter argued that such foreign companies should be subject tosupervision by the Board as supervised securities holding companies ifthey wish to operate in the United States by owning national banks.The Board is finalizing the rule with only technical modifications.III. Description of Final Rule.The final rule permits securities holding companies to elect to becomesupervised securities holding companies by registering with the Board.The final rule outlines the requirements that a securities holdingcompany must satisfy to make an effective registration, including filingthe appropriate form with the responsible Reserve Bank, providing alladditional information requested by the Board, and satisfying thestatutory waiting period of 45 days or such shorter period the Boarddetermines appropriate.Section 241.1 of the final rule outlines the authority under which the Boardis issuing the rule.Section 241.2 of the final rule changes the proposed definition of the term“securities holding company” in order to more closely reflect thestatutory language.The revised definition contains additional language, which makes clearthat to become a securities holding company, a company must, amongother things, be “required by a foreign regulator or a provision of foreignlaw to be subject to comprehensive consolidated supervision.”Under the Dodd-Frank Act and final rule, a company that is currentlysubject to comprehensive consolidated supervision by a foreign regulator,a nonbank financial company supervised by the Board, a bank holdingcompany, a savings and loan holding company, an insured bank, asavings association, or a foreign banking organization with U.S. bankingoperations would not qualify for registration as a supervised securitiesholding company. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27Under the final rule, terms such as “affiliate,” “bank,” “bank holdingcompany,” “control,” and “subsidiary” are defined to have the samemeaning as in section 225.2 of the Board’s Regulation Y.Section 241.3 of the final rule requires a securities holding company thatelects to register to become a supervised securities holding company tofile the proper form with the responsible Reserve Bank.The Board is creating a new form for this purpose.The form, which is similar to the Board’s current form Application for aForeign Organization to Acquire a U.S. Bank or Bank Holding Company(FR Y-3F; OMB No. 7100-0119), used by a company registering tobecome a bank holding company, includes a number of questionsrelating to the organizational structure of the securities holding company,its capital structure, and its financial condition.Specifically, the form requires a securities holding company electing to besupervised to submit:1. An organization chart for the securities holding company showing allsubsidiaries.2. The name, asset size, general activities, place of incorporation, andownership share held by the securities holding company for each of thesecurities holding company’s direct and indirect subsidiaries thatcomprise 1 percent or more of the securities holding company’sworldwide consolidated assets.3. A list of all persons (natural as well as legal) in the upstream chain ofownership of the securities holding company who, directly or indirectly,own 5 percent or more of the voting shares of the securities holdingcompany.In addition, the Board would request information concerning any votingagreements or other mechanisms that exist among shareholders for theexercise of control over the securities holding company. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 284. For the senior officers and directors with decision-making authority forthe securities holding company, the biographical information requestedin the Interagency Biographical and Financial Report FR 2081c (theFinancial Report need not be provided).5. Copies of the most recent quarterly and annual reports prepared forshareholders, if any, for the securities holding company and certainsubsidiaries.6. Income statements, balance sheets, and audited GAAP statements, aswell as any other financial statements submitted to the securities holdingcompany’s current consolidated supervisor, if any, each on a parent-onlyand consolidated basis, showing separately each principal source ofrevenue and expense, through the end of the most recent fiscal quarterand for the past two (2) fiscal years.7. A description of the methods used by the securities holding company tomonitor and control its operations, including those of its domestic andforeign subsidiaries and offices (e.g., through internal reports andinternal audits).8. A description of the bank regulatory system that exists in the homecountry of any of the securities holding company’s foreign banksubsidiaries.The description also should include a discussion of each of the following:a. The scope and frequency of on-site examinations by the home countrysupervisor;b. Off-site monitoring by the home country supervisor;c. The role of external auditors;d. Transactions with affiliates;e. Other applicable prudential requirements; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29f. Remedial authority of the home country supervisor;g. Prior approval requirements; and,h. Any applicable regulatory capital framework.9. A description of any other regulatory capital framework to which thesecurities holding company is subject.The final rule further provides that the Board may at any time requestadditional information that it believes is necessary to complete theregistration.Under the rule, the registration is considered filed when all informationrequired by the Board is received.Section 241.3 of the final rule also states that a registration filed by asecurities holding company becomes effective and supervision by theBoard begins on the 45th calendar day after the date that a complete filingis received.Under the final rule, the Board also reserves the right to shorten the45-day waiting period and begin consolidated supervision at such earlierdate as the Board specifies to the securities holding company in writing.The final rule provides that, upon an effective registration, a supervisedsecurities holding company would be supervised and regulated as if itwere a bank holding company, and that the nonbanking restrictionscontained in section 4 of the BHC Act will not apply to a supervisedsecurities holding company.This treatment will generally mean that supervised securities holdingcompanies will, among other things, be required to submit the samereports and be subject to the same examination procedures, supervisoryguidance, and capital standards that currently apply to bank holdingcompanies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30The final rule provides the Board with flexibility to adjust theserequirements as appropriate to ensure that securities holding companiesoperate in a manner that is consistent with safety and soundness and thataddresses the risks they pose to financial stability.IV. Administrative Law MattersA. Paperwork Reduction Act AnalysisIn accordance with the requirements of the Paperwork Reduction Act of1995 (44 U.S.C. 3501 et seq.) (“PRA”), the Board may not conduct orsponsor, and the respondent is not required to respond to, an informationcollection unless it displays a currently valid Office of Management andBudget (OMB) control number.The OMB control numbers for the existing information collections areprovided below.The OMB control number will be assigned for the new informationcollection related to registrations described below.The Board reviewed the final rule under the authority delegated to theBoard by OMB.Title of Existing Information Collections:  The Annual Report of Bank Holding Companies (FR Y-6),  The Report of Foreign Banking Organizations (FR Y-7),  The Consolidated Financial Statements for Bank Holding Companies (FR Y-9C),  The Parent Company Only Financial Statements for Large Bank Holding Companies (FRY-9LP),  The Parent Company Only Financial Statements for Small Bank Holding Companies (FRY-9SP),  The Financial Statements for Employee Stock Ownership Plan Bank Holding Companies (FR Y-9ES), _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31  The Supplement to the Consolidated Financial Statements for Bank Holding Companies (FR Y-9CS),  The Financial Statements of U.S. Nonbank Subsidiaries of U.S. Bank Holding Companies (FR Y-11 and FR Y-11S),  The Financial Statements of Foreign Subsidiaries of U.S. Banking Organizations (FR2314 and FR 2314S),  The Bank Holding Company Report of Insured Depository Institutions’ Section 23A Transactions with Affiliates (FR Y-8),  The Consolidated Bank Holding Company Report of Equity Investments in Nonfinancial Companies (FR Y-12) and the Annual Report of Merchant Banking Investments Held for an Extended Period (FR Y-12A), and  The Capital and Asset Report of Foreign Banking Organizations (FR Y-7Q), and the Financial Statements of U.S. Nonbank Subsidiaries Held by Foreign Banking Organizations (FR Y-7N and FR Y-7NS).Frequency of Response: Annually, semi-annually, quarterly,event-generated.Affected Public: Nonbank companies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32NUMBER 3IntroductionLast year, the UK financial services industry faced regulatory change on asweeping scale.At the national level the last UK government introduced the FinancialServices Act 2010, which resulted in a number of changes to ourobjectives, powers and duties, in particular giving us a new financialstability objective and additional enforcement powers.In June 2010, the current UK coalition government announced that theFSA will be split up.The prudential supervision of banks and insurers will be moved to a newoperationally independent subsidiary of the Bank of England: thePrudential Regulation Authority (PRA).The FSA will be renamed the Financial Conduct Authority (FCA) and willfocus on consumer protection and markets oversight.The government also established a new committee of the Bank ofEngland with responsibility for delivering financial stability: the FinancialPolicy Committee (FPC). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33The European Union (EU), meanwhile, created three pan-Europeanagencies to address the risk of regulatory arbitrage and improve thequality of national supervision of banks, securities markets and theinsurance industry.The EU also created a new advisory body, the European Systemic RiskBoard (ESRB), to identify systemic risks and make recommendations formitigating them.Europe’s new regulatory architecture became operational in January 2011and will fundamentally change the way in which national supervisoryauthorities operate.A significant majority of regulatory requirements will be determinedsolely at the EU level and national supervisors will play a key role innegotiating and agreeing these, but their role as decision makers willcentre on their function as supervisors of firms and markets.The Financial Services Act 2010The Financial Services Act 2010 (the Act), which received royal assent on8 April 2010, resulted in a number of changes:Consumer protectionThe Act removed the FSA’s public awareness objective and required us toset up an independent body to take forward consumer education work.The Act also provides for more funding to be made available forconsumer education work.The Act gave us additional powers for the FSA to require consumerredress.This allows us to make sure that consumers receive redress in casesinvolving large-scale consumer mis-selling or other failures.Financial stability _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34The Act gave us a new financial stability objective to contribute toprotecting and enhancing UK financial stability.We are required to cooperate appropriately with the Treasury, the Bank ofEngland and other relevant bodies in pursuing this objective.The Act requires us to have and keep under review a financial stabilitystrategy.It enables us to gather information from entities, including unregulatedentities for financial stability purposes.It also requires us to consider the impact that international events andcircumstances could have on financial stability in the UK.Enhanced powersThe Act extends the scope of our key regulatory powers to make rules andto alter authorised firms’ regulatory permissions, so we may use thepowers in pursuit of any of our regulatory objectives, including the newfinancial stability objective.We have new rule-making powers for:• Remuneration: we now have the power to specify that remunerationagreements in breach of our rules are void;• Recovery and resolution plans;• Short selling; and• Consumer redress schemes.We have new enforcement powers to:• restrict or suspend the carrying on of regulated activities for up to 12months; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35• suspend or impose restrictions on an approved person for up to twoyears;• impose a financial penalty at the same time as cancelling a firm’spermission;• penalise any person who performs a controlled function4 withoutapproval; and• issue a warning notice against an individual three years from the timewe first became aware of the misconduct (increased from two years).Financial Services Compensation Scheme (FSCS)The Act contains provisions that will enable the FSCS to act as a singlepoint of contact and to pay redress to consumers where redress is due tothem under other schemes, such as schemes established outside the UK.UK regulatory reformOver the past nine months, the FSA has begun the process of aligning theorganisation to ensure it is ready to cut over to the new regulatorystructure.As a result, we incurred approximately £1m of direct costs last financialyear:• Programme management support £0.33m;• Regulatory design £0.10m;• IT design £0.33m; and• Other (e.g. HR and other central functions) £0.24m.Shortly after the end of our financial year in April 2011, we replaced ourRisk and Supervision business units with two new ones: the ConductBusiness Unit, which broadly aligns with the regulatory activities to beundertaken by the FCA, other than enforcement; and the Prudential _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36Business Unit, which broadly aligns with the regulatory activities of thePRA, other than enforcement. Central services will continue for thelifetime of the FSA to be structured on an unitary basis.We are confident that our programme remains on track and furtherprogress will be made during 2011/12.A new European supervisory structureEuropean Supervisory Authorities (ESAs) and the EuropeanSystemic Risk Board (ESRB)The creation of ESRB and the three new ESAs marks a significant changeto the way in which financial services regulation will be developed anddelivered across Europe.The ESRB will undertake macro-prudential analysis at EU level toidentify risks to EU financial stability and will make recommendations toaddress these risks.European Supervisory Authorities (ESAs)The ESAs became operational in January 2011.They are:• The European Banking Authority (EBA);• The European Insurance and Occupational Pensions Authority(EIOPA); and• The European Securities and Markets Authority (ESMA).They replace:• The Committee of European Banking Supervisors (CEBS);• The Committee of European Insurance and Occupational PensionsSupervisors (CEIOPS); and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37• The Committee of European Securities Regulators (CESR).The ESAs are responsible for developing a large proportion of the rulesthat apply to the financial services sector in the UK.These will be issued as EU regulations, so will be directly applicableacross the EU.As well as developing binding rules, the ESAs have powers to:• impose a temporary ban on financial activities;• investigate alleged breaches of EU rules;• take binding decisions in emergencies;• arbitrate in disputes between national supervisors;• play a coordinating role within colleges of supervisors;• undertake peer review;• directly supervise credit rating agencies (ESMA only); and• require information to be passed to them that is necessary fordischarging their responsibilities.In 2010/11, we devoted significant resource during the negotiation of theESA legislation to ensure that the ESA package as a whole secured thekey objectives of:• protecting the single market;• addressing the risks arising from regulatory arbitrage;• raising standards of supervision among national supervisors; while _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38• retaining responsibility for day-to-day supervision at the national level.Once the ESA legislative package was agreed in the Autumn of 2010, ourfocus shifted to preparing for the new European order. During 2010/11,we:• influenced the ESAs regulatory framework and operating model;• adapted our operating model to work effectively with the ESAs;• enhanced our secondments strategy and identified trainingrequirements; and• developed systems to handle ESA data requests.Financial stabilityIntroductionDuring 2010/11 the FSA’s mandate was significantly extended.From April 2010, we were given a new statutory objective, which mademore explicit the responsibilities for promoting financial stability that wehad been exercising under the ‘market confidence’ objective mandatedunder FSMA.At the same time, our supervisory approach continued to progress towardintensive supervision and proactive challenge, laying the groundwork forthe preventative interaction framework that will guide the PRA.We continued to embed the organisational and cultural change needed toimplement intensive supervision, moving our regulatory approach fromretrospective intervention to proactive challenge.Our supervisors made judgements on firms’ business models; interveningearly if they anticipated any risks that might arise from firms’ businessstrategies and approaches to funding and capital. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39This approach has demanded quality staff, industry knowledge and thewill to challenge the industry robustly where potential threats wereidentified.We contributed significantly to the development of a robust policy reformprogramme, driven by the initiatives and issues identified in The TurnerReview and the wider policy agenda mandated by the EU.And the FSA continued to play a leading role in influencing regulatoryreform on the global stage, while ensuring that the UK arrangements on,for example, key issues of capital and liquidity were consistent with thedirection of international standards.This section describes the work we accomplished in these areas, underthese headings:• The Financial Services Act – our new financial stability objective;• FSA supervision – a major intensification of approach;• Progress on reforming the international and European regulatoryframework – policy and practice; and• Specific measures to strengthen firms’ resilience.We also include the principal metrics we use to assess our supervisoryeffectiveness in relation to our financial stability objective and to gaugefinancial stability generally.These are:Supervisory effectivenessChart 1: Supervisory issues closedChart 2: Firm feedback on the quality of FSA supervisory risk assessmentsMeasures of financial stability _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40Chart 3: Cost of creditChart 4: FSA firm cancellationsChart 5: Major UK banks – CDS spreads, five-year senior debtA central tool in supervision is identifying the risk mitigation actionsfirms must take.Looking at the quantity identified and speed which with these are closedgives a perspective on the intensity and effectiveness of our supervision.The number of issues closed in Q4 2010/11 is 439 (from 303 in Q32010/11); this represents 17% (12% in Q3 2010/11) of the population ofopen issues.This shows an absolute and proportional increase in the number of issuesclosed than previously reported. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41The proportion of high-risk issues closed was slightly higher than otherissues at 18%, reflecting us prioritising issues with the most risk.Also, about 40% of the issues (recorded and closed) were in respect ofhigh-impact firms, reflecting the enhanced focus of our risk assessmentand mitigation work on these firms.From our regulated firms’ perspective, the quality of our risk assessmentin the last six months has reduced slightly from 5.2 down to 4.9, with themost significant reductions in our Major Retail Groups Division andRetail Division.Risk mitigation is scored more positively at 5.3, but again this representsa fall against the 5.6 recorded for the six months to June.However, scores remain positive in the context of a 1-7 scoring system,where 4 is neutral.The deterioration may have been driven by the amount and pace ofregulatory change, which has continued to put pressure on both sides ofthe firm-supervisory relationship. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42The current cost of interbank borrowing (measured by the Libor-OISspread) – in a context and relative to the extremes of 2008 – is notexcessive.However, spreads have recently entered a slightly more volatile period,driven by movement in the OIS swap rate.In part, this reflects uncertainty about the short-term outlook for the bankrate, amid persistent above target inflation and variable information aboutthe performance of the economy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43This chart shows the number of authorised firms this year that havecancelled their authorisation with the FSA.Not all cancellations are necessarily failures and not all failures areregulatory failures.Nevertheless, this chart gives some indication of the level of distress inthe system.During 2010/11, there was a significant reduction in thecancellation rate among significant impact firms. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44UK banks’ credit default swaps (CDS) spreads are a measure of howinvestors perceive the default risk posed by these firms.UK banks’ CDS spreads rose in November, as the Irish sovereign crisispushed up CDS spreads for Eurozone sovereigns.Spreads for some of the banks fell back after the EU and IMF bailout wasannounced.HSBC and Standard Chartered have seen swap rates rise in early 2011 dueto concerns in the aftermath of the Japanese earthquake.Nevertheless, using absolute CDS as an indicator, they remain the bankswith the lowest perceived credit risk, driven in part by their strength inemerging market economies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45Solvency IIAs we said in our Business Plan for 2010/11, Solvency II is a fundamentalchange of the prudential regime for the European insurance industry.It aims to establish a revised set of EU-wide risk management standardsand capital requirements that will replace and harmonise the currentarrangements.Policy in this area continues to be developed in Europe.There have been delays to the timeline that have affected our ownconsultation and shortened the window for implementation.As a result, we are looking for ways to manage this uncertainty.At the same time, we have continued to contribute to the development ofthe Directive, such as through our involvement in the work of EuropeanInsurance and Occupational Pensions Authority (EIOPA).We continue to lead some of the working groups, and Hector Sants wasappointed to the EIOPA Management Board in January 2011.Our work with the UK industryWe have maintained close contact with the UK insurance industry onboth policy and implementation issues.We continued in 2010 to engage with firms to understand how thedeveloping requirements affect them and inform our contributions toEIOPA.We also had ongoing discussions with firms about how prepared they arefor the new regime.The fifth quantitative impact study (QIS5) helped us increase ourdialogue with firms on both fronts. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46We gave briefings and ran workshops to educate firms about theimportance of taking part in QIS5.We encouraged firms of all sizes and types to participate in the exercise toprovide a robust evidence base to inform the ongoing development of theSolvency II landscape.During the exercise, we answered over 600 queries, and the UK report toEIOPA was compiled with submissions from 267 solo firms and 35groups, representing over 70% of the market.We also had discussions with firms about the practical implications forthem and we will continue to do so in the run up to implementation.We have continued to make progress with the internal model approvalprocess (IMAP).We published an update in April 2010 setting out the pre-applicationprocess for firms, and the findings of the thematic review in February2011.At the end of March 2011, started the next phase of IMAP as we endeavourto give as many firms as possible a decision on their model for day one.We further detailed our approach at our Solvency II Conference in April2011 – more information about this is available on the dedicatedSolvency II pages of the FSA website.As stated above, we had started to prepare our consultations; however, thepublication of the Omnibus II proposals to amend the Solvency IIDirective to bring it in line with the new European regulatory structureand allow for transitional provisions has meant that our consultationtimetable has been affected.Our consultation process will relate to the transposition of the level 1 textof the Directive and consequential changes to the Handbook.We expect to publish the first Consultation Paper later this year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47We will review the European policy timelines regularly, and publish ourown consultation timeline on our website in due course.Internally, we developed and delivered technical training for supervisorsand other specialists working on Solvency II.At the end of March, we had trained over 450 people.To deliver Solvency II we have increased our resources significantly, withrecruitment ongoing to provide the skills and processes to support anddeliver the implementation of the Directive.Most recently, we shared our current thinking on the policy issues andimplementation approach, with approximately 550 people from the UKinsurance industry at our Solvency II Conference on 18 April 2011.• We outlined our two-tier approach to the way we would allocateresources to firms in the pre-application phase of IMAP.• We discussed the main policy uncertainties, which we also set out in theaccompanying conference document Delivering Solvency II, April 2011.• We outlined the key dates, including our assumptions that fullimplementation will be on 1 January 2013, and that we would be open toreceive applications on the provisions of the Directive that require ourapproval.• We underlined the importance of the UK industry’s continuedinvolvement in developing the approach to implementation in Europeand the UK.We will do this through a number of different fora, including the existingInsurance Standing Group and its sub-groups, which has over 100 peopleregistered to receive information.We will also create new ones as needed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48We published an overall update on Solvency II in June 2010 on all pillarsof the Directive to inform and motivate firms to take action as needed.We have tailored our information for smaller insurers through our eventsand our website, including things for firms to consider when creatingtheir implementation plans.We also gave briefings to market analysts and ratings agencies (February2011), and to non-executive directors of insurance and reinsurance firms(January and April 2011) as part of our educational programme.2011/12 is critical in our preparations for implementing Solvency II, inEurope and the UK.We are confident that our implementation approach will help us deliverour Solvency II programme and carry out our obligations fully. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49NUMBER 4Interview with Gabriel Bernardino,Chairman of EIOPA, conducted by JanWagner, Versicherungsmagazin(Germany)The EU’s new regulatory regime for insurers,known as Solvency II, will take effect from 2014.Although hailed by EU regulators as aninnovation, the regime has come under sharpcriticism from smaller insurers, including severalin Germany.They complain that the scheme favors biggerinsurers who have the resources to easily adjustto the new regime.Wrong says Gabriel Bernardino, who as chairman of the EU insuranceand pension regulator EIOPA will be Solvency II’s chief enforcer.Versicherungsmagazin spoke to him at length.Why is Solvency II needed? Has not Solvency I ensured for awell (functioning insurance industry? I know of no cases inGermany where the insured lost their money when an insurerwent under.The idea was never that Solvency II would fix the market becauseSolvency I failed, or because insurers needed more capital.The idea was rather a move toward a risk_based system.The problem is that there is misallocation of capital among companies.Some have more capital than they need, and some have less. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50This has negative consequences for protection and pricing.To illustrate this, let us take two insurance firms with the same liabilitiesbut two different investment strategies.One is based on shares and the other is based on bonds.From a market perspective, you would conclude that the firm with a sharedriven strategy would need to hold more capital than the one with a bonddriven one.But the current regime doesn’t require this! The risks on the asset side arenot taken into account, and that’s what Solvency II aims to resolve.Are European insurers prepared for the transition to Solvency II?When Solvency II begins in 2014, there will be no ‘Big Bang.’That’s because some of its elements are already in the system.In Germany for example, incentives for better risk management andgovernance are embedded in MaRisk, which is already in force.The objective is not to force insurers to have more capital. It is rather tohave capital better aligned with the risks.You will have companies that have more capital than they need under arisk based system and others that do have less than they need.For those who have less, it’s fair to ask them to raise more capital.But even in the latter situation, Solvency II is accommodating.You don’t need to apply it immediately from 2014, so you have time toraise the capital you need.Another example is the life business where a transition period applies tocalculations of the liabilities according to Solvency II. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51Isn’t it true though that big listed insurers have an advantageover mutuals, as they will be able to raise the capital they needunder Solvency II more easily?If you look at mutuals around Europe, they collectively have much morecapital than public companies.I therefore don’t think Solvency II will be a big burden for them.Moreover: If they can demonstrate to the regulator that they effectivelymanage the risks on their investments, they may deviate from thestandard model with its set of risk charges and use an internal one whichis more flexible.So smaller insurers have nothing to fear from Solvency II?I’m not saying that the introduction of Solvency II will have no effect onthe market.Something like this always does.One possible consequence of Solvency II is that there will be someconcentration in certain markets. But we’re seeing this already!Some insurers complain that Solvency II will compel them toinvest in safe, but low yielding instruments like bonds, as theycarry no risk charge.Clearly that’s not what we have seen and that’s not what we will see.The US asset manager Black Rock did a survey some months ago inwhich it asked European insurers what asset classes they would targeteven under Solvency II.They replied that they would invest more in alternative investments likehedge funds, venture capital and project finance.And why? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52In a low interest rate environment insurers have to find ways of boostingreturns.No one is saying that with Solvency II you have to invest more in this orthat asset class.We’re merely saying that if you have more risk, you should have morecapital.Given the European debt crisis, does it still make sense torequire no risk charge for sovereign bonds. Greek bonds canhardly be considered safe instruments…Although there is a zero risk charge for sovereign bonds, Solvency II dealswith the specificity of the various asset classes in that market valuationsare used.This is different than in the banking sector.If sovereign debt in the portfolios of insurers were to be assessed underSolvency II, it would need to be rated according to the risk that themarkets perceive nowadays.And that perception has definitely changed with the debt crisis, noquestion.So if say German Bunds decrease in value, this is immediately reflectedon the portfolios of the insurers, and this is the figure you take intoaccount in order to calculate the difference between your assets andliabilities.If therefore an insurer has a 100 percent solvency requirement, but themarkets penalize some bonds on the portfolio, then the assets diminishvalue and your solvency diminishes.So you see, Solvency II does take the risk associated with sovereign bondsinto account. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53For assets which are more volatile like shares and real estate, a further riskcharge applies.Will the reporting requirements under Solvency II be a burdenfor smaller insurers?The requirements are harmonized around Europe, so this makes thingseasier for cross border companies.But this is also good for medium sized ones with business in two or threecountries.Having one system of reporting provides a huge cost benefit for allinsurers doing cross border business.The idea is to bring more commonality to supervision.Secondly, we’ve got the principle of proportionality applied to theultimate extent.There will be of course more complexity for those insurers who areinvested in say structured products or use derivatives.But if you don’t invest in these kinds of instruments your reporting will beless complex.There will be annual reporting, which is more comprehensive, as well asquarterly reporting on the most important elements.But for smaller companies whose risk profile doesn’t really change, theregulators have the option of waiving the quarterly reporting requirement.Will Solvency II be applied to pension funds?As I have always said, this is not a copy_paste exercise. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54There are elements of Solvency II that make lots of sense for pensionfunds, such as governance, transparency and risk management.These are known as the second and third pillars of Solvency II.In terms of the capital requirements, or the first pillar of the regime, weconcluded that there is great diversity among pension plans in Europe.There are plans that are basically insurance type contracts, and in thoseyou should have a regime like Solvency II.But there are also employer sponsored plans where the risk is nottransferred to the insured.This is a different type of system than the insurance type, and it makeslittle sense to apply exactly the same capital requirements. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55NUMBER 5Hearing on the ESRB before the Committee on Economic andMonetary Affairs of the European ParliamentIntroductory statement by Mario Draghi, Chair of the ESRBBrussels, 31 May 2012Dear Madam Chair,Dear Honourable Members,I am very pleased to appear before this Committee today to present thefirst annual report on the activities of the European Systemic Risk Board(ESRB) – of which you have all received a copy and which is beingpublished as I speak.In my remarks today, I will refrain from repeating the content of thereport and will instead focus on three key areas of the ESRB’s work overthe past year, which will also keep us busy for the foreseeable future.These are:i) The assessment of systemic risks;ii) The establishment of a sound macro-prudential framework in the EU;andiii) Medium-term structural developments in the EU financial system.I will then be at your disposal for questions.1. Assessment of systemic risks in the EU financial systemIt is less than a year since the ESRB cautioned that the risks to the EUfinancial system had become systemic. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56After a period of stabilisation on the back of actions by central banks andother institutions earlier this year, more recently there have been renewedbouts of volatility and uncertainty, although not at the same levelsreached in November 2011.Fundamental challenges persist. In my view, these include:i) Limiting contagion between Member States across the EU; andii) Promoting a macroeconomic strategy that, together with fiscalconsolidation, supports growth and furthers the competivenessadjustments needed to tackle the economic imbalances within the EU.Addressing these challenges in a decisive and sustainable manner is aprerequisite for the success of measures to ensure a more resilientfinancial system capable of supplying, on a sustainable basis, thefinancial services necessary to support economic activity.From a macro-prudential point of view, such measures include:i) Implementing credible mechanisms for the recapitalisation andrestructuring of banks, where needed; andii) Improving banking supervision and resolution at the European level.In the past, the ESRB has underlined the need for all national andEuropean authorities to act, and to do so in unison, with speed, ambitionand a total commitment to safeguard financial stability.Today, I reiterate this call, while acknowledging the efforts undertaken sofar.Within the broader economic and financial context, the financial systemcontinues to face the challenge of adjustment in order to addressimbalances accumulated in the past.For banks, progress has already been made on some fronts, but more isneeded. For other financial sectors, it is important that international and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. P a g e | 57EU reforms, designed to improve their resilience, are fully implementedand adhered to – an issue that I will return to later.The ESRB is concerned with two aspects of banks’ adjustment.First, it should be carried out in an orderly way to support economicgrowth to the full extent necessary, without exacerbating market fragilityand the positions of others in the financial system.Second, the degree of adjustment planned by the EU banking sector overthe coming years must be sufficient to restore confidence in the strengthof banks’ balance sheets.With regard to the first point, official data and surveys from manycountries across the EU indicate some overall stabilisation in financialconditions in the early part of this year.However, the recent turbulence highlights the uncertainty surroundingthe outlook for these financial conditions, given their link to thesoundness of EU banks’ balance sheets and, in turn, the direct or indirectconnections between those balance sheets and sovereign vulnerabilities.Concerning the second point, close monitoring and a systemicassessment of the feasibility and nature of the adjustment by banks, aswell as within the financial system more broadly, is crucial.In this regard, the ESRB has called upon its partners within the EuropeanSystem of Financial Supervision – supervisory authorities at the nationaland EU level – to regularly collect detailed, ex ante information frombanks and other key players in the system, and report it to the ESRB.The General Board will review the latest developments – and theirimplications – at its meeting in June.2. A sound macro-prudential framework for the EULet me now turn to the work undertaken to establish a framework capableof addressing the deficiencies of the pre-crisis framework in preventingand mitigating systemic risks in the EU. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  58. 58. P a g e | 58While the launch of the ESRB was a first, and necessary, step in thisrespect, it is vital to develop a sound and comprehensivemacro-prudential framework for both the EU as a whole and theindividual Member States.As indicated in the Annual Report, this has been one of the ESRB’spriorities since its inception.First, in order to create a solid foundation for pre-emptive action againstsystemic risks, it is essential to develop macro-prudential mandates andtools.In its recommendation published in January, the ESRB highlighted theneed for well-defined macro-prudential mandates for national authoritiesto act either on their own initiative, or in response to the ESRB’s advice.In accordance with the ESRB’s duty to follow up on itsrecommendations, the first reports from the Member States outliningtheir progress thus far are expected by the end of June under the ESRB’s“comply or explain” mechanism.A key lesson from the past is that financial or systemic stability mandatesmust be accompanied by the means to act.Macro-prudential authorities will need to be equipped with effectivepolicy tools to respond, in a pre-emptive way, to the complex andever-changing variety of systemic risks.The ESRB is currently working on identifying the minimum set of toolsnecessary for conducting macro-prudential policies throughout the EU.Second, it is crucial to ensure that macro-prudential issues are taken intoconsideration when developing EU legislation for the financial sector,given the impact that such regulations could have on incentives withinthe financial system.In this regard, I would like to touch on a number of important pieces ofEU legislation that the ESRB has been following: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  59. 59. P a g e | 59i) A draft directive and regulation on capital requirements for creditinstitutions (the “CRD/CRR”);ii) The proposal for a regulation on OTC derivatives, centralcounterparties and trade repositories (“EMIR”); andiii) The part of the proposal for the Omnibus II directive that concerns theregulation of the insurance sector.With regard to the CRD/CRR, I very much welcome the recent progressmade by this Committee, as well as by the EU Council, on advancing theproposals put forth by the Commission less than a year ago.Your work together with the Council provides a promising basis for theestablishment of important macro-prudential instruments for addressingsystemic risks in the banking sector.To assist you, and the Council, in your work on the CRD/CRR, the ESRBwrote to you in March outlining a number of macro-prudential principles.I urge you to consider these principles in order to ensure thatmacro-prudential authorities, at both the EU and national level, are fullyequipped with a flexible set of policy tools and sufficient scope to act earlyand effectively to prevent the build-up of systemic risks in the future.Obviously, discretion to pursue macro-prudential policies requiresefficient coordination as a safeguard against potential negativeexternalities or unintended consequences.The ESRB is ready to play a central role in this respect, and work is underway to establish a general framework for the coordination of nationalmacro-prudential policies by the ESRB, where such policies give rise tomaterial spillovers across borders.The agreement on EMIR was also an important step forward inimplementing lessons from the crisis, and it includes a number of usefulelements to safeguard financial stability in the EU. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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