Monday October 22, 2012 - Top 10 Risk Management News

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Monday October 22, 2012 - Top 10 Risk Management News

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Monday October 22, 2012 - Top 10 Risk Management News

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the weeks agenda, and what is nextDear Member,“You would not expect to put an earthquaketidy in a few minutes, would you?”Who said that?Lord Stamp told that to Keynes. Read the amazing speech given byMervyn King, Governor of the Bank of EnglandAccording to Mervyn King, the new Keynesian model omits a number ofkey factors. “The treatment of expectations is simplified, and neglects thepossibility that expectations themselves may be a source of fluctuations,rather than simply reflecting changes elsewhere in the economy.”Grab a cup of coffee first, and readmore at Number 6 below.Welcome to the Top 11 list (thisweek). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2The Federal Reserve BoardTwo final rules with stress testingrequirements for certain bank holdingcompanies, state member banks, andsavings and loan holding companiesThe Federal Reserve Board on Tuesday published two final rules withstress testing requirements for certain bank holding companies, statemember banks, and savings and loan holding companies.EIOPA Work Programme 2013EIOPA Work Programme 2013 describes the goals anddeliverables for EIOPA in its third year of operation.EIOPA has decided to reshape the structure of its WorkProgramme, following the recommendation from theEuropean Court of Auditors, aligning it with the tasks thatthe Regulation settling EIOPA assigns to the Authority.EBA publishes follow-upreview of banks’ transparencyin their 2011 Pillar 3 reportsThe European Banking Authority(EBA) published today a follow-up review aimed at assessing thedisclosures European banks’ made in response to the Pillar 3requirements set out in the Capital Requirements Directive (CRD). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Speech by Andrew Bailey, ManagingDirector, Prudential Business Unit at theEdinburgh Business SchoolScotland is home to a very important financialservices industry for the UK and Europe andalthough it may at times seem like the changes taking place in regulationappear through London and Whitehall bubbles, they are clearly asrelevant to you as they are to your counterparts in the City of London andCanary Wharf.Financial Instruments andExchange (Amendment) Actof 2012[Briefing Materials]October 2012, Financial ServicesAgency, JapanTwenty years of inflationtargetingSpeech given by Mervyn King, Governor of theBank of EnglandThe Stamp Memorial Lecture, London School ofEconomics _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4Statement by theHonorable, Mr. KorikiJojima Minister ofFinance of Japanand Governor of theIMF for JapanTwenty-Sixth Meeting of the International Monetary and FinancialCommittee, Tokyo, JapanCommuniqué of theTwenty-Sixth Meetingof the IMFCChaired by Mr. Tharman Shanmugaratnam, Deputy Prime Minister ofSingapore and Minister for FinanceTo: BanksBank Holding CompaniesFederally Regulated Trust and LoanCompaniesCooperative Retail AssociationsSubject: New Required Interim Public Capital DisclosureRequirements related to Basel III Pillar 3On June 26, 2012, the Basel Committee on Banking Supervision (BCBS)issued its final rules on the information banks must publicly disclosewhen detailing the composition of their capital. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5Hearing before theCommittee on Economic andMonetary Affairs of the EuropeanParliamentIntroductory statement by Chair of theESRB, BrusselsCapital and Adventure: The Auditor’sRole in the Modern CorporationJames R. Doty, ChairmanInternational Forum of Independent AuditRegulators (IFIAR)London, England _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6The Federal Reserve BoardTwo final rules with stress testingrequirements for certain bank holdingcompanies, state member banks, andsavings and loan holding companiesThe Federal Reserve Board on Tuesday published two final rules withstress testing requirements for certain bank holding companies, statemember banks, and savings and loan holding companies.The final rules implement sections 165(i)(1) and (i)(2) of the Dodd-FrankWall Street Reform and Consumer Protection Act that require supervisoryand company-run stress tests.Nonbank financial companies designated by the Financial StabilityOversight Council will also be subject to certain stress testingrequirements contained in the rules."Implementation of the Dodd-Frank stress test requirement is animportant step in the Federal Reserves efforts to promote the health ofthe financial sector," Governor Daniel K. Tarullo said."Stress testing is a key tool to ensure that financial companies haveenough capital to weather a severe economic downturn without posing arisk to their communities, other financial institutions, or to the generaleconomy."The Federal Reserve will begin conducting supervisory stress tests underthe final rules this fall for the 19 bank holding companies that participatedin the 2009 Supervisory Capital Assessment Program and subsequentComprehensive Capital Analysis and Reviews.The final rules also require these companies and their state-member banksubsidiaries to conduct their own Dodd-Frank company-run stress teststhis fall, with the results to be publicly disclosed in March 2013. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7In general, other companies subject to the Boards final rules forDodd-Frank stress testing will be required to comply with the final rulebeginning in October 2013.Companies with between $10 billion and $50 billion in total assets thatbegin conducting their first company-run stress test in in the fall of 2013will not have to publicly disclose the results of that first stress test.The Boards two final rules revise portions of the Federal Reserves noticeof proposed rulemaking to implement the enhanced prudential standardsand early remediation requirements established under the Dodd-FrankAct.The Board coordinated closely with the Office of the Comptroller of theCurrency and the Federal Deposit Insurance Corporation to ensure thatfinal stress testing rules issued by the agencies are consistent andcomparable.The Board also coordinated with the Federal Insurance Office as requiredby the Dodd-Frank Act.The Federal Reserve will release the scenarios for this years supervisoryand company-run stress tests no later than November 15, 2012.As required by the Dodd-Frank Act, the scenarios will describehypothetical baseline, adverse, and severely adverse conditions, withpaths for key macroeconomic and financial variables.To help firms prepare to estimate their losses and revenues under thescenarios, the Federal Reserve on Tuesday released historical data forvariables likely to be used in the scenarios.A revised version of these historical data, reflecting the latest information,will be published along with the scenarios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8Important PartsFEDERAL RESERVE SYSTEMAnnual Company-Run Stress Test Requirements for BankingOrganizations with Total Consolidated Assets over $10 Billion Other thanCovered CompaniesAGENCY: Board of Governors of the Federal Reserve System (Board).ACTION: Final rule.SUMMARY: The Dodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank Act or Act) requires the Board to issueregulations that require financial companies with total consolidatedassets of more than $10 billion and for which the Board is the primaryfederal financial regulatory agency to conduct stress tests on an annualbasis.The Board is adopting this final rule to implement the company-runstress test requirements in section 165(i)(2) of the Dodd-Frank Actregarding company-run stress tests for bank holding companies with totalconsolidated assets greater than $10 billion but less than $50 billion andstate member banks and savings and loan holding companies with totalconsolidated assets greater than $10 billon.This final rule does not apply to any banking organization with totalconsolidated assets of less than $10 billion.Furthermore, implementation of the stress testing requirements for bankholding companies, savings and loan holding companies, and statemember banks with total consolidated assets of greater than $10 billionbut less than $50 billion is delayed until September 2013.DATES: The rule is effective on November 15, 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9BackgroundThe Board has long held the view that a banking organization, such as abank holding company or insured depository institution, should operatewith capital levels well above its minimum regulatory capital ratios andcommensurate with its risk profile.A banking organization should also have internal processes for assessingits capital adequacy that reflect a full understanding of its risks andensure that it holds capital commensurate with those risks.Moreover, a banking organization that is subject to the Board’s advancedapproaches risk-based capital requirements must satisfy specificrequirements relating to their internal capital adequacy processes in orderto use the advanced approaches to calculate its minimum risk-basedcapital requirements.Stress testing is one tool that helps both bank supervisors and a bankingorganization measure the sufficiency of capital available to support thebanking organization’s operations throughout periods of stress.The Board and the other federal banking agencies previously havehighlighted the use of stress testing as a means to better understand therange of a banking organization’s potential risk exposures.In particular, as part of its effort to stabilize the U.S. financial systemduring the recent financial crisis, the Board, along with other federalfinancial regulatory agencies and the Federal Reserve system, conductedstress tests of large, complex bank holding companies through theSupervisory Capital Assessment Program (SCAP).The SCAP was a forward-looking exercise designed to estimate revenue,losses, and capital needs under an adverse economic and financial marketscenario.By looking at the broad capital needs of the financial system and thespecific needs of individual companies, these stress tests providedvaluable information to market participants, reduced uncertainty about _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10the financial condition of the participating bank holding companiesunder a scenario that was more adverse than that which was anticipatedto occur at the time, and had an overall stabilizing effect.Building on the SCAP and other supervisory work coming out of thecrisis, the Board initiated the annual Comprehensive Capital Analysis andReview (CCAR) in late 2010 to assess the capital adequacy and theinternal capital planning processes of large, complex bank holdingcompanies and to incorporate stress testing as part of the Board’s regularsupervisory program for assessing capital adequacy and capital planningpractices at large bank holding companies.The CCAR represents a substantial strengthening of previous approachesto assessing capital adequacy and promotes thorough and robustprocesses at large banking organizations for measuring capital needs andfor managing and allocating capital resources.The CCAR focuses on the risk measurement and management practicessupporting organizations’ capital adequacy assessments, including theirability to deliver credible inputs to their loss estimation techniques, aswell as the governance processes around capital planning practices.In the wake of the financial crisis, Congress enacted the Dodd-Frank Act,which requires the Board to issue regulations that require bank holdingcompanies with total consolidated assets of $50 billion or more (largebank holding companies) and nonbank financial companies that theFinancial Stability Oversight Committee has designated to be supervisedby the Board (together, covered companies) to conduct stress testssemi-annually, and requires other financial companies with totalconsolidated assets of more than $10 billion and for which the Board is theprimary federal financial regulatory agency to conduct stress tests on anannual basis (company-run stress tests).The Act requires that the Board issue regulations that:(i) Define the term “stress test” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11(ii) Establish methodologies for the conduct of the company-run stresstests that provide for at least three different sets of conditions, includingbaseline, adverse, and severely adverse conditions(iii) Establish the form and content of the report that companies subjectto the regulation must submit to the Board(iv) Require companies to publish a summary of the results of therequired stress tests.On January 5, 2012, the Board invited public comment on a notice ofproposed rulemaking (proposal or NPR) that would implement theenhanced prudential standards required to be established under section165 of the Dodd-Frank Act and the early remediation requirementsestablished under Section 166 of the Act, including proposed rulesregarding company-run stress tests.The proposed rules would have required each bank holding company,state member bank, and savings and loan holding company with morethan $10 billion in total consolidated assets to conduct an annualcompany-run stress test using data as of September 30 of each year andthe three scenarios provided by the Board.In addition, each state member bank, bank holding company, andsavings and loan holding company would be required to disclose asummary of the results of its company-run stress tests within 90 days ofsubmitting the results to the Board.The Dodd-Frank Act mandates that the OCC and the FDIC adopt rulesimplementing stress testing requirements for the depository institutionsthat they supervise, and the OCC and FDIC invited public comment onproposed rules in January of 2012.The Board is finalizing the stress testing frameworks in two separaterules.First, the Board is issuing this final rule, which implements thecompany-run stress testing requirements applicable to bank holding _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12companies with total consolidated assets greater than $10 billion but lessthan $50 billion and savings and loan holding companies and statemember banks with total consolidated assets greater than $10 billion.Second, the Board is concurrently issuing a final rule implementing thesupervisory and semi-annual company-run stress testing requirementsapplicable to large bank holding companies and nonbank financialcompanies supervised by the Board.Overview of CommentsThe Board received approximately 100 comments on its NPR onenhanced prudential standards and early remediation requirements.Approximately 40 of these comments pertained to the proposed stresstesting requirements.Commenters ranged from individual banking organizations to trade andindustry groups and public interest groups.In general, commenters expressed support for stress testing as a valuabletool for identifying and managing both microand macro-prudential risk.However, several commenters recommended changes to, or clarificationof, certain provisions of the proposed rule, including its timeline forimplementation, reporting requirements, and disclosure requirements.Commenters also urged greater interagency coordination regarding stresstests.A. Delayed compliance dateCommenters suggested that companies with total consolidated assets lessthan $50 billion that have not previously been subject to stress-testingrequirements need more time to develop the systems and procedures tobe able to conduct company-run stress tests and to collect the informationthat the Board may require in connection with these tests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13In response to these comments and to reduce burden on theseinstitutions, the final rule requires most bank holding companies, savingsand loan holding companies, and state member banks to conduct theirfirst stress test in the fall of 2013.In addition, the final rule requires bank holding companies, savings andloan holding companies, and state member banks with less than $50billion in total consolidated assets to begin publicly disclosing their stresstest results in 2015 with respect to the stress test conducted in the fall of2014.Banking organizations that become subject to the rule’s requirementsafter November 15, 2012 must comply with the requirements beginning inthe fall of the calendar year that follows the year the company meets theasset threshold, unless that time is extended by the Board in writing.For example, a company that becomes subject to the rule on March 31,2013 must conduct its first stress test in the fall of 2014 and report theresults in 2015.B. TailoringThe proposed rule would have applied consistent annual company-runstress test requirements, including the compliance date and thedisclosure requirements, to all banking organizations with totalconsolidated assets of more than $10 billion.The Board sought public comment on whether the stress testingrequirements should be tailored, particularly for financial companies thatare not large bank holding companies.Several commenters expressed concern that the NPR that would haveapplied stress testing requirements previously applicable only to largebank holding companies, such as those conducted under the CCAR, tosmaller, less complex banking organizations with smaller systemicfootprints. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14The Board recognizes that bank holding companies, savings and loanholdings companies, and state member banks with total consolidatedassets less than $50 billion are generally less complex and pose morelimited risk to U.S. financial stability than larger banking organizations.As a result, the Board has modified the requirements in the final rule forthese institutions, and expects to use a tailored approach inimplementation.The final rule modifies the requirements for smaller bankingorganizations in a number of ways.First, as noted above, most banking organizations, other than statemember bank subsidiaries of the large bank holding companies thatparticipated in the SCAP, are not required to conduct their first stress testuntil 2013.The final rule also provides a longer period for smaller bankingorganizations to conduct their stress tests.Under the final rule, smaller banking organizations, other than statemember bank subsidiaries of SCAP bank holding companies, are notrequired to report the results of the stress test until March 31.The final rule also modifies the public disclosure requirements, generallyrequiring less detailed disclosure for smaller banking organizations thanfor larger banking organizations.Separately, the Board intends to seek comment on reporting forms thatsmaller banking organizations would use in reporting the results of theirstress tests to the Board, which are expected to be significantly morelimited than the reporting forms applicable to large bankingorganizations.Banking organizations may be required to include additionalcomponents in their adverse and severely adverse scenarios or to useadditional scenarios in their stress tests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15The Board expects to apply such additional components and additionalscenarios to large, complex banking organizations.For example, the Board expects to require large banking organizationswith significant trading activities to include global market shockcomponents in their adverse and severely adverse scenarios, and mayrequire large or complex banking organizations to use additionalcomponents in the adverse and severely adverse scenarios or to useadditional scenarios that are designed to capture salient risks to specificlines of business.Finally, the Board plans to issue supervisory guidance to provide moredetail describing supervisory expectation for company-run stress tests.This guidance will be tailored to banking organizations with totalconsolidated assets greater than $10 billion but less than $50 billion.C. CoordinationMany commenters emphasized the need for the federal banking agenciesto coordinate stress testing requirements for parent holding companiesand depository institution subsidiaries and more generally in regard tostress testing frameworks.Commenters recommended that the Board, the Office of the Comptrollerof the Currency (OCC), and the Federal Deposit Insurance Corporation(FDIC) coordinate in implementing the Dodd-Frank Act stress testingrequirements in order to minimize regulatory burden.Commenters asked that the agencies eliminate duplicative requirementsand use an interagency forum, like the Federal Financial InstitutionsExamination Council, to develop common forms, policies, procedures,assumptions, methodologies, and application of results.The Board has coordinated closely with the FDIC and the OCC to help toensure that the company-run stress testing regulations are consistent andcomparable across depository institutions and depository institutionholding companies and to address any burden that may be associated _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16with having multiple entities within one organizational structure subjectto stress testing requirements.The Board anticipates that it will continue to consult with the FDIC andOCC in the implementation of the final rule, and in particular, in thedevelopment of stress scenarios.The Board plans to develop scenarios each year in close consultation withthe FDIC and the OCC, so that, to the greatest extent possible, a commonset of scenarios can be used for the supervisory stress tests and the annualcompany-run stress tests across various banking entities within the sameorganizational structure.D. Consolidated publication and group-wide systems andmodelsIn addition to requesting better coordination, commenters inquired as towhether a company-run stress test conducted by a parent holdingcompany would satisfy the stress testing requirements applicable to thatholding company’s subsidiary depository institutions.Commenters recommended that, in order to reduce burden, the Boarddevelop and require the use of a single set of scenarios for a bank holdingcompany and any depository institution subsidiary of the bank holdingcompany, if the Board imposed separate stress testing requirements onboth the bank holding company and bank.In order to reduce burden on banking organizations, the final ruleprovides that a subsidiary depository institution generally will disclose itsstress testing results as part of the results disclosed by its bank holdingcompany parent.Disclosure by the bank holding company of its stress test results andthose of any subsidiary state member bank generally will satisfy anydisclosure requirements applicable to the state member bank subsidiary.Moreover, a state member bank that is controlled by a bank holdingcompany may rely on the systems and models of its parent bank holding _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17company if its systems and models fully capture the state member bank’srisks.For example, under those circumstances, the bank holding company andstate member bank may use the same data collection processes andmethods and models for projecting and calculating potential losses,pre-provision net revenues, provision for loan and lease losses, and proforma capital positions over the stress testing planning horizon.Description of the Final RuleScope of ApplicationThe final rule applies to any bank holding company with average totalconsolidated assets of greater than $10 billion but less than $50 billion,and any state member bank and savings and loan holding company thathave average total consolidated assets of more than $10 billion (“assetthreshold”).Average total consolidated assets is based on the average of the totalconsolidated assets as reported on bank holding company’s or savingsand loan holding company’s four most recent Consolidated FinancialStatement for Bank Holding Companies (FR Y-9C) or a state memberbank’s four most recent Consolidated Report of Condition and Income(Call Report).If the bank holding company, savings and loan holding company, or statemember bank has not filed the FR Y-9C or Call Report, as applicable, foreach of the four most recent quarters, average total consolidated assetswill be based on the average of the company’s total consolidated assets, asreported on the company’s FR Y-9C or Call Report, as applicable, for themost recent quarter or consecutive quarters.In either case, average total consolidated assets are measured on the as-ofdate of the relevant regulatory report. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18Once a bank holding company, savings and loan holding company, orstate member bank meets the asset threshold, the company will remainsubject to the final rule’s requirements unless and until the totalconsolidated assets of the company are less than $10 billion, as reportedon four consecutively filed FR Y-9C or Call Report, as applicable(measured on the as-of date of the relevant FR Y-9C or Call Report, asapplicable).A bank holding company, state member bank, or savings and loanholding company that has reduced its total consolidated assets to below$10 billion will again become subject to the requirements of this rule if itmeets the asset threshold again at a later date.However, if a bank holding company’s total consolidated assets equal orexceed $50 billion or a savings and loan holding company becomesdesignated as a nonbank financial company supervised by the Board,such companies will be required to conduct stress tests under subpart Gof the Board’s Regulation YY (12 CFR Part 252 Subpart G).Such a company will be required to comply with this final rule until it isrequired to conduct stress tests under subpart G.The final rule does not apply to foreign banking organizations.The Board expects to issue a separate rulemaking on the application ofenhanced prudential standards to foreign banking organizations.A U.S.-domiciled bank holding company subsidiary of a foreign bankingorganization that has total consolidated assets of $10 billion or more issubject to the requirements of this rule.Effective DateUnder the proposal, the company-run stress testing requirementsapplicable to bank holding companies and state member banks wouldhave become effective upon adoption of the final rule. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19A bank holding company, savings and loan holding company, or statemember bank that met the rule’s asset threshold as of the adoption of therule would have been required to immediately comply with itsrequirements.A bank holding company, savings and loan holding company, or statemember bank that met the proposal’s asset threshold more than 90 daysbefore September 30 of a given year would be subject to stress testingrequirements beginning in that calendar year.The Board received comments with regard to the timing of the first stresstest for institutions that meet the asset threshold upon the rule’s effectivedate and for institutions that meet the asset threshold at a later date, andhas modified both aspects of the final rule.1. First Stress Test for Bank Holding Companies and State MemberBanks that Meet the Asset Threshold on or before December 31, 2012Commenters indicated that smaller and mid-sized banking organizationsneed more time to develop the systems and procedures to conductcompany-run stress tests and to collect the information requested by theBoard in connection with these tests.In response to these comments, the Board is delaying the date thatexisting, smaller companies are required to conduct their first stress test,as described below.a. Bank Holding CompaniesUnder the final rule, a bank holding company that meets the assetthreshold on or before December 31, 2012, must conduct its first stress testbeginning in the fall of 2013, unless that time is extended by the Board inwriting.Such a bank holding company is not required to publicly disclose theresults of its stress test until June 2015. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20b. State Member BanksUnder the final rule, a state member bank that meets the asset thresholdon or before November 15, 2012, and is a subsidiary of a bank holdingcompany that participated in the SCAP, or successor to such bankholding company, must comply with the requirements of this subpartbeginning in the fall of 2012, unless that time is extended by the Board inwriting.Any other state member bank that meets the asset threshold on or beforeDecember 31, 2012, must comply with the requirements of this subpartbeginning in the fall of 2013, unless that time is extended by the Board inwriting.If such a state member bank has total consolidated assets of less than $50billion as of December 31, 2012, it is not required to publicly disclose theresults of its stress test until June 2015.2. First Stress Test for Bank Holding Companies and State MemberBanks Subject to Stress Testing Requirements After December 31,2012Commenters similarly expressed concern that bank holding companies,state member banks, and savings and loan holding companies met therule’s asset threshold after the effective date of the final rule would nothave sufficient time to build the systems, contract with outside vendors,recruit experienced personnel, and develop stress testing models that areunique to their organization under the proposed compliance date.In addition, the Federal Advisory Council recommended that the Boardphase in disclosure requirements to minimize risk, build precedent, andallow banks and supervisors to gain experience, expertise, and mutualunderstanding of stress testing models.In response to these comments, the Board extended the compliance dateapplicable to bank holding companies and state member banks thatexceed the final rule’s asset threshold after December 31, 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21Under the final rule, these companies will be required to conduct theirfirst stress tests beginning in the fall of the calendar year after they meetthe asset threshold, unless that time is extended by the Board in writing.3. First Stress Test for Savings and Loan Holding CompaniesUnder the final rule, a savings and loan holding company will not berequired to conduct its first stress test until after it is subject to minimumcapital requirements.A savings and loan holding company that meets the asset threshold whenit becomes subject to minimum capital requirements will be required toconduct this first stress test in the fall of the calendar year after it firstbecomes subject to capital requirements, unless the Board accelerates orextends the time in writing.A savings and loan holding company that meets the asset threshold afterit becomes subject to capital requirements will be required to conduct itsfirst stress test beginning in the fall of the calendar year after it meets theasset threshold, unless that time is extended by the Board in writing.Annual Stress Tests RequirementsTiming of Stress Testing RequirementsThe Board proposed the following timeline for company-run tests in theNPR.The Board would have required an as-of date of September 30 ofinformation to be submitted to the Board.By no later than mid-November of each calendar year, the Board wouldprovide bank holding companies, state member banks, and savings andloan holding companies with scenarios for annual stress tests.By January 5 of the following calendar year, these companies would berequired to submit regulatory reports to the Board on their stress tests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22By early April of that calendar year, companies would be required to makepublic disclosure of results.Several commenters provided suggestions on the proposed timeline.Those comments focused on the as-of date for data to be submitted bybank holding companies, state member banks, and savings and loanholding companies, the date for submitting results to the Board, and thedates when public disclosures of stress test results are to be made.For instance, some commenters suggested that the Board should use datacollected at as-of dates other than September 30, such as June 30 orDecember 31, and make corresponding changes to the timing of publicdisclosure in order to reduce burden on companies during the year-endperiod.One commenter suggested having a floating submission date, allowingorganizations to submit their results at the point in the year when it ismost convenient.Some commenters also requested that the Board release the scenariosearlier to provide banking organizations more time to prepare therequired reports for the stress tests.The final rule maintains the as-of date for data for the purposes of theannual company-run stress tests so that the same set of scenarios can beused to conduct annual company-run stress tests for large bank holdingcompanies and their subsidiary state-member banks.The Board believes, and several commenters noted, that such alignmentis beneficial.Furthermore, using the same scenarios for all firms subject to stresstesting requirements will decrease market confusion, minimize burdenon institutions, and provide for comparability across institutions.As stated in the concurrent final rule for covered companies, it wasnecessary to maintain the September 30 as-of date for stress test _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23requirements for large bank holding companies in order to align thestress testing requirements with the capital planning requirementsapplicable to these institutions under section 225.8 of the Board’sRegulation Y.Commenters requested that the Board release the scenarios earlier in theannual stress test cycle to provide banking organizations more time toprepare the reports for company-run stress tests.Under the final rule, the Board will provide descriptions of the baseline,adverse, and severely adverse scenarios generally applicable to companiesno later than November 15 of each year, and provide any additionalcomponents or scenarios by December 1.The Board believes that providing scenarios earlier than November couldresult in the scenarios being stale, particularly in a rapidly changingeconomic environment, and that it is important to incorporate economicor financial market data that are as current as possible while providingsufficient time for companies to incorporate the scenarios in their annualcompany-run stress tests.Commenters suggested that smaller banking organizations be allowedadditional time to conduct their company-run stress tests in light ofresource constraints faced by these institutions.In response to these comments, the Board has delayed the timing ofreport submission to the Board for most banking organizations.Consistent with the requirements imposed on large bank holdingcompanies under subpart G, the final rule requires a state member bankthat is controlled by a bank holding company that has average totalconsolidated assets of $50 billion or more and a savings and loan holdingcompany that has average total consolidated assets of $50 billion or moreto conduct its stress test and submit its results to the Board by January 5,unless that time is extended by the Board in writing. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24All other bank holding companies, savings and loan holding companies,and state member banks are required to conduct their stress tests andsubmit the results to the Board by March 31.Commenters also noted that the proposed public disclosure deadlineswould interfere with so-called “quiet periods” that some publicly tradedbanking organizations enforce in the lead up to earnings announcements.These quiet periods are designed to limit communications that coulddisseminate proprietary company information prior to earningsannouncements.In light of these comments, the Board adjusted the disclosure date toavoid interfering with firms’ quiet periods.Under the final rule, a savings and loan holding company with totalconsolidated assets of $50 billion or more or a state member bank that is asubsidiary of a bank holding company with total consolidated assets of$50 billion or more is required to disclose the results of its stress testsbetween March 15 and March 31 of each year.All other banking organizations will be required to disclose their resultsbetween June 15 and June 31.ScenariosThe proposal provided that the Board would publish a minimum of threedifferent sets of economic and financial conditions, including baseline,adverse, and severely adverse scenarios, under which the Board wouldconduct its annual analyses and companies would conduct their annualcompany-run stress tests.The Board would update, make additions to, or otherwise revise thesescenarios as appropriate, and would publish any such changes to thescenarios in advance of conducting each year’s stress test. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25Commenters suggested that significant changes in scenarios from year toyear could cause a banking organization’s stress testing results todramatically change.To ameliorate this volatility, commenters suggest that the federalbanking agencies have a uniform approach for identifying stressscenarios or establish a “quantitative severity limit” in the final rule toensure that scenarios do not drastically change from year to year.Commenters pointed out that consistency in annual scenariodevelopment will make comparability of stress test results betweeninstitutions and across time periods more accurate, increase marketconfidence in the results of stress tests, and make for more dependablecapital planning by banking organizations.Commenters also requested the opportunity to provide input on thescenarios.The Board believes that it is important to have a consistent andtransparent framework to support scenario design.To further this goal, the final rule clarifies the definition of “scenarios”and includes definitions of baseline, adverse, and severely adversescenarios.In the final rule, “scenarios” are defined as those sets of conditions thataffect the U.S. economy or the financial condition of a bank holdingcompany, savings and loan holding company, or state member bank thatthe Board annually determines are appropriate for use in thecompany-run stress tests, including, but not limited to, baseline, adverse,and severely adverse scenarios.The baseline scenario is defined as a set of conditions that affect the U.S.economy or the financial condition of a bank holding company, savingsand loan holding company, or state member bank, and that reflect theconsensus views of the economic and financial outlook. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26The adverse scenario is defined as a set of conditions that affect the U.S.economy or the financial condition of a bank holding company, savingsand loan holding company, or state member bank that are more adversethan those associated with the baseline scenario and may include tradingor other additional components.The severely adverse scenario is defined as a set of conditions that affectthe U.S. economy or the financial condition of a bank holding company,savings and loan holding company, or state member bank and that overallare more severe than those associated with the adverse scenario and mayinclude trading or other additional components.In general, the baseline scenario will reflect the consensus views of themacroeconomic outlook expressed by professional forecasters,government agencies, and other public-sector organizations as of thebeginning of the annual stress-test cycle.The Board expects that the severely adverse scenario will, at a minimum,include the paths of economic variables that are generally consistent withthe paths observed during severe post-war U.S. recessions.Each year, the Board expects to take into account of salient risks thataffect the U.S. economy or the financial condition of a bank holdingcompany, savings and loan holding company, and state member bankthat may not be observed in a typical severe recession.The Board expects that the adverse scenario will, at a minimum, includethe paths of economic variables that are generally consistent with mild tomoderate recessions.The Board may vary the approach it uses for the adverse scenario eachyear so that the results of the scenario provide the most value tosupervisors, given the current conditions of the economy and the bankingindustry.Some of the approaches the Board may consider using include, but arenot limited to, a less severe version of the severely adverse scenario or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27specifically capturing, in the adverse scenario, risks that the Boardbelieves should be understood better or should be monitored.The scenarios will consist of a set of conditions that affect the U.S.economy or the financial condition of a bank holding company, savingsand loan holding company, or state member bank over the stress testplanning horizon.These conditions will include projections for a range of macroeconomicand financial indicators, such as real Gross Domestic Product (GDP), theunemployment rate, equity and property prices, and various other keyfinancial variables, and will be updated each year to reflect changes in theoutlook for economic and financial conditions.The paths of these economic variables could reflect risks to the economicand financial outlook that are especially salient but were not prevalent inrecessions of the past.Depending on the systemic footprint and scope of operations andactivities of a company, the Board may require that company to includeadditional components in its adverse or severely adverse scenarios or touse additional scenarios or more complex scenarios that are designed tocapture salient risks to specific lines of business.For example, the Board recognizes that certain trading positions andtrading-related exposures are highly sensitive to adverse market events,potentially leading to large short-term volatility in certain companies’earnings.To address this risk, the Board will require companies with significanttrading activities to include market price and rate “shocks,” as specifiedby the Board, that are consistent with historical or other adverse marketevents.The final rule also provides that the Board may impose this trading shockon a state member bank that is subject to the Board’s market risk rule (12CFR part 208, appendix E) and that is a subsidiary of a bank holdingcompany subject to the trading shock under the final rule or under the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28Board’s company-run stress test rule for covered companies (12 CFR252.144(b)(2)(i)).The Board is making this modification to allow for coordination of thetrading shock between a bank holding company and any state memberbank subsidiary that is subject to the market risk rule.In addition, the scenarios, in some cases, may also include stress factorsthat may not be directly correlated to macroeconomic or financialassumptions but nevertheless can materially affect covered companies’risks, such as factors that affect operational risks.The process by which the Board may require a company to includeadditional components or use additional scenarios is described undersection D.2 of this preamble.Some commenters suggested that the Board adopt a tailored approach toscenarios to better capture idiosyncratic characteristics of each company.For example, commenters representing the insurance industry suggestedthat any stress testing regime applicable to insurance companiesincorporate shocks relating to the exogenous factors that actually impacta particular company, such as a shock to the insurance companysinsurance policy portfolio arising from a natural disaster, andde-emphasize shocks arising from traditional banking activities.In the Board’s view, a generally uniform set of scenarios is necessary toprovide a basis for comparison across companies.However, the Board expects that each company’s stress testing practiceswill be tailored to its business model and lines of business, and that thecompany may not use all of the variables provided in the scenario, if thosevariables are not appropriate to the firm’s line of business, or may addadditional variables, as appropriate.In addition, the Board expects banking organizations to consider otherscenarios that are more idiosyncratic to their operations and associatedrisks, as part of their ongoing internal analyses of capital adequacy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29FEDERAL RESERVE SYSTEMSupervisory and Company-Run Stress Test Requirements forCovered CompaniesAGENCY: Board of Governors of the Federal Reserve System(Board).ACTION: Final rule.SUMMARY: The Dodd-Frank Wall Street Reform and ConsumerProtection Act (Dodd-Frank Act or Act) requires the Board to conductannual stress tests of bank holding companies with total consolidatedassets of $50 billion or more and nonbank financial companies theFinancial Stability Oversight Council (Council) designates forsupervision by the Board (nonbank covered companies, and together,with bank holding companies with total consolidated assets of $50 billionor more, covered companies) and also requires the Board to issueregulations that require covered companies to conduct stress testssemi-annually.The Board is adopting this final rule to implement the stress testrequirements for covered companies established in section 165(i)(1) and(2) of the Dodd-Frank Act.This final rule does not apply to any banking organization with totalconsolidated assets of less than $50 billion.Furthermore, implementation of the stress testing requirements for bankholding companies that did not participate in the Supervisory CapitalAssessment Program is delayed until September 2013.DATES: The rule is effective on November 15, 2012 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30BackgroundThe Board has long held the view that a banking organization, such as abank holding company or insured depository institution, should operatewith capital levels well above its minimum regulatory capital ratios andcommensurate with its risk profile.A banking organization should also have internal processes for assessingits capital adequacy that reflect a full understanding of its risks andensure that it holds capital commensurate with those risks.Moreover, a banking organization that is subject to the Board’s advancedapproaches risk-based capital requirements must satisfy specificrequirements relating to their internal capital adequacy processes in orderto use the advanced approaches to calculate its minimum risk-basedcapital requirements.Stress testing is one tool that helps both bank supervisors and a bankingorganization measure the sufficiency of capital available to support thebanking organization’s operations throughout periods of stress.The Board and the other federal banking agencies previously havehighlighted the use of stress testing as a means to better understand therange of a banking organization’s potential risk exposures.In particular, as part of its effort to stabilize the U.S. financial systemduring the recent financial crisis, the Board, along with other federalfinancial regulatory agencies and the Federal Reserve system, conductedstress tests of large, complex bank holding companies through theSupervisory Capital Assessment Program (SCAP).The SCAP was a forward-looking exercise designed to estimate revenue,losses, and capital needs under an adverse economic and financial marketscenario.By looking at the broad capital needs of the financial system and thespecific needs of individual companies, these stress tests providedvaluable information to market participants, reduced uncertainty about _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31the financial condition of the participating bank holding companiesunder a scenario that was more adverse than that which was anticipatedto occur at the time, and had an overall stabilizing effect.Building on the SCAP and other supervisory work coming out of thecrisis, the Board initiated the annual Comprehensive Capital Analysis andReview (CCAR) in late 2010 to assess the capital adequacy and theinternal capital planning processes of large, complex bank holdingcompanies and to incorporate stress testing as part of the Board’s regularsupervisory program for assessing capital adequacy and capital planningpractices at large bank holding companies.The CCAR represents a substantial strengthening of previous approachesto assessing capital adequacy and promotes thorough and robustprocesses at large banking organizations for measuring capital needs andfor managing and allocating capital resources.The CCAR focuses on the risk measurement and management practicessupporting organizations’ capital adequacy assessments, including theirability to deliver credible inputs to their loss estimation techniques, aswell as the governance processes around capital planning practices.On November 22, 2011, the Board issued an amendment (capital planrule) to its Regulation Y to require all U.S bank holding companies withtotal consolidated assets of $50 billion or more to submit annual capitalplans to the Board to allow the Board to assess whether they have robust,forward-looking capital planning processes and have sufficient capital tocontinue operations throughout times of economic and financial stress.In the wake of the financial crisis, Congress enacted the Dodd-Frank Act,which requires the Board to implement enhanced prudential supervisorystandards, including requirements for stress tests, for covered companiesto mitigate the threat to financial stability posed by these institutions.Section 165(i)(1) of the Dodd-Frank Act requires the Board to conduct anannual stress test of each covered company to evaluate whether thecovered company has sufficient capital, on a total consolidated basis, to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32absorb losses as a result of adverse economic conditions (supervisorystress tests).The Act requires that the supervisory stress test provide for at least threedifferent sets of conditions—baseline, adverse, and severely adverseconditions—under which the Board would conduct its evaluation.The Act also requires the Board to publish a summary of the supervisorystress test results.In addition, section 165(i)(2) of the Dodd-Frank Act requires the Board toissue regulations that require covered companies to conduct stress testssemi-annually and require financial companies with total consolidatedassets of more than $10 billion that are not covered companies and forwhich the Board is the primary federal financial regulatory agency toconduct stress tests on an annual basis (collectively, company-run stresstests).The Act requires that the Board issue regulations that:(i) Define the term “stress test”;(ii) Establish methodologies for the conduct of the company-run stresstests that provide for at least three different sets of conditions, includingbaseline, adverse, and severely adverse conditions;(iii) Establish the form and content of the report that companies subjectto the regulation must submit to the Board; and(iv) Require companies to publish a summary of the results of therequired stress tests.On January 5, 2012, the Board invited public comment on a notice ofproposed rulemaking (proposal or NPR) that would implement theenhanced prudential standards required to be established under section165 of the Dodd-Frank Act and the early remediation requirementsestablished under Section 166 of the Act, including proposed rulesregarding supervisory and company-run stress tests. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33Under the proposed rules, the Board would conduct an annualsupervisory stress test of covered companies under three sets of scenarios,using data as of September 30 of each year as reported by coveredcompanies, and publish a summary of the results of the supervisory stresstests in early April of the following year.In addition, the proposed rule required each covered company to conducttwo company-run stress tests each year: an “annual” company-run stresstest using data as-of September 30 of each year and the three scenariosprovided by the Board, and an additional company-run stress test usingdata as of March 31 of each year and three scenarios developed by thecompany.The proposed rule required each covered company to publish thesummary of the results of its company-run stress tests within 90 days ofsubmitting the results to the Board.Together, the supervisory stress tests and the company-run stress testsare intended to provide supervisors with forward-looking information tohelp identify downside risks and the potential effect of adverse conditionson capital adequacy at covered companies.The stress tests will estimate the covered company’s net income and otherfactors affecting capital and how each covered company’s capitalresources would be affected under the scenarios and will produce proforma projections of capital levels and regulatory capital ratios in eachquarter of the planning horizon, under each scenario.The publication of summary results from these stress tests will enhancepublic information about covered companies’ financial condition and theability of those companies to absorb losses as a result of adverseeconomic and financial conditions.The Board will use the results of the supervisory stress tests andcompany-run stress tests in its supervisory evaluation of a coveredcompany’s capital adequacy and capital planning practices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34In addition, the stress tests will also provide a means to assess capitaladequacy across companies more fully and support the Board’s financialstability efforts.The Dodd-Frank Act mandates that the OCC and the FDIC adopt rulesimplementing stress testing requirements for the depository institutionsthat they supervise, and the OCC and FDIC invited public comment onproposed rules in January of 2012.The Board is finalizing the stress testing frameworks in two separaterules.First, the Board is issuing this final rule, which implements thesupervisory and company-run stress testing requirements for coveredcompanies (final rule).Second, the Board is concurrently issuing a final rule implementingannual company-run stress test requirements for bank holdingcompanies, savings and loan holding companies, and state memberbanks with consolidated assets greater than $10 billion that are nototherwise covered by this rule.The Board is issuing this final rule implementing the stress testingrequirements in advance of the other enhanced prudential standards andearly remediation requirements in order to address the timing of when thestress testing requirements will apply to various banking organizationsand to require large bank holding companies to publicly disclose theresults of their company-run stress tests conducted in the fall of 2012.Description of the Final RuleScope of ApplicationThis final rule applies to any bank holding company (other than a foreignbanking organization) that has $50 billion or more in average totalconsolidated assets and to any nonbank financial company that the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35Council has determined under section 113 of the Dodd-Frank Act must besupervised by the Board and for which such determination is in effect.Average total consolidated assets for bank holding companies is based onthe average of the total consolidated assets as reported on the bankholding company’s four most recent Consolidated Financial Statementfor Bank Holding Companies (FR Y–9C).If the bank holding company has not filed the FR Y-9C for each of thefour most recent consecutive quarters, average total consolidated assetswill be based the average of the company’s total consolidated assets, asreported on the company’s FR Y–9C, for the most recent quarter orconsecutive quarters.In either case, average total consolidated assets are measured on the as-ofdate of the relevant regulatory report.Once the average total consolidated assets of a bank holding companyexceed $50 billion, the company will remain subject to the final rule’srequirements unless and until the total consolidated assets of thecompany are less than $50 billion, as reported on four FR Y-9C reportsconsecutively filed.Average total consolidated assets are measured on the as-of date of theFR Y-9C.The final rule does not apply to foreign banking organizations.The Board expects to issue for public comment a separate rulemaking onthe application of enhanced prudential standards and early remediationrequirements established under the Dodd-Frank Act, including enhancedcapital and stress testing requirements, to foreign banking organizationsat a later date.AU.S.-domiciled bank holding company subsidiary of a foreign bankingorganization that has total consolidated assets of $50 billion or more issubject to the requirements of this final rule _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36ScenariosThe proposal provided that the Board would publish a minimum of threedifferent sets of economic and financial conditions, including baseline,adverse, and severely adverse scenarios, under which the Board wouldconduct its annual analyses and companies would conduct their annualcompany-run stress tests.The Board would update, make additions to, or otherwise revise thesescenarios as appropriate, and would publish any such changes to thescenarios in advance of conducting each year’s stress test.Commenters suggested that significant changes in scenarios from year toyear could cause a banking organization’s stress testing results todramatically change.To ameliorate this volatility, commenters suggest that the federalbanking agencies have a uniform approach for identifying stressscenarios or establish a “quantitative severity limit” in the final rule toensure that scenarios do not drastically change from year to year.Commenters pointed out that consistency in annual scenariodevelopment will make comparability of stress test results betweeninstitutions and across time periods more accurate, increase marketconfidence in the results of stress tests, and make for more dependablecapital planning by banking organizations.Commenters also requested the opportunity to provide input on thescenarios.The Board believes that it is important to have a consistent andtransparent framework to support scenario design.To further this goal, the final rule clarifies the definition of “scenarios”and includes definitions of baseline, adverse, and severely adversescenarios. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37Scenarios are defined as those sets of conditions that affect the U.S.economy or the financial condition of a covered company that the Board,or with respect to the mid-cycle stress test, the covered company,annually determines are appropriate for use in the company-run stresstests, including, but not limited to, baseline, adverse, and severely adversescenarios.The baseline scenario is defined as a set of conditions that affect the U.S.economy or the financial condition of a covered company and that reflectthe consensus views of the economic and financial outlook.The adverse scenario is defined as a set of conditions that affect the U.S.economy or the financial condition of a covered company that are moreadverse than those associated with the baseline scenario and may includetrading or other additional components.The severely adverse scenario is defined as a set of conditions that affectthe U.S. economy or the financial condition of a covered company andthat overall are more severe than those associated with the adversescenario and may include trading or other additional components.In general, the baseline scenario will reflect the consensus views of themacroeconomic outlook expressed by professional forecasters,government agencies, and other public-sector organizations as of thebeginning of the annual stress-test cycle.The Board expects that the severely adverse scenario will, at a minimum,include the paths of economic variables that are generally consistent withthe paths observed during severe post-war U.S. recessions.Each year the Board expects to take into account of salient risks thataffect the U.S. economy or the financial condition of a covered companythat may not be observed in a typical severe recession.The Board expects that the adverse scenario will, at a minimum, includethe paths of economic variables that are generally consistent with mild tomoderate recessions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38The Board may vary the approach it uses for the adverse scenario eachyear so that the results of the scenario provide the most value tosupervisors, given the current conditions of the economy and the bankingindustry.Some of the approaches the Board may consider using include, but arenot limited to, a less severe version of the severely adverse scenario orspecifically capturing, in the adverse scenario, risks that the Boardbelieves should be understood better or should be monitored.The scenarios will consist of a set of conditions that affect the U.S.economy or the financial condition of a covered company over the stresstest planning horizon.These conditions will include projections for a range of macroeconomicand financial indicators, such as real Gross Domestic Product (GDP), theunemployment rate, equity and property prices, and various other keyfinancial variables, and will be updated each year to reflect changes in theoutlook for economic and financial conditions.The paths of these economic variables could reflect risks to the economicand financial outlook that are especially salient but were not prevalent inrecessions of the past.Depending on the systemic footprint and scope of operations andactivities of a company, the Board may use, and require that company touse, additional components in the adverse and severely adverse scenariosor additional or more complex scenarios that are designed to capturesalient risks to specific lines of business.For example, the Board recognizes that certain trading positions andtrading-related exposures are highly sensitive to adverse market events,potentially leading to large short-term volatility in covered companies’earnings.To address this risk, the Board may require covered companies withsignificant trading activities to include market price and rate “shocks” in _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39their adverse and severely adverse scenarios as specified by the Board,that are consistent with historical or other adverse market events.In addition, the scenarios, in some cases, may also include stress factorsthat may not be directly correlated to macroeconomic or financialassumptions but nevertheless can materially affect covered companies’risks, such as factors that affect operational risks.The process by which the Board may require a covered company toinclude additional components in its adverse and severely adversescenarios or to use additional scenarios is described under section III.E.2of this Supplementary Information.The Board plans to publish for comment a policy statement thatdescribes its framework for developing scenarios.Some commenters suggested that the Board adopt a tailored approach toscenarios to better capture idiosyncratic characteristics of each company.For example, commenters representing the insurance industry suggestedthat any stress testing regime applicable to insurance companiesincorporate shocks relating to the exogenous factors that actually impacta particular company, such as a shock to the insurance companysinsurance policy portfolio arising from a natural disaster, andde-emphasize shocks arising from traditional banking activities.In the Board’s view, a generally uniform set of scenarios is necessary toprovide a basis for comparison across companies.However, the Board expects that each company’s stress testing practiceswill be tailored to its business model and lines of business, and that thecompany may not use all of the variables provided in the scenario, if thosevariables are not appropriate to the firm’s line of business, or may addadditional variables, as appropriate.In addition, the Board expects banking organizations to consider otherscenarios that are more idiosyncratic to their operations and associatedrisks as part of their ongoing internal analyses of capital adequacy and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40include company-specific vulnerabilities in their scenarios whencomplying with the Board’s requirements for mid-cycle company-runstress test. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41EIOPA Work Programme 2013EIOPA Work Programme 2013 describes thegoals and deliverables for EIOPA in its third yearof operation.EIOPA has decided to reshape the structure of itsWork Programme, following the recommendationfrom the European Court of Auditors, aligning itwith the tasks that the Regulation settling EIOPAassigns to the Authority.Such change in structure has not affected thehighly ambitious programme presented for 2013,nor the high quality internal standards that informand guide all EIOPA deliverables.The content of this Work Programme is driven by EIOPA role towardsSupervisory and Regulatory Convergence, the core importance thatConsumers have in EIOPA strategy and Mission, and the active role inthe field of Financial Stability and Crisis Management.Relevant projects such as Solvency II will be reshaped, with a clear shiftfrom regulation to supervision.Other areas of work, in particular in the field of pensions, will demandsignificant efforts from EIOPA in terms of sound and quality deliverablesto the European Commission in the frame of their projectedenhancement of pensions regulation.Supervisory tasks, and their convergence, rank high among EIOPApriorities.Concrete deliverables such as a supervisory handbook, an internal modelssupport expert unit, or an enhancement of the role and scope of thecolleges of supervisors will be provided during 2013. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42External relations, within Europe and outside, will continue playing asignificant role in EIOPA deliverables.EIOPA places great value on the formal opinions, and othercontributions, made by its two stakeholder groups for insurance and foroccupational pensions.In addition to its sectoral work, EIOPA’s Chair will take theChairmanship of the Joint Committee of ESAs.All these developments will entail a further growth of the organisation, interms of budget and resources.Staff number, if the Budgetary Authority agrees to the request of EIOPA,will grow up to 112, to achieve the objectives and deliverables set in thisWork Programme.Priorities still have to be made with regards to EIOPA mandate, as theAuthority will only reach its anticipated size in 2020.For 2013, according to EIOPA proposal, the budget will grow from 15.6 to20 million Euro, with a share of 40% from the Commission and 60% fromits Members.If at the end of the budgetary process EIOPA’s budget would not reachthe aforementioned figure, the Work Programme would be reprioritizedand some of the deliverables today incorporated would have to bepostponed.These deliverables are marked green in Annex I of the Work Programme.The language versions of the document’s main part will be madeavailable at a later stage.InsuranceThe European insurance market is the largest in the world. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43Given its importance there will be substantial benefits from theintroduction under Solvency II of a Europe-wide harmonised frameworkwhich provides the right incentives for insurers to better understand,measure and manage their risks.EIOPA has already achieved a great deal in the preparation for SolvencyII.EIOPA is currently consulting on the technical standards and guidelinesin order to complete the legislative framework for Solvency II.Its last quantitative impact study (QIS5) of the impact of Solvency II wasthe most ambitious and comprehensive impact study ever carried out inthe financial sector, involving more than 2,500 insurance companies.It has provided technical contributions during the political discussions onkey aspects of Solvency II such as long term guarantees and reporting.It is already carrying out assessments of whether third countries’insurance frameworks are equivalent to those of the EU’s.In 2013 EIOPA will finalise the standards and guidelines which insuranceundertakings require as part of the Solvency II framework.These will comprise the 53 standards and guidelines mandated bylegislation and on its own initiative a guideline on external scrutiny oraudit for the purposes of Solvency II publicly disclosed information.The standards and guidelines will cover the solvency capitalrequirements, own funds, internal models, group supervision, supervisorytransparency and accountability, reporting and disclosure, valuation, thevaluation of assets and liabilities other than technical provisions, andgovernance.In 2013 EIOPA will also continue to identify, scope and implement theoperational tasks required of it under Solvency II.This includes the following _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44- Publishing a list of authorised firms,- Collecting and publishing a report about the use of capital add-ons and the extent to which they are consistently applied across member states- Deriving and publishing the risk free rate.- Mapping the ratings of External Credit Assessment Institutions.- Publishing lists of typologies of regional governments and local authorities, exposures to whom are to be treated as exposures to the central government.- Specifying adjustments to be made for currencies pegged to the euro.- Choosing the equity index for the equity dampening mechanism- Determining, at the request of national supervisory authorities or on its own initiative, the existence of an exceptional fall in financial markets for the application of the extension of the SCR recovery period- Reporting to the European Parliament on the functioning of supervisory colleges and the appointment of the group supervisor.These specific operational tasks are accompanied by generic tasks whichhave been given to EIOPA as part of the new supervisory structure.This includes the power for binding mediation, further work onequivalence assessments, and membership of colleges of supervisors.EIOPA will consider what should be the configuration of working groupsand other mechanisms to deliver this next phase of insurance regulation.On its own initiative EIOPA will also deliver the following during 2013: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45- Start working on best practices with respect to aspects of the Supervisory Review Process for supervisors as a practical step to contributing to a common supervisory culture among supervisors- Develop a centre of expertise on the use of internal models under Solvency II- Collect data in EIOPA for further use for the purposes of financial stability and micro-prudential analysis, as part of implementing EIOPA’s database strategy EIOPA will continue in 2013 to build links between the Solvency II framework and other areas.It will complete the current assessments of equivalence of third countriesand begin to assess the impact on consumer choice of the solvency IIframework.EIOPA’s plans are naturally dependent on political and otherdevelopments, especially with respect to the quantitative supervisoryframework.EIOPA will also enter a process of maintenance of its standards andguidelines; this maintenance includes:- The revision of standards and guidelines already published. - The potential drafting of additional guidelines and recommendations,following the further needs which might be identified throughcommunication with stakeholders and National Supervisory Authorities.CollegesColleges of Supervisors (Colleges) are considered efficient and effectivetools used in supervision of financial institutions, and they are essentialinstruments to enhance mutual understanding among supervisors andconvergence of supervisory practices, with tangible benefits toundertakings, supervisors and policyholders. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46The overall strategic target of EIOPA’s college work is to build theposition of the EEA supervisory community towards the cross borderoperating insurance groups for the benefit of both group and solosupervision.The focus is on combining and leveraging the knowledge and forces ofthe National Supervisory Authorities in the EEA to form a strong andequal supervisory body to effectively deal with centrally organized andmanaged undertakings.According to EIOPA Regulation, day to day supervision as well as the setup and organisation of the Colleges is the responsibility of the NationalSupervisory Authorities.EIOPA as a member of Colleges promotes communication, cooperation,consistency, quality and efficiency in Colleges and provides oversight.EIOPA established in 2011 and reinforced in 2012 a highly qualifiedCollege Team and each staff member has a portfolio comprising severalColleges.This allows EIOPA to cover all 93 colleges currently active in Europe,targeting physical participation in at least 70 colleges of supervisorsduring 2013.EIOPA expects that the added value brought by EIOPA into the Collegesand activities of the Colleges will have improved considerably in 2012 andin 2013 the participation of EIOPA Staff in the Colleges can beconsolidated.When monitoring the functioning of Colleges, the result will form thebasis of EIOPA’s Action Plan for Colleges 2013 and include measurable,realistic, and at the same time ambitious goals.As for the 2012 Action Plan, the performance of individual colleges on theagreed deliverables will be made public.In 2013 EIOPA will: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47- Promote specifically the finalisation of the preparation of the Colleges for Solvency II, e.g. coordination agreements are expected to be agreed by year-end 2013 by all Colleges- EIOPA staff will continue as a Member in the Colleges to advise Group Supervisors and Colleges on the possibilities to improve the functioning of their College. Practical solutions and examples of supervisory practices will be collected- Develop best practices on specific topics with a particular focus on delegation of tasks amongst supervisors- To promote a common understanding of the group’s risk profile within Colleges, EIOPA will prepare for a data collection and analysis system for peer comparisons as a support function to Colleges _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48EBA publishes follow-upreview of banks’ transparencyin their 2011 Pillar 3 reportsThe European Banking Authority (EBA) published today a follow-upreview aimed at assessing the disclosures European banks’ made inresponse to the Pillar 3 requirements set out in the Capital RequirementsDirective (CRD).Overall, the EBA welcomes efforts made by banks to improve theirdisclosure practices and to comply with the new requirements introducedwith CRD 3.Nevertheless, the report notes that there is still room for improvements inBanks’ Pillar 3 disclosures, and the EBA intends to continue to press forsuch improvements.Main findingsWeaknesses remain in the areas of banks disclosures of credit risk – onInternal Ratings Based approaches (IRB) and securitisation activities –and market risk.The introduction of new disclosure requirements in CRD 3 in particularin the areas of securitisation and market risk may explain some of theweaknesses identified.But the EBA has also noted that weaknesses already identified in itsprevious assessments remain and calls for further action.Beyond assessing compliance with CRD disclosures requirements, theEBA has also performed an analysis of banks’ Basel III implementationdisclosures, in particular as regards the impact on own funds, and of the2011 EBA Capital Exercise related disclosures.Information provided by credit institutions in these two areas were foundto be of varying quality. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49In all disclosure areas, the EBA has identified some best practices whichcredit institutions are encouraged to follow, in order to enhance thegeneral quality of Pillar 3 information.With a view of both facilitating compliance with the requirements as wellas enhancing the quality and comparability of disclosures, the EBA willthis year supplement information on best practices with furtherexplanations on the objective and content of the disclosure requirements,which banks are also encouraged to consider while preparing their Pillar 3disclosures.Some improvements in the quality of disclosures were noted in the area ofremuneration and own funds.On the latter, credit institutions provided appropriate details of capitalitems and a meaningful breakdown of deductions.With regards to the timing, formats or verification of disclosures, nosignificant changes have been made in banks’ practices of reporting Pillar3 information.However, information was generally published nearer to the reportingdate of banks’ annual accounts and annual report but the EBA will stillpush for publication of these reports at the same time to allow investors tohave the complete set of publicly available information at once.Next stepsBased on the findings and content of this report, the EBA, throughout2012 and in 2013, plans to implement a strategy for enhanced transparencyand to that end willi) Keep on identifying best practices of public disclosures in thepublications as well as the CRD requirements for which compliance hasto be improved andii) Will work on these improvements, including in the area ofcomparability of disclosures. In this respect, the EBA will consult andengage with the industry and users where it is needed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50BackgroundThe analysis, carried out in 2012 and covering a sample of nineteenEuropean banks, focussed mainly on those areas where the need forimprovement had already been identified in previous assessments as wellas on areas where new disclosure requirements have been introducedwith CRD3.The conclusions of this review will serve as essential input for definingand developing the EBA’s strategy in enhancing the area oftransparency.The European Banking Authority was established by Regulation (EC)No. 1093/2010 of the European Parliament and of the Council of 24November 2010.The EBA has officially come into being as of 1 January 2011 and has takenover all existing and ongoing tasks and responsibilities from theCommittee of European Banking Supervisors (CEBS).The EBA acts as a hub and spoke network of EU and national bodiessafeguarding public values such as the stability of the financial system,the transparency of markets and financial products and the protection ofdepositors and investors.Executive summaryOne of the EBA’s regular tasks is to assess Pillar 3 reports of Europeanbanks / credit institutions1 and monitor their compliance with therequirements of the Capital Requirements Directive (CRD).This analysis continues from Pillar 3 assessments that have been carriedout annually since 2008.It focuses particularly on areas where the need for improvement wasalready identified in previous assessments.It also covers areas where new disclosure requirements entered into forcein 2011. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51The current analysis was carried out in 2012 and covers the 2011 Pillar 3reports of nineteen European banks.No significant changes in banks’ practices were noted this year in thepractical aspects of the publication of Pillar 3 information (e.g. timing,formats or verification of disclosures), although the EBA noted that bankshave generally published their Pillar 3 information nearer to the reportingdate of their annual accounts and publication of their annual reports.The EBA would prefer the Pillar 3 information to be published at thesame time as these annual reports and accounts, and expects the situationto improve as a result of compliance with the new Capital RequirementsRegulation (CRR).As far as remuneration disclosures are concerned, if these are not actuallyincluded in the Pillar 3 reports or annual reports, the EBA would alsoprefer them to be published at the same time and provide cross-referencesbetween the reports.This would then ensure that Pillar 3 report users (investors and otherusers) have timely access to the complete set of publicly availableinformation that is essential for assessing credit institutions’ risk profiles.Disclosures on own funds were generally assessed as comprehensive,with credit institutions providing details of capital items and ameaningful breakdown of deductions.Cases of non-compliance were mostly related to disclosures on thegrandfathering of instruments, qualitative details about the capitalinstruments or breakdowns of capital items.The EBA also believes that comparability of disclosures on own-fundswill be significantly improved by the implementation of the CRR and ofthe related EBA‘s implementing technical standards on own fundsdisclosures, which will provide common definitions and templates fordisclosures.However, the analysis of information on credit risk – Internal RatingsBased (IRB) approach and securitisation risk – revealed certainweaknesses as well as the need for improvements and more explanationon the rationale for and the expected content of disclosure requirements. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52In particular, credit institutions are expected to increase the back-testingdisclosures.Half of the banks in the sample failed to comply with the relevant CRDrequirement, and many of the banks provided confusing informationabout the assumptions underlying internally developed models.In this context, the EBA also notes that to allow meaningful and reliableconclusions to be drawn on the functioning of the model, disclosures of acomparison between expected losses against actual losses should beprovided for a period of at least three years - a best practice that is notfollowed by the majority of the banks.As far as securitisation risk is concerned, the small number of disclosuresassessed as adequate was mainly due to the introduction of newqualitative and quantitative disclosures requirements with theimplementation of CRD III.Significant improvement is therefore needed for new disclosures on riskmanagement and exposures in the trading book or related to specialpurpose entities (SPEs).However, there were also failures to comply with disclosure requirementswhich were related to pre-CRD III requirements.Market risk was another area where many new disclosure requirementswere introduced and here the analysis also identified certain areas wheresignificant improvements were needed.These included disclosures on back-testing of internal models, stresstesting, valuation models, adequate breakdown of market risk capitalrequirements, stressed VaR measure, the new incremental risk charge aswell as the comprehensive risk measure.On the other hand, significant improvements were noted in the area ofremuneration disclosures with a total of 57% of the banks in the sampleassessed as providing adequate disclosures or disclosures that capturedthe spirit of the CRD requirements.In all these disclosure areas, the EBA identified some best practiceswhich credit institutions are encouraged to follow to enhance the qualityof Pillar 3 information. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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