Top 10 Risk and Compliance Stories

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International Association of Risk and Compliance
Professionals (IARCP)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.risk-compliance-association.com

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

George Lekatis
President of the IARCP
Dear Member,

Are regulations holding back growth?

This is a really interesting question. Read the answer at No 8 of our list!

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International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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Welcome to the Top 10 list.

PCAOB

Keynote Address: Driving Change to
Achieve Independent and High Quality
Audits
Jeanette M. Franzel, Board Member

Chairman Ben S. Bernanke

At the 48th Annual Conference on Bank Structure
and Competition, Chicago, Illinois (via satellite) -
May 10, 2012

Banks and Bank Lending: The State of Play

Speech

Gabriel Bernardino, Chairman of EIOPA
EIOPA, Solvency II and the Loss Adjusting Profession

General Assembly of the European Federation of Loss
Adjusting Experts, Porto, 11 May 2012

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“Shaping the future of Europe’s financial
markets”

Verena Ross, Executive Director of ESMA,
Centre Forum, London, 11 May 2012

Formation of the Enhanced Disclosure
Task Force

The importance to market confidence of useful disclosure by financial
institutions of their risk exposures and risk management practices has
been underscored in recent years.

FSA publishes Recovery and Resolution Plan
(RRP) update

The Financial Services Authority (FSA) has published a feedback
statement setting out the approach being taken by the FSA to ensure
firms develop appropriate recovery plans and resolution packs.

Speech by SEC Staff:
Address at the Private Equity International Private Fund Compliance
Forum
By Carlo V. di Florio, Director, Office of Compliance Inspections and
Examinations, U.S. Securities and Exchange Commission
New York, NY, May 2, 2012

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Recent U.S. Economic Growth in Charts
May 2012

Opening Remarks by Ms Jacqueline Loh, Assistant
Managing Director, Monetary Authority of Singapore
at the EDHEC-RISK Days Asia 2012 Conference at Marina Bay Sands
Conference Centre on 9 May 2012

Statistical release: OTC derivatives statistics at
end-December 2011

Monetary and Economic Department
May 2012

Bank for International Settlements

A summary of the latest statistics on
over-the-counter (OTC) derivatives markets.

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Keynote Address: Driving Change to Achieve Independent and
High Quality Audits
DATE: May 3, 2012
SPEAKER(S): Jeanette M. Franzel, Board Member
EVENT: Baruch College Financial Reporting Conference
LOCATION: New York, NY

Good Afternoon,

I am honored to be here today at this important conference. I thank all of
you for your interest in advancing and improving financial reporting and
auditing, as evidenced by your participation in this conference today.

I am the newest Board Member, appointed in February of this year, and
I've been on the job for almost 9 weeks now (not that I am counting).

In January 2011, three new members were appointed to the Board, Lew
Ferguson, Jay Hanson, and our Chairman, Jim Doty.

With 4 of the 5 Board members being relatively new, we are often referred
to as the "new Board." Of course, Steve Harris continues as our senior
statesman, having been on the Board since 2008.

Today, I will provide my impressions and observations from my first nine
weeks on the job, as well as an update on the current activities of this very
busy, "new Board."

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Before I go further, however, I must tell you that the views I express today
are my personal views and do not necessarily reflect the views of the
Board, any other Board member, or the staff of the PCAOB.

Reliability, Role, and Relevance of the Audit

Auditors have been given an important role in the capital markets — to
provide assurance to investors, owners, lenders and others that the
audited company's financial statements and related disclosures fairly
present the institution's financial results in conformity with applicable
accounting and disclosure standards and rules.

Clearly, reliable financial statements play a key role in the financial
markets, which are integral to the success and well-being of American
households and businesses, the U.S. economy, and participants and
stakeholders from around the world.

The securities markets provide a reliable funding mechanism for
American — and, increasingly, foreign — businesses.

More than half of American households invest their savings in securities
to provide for retirement, education, and other goals.

Our economy is resilient, even in the face of the recent financial crisis, in
part because millions of savers continue to be willing to invest in business
enterprises to fuel growth, growth that results in more workers, more
savings and more investment.

This cycle promotes economic wealth, but it relies on the system of
accurate financial disclosures by public companies to the investors who
entrust capital to them.

As we approach the 10th anniversary of the Sarbanes-Oxley Act and 9
years of PCAOB operations, we seem to be, once again, in a period of
re-examination of the role, relevance, and reliability of financial audits in
protecting investors and the public interest.

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Many of the topics currently being debated have been debated over the
decades—auditor independence, the role of audit committees,
professional skepticism and objectivity, audit quality, and the auditor's
report, among others.

One possible line of response to reevaluating these issues is "we decided
decades ago on this," or "this has worked fine for the last 70 years."

Even if these are some of the "same old topics" that have been debated
for decades, we can also look to the many corporate failures and financial
crises that have occurred over the decades and recognize the importance
of ongoing re-examination and adjustments in the auditing model.

First of all, auditing is very difficult and filled with competing tensions,
and we can and should continue to learn from years of experience.

Secondly, rapid changes in the financial markets, globalization,
technology, and how business is conducted continue to drastically impact
financial reporting and auditing.

Often, we are inspired to re-examine financial reporting and auditing in
reaction to a crisis. In a way, we may be reacting to the financial crisis and
serious economic situation over the past several years.

But the current efforts are occurring in a measured and forward-looking
manner, in addition to looking back to examine the impact of the
Sarbanes-Oxley Act and PCAOB's accomplishments to date.

Also, the profession and its oversight bodies have new information,
including a large body of PCAOB inspection results and recent academic
research that shed light on auditor processes, behavior, and judgments.

Role of the PCAOB

As you know, the Sarbanes-Oxley Act of 2002 established the PCAOB to
oversee the audits of the financial statements of public companies.

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In July 2010, the Dodd-Frank Act amended the Sarbanes-Oxley Act and,
among other things, vested the PCAOB with the authority to oversee
audits of broker-dealers.

The statutory mission of the PCAOB is to oversee the audits of public
companies in order to protect the interests of investors and further the
public interest in the preparation of informative, accurate, and
independent audit reports.

The PCAOB is also charged with overseeing the audits of broker-dealer
compliance reports under federal securities laws to promote investor
protection.

The PCAOB has four main responsibilities under the Act:

- register public accounting firms that audit public companies or
broker-dealers;

- establish auditing and other professional standards;

- conduct and report on regular inspections of registered public
accounting firms that audit public companies or broker-dealers; and

- conduct investigations and disciplinary proceedings in cases where
auditors may have violated certain provisions of the Sarbanes-Oxley
Act of 2002, the rules of the PCAOB and the Securities and Exchange
Commission, and other laws, rules, and professional standards
governing the audits of public companies, brokers, and dealers.

Currently, approximately 2,400 firms are registered with the Board.

Of those, approximately 516 are firms that reported auditing
broker-dealers but no issuers.

In addition, the 2,400 total registered firms include approximately 815
firms that reported issuing no audit reports for issuers or broker-dealers,
but have nonetheless chosen to register with the PCAOB.

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PCAOB annually inspects firms that audit over 100 issuers, while firms
that issue 100 or fewer audit reports each year are subject to inspection
every three years.

PCAOB does not inspect firms that do not perform audit work for issuers.

In addition, PCAOB is currently conducting an interim inspection
program for auditors of broker-dealers, and will use information from this
interim program to guide its decisions about a permanent program,
including whether to differentiate among classes of brokers and dealers in
terms of inspection schedules, and possible exemptions from inspections.

During 2011, PCAOB inspected 10 firms that audited more than 100
issuers.

As part of those inspections, PCAOB inspectors examined portions of
more than 340 audits.

Also during 2011, PCAOB inspected 203 firms in the 3-year category,
examining portions of more than 485 audits by those firms.

Finally, in the interim inspection program for broker-dealer auditors,
PCAOB inspected 8 audit firms in 2011, covering portions of 19 audits of
broker-dealers.

Since it began its inspections operations, the PCAOB has conducted over
1800 inspections and reviewed over 7800 audits.

PCAOB inspection reports issued to the firms after their inspections
identify deficiencies in the firms' audit work as well as weaknesses or
deficiencies in the firms' quality control policies and procedures.

Certain portions of the inspection reports — those dealing with
particularly significant audit deficiencies identified by inspectors — are
made publicly available.

With respect to any problems found by the Board in the firm's quality
control systems, firms are given twelve months to remediate those issues
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or face publication of the portion of the inspection report describing those
issues.

Remediation is a very important part of the process.

It is through these actions that firms propose to correct their quality
control deficiencies in order to drive improvements in auditing.

We have seen most firms take their responsibilities for remedial efforts
and improvements seriously.

In addition to our activities in connection with registering and inspecting
firms, the Board is responsible for setting auditing standards for the
audits of public companies and brokers and dealers.

I will talk in a few minutes about some of our priorities in this area.

Finally, the PCAOB also has an active Division of Enforcement and
Investigations.

To date, the PCAOB has taken 49 disciplinary proceedings against 39
registered accounting firms and 52 persons associated with registered
firms.

The sanctions have included censures, fines, suspensions or bars from
being associated with a registered firm, and revocations of firm
registrations.

To date, the Board has revoked the registration of 25 firms, barred 41
individuals, and suspended 5 individuals and 1 firm's registration.

In my short time with the Board, I have put the registration, inspection,
standards, and enforcement roles that I have just described into a
"bucket" that I think of as the Board's "ordinary business operations."

The workload associated with carrying out the Board's "ordinary
business" is heavy and varied, and is integral to fulfilling the Board's
mission and statutory responsibilities.
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The information and knowledge we gain from our operations also
provides input for the Board's priorities and consideration of longer-term
initiatives in order to promote independent and high quality audits that
protect investors and further the public interest.

PCAOB Priorities and Initiatives

PCAOB is in a unique position given the knowledge and information
gained through the inspection program to identify trends and risks in the
auditing profession.

PCAOB staff and the Board also work one-on-one with firm personnel
and firm leadership in discussing issues impacting audits, including
effective audit practices and responses and ways to enhance audit quality
in light of current pressures and risks.

The Board also issues practice alerts, summary reports, research notes,
interpretative releases and other communications in order to also
communicate these issues broadly.

Finally, PCAOB uses input from its inspections, task forces, the
Academic community, and other stakeholders in developing its standards
setting agenda.

I mentioned earlier the category of the PCAOB workload that I think of as
"ordinary business operations."

I think of our other work as being in the category of "leadership in
protecting investors and the public interest" by being a driving force for
change when needed, to ensure independent and high quality audits.

In this category, we have several layers:

- Drive change in the profession to correct gaps in auditing practice
under the current audit model in order to achieve needed
improvements in the near term.

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- Determine what types of changes are needed in the audit
model—including auditing standards, as well as the business model
used by the firms in implementing those standards—in order to help
ensure reliable audits and investor protection in the future.

- Determine through ongoing monitoring whether, at any time,
immediate actions are needed to mitigate unusual, emerging risks to
financial audits from a variety of factors, including rapid changes and
increasing complexity in business operations and financial markets,
evolving technology, the global business environment, and other
factors.

Improvements Needed in Current Audit Practices

Regarding the current gaps in practice, PCAOB inspections continue to
find serious audit deficiencies on a regular basis.

In fact, our inspection reports issued during 2011 related to the 2010
inspection cycle, including reports on inspections of some of the largest
firms, show a significant and concerning increase in inspection findings.

Such deficiencies include cases where auditors issue clean opinions even
though:

- the audit work is incomplete or not properly conducted;

- financial statement information is contradicted by other available
evidence; and/or

- audit conclusions on material issues are based on management's
views without independent verification.

Clearly improvements are needed in current audit process under current
standards.

In that regard, the PCAOB staff and Board Members devote considerable
attention and time to working with firms to evaluate systemic root causes

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within a firm's structure, operations, processes or other areas that detract
from audit quality or cause deficiencies.

When the Board issues inspection reports, the portion of the report
containing findings about deficiencies in a firm's system of quality
control, referred to as "part 2" of the report, are subject to statutory
restriction on public disclosure.

The firm has 12 months from the issuance of the inspection report to
address the issues to the Board's satisfaction.

The PCAOB staff and Board also spend considerable time evaluating
firm's remediation plans and actions.

If a firm does not satisfactorily address any of the quality control
criticisms within 12 months, the portion of the report discussing the
particular criticism(s) is made publicly available.

PCAOB Standards-Setting Activities

The Board uses information that it learns in its inspections and from
other sources to evaluate the need for changes in auditing standards.

In developing new standards, the PCAOB also seeks advice from a wide
variety of interested stakeholders on ways to improve audits.

The Board's standards activities are informed by meetings and dialogue
with investors, auditors, representatives of public companies, members of
the academic community, and through its Standing Advisory Group.

The Board also holds roundtable discussions and other public meetings
to deepen its dialogue with commenters and other interested parties.

The Board works closely with the SEC on the development of standards
and monitors the work of accounting standard setters, such as the
Financial Accounting Standards Board, for developments that may affect
auditing.

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The Board currently has a full agenda for seeking views on ideas and
specific proposals impacting auditing and related professional practice
standards through concept releases, proposed standards, and potential
future projects.

Concept Releases

The Board is currently evaluating comments and feedback on two
concept releases, one dealing with the auditor's reporting model and
another with auditor independence and mandatory firm rotation.

These concept releases did not propose new auditing standards.

Rather, they sought the public's views on particular matters so that the
Board can better evaluate the need for future standard-setting.

- Auditor's Reporting Model — On June 21, 2011, the Board issued a
concept release to seek public comment on potential changes to the
auditor's reporting model.

Such potential changes could include a supplement to the auditor's
report in which the auditor would be required to provide additional
information about the audit and the auditor's view of the company's
financial statements (an "Auditor's Discussion and Analysis");
required and expanded use of emphasis paragraphs in the auditor's
report; auditor reporting on other information outside the financial
statements; and clarification of certain language in the auditor's
report.

The concept release was preceded by several discussions with the
PCAOB's advisory groups, and extensive outreach by PCAOB staff in
2010 and early 2011.

In addition, the Board solicited further comment at a roundtable on
Sept. 15, 2011.

The deadline for comments on the concept release was Sept. 30, 2011.

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Staff is currently preparing a proposed standard.

- Auditor Independence and Audit Firm Rotation — As a result of
PCAOB inspections, the experience of other audit regulators and
concerns expressed by investors, the Board issued a concept release
Aug. 16, 2011, seeking public comment on a variety of possible
approaches to improving auditor independence, objectivity and
professional skepticism.

As part of that concept release, the Board sought comment on
whether a rotation requirement would risk significant cost and
disruption and how mandatory rotation would serve the Board's goals
of protecting investors and enhancing audit quality.

The Board also sought comment on whether other measures could
meaningfully enhance auditor independence. The deadline for
comments was Dec. 14, 2011.

The Board held a public meeting to obtain further comment on the
concept release on March 21 and 22, for which the comment period
was reopened. Future such public meetings are planned.

Proposed standards

The Board is currently evaluating comments on several proposed
standards and seeking comment on one proposal.

- Audits of SEC-Registered Brokers and Dealers — The Dodd-Frank
Act gave the PCAOB the authority to oversee auditors of
SEC-registered brokers and dealers, including authority to set
standards and rules for audits of brokers and dealers.

On July 12, 2011, the Board proposed standards dealing with (1)
examination engagements for compliance reports, (2) review
engagements of exemption reports, and (3) auditing supplemental
information.

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The deadline for comments on the proposed PCAOB standards was
Sept. 12, 2011.

Further action on the Board's proposals is dependent on the SEC's
adoption of the proposed amendments to its Exchange Act 17a-5 rule.

- Transparency — On Oct. 11, 2011, the Board proposed amendments to
its standards that would improve the transparency of public company
audits by requiring that audit reports disclose the name of the
engagement partner as well as the names of other independent public
accounting firms and other persons that took part in the audit.

The amendments would also require registered public accounting
firms to disclose the name of the engagement partner for each audit
listed on the firms' annual reports filed with the PCAOB.

The deadline for comments on the proposed amendments was Jan. 9,
2012.

- Communications with Audit Committees — On Dec. 20, 2011, the
Board reproposed a new auditing standard, Communications with
Audit Committees, and related amendments.

The standard is intended to benefit investors by establishing
requirements that enhance the relevance and quality of the
communications between the auditor and the audit committee.

The deadline for comments was Feb. 29, 2012.

- Auditing Related Party Transactions — On February 28, 2012, the
Board proposed a new standard, Related Parties, as well as
amendments to certain PCAOB auditing standards to assist auditors
in detecting and addressing the audit risks associated with related
parties and other unusual transactions.

The comment period expires May 15, 2012.

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Potential future projects
The Board is also considering possible revisions to standards in the
following areas to strengthen and clarify requirements:

 auditors' use of specialists,
 part of the audit performed by other auditors,
 assignment and documentation of firm supervisory responsibilities,
 fair value measurements,
 going concern,
 confirmation,
 quality control,
 codification of PCAOB standards, and
 subsequent events.

As you can see, the Board is working on an ambitious agenda including
numerous areas of audit practice aimed at strengthening auditing
standards themselves, while improving audit practices and approaches.

Risk Monitoring, Assessment, and Research

Through the Office of Research and Analysis, the PCAOB also monitors
information obtained from a variety of sources, including PCAOB
inspections, public company financial reporting, price and volatility
information from debt and equity markets, and corporate governance
information in order to identify emerging risks to financial reporting and
auditing.

This information is then used by PCAOB's inspections, standards setting,
and enforcement functions. In addition, information is provided to the
public, as appropriate.

On March 15, 2011, PCAOB issued its first public "Research Note" to
provide new data on the growth of reverse merger transactions involving
companies based in China, Hong Kong, and Taiwan.

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A reverse merger typically occurs when an operating company merges
with a U.S. shell company that had previously registered its securities on a
U.S. exchange.

The Research Note, along with Staff Audit Practice alerts issued in July
2010 and October 2011, represented an effort by PCAOB to provide more
information to investors and other users of financial statements about the
audit environment for companies from the China region.

Additionally, the Office of Research and Analysis performs regular
research and analysis to support the various efforts of the Board while also
monitoring risks and identifying emerging issues.

Current Legislative Initiatives

Currently, legislation is pending (HR 3503 and S 1907) that would amend
the Sarbanes-Oxley Act of 2002 to make PCAOB disciplinary proceedings
open to the public.

Under the Sarbanes-Oxley Act as it exists today, the PCAOB's
disciplinary proceedings are nonpublic, unless the Board finds there is
good cause for a hearing to be public and each party consents to public
hearings.

PCAOB disciplinary proceedings remain nonpublic even after a hearing
has been completed and adverse findings made by a disinterested hearing
officer, if the auditors and firms opt to appeal and do not consent to make
the proceedings public.

The auditors and audit firms charged with violating applicable laws, rules
or standards have little incentive to consent to public disclosure of
disciplinary proceedings against them, and in fact, none have ever done
so.

Continued litigation postpones — often for several years — public
disclosure that the PCAOB has charged the auditor or firm, the nature of
those charges, and the content of adverse findings.

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In addition, unlike the authority the Securities Exchange Act of 1934
provides the SEC in its administrative proceedings, the PCAOB has no
authority, while litigation is pending, to issue temporary cease-and-desist
orders in appropriate cases, to prevent potential further harm to investors
or the public interest.

This situation results in a variety of unfortunate consequences for investor
protection and the public interest.

The public is denied access to important information regarding PCAOB
cases and respondents' alleged misconduct — no matter how serious.

As a result, investors are unaware that companies in which they may have
invested are being audited by accountants who have been charged, even
sanctioned, by the Board, and meanwhile, the audit firm and associated
persons may continue to issue audit reports.

If the SEC were to bring the same case as the PCAOB, alleging the same
violations, against the same auditor, the SEC's charges would be
disclosed at the time the Commission instituted its proceeding.

Any administrative trial would be open to the public.

If there were an appeal to the Commission and an oral argument, the
public could attend. The ability — or inability — of the SEC's staff to
prove its charges would be a matter of public record.

The non-public nature of PCAOB's enforcement proceedings is not good
for investors, for the auditing profession, or for the public at large.

* * *

The reliability, role, and relevance of financial audits, auditor
independence, and audit quality are enduring themes that we must
regularly monitor and evaluate in order to protect investors and the public
interest in a dynamic, global business environment.

This involves looking beyond the status quo and the current business
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cycle.

We also need to carefully consider and analyze the potential costs and
benefits of various actions as well as the risks of unintended
consequences.

I am pleased to have the opportunity as a Board member to explore the
broad range of issues impacting the auditing profession as we seek to
make progress to strengthen the reliability and accuracy of audit reports.

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Chairman Ben S. Bernanke
At the 48th Annual Conference on Bank Structure and Competition,
Chicago, Illinois (via satellite) - May 10, 2012

Banks and Bank Lending: The State of Play
I am pleased to speak this morning at what has become, over nearly 50
years, perhaps the most prestigious conference for bankers, academics,
and bank supervisors in the United States.
The first part of my remarks will highlight the significant progress that
has been made over the past several years toward restoring the banking
system to good health.
I will also talk about some of the challenges banks face as they adapt to
the post-crisis economic and regulatory environment.
I will then review recent trends in credit conditions, noting that bank
lending has generally been improving but remains restrained in some
areas.
The State of the Banking System

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Since the financial crisis, banks have made considerable progress in
repairing their balance sheets and building capital.
Risk-based capital and leverage ratios for banks of all sizes have
improved materially and are significantly above their previous highs.
Importantly, the 19 largest banking institutions that participated in the
2009 stress tests, as well as the two subsequent Comprehensive Capital
Analysis and Review (CCAR) processes, have considerably more and
better-quality capital than a few years ago.
Indeed, those firms have increased their Tier 1 common equity, the best
buffer against future losses, by more than $300 billion since 2009, to nearly
$760 billion.
The Tier 1 common ratio for these firms, which compares this
high-quality capital to risk-weighted assets, stood at 10-1/2 percent at the
end of last year.
The latest CCAR, conducted earlier this year, demonstrated that most of
the 19 firms would likely have sufficient capital to withstand a period of
intense economic and financial stress and still be able to lend to
households and businesses.
The hypothetical supervisory stress scenario used in the CCAR was quite
severe; it included a peak unemployment rate of 13 percent, a 50 percent
drop in equity prices, and a 21 percent further decline in housing prices,
as well as steep falls in prices of financial assets most exposed to
conditions in Europe.
Under this highly adverse scenario, the 19 bank holding companies were
projected to incur aggregate losses of more than $500 billion through the
fourth quarter of 2013.
Nevertheless, their aggregate Tier 1 common ratio was projected to be 6.3
percent at the end of the scenario period, and 15 of the 19 bank holding
companies were projected to maintain capital ratios above all four of the
regulatory minimum levels--even after taking into account their proposals
for capital actions such as dividends, share buybacks, and share issuance
in the baseline scenario.

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The banking sector overall also has substantially improved its liquidity
position over the past few years.
Indeed, large banks in the aggregate have more than doubled their
holdings of cash and securities since 2009.
Large banks have reduced their collective dependence on short-term
wholesale funding, and many are flush with retail deposits, which tend to
be a more stable funding source.
Challenges on the liquidity front remain, however: Some large firms still
rely heavily on wholesale short-term funding; and the liquidity needs of
the banking system as a whole may become somewhat higher for a while
as some of the securities issued under the Federal Deposit Insurance
Corporation's Temporary Liquidity Guarantee Program come due, and as
the unlimited insurance on noninterest-bearing transaction accounts
expires at the end of the year.
Nevertheless, over time, greater liquid asset positions and reduced
dependence on wholesale short-term funding, together with more and
better capital, will make the banking sector less susceptible to
unexpected disruptions in short-term funding markets.
The credit quality of large banks' assets is looking better as well, although
the improvements have been uneven across types of loans.
In the aggregate, delinquency rates on loan portfolios at large banks have
declined substantially from their peaks.
However, while delinquencies on commercial and industrial (C&I) loans
and consumer loans have fallen to the lower end of their historical ranges,
delinquencies on loans backed by commercial or residential real estate
have declined only moderately and remain elevated.
The profitability of large banks has been edging up as credit quality has
firmed and banks have trimmed noninterest expenses.
Even so, large banks' profitability remains well below the levels that
prevailed before the financial crisis began, and banks continue to struggle
to expand their revenues.

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Developments that can be traced back to the financial crisis--including a
still-weak economy, changes in market conditions and practices, and
tighter financial regulations--are clearly important reasons for these
trends.
Community banks play important roles in local economies, and so it is
notable that their condition has also improved.
Their regulatory capital ratios have increased significantly since 2009 and
stand well above their recent norms.
As has been the case at large banks, delinquency and charge-off rates at
community banks have declined across most major categories of loans,
and fewer institutions failed in 2011 than in each of the previous two years.
That said, clusters of small bank failures can affect credit availability in a
community while bank-dependent borrowers work to establish new
relationships with surviving institutions.
In addition, while standard measures of community banks' profitability,
such as return on equity and assets, improved last year, as was also true at
larger institutions, most of the gains were due to reductions in loan loss
provisions rather than to more sustainable sources of profit such as
expanded lending.
Financial-market indicators reflect the substantial improvements in
banks' financial conditions since the crisis as well as the sizable
challenges remaining.
Bank credit default swap (CDS) premiums are now well below their crisis
peaks, and bank stock prices have retraced some of their earlier losses
and have outperformed the broader market this year, boosted somewhat
by the release of the CCAR results in March and first-quarter earnings
that largely beat analysts' expectations.
However, CDS premiums remain elevated for some of the larger, more
globally connected firms, and their stocks continue to trade at
market-to-book ratios of less than 1.

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A number of key systemic risk measures that evaluate the potential
performance of firms during times of financial market stress have
improved in recent months.
These indicators of systemic risk are now well below their levels in the
crisis, and, overall, they present a picture of a banking system that has
become healthier and more resilient.
Regulatory and Financial Challenges
Banks face a number of significant challenges as they adapt to the
post-crisis economic environment and to new domestic and international
regulatory requirements.
The most systemically important financial firms will face meaningfully
higher capital and liquidity requirements and continue to undergo regular
supervisory stress tests.
They will also be required to submit so-called living wills to facilitate their
orderly resolution if necessary.
Additionally, banks must enhance their reporting systems and improve
disclosure.
These new requirements are critical to safeguard the stability of the
financial system and to help prevent another costly crisis.
At the same time, regulators appreciate that the new rules impose
significant burdens on banks.
For that reason, and to minimize adverse effects on the supply of credit,
many of the most significant rules are being phased in gradually and only
after extended processes of consultation with industry and other
stakeholders.
It is worth reiterating that most of these enhanced regulatory and
supervisory measures focus on the largest, most interconnected financial
institutions, and we are working to ensure that community banks are not
subjected to rules designed primarily to constrain risks at larger
institutions.

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We have an ongoing dialogue with community banks through many
channels, including, for example, our Community Depository Institutions
Advisory Council.
The council, whose membership is drawn from smaller banks, credit
unions, and savings associations in each of the 12 Federal Reserve
Districts, meets with the Board in Washington twice a year to discuss
supervisory and regulatory issues that affect their institutions.
We have also established a special supervisory subcommittee of the
Board which focuses on community banking issues.
In addition to strengthened regulatory and supervisory requirements,
banks face market demands that they operate with more resilient
business models.
In many contexts, counterparties are demanding greater security in the
form of more and better-quality collateral or higher margins.
In addition, lenders to banks may be requiring greater compensation for
risk, thereby raising banks' funding costs.
Banks have also been navigating an economic recovery that has been
halting at times.
Consequently, although the condition of the banking system is improving,
demand for credit generally has remained sluggish, and the
creditworthiness of some borrowers that would normally turn to banks for
loans remains impaired.
These factors, together with tighter credit policies imposed by many
lenders, have restrained somewhat the expansion of bank credit.
Credit Conditions and Bank Lending
Notwithstanding the various headwinds, credit conditions in the United
States have improved significantly in a number of areas.
Many--though certainly not all--businesses and households are finding it
easier to borrow than they did a few years ago, in part because of better
conditions in financial markets more broadly.

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Large businesses with access to capital markets have generally been able
to raise funds at attractive terms, with both investment- and
speculative-grade firms taking advantage of historically low interest rates
to issue bonds at a robust rate.
Moreover, consumers with strong credit histories have ready access to
credit cards and auto loans, supported by solid issuance of
consumer-related asset-backed securities.
Banks also supply credit by purchasing securities, and their purchases
have grown rapidly in recent months--in particular, those of
agency-guaranteed mortgage-backed securities (MBS).
In this challenging time for housing markets, banks are attracted by the
securities' government guarantee.
Additionally, some larger banks may be accumulating these securities in
preparation for more-stringent liquidity regulations.
Signs of improvement notwithstanding, credit conditions in some sectors
and for some types of borrowers remain tight.
Mortgage lending is an important example.
Since its peak, U.S. home mortgage credit outstanding has contracted
about 13 percent in real terms.
Many factors suggest that this situation will be difficult to turn around
quickly, including the slow recovery of the economy and housing market,
continued uncertainty surrounding the future of the government -
sponsored enterprises (GSEs), the lack of a healthy private-label
securitization market, and cautious attitudes by lenders.
Financing conditions in the commercial real estate sector also remain
strained as fundamentals, including high vacancy rates, depressed
property prices, and the poor quality of existing loans, continue to be
weak.
Moreover, the market for commercial MBS--a source of liquidity for some
lenders in this sector--is still struggling to regain its footing.

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The Federal Reserve's quarterly Senior Loan Officer Opinion Survey on
Bank Lending Practices (SLOOS) offers a more-nuanced view of how
lending terms are changing.
The SLOOS indicates that standards and terms in many loan categories
have eased somewhat further in recent quarters from the very tight
conditions that prevailed earlier in the recovery.
For example, the April SLOOS pointed to the first material net easing in
lending standards for commercial real estate loans since 2005 and to a
further easing of standards for most types of consumer loans.
In addition, SLOOS respondents suggested that stepped-up competition
has induced a large number of domestic banks to reduce fees and spreads
on C&I loans to firms of all sizes.
The SLOOS also indicates that demand for many types of loans has
continued to increase, with demand for C&I loans having risen to
relatively high levels.
Consistent with the results of the SLOOS, C&I lending has indeed been
rising sharply lately.
Banks have focused on C&I lending because business borrowers'
creditworthiness is improving and because the majority of C&I loans
carry floating interest rates that reduce interest rate risk.
In addition, domestic banks reportedly are picking up customers as a
result of a pullback by some European institutions.
Auto lending also has reportedly been solid, reflecting strong
fundamentals in auto markets--such as robust demand for used cars and
relatively low delinquency rates on existing auto loans.
The strong fundamentals for auto loans in turn also appear to have
contributed to an easing of lending standards and terms.
But, as I mentioned earlier, residential mortgage lending has been
particularly sluggish.
Tight lending standards and terms remain especially evident.

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To be sure, a return to pre-crisis lending standards for residential
mortgages wouldn't be appropriate; however, current standards may be
limiting or preventing lending to many creditworthy borrowers.
For instance, in the April SLOOS, we asked banks a hypothetical
question about their willingness to originate GSE-eligible mortgages
relative to 2006 for borrowers with a range of credit scores and available
down payments.
The SLOOS found that even when the loans were accompanied by a 20
percent down payment, many banks were less likely to originate loans to
borrowers with given GSE-eligible credit scores, despite the originating
bank's ability to sell the mortgage to the GSEs.
Most banks indicated that their reluctance to accept mortgage
applications from borrowers with less-than-perfect records is related to
"putback risk"--the risk that a bank might be forced to buy back a
defaulted loan if the underwriting or documentation was judged deficient
in some way.
Small businesses owners, who in the past might have tapped into the
equity in their homes or used their homes as collateral for small business
loans, also have found conditions challenging in recent years.
The stock of small loans to businesses on bank balance sheets at the end
of last year was more than 15 percent below its peak in 2008.
These loans looked to have ticked up in the fourth quarter of 2011,
consistent with the reported increase in demand for loans by small firms
in the SLOOS.
Responses to the monthly National Federation of Independent Business
survey also suggest some modest improvement in the small business
sector: The share of respondents reporting a need for credit has moved up
from lows of recent years, and the net share of respondents who say that
credit is more difficult to obtain than it was three months ago is notably
below its peak in 2009.

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The Federal Reserve is keenly interested in understanding how shifts in
loan supply, loan demand, and borrower quality may be affecting lending
and, by extension, the broader economy.
Of course, sorting out the relative effect of changes in loan demand from
the effect of changes in loan supply can be quite difficult because they
can be influenced by the same factors.
For example, a shift in the economic outlook can affect both the
willingness of banks to lend and the desire and ability of firms and
households to borrow.
Recent research at the Federal Reserve examines cyclical changes in
banks' lending standards as reported in the SLOOS--a commonly used
indicator of loan supply.
It attempts to assess how much of those changes were a "typical"
response to macroeconomic and bank-specific factors, and how much
was "atypical" or unexplained.
This analysis suggests that the tightening of lending standards that
occurred between 2007 and 2009 was much greater than a model based on
historical experience would predict, contributing to the subdued pace of
lending.
These results are consistent with other evidence that the crisis induced
exceptionally high levels of risk aversion and uncertainty on the part of
both lenders and borrowers, constraining the flow of credit.
As these factors have receded and the economy has improved, lending
standards have become less stringent.
Some bankers and borrowers believe that enhanced supervision and
regulation has made it more difficult for banks to expand their lending.
The Federal Reserve takes seriously its responsibility to ensure that
supervisory actions to protect banks' safety and soundness do not
unintentionally constrain lending to creditworthy borrowers, and we have
taken a variety of steps to address these concerns.

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For example, we have issued guidance to supervisors stressing the
importance of taking a balanced approach to supervision and of promptly
upgrading a bank's supervisory rating when warranted by a sustainable
improvement in its condition and risk management.
Some analysis has indicated that, all else being equal, banks with lower
supervisory ratings tend to lend less; prompt upgrades by supervisors
when such upgrades are appropriate may thus ease an unnecessary
constraint on lending.
Indeed, in the fourth quarter of 2011 and the first quarter of this year, the
number of ratings upgrades for banks and bank holding companies
supervised by the Federal Reserve exceeded the number of downgrades.
The last time that upgrades exceeded downgrades was in 2005.
In addition, we have stepped up examiner training on relevant lending
issues, and we have emphasized to examiners that an open dialogue with
bank management is essential.
We have also looked into specific concerns raised about the examination
process and its effect on banks' willingness to lend.
For example, during 2011, we reviewed commercial real estate loan
classification practices to assess whether examiners were properly
implementing the interagency policy statement on workouts of
commercial real estate loans.
We analyzed documentation for more than 300 loans with identified
weaknesses in six Federal Reserve Districts.
We found that Federal Reserve examiners were appropriately
implementing the guidance and were consistently taking a balanced
approach in determining loan classifications.
Moreover, the documentation we reviewed indicated that examiners were
carefully considering the full range of information provided by bankers,
including relevant mitigating factors, in determining the regulatory
treatment for the loans.

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Conclusion
To sum up, conditions in the banking system--and the financial sector
more broadly--have improved significantly in the past few years.
Banks have strengthened their capital and liquidity positions.
The economic recovery has facilitated the rebuilding of capital and
helped improve the quality of the loans and other assets on banks'
balance sheets.
Nonetheless, banks still have more to do to restore their health and adapt
to the post-crisis regulatory and economic environment. As the recovery
gains greater traction, increasing both the demand for credit and the
creditworthiness of potential borrowers, a financially stronger banking
system will be well positioned to expand its lending.
Improving credit conditions will in turn help create a more robust
economy.

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Speech
Gabriel Bernardino, Chairman of EIOPA
EIOPA, Solvency II and the Loss
Adjusting Profession
General Assembly of the European
Federation of Loss Adjusting Experts
Porto, 11 May 2012

Important parts

I will touch on three main issues:

I. What is EIOPA, the European Insurance
and Occupational Pensions Authority for
whom I have the privilege to serve as
chairman;

II. How Solvency II can contribute to the
improvement of risk management;

III. The loss adjusting profession, its relevance for the insurance market
and the overall society.

What is EIOPA?

EIOPA is the European supervisory authority for the insurance and
occupational pensions sectors.

We are a young organisation: in January, we completed our first year as a
European agency, one of the three European Supervisory Authorities in
the financial system.

We are an independent Union body with legal personality, accountable to
the European Parliament and the Council.

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We clearly see our mission, tasks and responsibilities. We see EIOPA’s
mission in protecting public interest by contributing to the short, medium
and long term stability and effectiveness of the financial system, for the
EU citizens and economy.

This mission is pursued by promoting a sound regulatory framework and
consistent supervisory practices in order to protect the rights of
policyholders, pension scheme members and beneficiaries and contribute
to the public confidence in the European Union’s insurance and
occupational pensions sectors.

This is a very important mission if we realize the relevance of insurance
and occupational pensions in the daily life of citizens and on the
development of the economy.

The objectives of the new European supervisory authorities, and
particularly of EIOPA, are extremely relevant:

 Contribute to a stable and effective financial system;
 Promote sound regulation and supervision;
 Enhance customer protection;
 Ensure the transparent, efficient and orderly functioning of the
markets;
 Contribute to international supervisory co2ordination;
 Avoid regulatory arbitrage;
 Ensure equal conditions of competition; and
 Implement appropriate regulation and supervision of risks.

In order to fulfil these objectives, EIOPA has important powers.

We develop technical standards that become binding for all insurance
undertakings in the EU and issue guidelines and recommendations that
national supervisors apply on a “comply or explain” basis.

We settle disagreements between national supervisory authorities in cross
border situations and have a coordinating role in crisis situations.

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EIOPA monitors the correct application of the EU law in the different
Member States, by using, if necessary, its powers of investigation in local
markets.

EIOPA and national supervisors are independent from one another, but
closely cooperate with one another.

EIOPA does not substitute local authorities.

It has its own powers and responsibilities, but day to day supervision
remains a task of the national authorities.

The key decision organ of EIOPA is the Board of Supervisors, where the
heads of the national supervisory authorities are represented.

However, it is very important to mention that the EIOPA Regulation
provides that members of the Board of Supervisors must act with
independence and within the sole interest of the European Union.

Most of our decisions are taken by simple majority, some by qualified
majority.

EIOPA wants to represent an added value to European consumers and to
the European supervisory landscape.

In order to fulfil its mandate, EIOPA is building up its own resources and
exploiting the knowledge and experience of its Members.

This is a very important element. We want to create a truly European
supervisory culture. A culture based on best and robust practices.

In order to create this culture, I want to bring together all the national
supervisory authorities. All of them have an important contribution to
make.

EIOPA’s regulatory tasks

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EIOPA has been working on Solvency II, advising the EU Commission
on the Level 2 implementing measures.

We have also been developing draft technical standards and guidelines on
around 40 different areas of Solvency II.

We are doing this in a transparent way by informally consulting with key
stakeholders.

We plan to publicly consult as soon as the legal framework will allow us to
do that.

In order to facilitate the preparatory work of insurance undertakings for
Solvency II, we launched a number of important public consultations in
areas such as the Own Risk and Solvency Assessment (ORSA) and
Supervisory Reporting and Public Disclosure, including the Solvency II
XBRL Taxonomy.

We continued to work on the Solvency II specifications for example by
issuing a joint report on calibration of non life risk factors in the standard
formula.

EIOPA also provided input into the Commission’s revision of the
Insurance Mediation Directive (IMD) by carrying out an extensive survey
of national laws providing for sanctions (both criminal and
administrative) for violations of the provisions of the IMD.

The Commission’s legislative proposal (IMD2) is expected soon and I am
aware that the Commission intends to capture loss adjusters under the
scope of IMD2.

Also, on the regulatory side, we delivered our advice to the Commission
on the revision of the IORP Directive. Stability and consumer protection
were at the core of our advice.

We advocate the use of a consistent and realistic measurement of all
assets and liabilities and proposed the adoption of a Key Information

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Document (KID), containing the fundamental elements about
performance, costs, charges and risks of defined contribution schemes.

I believe that this will help to increase the confidence of consumers in this
type of plans.

Oversight
At EIOPA, we are committed and motivated to contribute to the creation
of a truly European supervisory culture: a culture that promotes stability,
enhances transparency and fosters consumer protection.

A culture based on intelligent and effective regulation which does not
stifle innovation.

That is why in the area of oversight we took as a priority our participation
in the colleges of supervisors, contributing to a more consistent practice.

In the course of 2011, colleges of supervisors with at least one physical
meeting or teleconference were organized for 69 European insurance
groups.

Last year, we set an annual action plan for colleges of supervisors and
were monitoring its actual implementation.

In February 2012, EIOPA issued the report on the functioning of colleges
in 2011 and the Action Plan 2012 for colleges of supervisors.

In the Action Plan, we defined clear timelines within the colleges for the
setting up of an appropriate work plan to deal with the group internal
model validation process.

Consumer protection and financial innovation

Consumer protection and financial innovation are priority areas for
EIOPA.

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We have prepared Guidelines and a Best Practices Report on Complaints
Handling by Insurers.

With these Guidelines, we intend to fill an existing regulatory gap at EU
level and promote convergence of regulatory practice.

They were the subject of a public consultation at the end of last year and
are due to be finalised in the second quarter of 2012.

At the end of last year, EIOPA published a Report on Financial Literacy
and Education Initiatives by national competent authorities; it was a
stock take of existing structures/processes in Member States.

This was in line with a requirement under our empowering legislation to
review and coordinate such initiatives.

We collected data on consumer trends amongst our Members authorities.

This helped us to prepare an Initial Overview, analysing and reporting on
those trends.

This Overview was published this year in February.

The Overview identified three key trends:

(i) Consumer protection issues around Payment Protection Insurance
(PPI)

(ii) Development of unit linked life insurance and

(iii) Increased use of comparison websites by consumers.

This is just the start of our ongoing monitoring of consumer trends.

And finally, we focused on disclosure and selling practices of Variable
Annuities.

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This exercise was brought about by the fact that some variable annuities
products may achieve outcomes that are not easy for consumers to
understand.

We consulted on a draft Report at the end of last year and its final version
was published this year in April.

Finally, last year, we organized our first EIOPA Consumer Strategy Day
where we had the opportunity to discuss important consumer issues with
different stakeholders.

Financial stability

EIOPA was also active in the financial stability domain by assessing the
resilience of the EU insurance sector to major shocks through the EU
wide stress test exercise and by testing different scenarios on the low yield
stress test which shows that the insurance industry would be negatively
affected if a scenario were to materialize where yields remain low for a
prolonged period of time.

EIOPA also issues, on a biannual basis, Financial Stability Reports.

One of the conclusions we made in our December publication is that
“due to significant natural catastrophes during the examined period,
reinsurers suffered above average losses.

Furthermore, life insurers may be subject to the risk of having insufficient
liquidity, which can be emphasised by banking related transactions, e.g.
through “liquidity swaps” and similar products as well as due to
increasing surrenders”.

Furthermore, EIOPA is contributing to macroprudential discussions and
risk analysis in the context of the European Systemic Risk Board,
supported by the establishment of the EIOPA Risk Dashboard.

International relations

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EIOPA is fully aware of the importance of international relations in a
globalized world.

In this area, we provided final advice to the European Commission on the
assessment of the Solvency II equivalence of the Swiss, Bermudan and
Japanese supervisory systems and we have started to contribute to the
development of robust international standards by actively participating in
the work of the International Association of Insurance Supervisors (IAIS).

During 2011, EIOPA maintained its regulatory and supervisory dialogues
with the US National Association of Insurance Commissioners (NAIC),
the China Insurance Regulatory Commission, the Japanese Financial
Services Authority and the Latin American Association of Insurance
Supervisors.

EIOPA also enhanced its regular exchanges with the US Federal
Insurance Office (FIO) in the context of FIO’s responsibilities for
insurance law harmonisation at US federal level and in the area of
international relations.

EIOPA’s values

I would like to say a couple of words about EIOPA’s values.

In our daily activities and relations with our members and stakeholders,
we are governed by the principles of Independence, Responsibility,
Integrity, Transparency, Efficiency and Team Spirit.

We aim to be a modern, competent and professional organization that is
aware of the expectations of European citizens and wants to ensure that
they all are taken on board in our strategies and actions.

Our goal is to act independently in an effective and efficient way towards
the creation of a common European supervisory culture – and this should
not be just empty words.

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We consider it our shared responsibility to build a sound framework for
the future of insurance activities; a framework that takes into account the
specificities of their business models.

I would like to assure you that we are ambitious in fulfilling our
obligations towards EU citizens and businesses and I am confident that
together we will succeed.

Solvency II
As you know, Solvency II is the new regulatory regime for the EU
insurance industry and will be implemented on 1 January 2014.

Solvency II will bring a better alignment between risk and capital,
promoting good risk management practices and fostering transparency.

Regulatory regimes are always a result of a balancing act between
different objectives.

Solvency II will provide an appropriate basis for increased policyholder
protection and will contribute to reinforce financial stability, allowing
insurance companies to continue to play their natural countercyclical role
in times of stressed markets.

Gladly, the Solvency II regime is increasingly being perceived as more
than a “check the box” regulatory exercise that determines capital
requirements.

It requires the European insurance industry to critically analyze its risks,
and in the process, assess the true costs attached to them.

Today, I would like to talk to you particularly about risk management,
which I think is of particular relevance for your profession.

Now, more than ever, insurers need to rely on strong risk management
capabilities in order to deal with the different challenges posed by the
economic slowdown, the financial market volatility, the stress on

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sovereign debt, the demographic changes and the evolving pattern of
natural catastrophes.

During the last decade, not only risk management itself but also its
practical application underwent a major transformation.

Improvements in modelling methodology, significant development of
new internal control instruments, increasing investors’ and analysts’
pressure as well as a new generation of risk managers with a more holistic
view arriving in the company’s also triggered change.

Companies which invested, early and continuously, in establishing an
effective and well integrated risk management are now taking the benefits
from that strategic decision.

It should not come as a surprise that insurance and reinsurance
undertakings are at the forefront of applying sound and robust practices
of risk management.

After all, insurance is in itself a risk management tool and thus the
industry possess a wide range of specific know how and experience in this
area.

Nevertheless, from an historical perspective, risk management has not
been viewed as a relevant element of the insurance regulatory regime.

This has changed with Solvency II.

I believe that appropriate risk management is a cornerstone of any
modern risk based regulatory regime and consequently has its own role in
the supervisory process.

Solvency II is mostly known for its risk based capital requirement
calculation.

However, it is essential to recognize that one of the most important
elements in this regime is the heavy reliance on robust risk management
practices.
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Under the Solvency II regime, insurance and reinsurance undertakings
must have in place an effective risk management system comprising
strategies, processes and reporting procedures necessary to identify,
measure, monitor, manage and report, on a continuous basis the risks, at
an individual and at an aggregated level, to which they are or could be
exposed, and their interdependencies.

Importantly, risk management cannot be seen as a point in time
procedure.

It is a continuous process that should be used in the implementation of
the undertaking’s overall strategy and should allow an appropriate
understanding of the nature and significance of the risks to which it is
exposed, including its sensitivity to those risks and its ability to mitigate
them.

Taking into consideration some lessons learned from the financial crisis,
Solvency II identifies a number of elements which are particularly
relevant for a robust implementation of a risk management system:

• First of all, it is paramount to recognize the ultimate responsibility of the
management body in ensuring that the implemented risk management
system is suitable, effective and proportionate to the nature, scale and
complexity of the risks inherent in the business.

• Secondly, the risk management system needs to be documented and
communicated to the relevant management and staff, to ensure it is
embedded within the business.

• Thirdly, an effective risk management system should cover all material
risks the undertaking might be exposed to.

• Finally, and significantly, the risk management system must be
integrated into the organizational structure of the undertaking and its
decision making processes.
From a supervisory perspective, the insurance undertaking’s risk
management system must be comprehensive, covering at least areas like
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underwriting and reserving, asset–liability management, investment,
liquidity and concentrations, operational risk and reinsurance and other
risk mitigation techniques.

In each of these areas, supervisors have been transparent in their
expectations towards undertakings.

Let me touch particularly on the area of underwriting and reserving.

Underwriting risk is at the centre of the insurance business.

The risk of loss or of adverse change in the value of insurance liabilities,
due to inadequate pricing and reserving assumptions is clearly related to
the quality of the information available and its management.

Consequently, supervisors expect that suitable processes and procedures
will be in place to ensure the reliability, sufficiency and adequacy of both
the statistical and accounting data to be considered both in the
underwriting and reserving processes.

As part of the system of governance, insurance undertakings should be
required to employ personnel with the skills, knowledge and expertise
necessary to discharge the responsibilities allocated to them properly.

Furthermore, insurance undertakings should ensure that effective
systems are in place to prevent conflicts of interest and that potential
sources of conflicts of interest are identified and procedures are
established in order to ensure that those involved with the
implementation of the undertaking’s strategies and policies understand
where conflicts of interest could arise and how such conflicts are to be
addressed.

Furthermore, the undertaking should ensure that all policies and
procedures established for underwriting are applied by all distribution
channels of the undertaking insofar as they are relevant for them and that
they have in place adequate claims management procedures which
should cover the overall cycle of claims: receipt, assessment, processing

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and settlement, complaints and dispute settlement and reinsurance
recoverables.

I believe that the practical implementation of these requirements is of
fundamental relevance for the loss adjusting profession.

The Loss Adjusting profession

The profession of loss adjuster is crucial for the insurance business and
for the society.

The services provided by loss adjusters to insurers and other customers
should be based on professionalism, independence and impartial and
accurate assessment of claims.

These are indeed the key words of your federation.

Your role is particularly sensitive in the relationship between insurers and
their clients and claimants.

You have a particularly relevant role when dealing with major
catastrophes.

I am aware that, during the years of its existence, FUEDI made a lot of
efforts in maintaining high standards of professional conduct and
competence, high educational standards as well as unified standards of
customer services.

I believe that these efforts represent a priceless contribution to the fully
integrated and reliable insurance market of the European Union and to
the overall reinforcement of consumer protection.

I am sure that, in the near future, the loss adjusting profession will be
further recognized at the EU level.

In my opinion, it is fundamental to assure that all loss adjusters working
in the EU follow strict rules of professional conduct including
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maintaining qualities of integrity and impartiality and are bound by
sound loss adjusting practices.

It is also my belief that proper self regulation is an important tool in this
area, but nevertheless, some basic principles should be incorporated in
the EU regulatory framework.

I am looking forward to work in close cooperation with your profession
and with the insurance industry to ensure increased confidence for
policyholders and beneficiaries in the insurance sector.

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“Shaping the future of Europe’s financial markets”
Verena Ross, Executive Director of ESMA,
Centre Forum, London, 11 May 2012

Ladies and Gentlemen,

I am very pleased to be with you today and I would like to thank you for
inviting me to deliver the keynote speech this morning.

I am keen to share with you my views on the future of Europe’s financial
markets, and in particular on the role of ESMA in meeting the challenges
of regulating these markets.

I would like to begin by addressing some of the background behind the
current system of regulation in the EU before moving on to speak about
ESMA and our Work Programme.

What kind of financial oversight system is now developing in Europe?

In June 2009, the Heads of EU Member States and governments called for
a move towards more harmonised regulation and integrated European
supervision in order to ensure a true level playing field for all actors at the
EU level.

This call reflected not only the repercussions of the financial crisis, which
has deeply affected, and continues to affect, Europe, but it also responded
to failings in the areas of cooperation, coordination, consistent
application of Union law and trust between national supervisors.

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The response of the EU was the establishment of the European System of
Financial Supervision and the creation of the European Supervisory
Authorities for securities, banking and insurance in 2011, as well as the
European Systemic Risk Board.

This was a crucial political decisions on the part of the European Union
to improve financial services regulation in Europe.

The new system’s objective is not only to secure a more robust legal
framework for financial markets and all its players, but also to provide
benefits to investors and the wider economy.

Moreover, the benefits of a single financial market are even more obvious
when looking at the alternative: 27 separated and isolated financial
systems functioning with their own rules.

The 16 months, since our establishment on 1 January 2011, have been a
busy time for ESMA, on the organisational, regulatory and supervisory
fronts.

We have set about building the new organisation at a time of ongoing
turmoil in the EU financial markets and of significant legislative activity
in the area of securities regulation.

In terms of operational set-up, ESMA began life with about 35 staff from
its predecessor body, the Committee of European Securities Regulators,
at the beginning of 2011 but by year’s end had nearly doubled to about 70.

This included the reorganisation to align the structure and the
subsequent recruitment of the management tier to ensure that we had the
required basis in place to support delivery of our responsibilities.

We have succeeded in recruiting highly qualified candidates from varied
backgrounds including government, regulatory bodies and the private
sector.

And we are not finished yet.

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By the end of this year we intend to have 100 staff on board and I would
like to take this opportunity to say that we are still keen on attracting
experienced candidates from as broad a range of backgrounds as
possible.

I/ ESMA’s Role in the new EU framework

What is our role in the new EU regulation framework?

ESMA has two key aspects to its mission as an organisation, which are:
the building of a “single rulebook” for the regulation of the EU’s financial
markets and ensuring its consistent application at national level.

While this is an ambitious mission, presenting significant challenges, I
feel that ESMA has already made some substantial progress in meeting
the challenges in both these areas over its first 16 months of existence.

Development of a Single Rulebook

In terms of the development of a single rulebook for Europe, ESMA took
on its new role as EU securities markets standard setter with clear
responsibilities for the development of technical standards and advice for
new, or soon to be revised, pieces of legislation.

Over the last year, we not only produced the first technical standards (for
credit rating agencies (CRAs) and short-selling), but also conducted
significant preparatory work for the enormous task of devising the
standards for the OTC derivatives markets (under EMIR) this year.

We provided advice to the Commission for secondary legislation in the
areas of prospectuses and alternative investment funds under AIFMD.

Furthermore, we used our powers to issue guidelines and
recommendations to enhance the regulatory regime on "Systems and
controls in an automated trading environment" as well as on "regulatory
framework for ETFs and other UCITS" that will be published by ESMA
in June.
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Supervisory Convergence

While the single rulebook will be the basis achieving supervisory
convergence, purely having a single legal text does not actually achieve
convergence in implementation and actual regulation on the ground.

Supervisory convergence is still very much work in progress, but I want to
point to a number of work streams through which ESMA has actively
worked on achieving this common approach to regulation.

ESMA has issued opinions on the treatment of sovereign debt under
IFRS and on a number of pre-trade transparency waivers - basically
agreeing on what the national regulatory treatment should be in these two
important areas.

During the difficult market period last August, ESMA co-ordinated -
without formal legal powers - simultaneous bans on net short positions in
Belgium, France, Italy and Spain, playing a role in aligning wherever
possible the interpretation and implementation of the measures.

Similarly, we coordinated monitoring of market developments and
market infrastructure resilience through this difficult period.

ESMA also conducts peer reviews of national authorities’ activities, which
we publish.

These reviews look at such elements as the degree of convergence
reached in the application of EU law and in its enforcement.

One area which ESMA has recently conducted a peer review on is market
abuse and the use of sanctions in this area.

Direct supervision

Going beyond supervisory convergence, ESMA has been given
responsibility to directly supervise a number of cross-border market
players.
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In July 2011 we took on the responsibility for the registration and
supervision of CRAs wishing to conduct business in the EU.

Bringing CRAs under the umbrella of EU supervision is a milestone
achievement which will contribute to a sounder rating process and thus
more resilient markets and improved investor protection.

In this context, we have undertaken our first on-site inspections before
the end of the year, and will conduct further individual and thematic
supervisory reviews, on-site inspections and off-site monitoring and risk
analysis, this year.

From 2013, ESMA will also take on direct supervisory responsibility for
Trade Repositories (TRs) under the EMIR regulation - expanding the
cross EU supervisory role.

Key priorities for 2012

The introduction of new and the overhaul of existing legislation will be a
key challenge for ESMA this year.

ESMA will work on establishing harmonised binding implementing
measures in different areas such as: OTC derivatives (EMIR), investment
funds (UCITS), alternative fund managers (AIFMD) and issuers
(Prospectus directive).

EMIR in particular will dominate our agenda for the next 6 months, with
a consultation paper in June and final standards due to be delivered by
end September.

In addition, ESMA will provide advice and support on legislation being
introduced and debated by Council and Parliament, including
MiFID/MiFIR, MAD/MAR, CSD, Venture capital etc.

We will need to start conducting some preparatory work in many of these
areas, as the issues ESMA is likely to have to work on (once the Level 1
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legislative process is completed) are not only numerous but often
technically complex and difficult.

ESMA will want to collect information and data, for example to support
its future work in areas such as non-equity transparency under
MiFID/MiFIR.

On the supervision side, 2012 will be the first year in which ESMA will
fully exercise its duties on CRAs and - as I already mentioned - needs to
prepare itself to also take up supervisory responsibilities for Trade
Repositories.

ESMA will also need to prepare for the work on supervisory colleges
which will be established in 2013 for the regulation of cross-border central
counter parties under the OTC derivatives legislation.

The reach and impact of these institutions operating in one country could
dramatically affect investors and intermediaries of other countries. ESMA
will play, in this framework, a co-ordination and a mediation role if
needed.

II/ ESMA’s stakeholders - national regulators, market players
and investors

While ESMA has many new tasks and powers, the new framework is
based on effective and extensive cooperation with and between national
supervisory authorities.

In this context I would like to mention the very active participation by the
UK FSA in ESMA’s activities, at technical level and in ESMA’s Board of
Supervisors.

It is important for us to have this strong input especially into ESMA's rule
making process.

In addition, we continue to rely on the UK - as on any other national
competent authority - to conduct the day to day supervision of their
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P a g e | 53

authorised firms and market infrastructure players, many of which are
active across the whole of the Union.

ESMA's mandate is clear: building “one set of rules” for an “effective EU
single market” – and I know that UK investors and financial institutions
support this motto.

It is in the interest of issuers, investors and intermediaries to have the
same rules across Europe.

It makes it easier for issuers to raise cheaper funding and for financial
institutions to develop their business across the EU single market.

It is also in the retail investor’s interest to have a larger choice of financial
products and the same level of protection wherever a product is sold in
Europe.

To create this single set of rules and achieve an 'effective EU single
market', ESMA needs input not only from national competent authorities,
but also from the wider stakeholder community.

This includes the key market players - buy side/sell-side, infrastructure,
issuers, etc - but also retail investors, small and medium size companies
as well as the European institutions.

We are dependent on receiving thoughtful and informed views, but also
data and information that allows us to evaluate different policy options
impartially, in order to develop the high quality standards and advice that
you expect from us on the wide range of topics that are under ESMA's
remit.

In this context, I would remind this audience that while it may be the
national tendency to see rules and regulations emanating from Brussels
as an attempt to stifle the UK's financial services sector, they should view
this consultative process as an opportunity for them to contribute to the
development of a regulatory system which takes into account the best
attributes of Europe’s largest capital market while ensuring that these
markets are allowed to flourish to the benefit of all.
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III/ ESMA’s role in international cooperation

On international cooperation ESMA will play a central role with the
objective of fostering consistent application of European rules toward
third country entities. In coordination with the European Commission,
ESMA will also ensure that Europe speaks with one single voice when it
has to deal with third county regulators and will strengthen Europe’s
position.

Global leaders have established common objectives at G20 levels and
regulators have set up a number of international groups aiming at
international consistency of the different regimes.

At the end of the process we will need to rely on equivalence and
co-operation among authorities. We will never be effective if a single
regulator seeks to regulate global financial markets from one single
location.

ESMA is already and will continue to play its full role in the global
dialogue, whether that is in relation to the OTC derivative agenda, the
regulation of CRAs or alternative investment fund managers.

Concluding remarks

I would like to conclude by saying that ESMA has a big contribution to
make to the new European system and financial supervision. I have
explained this morning what we have already done and what we are
planning to do, to contribute to the objective of a stable financial market
for Europe.

In this endeavour we will be working closely with national supervisors,
the European institutions and our wider stakeholders, while also keeping
an eye on the international dimension of financial markets.

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Formation of the Enhanced Disclosure Task Force

The importance to market confidence of useful disclosure by financial
institutions of their risk exposures and risk management practices has
been underscored in recent years, and the FSB mentioned, in its press
release on 20 March 2012, that it will facilitate the formation of a
private-sector task force to develop principles for improved disclosures.

The FSB is pleased to announce that the Enhanced Disclosure Task
Force (EDTF) has been established.

The co-chairs of the EDTF are: Hugo Bänziger, Chief Risk Officer and
Member of the Management Board, Deutsche Bank; Russell Picot, Group
General Manager and Group Chief Accounting Officer, HSBC Holdings
plc; and Christian Stracke, Managing Director, Member of Investment
Committee, and Global Head of Credit Research Group, PIMCO.

In addition to the co-chairs, the EDTF initially has 25 senior officials and
experts representing financial institutions, investors and analysts, credit
rating agencies, and external auditors. Summary biographies of the
co-chairs and a listing of the task force’s initial participants are shown in
the annex to this press release.

The primary objectives of the EDTF are

(i) to develop principles for enhanced disclosures, based on current
market conditions and risks, including ways to enhance the comparability
of disclosures, and

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(ii) to identify leading practice risk disclosures presented in annual
reports for end-year 2011 based on broad risk areas such as those
identified in the summary of the first FSB roundtable on risk disclosures
held in December 2011.

The EDTF will have dialogue with standard-setting bodies, such as the
International Organization of Securities Commissions, the Basel
Committee on Banking Supervision, the International Association of
Insurance Supervisors, the International Accounting Standards Board,
the US Financial Accounting Standards Board, and the International
Auditing and Assurance Standards Board, at key stages as it develops its
recommendations.

The recommendations of the EDTF are expected to be reported to the
FSB and published during October 2012.

The FSB will consider holding another international roundtable by
end-2012 to facilitate further discussion by investors, financial
institutions, auditors, standard setters, regulators and supervisors on
market conditions and risks at that time and the progress toward
improving the transparency of risks and risk management through
relevant disclosures.

Mark Carney, Chairman, FSB, said “We welcome the formation of the
Enhanced Disclosure Task Force”.

He added “The FSB supports these efforts which, together with the
activities of standard setters, are expected to result in improved risk
disclosure practices by financial institutions that will provide timely and
useful information to investors”.

Summary of key themes that arose during an FSB roundtable on
risk disclosure

The FSB held a roundtable on risk disclosure in Basel on 9 December
2011.

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Eighty-two senior officials and other experts from around the world took
part in the roundtable, representing investors and analysts, asset
managers, credit rating agencies, banks, insurance companies, audit
firms, audit regulators, accounting and auditing standard setters, as well
as prudential and market authorities.

It fostered a rich and lively dialogue about the current state of risks and
related disclosures and how to improve their transparency.

The key themes that arose during the course of the discussion are
summarised below:

Risk disclosure foundations

Participants generally preferred risk disclosure requirements in
accounting standards and securities regulatory requirements that are
principles-based rather than rules-based, but investors also called for
measures to improve comparability, such as more consistent risk
disclosure formats or templates.

Principles-based approaches, such as those in the IASB’s IFRS 7 (on
financial instrument disclosure) and the US Securities and Exchange
Commission’s guidance on management’s discussion and analysis
(MD&A), may be sufficient to underpin disclosure improvements of the
type discussed at the roundtable without the issuance of new disclosure
requirements, but greater attention needs to be paid to address user needs
for information about emerging risks.

A key theme raised was that while participation from the private sector is
essential in driving forward leading practice risk disclosures, the public
sector also plays a vital role in promoting financial stability and in
encouraging improved disclosure practices.

Views of regulators and accounting standard setters.
The IASB and FASB discussed their initiatives in recent years to enhance
risk disclosures.
_____________________________________________________________

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