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Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
Monday November 12 2012 - Top 10 Risk Management News
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Monday November 12 2012 - Top 10 Risk Management News
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Monday November 12 2012 - Top 10 Risk Management News
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Monday November 12 2012 - Top 10 Risk Management News

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Monday November 12 2012 - Top 10 Risk Management News

Monday November 12 2012 - Top 10 Risk Management News

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  • 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the weeks agenda, and what is nextDear Member,If you had to put Global SystemicallyImportant Banks (G-SIBa) in “buckets”…what would you do?This year, the G-SIBs are shown allocated to buckets corresponding totheir required level of additional loss absorbency.This is what the Financial Stability Board and the Basel Committee did: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 2. Page |2The additional loss absorbency requirements for G-SIBs will be phased instarting from 2016, initially for those banks identified as G-SIBs inNovember 2014, and are to be fully met by 2019.Learn more at Number 10 of our list!At Number 5 of our list you will find the “metaphorical overreach” of theweek:“If you will forgive me for a possible metaphorical overreach, one canthink of ethical concepts as the white blood cells that make anorganization’s “immune system” – its compliance and risk managementsystems and culture – effective.Extending that same metaphor, conflicts of interest can be thought of asthe viruses that threaten the organization’s wellbeing.As in the microbial world, these viruses come in a vast array of constantlymutating formats, and if not eliminated or neutralized, even the simplestvirus is a mortal threat to the body.Especially when combined with the wrong culture and incentives,conflicts of interest can do great harm. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 3. Page |3Who said that?Carlo V. di Florio, Director, Office of Compliance Inspections andExaminations, National Society of Compliance Professionals, SECRead more at Number 5 of our list.Welcome to the Top 10. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 4. Page |4The FSB welcomes the report ofthe Enhanced Disclosure TaskForceThe Financial Stability Board (FSB)welcomes the publication of the Reportof the Enhanced Disclosure Task Force(EDTF) and views it as a valuable stepto improve the quality of riskdisclosures.The EDTF’s principles andrecommendations for improved bankrisk disclosures and leading disclosure practices are designed to providetimely information useful to investors and other users, which togetherwith current regulatory developments and standard setterrecommendations can contribute, over time, to improved marketconfidence in financial institutions.Report to G20 FinanceMinisters and CentralBank Governors on BaselIII implementationThe G20 Leaders met in LosCabos in June 2012. At this Summit, they endorsed the work of the BaselCommittee on Banking Supervision in monitoring the globalimplementation of its standards, and urged jurisdictions to meet theircommitments.“We welcome progress in implementing Basel II, 2.5 and III and urgejurisdictions to fully implement the standards according to the agreedtimelines.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 5. Page |5Agencies Issue Statement onSupervisory Practices RegardingFinancial Institutions andBorrowers Affected by HurricaneSandyThe Office of the Comptroller of theCurrency, the Board of Governors of theFederal Reserve System, and the Federal Deposit Insurance Corporation(the agencies) recognize the serious impact of Hurricane Sandy on thecustomers and operations of many financial institutions and will provideregulatory assistance to affected institutions subject to their supervision.The Recovery andMonetary PolicyWilliam C. Dudley, President and Chief Executive OfficerConflicts of Interest and Risk GovernanceCarlo V. di FlorioDirector, Office of Compliance Inspections andExaminationsNational Society of Compliance Professionals _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 6. Page |6Commission WorkProgramme 2013“Todays absolute imperative is totackle the economic crisis and put the EU back on the road to sustainablegrowth”.Feedback on commentsreceived from stakeholders to the EBA, EIOPA and ESMA’sJoint Consultation PaperOn its proposed response to the European Commission’s Call for Adviceon the Fundamental Review of the Financial Conglomerates DirectiveFinancial crime: a guide for firmsPart 1: A firm’s guide to preventing financialcrimeThis Guide consolidates FSA guidance onfinancial crime.It does not contain rules and its contents are not binding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 7. Page |7The Irish banking sector – five challengesAddress by Mr Matthew Elderfield, DeputyGovernor of the Central Bank of Ireland, to theAssociation of Compliance Officers in Ireland,University College Cork, CorkFSB releases reports onprogress in implementing theSIFI frameworkThe FSB is releasing three documentson latest steps in implementing the FSB’s policy framework foraddressing the systemic and moral hazard risks associated withsystemically important financial institutions (SIFIs). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 8. Page |8The FSB welcomes the reportof the Enhanced DisclosureTask ForceThe Financial Stability Board (FSB)welcomes the publication of the Reportof the Enhanced Disclosure Task Force(EDTF) and views it as a valuable stepto improve the quality of riskdisclosures.The EDTF’s principles andrecommendations for improved bankrisk disclosures and leading disclosure practices are designed to providetimely information useful to investors and other users, which togetherwith current regulatory developments and standard setterrecommendations can contribute, over time, to improved marketconfidence in financial institutions.The FSB encourages banks to continue to strive to improve riskdisclosures.The EDTF was formed in May at the initiative of the FSB.The task force represents a unique private sector initiative – one thatbrings together on a global basis, senior officials and experts fromfinancial institutions, investors, and audit firms – to developrecommendations for enhancing risk disclosure practices by major banksstarting with end-year 2012 annual risk disclosures and continuing into2013 and beyond.1. BackgroundIt has been five years since the beginning of the financial crisis and thepublic’s trust in financial institutions has yet to be fully restored. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 9. Page |9Investors today are more sensitive to the complexity and opacity of banks’business models and credit spreads for financials remain persistentlyhigher than for similarly-rated corporates.Moreover, in some markets, banks still need significant liquidity supportfrom the public sector.Many banks are now trading at market values below their book values,which is in marked contrast to the past.Investors and other public stakeholders are demanding better access torisk information from banks; information that is more transparent, timelyand comparable across institutions.In response, international regulators and standard setters have taken arange of steps to improve the quality and content of the financialdisclosures of banks, including initiatives by the Financial Stability Board(FSB)1 in 2011 and the Senior Supervisors Group2 in 2008.Banks have also made efforts to improve disclosures, both individuallyand collectively.This report differs in one crucial respect: it has been developed amongprivate sector stakeholders as a joint initiative representing both usersand preparers of financial reports.By bringing together the perspectives of leading global banks, investors,analysts and external auditors, this report seeks to establish a benchmarkfor high-quality risk disclosures, with specific emphasis onenhancements that can be implemented in the short term, particularly in2012 and 2013 annual reports.High-quality risk disclosures should be viewed as a collective public goodgiven the systemic importance of banks and the contingent liability theyrepresent for taxpayers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 10. P a g e | 10Poor quality disclosures can result in higher uncertainty premiums, andthis can undermine the extension of credit needed to supportemployment and productive investments in struggling economies,and affect its price.Disclosures that describe risks and risk management practicestransparently help to build confidence in the firm’s management, which isparticularly important in attracting debt and equity investors and may inturn support higher equity valuations.By enhancing investors’ understanding of banks’ risk exposures and riskmanagement practices, high-quality risk disclosures may reduceuncertainty premiums and contribute to broader financial stability.For well-managed firms, the benefits of proactively enhancing riskdisclosures are clear.2. Objectives and processThe Enhanced Disclosure Task Force (EDTF) was established by theFSB in May 2012 following an FSB roundtable in December 2011 ofeighty-two senior officials and experts from around the world.The roundtable outlined broad goals for improving the quality,comparability and transparency of risk disclosures, while reducingredundant information and streamlining the process for bringing relevantdisclosures to the market quickly.With the goal of improving the risk disclosures of banks and otherfinancial institutions, the primary objectives of the EDTF were to:i. Develop fundamental principles for enhanced risk disclosures;ii. Recommend improvements to current risk disclosures, including waysto enhance their comparability; andiii. Identify examples of best or leading practice risk disclosurespresented by global financial institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 11. P a g e | 11Membership of the EDTF had wide geographical representation andincluded senior executives from leading asset management firms,investors and analysts, global banks, credit rating agencies and externalauditors.To organise its work and the resulting recommendations, the EDTFestablished six workstreams reflecting banks’ primary risk areas,and each task force member was allocated to a workstream so that theycomprised both users and preparers of financial reports.The workstreams were as follows:i. risk governance and risk management strategies/business model;ii. capital adequacy and risk-weighted assets;iii. liquidity and funding;iv. market risk;v. credit risk; andvi. other risks.Each workstream analysed current disclosures in its risk area byreviewing a sample of banks’ recent annual and interim reports, Pillar 3reports and other publicly available information, such as media releasesand presentations to investors.On the basis of that analysis, and following extensive discussion amongits members, each workstream developed recommendations forenhancing disclosures in its respective risk area, and presented them tothe EDTF plenary for further consideration.The task force had plenary meetings in London, New York, Singaporeand Frankfurt, and held two additional meetings by telephone. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 12. P a g e | 12During those meetings, the EDTF thoroughly debated and challengedeach recommendation proposed by the workstreams.As a result, the recommendations in this report represent the collectiveviews and expertise of the EDTF membership.Also, at key stages in its work, the Co-chairs of the EDTF engaged indialogue with securities and banking regulators and supervisors,accounting standard-setters, banking associations and other stakeholderorganisations located in Europe, North America, Latin America, theMiddle East and Asia.Minutes of these meetings were circulated to EDTF members and,during the plenary meetings, the Co-chairs gave oral accounts of thesestakeholder organisations’ views on risk disclosure issues, including anyinitiatives underway to address risk disclosure issues.Prior to its finalisation, a draft of the report was circulated by the EDTF tokey stakeholder organisations, including the International BankingFederation and the Institute of International Finance, and feedback wassolicited on its content.Working within the EDTF’s compressed timetable for providingcomments, these international organisations expeditiously distributedthe document to their respective memberships and provided the EDTFwith invaluable feedback.The task force considered the input received from its extensive outreachprogramme as well as the views of the EDTF membership in thedevelopment and finalization of this report.3. Scope and other considerationsScope of the recommendations in this reportThe fundamental principles are applicable to all banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 13. P a g e | 13However, the EDTF has developed the recommendations for enhancedrisk disclosures with large international banks in mind, although theyshould be equally applicable to banks that actively access the majorpublic equity or debt markets.Some of the recommendations, therefore, are likely to be lessapplicable to smaller banks and subsidiaries of listed banks and theEDTF would expect such entities to adopt only those aspects of therecommendations that are relevant to them.This report was not specifically developed for other types of financialservices organisations, such as insurance companies, though thefundamental principles and recommendations contained herein mayprovide some appropriate guidance.Banks will need to continue to comply with the relevant securities lawsand reporting requirements applicable to their activities, and will alsoneed to assess any relevant confidentiality and other jurisdictional legalissues.In addition, all banks, including the large international ones, will need toassess factors specific to their circumstances such as the materiality, costsand benefits of each recommendation in this report.In making these assessments, banks should consider their users’ needsand expectations and may wish to speak directly to their key stakeholdersas they begin to implement changes.The EDTF acknowledges that existing jurisdictional differences inaccounting and regulatory requirements may affect how banksimplement the recommendations, and may make it difficult to achievefull comparability between banks across jurisdictions.Timing of implementationThe EDTF believes that many of the recommendations can be adopted in2012 or 2013, for example, those that involve only the re-ordering oraggregation of existing disclosures in banks’ reports to enable users to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 14. P a g e | 14find and assimilate information more quickly, or those that are based oninformation that is already reported to management.However, other recommendations may take longer to develop andimplement, particularly where banks need to create new systems andprocesses to ensure that the information required to support theenhanced disclosure is of high quality, and thus the EDTF envisagesenhancements of the risk disclosures of banks continuing after 2013.The EDTF also recognises that banks have other commitments withsimilar timelines, such as implementing Basel II or Basel III and theGlobally Systemically Important Banks (G-SIB) data template.Some of the recommendations are dependent on the finalisation orimplementation of particular regulatory rules and, thus, cannot beadopted until then.Frequency of disclosuresThis report has been produced in the context of the existing legal andregulatory requirements for banks’ public reporting.Banks produce annual reports, which contain audited financialstatements and management commentary (including risk commentary),and interim reports.Some banks also produce preliminary announcements before their annualor interim reports are available.Interim reports and preliminary announcements are intended to provideusers with timely updates on the bank’s last annual report.The recommendations do not suggest changing the requirements forinterim reporting, which vary from market to market.However, the EDTF thinks that several areas in the report should bedisclosed more frequently than in annual reports, and thus that more risk _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 15. P a g e | 15disclosures would be included in interim reports than is currently thecase.Banks should consider whether their interim reports contain relevant riskinformation to support the financial information presented and whethersuch reports provide a sufficient update on top and emerging risks.Location of disclosuresIn making its recommendations, the EDTF generally does not specifywhere any new disclosure should be made, nor does it suggest that bankschange the current location of their reported information when adoptingthe enhancements.Banks should retain flexibility in what they choose to disclose in theirannual reports and other filings, such as their Pillar 3 reports.However, the EDTF expects many of the detailed regulatory capitaldisclosures will remain in or will be added to the Pillar 3 report.Consistent with the FSB’s recommendation in 2011, the task forceadvocates, as part of the fundamental principles, that annual reports andPillar 3 reports should be published at the same time, and believes thatthis would provide users with complete and timely reporting across thekey areas of interest.It is not the intention of this report to create a checklist of all possible riskdisclosures or to reproduce existing disclosure requirements set forth inaccounting and regulatory standards.Banks will need to assess the recommendations in this report in the lightof how they apply the existing disclosure requirements in theirjurisdictions.Indeed, those extensive existing requirements may contribute to bothpreparers’ views that financial reporting is a compliance exercise andusers’ difficulties in navigating long annual reports. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 16. P a g e | 16This can be a particular concern for international banks that must meetvarying and sometimes overlapping disclosure requirements in differentjurisdictions.As a result, some banks may question whether the benefits of increasedtransparency justify the additional investment in resources, managementattention and the potential risks involved in making forward-lookingstatements.This report addresses these concerns by recommending ways for banks tocommunicate important disclosures to users more effectively andefficiently.4. Fundamental principles for risk disclosureThe EDTF has collectively identified seven principles for enhancing riskdisclosures, which both underpin the recommendations set out in thisreport and provide an enduring framework for future work on riskdisclosures.These principles provide a firm foundation from which to achievetransparent, high-quality risk disclosures that enable users to understandin an integrated manner a bank’s7 business and its risks, and the resultanteffects on its performance and financial position.The seven fundamental principles for enhanced risk disclosures are:1. Disclosures should be clear, balanced and understandable.2. Disclosures should be comprehensive and include all of the bank’s keyactivities and risks.3. Disclosures should present relevant information.4. Disclosures should reflect how the bank manages its risks.5. Disclosures should be consistent over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 17. P a g e | 176. Disclosures should be comparable among banks.7. Disclosures should be provided on a timely basis.Principle 1: Disclosures should be clear, balanced andunderstandable.- Disclosures should be written with the objective of communicating information to a range of users (i.e. investors, analysts and other stakeholders) rather than simply complying with minimum requirements. The disclosures should be sufficiently granular to benefit sophisticated users but should also provide summarised information for those who are less specialised, along with clear signposting to enable navigation through the information. Disclosures should be organised so that key information and messages are prioritised and easy to find.- There should be an appropriate balance between qualitative and quantitative disclosures, using text, numbers and graphical presentations. Fair and balanced narrative explanations should provide insight into the implications of the quantitative disclosures and any changes or developments that they portray.- Disclosures should provide straightforward explanations for more complex issues. Descriptions and terms should fairly represent the substance of the bank’s activities. Terms used in the disclosures should be explained or defined. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 18. P a g e | 18Principle 2: Disclosures should be comprehensive and includeall of the bank’s key activities and risks.- Disclosures should provide an overview of the bank’s activities and its key risks. They should include a description of how the bank identifies, measures, manages and reports each risk, highlighting any significant internal or external changes during the reporting period and the key actions taken by management in response.- Disclosures should include informative explanations of important processes and procedures – as well as underlying cultures and behaviours – that affect the bank’s business and its risk generation or risk management. Disclosures of such items should enable users to obtain an understanding of the bank’s risk management operations and the related governance by the bank’s board and senior management.- When appropriate and meaningful, disclosures should be complemented with information about key underlying assumptions and sensitivity or scenario analysis. Such analysis should demonstrate the effect on selected risk metrics or exposures of changes in the key underlying assumptions, both in qualitative and quantitative terms.Principle 3: Disclosures should present relevant information.- The bank should provide disclosures only if they are material and reflect its activities and risks – and can be prepared without unreasonable cost. Accordingly, disclosures should be eliminated if they are immaterial or redundant. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 19. P a g e | 19 Disclosing immaterial information or information on situations that do not apply to the bank reduces the relevance of its disclosures and undermines the ability of users to understand them. However, when exposures receiving significant current market attention are either immaterial or nonexistent, the bank should acknowledge this fact to reduce uncertainty among users. Moreover, banks should avoid generic or boilerplate disclosures that do not add value or do not communicate useful information.- Disclosures should be presented in sufficient detail to enable users to understand the nature and extent of the bank’s risks. Where period-end information may not be representative of the risks, consideration should be given to providing averages and high and low balances during the period. The type of information, the way in which it is presented and the accompanying explanatory notes will differ between banks and will change over time, but information should be reported at the level of detail that users need in order to understand the bank, its risk appetite, its exposures and the manner in which it manages its business and risks, including in stress conditions.- The bank should explain its business model to provide context for its business and risk disclosures. In many cases, disclosures will focus on the consolidated group. However, understanding the risks relative to returns embedded in key operating subsidiaries and business divisions – and the way that risks are shared or assets, liabilities, income and costs are allocated across the group – can be key to users’ understanding of the risks to which the group is exposed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 20. P a g e | 20Principle 4: Disclosures should reflect how the bank manages itsrisks.- Disclosures should be based on the information that is used for internal strategic decision making and risk management by key management, the board and the board’s risk committee. Approaches to disclosure should be sufficiently flexible to allow banks to reflect their particular circumstances in both narrative and quantitative terms.- The bank should explain the risk and reward profile of its activities. Disclosures should be representative of risk exposures during the period, as well as at the end of the period.- If disclosure of particularly commercially sensitive or otherwise confidential information would unduly expose the bank to litigation or other risks, the level of information provided will need to balance confidentiality and materiality. If material, a bank should assess what information should be provided to ensure users are aware of important issues without disclosing potentially damaging confidential details.Principle 5: Disclosures should be consistent over time.- Disclosures should be consistent over time to enable users to understand the evolution of the bank’s business, risk profile and management practices. Core disclosures should not change dramatically but should evolve over time, allowing for inter-period comparisons.- Changes in disclosures and related approaches or formats (e.g. due to changes in risk practices, emerging risks, measurement methodologies or accounting or regulatory requirements) should be clearly highlighted and explained. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 21. P a g e | 21 Presenting comparative information is helpful; however, in some situations it may be preferable to include a new disclosure even if comparative information cannot be prepared or restated.Principle 6: Disclosures should be comparable among banks.- Disclosures should be sufficiently detailed to enable users to perform meaningful comparisons of businesses and risks between different banks, including across various national regulatory regimes. Disclosures that facilitate users’ understanding of the bank’s exposures compared with its competitors are of particular importance in building users’ understanding and confidence as well as reducing the risk of inappropriate comparisons.Principle 7: Disclosures should be provided on a timely basis.- Information should be delivered to users in a timely manner using appropriate media (e.g. annual and interim reports, websites, news releases, or regulatory reports). The bank should seek to release to the market all relevant and important risk-based information at the same time (e.g. the annual report and Pillar 3 disclosures). Equally important are regular updates of financial information; users need more frequent updates than just the annual report. This can be accomplished through various means and media; thus banks should endeavour to provide frequent updates to their users to ensure financial information remains up to date.The EDTF acknowledges that in some cases there will be tensionbetween two or more fundamental principles.For example, under Principles 4 and 5, disclosures are most useful if theyprovide information that reflects how the bank manages its risks and areconsistent over time while, under Principle 6, disclosures should enable _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 22. P a g e | 22users to perform meaningful comparisons between banks. Similarly, therecan be tension within a single principle.For example, Principle 1 states that disclosures should be clear, balancedand understandable, but users have differing views on the level of detailthat is needed to achieve that objective.Even sophisticated users find that some granular disclosures, which maybe provided to comply with particular regulatory or accountingrequirements, are difficult to use or understand unless they areaccompanied by summarised information.Tension may also arise if investors seek information that is toocommercially sensitive for banks to disclose.The EDTF believes that these tensions do not reflect a fault or weaknessin the fundamental principles but are inevitable given the varying, andsometimes competing, needs of users, preparers and regulators.Banks should endeavour, both individually and collectively, to find anappropriate balance among the principles, and indeed within particularprinciples, without creating excessive disclosures that will overwhelmusers.Users should provide ongoing feedback to banks about whether they areachieving an appropriate balance.It is acknowledged that the applications of the principles will differbetween risk areas and may change over time.The aim of the fundamental principles, and the recommendations thatfollow from them, is to address investors’ concerns about the quality andtransparency of banks’ disclosures.However, users already have considerable knowledge of topics such asgeneral business risks, finance and current economic conditions, and abank’s disclosures are not the sole source of information available tothem. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 23. P a g e | 23This report builds on that existing knowledge and information, and seeksto avoid developing disclosures that would duplicate information thatshould already be known, apparent or readily accessible from othersources.5. Recommendations for enhancing risk disclosuresThe EDTF has identified the following recommendations for enhancingrisk disclosures.Additionally, there are eight examples in the appendix to this section thatillustrate how particular recommendations could be adopted to produceclear and understandable disclosures.Section 6 provides additional commentary that expands on theserecommendations.General1: Present all related risk information together in any particular report.Where this is not practicable, provide an index or an aid to navigation tohelp users locate risk disclosures within the bank’s reports.2: Define the bank’s risk terminology and risk measures and present keyparameter values used.3: Describe and discuss top and emerging risks, incorporating relevantinformation in the bank’s external reports on a timely basis.This should include quantitative disclosures, if possible, and a discussionof any changes in those risk exposures during the reportingperiod.4: Once the applicable rules are finalised, outline plans to meet each newkey regulatory ratio, e.g. the net stable funding ratio, liquidity coverage _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 24. P a g e | 24ratio and leverage ratio and, once the applicable rules are in force, providesuch key ratios.Risk governance and risk management strategies/businessmodel5: Summarise prominently the bank’s risk management organisation,processes and key functions.6: Provide a description of the bank’s risk culture, and how proceduresand strategies are applied to support the culture.7: Describe the key risks that arise from the bank’s business models andactivities, the bank’s risk appetite in the context of its business modelsand how the bank manages such risks.This is to enable users to understand how business activities are reflectedin the bank’s risk measures and how those risk measures relate to lineitems in the balance sheet and income statement.8: Describe the use of stress testing within the bank’s risk governance andcapital frameworks.Stress testing disclosures should provide a narrative overview of thebank’s internal stress testing process and governance.Capital adequacy and risk-weighted assets9: Provide minimum Pillar 1 capital requirements, including capitalsurcharges for G-SIBs and the application of counter-cyclical and capitalconservation buffers or the minimum internal ratio established bymanagement.10: Summarise information contained in the composition of capitaltemplates adopted by the Basel Committee to provide an overview of themain components of capital, including capital instruments and regulatoryadjustments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 25. P a g e | 25A reconciliation of the accounting balance sheet to the regulatory balancesheet should be disclosed.11: Present a flow statement of movements since the prior reporting datein regulatory capital, including changes in common equity tier 1, tier 1and tier 2 capital.12: Qualitatively and quantitatively discuss capital planning within a moregeneral discussion of management’s strategic planning, including adescription of management’s view of the required or targeted level ofcapital and how this will be established.13: Provide granular information to explain how risk-weighted assets(RWAs) relate to business activities and related risks.14: Present a table showing the capital requirements for each methodused for calculating RWAs for credit risk, including counterparty creditrisk, for each Basel asset class as well as for major portfolios within thoseclasses.For market risk and operational risk, present a table showing the capitalrequirements for each method used for calculating them.Disclosures should be accompanied by additional information aboutsignificant models used, e.g. data periods, downturn parameterthresholds and methodology for calculating loss given default (LGD).15: Tabulate credit risk in the banking book showing average probabilityof default (PD) and LGD as well as exposure at default (EAD), totalRWAs and RWA density for Basel asset classes and major portfolioswithin the Basel asset classes at a suitable level of granularity based oninternal ratings grades.For non-retail banking book credit portfolios, internal ratings grades andPD bands should be mapped against external credit ratings and thenumber of PD bands presented should match the number ofnotch -specific ratings used by credit rating agencies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 26. P a g e | 2616: Present a flow statement that reconciles movements in RWAs for theperiod for each RWA risk type.17: Provide a narrative putting Basel Pillar 3 back-testing requirementsinto context, including how the bank has assessed model performanceand validated its models against default and loss.Liquidity18: Describe how the bank manages its potential liquidity needs andprovide a quantitative analysis of the components of the liquidity reserveheld to meet these needs, ideally by providing averages as well asperiod-end balances.The description should be complemented by an explanation of possiblelimitations on the use of the liquidity reserve maintained in any materialsubsidiary or currency.Funding19: Summarise encumbered and unencumbered assets in a tabular formatby balance sheet categories, including collateral received that can berehypothecated or otherwise redeployed.This is to facilitate an understanding of available and unrestricted assetsto support potential funding and collateral needs.20: Tabulate consolidated total assets, liabilities and off-balance sheetcommitments by remaining contractual maturity at the balance sheetdate.Present separately(i) Senior unsecured borrowing(ii) Senior secured borrowing (separately for covered bonds and repos)and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 27. P a g e | 27(iii) Subordinated borrowing.Banks should provide a narrative discussion of management’s approachto determining the behavioural characteristics of financial assets andliabilities.21: Discuss the bank’s funding strategy, including key sources and anyfunding concentrations, to enable effective insight into available fundingsources, reliance on wholesale funding, any geographical or currencyrisks and changes in those sources over time.Market risk22: Provide information that facilitates users’ understanding of thelinkages between line items in the balance sheet and the incomestatement with positions included in the traded market risk disclosures(using the bank’s primary risk management measures such as Value atRisk (VaR)) and non-traded market risk disclosures such as risk factorsensitivities, economic value and earnings scenarios and/or sensitivities.23: Provide further qualitative and quantitative breakdowns of significanttrading and nontrading market risk factors that may be relevant to thebank’s portfolios beyond interest rates, foreign exchange, commodity andequity measures.24: Provide qualitative and quantitative disclosures that describesignificant market risk measurement model limitations, assumptions,validation procedures, use of proxies, changes in risk measures andmodels through time and descriptions of the reasons for back-testingexceptions, and how these results are used to enhance the parameters ofthe model.25: Provide a description of the primary risk management techniquesemployed by the bank to measure and assess the risk of loss beyondreported risk measures and parameters, such as VaR, earnings oreconomic value scenario results, through methods such as stress tests,expected shortfall, economic capital, scenario analysis, stressed VaR orother alternative approaches. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 28. P a g e | 28The disclosure should discuss how market liquidity horizons areconsidered and applied within such measures.Credit risk26: Provide information that facilitates users’ understanding of the bank’scredit risk profile, including any significant credit risk concentrations.This should include a quantitative summary of aggregate credit riskexposures that reconciles to the balance sheet, including detailed tablesfor both retail and corporate portfolios that segments them by relevantfactors.The disclosure should also incorporate credit risk likely to arise fromoffbalance sheet commitments by type.27: Describe the policies for identifying impaired or non-performingloans, including how the bank defines impaired or non-performing,restructured and returned-to-performing (cured) loans as well asexplanations of loan forbearance policies.28: Provide a reconciliation of the opening and closing balances ofnon-performing or impaired loans in the period and the allowance forloan losses.Disclosures should include an explanation of the effects of loanacquisitions on ratio trends, and qualitative and quantitative informationabout restructured loans.29: Provide a quantitative and qualitative analysis of the bank’scounterparty credit risk that arises from its derivatives transactions.This should quantify notional derivatives exposure, including whetherderivatives are over-the-counter (OTC) or traded on recognisedexchanges. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 29. P a g e | 29Where the derivatives are OTC, the disclosure should quantify how muchis settled by central counterparties and how much is not, as well asprovide a description of collateral agreements.30: Provide qualitative information on credit risk mitigation, includingcollateral held for all sources of credit risk and quantitative informationwhere meaningful.Collateral disclosures should be sufficiently detailed to allow anassessment of the quality of collateral.Disclosures should also discuss the use of mitigants to manage credit riskarising from market risk exposures (i.e. the management of the impact ofmarket risk on derivatives counterparty risk) and single nameconcentrations.Other risks31: Describe ‘other risk’ types based on management’s classifications anddiscuss how each one is identified, governed, measured and managed. Inaddition to risks such as operational risk, reputational risk, fraud risk andlegal risk, it may be relevant to include topical risks such as businesscontinuity, regulatory compliance, technology, and outsourcing.32: Discuss publicly known risk events related to other risks, includingoperational, regulatory compliance and legal risks, where material orpotentially material loss events have occurred.Such disclosures should concentrate on the effect on the business, thelessons learned and the resulting changes to risk processes alreadyimplemented or in progress.Appendix to Section 5The following appendix includes eight examples of possible disclosureformats to assist banks in adopting the recommendations in this report. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 30. P a g e | 30These examples reflect instances where investors have suggested thatconsistent tabular presentation is particularly important to improvingtheir understanding of the disclosed information and facilitatingcomparability among banks.All numbers included in the Figures are for illustrative purposes.It is understood that differing business models, reporting regimes andmateriality will affect how banks provide such information. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 31. P a g e | 31 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 32. P a g e | 32Core Tier 1 (CET1) CapitalIn addition to those items illustrated on the previous page, the line item‘other, including regulatory adjustments and transitional arrangements’may include (as per applicable regime):- common share capital issued by subsidiaries and held by third parties;- other movements in shareholders’ equity;- reserves arising from property revaluation;- defined benefit pension fund adjustment;- cash flow hedging reserve;- shortfall of provisions to expected losses;- securitisation positions;- investments in own CET1;- reciprocal cross-holdings in CET1;- investments in the capital of unconsolidated entities (less than 10%);- significant investments in the capital of unconsolidated entities (amount above 10% threshold);- mortgage servicing rights (amount above 10% threshold);- deferred tax assets arising from temporary differences (amount above 10% threshold);- amounts exceeding 15% threshold; and- regulatory adjustments applied due to insufficient additional tier 1. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 33. P a g e | 33Other ‘non-core’ tier 1 (additional tier 1) capitalThe line item ‘other, including regulatory adjustments and transitionalarrangements’ may include (as per applicable regime):- other ‘non-core’ tier 1 capital (additional tier 1) instruments issued by subsidiaries and held by third parties;- unconsolidated investments deductions;- investments in own additional tier 1 instruments;- reciprocal cross-holdings;- significant investments in the capital of unconsolidated entities;- other investments in the capital of unconsolidated entities;- grandfathering adjustments;- regulatory adjustments applied due to insufficient tier 2 capital; and- currency translation differences.Tier 2 CapitalThe line item ‘other, including regulatory adjustments and transitionalarrangements’ may include (as per applicable regime):- tier 2 capital instruments issued by subsidiaries and held by third parties;- unconsolidated investments deductions;- investments in own tier 2 instruments;- reciprocal cross-holdings; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 34. P a g e | 34- significant investments in the capital of unconsolidated entities;- other investments in the capital of unconsolidated entities;- collective impairment allowances;- grandfathering adjustments; and- currency translation differences. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 35. P a g e | 35 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 36. P a g e | 366. Additional commentary on areas identified for enhanced riskDisclosuresThis section describes the EDTF’s views on current risk disclosurepractices, recognizing areas of leading practice and those which could beenhanced.The section also reproduces the recommendations and providesadditional explanatory guidance designed to place them in context andhighlight their importance to users.Banks will need to continue to comply with securities laws and reportingrequirements relevant to their operations to ensure that they are not _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 37. P a g e | 37breached, and assess appropriate confidentiality and other jurisdictionallegal issues, particularly where the disclosure of commercially sensitiveinformation would threaten a bank’s stability or possess the potential togive rise to systemic risk.They will also wish to consider factors specific to their circumstancessuch as the materiality, costs and benefits of disclosures.The additional commentary accords with the fundamental principles andexpands on the recommendations set out in Section 5 of this report.The enhanced disclosures emphasise relevance, consistency orcomparability, depending on the importance of the principle to aparticular area.Users need to understand how the bank manages risk and be able tomake comparisons over time and between reporting organisations.The EDTF recognises that differences in regulatory and accountingrequirements in different jurisdictions may make it difficult to achievecomparability and it will take time to improve this, but it remains an aimof enhanced disclosures.The EDTF’s recommendations are organised within the following sevenbroad risk areas, which are the major categories of risk for banks:6.1 risk governance and risk management strategies/business model;6.2 capital adequacy and risk-weighted assets;6.3 liquidity;6.4 funding;6.5 market risk;6.6 credit risk; and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 38. P a g e | 386.7 other risks.Many of these risk areas are inter-related. For example, reputational riskmay be addressed as part of ‘other risks’ but may also be a key driver ofrisk governance. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 39. P a g e | 39Report to G20Finance Ministersand Central BankGovernors onBasel IIIimplementationIntroduction and summaryThe G20 Leaders met in Los Cabos in June 2012. At this Summit, theyendorsed the work of the Basel Committee on Banking Supervision inmonitoring the global implementation of its standards, and urgedjurisdictions to meet their commitments.“We welcome progress in implementing Basel II, 2.5 and III and urgejurisdictions to fully implement the standards according to the agreedtimelines.”This report updates the G20 Finance Ministers and Central BankGovernors on the progress made by Basel Committee memberjurisdictions in implementing the Basel III standards (including Basel IIand Basel 2.5, which now form integral parts of Basel III).It also highlights specific areas that require attention if the goal ofachieving timely and consistent implementation is to be achieved.The Basel Committee believes that full, timely and consistentimplementation of Basel III by its members is essential for restoringconfidence in the regulatory framework for banks and to help ensure asafe and stable global banking system.The transitional phase for implementing the Basel III packagecommences on 1 January 2013, by when all jurisdictions should have inplace the necessary regulations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 40. P a g e | 40At the time of this report, eight of the 27 member jurisdictions of the BaselCommittee have issued their final set of Basel III related regulations, 17members have published draft regulations, and two members arecurrently in the process of drafting regulations but have not yet publishedthem.Given their commitment, and the fact that the transitional date is apublically announced one, it is especially important that memberjurisdictions that are home to global systemically important banks(G-SIBs) make every effort to issue final regulations as soon as possible inorder to meet the transition period deadline.To facilitate proper implementation and follow up, the Basel Committeehas begun to assess the consistency of these regulations and progresswith implementation against 14 core elements of the Basel framework.As a first step, the Committee conducted detailed assessments of thecontent and substance of the final regulations implementing the Basel IIIpackage in Japan, and the draft regulations in the European Union andthe United States.While noting implementation progress in all three jurisdictions, theassessments have identified areas of divergence from the globally agreedBasel standards.In the case of Japan, no material deviations were observed and thejurisdiction is assessed overall as “compliant.”In the European Union and the United States, 4 there were a fewdeviations in the draft regulations that were assessed to be of a materialnature (for securitisation related regulations in the United States, and forregulations covering the definition of capital and the internalratings-based (IRB) approach in the European Union).All other elements in both jurisdictions were either “compliant” or“largely compliant.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 41. P a g e | 41Given the importance of making the banking system more resilient, it isessential that the Basel framework is implemented consistently andaccording to the globally-agreed timelines.The Basel Committee therefore urges the G20 Finance Ministers andCentral Bank Governors to call on(i) All Basel Committee jurisdictions to meet the globally agreeddeadline;(ii) The European and United States authorities, and others who undergoa Basel Committee regulatory consistency assessment, to close anyidentified gaps between their regulations and Basel III and;(iii) All jurisdictions to ensure their implementation of Basel III remainstimely and consistent with the internationally agreed package of reforms.The Basel Committee also continues to perform detailed analysis of thevariations in risk-weighted assets across banks, across jurisdictions andover time, both for assets in the banking book and in the trading book.This report includes preliminary conclusions of this analysis.More detailed assessment reports, potentially including policyrecommendations, where appropriate, will be considered by theCommittee later in 2012 and in early 2013.Basel standardsIn June 2004, a package of reforms known as Basel II introduced morerisk-sensitive minimum capital requirements for banks, including anenhanced measurement of credit risk, and capture of operational risk.Basel II also reinforced the requirements by setting out principles forbanks to assess the adequacy of their capital and for supervisors to reviewsuch assessments to ensure banks have the necessary capital to supporttheir risks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 42. P a g e | 42It also strengthened market discipline by enhancing disclosurerequirements.The deadline for implementation of the Basel II framework by memberjurisdictions was the end of 2006.In July 2009, the Committee introduced enhancements to the Basel IIframework in response to lessons from the financial crisis.These reforms, referred to as Basel 2.5, relate to the measurement of risksfor calculating regulatory capital for securitisation and trading bookexposures (Pillar 1), risk management and supervisory review (Pillar 2)and disclosure (Pillar 3).A deadline for implementing these reforms was set for end 2011.In December 2010, the Basel Committee published Basel III, acomprehensive set of reforms to raise the resilience of banks,supplementing Basel II and 2.5 in a number of dimensions.Basel III addresses both firm-specific and broader, systemic risks by:• Raising the quality of capital, with a focus on common equity, and thequantity of capital to ensure banks are better able to absorb losses;• Enhancing the coverage of risk, in particular for capital marketactivities;• Introducing capital buffers which should be built up in good times sothat they can be drawn down during periods of stress;• Introducing an internationally harmonised leverage ratio to serve as abackstop to the risk-based capital measure and to contain the build-up ofexcessive leverage in the system;• Introducing minimum global liquidity standards to improve banks’resilience to acute short term stress and to improve longer term funding;and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 43. P a g e | 43• Introducing additional capital buffers for the most systemicallyimportant institutions to address the issue of “too big to fail.”The implementation period for Basel III capital requirements starts from1 January 2013 and includes transitional arrangements until 1 January2019.The transitional arrangements are available to give banks time to meetthe higher standards, while still supporting lending to the economy.The liquidity requirements, leverage ratio and systemic surcharges comeinto force in a phased approach starting from 2015.The implementation of these rules will, therefore, be assessed later6 andare not covered in this report.Design of the Committee’s Basel III Implementation ReviewProgrammeIn January 2012, the Group of Central Bank Governors and Heads ofSupervision (GHOS), the Basel Committee’s oversight body, endorsedthe comprehensive process proposed by the Committee to monitormembers’ implementation of Basel III.The process consists of the following three levels of review:• Level 1: ensuring the timely adoption of Basel III;• Level 2: ensuring regulatory consistency with Basel III; and• Level 3: ensuring consistency of outcomes (initially focusing onrisk-weighted assets).The Basel Committee has published three “Level 1” progress reports.It has completed a “Level 2” review of Japan, and has releasedpreliminary reports on the European Union and the United States. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 44. P a g e | 44In addition, it has commenced an assessment of Singapore.The Committee’s “Level 3” reviews are conducting detailed assessmentsof banks’ models to compute capital charges for the banking and tradingbook, based on test portfolios, information obtained from questionnairesand visits to individual banks.The Basel Committee has worked in close collaboration with theFinancial Stability Board, (FSB) given the FSB’s role in coordinating themonitoring of implementation of regulatory reforms.The Committee designed its programme to be consistent with the FSB’sCoordination Framework for Monitoring the Implementation ofFinancial Reforms (CFIM) agreed by the G20.The objectives and the process of each of the three levels of review are asfollows.Level 1: Timely adoption of Basel IIIThe objective of the “Level 1” assessment is to ensure that Basel III istransformed into domestic regulations according to the agreedinternational timelines.It does not include the review of the content or substance of the domesticrules.Each Basel Committee member jurisdiction’s status is reported in asimple table.Separately, the Financial Stability Institute (FSI) of the Bank forInternational Settlements is surveying non-Basel Committee membercountries and has published the results. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 45. P a g e | 45Level 2: Regulatory consistencyThe objective of the “Level 2” assessments is to ensure compliance ofdomestic regulations with the international minimum requirements.The Level 2 assessments are conducted by teams of 6-7 specialists with adiverse range of technical skills from independent jurisdictions.The reviews take place over a period of six months and include a detailedself-assessment, on-site visits and an assessment of the materiality ofdivergences.Multiple layers of cross-checking and peer review exist to ensure a fairand rigorous process and consistent treatment across reviews.All Basel Committee members will be assessed over time.The Committee decided to prioritise its reviews, focusing first on thehome jurisdictions of global systemically important banks (G-SIBs).The first three reviews of the draft regulations in the European Union andthe United States, and final rules in Japan have been concluded inSeptember and the reports are available on the BIS website.Level 3: Risk-weighted assets consistencyThe objective of the “Level 3” assessments is to ensure that the outcomesof the rules are in line with the intended policy objectives in practiceacross banks and jurisdictions.It extends the scope of Levels 1 and 2, both of which focus on nationalrules and regulations, to supervisory implementation at the bank level.The Committee has established two expert groups, one for the bankingbook and one for the trading book. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 46. P a g e | 46These groups are identifying and analysing areas of material variabilityand inconsistencies in the calculation of risk-weighted assets (RWAs, orthe denominator of the Basel capital ratio).Depending on the outcome, the work may result in policyrecommendations to address identified inconsistencies.Progress and findings to dateLevel 1Basel II, which was due to come into force from end 2006, has beenimplemented in full by three-quarters of member jurisdictions.Of the five countries that have not yet fully implemented Basel II, two arehome countries of G-SIBs – China and the United States.Both countries are in the process of assessing their banks’ progresstoward meeting all the qualifying criteria for the advanced approaches.The other countries that are still in the process of implementing Basel IIare Argentina, Indonesia and Russia.Basel 2.5, which was due to be implemented by Basel Committeemembers by end 2011, has been implemented by 20 of the 27 memberjurisdictions.China, Saudi Arabia and the United States have issued final regulationsfor Basel 2.5 that come into effect from 1 January 2013.Basel III regulations are due to come into effect from 1 January 2013.While progress can be observed, only eight of the 27 Basel Committeemember jurisdictions have thus far issued final regulations – Australia,China, Hong Kong SAR, India, Japan, Saudi Arabia, Singapore andSwitzerland. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 47. P a g e | 47This means there is now a high probability that just six of the 29 globalsystemically important banks identified by the FSB in November 2011will be subject to Basel III regulations from the globally agreed start date.Level 2The assessment of the European Union analysed the 5th Danishcompromise versions of the Capital Requirements Regulation (CRR) andCapital Requirements Directive (CRD4).The assessment judged 12 of the 14 key components as either“compliant” or “largely compliant”.A “materially non-compliant” rating was assigned in two areas:Definition of capital and internal ratings-based (IRB) approach to creditrisk.The review identified a number of areas of material (or potentiallymaterial) deviation in the draft regulations relating to the definition ofcapital, which are described in more detail in the report.For IRB credit risk, the material finding relates to the “permanent partialuse” which allows IRB banks to risk-weight sovereign exposuresaccording to the standardised approach (eg subject those claimsdenominated and funded in local currency to a 0% risk weight).A subsequent review will take place on the final regulations onceavailable.It should be noted that the European Commission disagrees with theseconclusions and believes that the findings overstate the degree ofdivergence from the Basel standards and that the section gradings havenot been assigned consistently across jurisdictions.The assessment of Japan was based on final regulations that will comeinto force from end March 2013 in line with the end of the fiscal year inJapan. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 48. P a g e | 48Each of the 13 key components was assessed as either “compliant” or“largely compliant.”For capital buffers (capital conservation and countercyclical), thedomestic rules are not yet in place and hence the finding is “not yetassessed.”The Japanese authorities plan to issue the rules by 2015, ie one year beforethe 2016 deadline.The overall grade of “compliant” is based on three facts/observations(i) The number of gaps is relatively low,(ii) Gaps were found to be non-material, both in isolation and inaggregate, and(iii) The review recognised secondary legislation as generally binding.The assessment of the United States was based on final rulesimplementing advanced approaches, the final rule on market risk andthree notices of proposed rulemaking (NPRs) issued in June 2012.The assessment has highlighted the overarching issue of prolongedparallel run for banks on the advanced IRB and the advancedmeasurement approach (AMA), the only available options for credit andoperational risk in the United States.At the time of the report, none of the core US banks had receivedpermission to exit the transitional parallel run.As a result, US banks continue to determine their capital requirementsbased primarily on the Basel I framework, and the review noted there islittle incentive for some core banks to move onto the more advancedapproaches.The US assessment team judged 12 of the 13 key components as“compliant” or “largely compliant”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 49. P a g e | 49A “materially non-compliant” rating was assigned to securitisationexposures.It was noted that the US regulatory agencies’ proposed implementationmust conform with the prohibition on the use of external credit ratings, asrequired by the Dodd-Frank Act.The US authorities were unable to demonstrate that their alternativeformulation of the rules would not result in weaker capital requirementsthan the Basel requirements.This will be subject to further follow-up analysis once final rules are inplace.The US authorities believe that the US implementation of securitisation islikely to be at least as robust as the Basel standards.Level 3Analysis of risk-weighted assets in the banking bookThe Committee is also evaluating sources of material differences inrisk-weighted assets (RWAs) across banks in the banking book.The Committee is assessing the extent to which differences in credit riskparameters based on the IRB approach for credit risk are driven bydifferences in risk levels or differences in practices – in the latter case theCommittee will discuss whether the variations are consistent withrelevant Basel standards.Review of existing studiesThe Committee has reviewed a wide range of existing analyses of RWAsacross banks and countries to assess methodologies and identify possibledrivers of RWA differences.The various studies highlighted many potential drivers, most of whichsuggested that RWA differences are driven by both risk-based and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 50. P a g e | 50practice-based factors, although the relative focus on different driversvary and no study could pinpoint the definitive causes of RWAdifferences.The review highlighted important lessons for the Committee’s ownanalytical work:• There is a need to carry out both top-down and bottom-up analyseswhile recognising the limitations of each method;• Better analysis would be facilitated by using more complete (includingnon-public) data sources, and by collecting new and better data directlyfrom selected banks; and• An assessment of differences in specific practices by banks, nationalsupervisors, and other sources such as accounting standards authoritiescan help better identify and understand ultimate drivers of RWAdifferences.Top-down analysisDrawing on these lessons, the Committee is undertaking furthertop-down analysis using supervisory data collected by the Committee aspart of ongoing capital monitoring.The analysis covers 56 large, internationally active banking organisationsand 44 non-internationally active banking organisations in 15jurisdictions.Preliminary findings indicate that corporate and retail exposures are thelargest contributors to credit RWA and show the greatest variability inportfolio risk-weights across banks and countries.Risk-weights for bank and sovereign exposures may vary significantlyacross banks as well, but these asset classes are less significantcontributors to credit RWA variations because of their low absoluterisk-weights. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 51. P a g e | 51Probability of default (PD) appears to be a significant source of RWAvariability for the corporate, bank and sovereign asset classes.Loss given default (LGD) appears to be the more important riskparameter for the retail asset class, although LGD also is an importantcontributor to RWA variability for corporates.Bottom-up portfolio benchmarkingThe Committee is also conducting a bottom-up portfolio benchmarkingexercise using a test portfolio of common exposures to supplement itstop-down analysis.Thirty-three banks from 13 jurisdictions participated in the exercise byreporting PD and LGD estimates for a set of sovereign, bank, andcorporate exposures.The data submitted by the banks is being reviewed to assess thevariability of PD and LGD estimates across banks for common obligorsand exposures.Range of practices and on-site visitsRecognising the importance of overlaying the analytical work with anassessment of differences in bank and regulatory practices, theCommittee has developed a list of potentially important practice-baseddrivers of RWA differences.This work draws on existing supervisory knowledge and judgement of thesignificance and prevalence of different practices.Based on this initial list of drivers and taking into account the preliminaryfindings from the top-down analysis, the Committee has identifiedcertain risk measures (like probability of default) as areas where thematicreviews would be fruitful. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 52. P a g e | 52Depending on the results of these thematic reviews as well as thetop-down and bottom-up analytical work, there may be a need to conductmore focused reviews of practices through on-site visits to banks in 2013.Future directionIn early 2013, the Committee expects a final report summarising allfindings regarding the relative importance of various sources and driversof RWA variation, as well as the extent to which RWA differences do or donot reflect underlying differences in risk.Based on the conclusions of the work, the Committee may considerchanges related to reporting and disclosure, as well as possible narrowingof the range of practices in some areas.Finally, the Committee will consider recommendations or options forongoing monitoring and supervisory activities to foster RWA consistencyin the future.Analysis of risk-weighted assets in the trading bookThe Committee is working on completing the analysis of variability ofmarket risk measures across banks.The analysis is primarily based on publicly available information, but alsoconsiders the variability of supervisory data.Furthermore a test portfolio exercise has been undertaken, in which 15large, internationally active banks participated.The Committee expects to publish some results of this analysis by the endof this year.Publicly available information and supervisory dataThe analysis based on publicly available information so far revealsmaterial differences in the ratio of the regulatory measure of market risk _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 53. P a g e | 53(market-risk RWA or mRWA) to total trading assets across the selectedsample.To the extent that such differences are driven by differences in risk taking– for example as a result of differences in business models or tradingstrategies – the variation should not be a cause for concern.An analysis of the composition of trading assets provides some support tothis view, as it shows that banks with a higher ratio of mRWA to totaltrading assets typically have a greater proportion of risky trading assetson the balance sheet, including distressed debt and illiquid equity.However, even after addressing these factors, there remains materialunexplained variation in mRWA across banks.Other possible factors that might explain such a variation are:• Differences in supervisory approaches (such as the timing of Basel 2.5adoption);• Differences in the use of capital add-ons or multipliers;• Methodological choices; or• The degree of reliance of banks on internal model approaches versusstandardised approaches.A key finding is that data available in public information generally doesnot appear sufficient to fully explain the variation in mRWA across banks,nor to explain the variation in mRWA for a single bank over time.Limits to the detail of public disclosure can be explained by banks’ desireto keep their trading strategies and positions private for competitivereasons.However these shortcomings in disclosure make cross-bank comparisondifficult. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 54. P a g e | 54Some banks provide more detailed and useful disclosures than others andminimal guidance across jurisdictions adds to inconsistencies in content.In some jurisdictions, Basel II Pillar 3 reports were not available for theanalysis.The Committee is therefore considering broadening its analysis toinvestigate the utility of consistent supervisory data in explainingdifferences in mRWA.An initial finding is that supervisory data collection, while consistentwithin jurisdictions, is not consistent across jurisdictions.Some jurisdictions collect only limited additional data for supervisorypurposes.It must be noted, however, that in some jurisdictions efforts are underwayto improve the regulatory data collection related to banks’ trading books.These supervisory efforts may suggest options for more consistentpatterns of disclosure across banks.Test portfolio exerciseTo further examine the modelling choices that potentially drivedifferences in mRWA, the Committee conducted a test portfolio exercise.The test portfolios and accompanying questionnaires were designed tocover a range of trading portfolios and trading strategies, which closelyrepresented but were generally less complex than banks’ actual portfoliosand trading strategies.A total of 15 large, internationally active banks from nine jurisdictionsparticipated in the exercise.The participating banks calculated for each hypothetical test portfolio theoutcome of their internally modelled risk measures and provided detailed _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 55. P a g e | 55information regarding their modelling assumptions throughsupplemental questionnaires.This allowed the Committee to identify modelling choices that drivepotential variation in mRWA.To investigate the results in more detail, a programme of on-site visitswas initiated in which 9 participating banks were visited by internationalteams of supervisors.The objective of the visits was to gain further understanding of the marketrisk models that the banks use and to investigate in more detail the causesof variability identified across banks.The initial results from the test portfolio exercise suggest there isgenerally less variability observed for internal models that have been inuse for a long time.In addition, the variability is generally less for models where there aremore regulatory constraints.Next stepsThe Committee will further elaborate on the initial findings and possiblepolicy options.Regarding the analysis of public data, one expectation of the outcome ofthis exercise could be suggestions related to improvements in publicdisclosures for mRWA calculations.With regard to the analysis of the test portfolio exercise, a finalquantification of the level of variability of each internal model for eachportfolio in the exercise is expected.The findings will also serve as input for the Committee’s currentfundamental review of the trading book. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 56. P a g e | 56The analysis suggests that there is a direct relationship betweencomplexity of risk metric/product and the associated variability of themetric across banks.The current test portfolio exercise was based on a set of plain vanillaportfolios and excluded the most complex market risk models that areused by banks.The Committee believes it is important to consider more complexproducts and models in a future exercise. A follow-up test portfolioexercise including more complex portfolios is therefore being consideredfor 2013.Further workLevel 1The Committee will continue to publish progress reports every sixmonths.The next report will be published in April 2013 showing the position as atend March 2013.Level 2A Level 2 assessment of Singapore is underway and the report will bepublished in April 2013.A review of Switzerland will commence in early 2013 followed by China inthe second quarter.Reviews of Australia, Brazil and Canada will commence in the secondhalf of 2013.Follow-up reviews of the European Union and the United States willcommence after final regulations are published and will cover the finalrules in their entirety. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 57. P a g e | 57The reviews will assess whether identified gaps have been rectified butwill also check for issues that were not present in the draft regulations.At present, the Committee is conducting a “lessons learnt” review toreflect on the experience of the first three Level 2 reviews.Level 3Findings of the Level 3 assessments for the banking book and tradingbook will be reported to the Committee around the end of 2012 or early2013. Further analysis will be conducted in 2013, and, subject to decisionsat a later stage, will continue on an ongoing basis.Further policy development work may be necessary to address thefindings. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 58. P a g e | 58 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
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  • 63. P a g e | 63 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 64. P a g e | 64Agencies Issue Statement onSupervisory Practices RegardingFinancial Institutions andBorrowers Affected by HurricaneSandyWASHINGTON--The Office of theComptroller of the Currency, theBoard of Governors of the FederalReserve System, and the Federal Deposit Insurance Corporation (theagencies) recognize the serious impact of Hurricane Sandy on thecustomers and operations of many financial institutions and will provideregulatory assistance to affected institutions subject to their supervision.The agencies encourage institutions in the affected areas to meet thefinancial services needs of their communities.A complete list of the affected disaster areas can be found atwww.fema.gov.Lending: Bankers should work constructively with borrowers incommunities affected by Hurricane Sandy.The agencies realize that the effects of natural disasters on localbusinesses and individuals are often transitory, and prudent efforts toadjust or alter terms on existing loans in affected areas should not besubject to examiner criticism.In supervising institutions affected by the hurricane, the agencies willconsider the unusual circumstances they face.The agencies recognize that efforts to work with borrowers incommunities under stress can be consistent with safe-and-sound bankingpractices as well as in the public interest. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 65. P a g e | 65Community Reinvestment Act (CRA): Financial institutions may receiveCRA consideration for community development loans, investments, orservices that revitalize or stabilize federally designated disaster areas intheir assessment areas or in the states or regions that include theirassessment areas.For additional information, institutions should review the InteragencyQuestions and Answers Regarding Community Reinvestment (PDF).Investments: Bankers should monitor municipal securities and loansaffected by the hurricane. The agencies realize local government projectsmay be negatively affected. Appropriate monitoring and prudent efforts tostabilize such investments are encouraged.Reporting Requirements: Institutions affected by Hurricane Sandy thatexpect to encounter difficulty submitting accurate and timely regulatoryreport data for the September 30, 2012, report date should contact theirprimary federal regulatory agency to discuss their situation.These regulatory reports include the Consolidated Reports of Conditionand Income (Call Report) and holding company Y reports.The agencies do not expect to assess penalties or take other supervisoryaction against institutions that take reasonable and prudent steps tocomply with regulatory reporting requirements if those institutions areunable to fully satisfy those requirements by the specified filing deadlinesbecause of the effects of Hurricane Sandy.The agencies staffs stand ready to work with affected institutions thatmay be experiencing problems fulfilling their reporting responsibilities,taking into account each institutions particular circumstances, includingthe status of its reporting and recordkeeping systems and the condition ofits underlying financial records.Publishing Requirements: The agencies understand that the damagecaused by the hurricane may affect compliance with publishing and otherrequirements for branch closings, relocations, and temporary facilitiesunder various laws and regulations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 66. P a g e | 66Institutions experiencing disaster-related difficulties in complying withany publishing or other requirements should contact their primary federalregulatory agency.Temporary Banking Facilities: The agencies understand that many banksface power, telecommunications, staffing and other challenges inre-opening facilities after the hurricane.In cases where operational challenges persist, the appropriate primaryfederal regulator will expedite any request to operate temporary bankingfacilities to provide more convenient availability of services to thoseaffected by the hurricane.In most cases, a telephone notice to the primary federal regulator willsuffice initially. Necessary written notification can be submitted later. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 67. P a g e | 67The Recovery andMonetary PolicyWilliam C. Dudley, President and Chief Executive OfficerRemarks at the National Association for Business Economics AnnualMeeting, New York CityGood morning. It is a pleasure to have the opportunity to speak at thisNABE (National Association for Business Economics) conference today.Having spent more than 20 years as a business economist working in theprivate sector before joining the Federal Reserve Bank of New York in2007, I feel right at home here today.My remarks will focus on the economic outlook. I do this with sometrepidation, of course.In the private sector there are two adages about forecasting thatunderscore the need to be humble in this endeavor:First, forecast often.Second, specify a level or a time horizon, but never specify both, together.But more seriously, despite the difficulties in making accurate forecasts,we still need to understand as best we can why the economy is performingthe way it is, what that implies about the economic outlook, and, howpolicymakers can respond to generate better outcomes.We live in a highly complex and uncertain world, but we need to make asmuch sense out of it as possible. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 68. P a g e | 68As always, what I have to say reflects my own views and not necessarilythose of the FOMC (Federal Open Market Committee) or the FederalReserve System.My attention today will be on three important questions:Why has the U.S. recovery been so sluggish and consistently weaker thanexpected?What should we, as monetary policymakers, do it about it?What other policy actions are needed to help ensure a timely transition tostrong and sustainable growth?The disappointing recoveryTurning to the first question, U.S. economic growth has been quitesluggish in recent years.For example, annualized real GDP (gross domestic product) growth hasaveraged only about 2.2 percent since the end of the recession in 2009.As a consequence, we have seen only modest improvement in the U.S.labor market.Not only has growth been slow, it has also been disappointing relative tothe forecasters expectations. For example, the Blue Chip Consensus havebeen persistently too optimistic in recent years.This is illustrated in Exhibit 1 which shows how private sector forecastsfor 2008 through 2013 have evolved over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 69. P a g e | 69Two aspects of this exhibit are noteworthy.First, forecasters have consistently expected the U.S. economy to gathermomentum over time.Second, with only one exception, the growth forecasts for each year havebeen revised downward over time, as the expected strengthening did notmaterialize.In contrast, as shown in Exhibit 2, there has been no notable pattern offorecast misses for inflation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 70. P a g e | 70Sometimes, inflation has been a bit higher than expected, other times abit lower.On balance, inflation has been very close to our 2 percent longer-runobjective.Although I have focused on the private forecasting record here, theFOMC participants forecasts show a similar pattern.It is on the growth side where there have been chronic, systematic misses.In my view, the primary reason for the poor performance of the U.S.economy over this period has been inadequate aggregate demand.There are several explanations for this.Although some were well-known earlier, others have only become moreobvious as the recovery has unfolded. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 71. P a g e | 71One reason is the nature of economic recoveries following financialcrises.On that basis, the poor performance of the U.S. economy is notunusual—historical experience shows clearly that recoveries followingfinancial crises typically are very slow and difficult.During the credit boom, finance is available on easy terms and theeconomy builds up excesses in terms of leverage and risk-taking.When the bust arrives, credit availability drops sharply and financialdeleveraging occurs.Wealth falls sharply, precautionary liquidity demands increase, desiredleverage drops further.In the U.S. case, there were some idiosyncratic elements, such assubprime lending and collateralized debt obligations.But, in the end, the U.S. experience included the major elements of mostbooms: Too much leverage, too little understanding of risk, too easycredit terms, and then a very sharp reversal.When the bust arrives, over-indebted households and businesses want toincrease their saving and liquidity buffers, and financial intermediarieswant to raise credit standards.Both responses restrain demand and make a cyclical rebound moredifficult.In the U.S. case, because the bust was concentrated in housing, the scopefor a strong cyclical recovery was particularly constrained because theinterest-rate sensitive sector that would typically lead such a reboundcould not recover until the overhang of unsold homes and the impairmentof housing finances was corrected.The U.S. recovery has also been subpar because it has been taking placein the context of a weak global economy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 72. P a g e | 72Historically, after a country experienced a financial crisis, growingforeign demand and currency depreciation have often led to a sharpimprovement in the trade account that has put a floor under economicactivity.In such circumstances, rising exports substitute for domesticconsumption in supporting aggregate demand.This demand, in turn, encourages businesses to hire and invest.In contrast, this time the shock generated by the U.S. housing bust hadglobal consequences, exposing economic vulnerabilities outside of theUnited States, especially in Europe.Under these circumstances, the scope for trade as a support for U.S.growth, while positive, has been very limited.These two factors—the dynamics following financial crises and theweakness of foreign demand—help explain why U.S. growth has beenweak, but I dont think these factors explain why it has been consistentlyweaker than expected.After all, on the other side of the ledger, the policy response following thecrisis has been much more aggressive than is typical.On the monetary policy side, the Federal Reserve cut short-term interestrates close to zero, communicated that short-term rates were likely to stayexceptionally low far into the future, and undertook a series of large-scaleasset purchases in order to ease financial conditions further.On the fiscal side, in 2009 the Congress and Administration enacted thelargest fiscal stimulus program in history and some of these fiscal actionswere renewed (e.g., extended unemployment compensation benefits) andnew initiatives undertaken (e.g., the payroll tax holiday) once it becameclear that the recovery was faltering. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 73. P a g e | 73Also, there were significant policy actions taken to strengthen thebanking system, including forcing banks to recapitalize so that theywould have the capacity to sustain their lending.So why has the recovery disappointed?One possibility is that the negative dynamics of a post-bubbleenvironment are even more potent than had been appreciated. Feedbackloops may be more powerful and frictions may be larger.In the U.S. case, this is particularly germane with respect to housing andmortgage finance.For example, we have found significant shortcomings in thoseinstitutional structures available to support the workout of the overhangof mortgage debt in an efficient and timely manner.A second reason may be the series of additional negative shocksexperienced since the initial phase of the financial crisis.The largest of these relate to the crisis in the eurozone.But one could also add the periodic commodity price shocks, thedisruptive impact of the tragic Japanese earthquake and tsunami onglobal trade and production, and the effect of the uncertainties around theimpending fiscal cliff on hiring and investing.That said, the shocks since the acute phase of the crisis in the UnitedStates were not uniformly negative.Take, for example, the sharp increase in U.S. oil and natural gasproduction stemming, in part, from the innovations in drilling andextraction technologies.Not only does this rising production directly boost real GDP, but also thelarge drop in natural gas prices has significantly improved the industrialcompetitiveness of U.S.-based businesses. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 74. P a g e | 74A third reason for the weaker than expected recovery likely lies in theinterplay between secular and cyclical factors.In particular, I believe that demographic factors have played a role inrestraining the recovery.The developed worlds populations are aging rapidly. In the UnitedStates, for example, the baby boom generation, which is a particularlylarge cohort, is now beginning to retire.As the population ages, this has two consequences.First, the spending decisions of the older age cohorts are less likely to beeasily stimulated by monetary policy.That is because such age groups tend to spend less of their incomes onconsumer durables and housing.Second, as the population ages and the number of retirees climbs, thecosts associated with Social Security, government pensions, andhealthcare retirement benefits increase.This creates budgetary pressure and leads to a choice of raising revenueto fund these costs, cutting other government programs, or cuttingbenefits.Now if this all had been fully anticipated by retirees and near-retirees,then this would already be factored into their spending and savingdecisions.But, I doubt that this has been the case. I suspect that many have beensurprised by the swift change in economic circumstances as the housingboom went bust.I doubt that many fully anticipated the budget crunch and the prospectthat their future retiree and healthcare benefits would likely be curbed ortheir taxes would have to rise in the future. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 75. P a g e | 75When households begin to anticipate this, they reduce their assessmentof their sustainable living standards.This downward reassessment then feeds back to current spending andsaving decisions.A fourth reason why the recovery has been slower than expected may bethat we overestimated the capacity for fiscal policy to continue to providesupport to growth until a vigorous recovery was achieved.On the fiscal side, the authorities can cut taxes or increase spending tosupport income and demand during the deleveraging phase that followsthe financial crisis. But the ability of such stimulus to continue to supporteconomic activity ultimately encounters budgetary limits.For example, the need to keep the long-term fiscal trajectory on asustainable path limits the size and duration of federal fiscal stimulusmeasures.For state and local governments, the statutory requirements for balancedbudgets meant that fiscal policies turned restrictive relatively quicklyonce budget surpluses and rainy day funds were exhausted, and this wasonly temporarily mitigated by federal transfers to the states as part of theinitial fiscal stimulus program.Fiscal policy is now a drag rather than a support to growth in the UnitedStates, and this will likely continue.Monetary policyI would give each of these four explanations some weight for why therecovery has been consistently weaker than expected.But I would add a fifth, monetary policy, while highly accommodative byhistoric standards, may still not have been sufficiently accommodativegiven the economic circumstances.Now let me be clear. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 76. P a g e | 76I believe the evidence overwhelmingly indicates that our monetary policyhas been effective in easing financial conditions and supportingeconomic activity.After reducing the traditional policy tool, the target for the overnightfederal funds rate, to close to zero, the Fed has aggressively employed twocomplementary types of non-traditional tools—asset purchases andforward guidance on the policy rate—to provide additional stimulusthrough their effects on long term rates and various risk premia.Effective forward guidance on interest rates causes market participants tolower their expectations and uncertainty about future path of interestrates and to anticipate that easier financial conditions will persist well into the future.This pushes down the yield curve and leads to easier financial conditions.Federal Reserve asset purchases also make financial conditions moreaccommodative.Such purchases, by taking duration out of private hands, push down termpremia and lead to lower long-term rates than would otherwise be thecase for any given economic outlook.Agency MBS (mortgage-backed securities) purchases absorb prepaymentrisk and reduce secondary and primary mortgage rates, stimulatingdemand for housing and increasing purchasing power throughrefinancing.Lower long-term rates support the prices of equities and housing,boosting wealth and easing balance sheet constraints, while anaccommodative monetary policy stance reduces downside risks for theeconomy and this leads to lower default risk premia on corporate debt.Our two tools work in a complementary manner. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 77. P a g e | 77Asset purchases strengthen the credibility of the forward guidance oninterest rates, while forward guidance provides information about howlong the FOMC is likely to hold on to the assets it purchases.My conclusion is that the easing of financial conditions resulting fromnon-traditional policy actions has had a material effect on both nominaland real growth and has demonstrably reduced the risk of particularlyadverse outcomes.Nevertheless, I also conclude that, with the benefit of hindsight,monetary policy needed to be still more aggressive. Consequently, it wasappropriate to recalibrate our policy stance, which is what happened atthe last FOMC meeting.As I argued in a recent speech, simple policy rules, including the mostpopular versions of the Taylor Rule, understate the degree of monetarysupport that may be required to achieve a given set of economicobjectives in a post-financial crisis world.That is because such rules typically do not adjust for factors such as atime-varying neutral real interest rate, elevated risk spreads, or impairedtransmission channels that can undercut the power of monetary policy.One reason that monetary policy may have been less powerful thannormal is that one of the primary channels through which monetarypolicy influences the real economy—housing finance—has been partiallyimpaired.This has both quantity and price dimensions.Credit availability to households with lower-rated credit scores remainslimited and households with homes that have fallen sharply in value havelost most or all of their home equity and this makes it very difficult forthem to refinance these mortgages.Federal Reserve MBS purchases have succeeded in driving downmortgage rates to historically low levels. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 78. P a g e | 78But these purchases would have had still more effect on the economy ifpass-through rates from the secondary market to the primary market hadbeen higher.As can be seen in Exhibit 3, the Federal Reserves purchases significantlynarrowed the spread between agency MBS and Treasury yields, with thelatest round of purchases notably effective in this regard.But, as shown in Exhibit 4 the spread between primary mortgage ratesand agency MBS yields has widened and this has limited the drop inprimary mortgage rates. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 79. P a g e | 79The incomplete pass-through from agency MBS yields into primarymortgage rates is due to several factors—including a concentration ofmortgage origination volumes at a few key financial institutions andmortgage rep and warranty requirements that discourage lending forhome purchases and make financial institutions reluctant to refinancemortgages that have been originated elsewhere.On a related note, higher guarantee fees charges by Fannie Mae andFreddie Mac have increased the fixed cost of originating loans and thishas also increased the spread between primary and secondary mortgagerates.Factors limiting pass-through warrant ongoing attention frompolicymakers.Another reason why monetary policy has become less effective instimulating the economy is because the impetus from a given level ofmonetary accommodation likely has become attenuated—that is, lesspowerful—over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 80. P a g e | 80Historically, attenuation has not been important because monetary policytypically has not stayed exceptionally easy for long periods of time. Butthis time is different and that difference may be important.So how might the monetary policy impulse on economic activity havebecome attenuated over time?I would suggest two potential channels.The first channel is that monetary policy works, in part, by changing thetiming of purchase decisions.If interest rates decline, the drop in financing costs may induce somehouseholds to buy a motor vehicle or purchase a home now rather than inthe future.Of course, if the car or home is purchased today, this will borrow at least aportion of those sales from the future.There is a limit to how many cars and homes most people will want tobuy, given their budget constraints.In this case, as the stimulus from the policy stays in place, the impulse oneconomic growth will gradually "wear off" as there are fewer and fewerhouseholds who can be induced to pull their future planned purchasesforward to the present.The same argument applies to mortgage refinancing activity.The stimulus comes from the refinancing activity, which increases theamount of income that borrowers have available for other expenditures.The impetus to growth wears off unless mortgage rates keep dropping,stimulating additional rounds of refinancing activity.The second channel is that low interest rates will gradually reduce theinterest income of savers and this could eventually affect theirconsumption. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 81. P a g e | 81Household interest income has fallen considerably over the past fewyears.This effect is likely to work quite slowly.The fact that interest rates are low for six months or a year probably doesnot have much impact on households expectations of their long-terminterest income and thus, does not have much of an impact on consumerspending.But, as low interest rates are sustained, this could eventually lead to adownward adjustment in households assessments of their interestincome over time and influence their spending.One way to look at this is through the prism of forward real interest rates.If interest rate expectations many years forward have fallen, thenexpectations about the permanent level of interest income should havedeclined as well.As shown in Exhibit 5, forward real rates five years ahead have declinednotably over the past few years. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 82. P a g e | 82This could be a reasonable proxy for savers expectations.Note that the decline in Exhibit 5 has not been precipitous, it hasoccurred very gradually over time.However, policymaking is about making choices between availablealternatives.In the long run, even savers would be better off in a world in whichaggressive monetary policy generates a strengthening recovery thateventually permits the normalization of interest rates, than they would becompared to a circumstance in which the United States allowed itself tofall into a Japan-style trap of low growth and low rates for decades.So I do not view the effect of low rates on savers as a reason to be lessaccommodative.Rather, in my view, the potential for the monetary policy impulse to beattenuated over time, is an additional reason to be aggressive in terms ofthe policy response. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 83. P a g e | 83A more front-loaded program would avoid greater attenuation comparedwith a policy that started out less aggressive but added stimulusgradually over time.This has two benefits.First, it would likely be more successful in generating the desiredrecovery more quickly.Second, relative to a more back-loaded program, less would ultimatelyneed to be done to achieve the desired set of outcomes.The fact that there are asymmetric payoffs from an economy that isweaker than expected versus one that is stronger than expected, giventhat we are at the zero lower bound reinforces this conclusion.In particular, if the economy were to continue to underperform, andexperienced a severe shock, there would be some risk of getting stuck in adeflationary situation in which monetary policy would be even lesseffective.At the present time there is no conflict between our employment objectiveand our inflation objective, as I expect inflation to be at or below our 2percent longer-run objective over the coming years.But shouldnt we also consider the costs associated with a moreaggressive monetary policy of the kind adopted at the last FOMCmeeting, especially when we are using non-traditional monetary policytools?Absolutely. We have carefully evaluated three potential sets of costs andwill continue to review them.The first set of costs stems from the risk that the current monetary policyregime could distort asset allocations and lead to renewed financial assetbubbles.We look at this issue on an ongoing basis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 84. P a g e | 84To date, there is little evidence of problems or excesses, but this couldchange as the recovery proceeds.If these costs were to rise, we would need to examine what steps could betaken on the macro-prudential front in response.Also, such developments would need to be incorporated into themonetary policy decision-making process.The second set of costs stems from the risk that exit from this regimecould prove difficult.In particular, some observers worry that the expansion of the FederalReserves balance sheet could ultimately prove inflationary.If that were the case, then I would regard the costs as exceptionally high.Fortunately, I am confident that such fears are misplaced.That is because we now have the ability to pay interest on excess reserves(IOER).This means we can keep inflation in check regardless the size of ourbalance sheet.If the recovery got underway in earnest and credit demand surged, wecould slow down the rate of credit creation by raising the interest rate wepay on excess reserves.Banks wouldnt lend out funds at lower rates than what they can earnfrom holding reserves with us.As a result, a hike in the IOER would raise the level of interest ratesthroughout the economy and this would dampen any expansion of credit.Our ability to pay interest on excess reserves is an essential tool that wecan use to avoid future inflation problems. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 85. P a g e | 85We are mindful of the fact that there could still be confusion about howexit will take place.This could increase financial market volatility.To reduce this risk, the FOMC has published a set of exit principles.These principles lay out a roadmap about how exit is likely to occur:First, the end of reinvestment of maturing securities; second, an increasein short-term interest rates, and, third, the gradual sale of mortgagebacked securities to shrink the magnitude of excess reserves in thesystem and ultimately to restore the Feds balance sheet to apredominately all-Treasury portfolio.A degree of humility is appropriate given the lack of experience as to howmarkets will respond when economic conditions eventually causeinvestors to anticipate exit.When asset purchases are anticipated to end or when asset sales begin tobe anticipated, this will affect term premia in ways that cannot beprecisely predicted in advance.That said, I do expect the repricing will prove manageable.We will seek to communicate so as to avoid generating sharp shifts interm premia and in long-term interest rates.Also, we will play close attention to ensure that financial institutions aremanaging their interest rate risks appropriately.The third set of costs is the impact of higher short-term rates on theFederal Reserves earnings and balance sheet when exit occurs.When we ultimately raise short-term interest rates, this will squeeze theFeds net interest margin. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 86. P a g e | 86Also, when the Fed sells long-term assets, there is some prospect forlosses on these sales depending on the level of long-term interest rates atthe time when such sales occur.This means that the Feds earning could fall sharply or even turn negativein a given year.We look at this issue very closely to understand the risks here.The good news is that a very large proportion of our liabilities—thoseassociated with currency outstanding—has no interest cost.This mitigates the risk of a sharp net interest margin squeeze.Moreover, our analysis shows that the cumulative income generated overthe period in which the balance sheet has been unusually large is likely toexceed normal levels under a wide range of scenarios.In my view, while the costs are real and need to be carefully evaluated,they pale relative to the costs of not achieving a sustainable economicrecovery.A failure in that regard would lead to widespread chronic unemployment.Not only would that be tragic for millions of people, but it also wouldgenerate chronic shortfalls in the nations potential output and fiscalcapacity.Relative to the costs outlined above, the benefits from avoiding such anoutcome seem overwhelming.Cyclical and structural policyAlthough I favor an aggressive monetary policy in the current situation, Ialso recognize that monetary policy is not a panacea.We all know that in the long run money is neutral—that is, that whilemonetary policy can help the economy return to full employment _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 87. P a g e | 87following a shock, the full employment level of output, employment andreal income depends on factors outside of monetary policy.Also, we must recognize that the strength of the current cyclical recoverywill depend importantly on non-monetary policy choices.Other steps are needed to secure the best available economic outcome.In particular, attention should be paid to what could be done to capitalizeon the recent stabilization in house prices to improve access to mortgagecredit and to foster competition in mortgage origination to ensure a morecomplete pass-through of low secondary mortgage rates to households.Indeed, if balance sheet dynamics are more important and frictionsaround housing more powerful than we initially understood, then thereshould be strong payoff to policies that ease them.At the same time, Congress and the White House should take steps thatreduce the short-term and long-term uncertainty over fiscal policy.Currently, households and businesses face elevated short-termuncertainty as to what will happen to tax and spending policies in 2013and how this will affect the economic outlook.I believe this is restraining hiring and investment today.But families and businesses also face long-term uncertainty about howthe countrys fiscal challenges will be addressed.Providing greater clarity about the scope and terms of Social Security andMedicare must be helpful, especially in correcting those expectations thatare unduly pessimistic.On this score, Social Security is particularly noteworthy. According to a2011 Pew Research Center poll, more than 40 percent of people aged 18 to30 believe they will receive no retirement income from Social Security,even though Social Security receipts are estimated to equal about 75percent of benefits on a sustainable basis under the current regime. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 88. P a g e | 88Congress and the White House should enact a fiscal program that startswith mild restraint, but credibly builds that restraint over time so as to putthe nations debt burden on a clearly sustainable course.Ideally, the program would have broad bipartisan support and provideclarity not just on the near-term outlook, but also about how the majorentitlement programs would be adjusted.Also, steps could be taken to increase the productive capacity of theeconomy over time.Such actions are desirable because a more productive economy willgenerate higher living standards and have greater fiscal capacity.Let me briefly mention a few steps that could be taken to increase theeconomys potential over time—immigration policies that attract workerswith scarce skills to the United States; education policies and jobretraining programs that build and replenish human capital; spending oninfrastructure to remove bottlenecks; tax simplification and theelimination of tax policies that distort investment and saving decisions;regulatory policies that are attentive to costs and benefits and thatemphasize getting the incentives right.Counter-cyclical policies and structural policies are not substitutes, theyare complements.We need both.The strength of demand today is importantly influenced by expectationsabout future living standards.The lower the expected path of national income, the less favorable thedistribution of that income is expected to be, and the greater theuncertainty over the mix of tax rates and benefits a person or businessexpects to pay and receive, the less they will spend or invest today.Thus, policies that improve the long-run outlook make a cyclical recoveryeasier to achieve today. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 89. P a g e | 89Conversely, a monetary policy that promotes a cyclical recovery supportsthe economys long-run prospects.Left for too long, long term unemployment will eventually lead topermanent atrophying of skills that will restrain the economys growthpotential.This is also true for the cohort of young workers who are stuck in jobs forwhich they are overqualified and who are having trouble securing theprofessional experience that would make them increasingly productiveover time.Although the outlook for the U.S. economy remains somewhat cloudy aswe look into 2013, I remain a long-run optimist about where we areheaded.The long term prospects of the U.S. economy are excellent.The United States leads the world in higher education, technology andinnovation and has recently acquired new comparative advantages inenergy.We have an exceptionally dynamic labor market, high rates ofentrepreneurialism, competitive product markets, and a well-capitalizedfinancial system that relentlessly reallocates capital from one sector to thenext in search of higher returns.Even over the next few years, while there are significant downside risksrelating to the fiscal cliff and the eurozone, it is possible that the recoverycould turn out stronger than expected.The underlying process of balance sheet repair is considerably advanced,housing is recovering and, as that occurs, our newly recalibratedmonetary policy could gain additional traction.Thus, if uncertainties about the U.S. fiscal path and the future of theeurozone were resolved in a constructive manner, growth could pick upmore vigorously than anticipated. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 90. P a g e | 90This would be a wonderful outcome.The September FOMC statement noted: the Committee expects "that ahighly accommodative stance of monetary policy will remain appropriatefor a considerable time after the recovery strengthens."Consistent with this, if we were to see some good news on growth I wouldnot expect us to respond in a hasty manner.Only as we became confident that the recovery was securely established,would I expect our monetary policy stance to evolve to ensure that itremained appropriate to achievement of our objective: maximumsustainable employment in the context of price stability.Thank you for your kind attention. I would welcome a few questions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 91. P a g e | 91Conflicts of Interest and RiskGovernanceCarlo V. di FlorioDirector, Office of Compliance Inspectionsand ExaminationsNational Society of ComplianceProfessionalsThank you for inviting me to speak at thisevent.Your efforts to strengthen compliance and ethics throughout the privatesector are profoundly important.Today I would like to address a topic of perpetual importance to allaspects of compliance and ethics programs, conflicts of interest.I will begin by explaining what I mean by a “conflict of interest,” discusswhy conflicts of interest are of particular interest to the Securities andExchange Commission, and what the SEC and other regulators arecurrently focusing on regarding conflicts of interest.I will then turn to the role of risk management and risk controls withinfirms in identifying and managing conflicts of interest, especially thesignificance of managing conflicts of interest for the criteria laid out inSEC and FINRA compliance program rules and the U.S. FederalSentencing Guidelines on effective compliance and ethics programs.Of course I begin by noting that views I express here today are my ownand do not necessarily reflect the views of the Commission or of mycolleagues on the staff of the Commission.I. Regulators Interest in Conflicts of Interest.Why are conflicts of interest so important to the Commission’s examprogram? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 92. P a g e | 92The National Exam Program (“NEP”) has adopted a risk-based strategy,and we have identified conflicts of interest as a key area for our riskanalysis.This is based on the long experience of our exam program that conflictsof interest, when not eliminated or properly mitigated, are a leadingindicator of significant regulatory issues for individual firms, andsometimes even systemic risk for the entire financial system.Accordingly, we focus on conflicts of interest as an integral part of ourassessment of which firms to examine, what issues to focus on, and howclosely to scrutinize.In addition, over the past two years we conducted a sweep on conflicts ofinterest around confidential information received through investmentbanking and other business operations, and have just issued a report onthat sweep which I will discuss in a few minutes.We also try to flag conflicts of interest that we have identified in ourNational Examination Risk Alerts and other public statements.Other regulators have a similarly keen focus on conflicts of interest.For example, FINRA is currently conducting a sweep exam of itsmember firms concerning their efforts to identify and manage conflicts ofinterest.II. Conflicts of Interest and the Federal Securities Laws.Last year at this event I spoke about the ways in which ethicsunderpinned the federal securities regulatory regime.So I should begin by tying ethics to conflicts of interest.If you will forgive me for a possible metaphorical overreach, one can thinkof ethical concepts as the white blood cells that make an organization’s“immune system” – its compliance and risk management systems andculture – effective. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 93. P a g e | 93Extending that same metaphor, conflicts of interest can be thought of asthe viruses that threaten the organization’s wellbeing.As in the microbial world, these viruses come in a vast array of constantlymutating formats, and if not eliminated or neutralized, even the simplestvirus is a mortal threat to the body.Especially when combined with the wrong culture and incentives,conflicts of interest can do great harm.This is why the Commission’s National Exam Program (“NEP”) hasidentified conflicts of interest as a key focus of its risk-based strategy thepast few years.Accordingly, conflicts of interest are an integral part of our assessment ofwhich firms to examine, what issues to focus on, and how to examinethose issues.What is a “conflict of interest”?It is hardly a term of art.A simple Google search shows that it is used in varying ways in differentcontexts.I prefer to think of a conflict of interest as a scenario where a person orfirm has an incentive to serve one interest at the expense of anotherinterest or obligation.This might mean serving the interest of the firm over that of a client, orserving the interest of one client over other clients, or an employee orgroup of employees serving their own interests over those of the firm or itsclients.This way of thinking about conflicts takes the discussion to a broadconsideration of what is the right thing to do as a matter of law and ethicaldecision-making. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 94. P a g e | 94It also recognizes that there are reputational risks that can be damagingor even fatal to a business organization when people or firms makedecisions that may be technically within the letter of the law, but are notin keeping with the spirit of the law and hard to explain to theconstituencies with which they must keep faith, such as customers,creditors, investors, or employees.This rubric is useful as far as it goes, but really just about any badbehavior can be explained in terms of conflicts of interest.The types of conflicts that I find most challenging are situations wherepeople who profess to be ethical and clear-thinking are led astray bycultural pressure (poor tone at the top), misaligned financial incentives,herd behavior (everybody else is doing it), or just personal weaknesses–vanity, self-delusion or poor judgment.The best antidote for this type of conflict is a strong ethics program forthe organization, as well as a strong internalized sense of ethics byeveryone in an organization, manifested in their ability – especiallyexecutives, business managers, compliance officers and lawyers – tothink independently, rigorously, and objectively.Conflicts of interest exist throughout the commercial world.They are a particularly important challenge for large and complexfinancial institutions, which can have affiliations that lead to a host ofpotential conflicts of interest.If these are not carefully managed, this then leads to failure to protect theclient’s interests, with attendant regulatory and reputational risks thatcould be disastrous.Just as important, these businesses are highly dynamic, as new products,activities and trading strategies constantly evolve to meet changing clientneeds and market conditions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 95. P a g e | 95This means that new conflicts are constantly arising, and so these firmsneed to be very disciplined in continually searching for new conflicts andworking through how to address them.In addition, approaches to remediating existing conflicts may also requireregular reconsideration as circumstances change.Failure to manage conflicts of interest has been a continuing theme offinancial crises and scandals since before the inception of the federalsecurities laws.During the early 1930s, the Pecora hearings held by the Senate Committeeon Banking and Currency revealed a vast array of self-dealing and otherconflicts of interest throughout the financial markets, such as the use ofbank loans to support bank affiliates and affiliate-underwritten securities,and incentives on the part of banks to give investment advice thatsupported affiliate-underwritten securities.As described by former SEC Chairman Arthur Levitt,“Bank involvement in the securities markets came under close scrutinyafter the 1929 market crash. The Pecora hearings of 1933, which focusedon the causes of the crash and the subsequent banking crisis, uncovered awide range of abusive practices on the part of banks and bank affiliates.These included a variety of conflicts of interest; the underwriting ofunsound securities in order to pay off bad bank loans; and "pooloperations" to support the price of bank stocks.”Chairman Levitt went on to point out that these revelations ofuncontrolled conflicts of interest provided much of the impetus forenactment of the Securities Act of 1933 and the Securities Exchange Actof 1934, and the Glass-Steagall Banking Act of 1933.Conflicts of interest were also a strong impetus for the InvestmentCompany Act of 1940 and the Investment Advisor Act of 1940. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 96. P a g e | 96Recent decades have seen numerous examples of conflicts leading tocrisis.The 1980s were marked by insider trading scandals such as the IvanBoesky and Dennis Levine scandals, as well as the demise of theinvestment bank Drexel Burnham Lambert and the criminal conviction ofits star employee Michael Milken following federal civil and criminalcharges related largely to Milken’s dealings with Boesky.The 1990s and early 2000s exposed yet more financial scandals.The bursting of the internet bubble in 2000 and 2001 exposed problemswith conflicted research analysts who appeared to be influenced in theirreports by their firms’ investment banking interests, leading to newregulations of research by FINRA and to provisions in theSarbanes-Oxley Act dealing with research analyst conflicts of interest.In 2003 the Commission staff “found that the use of brokeragecommissions to facilitate the sales of fund shares [was] widespreadamong funds that rely on broker-dealers to sell fund shares, resulting inthe adoption of new rules to prohibit funds from this practice.”5The financial crisis of 2008 could itself be the basis of a seminar onconflicts of interest.The crisis exposed apparent conflicts of interest in many areas,particularly in the production and sale of mortgage-backed securities, andamong credit rating agencies that rated these instruments.For example, as the Financial Crisis Inquiry Commission (“FCIC”) notedin its report, in 2007 the SEC investigated conflicts of interest amongrating agencies in evaluating collateralized debt obligation (“CDO”)deals, and issued a report in June 2008 citing conflicts at Moody’s as amajor concern.The FCIC report cited many other purported conflicts underlying thecrisis, including underwriters assisting CDO managers in selectingcollateral, hedge fund managers selecting collateral from their funds to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 97. P a g e | 97place in CDOs that they offered to other investors, and a conflict faced byCitigroup in offering “liquidity puts” that offered it significant fees in theshort term but placed significant financial risk on it in the long term.Another prominent recent example is the settlement that the SEC reachedwith Goldman Sachs, in which that firm paid $550 million to settlecharges filed by the Commission, and acknowledged that disclosuresmade in marketing a subprime mortgage product contained incompleteinformation as they did not disclose the role of a hedge fund client whowas taking the opposite side of the trade in the selection of the CDO.Even since the financial crisis, another illustration of the problems thatarise from poorly controlled conflicts of interest arose just this pastsummer, when Barclays Bank entered into civil and criminal settlementswith U.S. and U.K. officials in which it admitted to misconduct related topossible collusion to fix the benchmark London Interbank Offered Rate(“LIBOR”).LIBOR is a critically important benchmark that is used to set short-terminterest rates on many derivatives and other financial instruments.The SEC and its staff have a long tradition of focusing on conflicts ofinterest.As one example, in 2003 then-SEC enforcement director Steven Cutlergave an important speech on the topic of conflicts of interest in 2003 thatwas a call to action for the financial services industry to institutionalize itscontrols around conflicts of interest and to monitor and control conflictsat a senior level.Since Cutler’s speech, I believe that the disastrous events leading to thefinancial crisis of 2008 are further support for the SEC’s concern aboutproperly managing conflicts of interest.It is important to recognize that regulators also have an obligation to bediligent about identifying and addressing conflicts of interest as theyemerge. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 98. P a g e | 98When our examination program identifies conduct that may create newrisks for the industry, we share our concerns so that senior management,compliance and risk managers are not taken by surprise.One important vehicle by which we communicate key risks, such asconflicts of interest, is through our Risk Alerts, which we began issuinglast year.These documents are a window through which we want to offer the publicand the financial services industry a view on key risks and to shareeffective risk management practices that we have observed.These include conflicts of interest that we want to highlight, as well aspractices that we have observed to control or mitigate conflicts.I want to also stress that the effective practices that we describe in the riskalert are for informational purposes and do not represent new legal orregulatory requirements.The Commission also recently released a public report of examinationsconducted by the NEP, FINRA and the NYSE regarding largebroker-dealers’ compliance with the information barriers requirement ofExchange Act Section 15(g).The report illustrates the types of conflicts of interest between abroker-dealer’s obligations toward clients and other business intereststhat need to be identified and effectively managed in order to satisfy itsobligation under Section 15(g) to “establish, maintain and enforce writtenpolicies and procedures reasonably designed… to prevent the misuse …of material nonpublic information” by the firm or its associated persons.For example, the report explains that certain groups withinbroker-dealers routinely engage in discussions with corporate insiders inorder to provide advice on strategic activities and financial managementissues: these groups include investment banking departments, capitalmarkets or syndicate groups that facilitate capital raising; and derivativesales groups. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 99. P a g e | 99Moreover, certain groups within broker-dealers, such as sales, trading,stock lending or prime brokerage, may obtain non-public informationregarding their institutional clients, such as order and positioninformation.Such information, provided on a confidential basis to facilitate servicesprovided to customers, could be misused to further the interests of thebroker-dealer, either by giving it an unfair advantage in trading orenabling it to issue research reports based on such information.In addition to discussing possible conflicts of interest between differentbusiness units or activities, the report also discusses situations andactivities that can give rise to conflicts of interest, such as when abroker-dealer gives an “above-the-wall” classification to certainindividuals or groups with the ability to influence trading.The staff was concerned that despite the conflict between their businessresponsibilities and receipt of material non-public information, thebroker-dealers did not impose mitigating controls such as physicalbarriers, documentation or monitoring on that individual or group.Conflicts that are also an ongoing key focus of the Commission’sNational Exam Program as we plan our examinations. Some of theconflicts of interest that are currently a high priority for our examinationsinclude:Compensation-Related Conflicts and Incentives:Retail customers interests potentially taking a back seat to variousfinancial incentives of a broker-dealer or its representatives inrecommendations and sales practices for new or risky products.This includes, for example, the retailization of complex instruments suchas structured securities products.It also includes aggressive marketing of retirement products, and whetheradequate due diligence is being performed on underlying investmentvehicles; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 100. P a g e | 100Lack of oversight of outside business activities of representatives;Incentives to place investors in accounts with fee structures that are highrelative to the services provided, such as certain investment adviser orwrap fee accounts;Portfolio Management-Related Conflicts:Investment advisers that prefer one client over another when managingmultiple accounts side-by-side, due to financial incentives or personalrelationships;Portfolio management activities by fund advisers that involve risksbeyond the risk tolerance levels or stated objectives in the prospectus,such as overconcentration in a single issuer or sector, purchasing illiquidsecurities that appear to deliver higher returns, or a mismatch of fundliquidity to an expectation of fund redemptions;Affiliations between investment advisers and broker-dealers:Whether the client is put into an IA or BD account and the incentivesassociated with that decision;Incentives of an investment adviser to use an affiliated broker-dealer forexecuting a clients trade even though the price or other terms of theexecution are substandard;Valuation:Incentives of broker-dealers and investment advisers to provide highmarks in pricing relatively illiquid positions;Inflating valuations to attract investors and charge more fees;Transfer agent conflicts:Conflicting incentives where a transfer agents principals are owners of oraffiliated with issuers, vendors, or others involved in the transfer agentsactivities (e.g., attorneys, brokers, etc.); _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 101. P a g e | 101Exchange conflicts:With regard to exchanges and self-regulatory organizations, blurred linesbetween SRO business and regulatory functions - for example, conflictswhen an official with business-side responsibilities is also involved inregulatory oversight, where he or she may be in a position to affect theperformance of competitors; andThe conflict between an exchanges responsibilities as an SRO and itsbusiness incentive to attract order flow from particular members.In addition to the high-profile cases that I mentioned earlier, conflicts ofinterest are at the heart of many cases that the Commission brings on aroutine basis.For example, just last month the Commission brought a settledadministrative proceeding against Focus Point Solutions and the HGroup, two Oregon-based investment advisory firms and their ownerregarding their failure to disclose compensation through arevenue-sharing agreement and other potential conflicts of interest toclients.As the Commission stated in its press release:“Most notably, Focus Point did not disclose to customers that it wasreceiving revenue-sharing payments from a brokerage firm that manageda particular category of mutual funds being recommended to Focus Pointclients.Because Focus Point received a percentage of every dollar that its clientsinvested in these mutual funds, there was an incentive to recommendthese funds over other investment opportunities in order to generateadditional revenue for the firm.”An even more current example came in the past week when, in a jointeffort among the enforcement and examination staffs together with theDivision of Risk, Strategy and Financial Innovation, the Commissioncharged a former $1 billion hedge fund advisory firm, Yorkville Advisors _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 102. P a g e | 102LLC, and two of its executives with “scheming to overvalue assets undermanagement and exaggerate the reported returns of hedge funds theymanaged in order to hide losses and increase the fees collected frominvestors.”The Commission alleged that the defendants “enticed pension funds andother investors to invest in their hedge funds by falsely portrayingYorkville as a firm that managed a highly-collateralized investmentportfolio and employed a robust valuation procedure.”This is the latest of seven cases that the Commission has brought from itsAberrational Performance Inquiry, an initiative in which the staff usesproprietary risk analytics to identify hedge funds with suspicious returns.This is proving to be a very effective tool for the staff to identifysignificant conflicts among private fund registrants, and to use thatinformation to target both examination and enforcement resources.Of course the Commission is not the only financial regulator that isconcerned about the management of conflicts of interest in the financialservices industry.Other financial regulators also frequently focus on this issue. Forexample, the Financial Industry Regulatory Authority (“FINRA”)recently announced that it is currently conducting a targeted sweepexamination of a number of firms on their approach to identifying andmitigating conflicts of interest, including an identification by each firm ofthe most significant conflicts that it is currently managing and theprocesses that the firm has in place to identify and assess whether any ofits business practices put the firm’s or its employee’s interests ahead ofthose of customers.FINRA has explained that the goal of the sweep is to better understandindustry practices in this area, and that it will seek to develop potentialguidance for the industry based on what it learns from the sweep.Another current initiative by a fellow regulator is the recent publication bythe Municipal Securities Rulemaking Board (MSRB”) of a concept _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 103. P a g e | 103proposal for public disclosure on its Electronic Municipal Access(“EMMA”) system of certain payments and receipts by brokers, dealersand municipal securities dealers, as well as municipal advisors, of certainfinancial incentives, such as third-party payments, that may createconflicts of interest.According to the MSRB, this proposal follows a number of civil andcriminal prosecutions involving alleged fraudulent activities relating tomunicipal securities offerings in which undisclosed third-party paymentsplayed a role.Given the centrality that controlling conflicts of interest has to theintegrity of our financial markets, it is not surprising that managingconflicts has been a key focus of both statutory changes and new rules bythe Commission.The Dodd –Frank Act contains numerous provisions relating to conflictsof interest.For example, Title VII contains a number of provisions that explicitlyaddress conflicts of interest in the derivatives market.Similarly, Title IX of the Act requires the Commission to write rulesprohibiting or restricting sales practices, conflicts of interest, andcompensation schemes for broker-dealers and investment advisers thatthe Commission deems contrary to the public interest and the protectionof investors.III. Effective Practices for Managing Conflicts of Interest.Turning from how regulators approach conflicts to how firms can assessand mitigate conflicts, I believe that an effective conflicts risk governanceframework includes three broad considerations.1. The first is that there needs to be an effective process, led by across-functional leadership team, to identify and understand all conflictsin the business model. These conflicts need to be understood both in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 104. P a g e | 104terms of their practical business implications as wells as in relation torelevant legal standards.This includes a recognition that conflicts are dynamic, and that inaddition to continually scanning for new conflicts, each and every conflictthat has been identified and addressed needs to be revisited periodicallyto determine if it is still being appropriately controlled in light of newbusiness circumstances, changing customer profiles, new regulatoryobligations, etc.For instance, in our exams of how firms protect material non-publicinformation (MNPI) from inappropriate uses, such as insider trading, wehave observed instances where firm programs lagged behind newbusiness strategies that created new sources of MNPI.While the business model evolved, the control framework did not and thatexposed these firms to significant risks.It is also important to risk-assess and prioritize which conflicts of interestpresent the greatest risk to the organization so that resources can beallocated accordingly to mitigate and manage those conflicts effectivelyboth from a compliance risk and reputation risk perspective.2. The second broad consideration, I believe, is to have a goodcompliance and ethics program tailored to address the conflicts ofinterest the firm has identified and prioritized.This is a topic of concern to every broker-dealer and investment adviser,given their supervisory obligations under the federal securities laws.Under the securities laws, registrants are expected to have effectivewritten policies and procedures to prevent violations of the securitieslaws, and to periodically review the adequacy and effectiveness of thosepolicies and procedures.For instance Rule 206(4)-7 under the Investment Advisors Act and Rule38a-1 under the Investment Company Act establish such requirements forinvestment advisors and investment companies. Similar requirements _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 105. P a g e | 105also exist for broker-dealers under FINRA rules.19 In my view in order tobe adequate and effective these compliance and supervisory policies andprocedures must include processes to identify, assess, mitigate andmanage conflicts of interest.In addition, for reference purposes the U.S. Federal SentencingGuidelines (“Guidelines”) since 2004 have provided helpful guidance onmany of the key elements of an effective compliance program. The 2004and 2010 amendments to the Guidelines, as you know, explicitly requirean effective compliance and ethics program as a mitigating factor indetermining criminal sentences for corporations.The Guidelines list seven factors that are minimally required.I would like to examine each of these factors in turn, and explain how Ibelieve it relates to effectively managing conflicts of interest.I believe that this analysis is also very germane to whether broker-dealersand investment advisers have met their supervisory obligations under thefederal securities laws.Standards and proceduresThe Guidelines look to companies to “establish standards andprocedures to prevent and detect criminal conduct.”The scope of what this may require depends on the size of theorganization, as the commentary to the Guidelines suggests, with largerorganizations expected to have more formal operations and resourcesthan smaller ones.However, I believe that for any organization, developing a strong processfor identifying and managing conflicts of interest is a key means ofpreventing and detecting not just criminal conduct, but other behaviorthat may create regulatory or reputational risks for the business.Since new conflicts of interest can arise rapidly as a business grows andevolves, and may become apparent to front-line employees before they _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 106. P a g e | 106come to the attention of more senior managers or control functions,communications about these standards and procedures are also anopportunity to emphasize to all employees the importance of their role inrecognizing new conflicts of interest, and their responsibility to elevatesuch conflicts to appropriate control functions.Some firms enhance this process by including conflicts assessment withinother processes, such as new product or business approval, conductcustomer surveys for potential conflicts, or conduct periodic or ad hocself-assessments of their business practices.OversightThe second factor is that the organization’s “governing authority” –typically a board of directors and senior management -- is knowledgeableabout the content and operation of the compliance and ethics programand exercises reasonable oversight with respect to its implementation andeffectiveness.In order to complement this oversight, some firms establish standingcommittees, composed of senior executives and senior control personnel,with focused responsibility on conflicts assessment.I believe that, in the financial services world, unremediated conflicts ofinterest are a leading indicator of the types of problems that a complianceand ethics program is intended to root out.Therefore, I find it difficult to see how the governance structure of afinancial services firm can satisfy this factor unless its oversight includesconsideration of the effectiveness of the compliance and ethics programin addressing conflicts of interest.Leadership consistent with effective ethics and complianceprogramThe third factor is that the organization use reasonable efforts to excludefrom any position of leadership any individual who has engaged in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 107. P a g e | 107conduct inconsistent with an effective compliance and ethics program –in other words, that the fox is not guarding the henhouse.Again, in my view it would be difficult for a financial services firm couldsatisfy this standard if any of its business unit heads or senior managershas not shown a commitment to proactively identifying and remediatingconflicts of interest in the business model of the organization.Education and TrainingThe fourth factor is that the organization take reasonable steps toperiodically train and otherwise communicate with its leadership,employees and agents about its compliance and ethics program,including its standards and procedures for implementing the program.It follows from what I have already said that, in my view, this training andother communication should include communication about theresponsibilities of everyone in the organization regarding identifying,escalating and remediating conflicts of interest.It should be tailored to specific conflicts in the business model and clearlyset forth the governance, risk management and compliance procedures tomitigate and manage these conflicts.Auditing and Monitoring.The fifth factor is to take reasonable steps to ensure that the complianceand ethics program is followed, including monitoring and auditing, aswell as periodic testing of the effectiveness of the program, and to haveand publicize a system by which employees and agents of theorganization can report or seek guidance regarding potential criminalconduct without fear of retaliation.Some firms will discuss with legal and compliance issues prior to a reviewand then report on issues discovered to any designated conflicts reviewauthority. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 108. P a g e | 108For financial service firms, this auditing, monitoring and testing should,in my view, encompass testing of the effectiveness of the organization’spolicies and procedures regarding management of conflicts of interest.Incentives and disciplineThe sixth factor is whether the organization has appropriate incentives tosupport the compliance and ethics program, and appropriate disciplinarymeasures for failing to take reasonable steps to prevent or detect criminalconduct.I believe that this factor, especially as it relates to incentives, goes to theheart of many problematic conflicts, since these often may involveincentives that an individual has that are inconsistent with duties that heor she owes to the organization, its clients or his or her customers.Response and preventionThe final factor is whether the organization takes reasonable steps torespond to any criminal conduct and to prevent its recurrence, includingmaking any necessary modifications to its compliance and ethicsprogram.In the case of a financial institution, I would think that this responsewould include a consideration of any conflicts of interest that may haveincentivized or otherwise facilitated the bad conduct, and considerationof how any such conflicts can more effectively be barred or remediated.Some firms go further, not only analyzing their weaknesses, but alsoissues identified at other firms so that the same problems do not happenat their establishment.3. The third consideration, in my view, is that this process for addressingconflicts of interest is fully integrated in the firm’s overall risk governancestructure.The business is the first line of defense responsible for taking, managingand supervising conflicts of interest, like other risks, effectively and in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 109. P a g e | 109accordance with laws, regulations and the risk appetite set by the boardand senior management of the whole organization.Key risk and control functions, such as compliance, ethics and riskmanagement, are the second line of defense.They need to have adequate resources, independence, standing andauthority to implement effective programs and objectively monitor andescalate conflicts of interest and other risk issues.Internal Audit is the third line of defense and is responsible for providingindependent verification and assurance that controls are in place andoperating effectively to address conflicts of interest.Finally, senior management and the board of directors need to beengaged.This includes considering the risk that conflicts of interest presentthroughout key business processes, including strategic planning, capitalallocation, performance monitoring and evaluation of business units andindividual business leaders.Some of the more effective practices I have observed include having keyrisk and control functions involved in each of these key processes withsenior management and the board so they can provide their independentview on how business units and individual business leaders are doing atmanaging conflicts and promoting a culture of compliance and ethics.Let me close with a few brief observations for senior managers andindependent directors.I believe that your role in conflicts management and ensuring a culture ofcompliance and ethics is critically important.At the end of the day, managing conflicts is much more than just having astrong compliance program, although that is obviously critical. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 110. P a g e | 110It also requires establishing a culture that, regardless of regulatoryrequirements, does not tolerate conduct that casts doubt on theorganization’s commitment to high ethical standards, and that values thefirm’s long-term reputation over any possible short-term benefit fromexploiting its clients or customers.Former SEC Chairman Richard Breeden said it best when he stated that“[i]t is not an adequate ethical standard to aspire to get through the daywithout being indicted.”In addition, while it is undoubtedly helpful to have certain individuals orgroups who are tasked with specific roles regarding mitigating conflicts,the responsibility of everyone in the organization to identify conflicts andsee that they are managed appropriately should always be emphasized.As leaders in your organizations, that responsibility starts with you.Finally, it is important to think proactively when it comes to conflicts ofinterest.As I mentioned earlier, in the financial services industry, and likely inother types of organizations as well, conflicts of interest are continuallyarising in new forms that need to be addressed aggressively and withvision and foresight.Where conflicts of interest are concerned, eternal vigilance andindependent oversight are warranted in order to protect an institution’sreputation and brand.ConclusionThank you for your attention. I am now happy to answer any questionsyou may have on this topic. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 111. P a g e | 111Commission WorkProgramme 2013Todays absolute imperative isto tackle the economic crisis and put the EU back on the road tosustainable growth.This is the number one task for this generation of Europeans.It calls for a Europe able to compete in the global economy, reshaped toseize the opportunities of the future.It requires the stable macroeconomic environment which true economicand monetary union can bring.It needs a step change in the economy, to release the many strengthsEurope can bring to bear in tomorrows economy of high innovation andhigh skills.This demands changes to the business environment in the Single Market;it requires that the huge potential of Europes networks and of the ITrevolution is fully exploited; it calls for new skills and help so that thoseshut out of the labour market today can make their contribution; and itmust be shaped by the needs and opportunities of resource efficiency.These are long-term challenges calling for a concerted effort from allsections of society – but in all cases, the EU contribution is a preconditionfor success.This is why, in the State of the Union address, President Barroso calledfor new thinking for Europe – to draw the consequences of the challengeswe are now facing and that are fundamentally changing our world.There can be no growth without reform and no way of confronting ourchallenges unless we do it together. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 112. P a g e | 112The State of the Union speech launched ambitious ideas for the long termframing of the EU – a deep and genuine economic union, based on apolitical union.This vision must be translated into practice through concrete steps, if it isto address the lingering crisis that continues to engulf Europe, and theEuro Area in particular.This 2013 Work Programme sets out the long term vision of what the EUmight look like in key policy areas, summarises what is missing today andexplains how the Commission will tackle these challenges.By prioritising the right kind of initiatives, the EU can contribute togrowth and job creation and can step by step move closer to its longerterm vision.The Commission has already tabled a wide range of growth enhancingproposals which are now being negotiated by the co-legislators.Timely adoption and full implementation of these measures would send acrucial signal of confidence to citizens and to investors, helping toreinvigorate economic activity and stimulating much needed job creation.It would add up to a major record of EU action before the June 2014European Parliament elections.In 2013 the Commission will devote much effort to implementation as animmediate way of delivering on the benefits of EU action.Following the decisions to be taken on the multi-annual financialframework by the end of 2012, during 2013 the Commission will focus onfinalizing arrangements for rapid implementation, including through theuse of country-specific negotiation mandates to ensure that the prioritiessupported through EU-funded investment are clearly targeted on growthand jobs.Targeted investment supported by a modern, proreform EU budget canmake a decisive contribution to growth, jobs and competitiveness. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 113. P a g e | 113The proposals in this work programme will be tabled during 2013 and inthe first part of 2014, bearing in mind the end of the current legislature.In the following sections some of the key action is highlighted to showhow the Commission will contribute to filling in the gaps between theEUs objectives and the current situation.Getting the foundations right: towards genuine Economic andMonetary UnionThe objectiveEuropes strength lies in the interconnection of our economies.The single market and the common currency have driven this forward,and the integrated economic policy making at the European level throughthe European semester is now drawing our economies together as neverbefore.However, the crisis has shown that the single market for financial servicescan only deliver financial stability, economic growth and jobs if it ismatched with a strong single regulatory and supervisory authority at EUlevel.The next step must be to deepen economic and monetary union with afully-functioning banking and fiscal union.What is missing today?A genuine EMU needs a comprehensive approach to tackle the viciouscircle of excessive private sector indebtedness, unsustainable sovereigndebt and banking sector weakness.The EU lacks a global framework which fills in the gaps in a fullyintegrated financial services policy, with a single supervisory mechanismfor banks and a single rule book to govern all financial institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 114. P a g e | 114It also needs to complete and implement the more effective mechanismsput forward to prevent and correct unsustainable fiscal policies andeconomic imbalances.Better coordination of tax policies will also be crucial.The progress made through the European semester has also not yetreached its potential in terms of carrying through recommendations intostructural reforms in the EU.While not yet complete, our economic governance has already beenthoroughly reinforced through the Europe 2020 Strategy, the EuropeanSemester, and the implementation of the Six-Pack legislation.Agreement on the Two-Pack legislation is urgent in order to completefurther the economic governance.In 2013 the Commission will:- Launch the fourth European Semester through the Annual Growth Survey;- Follow up on the blueprint for a comprehensive and genuine EMU which it will publish before the end of 2012;- Propose additional legislation to further enhance stability, transparency and consumer protection in the financial sector (for example, on the systemic risks related to nonbanks and shadow banking).The legislation already in place and now being considered adds up to afundamental reshaping of the EUs financial system.Agreement on banking supervision will put the European financialsystem on far more secure foundations and act as a springboard forconfidence. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 115. P a g e | 1152013 will see the implementation of many of the detailed rules of thispackage.The same is true for cohesion policy, where the key priorities forgrowth-enhancing measures and structural reforms brought out in theEuropean semester will be put at the core of new national and regionalprogrammes and where the focus will be on the finalisation of thecountry-specific mandates for the next generation of structural funds.The Commission will also take action to fight tax fraud and evasion,including an initiative on tax havens, bringing the EU dimension to bearon national efforts to consolidate public finances.Boosting competitiveness through the Single Market andindustrial policyThe objectiveSustainable growth and job creation need to combine a stablemacro-economic environment with the ability to compete in the globaleconomy.Europe has strengths which can give it a competitive edge through amodernised social market economy and can help it to take the leadin the new industrial revolution.The Single Market and fair competition can come together with targetedinvestment and the right approach to entrepreneurship to exploit theopportunities for growth through new technologies and innovation.What is missing today?The Single Market needs to continue to adapt to reach the potential forbusinesses and consumers in a borderless Europe. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 116. P a g e | 116Technological change offers huge possibilities, but it needs to beaccompanied by new approaches in areas like procurement, standards,and intellectual property.The EU needs a long-term framework for energy and climate policies sothat investment and policy target competitiveness and tackle climatechange.Europe falls short on innovation, with obstacles to building new marketsand investing in the technologies that will change the way we live, as wellas wider issues of attitudes to entrepreneurship and business failure.It also needs the right legal framework to move Galileo towardscommercial operations.This is exacerbated by the problems faced by companies, in particularSMEs, in accessing finance in the wake of the crisis, as well as theunnecessary costs of administrative burdens and the impact of someoutdated public administrations.Shortcomings in implementation also hold back the full benefits.The recent Single Market Act-II set out 12 new concrete priority actions,to reenergise the Single Market around four main drivers: networks,mobility, the digital economy and cohesion.Following up on its 2012 Communication on a new industrial policy, theCommission will take a fresh look at the single market for products,which makes up 75% of intra-EU trade.These actions follow on the priority actions under the first phase of theSingle Market Act, which now need to be agreed quickly.The Commission will work hard with the co-legislators in 2013 to bringthese proposals to fruition and full and effective implementation.Key proposals will include: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 117. P a g e | 117- Initiatives to align rules and cut the costs of VAT compliance through a single declaration;- A legislative proposal to make e-invoicing mandatory for public procurement will facilitate business-to-government interaction, reduce costs and serve as a pilot for other sectors;- Initiatives to update and simplify the rules for the circulation of products in the single market, and identify gaps still blocking free circulation, as well as intensified work on standards, certification and labels;- As part of Horizon 2020, 2013 will see proposals to launch and develop a range of major public-private partnerships to bring private and public investment together with the EU budget to drive a common approach to key strategic sectors like pharmaceuticals, air traffic management and nanotechnology, leveraging some €9-10 billion in new investment;- Initiative on energy technologies and innovation to deliver a sustainable, secure and competitive energy system;- Proposing a series of major reforms to modernise state aid;- Modernise our approach to intellectual property rights to ensure that it is effective and consumer-friendly in the digital world.Energy efficiency is a key area for competitiveness.The Commission will reinforce its cooperation with Member States on theimplementation of the energy efficiency directive, the energy labellingand ecodesign legislation.Implementing the strategy for Key Enabling Technologies will also be akey lever of competitiveness.The Commission will deepen its work to help SMEs facing the challengeof financing and implement the Action Plan for entrepreneurship. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 118. P a g e | 118Support from the European Regional Development Fund and theCOSME programme will be ready to roll out when the new financingperiod starts in 2014.New programming of the European Social Fund will also include aparticular focus on the provision of skills necessary for successfultransition from school to work and for increasing employability of theworkforce.Connect to Compete: Building tomorrows networks todayThe objectiveA fully integrated and interconnected European Single Market coveringtelecoms, energy and transport is a prerequisite for competitiveness, jobsand growth.Achieving this requires affordable, accessible, efficient and securenetwork infrastructure.Accelerating the roll out of the digital economy will bring benefits acrossall sectors, through enhanced productivity, efficiency and innovation.Europe must have state-of-the-art digital networks to retain and build itsglobal competitive position, to be able to handle the explosion in internetuse and exchange of data and to fully exploit the efficiency gains andinnovative services allowed by major online developments.In energy, significant investments in electricity grids and other energynetworks will help make energy supplies more secure, sustainable andcompetitive.On transport, a fully integrated single market and more efficient networksallowing to switch easily between different modes, would bring hugebenefits to citizens and companies, including in urban areas. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 119. P a g e | 119What is missing today?National approaches and a variety of barriers hold back competitivenessand prevent the exploitation of networks on a European scale.Investment is not sufficiently galvanised to support projects which will bethe bedrock of Europes future prosperity and is held back byshortcomings in the regulatory environment.This also holds back the potential for innovation in areas like smart gridsand meters, and intelligent transport.A lack of interoperability increases costs and holds back the level playingfield.Gaps in the regulatory framework hold back business investment andconsumer confidence in key areas like payments.Gaps in infrastructure create extra costs and inefficiencies for energyconsumers, delay modernization of logistics, and prevent the fullexploitation of broadband.In order to continue to fill in the missing links in 2013/14, theCommission will make proposals to:- Modernise Europes transport and logistics to help companies save time and energy, as well as reduce emissions, through proposals on rail and freight transport, goods traffic between EU ports, and the Single European Sky;- Tackle the obstacles to electronic payments;- Support investment in high speed networks;- Boost the coverage and capacity of broadband by reducing the cost of its deployment and freeing up band width for wireless broadband. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 120. P a g e | 120Alongside cohesion policy, the Connecting Europe Facility5 will be oneof the EUs most obvious contributions to cutting through these obstaclesby stimulating infrastructure.2013 should see the facility up and running and key choices made ontargeting.It should also see project bonds being rolled out to help harness privatesector investment.This will go hand in hand with consolidating regulation.More needs to be done to achieve a true European transport area withEuropean rules: proposals on connecting up in the rail sector and onaccelerating the implementation of the Single European Sky should betaken forward as priorities.In the field of energy, the latest phase of liberalisation towards thecompletion of the internal energy market by 2014 must be driven throughto make Europes future energy supply sustainable, competitive andsecure.A new framework for national interventions in the energy sector will be acore element to ensure that adequate investments are made and thatmarket interventions are necessary and proportionate.Growth for jobs: Inclusion and excellenceThe objectiveThrough its capacity to combine growth and inclusiveness, our socialmarket economy is one of Europes greatest assets.But today its economy and its society face the threat that the graveproblems of high unemployment, increased poverty and social exclusionrisk becoming structural. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 121. P a g e | 121The EU dimension must be harnessed to assist Member States to findevery opportunity to help people looking for work and to address themismatch between labour supply and demand.This starts with an active employment policy to help them to have theright skills to be employed and which uses the potential of mobility to thefull.The goal should be to find innovative ways to increase educationalattainment and labour market participation.Adequate and sustainable social policies and more accessible socialservices are needed to promote social inclusion and entry into the labourmarket.The job creation potential of key growth sectors, such as the greeneconomy, ICT and health and social care sectors needs to be fully tapped.To maintain its workforce in the longer term perspective ofan ageing society, European labour markets need to be inclusive,mobilising employees of all ages and at all level of qualifications.What is missing today?Public employment services and employers face a major challenge withthe scale of unemployment in Europe, in particular among youngpersons.To boost the employability levels is key to re-launch growth, taking alsointo consideration vulnerable groups.The potential for job creation in sectors such as the green economy, ICT,health and is not fully exploited.Education and training systems are not keeping up with changing labourmarket needs – resulting in shortages in key areas like science,mathematics and e-skills. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 122. P a g e | 122Higher education is not sufficiently connected to research and innovationactivities and is slow to build capacity in areas like ICT – which bothreflects and contributes to a lack of internationalisation.Life-long learning is still developing, and public policy and businesspractices do not reflect the need for older workers to extend their workingcareers.Undeclared work creates an extra challenge.Social protection and social investment should be more effective.Vulnerable groups find it particularly difficult to get into or to return tothe labour market.And the potential for labour mobility to fill gaps is held back by problemsin the recognition of qualifications, documentation and skills acrossMember States.Supporting Member States policies on employment and job creation isone of the highest priorities of the European semester.The Commission will continue in 2013 to work actively with MemberStates and social partners, in particular on the basis of the youthguarantee and traineeship initiatives to be set out later this autumn.In order to continue to fill in the missing links in 2013/14, theCommission will make proposals to:- Help improve the performance of public employment services and networking between national employment agencies;- Harness social investment for inclusive growth, through guidance for policy reforms identified in the framework of European semester, supported by the EU funds such as the European Social Fund; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 123. P a g e | 123- Furthering the internationalisation efforts of higher education, to prepare Europeans for an increasingly global, open and competitive labour market;- Put in place the right framework for the institutions handling occupational pensions.Obstacles to mobility remain one of the main lost opportunities of theSingle Market.Adoption and implementation of the revision of the ProfessionalQualifications Directive will be an important step to open up professions.Work should continue to examine and reduce unnecessary restrictions forregulated professions limiting the ability of professionals to work inanother Member State.Preparing the new generation of programmes under the European SocialFund will be a major goal for 2013, to ensure that this brings the quickestand most effective support to the modernisation of labour market policiesand social inclusion policies, strengthening of education and lifelonglearning systems, to ensure that groups like young and long-termunemployed have the right skills for the jobs of the future.A wide range of EU programmes will contribute to these goals, includingthe European Regional Development Fund, Horizon 2020 and Erasmusfor all.Using Europes resources to compete betterThe objectiveCompetitiveness today must be geared to competitiveness tomorrow.There is untapped potential for the EU economy to be more innovative,productive and competitive whilst using fewer resources and reducingenvironmental damage. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 124. P a g e | 124Less waste should be produced and more re-used and recycled in linewith the practice of the best performing Member States.Greater resource efficiency would contribute to growth, jobs andenhanced competitiveness, with reduced costs for business as well assignificant benefits for health and the environment, lower greenhouse gasemissions, contained energy bills and new opportunities created forinnovation and investment.The EU is particularly well-placed to give policy the long-term dimensionrequired.What is missing today?European society and the European economy do not yet exploit the fullpotential for resource efficiency.Much recyclable waste is either exported or sent to landfill.A lack of long-term frameworks holds back planning and investment,most obviously on a climate and energy framework beyond 2020, but alsoon long term sustainable use of key resources such as air, soil, energy,water, fish and biomass.At the same time, such frameworks can help to galvanise the innovationneeded to exploit the potential of the transition to a low-carboneconomy in areas like transport, energy and agriculture.In order to continue to fill in the missing links in 2013/14 the Commissionwill make proposals to:- Provide a long-term perspective on how the EU will move ahead from its 2020 targets to continue the trajectory towards a low-carbon economy through a comprehensive framework for the period to 2030;- Frame a new strategy on adaptation to climate change to make Europe more resilient; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 125. P a g e | 125- Review the waste legislation, to look at how new markets and better recycling can contribute to growth;- Adapt the EU policy framework for air quality.At the same time, the finalisation of the new generation of agriculture andfisheries policies and regional and rural development programmes willmaximise the opportunity to bring together innovation and job creationwith a focus on sustainability.The promotion of a resource efficient "blue economy" will help to releasethe potential of Europes maritime areas to contribute to growth.2013 will also bring the start of the 3rd phase of the EU EmissionTrading System (2013-2020).Building a safe and secure EuropeThe objectiveThe EU needs to protect its citizens and their rights from threats andchallenges and further remove obstacles to circulation of citizens inEurope.This includes fighting crime and corruption, controlling our externalborders and ensuring the respect of the rule of law and offundamental rights, with the right balance between security and mobility.It also needs a well functioning and efficient justice system to supportgrowth, entrepreneurship and attract investors.Equally, the EU works to proactively reduce risks to health, food andproduct safety, critical infrastructures and disasters.Safe and sustainable use of nuclear energy is a key element. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 126. P a g e | 126What is missing today?Threats to safety and security evolve, and the EUs response needs toreflect this by using technology to tackle safety in food or nuclear energy,by working for the swiftest and most effective disaster response and bydeepening cooperation in tackling the increasing cross border dimensionof crime.Areas like terrorist financing and the cross border traffic in weapons needparticular attention.The EU has a particular responsibility to protect its own financialinterests against fraud and corruption, but lacks the full institutionalframework required.Mutual trust in areas of safety, security and justice needs to be earned,and the networks and exchanges needed to build this are not alwayspresent.Vigilance is also needed to ensure that the fundamental rights of citizensin the EU are protected in full.If people and businesses are to take full advantage of their rights, theyneed easy access to justice, on equal terms in all countries in cases ofcross-border litigation.The Commission will make proposals to continue to fill in the missinglinks:- Establish a European Public Prosecutors Office to fight against crimes affecting the EU budget and protect its financial interests;- Fight traffic in firearms;- Improve judicial cooperation in both criminal and civil matters;- Revise legislation on nuclear safety and propose new legislation on nuclear insurance and liability; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 127. P a g e | 127- With 2013 marked as the European Year of Citizens, the Citizenship Report will review progress in ensuring that EU citizens can readily exercise their rights and identify future action.The Commission will also implement a variety of important initiatives topromote a virtuous circle of cooperation between nationaladministrations and judicial systems.The ongoing work of the Consumer Protection Cooperation network ofenforcement authorities is a core tool for practical enforcement.The first anti-corruption report and the first judicial scoreboard will bothoffer new tools to encourage best practice to be identified and pursued.Agreement on new arrangements for Schengen governance would alsogive Member States an important new tool to consolidate mutualconfidence in common control of borders.Efforts to reinforce application of existing solidarity mechanisms inimmigration will be continued.Pulling our weight: Europe as a global actorThe objectiveThe EUs interests and commitment to values of democracy, the rule oflaw and human rights depend heavily on what happens beyond itsborders.Promoting our values in our immediate neighbourhood and beyond is apriority, by building partnerships with third countries and promotingmultilateral solutions to common problems.Collectively, the EU is the largest donor of funds for developmentcooperation, climate finance and humanitarian aid in the world.We are also the worlds largest trading partner. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 128. P a g e | 128When we can deploy the Unions and Member States resources in aneffective and consistent way beyond our borders, and bring together thewide range of instruments available, the EU can have greater impact andinfluence on the world around us.This helps to deliver the goals of growth, stability and democracy and tomeet the goals of policies like tackling poverty and boosting peace andsecurity, as well as pursuing policies like addressing climate change, theenvironment, transport and energy, and optimising the opportunities forinternational cooperation in areas such as science and technology.In the year of Croatias accession, the enlargement process and theneighbourhood strategy continue to provide key tools to supportpositive change in partners on the EUs doorstep.What is missing today?On the global stage the EU is a key actor; but more can be done todevelop a truly unified approach using different strands of policy anddifferent instruments to reinforce each other.The EU should also ensure closer monitoring of the implementation of itscommitments, notably as part of the support provided to countries intransition in its neighbourhood.The external dimension is integral to promoting growth andcompetitiveness in 2013 and beyond.The EU is pursuing a bilateral trade and investment agenda ofunprecedented ambition to complement its efforts at the multilaterallevel.Negotiations are close to conclusion with such important partners asCanada, Singapore and India, and will hopefully soon be launched withJapan. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 129. P a g e | 129The final recommendations of the EU-US High Level Group on Jobs andGrowth may also pave the way for negotiations on an ambitious andcomprehensive transatlantic partnership.Japan and the United States are such key partners that successfulagreements with these two countries could add 1-1½% to EU GDP andcreate almost a million jobs.Such agreements would support multilateral liberalisation and regulatorydialogue, and open new markets for European products and services.Scoping exercises with other partners are currently being conducted.2013 will see a particular focus on consolidating the rule of law firmly atthe centre of enlargement policy, consolidating economic and financialstability and promoting good neighbourly relations and closer regionalcooperation in areas like trade, energy and transport.Neighbourhood policy will continue to centre on an incentive drivenapproach, where EU support for reforms follows a clear progress inbuilding democracy and the respect of human rights.Priorities in 2013 will be the Deep and Comprehensive Free Trade Areas,mobility partnerships and visa facilitation.The EU has responded to the rapid change in our neighbourhoodthrough the framework of the revised European Neighbourhood Policy,consolidating the Eastern partnership and launching a partnership forshared democracy and prosperity with the Southern neighbours.Our focus in 2013 with our Southern neighbours will be onimplementation and delivery, using innovative ways to mobilise politicaland economic resources to mutual benefit.As the Millennium Development Goals (MDG) Summit approaches in2015, the EU is working to fulfil its commitments on developmentassistance, as well as pursuing specific goals of sustainable growth andresilience in the face of crisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 130. P a g e | 130It also continues to pursue key negotiations such as reaching a newinternational climate agreement by 2015.At the same time, as the new generation of external action instruments isfinalised, 2013 will be a key year for ensuring that the EUs newdevelopment policy orientation – the Agenda for Change – ismainstreamed throughout our relationship with our partners, with a newfocus on good governance, inclusive and sustainable growth andstimulating investment in developing countries.It will also see further steps in ensuring an effective and swift crisisresponse capacity and developing a comprehensive response to crisisprevention, management and resolution.In order to continue to fill in the missing links in 2013/14 the Commissionwill make proposals to:- Assuming success in ongoing scoping exercises and in current preliminary discussions, propose negotiating directives for comprehensive trade and investment agreements with relevant partners;- Put forward coherent EU positions bringing together the Millennium Development Goals, the post-2015 development agenda and Rio+20. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 131. P a g e | 131Feedback oncomments received from stakeholders to the EBA, EIOPA andESMA’s Joint Consultation Paperon its proposed response to the European Commission’s Call for Adviceon the Fundamental Review of the Financial Conglomerates Directive _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
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  • 135. P a g e | 135Financial crime: a guide for firmsPart 1: A firm’s guide to preventingfinancial crimeThis Guide consolidates FSA guidance onfinancial crime.It does not contain rules and its contents arenot binding.• It provides guidance to firms on steps they can take to reduce theirfinancial crime risk.• The Guide aims to enhance understanding of FSA expectations andhelp firms to assess the adequacy of their financial crime systems andcontrols and remedy deficiencies.• It is designed to help firms adopt a more effective, risk-based andoutcomes focused approach to mitigating financial crime risk.• The Guide does not include guidance on all the financial crime risks afirm may face. The self-assessment questions and good and poor practicewe use in the Guide are not exhaustive.• The good practice examples present ways, but not the only ways, inwhich firms might comply with applicable rules and requirements.• Similarly, there are many practices we would consider poor that we havenot identified as such in the Guide. Some poor practices may be poorenough to breach applicable requirements.• The Guide is not the only source of guidance on financial crime. Firmsare reminded that other bodies produce guidance that may also berelevant and useful. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 136. P a g e | 136• Guidance in the Guide should be applied in a risk-based, proportionateway. This includes taking into account the size, nature and complexity ofa firm when deciding whether a certain example of good or poor practiceis appropriate to its business.• This Guide is not a checklist of things that all firms must do or not do toreduce their financial crime risk, and should not be used as such by firmsor FSA supervisors. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
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  • 143. P a g e | 143The Irish banking sector – fivechallengesAddress by Mr Matthew Elderfield, DeputyGovernor of the Central Bank of Ireland, tothe Association of Compliance Officers inIreland, University College Cork, CorkCompleting the task of fixing the Irishbanking system is not an end in itself.A healthy functioning banking system isessential to the economic well-being ofIreland.It is essential for breaking the damaging link between a distressedbanking system and weak public finances.And it is important for economic recovery that the banks are once again ina position to lend to small businesses and homeowners.But despite the considerable effort that has gone in to recapitalising,shrinking, restructuring and otherwise reforming the banking system, theprocess is by no means complete and significant challenges remain.How much longer will this process take and what can be done to speed itup?It may be a source of considerable frustration that this process is not yetover, but considering the severity of the banking crisis in Ireland,compounded with the on-going Eurozone debt crisis, it is perhaps not asurprise.What then are the remaining challenges that need to be tackled to speedup and complete the process of fixing the banks? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 144. P a g e | 144I would highlight such challenges: problem portfolios, balance sheetrestructuring, profitability, culture and capital.Let me take some time today to talk about each of these in turn.Problem portfoliosWhile the banks have transferred their troubled commercial propertyloans to NAMA (and are selling down their non-core portfolios), theyretain their legacy portfolio of mortgage, SME and other assets whichhave a high level of arrears, impairment and embedded losses.A lot of work has been undertaken to assess the quality of these assets andto ensure both that adequate capital is held against them and thatadequate accounting provisions are held (following new guidance fromthe Central Bank).So, a much greater level of capital has been set aside against the risk ofloss and higher levels of prudent provisions are now in place.However, more work remains to be done in order to develop a moreprecise and clear picture of the performance and degree of embeddedlosses in these portfolios.This is the first challenge.Efforts to date have involved, in the first instance, a top down estimate ofportfolio losses and, more recently with the assistance of Blackrock (aconsultant used by the Central Bank), a bottom-up loan by loan lossforecast exercise based on conservative modeling assumptions.But there is a remaining task: a case-by-case re-underwriting, involvingwhere possible recovery and where necessary restructuring, of troubledloans.This is crucially important for a number of reasons. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 145. P a g e | 145While the banks still have uncertainty about the granular performance oftheir loan portfolios, they will be unsure of the exact capital buffer that isin place and the extent to which they have adequate capital for extremeloss developments.To my mind, this encourages an attitude of hoarding capital and providesdisincentives to lending.At the end of the summer, there was much debate around a widelyreported Central Bank analysis of lending to the small business sector,where we found that loan rejection rates were significantly higher thanother EU jurisdictions, excepting Greece, and which to our mind pointedto supply constraints in the banking sector (in addition to problems overcredit quality).Uncertainty about the current loan book and the exact losses that willcrystallise (and therefore consume capital) are likely a factor inconstraining lending.Absent an exercise of even further recapitalisation, the best option is morespecificity and understanding of the performance of the legacy loanportfolios – and an exercise in facing up to losses and modifying loans asnecessary.The banks’ mortgage portfolios are a case in point and have involvedclose attention by the Central Bank.At this event last year, I explained how we were initiating a project torequire mortgage arrears resolution strategies from all lenders in Ireland.We received these in November of last year and provided feedback to thebanks, highlighting the need for more effort on a number of fronts.One major area of concern was the lack of operational capacity in thebanks to deal with customers in arrears so we required seniormanagement to commit to a step change improvement in that capacity. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 146. P a g e | 146The plans we received showed significant improvement and we arecontinuing to monitor progress closely.We also pressed the banks to work harder to develop specialist strategiesfor their buy to let portfolios.And, crucially, we insisted that the banks develop a broader range oftechniques to deal with loans in arrears, drawing on the ideas of theso-called Keane group.In a slight simplification of the position, the banks were relying heavily onthe provision of interest only arrangements or the capitalisation of interestarrears, even though these techniques were clearly unsuitable for asizeable group of customers with unsustainable mortgages as a result of asevere reduction in income.The banks were required to identify a broader range of techniques,including loan modification arrangements such a split mortgages and theintroduction of mortgage to rent schemes, and to pilot these during Q3 ofthis year.These pilots are now mostly concluded (although are dragging on in oneor two cases) and the banks are now in starting the process of rolling outthe new arrangements more widely.This process offers the prospect of restructuring loans where necessary toavoid customers continually re-defaulting.The Central Bank has studiously avoided prescribing the detail of theloan modification arrangements adopted by the banks and it mustnecessarily be for the banks themselves to undertake the case-by-casereview of customers that is required.However, I would observe that there is significant variability in theapproaches that the banks are taking to loan modification. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 147. P a g e | 147That is natural and understandable, and I would not expect a standardapproach across so many different institutions, with different portfoliosand different types of owners, for so many different customers.But there are some key parameters in the typical loan modificationarrangements that might perhaps merit a close side-by-side comparisonin due course.For example, a crucial new technique is that of the provision of a splitmortgage.This involves rightsizing the performing part of the mortgage based onaffordability, as determined by current income, and warehousing thenon-performing part.This is to be welcome, but the treatment of the warehoused elementmerits close attention.For example, is there shared risk between the bank and the customerregarding this element?And is it realistic that full interest accrues on this warehoused element?As the banks move out of their pilot phase on these new techniques andadopt them in their mortgage arrears resolution strategies, our code inthis area requires them to publish full details on their websites.So there will shortly be an opportunity for some comparative analysis ofthe different arrangements that are being promulgated and thereforesome public and customer feedback on the design choices that have beenmade.One important message today is that these efforts underway for mortgagearrears need to be matched for the banks’ SME portfolios.Earlier in the year, the Central Bank commissioned an in-depth analysisof the leading banks operational capacity for SME loan review, recoveryand resolution. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 148. P a g e | 148The results were in many respects dismayingly similar to those regardingmortgage arrears operations.For example, the reviews found the following: limited specialist skills,limited ability to scale up to conduct restructuring and resolution activity,inconsistent quality and depth of financial analysis of borrowers,incomplete financial information collected from borrowers, lack ofportfolio segmentation and limited use of KPI’s.More fundamentally, it appeared that portfolios were largely subject torescheduling and extended forbearance rather than a determined effort torestructure loans and deploy a wide range of workout options.Given the extent to which many SMEs entangled themselves in propertyinvestment, there is clearly a difficult task facing the banks.The message from this review work is that here too we need to see a stepchange in operational capacity and a mindset change in terms of tackling,rather than deferring, problems.So, while we will not be rolling out the same extensive regulatoryframework as is in place for mortgages and mortgage arrears (due to thedifferent consumer protection standards that are relevant), a key area ofregulatory focus in the coming months will be to press the banks toeffectively re-underwrite their SME portfolio and more decisively tacklethe challenge of recovering and as necessary restructuring problem loans.The banks need to raise their game on the handling of problem SMEloans and the Central Bank intends to press them to do just that.Balance sheet restructuringThe second principle challenge facing the Irish banks is of one of balancesheet restructuring.By this, I mean the process of disposing of certain assets in order tostrengthen the financial position of the bank and to shrink the size of thebalance sheet so that its funding position is more sustainable. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 149. P a g e | 149(I should note that I haven’t set out funding as one of the principal fivechallenges, which is perhaps unexpected, but this is on the grounds thatimproving the banks liquidity position and capacity to fund themselveswith reduced reliance on the central bank will flow from successfullyaddressing the other challenges.And indeed while all these are necessary conditions for improved funding,they are not sufficient, as it is clear that sustained access to wholesalemarkets – apart perhaps from heavily collateralized transactions such ascovered bonds and the like – is only realistically likely to occur after theIrish sovereign has fully returned to the market. So: funding is animportant and pressing issue, but one that will only be solved after boththe foundations of a stronger banking system and sovereign marketaccess have been re-established.)Ireland has demonstrated strong progress with the challenge of balancesheet restructuring.The first phase of this exercise, as is well known, involved theimplementation of NAMA.This allowed the transfer of hard to value and poorly performingcommercial property assets out of the banking system to improve thebalance sheet strength of the Irish banks.The second phase of this exercise, which is now well progressed, hasinvolved the identification and disposal of so-called non-core portfolios.This has less to do with cleaning out poor quality assets – although thereare some in this category – but rather reducing leverage in the balancesheet and reliance on central bank funding, by rightsizing the banks’balance sheets to a sensible proportion relative to their on-going ability tofund themselves.Progress in the disposal of non-core assets has been impressive, withmost banks hitting or exceeding their targets and doing so at a lower costto capital, by achieving better prices, than had been budgeted in ourstress test exercise. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 150. P a g e | 150The environment for asset disposals has, however, been getting moredifficult, as the Eurozone crisis has widened and the imperative todeleverage has touched other banks as well.The remaining challenge, then, in this space is to make sure that the assetdisposal process remains on track and is concluded successfully.However, the Irish authorities have been keen to emphasise that thisprocess should not be at the expense of fire sale prices, so the currentmarket environment may provide a constraint on the ability to reach theendpoint to a predefined schedule.Should that be the end of balance sheet restructuring?One area of debate is whether it is advisable to undertake a third phase ofrestructuring involving a select number of banks and certain portions oftheir core portfolios.The objective here would be to trim back the core balance sheets byidentifying poor performing or hard to value mortgage assets for transferout of the banking system.However, important technical issues remain to be solved regarding thesuitable vehicle for these assets, and how that would be funded.In short, there may be an opportunity for a new phase of balance sheetrestructuring to provide a further strengthening of the banking system –but this is not yet assured.ProfitabilityThe profitability challenge should, I hope, be obvious.It is important that the banks regain profitability in their core businessesso that they can stand on their own feet and no longer rely on taxpayersupport. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 151. P a g e | 151In post-crisis Ireland, where it often seems that regard for the banksamong the general public is at an all-time low, the prospect of theinstitutions which have caused so much economic distress, and requiredso much taxpayer support, earning ever-increasing profits from theiractivities is understandably met with dismay by those hard pressedconsumers that are being charged more.But it is surely preferable that the banking system is able to operate basedon the commercial arrangements it has with its customers rather thancontinuing to have dependence on government and taxpayer assistance.By breaking the nexus between banks and Government, both will be ableto access funds at a cheaper rate driving down costs to both bankcustomers and the taxpayer.The banking system needs to generate retained earnings to bolster itscapital position of its own accord, and therefore needs to re-establish itsprofitability.How is the profitability challenge going?Further balance sheet restructuring will help if it strips out poorperforming or high risk assets.Also, crucially, recognition of impaired assets and a granular and diligentre-underwriting of problem portfolios will allow loan book losses to be putin the past.These developments will help, but more is needed to be done, especiallywhile domestic demand remains depressed and inhibits new businessgrowth.At the centre of the profitability equation for the banks is a need toimprove their net interest margin.On aggregate, the net interest margin for the three main Irish banks hasfallen sharply, from 1.83% in 2007 to 0.82% by the first half of this year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 152. P a g e | 152Net interest margins remain highly compressed for the banks and willcontinue to do so while prevailing interest rates are low.Progress on profitability will only be possible in the interim due togradual re-pricing of assets to reflect the cost of funds.I should also note that in my view we are getting close to the positionwhere the changing circumstances arising from successfulimplementation of the IMF/EU programme and the introduction of thebanking union should permit the full removal of the governmentguarantee.This will favourably impact on profitability as a result of reduced fees.Realistically, however, the prospects for significant improvement in netinterest margins as a driver of profitability will be limited for theimmediate future in light of the macro-economic environment.What is in the banks’ own hands, however, is to rigorously tackle theiroperating costs.The banks need to continue their efforts in this area and the managementteams should be commended for tackling tough decisions around staffinglevels and branch closures, which are clearly difficult but necessarymeasures.As a note of caution, it is important that this process of rationalisationdoes not compromise the risk management infrastructure andIT/operational framework in the banking system.These would be short-term cost savings that sowed the seeds for laterproblems and painful expense, as we’ve seen in the past and indeed quiterecently.So, the Central Bank will encourage bank management to stick to theircost-cutting agenda, but to do so with careful deliberation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 153. P a g e | 153They do need to maintain the capacity to deliver the needed services tothe economy and the general public.CultureWhile most of the challenges are financial in nature, there is one that isnot but is nevertheless absolutely essential: We need to see a substantial,deeply rooted and sustained change in the culture that operates withinthe Irish banking system.Cultural change is evidently a complicated, laborious andtime-consuming process and will need to touch on the number ofdimensions, but at its essence we need to see a fundamental shift inattitudes to risk management and to the treatment of consumers.The financial crisis exposed a corrosive influence at the heart of the waythe Irish banks were run and that has had to be decisively tackled.The Central Bank has acted to initiate change in this area and hasencouraged improved governance and standards of behaviour.We have introduced a corporate governance code, which is fullyenforceable, designed to improve the rigour of oversight of bankmanagement and to broaden the gene pool of bank boardrooms.A new fitness and probity regime is now in place to more rigorously policethose who work in the financial services sector.Some 71 of the 73 executive and non-executive directors who were inplace at the time of the guarantee have now or will shortly depart thesystem.But the work of cultural change is by no means complete – indeed it stillhas a long way to go – and must necessarily be driven by the new boardsof the Irish banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 154. P a g e | 154They need to set the tone at the top and clearly articulate theirexpectations of ethical conduct amongst their management team andtheir staff at large.They need to ensure that the ranks of senior and middle management aresubject to renewal and refreshment, to bring some fresh blood into themix without the baggage of the past and with the motivation to lead theprocess of change.New standards of behaviour need to be backed up when hard cases ofindividual conduct come to a head, and not avoided.Recognition of the importance of good risk management, complianceand treating customers fairly needs to become embedded, hardwired intothe processes, remuneration, objectives, communications and way ofthinking in the Irish banks until it becomes second nature.This is a hard-to-measure and difficult task but needs to be kept at the topof the senior management and Board agenda.It is important to speed the recovery of the banking system, by helpingrenew the social contract between the banks and society at large and,more tangibly, ensuring that lapses in risk management or consumer caredo not lead to further losses, consumer detriment and reputationaldamage which impede the banks’ and the economy’s path to recovery.CapitalFinally, then, let us turn to the banks’ capital challenge and the questionof whether or not they have adequate economic and regulatory capital tooperate safely and provide the lending necessary for the economy.As I will explain, this is a complex question and is impacted by a numberof factors, some of which appear favourable and some of which do not.Answering this question also involves a considerable number ofjudgement calls, including the question of the speed with which we wantto get to the point that there remains absolutely no doubt about the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 155. P a g e | 155banks’ ability to meet both any future losses and the planned higherinternational capital standards that are coming down the track.The factors impacting the banks’ capital position are numerous and, ofcourse, are closely related to the previous challenges that I’ve outlined.The extent to which problem loans are successfully recovered ornecessarily written off or restructured will be a key factor, as will theextent of progress on balance sheet restructuring (and the costs thisimposes along the way).The banks’ ability to return to profitability will allow them to retainearnings so that the capital requirements of the future can be met on theirown.But what other elements will bear on the capital challenge?On the positive side, the current starting point is a strong one due to thesignificant capital injections that have taken place as a result of theprevious stress tests of the banking system.Current capital ratios for the leading domestic banks include a healthybuffer above minimum requirements: for example, the total capital ratiofor AIB is 19.9%, Bank of Ireland’s is 14.3% and PTSB’s is 21.5%.Above these requirements, the banks have a further buffer of contingentcapital instruments to absorb additional potential losses, which is anotherpositive.Also, as noted previously, since the last stress tests the losses on disposalof non-core assets has turned out to be less than predicted.And also in the positive, albeit tentatively, are some early signs of stabilityin the housing market, at least in the Dublin area.However, there are also adverse developments which could impact thenext in-depth assessment of capital. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 156. P a g e | 156While housing prices may have shown signs of stability in the Dublinarea, they are still significantly depressed and may have further to declineoutside Dublin.The macro-economic environment remains very difficult, with domesticdemand depressed and the continuing crisis in the Eurozone weighing onrecovery and confidence.The position on mortgage arrears has continued to deteriorate since thelast stress test (although, positively, are so far within stress levels) and theintroduction of insolvency legislation creates uncertainty as to the futuretrajectory of losses.And, as I’ve mentioned in previous remarks, we know that in the mediumterm the Irish banks need to close the gap to meet new internationalcapital standards under Basel 3 and CRD IV.Since we are talking about the speed of the recovery of the bankingsystem and the question of time, it is perhaps useful here to make thedistinction between current capital requirements and what one might callthe stressed capital position of the banks.Very simply put, the current capital position is the calculation of thebanks’ capital requirements against current prevailing minimumregulatory standards and in light of the bank’s current accountingposition.As I have just noted, the current capital position of the banks is healthydue to the significant injections of taxpayer and private funds that havetaken place.This healthy position appears assured for the immediate future given thebuffer between current capital levels and minimum Europeanrequirements.However, in the medium term the position becomes more uncertain,principally due to the anticipated strengthening of the minimum EU _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 157. P a g e | 157standards, uncertainty around profitability and uncertainty around theexact size of future losses in problem portfolios.This is where the stress capital position comes in: this is an exercise inprojecting forwards the level of losses (and of profitability) – and doing sowith an overlay of stress to provide an added degree of comfort andconservatism.As you know, this method has been used to good effect to force asignificant recapitalisation of the system already.How much uncertainty or risk is there in the medium term capitalposition for the banks?I’m afraid I’m going to disappoint you and say that we need to wait andsee and do another thorough, rigorous and professional job of assessingthat very question.This will take place during the course of next year and the Central Bankwill again conduct its own independent assessment of the banks’ loanlosses, again with the assistance of Blackrock, rather than rely on thebanks’ own calculations.We will, as before, call it as we see it.But in the design of this exercise – by ourselves, by the troika, by theEuropean Banking Authority and by the prospective new Eurozonebanking supervisor, the ECB (there will be a lot of chefs in this one!) –there will be some important judgement calls regarding the severityof the stress parameters and the methodology to be applied.Fundamentally, there is a public policy choice around living with acurrently healthy capital position until the point of need of public support,if indeed that is the case.Call this a just-in-time approach to backstops, if you like. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 158. P a g e | 158Or, alternatively, the stress design can be calibrated to frontloadanticipated new regulatory requirements or potential tail events whilediscounting the prospect of the banks earning their own way to fullcapital health.The benefit of this latter approach is that it more speedily gets the banksto a position of undeniable capital resilience, so that they should have nodeterrent from lending and the residual risk of future support at a laterdate is eliminated.But this frontloaded design choice is of course potentially costly in termsof adding to the sovereign debt burden.And in this respect, there is a sixth and most fundamental challenge of all,namely breaking the damaging link between the banking system and thegovernment finances.It is clear that this in itself is an essential component of the successfulcompletion of the financial programme for Ireland and a speedy recoveryof the Irish banking system.It is hard to think of the Irish banks returning to unsecured marketfunding before the government does so.And it is hard to think of the Irish banks’ capital position beingdefinitively resolved before the impact of bank debt on governmentfinances has been resolved.This has been the lesson of the Irish programme so far.That huge strides have been made in tackling the banking systemproblems through decisive and costly actions, but that there are limits tothe public policy measures that can be taken without Europeanassistance.The encouraging news is that this was recognised by Europeanpolicymakers in the Euro group summit at the end of June. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 159. P a g e | 159The damaging linkage between banking systems and sovereign financeshas been recognised and it has been accepted that borrowing torecapitalise banking systems adds to the negative feedback loop betweenthe two.I look forward to the outcome of the continuing discussions on theSummit conclusions so they are translated into a specific policy proposalthat is indeed effective in breaking the banking-sovereign link.However, there are key steps that need to take place before this canbe achieved, most notably the development of the banking union andcentralised Eurozone banking supervision.But that is a topic for another day.For now, my point is that in addition to the five domestic challenges forthe Irish banking system to more speedily achieve recovery, there is asixth European challenge where there are positive signs but much workstill to be done.This dependence on European developments, however, is no excuse forthe banks to delay in tackling the five challenges I have discussed.With apologies in advance for the risk of oversimplification, let me sumthis all up in the following way.One way to think about this is that the Irish banks are now out of thecritical ward, with more healthy vital signs, following radical surgery andan extensive transfusion of blood from the Irish taxpayer.But as they stagger back to work they are still weak and aren’tcontributing to society as they should.They need to demonstrate dedication in getting fully fit: they need to faceup to their remaining ailments – by recognising losses – and continue toslim down – both their balance sheets and their costs.The banks now have the uncomfortable task of telling the neighbours _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 160. P a g e | 160who donated blood to them that they need to charge them more ascustomers.And the banks need to approach their new situation with a new culture toshow they’ve truly changed their ways.These measures, which are in the hands of the banks’ own managementand do not depend on Europe, will help speed them to full recovery. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 161. P a g e | 161FSB releases reports onprogress in implementing theSIFI frameworkThe FSB is releasing three documents on latest steps in implementing theFSB’s policy framework for addressing the systemic and moral hazardrisks associated with systemically important financial institutions (SIFIs).1. Update of group of global systemically important banks(G-SIBs)An initial group of G-SIBs was published in November last year. Thisupdated list of G-SIBs is based on end-2011 data.This year, the G-SIBs are shown allocated to buckets corresponding totheir required level of additional loss absorbency.This allocation is provisional and will be based in the future on the bestand most current available data prior to implementation.The additional loss absorbency requirements for G-SIBs will be phased instarting from 2016, initially for those banks identified as G-SIBs inNovember 2014, and are to be fully met by 2019.The timelines for the other policy requirements relating to global SIFIs(G-SIFIs), and in particular the timetable for implementation ofresolution planning requirements for newly designated G-SIFIs, have alsobeen further specified.Update of group of global systemically important banks(G-SIBs)1. In November 2011 the Financial Stability Board published an integratedset of policy measures to address the systemic and moral hazard risksassociated with systemically important financial institutions (SIFIs). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 162. P a g e | 162In that publication, the FSB identified an initial group of G-SIFIs, namely29 global systemically important banks (G-SIBs), using a methodologydeveloped by the BCBS.2. The November 2011 report noted that the group of G-SIFIs is to beupdated annually based on new data and published by the FSB eachNovember.3. The FSB and BCBS have updated the list of G-SIBs using end-2011data.The list of banking groups identified as G-SIBs is reduced by one overall,from 29 to 28.Compared with the list published in November 2011, two banks have beenadded to the G-SIB list, and three banks have been removed from it.4. As noted in 2011, from this year, the list of G-SIBs shows their allocationto buckets corresponding to their required level of additional lossabsorbency.Additional loss absorbency requirements for G-SIBs will be phased instarting from 2016, initially for those banks identified as G-SIBs inNovember 2014.5. The quality of data used in applying the identification methodologyand to allocate G-SIBs into buckets for additional loss absorbency hasimproved considerably over the last year.In addition, several of the underlying data items included in themethodology have been refined to make the calibration more robust.The BCBS will continue to work to address remaining data quality issuesand adopt any necessary methodological refinements before the lossabsorbency requirements go into effect.The scores and the corresponding buckets for G-SIBs are provisional andwill be based in the future on the best and most current available dataprior to implementation.6. The group of G-SIBs will be updated in November 2013.7. The November 2011 report set out the policy requirements relating toG-SIFIs, together with the timetable by which those requirements were to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 163. P a g e | 163be met. For this updated list, as well as for future updates, the followingtime-lines relating to the requirements will apply:i) Financial institutions no longer designated as a G-SIFI will continue tobe subject to the requirement for recovery and resolution plans to theextent that the firm is assessed by national authorities to be systemicallysignificant or critical in the event of failure.Authorities are encouraged to continue to apply the other resolutionrequirements to support resolution planning; however, once a financialinstitution is no longer designated as a G-SIFI, implementation of thoserequirements will no longer be subject to peer review by the FSB under itsresolvability assessment process.ii) As set out in the November 2011 report, the additional loss absorbencyrequirements for G-SIBs will begin to apply from 2016, applying initiallyto G-SIBs identified in November 2014, using the allocation to buckets forhigher loss absorbency at that date.The requirements will be phased in starting from January 2016 with fullimplementation by January 2019.iii) G-SIFIs are required to meet higher supervisory expectations for riskmanagement functions, data aggregation capabilities, risk governanceand internal controls.G-SIBs designated in November 2011 or November 2012 must meet thehigher expectations for data aggregation capabilities and risk reportingby January 2016.G-SIBs designated in subsequent annual updates will need to meet thesehigher expectations within three years of the designation.8. The FSB and the standard setting bodies are extending the SIFIframework to other systemically important financial institutions.i) The FSB and BCBS have finalised a principles-based, minimumframework for addressing domestic systemically important banks(D-SIBs).National authorities should begin to apply requirements to banksidentified as D-SIBs in line with the phase-in arrangements for the G-SIBframework, i.e. from January 2016. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 164. P a g e | 164ii) The International Association of Insurance Supervisors (IAIS) hasissued for public consultation its proposed assessment methodology foridentifying global systemically important insurers (G-SIIs) as well aspolicy measures to be applied to G-SIIs.An initial designation by the FSB of insurance groups as G-SIIs isplanned in April 2013.iii) The FSB, in consultation with IOSCO, will finalise a proposedassessment methodology for identifying systemically important non-banknon-insurance financial institutions over the course of 2013.G-SIBs as of November 2012 allocated to buckets correspondingto required level of additional loss absorbency _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 165. P a g e | 1652. Progress report on Resolution of Systemically ImportantFinancial InstitutionsProgress in reforming national resolution regimes and advancingrecovery and resolution planning for G-SIFIs is encouraging overall.Getting the right legislation in place is essential to countries having thenecessary powers to advance resolvability of G-SIFIs and the legalcapacity for cross-border border co-operation.Reforms to align resolution regimes with the FSB’s Key Attributes ofEffective Resolution Regimes for Financial Institution are not completeand still ongoing in several FSB jurisdictions.Some headway has been made in G-SIFIs resolution planning.Cross-border crisis management groups are now established for nearly allthe G-SIFIs designated by the FSB in November 2011 and have initiateddiscussions on high-level resolution strategies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 166. P a g e | 166Operational resolution plans and institution-specific cooperationagreements to implement the strategies and plans are on track to becompleted during the first half of 2013.However, effective implementation is contingent on the requisite legalframeworks being in place and may also require some adaptation of firms’financial and organisational structures.The FSB has further work underway to support implementation of theKey Attributes.This includes the development of an assessment methodology for the KeyAttributes and further guidance on the application of the Key Attributes tothe resolution of non-banks, including insurers, investment firms andfinancial market infrastructures.The FSB will be publishing shortly for consultation draft guidance on keyaspects of recovery and resolution planning.Resolution of Systemically Important Financial InstitutionsProgress ReportSummarySince the adoption of the FSB Key Attributes of Effective ResolutionRegimes for Financial Institutions (“the Key Attributes”) as a newinternational standard for resolution regimes in November 2011, manyjurisdictions have initiated reforms to align national resolution regimesand institutional frameworks with the Key Attributes. Overall, progress isencouraging.Implementation of the Key Attributes in national resolutionregimesRecent reforms focus on extending the resolution tools to include powerssuch as bail-in, transfer and bridge bank powers, and on widening thescope of resolution regimes to cover non-bank financial institutions that _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 167. P a g e | 167could be systemically critical if they fail, including investment firms,financial market infrastructures (FMIs) and insurers (particularlyinsurance groups with non-traditional insurance activities).The Key Attributes will need to be applied in a manner that reflects thespecificities and objectives of resolution of particular sectors, such asprotecting insurance policy holders in resolution; facilitating the rapidreturn or transfer of holdings of client assets in resolution to protect theinterests of customers of investment firms; and ensuring the continuity ofcritical operations and services of FMIs.Recovery and resolution planning for G-SIFIsHigh importance is being given to the effective implementation of theKey Attributes that are directed at global systemically important financialinstitutions (G-SIFIs).This includes the requirements for cross-border crisis managementgroups (CMGs), institution-specific cross-border cooperation agreements(COAGs), recovery and resolution plans (RRPs) and resolvabilityassessments for all G-SIFIs.Considerable but uneven progress has been made in implementing theserequirements, guided by CMGs which are now established for nearly allthe G-SIFIs designated by the FSB in November 2011.In the course of that work it became clear that recovery planning,resolvability assessments and the development of COAGs areinter-dependent and iterative processes, and progress in these areas islargely dependent on a clearly articulated, high level ‘resolution strategy’for a firm.Accordingly, the priorities of CMGs were adapted to focus on thedevelopment of resolution strategies by end-2012.Recognising that certain aspects of the recovery and resolution planningrequirements would benefit from deeper examination and building on the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 168. P a g e | 168experience of its Members to date, the FSB has developed guidance thatit is releasing for public consultation on:(i) The nature of the stress scenarios and triggers for recovery actions thatshould be used in G-SIFIs’ recovery plans;(ii) The development of resolution strategies and associated operationalresolution plans tailored to different group structures, drawing on twostylised approaches to resolution - ‘single point of entry’ and ‘multiplepoint of entry’; and(iii) The identification of the critical functions that would need to bemaintained.This guidance is expected to assist those CMGs, authorities and firms atearlier stages of the recovery and resolution planning process and topromote consistency in the approaches of CMGs.Implementation of the remaining G-SIFI resolution planningrequirements is on track to be completed during the first half of 2013, afterwhich the implementation of the resolution planning requirements inrelation to each G-SIFI will be reviewed through resolvabilityassessments by resolution authorities and CMGs, and through aresolvability assessment process that the FSB expects to launch in 2013.For financial firms that are no longer designated as G-SIFIs, theimplementation of those requirements will not be evaluated through theFSB assessment process.However, such firms will still be required to have RRPs, and nationalauthorities are encouraged to continue to apply the other requirementsproportionately to those firms.IntroductionThe global financial crisis provided a sharp and painful lesson of the coststo the financial system and the global economy of the absence of effective _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 169. P a g e | 169powers and tools for dealing with the failure of systemically importantfinancial institutions (SIFIs).In November 2011, the G20 endorsed the Key Attributes of EffectiveResolution Regimes for Financial Institutions (“the Key Attributes”) as anew international standard for resolution regimes, while in June 2012 theG20 Leaders reiterated their commitment to make national resolutionregimes consistent with the Key Attributes and expressed their supportfor the on-going elaboration of RRPs and COAGs for all G-SIFIs.This report describes the progress so far in implementing the KeyAttributes, including the specific requirements aimed at G-SIFIs, and theadditional work that the FSB is undertaking to advance the effectiveimplementation of the Key Attributes.- Section 1 provides an overview of the status of reforms of national resolution regimes and the FSB’s initiative to evaluate progress through a first thematic peer review of effective resolution regimes.- Section 2 reports on additional work underway to support implementation of the Key Attributes, which includes the development of an assessment methodology, work on the application of the Key Attributes to resolution regimes for the non-banking sector, including insurers, FMIs and firms with significant holdings of client assets, and the sharing of relevant information for resolution purposes between all authorities having a role in resolution.- Section 3 discusses the status of implementation of the set of resolution planning requirements that specifically apply to G-SIFIs as well as the work on further guidance to support their implementation.1. Implementation of the Key Attributes1.1 OverviewThe Key Attributes set out twelve essential features that should be part ofresolution regimes in all jurisdictions (see Text Box 1). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 170. P a g e | 170Their objective is to enable authorities to resolve any financial firm thatcould be systemically significant or critical in the event of failure,irrespective of its size, the nature of its business or its geographical reach,without severe systemic disruption and without exposing taxpayers toloss.Text Box 1: The twelve Key AttributesThe Key Attributes set out the core elements considered necessary for aneffective resolution regime for any type of financial institution, includingbanks, insurers, securities and investment firms and FMIs:1. Scope - The regime should cover any financial institution that could besystemically significant or critical if it fails.2. Resolution authority - The regime should be administered by aresolution authority (or authorities) with a statutory mandate to promotefinancial stability and the continued performance of critical functions.3. Resolution powers - The regime should provide for a broad range ofresolution powers, including powers to transfer the critical functions of afailing firm to a third party; powers to convert debt instruments intoequity and preserve critical functions (‘bail-in within resolution’); powersto impose a temporary stay on the exercise of termination rights underfinancial contracts (subject to safeguards for counterparties) and imposea moratorium on payments and on debt enforcement actions against thefailing firm; and powers to achieve the orderly closure and wind-down ofall or parts of the firm’s business with timely pay-out or transfer of insureddeposits.4. Set-off, netting, collateralisation, segregation of client assets - Thesegregation of client assets should be effective in resolution.Financial contracts, including netting and collateralisation agreements,should be enforceable.However, entry into resolution and the exercise of any resolution powersshould not in principle constitute an event that entitles any counterparty _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 171. P a g e | 171of the firm in resolution to exercise acceleration or early terminationrights under such agreements provided the substantive obligations underthe contract continue to be performed (as would be the case if thecontracts were transferred to a sound financial firm or bridgeinstitutions).5. Safeguards - All creditors should receive at a minimum what they wouldhave received in a liquidation of the firm (‘no creditor worse off than inliquidation’ safeguard).Resolution powers should be exercised in a way that respects thehierarchy of claims, subject to some flexibility for authorities to departfrom the general principle of equal treatment of creditors of the sameclass where necessary to contain the potential systemic impact of a firm’sfailure or to maximise the value for the benefit of all creditors as a whole.Rights to judicial review should be available for affected parties tochallenge actions that are outside the legal powers of the resolutionauthority.6. Funding of firms in resolution - Resolution regimes should includefunding mechanisms that can provide temporary financing to continuecritical operations as part of the resolution of a failing firm.Such funding should be derived, or recovered, from private sources.7. Legal framework conditions for cross-border cooperation - Resolutionregimes should empower and encourage resolution authorities whereverpossible to act to achieve a cooperative solution with their foreigncounterparties.Authorities should be able to give effect in their jurisdiction to resolutionmeasures taken by a foreign resolution authority.8. Crisis Management Groups (CMGs) - Home and key host authoritiesof all G-SIFIs should maintain CMGs with the objective of enhancingpreparedness for, and facilitating the resolution of a G-SIFI. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 172. P a g e | 1729. Institution-specific cross-border cooperation agreements (COAGs) -COAGs should be in place between the home and relevant hostauthorities that need to be involved in the preparation and managementof a crisis affecting a G-SIFI.10. Resolvability assessments - Resolvability assessments should becarried out for all G-SIFIs.Authorities should have appropriate powers to require the adoption ofappropriate measures to ensure that a firm is resolvable under theapplicable regime.11. Recovery and resolution planning - Recovery and resolution plans(including high level resolution strategies) should be in place for all firmsthat may be systemic or critical in the event of failure.12. Access to information and information sharing - Jurisdictions shouldremove legal, regulatory or policy impediments that hinder the domesticand cross-border exchange of information - in normal times and during acrisis - necessary for recovery and resolution planning and for resolution.1.2 Status of reforms of national resolution regimesReforms are underway in many jurisdictions to align national statutoryresolution regimes and institutional frameworks with the Key Attributes.In the US, the implementation of the Dodd-Frank Wall Street Reform andConsumer Protection Act (Dodd-Frank Act), which provides for powersto resolve systemically important financial institutions and requires thepreparation of resolution plans, represents an important step towardsimplementation of the Key Attributes.Likewise, the adoption by the European Commission of a proposal for anEU regime for bank recovery and resolution is critical for advancingconsistent reforms across the EU. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 173. P a g e | 173A number of FSB member jurisdictions are in the process of reformingtheir statutory regimes or have recently introduced legislative changes orother actions to implement the Key Attributes: - Australia - Australia undertook comprehensive reforms of its crisis resolution framework, which included the introduction of a deposit guarantee regime in 2008. It recently released a consultative document with proposals to further strengthen powers to resolve financial institutions, including insurers and FMIs, as well as non-regulated entities within a financial group in resolution. - Germany - In Germany, reforms came into force in 2011 that strengthened and expanded crisis management and resolution powers. They include transfer and bridge bank powers, the establishment of a special restructuring fund, and the introduction of a two-stage recovery and reorganisation procedure for banks. - Netherlands - In May 2012, the Netherlands introduced a new Act on Special Measures for Financial Institutions which provides a range of new resolution powers to the De Nederlandsche Bank (Dutch Central Bank) and the Dutch Ministry of Finance. These powers include the powers to carry out a sale of a problem institution to a private party or bridge institution by transfer of shares; and the powers to transfer assets and liabilities of a problem institution to a private party or bridge institution, in case of guaranteed deposits with funding from the deposit guarantee scheme. - Spain – The powers of the Spanish resolution authorities were significantly expanded in August 2012: Banco de España was provided with additional early intervention powers; the Fund for Orderly Restructuring of Banks (FROB) was given powers to provide temporary financial assistance under a restructuring plan approved by _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 174. P a g e | 174 Banco de España; and a new legal framework for the resolution of banks was established. That framework enables the FROB to carry out the restructuring or resolution of a failing bank, overriding shareholders’ rights where necessary, and includes powers to impose losses on subordinated liabilities (“limited bail-in”). Resolution tools in Spain now include: sale of assets or business lines of a failing bank; and transfer to a bridge bank or asset management company.- Switzerland - Switzerland introduced legislative changes in 2008, 2011 and 2012 to strengthen its resolution regime. These included the introduction of a recovery and resolution planning requirements, bridge bank powers and extension of the Swiss Financial Market Supervisory Authority’s (FINMA) resolution powers to insurers and other types of financial institutions.- United Kingdom - The introduction of the Special Resolution Regime for UK banks in 2009 gave UK authorities a broad range of resolution powers for failing UK banks. The Financial Services Act adopted in 2010 required banks to have RRPs. UK deposit taking banks and systemic investment firms were required to have completed RRPs by June 2012. In August 2012, the UK Treasury published a consultation paper, accompanied by draft legislation, setting out proposals on enhancing the mechanisms available for dealing with the failure of systemically important non-bank financial institutions and FMIs. The proposal covers four broad groups: investment firms and parent undertakings; central counterparties (CCPs); other FMIs (such as payments systems); and insurers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 175. P a g e | 175- United States - The orderly liquidation authority established under Title II of the Dodd-Frank Act applies to financial companies and certain of subsidiaries that could be systemically significant or critical in failure. The Dodd-Frank Act also introduced a resolution planning requirement.Legislative reforms will be necessary in many jurisdictions to fillremaining gaps in the implementation of the Key Attributes.In many jurisdictions the scope of application of the resolution regimeremains limited to domestically incorporated banks and does not extendto non-bank financial institutions that could be systemically significant orcritical if they fail, such as large investment firms or CCPs.Nor is it clear in many cases whether the national regime extends tobranches of foreign financial institutions.A number of jurisdictions do not have the full range of resolution toolscalled for by the Key Attributes, such as bail-in powers or the authority toimpose temporary stays on acceleration or early termination rights infinancial contracts.The absence of a clear mandate of resolution authorities to seekcooperation with their foreign counterparts and the lack of legal capacityto give effect to foreign resolution measures may pose significantimpediments to cross-border resolutions, if not addressed.1.3 Thematic peer review to evaluate implementation in FSBmember jurisdictionsThe reform of resolution regimes have been identified as a priority areaunder the FSB Coordination Framework for Implementation Monitoring(CFIM). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 176. P a g e | 176As a result, the implementation of the Key Attributes by FSB memberjurisdictions will undergo intensive monitoring and detailed reporting,with a first thematic peer review of resolution regimes already underway.The objective of the peer review is to evaluate FSB member jurisdictions’existing resolution regimes and any planned changes to those regimesusing the Key Attributes as a benchmark.The review will provide a fuller picture of the status of reforms and theprogress made by different jurisdictions across different financial sectors(banking, insurance, securities, and FMIs).The findings will be published in early 2013.2. Work underway to support effective implementation2.1 OverviewThe FSB has further work underway to support implementation of theKey Attributes.An assessment methodology is being developed as guidance forjurisdictions when implementing the Key Attributes and as a tool for theconduct of assessments in the context of peer reviews.The FSB is working with sectoral standard setters to ensure that themethodology reflects sector-specific considerations and to developfurther guidance as necessary.In response to external events, including the failure of MF Global, theFSB is undertaking further work on the protection of client assets inresolution.The FSB is also working to address barriers to information exchangeamongst relevant authorities, since these have the potential to thwart thedevelopment of resolution strategies and plans and their implementationin a crisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 177. P a g e | 1772.2 Development of a methodology to assess implementationThe FSB is working with representatives of national authorities, theEuropean Commission, the IMF and World Bank, and standard settingbodies (Basel Committee on Banking Supervision (BCBS), Committee onPayment and Settlement Systems (CPSS), International Association ofDeposit Insurers (IADI), International Association of InsuranceSupervisors (IAIS) and International Organization of SecuritiesCommissions (IOSCO)) to develop an assessment methodology for theKey Attributes.The methodology will complement the Key Attributes by providingcriteria against which implementation of each individual Key Attributecan be assessed, and explanatory notes about particular criteria where theFSB considers that further detail or explanation would be useful.It is intended as guidance for jurisdictions when implementing the KeyAttributes and as a tool for the conduct of assessments in the context ofpeer reviews within the FSB framework for implementation monitoring orIMF and World Bank assessments of resolution regimes in the context ofFinancial Sector Assessment Programs (FSAPs) and Reports on theObservance of Standards and Codes (ROSCs).The FSB plans to consult publicly on a draft of the methodology in thesecond half of 2013.2.3 Sector-specific considerationsThe Key Attributes are an ‘umbrella’ standard for resolution regimes forall types of financial institutions that can potentially be systemicallyimportant in failure. Sector-specific resolution regimes should thereforebe consistent with the objectives and relevant requirements of the KeyAttributes.However, not all resolution powers and features of resolution regimes setout in the Key Attributes are relevant for all sectors. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 178. P a g e | 178Different types of financial firms - even within a particular sector - havedistinctive features that need to be reflected in the way in which thepowers and tools set out in the Key Attributes are applied when resolvingsuch entities (see Text Box 2).As a consequence, the Key Attributes may require some adaptation forsector-specific application.The FSB is working with standard setters to ensure that the assessmentmethodology deals comprehensively with the application of individualattributes to different types of financial institutions and sectors.The IAIS is currently analysing the Key Attributes from the perspective ofthe resolution of insurers and the protection of policy holders.The IAIS consultation document on globally systemically importantinsurers (G-SIIs) that was released in October 2012 includes a proposal toconsider whether to develop a specific template for assessing theresolvability of G-SIIs.It also proposes that resolvability assessments assess the extent of ex anteseparation of traditional and non-insurance activities from traditionalinsurance activities, and that the authorities consider and take allnecessary actions to ensure effective resolution, including removingobstacles to the separability of non-traditional and non-insuranceactivities from traditional insurance activities during a stressed event.The IAIS also proposes, where necessary, to explore with members theneed to develop further guidance for inclusion in the FSB’s assessmentmethodology for the Key Attributes.Similarly, in July CPSS-IOSCO published a consultative report onrecovery and resolution of FMIs.The report analyses how the Key Attributes apply to FMIs in a mannerthat achieves the objective of avoiding systemic disruptions by ensuringthe continuity of critical operations and services of FMIs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 179. P a g e | 179The outcome of that analysis and public consultation will be incorporatedinto the assessment methodology for the Key Attributes. CPSS-IOSCOare working to provide further guidance on how FMIs should produceviable and robust recovery plans and how these should fit alongsideresolution plans.Text Box 2 – Sector-specific considerationsBanks – The full range of resolution powers specified in the KeyAttributes should be available to resolution authorities with responsibilityfor the resolution of banks that could be systemically significant or criticalin the event of failure.Insurers – As an international standard the Key Attributes generally alsoapply to resolution regimes for insurance firms that could be systemicallysignificant or critical in the event of failure.The Key Attributes directed at G-SIFIs (see Text Box 3) apply to anyinsurer that is designated as a G-SII. The Key Attributes recognise thattwo resolution tools – portfolio transfer and ‘run-off’’ – are likely to beparticularly relevant for the resolution of an insurer.However, when insurers also engage in either non-traditional insurancebusiness or non-insurance business some of the other resolution powersset out in Key Attribute 3 that are not generally aimed at traditionalinsurance business may be necessary.Financial Market Infrastructure - The key objective of resolution regimesfor FMIs needs to ensure uninterrupted continuity of the criticaloperations and services of a failing FMI.Accordingly, it should ensure the timely completion of payment, clearingand settlement functions by an FMI throughout the period that it is inresolution.The regime should enable authorities to preserve those systemicallycritical operations and services, either by arranging their orderly transferto another FMI or bridge institution; by providing participants sufficient _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 180. P a g e | 180time to establish and to move to an alternative arrangement; or by therestoring the FMI’s ability to provide those services as a going concern(including by allocating any shortfall in the FMI’s resources acrossparticipants or other creditors of the FMI).To achieve these outcomes and taking into account the specificities ofdifferent types of FMIs, statutory resolution regimes for FMIs shouldprovide for a broad set of tools and powers consistent with those in theKey Attributes and resolution authorities should apply them in a mannerthat is consistent with the CPSS-IOSCO Principles for Financial MarketInfrastructures.Securities and investment firms - Ensuring the rapid return of clientmoney and assets or their transfer to a sound firm or bridge institution is akey objective of the resolution of securities and investment firms.Resolution authorities therefore require clear powers to transfer holdingsof client assets to a performing third party or bridge institution, withoutthe consent of the affected clients (see below 2.4).In order for that power to be exercisable effectively, the regulatoryframework needs to include clear rules requiring the segregation andidentification of client assets, and compliance with those rules isenforced.As with the exercise of other resolution powers, arrangements are neededto give effect to transfers, or to facilitate recovery by a resolution authorityor liquidator, of client assets that are located in other jurisdictions.2.4 Resolution of firms with significant holdings of client assetsThe Key Attributes state that an effective resolution regime should ensurethe rapid return of segregated client assets and call for clear, transparentand enforceable arrangements that promote the effective segregation ofclient assets and prompt access to segregated client funds in resolution. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 181. P a g e | 181Greater understanding is needed of how those objectives can be achievedin the case of financial firms with significant holdings of client assets, andparticularly where those assets are held in different jurisdictions.The transfer of holdings of client assets to a private sector firm or bridgeinstitution may be the preferred resolution option, given that it maintainscontinuity of the services provided to the clients and minimises anyinterruption of access by clients to their assets.Resolution regimes should therefore include a power for resolutionauthorities to transfer holdings of client assets to a performing third partyor bridge institution.The power should be available especially for banks, non-deposit-takinginvestment firms or broker-dealers, and FMIs that could be systemicallysignificant or critical in the event of failure.No formal arrangements or procedures are currently in place betweenjurisdictions to facilitate transfers or return of client assets in across-border resolution.A foreign resolution authority, foreign administrator or liquidatorgenerally needs to obtain the assistance of the local courts.However, the court process may take time which, as a practical matter,may represent a procedural impediment to rapid transfer or recovery,even where resolution authorities have powers to transfer client assets andassets are segregated and identified.Rapid transfers in a cross-border context could be facilitated if the homeresolution authority’s transfer powers were matched by broad transferpowers of the host authority and the latter were able to use those powersto effect a transfer of assets located in its jurisdiction made by the foreignhome authority.The FSB has work underway to elaborate further on the nature of thepowers resolution authorities need to transfer holdings of client assets to a _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 182. P a g e | 182third party or bridge institution, in particular where the firm in resolutionis holding client assets in a foreign jurisdiction.Where client assets are held by entities that are located in anotherjurisdiction, for example, an affiliate of the firm in resolution, athird-party custodian, or other intermediary, differences in the respectivenational laws relating to way in which client assets are held and protectedmay give rise to legal disputes as to ownership and entitlement to theassets, and complicate transfers or the rapid return of the assets to clients.The likelihood of disputes, which may take considerable time to resolve,is exacerbated in cases of correlated failures where both the firm thatoriginally received the client assets and the firm that holds them aresubject to resolution or insolvency procedures, since the administrators orinsolvency appointees of both firms will have a statutory responsibility tomaximise value for the clients and creditors of the firm to which they areappointed.Insufficient protection of client assets, and uncertainty about theownership rights of clients where the firm exercises rights of use overcollateral or re-hypothecates client assets, also increases the likelihood of‘runs’ as clients remove assets from a stressed firm in order to protecttheir rights.These effects increase the risk of disorderly failure and may undermineauthorities’ ability to minimise contagion and preserve financial stabilitythrough resolution.Accordingly, when developing resolution plans and conductingresolvability assessments, authorities need to consider the feasibility ofexecuting a transfer of custodial functions to another firm.The FSB is working to develop more explicit guidance on this necessaryaspect of resolution planning and resolvability assessments which willspecify how the handling of clients assets should be taken into account byauthorities when developing resolution plans for firms that hold asignificant amount of client assets domestically or in other jurisdictions.Authorities and firms should have a clear understanding, in particular, of: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 183. P a g e | 183(i) The applicable law governing holdings of client assets, in particularwhere they are held through a chain of intermediaries located in foreignjurisdictions;(ii) Any rights of re-use that may be exercisable;(iii) The rules that apply where there is a shortfall of client assets;(iv) Arrangements in place that ensure that the identity of clients and theirassets can be established rapidly and with certainty; and (v) the existenceof arrangements, including ‘porting’ arrangements for CCPs, that wouldfacilitate transfers in a crisis.2.5 Information sharing for resolution purposes andconfidentialityTo arrive at a group-wide resolution plan and resolvability assessment,home and host authorities will need to share views and information in theCMGs on the functions they consider to be critical and on possiblestrategies for ensuring the effective resolution of the group.In principle, it should be possible to share relevant information betweenall authorities that have a role in resolution, subject to adequateconfidentiality safeguards.However, differing terms and conditions for information sharing acrossjurisdictions complicate cross-border cooperation.Constraints on the timely sharing of information between authorities thathave responsibilities related to resolution also hamper cooperation.Particular hurdles may arise where information generated for supervisorypurposes needs to be shared with non-supervisory authorities that alsohave a role in resolution, such as central banks (that are not acting in asupervisory capacity), resolution authorities and ministries of finance.The Key Attributes stipulate that sharing of information within CMGswith other authorities with a role in the resolution of a particular firm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 184. P a g e | 184should be possible under the legal frameworks of all jurisdictions, subjectto specific conditions being met to protect the confidentiality of theinformation.The recipient authority should be subject to confidentiality requirementsthat are equivalent to those that apply to the disclosing authority, witheffective sanctions for breach; and should commit not to disclose theinformation to third parties or the public, to seek prior consent for anyonward disclosure of information, and to undertake best efforts to resistdisclosure where compelled by statute or legal process, including byemploying legal means to challenge an order to disclose.Professional secrecy obligations should generally prohibit officers andemployees of authorities from disclosing information acquired in thecourse of discharging their mandates.In jurisdictions with ‘Freedom of Information’ legislation, exemptionsfrom disclosure requirements should be possible for resolution relatedinformation received from foreign authorities.The negotiation of institution-specific cross-border cooperationagreements (COAGs) amongst relevant home and host authorities, asrequired for each G-SIFI under the Key Attributes (see below), isintended to put in place a more predictable and explicit framework forsharing information for resolution and resolution planning purposes.It will also require authorities to determine whether their legal frameworkprovides the appropriate gateways for information sharing, or whetherthey need to be revised to allow the sharing information for resolutionpurposes with the full range of authorities involved in resolution.Many jurisdictions’ legal regimes already have appropriate scope forauthorities to improve cross-border and domestic information-sharing forresolution purposes.However, important work remains to be done to address the practical andpolicy concerns involved in sharing recovery and resolution information. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 185. P a g e | 185The FSB is examining how to address remaining obstacles and improvethe on-going work, including institution-specific COAGs currently beingdeveloped, to facilitate information sharing for resolution purposes.3. Key Attributes directed at G-SIFIs3.1 OverviewIn November 2011, the FSB released an initial list of institutionsdesignated as G-SIFIs on the basis of a methodology developed by theBCBS.The FSB announced that this list will be reviewed and updated annually.Firms designated as G-SIFIs are subject to specific resolution planningrequirements relating to CMGs, COAGs, RRPs and regular resolvabilityassessments (see Text Box 3).Text Box 3: Key Attributes directed at G-SIFIsCrisis Management Groups (Key Attribute 8) - CMGs are mandatory forall G-SIFIs.CMGs establish a mechanism for information exchange, cooperation andcoordination between the relevant authorities of the home and key hostcountries of the G-SIFI.Such arrangements enhance preparedness for a crisis and facilitate themanagement of any such crisis and, if necessary, the orderly resolution ofthe firm.Institution-specific cross-border Cooperation Agreements (COAGs) (KeyAttribute 9) - COAGs must be in place for all G-SIFIs. COAGs support theoperations of the CMGs by setting out the objectives and processes forcooperation between the home and relevant host authorities that need tobe involved in planning for and carrying out resolution of a G-SIFI. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 186. P a g e | 186They should also define the roles and responsibilities of the authoritiespre-crisis (that is, in the recovery and resolution planning phase) andduring a crisis; and set out the processes for information sharing andcoordination in the development of resolution strategies and the RRPs forthe G-SIFI.Recovery and Resolution Plans (RRPs) (Key Attribute 11) - RRPs,consisting of a recovery plan and a resolution plan, are required for allG-SIFIs and any other firms that could be systemically significant orcritical if they fail.- The recovery plan (prepared by the firm) should identify options torestore financial strength and viability when the firm comes under severestress. The responsibility for developing, maintaining and executing therecovery plan lies with the firm.- The resolution plan (prepared by the authorities) should set out howresolution powers would be used to preserve the firm’s systemicallyimportant functions, with the aim of making the resolution of any firmfeasible without severe disruption and without exposing taxpayers to loss.It includes a resolution strategy agreed by the home authorities incooperation with key host authorities and an operational resolution planthat provides further detail on how the authorities would implement thestrategy.The home resolution authority should lead the development of the groupresolution plan for a G-SIFI in coordination with the firm’s CMG.Host resolution authorities may maintain their own resolution plans forthe firm’s operations in their jurisdiction, cooperating with the homeauthority to ensure that the plan is as consistent as possible with thegroup plan.RRPs are expected to be regularly updated and evolve over time.They should be subject to at least annual reviews by the relevant CMG. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 187. P a g e | 187To promote ownership at top level and ensure that key decision makersare sufficiently informed and involved in the process, the resolutionstrategies should also be subject to regular reviews by top officials ofhome and relevant host supervisory and resolution authorities.Resolvability assessments (Key Attribute 10) - Resolvability assessmentsevaluate the feasibility of resolution strategies and their credibility in lightof the likely impact of the firm’s failure on the financial system and theoverall economy.Resolvability assessments should help identify any remaining barriers toresolution, and should inform the development and further improvementof the resolution plan.3.2 Status of implementation of the Key Attributes directed atG-SIFIsConsiderable but uneven progress has been made in implementing theG-SIFI-specific recovery and resolution planning requirements.However, it is important to recognise that resolution planning is aniterative process, in which strategies and plans are developed andamended to take account of changing circumstances, including changesin financial markets, firms’ internal organisation and structures, and innational legal resolution regimes and funding arrangements.As such, they need to be maintained as living documents which areimproved and updated over time.- Crisis Management Groups - CMGs have been established for nearly all of the 29 G-SIFIs designated in November 2011. CMG membership includes the prudential supervisor, central bank and, where it is a separate authority, the resolution authority of the home and key host countries. In some cases, the finance ministry of the home or host jurisdiction participates in a restricted manner – restrictions being necessary to protect the confidentiality of firm-specific supervisory information. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 188. P a g e | 188 Senior level engagement, with meetings at the level of Heads of Supervision and General Counsel, has proved critical in advancing recovery and resolution planning work within CMGs.- Recovery plans - Initial reviews of recovery plans have taken place for most G-SIFIs, though in-depth reviews are still in progress. These reviews have highlighted a need for greater severity in the hypothetical stress scenarios and for a more exhaustive analysis with regard to impediments to the implementation of recovery measures, taking into account interconnections between group entities and constraints arising from the legal framework.- Resolution strategies and operational plans, resolvability assessments and cooperation agreements - CMGs have been focusing more recently on developing a clearly articulated “resolution strategy” for their respective G-SIFIs. These strategies outline, at a high level, the strategic approach to resolution that is likely to be adopted should the need arise, but they do not prescribe the precise course of action that the authorities will pursue or preclude the development of fall-back options, given the need to consider the circumstances existing at the time of a resolution. The resolution strategies should give the necessary direction to the next stage of work in the CMGs, which should aim to develop detailed operational resolution plans to implement the strategies and to finalise COAGs. Home authorities for each G-SIFI are to propose a basic resolution strategy to key host authorities for discussion within CMGs, with top-level participation, before the end of 2012.As this work has progressed, it has become clear that certain aspectswould benefit from deeper examination, including of the emerginglessons and that it would be beneficial to document this in the form ofguidance to CMGs (see Section 3.3). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 189. P a g e | 1893.3 Further guidance for the recovery and resolution planningprocessTo support the work described in Section 3.2, the FSB will shortly bereleasing a consultative document (“Recovery and Resolution Planning:Making the Key Attributes Operational” seeking comments from thepublic on specific aspects of recovery and resolution planning forG-SIFIs:(i) The nature of the stress scenarios and triggers for recovery action thatshould be used in G-SIFIs’ recovery plans, and the extent to which planslink specific scenarios and triggers to specific recovery options;(ii) The development of resolution strategies and operational resolutionplans tailored to different group structures, drawing on two stylisedapproaches to resolution: a ‘single point of entry’ approach by whichgroup resolution takes place primarily through action by the homeauthority at the level of the parent or holding company; and a ‘multiplepoint of entry’ approach whereby resolution actions are taken by multipleauthorities along national, regional or functional lines; and(iii) The identification of the critical functions and critical shared servicesthat would need to be continued in resolution for reasons of systemicstability.3.4 Coordination with host jurisdictions with a systemic G-SIFIpresenceFor reasons of operational efficiency, participation in CMGs should belimited to authorities from the home and key host jurisdictions.However, the failure of a G-SIFI may have an impact on financial stabilityin other host jurisdictions that are not included in the CMG.The Key Attributes therefore provide that home authorities of G-SIFIsshould establish a process to ascertain which other jurisdictions assessthe local operations of a G-SIFI as systemically important to the localfinancial system, and should ensure that appropriate arrangements for _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 190. P a g e | 190communication, cooperation and information sharing with suchnon-CMG jurisdictions are in place.Home authorities and CMGs may also wish to consider for this purposethe principles that the BCBS has developed to identify domesticsystemically important banks.The FSB will develop further guidance for arrangements and proceduresfor cooperation and information sharing with host authorities for which aG-SIFI’s operations are locally systemic but that are not represented onthe CMG.3.5 Review process to assess G-SIFI resolvabilityImplementation of all G-SIFI resolution requirements, includingresolution strategy, planning, resolvability assessments and COAGs, willbe reviewed through resolvability assessments conducted by theresolution authorities and CMGs as well as through a resolvabilityassessment process for G-SIFIs that the FSB expects to launch in 2013.The process should ensure adequate and consistent reporting on theimplementation of all G-SIFI resolution requirements across institutions.It should help identify instances of incomplete implementation andhighlight material recurring issues that need to be addressed at policylevel.3. Progress report on Increasing the Intensity and Effectivenessof SIFI SupervisionThis report concludes that further steps are needed to make supervisionmore proactive and effective.It notes that the IMF-World Bank’s Financial Stability AssessmentPrograms continue to indicate that problems exist in countries meetingthe requirements for effective supervision.The report makes further recommendations to support continuousimprovement in SIFI supervision, in particular of G-SIFIs: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 191. P a g e | 191- More intense SIFI supervision. Supervisors should be more proactive in assessing succession planning, risk culture, the effectiveness of Boards and senior management, and stress testing processes at firms.- Assessment of effective supervision. Governments should commit to implement the various standard setters’ Core Principles for effective supervision, including official mandates, resources and independence of supervisors. The IMF and World Bank should actively monitor progress.- Operational risk. The BCBS should update its capital requirements for operational risk by the end of 2014, as operational risk has been a prominent factor in recent loss events at financial institutions.- Supervisory colleges. The FSB and standard setters should intensify efforts to increase the effectiveness of supervisory colleges, including through the adequate exchange of information and cooperation within core supervisory colleges.Increasing the Intensity and Effectiveness of SIFI SupervisionProgress Report to the G20 Ministers and GovernorsExecutive SummaryIn the aftermath of the financial crisis, the Financial Stability Board (FSB)and the G20 Leaders identified as a priority the need for more intense andeffective supervision particularly as it relates to systemically importantfinancial institutions (SIFIs).Increasing the intensity and effectiveness of supervision is a key pillar ofthe FSB’s SIFI framework, along with requiring higher loss absorbencyand facilitating the resolvability of failing financial institutions.In this third report, members of the FSB Supervisory Intensity andEffectiveness group (SIE) observe that weak risk controls at financialinstitutions are still being witnessed and there remains room for _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 192. P a g e | 192improvement in supervision to ensure that it is effective, proactive andoutcomes-focused.The International Monetary Fund (IMF) and World Bank FinancialSector Assessment Program (FSAP) continue to identify problems in thefundamental requirements for effective supervision, such as the coreprinciples for official mandates, resources, and independence.To some extent this underscores a point made in 2010: changes insupervisory intensity and effectiveness are challenging to implementquickly as it takes a change in the preconditions for supervision, as well aschanges in culture and different types of skills and resource levels.This report covers areas where supervisory practice is becoming morerobust, while noting areas where supervisory practice still needs to beimproved.One major change in many countries is a move to more extensive anddeeper engagement with systemically important firms.This is evidenced by more frequent interaction with Boards, and in somecases more proactive engagement with firms in relation to their processfor filling critical roles. Such efforts require seasoned judgement bysupervisors.For some, this will be seen as stepping into areas that typically residewithin the remit of the firm’s management; for supervisors it reflects thesignificant externalities that exist with SIFIs, thereby requiring morerobust succession planning and appointment processes for key positions,particularly leaders of key control functions.In addition, this report discusses the need for supervisors to become moreactive in explicitly assessing risk culture at firms.While light-touch supervision has been clearly rejected, supervisors arere-considering the range of approaches required to ensure effectivesupervision. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 193. P a g e | 193For example, during the 1990s and early 2000s there was a move awayfrom detailed assessments of profits and losses (P&L) and financial data(which were very time consuming) toward assessments of controls withinfinancial institutions – a necessary move as financial institutions becamemore complex.However the pendulum may have swung too far away from analysis of thefundamental, strategic risks that underlie the sustainability of financialinstitutions’ business models.The SIE will explore this issue further, with a view to identifying bestpractice approaches that could be adopted.In order to remain effective, supervisory focus needs to change withchanging risks and circumstances.As an example, this report highlights the importance of zeroing in onoperational risk at G-SIFIs, which has been a key risk in recent loss eventsat financial institutions.This risk will continue to increase as financial institutions seek new waysto generate earnings, such as further expanding into wealth managementand other revenue generating areas with low risk-weighted assets andrequired capital.To the extent that operational risk provides a broad, high level threat tothe firm’s business strategy, supervisors should satisfy themselves thatBoards and senior management dedicate sufficient attention andresources to the management of operational risk with regard toprevention and control.Moreover, aspects of operational risk, such as business continuity andinformation security, cannot be addressed by adding capital.No supervisory system can catch everything.The main responsibility for identifying and managing risk rests with eachfirm’s management, whose risk managers, compliance and internal audit _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 194. P a g e | 194personnel will always greatly outnumber the resources available tosupervisors.The more – and more sophisticated – activity of financial institutions hasincreased the array and intensity of the risks to which institutions areexposed.Risk-based supervision seeks to address this through deploying limitedsupervisory resources to the riskiest institutions and areas, prioritisedbased on an assessment of the risks therein.Other institutions and areas will, however, continue to present risks andsupervisory authorities will lack the resources to examine everything.As such, supervisory approaches and areas of focus need to beperiodically reviewed to confirm that, for instance, institutions and areaspreviously classified as “low or moderate risk” still warrant thisassessment.Effective supervision requires finding the right balance between focusingon areas of higher risk while also ensuring some periodic coverage of allaspects, including, for example, those that might prove risky ex post.Striking the right balance is an ongoing challenge; however, regulatorydevelopments since the global financial crisis should allow supervisors toexplore and leverage off deeper information sets and analysis.This may include the information that can be made available from centralrepositories and other centralised sources of financial data to trackanomalies in the market, and information from implementation ofrecovery and resolution plans which provide supervisors with newinsights.The financial system is composed of institutions of many forms andshapes.While supervisory approaches to second-tier institutions in somecountries might still rely on more traditional, risk-based approaches that _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 195. P a g e | 195call for a lesser degree of (or no) supervisory intensity, both the eventsduring the crisis (e.g. Northern Rock) and recent events (e.g. the Spanishcrisis) clearly demonstrate that small institutions can pose their ownchallenges to stability as a result of geographic and productconcentration.The overall supervisory strategy needs to be mindful of suchvulnerabilities.Finally, supervisors need to be equipped with the mandate, independenceand resources to reduce the likelihood of SIFI failures.Resource constraints at supervisory authorities was an area identified inthe 2011 FSB report as hampering progress toward improving theintensity and effectiveness of supervision.To get at the crux of this issue, SIE members completed a survey aimedat assessing the resource constraints at supervisory authorities,particularly in the oversight of SIFIs and G-SIFIs.In addition, the IMF reviewed nine recent FSAP assessments regardingthe adequacy of supervisory resources. Collectively, they describe some ofthe challenges supervisory agencies face in building the capacity requiredfor the supervision of financial institutions, in particular of G-SIFIs.An immediate challenge is determining the supervisory staff required, notonly in regard to numbers but also seniority and skill mix.In summary, while the intensity of supervision has increased since thecrisis, much remains to be done to support continuous improvement inSIFI supervision, in particular of G-SIFIs.When done well, however, effective and high quality supervision leads tomore robust discussions with institutions and early responses toinadequately controlled risk-taking, from which both sides gain. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 196. P a g e | 196To support continuous improvement, the report draws somerecommendations that flow from the discussions among members of theSIE group.List of recommendations:More intense SIFI supervisionThe following recommendations are aimed at intensifying SIFIsupervision but they are also applicable for the supervision of financialinstitutions more generally.1. Supervisors should adopt proactive approaches to assess successionplanning and set performance expectations for key positions within SIFIs(e.g. CEOs, CROs, Internal Auditors), elements that should no longer beregarded as only internal matters for financial institutions.At a minimum, supervisors should require that firms have robustprocesses in place to ensure effective talent management and successionplanning for leaders of control functions and other key positions.They also should be informed of the rationale for appointments to suchpositions in advance of the appointments being made.2. Supervisory interactions with Boards and senior management shouldbe stepped up, in terms of frequency and level of seniority, as should theassessment of the effectiveness of Boards and senior management.Supervisors should satisfy themselves that SIFIs have a robust process inplace to assess applicants for Board-level or senior management positionsand should be informed of the rationale for Board appointments inadvance of such announcements.3. Supervisory authorities should continually re-assess their resourceneeds; for example, interacting with and assessing Boards requireparticular skills, experience and adequate level of seniority. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 197. P a g e | 197Multi-year resource plans, supervisory training programs, long-termcareer paths and development of “soft” skills, such as leadership andcommunication skills, are essential.The SIE will review supervisory approaches to and emphasis on trainingprograms in the coming year.4. Supervisors of G-SIFIs need to ensure that the stress testingundertaken for G-SIFIs is comprehensive and commensurate with therisks and complexities of these institutions and should advance furtherwith the implementation of the BCBS Principles for Sound Stress TestingPractices.5. Supervisors should further explore ways to formally assess risk culture,particularly at G-SIFIs. Establishing a strong risk culture at financialinstitutions is an essential element of good governance.Metrics such as audit findings not being closed and employee surveyresults could allow conclusions about culture to be reached on anongoing basis and before major issues arise due to weak risk cultures.Supervisors should also expect financial institutions to be proactive inthis regard.The SIE will discuss supervisory practices and approaches towardassessing risk culture.6. Supervisors need to evaluate whether their approach to and methods ofsupervision remain effective or have, for example, moved too far towardfocusing on adequacy of capital and control systems, and away fromdetailed assessments of sources of profits and financial data.The SIE will explore this further, including resource implications relativeto the benefits of increasing focus in the latter areas.7. Supervisors need to consider putting in place additional datamanagement and analysis processes for the information available from arange of sources, such as that collected by trade repositories and other _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 198. P a g e | 198centralised sources of financial data, so that key players in markets andmarket anomalies are identified.Supervisors should explore how this new information could be useful inthe supervision of SIFIs.8. By the end of 2013, the FSB SIE group should report on progresstoward addressing these issues and set out best practices orrecommendations for how to enhance the effectiveness of supervision ineach of the above areas.Assessment of effective supervision9. The FSB’s initiative on promoting adherence to regulatory andsupervisory standards focuses on banking supervision, insurancesupervision and securities regulation and views the IMF-World BankFSAPs and ROSCs as central mechanisms for promoting implementationof the BCBS, IAIS and IOSCO core principles.However, there are differences in the assessment methodology andratings nomenclature in regard to the:(i) Use of discretion in the assessments to take account of proportionalityand materiality;(ii) Degree to which standards are aspirational versus minimumrequirements; and(iii) Messages communicated given the different terminology for ratings,particularly when applied to core principles that address similar areas.As the FSB places increased reliance on FSAPs and ROSCs and focuseson SIFIs (which can be from any sector), the FSB, in collaboration withthe IMF, World Bank and standard setters, should examine the pros andcons of harmonising the assessment methodology and ratingsnomenclature. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 199. P a g e | 19910. Emphasis must continue to be placed on the fundamentalrequirements for effective supervision, particularly in regard to officialmandates, resources, and independence as FSAPs and ROSCs continueto indicate problems in these areas.The BCBS, IAIS, and IOSCO core principles provide a clear benchmarkfor what is needed to achieve effective supervision, and the enhancedBCBS and IAIS core principles raise the bar by placing greater emphasison these issues.Governments should commit to implementing the BCBS, IAIS andIOSCO core principles for effective supervision and the IMF/World Bankshould actively monitor progress toward full implementation throughFSAPs and ROSCs.In addition, the FSB should enhance its monitoring of these areas,leveraging for example on the FSB Implementation Monitoring Networkexercise, to ensure that adherence to these core principles becomes amatter of ongoing attention and public disclosure.11. The IAIS should follow-up on its findings from the self-assessmentexercise against ICP 23 on group-wide supervision, including thechallenges and prerequisites for effective group-wide supervision andensuring supervisors have the powers to act at the level of the holdingcompany.The IAIS should report to the SIE by end 2013 on the progress madetoward achieving group-wide supervision and equipping supervisors withthe appropriate powers to act at the level of the holding company.Operational risk12. The recent spate of high-profile, and potentially solvency-threatening,operational risk events and failures have added some urgency tofundamentally reviewing the BCBS approach toward capital foroperational risk. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 200. P a g e | 200The BCBS should update its capital requirements for operational risk bythe end of 2014.13. The BCBS should conduct a peer review on implementation of itsPrinciples for the Sound Management of Operational Risk by June 2014.The BCBS should supplement the review with an assessment of theadditional guidance needed on operational controls within capitalmarkets and trading businesses.14. The BCBS should conduct a study of its Supervisory Guidelines for theAdvanced Measurement Approaches by end 2015 to assess whether anychanges are necessary to enhance their effective implementation and tobring more consistency to supervisory approaches in this area.15. The IAIS should maintain its timeline for launching a peer review in2014 to assess effective implementation of ICP 16 on enterprise riskmanagement for solvency purposes and ICP 17 on capital adequacy, asboth principles cover operational risk.Supervisory colleges16. The FSB, in collaboration with the standard setters, should intensifyefforts to increase the effectiveness of supervisory colleges, particularlyfor G-SIFIs.Given the strong interest and expectation of colleges expressed throughthe G20 process, it is critical that the FSB further consider ways to ensureadequate exchange of information and cooperation within coresupervisory colleges, as well as avenues to promote joint decision makingprocesses in the future.The FSB should submit a report to the September 2013 G20 Summitwhich sets out policy recommendations to address the issues identified ashindering the effectiveness of core supervisory colleges.17. The BCBS and IOSCO should monitor the establishment andcomposition of core (and universal) colleges as well as assess the activity _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 201. P a g e | 201of new colleges and frequency of existing colleges (as the IAIS does) andreport progress to the FSB on an annual basis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 202. P a g e | 202Certified Risk and Compliance Management Professional(CRCMP) distance learning and online certification program.Companies like IBM, Accenture etc.consider the CRCMP a preferredcertificate. You may find more if yousearch (CRCMP preferred certificate)using any search engine.The all-inclusive cost is $297.What is included in the price:A. The official presentations we usein our instructor-led classes (3285 slides)The 2309 slides are needed for the exam, as all the questions arebased on these slides. The remaining 976 slides are for reference.You can find the course synopsis at:www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htmB. Up to 3 Online ExamsYou have to pass one exam.If you fail, you must study the officialpresentations and try again, but you do not need to spend money. Upto 3 exams are included in the price.To learn more you may visit:www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdfC. Personalized Certificate printed in full colorProcessing, printing, packing and posting to your office or home. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  • 203. P a g e | 203D. The Dodd Frank Act and the newRisk Management Standards (976slides, included in the 3285 slides)The US Dodd-Frank Wall Street Reformand Consumer Protection Act is themost significant piece of legislationconcerning the financial servicesindustry in about 80 years.What does it mean for risk andcompliance management professionals?It means new challenges, new jobs, newcareers, and new opportunities.The bill establishes new riskmanagement and corporate governanceprinciples, sets up an early warningsystem to protect the economy from future threats, and brings moretransparency and accountability.It also amends important sections of the Sarbanes Oxley Act. Forexample, it significantly expands whistleblower protections under theSarbanes Oxley Act and creates additional anti-retaliationrequirements.You will find more information at:www.risk-compliance-association.com/Distance_Learning_and_Certification.htm _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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