Monday September 10 2012 - Top 10 Risk Management News
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Monday September 10 2012 - Top 10 Risk Management News



Monday September 10 2012 - Top 10 Risk Management News

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Monday September 10 2012 - Top 10 Risk Management News Monday September 10 2012 - Top 10 Risk Management News Document Transcript

  • Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,According to Mr Kiyohiko G Nishimura, Deputy Governor ofthe Bank of Japan (to the 6th Irving Fisher Committee Conference, Bankfor International Settlements, Basel, 29 August 2012), “the Bank monitorsshadow banking entities and activities through various channels”.Wow! Look at that. Even secret services should become very jealous,especially the ones that don’t monitor such activity. What a plan! _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |2He continues:“Amongst these channels, direct monitoring of major shadow bankingentities is of course the most significant.Thus, the bank has increased the number of staff directly monitoringmajor securities companies.However, it is practically impossible to conduct dialogues with allfinancial institutions of a shadow banking nature, and moreover, shadowbanking activities tend to change rapidly with developments in financialmarkets.”It is a very interesting speech.Read more at Number 7B, just after the very interesting speech of MrYoshihisa Morimoto, Member of the Policy Board of the Bank of Japan.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |3Some Thoughts on Global Risks and Monetary PolicyCharles L. Evans, President and Chief Executive OfficerFederal Reserve Bank of ChicagoEBA, EIOPA andESMAJoint ConsultationPaper on Draft Regulatory Technical Standards on the uniformconditions of application of the calculation methods under Article 6.2 ofthe Financial Conglomerates Directive (JC/CP/2012/02)Cryptographic Key Management Workshop 2012Purpose: NIST is conducting a two-day Key Management Workshop onSeptember 10-11.The subject of the workshop is the technical and administrative aspects ofCryptographic Key Management Systems (CKMSs) that currently existand may be required for U.S. Federal use in the future. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |4Short Selling Regulation UpdateMarket Maker & Primary DealerExemption Notification ProcedureThe European Securities andMarkets Authority (ESMA) ispublishing this notice to alert financial market participants to itsupcoming consultation on the market making and authorised primarydealer exemption under the EU’s Short Selling Regulation (SSR) and theprocedure to be followed by firms and regulators in dealing withnotifications of intention to use the exemption.Preliminary AnnualReport on U.S.Holdings of ForeignSecuritiesPreliminary datafrom an annualsurvey of U.S.portfolio holdings offoreign securities atyear-end 2011 were released.Dr Andreas Dombret, Member of the ExecutiveBoard of the Deutsche BundesbankForeign banks between financial crisis andfinancial stability _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |5Economic activity and prices in Japan and monetarypolicySpeech by Mr Yoshihisa Morimoto, Member of thePolicy Board of the Bank of Japan, at a meeting withbusiness leaders, Ishikawa, 2 August 2012.Market intelligence, market information and statisticsin central bankingKeynote Speech by Mr Kiyohiko G Nishimura, DeputyGovernor of the Bank of Japan, to the 6th Irving FisherCommittee Conference, Bank for InternationalSettlements, Basel, 29 August 2012.News Release - The dog andthe frisbee – paper by AndrewHaldaneIn a paper given at the FederalReserve Bank of Kansas City’s36th economic policysymposium in Jackson Hole, Wyoming, Andrew Haldane – ExecutiveDirector for Financial Stability and member of the Financial PolicyCommittee – explores why the type of complex financial regulationdeveloped over recent decades may be sub-optimal for crisis control _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |6VII Annual Seminar on Risk, FinancialStability and BankingSão PauloA very interesting presentationWhat caused the Global Financial Crisis?Central Bank of Ireland Publishes July2012 Money and Banking StatisticsThe Central Bank of Ireland publishedthe July 2012 Money and BankingStatisticsLoans and other credit _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |7NUMBER 1Some Thoughts on Global Risks and MonetaryPolicyCharles L. Evans, President and Chief Executive OfficerFederal Reserve Bank of ChicagoIntroductionThank you for the invitation to speak to you today. I amvery happy for the opportunity to participate in Market NewsInternational seminar and to offer my thoughts on the U.S. and worldeconomies.We live in an amazingly interconnected world — a world in whichfinancial markets are linked by the instantaneous transmission ofinformation and business activity is intertwined among nations.For a long time, U.S. consumers and firms have been an important sourceof demand for Asian economies.This comes with pluses and minuses: Without the robust growth in theU.S. in 1997–98, the Asian financial crisis may well have been much worsethan it actually was; in contrast, the recession and sluggish growth in theU.S. over the past five years have weighed heavily on the demand forproducts from Asia.My comments today will focus primarily on the outlook for the U.S., butwith an eye on its potential impact on Asian economies.Of course, here I have to cover the substantial downside risks to theforecast stemming from both the European debt situation and the U.S.fiscal cliff.I will also discuss how this outlook and other economic analyses shapemy views for the appropriate stance of monetary policy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |8Before I turn to the focus of today’s discussion, I would like to remind youthat the views expressed are my own and do not necessarily representthose of the Federal Open Market Committee (FOMC) or the FederalReserve System.OutlookLet’s start with the economic outlook.We are all too familiar with the fact that the financial crisis that unfoldedin 2007 and 2008 precipitated a global recession that was unusually deepand lengthy in the U.S. and other advanced economies.Perhaps this shouldn’t have been surprising.The detailed analysis by Carmen Reinhart and Kenneth Rogoff (2009)concludes that recessions caused by financial crises generally are severeand are followed by anemic recoveries.By any yardstick, this certainly describes the U.S. recovery to date:Output growth has averaged only 2-1/4 percent annually, and resourcegaps remain huge.In particular, the unemployment rate remains over 8 percent — wellabove the 5-1/4 to 6 percent rate most FOMC participants view as beingconsistent with a fully employed labor force over the longer run.Both public and private sector forecasts see relatively modest rates ofgrowth over the next few years.For example, most recent forecasts by the private sector have 2012 grossdomestic product (GDP) growth at less than 2 percent; a pace that maynot even be enough to keep up with potential.Growth in 2013 is expected to be only moderately higher.Moreover, both the European debt situation and the looming U.S. fiscalcliff impart substantial downside risks to the forecast.Even absent any negative shocks, such tepid growth rates would close thelarge existing resource gaps only very gradually. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • Page |9Indeed, I expect that we will face unemployment well above sustainablelevels for some time to come.Implications for AsiaIn the aftermath of the Great Recession, most Asian economies enjoyed areturn to solid levels of growth.Today, however, growth in Asia faces some new challenges.One of these challenges is that Asian economies will not be immune tothe tepid growth prospects facing the world’s advanced economies.Forecasts for growth in Asia have been marked down over the past year,reflecting in part the impact of the downgrade in the outlook for Asianexports for the U.S. and the euro area.For example, the U.S. and the euro area account for about one-third ofChina’s merchandise exports.The recession and weak recoveries in those economies were big factors inthe Chinese current account surplus falling from about 10 percent of GDPin 2007 to less than 3 percent in 2011.This weakness remains a consideration as we look forward; indeed, it isan important reason why the International Monetary Fund (IMF) isprojecting that the Chinese current account surplus will fall even more by2013.International trade is an excellent thing: Exploiting comparativeadvantages raises living standards for all nations.However, all countries can’t simultaneously export their way out of theirproblems. For the world as a whole, the current account has to balance.Thus, countries with large external surpluses face risks to their economiesposed by slowdowns in their trading partners.Aggregate world growth must reflect aggregated domestic demands. So ifdemand is going to be sluggish in a large share of the world economy,other nations must take up the slack, or world growth will fall. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 10InflationWith regard to inflation, as you know, the FOMC’s long-run inflationobjective is 2 percent as measured by the price index for personalconsumption expenditures (PCE).For a number of reasons, I don’t foresee much risk that inflation will riseabove reasonable tolerance levels relative to this objective.First, we see evidence of low expectations for inflation and growth in thetoday’s historically low Treasury yields.If there were warning signs of dangerous inflationary pressures, theten-year rate wouldn’t be in the neighborhood of 1-3/4 percent!Second, even with the latest increase in oil prices, energy and commodityprices remain well off their recent peaks as the global outlook dims.Third, as I just noted, the output gap remains large and is likely to closeonly slowly.In this economic environment, wage pressures are practicallynonexistent.And it is hard to envision how major persistent inflation pressures willemerge without a parallel increase in wage costs. Such parallel price andwage increases were a big part of the 1970s inflation, a scenario some fearrepeating today.Fourth, inflationary dynamics depend in large part on the momentumgenerated by people’s expectations of future inflation; currently, inflationexpectations are well anchored, which will tend to keep inflation frommoving either up or down.Putting all of these factors together along with the fact that core inflationaveraged 1.8 percent over the past year, I conclude that inflation will likelyremain near or below our 2 percent target over the medium term.Sources of Risk and Their ImplicationsI would now like to turn to two important downside risks to the outlookfor growth. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 11This will be a bit of a U.S.-centric view, but clearly these risks also haveimportant implications for growth here in Asia and the rest of the world.EuropeLet me begin with the European debt situation.Obviously, the developments in Europe pose a significant downside riskto the U.S. economy and world economic growth more broadly.The direct effects of slower European growth on the U.S. economy wouldbe relatively small.The eurozone nations account for less than 15 percent of U.S.merchandise exports.Thus, according to standard elasticity estimates, even a moderateeurozone recession would reduce U.S. exports by only a couple of tenthsof GDP.The indirect effects of eurozone developments could, however, be moresevere, both in the U.S. and Asia. One possible channel would be throughfinancial contagion.If losses on euro-centric assets put a large enough dent in the balancesheets of financial institutions that lend to U.S. households andbusinesses, the increases in the cost and availability of credit wouldreduce growth in the U.S. with possible spillover effects into Asia as well.Clearly, this is a risk worth monitoring.Fortunately, though, U.S. financial institutions are in much better shapeto handle such potential losses than they were in 2008.Recognizing the risks posed by the European debt situation, U.S.institutions have reduced their direct exposure to European assets andtightened lending standards to European banks.On the regulatory front, the most recent stress tests made large U.S.banks demonstrate that they would have adequate capital even in theevent of a sharp European recession with contagion to global financialmarkets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 12A second possible channel would be through the effects of uncertainty oncurrent demand.Throughout the recovery, U.S. business and household sentiment hasbeen very fragile.Every hint of bad news seems to generate a wave of increased caution andan associated pullback in spending as firms and families seek to protecttheir individual balance sheets.After what the U.S. economy went through in the Great Recession, thisskittishness is understandable — particularly if one can envision a verylarge downside to the news event.And, as I just noted, given developments in Europe, there certainly aresome serious downside scenarios one can envision, even if they are notthe most likely outcomes.So it would be no surprise if yet another wave of uncertainty put a furtherdent in consumption and investment.U.S. fiscal cliffAnother risk to the U.S. economy comes from the so-called fiscal cliff.Under current U.S. law, numerous tax and spending provisions enacted invarious stimulus packages dating as far back as 2001 are scheduled toexpire on January 1, 2013.In addition, if no budget agreement is reached by Congress, there will besignificant automatic spending sequestration and other spending cuts inJanuary.According to projections made by the Congressional Budget Office(CBO), if all these things took place, real GDP growth would be reducedby about 4 percentage points in 2013.I’m not saying that a pullback of this magnitude should be the base-casescenario.The orders of magnitude are just too big to be a base case. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 13But when you go through the various items and make guesses at whichmay stay and which may go, it is easy to envision scenarios that include amarked increase in fiscal restraint in 2013.In addition, given the political process, it seems unlikely that we willknow much about the size or composition of the cuts until late in theprocess.It’s also easy to see how the rhetoric of public negotiating stances couldproduce an atmosphere that causes already jittery households andbusinesses to put some spending plans on hold.In sum, a messy resolution to the fiscal cliff problems presents animportant downside risk to U.S. growth prospects and, by extension, toworld economic growth.And even the possibility of such an outcome could be a drag in the secondhalf of the year.Policy ChoicesLet me now switch gears and talk about my views regarding the choicesfacing monetary policymakers in the U.S.Yes, we have substantial liquidity already in place in our financial system.On the surface, this looks like substantial monetary accommodation.But as a large body of economic theory tells us, for this liquidity to besufficiently accommodative, the public needs to expect that we will keepit in place for as long as is necessary to restore the economy to a soundfooting.This is why I believe we should clarify the Fed’s forward guidance withregard to the future course of policy. Let me now go into the detailsbehind these thoughts.An explicit economic state-contingent policyIn weighing alternative policy approaches, I think the best way to provideforward guidance is by tying our policy actions to explicit measures ofeconomic performance. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 14There are many ways of doing this, including setting a target for the levelof nominal GDP.But recognizing the difficult nature of that policy approach, I have a moremodest proposal: I think the Fed should make it clear that the federalfunds rate will not be increased until the unemployment rate falls below 7percent.Knowing that rates would stay low until significant progress is made inreducing unemployment would reassure markets and the public that theFed would not prematurely reduce its accommodation.Based on the work I have seen, I do not expect that such policy wouldlead to a major problem with inflation.But I recognize that there is a chance that the models and other analysissupporting this approach could be wrong.Accordingly, I believe that the commitment to low rates should bedropped if the outlook for inflation over the medium term rises above 3percent.The economic conditionality in this 7/3 threshold policy would clarify ourforward policy intentions greatly and provide a more meaningful guide onhow long the federal funds rate will remain low.In addition, I would indicate that clear and steady progress towardstronger growth is essential.Because we are not seeing that now, I support further use of our balancesheet to provide even more monetary accommodation.In June we decided to continue our Maturity Extension Program, whichputs downward pressure on long-term interest rates by extending theaverage maturity of the Federal Reserve’s securities portfolio.I thought that was a useful step.However, I believe it is time to take even stronger steps, such as thepurchase of more mortgage-backed securities, to increase the degree ofmonetary support for the recovery. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 15As suggested recently by my colleagues Eric Rosengren and JohnWilliams, these could be open-ended purchases, meaning that they wouldcontinue at a certain rate until there was clear evidence of improvement ineconomic conditions.To me, one example of clear evidence would be a resumption of relativelysteady monthly declines in unemployment for two or three quarters.Once this momentum was confidently established, the Fed could stopadding to our balance sheet but keep the funds rate at zero.The funds rate would remain unchanged in my thinking, until theunemployment rate hit at least 7 percent or the medium-term inflationoutlook deteriorated dramatically and rose above 3 percent.Later, reductions in the Fed’s balance sheet assets would occur sometimeafter the first increase in the funds rate.This corresponds to the general exit principles the FOMC agreed uponlast year.Presumably, the pace of asset reductions would be measured andconsistent with a continued, robust recovery in the context of pricestability.Accommodation in the Context of a Symmetric Inflation Targetand Balanced PolicyI can’t tell you how often people look at me in horror when I say that weshould adopt a conditional policy that tolerates the risk of inflationexceeding our target by as much as 1 percentage point.How can I accept inflation rising above our stated target? Isn’t thisblasphemy for a central banker?In January, in the same framework document that announced our 2percent inflation target, we also stated a number of principles for theconduct of monetary policy.One was that policy would take a balanced approach in achieving the twolegs of the Federal Reserve’s dual mandate — maximum employmentand price stability. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 16An explicit real-side mandate makes the Federal Reserve different thanmost central banks.While just about all central banks follow a flexible inflation targetingapproach, in which they seek to minimize real-side fluctuations in pursuitof their inflation objective, most are explicitly charged only with aninflation objective.But for the Fed, maximum employment is an explicit part of our policymandate.I strongly support the policy principles document we released in January.But we’re still hearing questions about whether our inflation goal issymmetric and about the specifics of how policy will be implementedunder the balanced approach articulated in this framework.As Chairman Bernanke (2012) stated at his April press conference, the 2percent inflation goal is a symmetric objective and not a ceiling oninflation.Symmetry means that inflation below 2 percent should be viewed as thesame policy miss as if inflation overran 2 percent by equal amount.We need to take symmetry seriously.If we disproportionately recoil at inflation a little above 2 percent versus alittle below, then we are not symmetrically weighing policy misses.And we will not average 2 percent inflation, which is our goal.There is some risk of this misperception taking hold. Consider theFOMC’s latest Summary of Economic Projections (SEP), which includesthe projections of all FOMC participants, voters and non-voters alike.In it, several forecasts have the funds rate rising before 2014, even thoughthroughout the projection period most see inflation at or below 2 percentand unemployment well above the sustainable rate indicated by thelong-run projections.Without further explanation, it’s difficult to see how this is consistent witha symmetric inflation goal and a balanced approach to achieving the twolegs in our dual mandate. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 17I believe the FOMC can do better at describing our thinking with respectto tolerance bands around our long-run inflation and unemploymentgoals.Clarification would increase both transparency and accountability.Importantly, it would reassure economic agents that Fed policy would nottighten prematurely.To me, a symmetric inflation goal and a balanced approach to policymean that if we are missing our employment mandate by a large amount,but are close to our inflation target, then we should be willing toundertake policies that could substantially reduce the employment gapeven if they run the risk of a modest, transitory rise in inflation thatremains within a reasonable tolerance range of our target.I believe such actions, such as the 7/3 threshold policy I have beenadvocating, would produce smaller net losses relative to our dual mandategoals than would current policy.Conclusion: The Need for a Vibrant Economy to Cushion RisksFinding a way to deliver more accommodation — whether it is monetaryor fiscal — is particularly important now because delays in reducingunemployment are costly.An unusually large percentage of the unemployed have been withoutwork for quite an extended period of time; their skills can become lesscurrent or even deteriorate, leaving affected workers with permanent scarson their lifetime earnings.And any resulting lower aggregate productivity also weighs on potentialoutput, wages and profits for the economy as a whole.The damage intensifies the longer that unemployment remains high.Failure to act aggressively now could lower the capacity of the economyfor many years to come.Such potential costs would come with the continuation of a subpar paceof economic recovery. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 18The significant risks I discussed earlier – financial disruption from aworsening of the situation in Europe or a messy resolution of U.S. fiscalpolicy – raise the specter of an even more worrisome outcome.At the moment economic growth is not much above stall speed.Another negative shock could send the economy into recession.And if a recessionary dynamic takes hold, it would be especially difficultto regain momentum.I have outlined some policy actions that I think can take us in thedirection of a more vibrant and resilient economy.Given the risks we face, I think it is vital that we make such moves today.I don’t think we should be in a mode where we are waiting to see what thenext few data releases bring.We are well past the threshold for additional action; we should take thataction now.Thank you.NoteCharles L. Evans is the ninth president and chief executive officer of theFederal Reserve Bank of Chicago. In that capacity, he serves on theFederal Open Market Committee (FOMC), the Federal Reserve Systemsmonetary policy-making body.The Federal Reserve Bank of Chicago is one of 12 regional Reserve Banksacross the country. These 12 banks — along with the Board of Governorsin Washington, D.C. — make up our nations central bank.As head of the Chicago Fed, Evans oversees the work of roughly 1400employees in Chicago and Detroit who conduct economic research,supervise financial institutions, and provide payment services tocommercial banks and the U.S. government.Before becoming president in September of 2007, Evans served asdirector of research and senior vice president, supervising the Banksresearch on monetary policy, banking, financial markets and regional _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 19economic conditions. Prior to that, Evans was a vice president and senioreconomist with responsibility for the macroeconomics research group.His personal research has focused on measuring the effects of monetarypolicy on U.S. economic activity, inflation and financial market prices. Ithas been published in the Journal of Political Economy, AmericanEconomic Review, Journal of Monetary Economics, Quarterly Journal ofEconomics, and the Handbook of Macroeconomics.Evans is active in the civic community. He is a board member at ChicagoMetropolis 2020 and the Metro Chicago Information Center, and a trusteeat Rush University Medical Center.Evans has taught at the University of Chicago, the University of Michiganand the University of South Carolina. He received a bachelors degree ineconomics from the University of Virginia and a doctorate in economicsfrom Carnegie-Mellon University in Pittsburgh. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 20NUMBER 2EBA, EIOPA and ESMAJoint Consultation Paper on Draft Regulatory Technical Standards on theuniform conditions of application of the calculation methods underArticle 6.2 of the Financial Conglomerates Directive (JC/CP/2012/02)I. Responding to this ConsultationEBA, EIOPA and ESMA (the ESAs) invite comments on all matters inthis paper and in particular on the specific questions stated in theattached document “Overview of questions for Consultation” at the endof this paper.Comments are most helpful if they:- respond to the question stated;- indicate the specific question to which the comment relates;- contain a clear rationale;- provide evidence to support the views expressed/ rationale proposed; and- describe any alternative regulatory choices EBA should consider.II. Executive SummaryThe CRR/CRD IV proposals (the so-called Capital RequirementsRegulation - henceforth ‘CRR’- and the so-called Capital Requirements _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 21Directive – henceforth ‘CRD’) set out prudential requirements for banksand other financial institutions which are expected to apply from 1January 2013.In anticipation of the finalisation of the legislative texts for theCRR/CRD IV, the EBA, EIOPA and ESMA (hereafter the ESAs) throughthe Joint Committee, have developed the draft RTS in accordance withthe mandate contained in Article 46(4) of the CRR and Article 139 ofCRDIV (amending Article 21 a (2a) of the Directive 2002/87/EC) on thebasis of the European Commission’s proposals.This Article provides the ESAs through the Joint Committee, to developdraft Regulatory Technical Standards (RTS) with regard to the conditionsof the application of the Article 6(2) of the Directive 2002/87/EC(hereafter the Directive).Further the ESAs have developed the draft RTS having regard to Article230 in connection with Articles 220 and 228 of the Directive2009/138/EC2.To the extent that the texts may change before their adoption, the ESAsshall adapt its draft RTS accordingly to reflect any developments.The RTS included in this consultation have to be submitted to the EUCommission by 1 January 2013.Please note that the ESAs have developed the present draft RTS based onthe European Commission’s legislative proposals for the CRR/CRD IV.They have also taken into account major changes subsequently proposedby the revised texts produced by the Council of the EU and the EuropeanParliament, during the ordinary legislative procedure (co-decisionprocess).Following the end of the consultation period, and to the extent that thefinal text of the CRR/CRD IV changes before the adoption of the RTS,the ESAs will adapt the draft RTS accordingly to reflect anydevelopments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 22Main features of the RTSThis consultation paper puts forward draft RTS in order to ensure thatinstitutions that are part of a financial conglomerate apply the appropriatecalculation methods for the determination of required capital at the levelof the conglomerate.They are based in particular on the following elements:General Principleso Elimination of multiple gearing;o Elimination of intra-group creation of own funds;o Transferability and availability of own funds; ando Coverage of deficit at financial conglomerate level having regard todefinition of cross-sector capital.Technical calculation methods1. Method 1: “Accounting consolidation method”:The FICOD provides in relation to Method 1 that the own funds arecalculated on the basis of the consolidated position of the group.According to this general provision, the calculation of own funds shouldbe based on the relevant accounting framework for the consolidatedaccounts of the conglomerate applicable to the scope of the Directive.The use of “consolidated accounts” eliminates all own funds’ intra-groupitems, in order to avoid double counting of capital instruments.According to the Directive provisions, the eligibility rules are thoseincluded in sectoral provisions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 232. Method 2: “Deduction and aggregation method”.This method calculates the supplementary capital adequacyrequirements of a conglomerate based on the accounts of solo entities.It aggregates the own funds, deducts the book value of the participationsin other entities of the group and specifies treatment of the proportionalshare applicable to own funds and solvency requirements.All intra-group creation of own funds shall be eliminated.3. Method 3: “Combination of methods 1 and 2”.The use of combination of accounting consolidation method 1 anddeduction and aggregation method 2 is limited to the cases where the useof either method 1 or method 2 would not be appropriate and is subject tothe permission by the competent authorities.III. Background and rationaleThe supplementary supervision of financial entities in a financialconglomerate is covered by the Financial Conglomerates Directive2002/87/EC, hereafter known as the Directive.This Directive provides for competent authorities to be able to assess at agroup-wide level the financial situation of credit institutions, insuranceundertakings and investment firms which are part of a financialconglomerate, in particular as regards solvency (including the eliminationof multiple gearing of own funds instruments).The nature of RTS under EU lawDraft RTS are produced in accordance with Article 10 of the ESAsregulation.According to Article 10(4) of the ESAs regulation, they shall be adoptedby means of Regulations or Decisions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 24According to EU law, EU regulations are binding in their entirety anddirectly applicable in all Member States.This means that, on the date of their entry into force, they become part ofthe national law of the Member States and that their implementation intonational law is not only unnecessary but also prohibited by EU law,except in so far as this is expressly required by them.Shaping these rules in the form of a Regulation would ensure alevel-playing field and would facilitate the cross-border provision ofservices.Background and regulatory approach followed in the draft RTSThese draft RTS are produced in accordance with CRD IV/CRRproposals, which provide that the EBA, ESMA and EIOPA (hereafter theESAs), through the Joint Committee, shall develop draft regulatorytechnical standards with regard to the conditions of the application of thecalculation methods with regard to Article 6(2) of the Directive and shallsubmit those draft regulatory technical standards to the Commission by 1January 2013.The proposed draft RTS covers the uniform conditions for the use of themethods for the determination of capital adequacy of a financialconglomerate under the Directive.They elaborate on Technical principles applying to all of the threemethods provided for by Directive; and also contain an Annex providingfurther detail for Method 2.The requirements contained in the draft RTS are mainly directed atinstitutions, although some of them are directed at competent authorities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 25IV. Draft Regulatory Technical Standards on the uniformconditions of application of the calculation methods underArticle 6.2 of the Financial Conglomerates DirectiveCommission Delegated Regulation (EU) No XX/2012supplementing Directive xx/XX/EU [CRD] of the European Parliamentand of the Council of [date], Regulation (..) No xx/XXXX [CRR] of theEuropean Parliament and of the Council of [date] and Directive2002/87/EC [Financial Conglomerates Directive] of the EuropeanParliament and of the Council of [date] with regard to regulatorytechnical standards for the uniform conditions of application of thecalculation methods under Article 6.2 of the Financial ConglomeratesDirective of XX Month 2012THE EUROPEAN COMMISSION,Having regard to the Treaty on the Functioning of the European Union,Having regard to the [proposal for a] Regulation (...) No xx/xxxx of theEuropean Parliament and of the Council of dd mm yyyy on prudentialrequirements for credit institutions and investment firms Regulationxx/xxxx [CRR] and in particular Article 46 (4) thereof.Having regard to the [proposal for a] Directive (...) No xx/xxxx of theEuropean Parliament and of the Council of dd mm yyyy on the access tothe activity of credit institutions and the prudential supervision of creditinstitutions and investment firms [CRDIV] and in particular Article 139thereof.Having regard to the Directive 2002/87/EC, as amended, of theEuropean Parliament and of the Council on the supplementarysupervision of credit institutions, insurance undertakings and investmentfirms in a financial conglomerate (hereinafter “the Directive”) and inparticular to Article 6(2) and Annex 1 thereof.Whereas: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 26(1) Directive 2002/87/EC provides in Chapter II, Section 2, rules oncapital adequacy of financial conglomerates, such that the elements ofown funds are available at the level of a Financial Conglomerates arealways at least equal to the capital adequacy requirements as calculated inaccordance with Annex I of the Directive.(2) Regulation (...) No xx/xxx (‘CRR’) provides in Article 46, within PartII, Chapter 2, Section 3, Sub-Section 2 and in the context of commonequityTier I rules, requirements for deduction where consolidation orsupplementary supervision are applied.This section of the CRR provides empowerments to the EuropeanCommission to adopt delegated acts (regulatory technical standards) inaccordance with articles 10-14 of the Regulation (EU) No 1093/2010establishing the European Banking Authority (‘EBA’), Articles 10-14 ofthe Regulation (EU) No 1094/2010 establishing the European Insuranceand Occupational Pensions Authority (‘EIOPA), and Articles 10-14 of theRegulation (EU) No 1095/2010 (‘ESMA), establishing the EuropeanSecurities and Markets Authority.These acts will complete the EU single rulebook for institutions in thearea of own funds.(3) Directive (...) No xx/xxx (‘CRDIV’) provides in Article 139 that theDirective 2002/87/EC shall be amended, such that the EBA, EIOPA andESMA through the Joint Committee, to develop draft RegulatoryTechnical Standards (RTS) with regard to the conditions of theapplication of the Article 6(2) of the Directive.(4) For effective supervision of Financial Conglomerates, supplementarysupervision should be applied to all such conglomerates, thecross-sectoral financial activities of which are significant, which is thecase when certain thresholds are reached, no matter how they arestructured. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 27Supplementary supervision should cover all financial activities identifiedby the sectoral financial legislation and all entities principally engaged insuch activities should be included in the scope of the supplementarysupervision, including asset management companies and alternativeinvestment fund management companies.(5) Without prejudice to sectoral rules, supplementary supervision of thecapital adequacy rules is necessary to bring more convergence in theapplication of the calculation methods listed in Annex 1 of the Directive.(6) For financial conglomerates which include significant banking orinvestment business and insurance business, multiple use of elementseligible for the calculation of own funds at the level of the financialconglomerate (multiple gearing) as well as any inappropriate intra-groupcreation of own funds must be eliminated.(7) The financial conglomerate should seek an acceptable timeframe forthe transferability of funds across entities within the financialconglomerate, which shall depend on whether the specific entity issubject to the Directive 2009/138/EC or the CRDIV/CRR.Moreover for an entity subject to the CRD IV/CRR this timeframe shouldbe expediated based on the fact that due to the nature of their activities,they are more vulnerable to a rapid deterioration in confidence and/orsudden resolution situation.(8) In addition any non-sector-specific own funds, in excess of sectoralrequirements, need to originate from entities which are not subject totransferability/availability impediments.(9) It is important to ensure that own funds are only included atconglomerate level if there are no impediments to the transfer of assets orrepayment of liabilities across different conglomerate entities, includingacross sectors.(10) If there is a deficit of own funds at the level of the financialconglomerate, the financial conglomerate should inform the coordinatoron the measures taken to cover this deficit. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 28(11) Further convergence in the way that financial conglomerates applythese rules shall ensure the robust and consistent application of themethods of calculation.(12) For bank-led conglomerates it is necessary to apply the most prudentmethod of calculation for the treatment of insurance holdings to avoidregulatory arbitrage.(13) It is important that sector-specific own funds cannot cover risksabove sectoral requirements.The financial conglomerate should first count sector-specific own fundsagainst their requirements (while respecting sectoral rules and limits) foreach relevant entity or group of entities. If there is an excess ofsector-specific own funds, this should not be recognised at conglomeratelevel.(14) When calculating supplementary capital adequacy of a financialconglomerate, in respect to non-regulated financial entities within thefinancial conglomerate, both a notional capital requirement and anotional level of own funds shoud be calculated.(15) Under Solvency II, method 1 is applied on the basis of consolidateddata which are set out at Level 2 and not on the basis of consolidatedaccounts.(16) Further changes to the capital adequacy rules may be addressed inthe European Commission’s review of Directive 2002/87/EC.(17) It is necessary that the new regime for treatment of methods ofconsolidation enters into force the soonest possible following the entryinto force of the CRR/CRD IV and Solvency II.(18) This Regulation is based on the draft regulatory technical standardssubmitted jointly by the EBA, EIOPA and ESMA to the Commission.(19) The EBA, EIOPA and ESMA have conducted open publicconsultations on the draft regulatory technical standards on which this _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 29Regulation is based, analysed the potential related costs and benefits, inaccordance with Article 10 of Regulation (EU) No 1093/2010, Article 10 ofRegulation (EU) No 1094/2010, Article 10 of Regulation (EU) No1095/2010,and requested the opinion of the Banking Stakeholder Groupestablished in accordance with Article 37 of Regulation (EU) No1093/2010, Insurance Stakeholder Group and the OccupationalStakeholder Group established in accordance with Article 37 ofRegulation (EU) No 1094/2010, and the European Securities and MarketsStakeholder Group established in accordance with Article 37 ofRegulation (EU) No 1095/2010.HAS ADOPTED THIS REGULATION:TITLE ISubject matter and definitionsArticle 1Subject matterThis Regulation lays down rules of the uniform conditions of applicationof the calculation methods under Article 6.2 of the Directive.Article 2Definitions1. Definitions of the CRD IV/CRR, Directive 2002/87/EC and Directive2009/138/EC shall apply to this Regulation.2. Capital instruments are those capital instruments eligible under CRR(Regulation 2012/…./EC) and those capital instruments referred to as“own funds” in Directive 2009/138/EC.3. Ultimate responsible entity is the entity within the financialconglomerate that is responsible for determining the capital for thefinancial conglomerate having regard to the following minimum criteria:control, the dominant entity from the market’s perspective (market listed _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 30entity) and the ability to fulfill specific duties towards its subsidiaries andits supervisor.4. ‘indirect holding’ as defined under definition 17 of Article 22 of CRR [tobe added if not in final CRR text].5. Insurance-led financial conglomerate is a financial conglomeratewhose most important sector is insurance as defined under Article 3(2) ofthe Directive.6. Bank-led financial conglomerate is a financial conglomerate whosemost important sector is banking as defined under Article 3(2) of theDirective.7. Investment firm-led financial conglomerate is a financial conglomeratewhose most important sector is investment services as defined underArticle 3(2) of the Directive.TITLE IITechnical PrinciplesArticle 3Elimination of multiple gearing and the intra-group creation ofown fundsThe ultimate responsible entity shall ensure that own funds, which havebeen created by intra-group transactions, be it direct or indirect, shall beeliminated for the purpose of determining the required capital on aconsolidated basis.Article 4Transferability and availability of own funds1. For all entities of a financial conglomerate, own funds, in excess ofsectoral solvency requirements, shall be considered available to absorblosses elsewhere in the financial conglomerate provided that all of thefollowing conditions are fulfilled: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 31(a) There are no practical, legal, regulatory, contractual or statutoryimpediments to the transfer of funds or repayment of liabilities acrossconglomerate entities in due course.This is the case when the transfer of own funds from one conglomerateentity to another is not barred by a restriction of any kind and there are noclaims of any kind from third parties on these assets.The ultimate responsible entity of the financial conglomerate shallconfirm to the satisfaction of the coordinator that the conditions set out inthis point are met.(b) For the purpose of assessing the transferability of funds to entitiessubject to 2009/138/EC, “in due course” shall mean no later than 9months;for the purpose of assessing the transferability of funds to entitiessubjected to CRR, “in due course” shall mean no later than, threecalendar days with no impediments on the coordinator requiring a fastertransfer if necessary.2. Own funds, in excess of sectoral solvency requirements, which do notmeet the criteria under point 1 shall be excluded from the conglomerate’sown funds.3. The financial conglomerate shall demonstrate that measures have beentaken to mitigate the risk that transfer of funds would have a materialeffect on the transferor’s solvency.EXPLANATORY TEXT for consultation purposesThis text is consistent with Annex 1 of the Directive which states “whencalculating own funds at the level of the financial conglomerate,competent authorities shall also take into account the effectiveness of thetransferability and availability of the own funds across the different legalentities in the group, given the objectives of the capital adequacy rules”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 32Point 1(a) aims to ensure that own funds are only included atconglomerate level if there are not impediments to the transfer of assets orrepayment of liabilities across different conglomerate entities, includingacross sectors.If the conglomerate cannot confirm to the satisfaction of the coordinatorthat there are no inherent impediments in relation to a given entity, thatentity’s own funds in excess of its sectoral requirements cannot beincluded at conglomerate level.The impediments to be considered include practical, regulatory,contractual or statutory ones.Point 1(b) establishes an acceptable timeframe for the transferability offunds across conglomerate entities.There is a differentiation based on the fact that entities subject to CRR,due to the nature of their activities, are more vulnerable to a rapiddeterioration in confidence and/or sudden resolution situation.Article 5Deficit of own funds at the financial conglomerate level1. When the difference calculated according to method 1, 2 or 3 as detailedin Annex 1 of the Directive is negative, the financial conglomerate shallensure that the deficit is remedied with cross-sector own funds elementsas defined in point 2 below.2. When calculating own funds at the level of the financial conglomerate,cross sector own funds are elements eligible for:(a) Common Equity Tier 1 in accordance with Regulation …/2012/EC[or Tier 1 Unrestricted Basic Own Funds in accordance with Directive2009/138/EC], or(b) Elements that meet both sets of rules for Additional Tier 1 inaccordance with Regulation …/2012/EC and Tier 1 [Restricted BasicOwn Funds in accordance with Directive 2009/138/EC], or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 33(c) elements that meet both sets of rules for Tier 2 in accordance withRegulation …/2012/EC and for Tier 2 in accordance with Directive2009/138/EC.3. Cross-sector own funds elements mentioned in point 2 shall only betaken into account if their transferability and availability across thedifferent legal entities in the financial conglomerate meet the conditionsset out in Article 4.EXPLANATORY TEXT for consultation purposesThe text is based on the Technical principles in Annex 1 of the Directive“Whichever method is used, when the entity is a subsidiary undertakingand has a solvency deficit, or, in the case of a non-regulated financialsector entity, a notional solvency deficit, the total solvency deficit of thesubsidiary has to be taken into account.Where in this case, in the opinion of the coordinator, the responsibility ofthe parent undertaking owning a share of the capital is limited strictly andunambiguously to that share of the capital, the coordinator may givepermission for the solvency deficit of the subsidiary undertaking to betaken into account on a proportional basis.”In line with the Directive only cross-sector own funds are allowed as aremedy to a conglomerate deficit.That is, from the point at which a conglomerate deficit is observed, thatshortfall amount shall be covered by the issuance of cross-sector ownfunds, regardless of the cause of the conglomerate deficit.The financial conglomerate shall inform the coordinator about the deficitand the measures to cover this deficit without delay.Article 6Consistency1. The Method of Calculation selected from those methods defined inAnnex 1 of the Directive shall be applied in a consistent manner over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 342. For the purpose of Article 6(2) and Annex 1 of the Directive, for abanking led conglomerate, where Article 46 (1) of the CRR is applied, thecoordinator, after consulting with other competent authorities concerned,shall decide the most prudent method to be applied by the financialconglomerate.Article 7ConsolidationFor the purpose of Art 6(2) and Annex 1 of the Directive, Method 1 of theDirective 2009/138/EC shall be considered as equivalent to theconsolidation as defined under Method 1 of the Directive, forinsurance-led financial conglomerate.The equivalence assessment is valid provided that the scope of the groupunder Solvency II is the same under the Directive or the difference in thescope is not material.EXPLANATORY TEXT for consultation purposesThis text is based on the Directive 2009/138/EC, Article 230 inconnection with Articles 220 ss.The Solvency II Implementation measures will need to be consideredonce they have been published.According to Directive 2009/138/EC, for the calculation of group ownfunds all the multiple use of eligible own funds and intra-group creationof capital should be eliminated.Moreover, own funds of other financial sectors should be calculatedaccording to the relevant sector rules.As a result, both Method 1 of the Directive 2009/138/EC and Method 1 ofthe Directive are consistent with the main objectives of thesupplementary supervision since they ensure that: all double-counting is _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 35removed; own funds are calculated in accordance with the definitions andlimits established in the relevant sectoral rules.The equivalence assessment is valid provided that the scope of the groupunder Solvency II is the same under the Directive or the difference in thescope is not material.Article 8Solvency requirement1. For the purpose of the calculation of the supplementary capitaladequacy requirements of the regulated entities in a financialconglomerate, a solvency requirement shall satisfy either of the pointslaid down in (a) and (b):(a) Where the rules for the insurance sector are to be applied, solvencyrequirement means the Solvency Capital Requirement as defined byArticle 100 or 218 of Directive 2009/138/EC as applicable, including anycapital add-on applied in accordance with Articles 37, 231(7) or 232 of thesame directive as applicable, and any other capital or own fundsrequirement applicable under Union legislation.(b) Where the rules for the banking or investment services sector are to beapplied, solvency requirement means the sum of own funds requirementsas defined by Articles 87 to 93 of CRR, combined buffer requirements asdefined by Article 122 of CRD IV, and specific own funds requirements asdefined by Article 100 of [CRDIV], and any other requirement applicableunder European Union law.Article 9The financial conglomerates own funds and capitalrequirements1. Except where expressly stated in this Regulatory Technical Standard,the financial conglomerates own funds and capital requirements shall becalculated in accordance with the definitions and limits established in therelevant sectoral rules. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 362. The own funds of asset management companies shall be calculatedaccording to Article 2 (l) of Directive 2009/65/EC; the capitalrequirements are calculated according to Article 7(1) (a) of Directive2009/65/EC.3. The own funds of alternative investment fund managers shall becalculated according to Article 9 of Directive 2011/61/EU.Article 10Sector specific own funds1. Sector specific own funds, are recognised for the coverage of risks at thesectoral level only and cannot be used to cover risks of another sector andshall not be included (above or) beyond the sectoral level.Sector specific own funds are own funds recognised under sectoral rulesthat do not fall within one of the following categories:(a) Common Equity Tier 1, Additional Tier 1 and Tier 2 own funds under[CRR]; or(b) Tier 1 unrestricted basic own funds, Tier 1 restricted basic own funds,and Tier 2 basic own funds under Directive 2009/138/EC.2. Risks originating from the other sector shall not be covered by sectorspecific own funds.EXPLANATORY TEXT for consultation purposesArticle 10 sets out that sector-specific own funds cannot cover risks abovesectoral requirements.In practice, this means that, for each relevant entity or group of entities,conglomerates need to first count sector-specific own funds against theirrequirements (while respecting sectoral rules and limits).If there is an excess of sector-specific own funds, this shall not be _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 37recognised at conglomerate level.In addition, as stated in Article 4, any non-sector-specific own funds inexcess of sectoral requirements need to originate from entities which arenot subject to transferability/availability impediments.Article 11Treatment of cross sector holdings for the calculation of capitalrequirementsWhere an insurance holding of a bank-led financial conglomerate or aninvestment firm-led financial conglomerate is eliminated pursuant toArticles 14.3 and 14.4 or Article 15.2 or the application of these Articles aspart of Method 3, no capital charge for that holding shall be applied at thefinancial conglomerate level for the purpose of supplementarysupervision, even if a capital charge is applied at sectoral level.EXPLANATORY TEXT for consultation purposesAt sectoral level, holdings may receive a risk weight or capital charge.At the financial conglomerate level, the same holding may be deducted oreliminated from own funds through consolidation, making the riskweight or capital charge superfluous.This capital charge shall thus not be applied for the purposes of thecalculation of the conglomerates solvency requirements.Article 12Non-regulated financial entities1. For a non-regulated mixed financial holding company and for anon-regulated entity held by a mixed financial holding company, the ownfunds and the capital requirements attributable to the non-regulatedfinancial sector entities shall be calculated according to the mostimportant sector in the financial conglomerate in accordance with Article3(2) of the Directive. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 382. The own funds and the solvency requirements attributable to othernon-regulated financial entities shall be calculated according to thesectoral rules of the sector (insurance or banking) to which the nonregulated entity is designated.EXPLANATORY TEXT for consultation purposesA “mixed financial holding company” is defined under Article 2(15) of theDirective.Whichever method is used, for the purpose of the calculation of thesupplementary capital adequacy of a financial conglomerate, both anotional capital requirement and notional level of own funds should becalculated for non-regulated financial entities.These should be calculated according to the rules of the sector to whichthe non regulated entity belongs, or according to the most importantsector in the conglomerate, having regard to Annex 1 of the Directive “Inthe case of a non-regulated financial sector entity, a notional solvencyrequirement is calculated in accordance with section II of this Annex,notional solvency requirement means the capital requirement with whichsuch an entity would have to comply under the relevant sectoral rules as ifit were a regulated entity of that particular financial sector; the notionalsolvency requirement of a mixed financial holding company shall becalculated according to the sectoral rules of the most important financialsector in the financial conglomerate”.Article 13Transitional and grandfathering arrangementsThe sectoral rules applied in the calculation of conglomerate own fundsand solvency requirements shall take into account any transitional orgrandfathering arrangements in force at sectoral level. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 39TITLE IIITechnical calculation methodsArticle 14Method 1 Calculation criteria1. The own funds of a financial conglomerate shall be calculated on thebasis of the consolidated accounts (according to the relevant accountingframework) applied to the scope of supplementary supervision of theDirective.2. The calculation of own funds shall take into account the removal ofintra group balances, transactions and income and expenses related tothe process of accounting consolidation.3. For bank-led and investment firm-led conglomerates, unconsolidatedsignificant investments in a financial sector entity pursuant to Article 40of the CRR shall be fully deducted, if the entity belongs to the insurancesector as defined in Article 2(8) of the Directive.4. Unconsolidated non significant investments are deducted inaccordance with the treatment described in Article 43 of CRR.5. For bank-led and investment firm-led conglomerates, the sectoraltreatment in Part 2, Title II of the CRR shall apply to all unconsolidatedinvestments, participations and holdings of a conglomerate entity,provided that:(a) The conglomerate entity is a credit institution or an investment firm;and(b) The investment, participation or holding is in a credit institution or inan investment firm.6. Without prejudice to points 3 and 4, any other own funds issued by oneconglomerate entity and held by another, if not already eliminated in theaccounting consolidation process, shall be deducted. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 407. Joint controlled entities shall be treated in accordance with sectoralrules.8. The valuation of assets and liabilities calculated for the purposes ofDirective 2009/138/EC shall be used at the level of the financialconglomerate.9. Where asset or liability values are subject to the calculation ofprudential filters and deductions in accordance with those required underCRR, the asset or liability values used shall be those attributable to therelevant entities under CRR, excluding assets and liabilities attributableto other entities of the financial conglomerate.Where calculation of a threshold or limit is required in order to respectsectoral rules, the threshold or limit shall be calculated on the basis of theconsolidated data of the financial conglomerate and after the removal ofholdings called for by these standards.10. Where credit institutions/investment firms and related entities areconsolidated under CRR, the same entities shall be considered together.11. Where insurance and related entities are consolidated under Directive2009/138/EC, the same entities shall be considered together.12. Conglomerate entities that are not consolidated under CRR orDirective 2009/138/EC shall be treated separately.13. For the purpose of the calculation of solvency requirements, eachsector shall respect the requirements as calculated under the relevantsectoral rules.When summing the relevant sectoral solvency requirements there shall beno adjustment other than as foreseen by Article 11 of Title II or as causedby adjustments to sectoral thresholds and limits pursuant to point 9 ofthis Article 14. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 41EXPLANATORY TEXT for consultation purposesACCOUNTING CONSOLIDATION AND JOINTCONTROLLED ENTITIES (Points 1, 2 and 7)Under Method 1, the Directive requires the calculation of the own fundsof the conglomerate on the basis of the consolidated position of thegroup.In addition, any inappropriate intra-group creation of own funds must beeliminated.In order to ensure these provisions are respected, points 1 and 2 of Article14 requires the conglomerate to use consolidated accounts (applied to thescope of the conglomerate) as the starting point for the calculation of theown funds.In doing so, the conglomerate must allow all eliminations of own fundsarising from the process of accounting consolidation to take place.Joint-controlled entities are to be proportionally consolidated in line withpoint 6.OTHER INTRA-GROUP CREATION OF OWN FUNDS(Point 6)In line with the Directive’s principles, Article 3 of this Regulation calls forthe elimination of all own funds that have been created by intra-grouptransactions, be it direct or indirect.For the avoidance of doubt in the context of Method 1, point 5 furtherspecifies that all intra-group creation of own funds should be eliminatedon top of accounting consolidation, if not already eliminated as part of theaccounting consolidation process.Such additional elimination may be required in particular where thetreatment of the participation called for by the Directive is different fromthat provided for by accounting rules, considered that accounting rules _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 42doesn’t consider the multiple gearing issue.CROSS SECTOR HOLDINGS AND OTHER HOLDINGS(Points 3, 4 and 5)For bank-led and investment firm-led conglomerates, the calculation ofown funds at the level of the conglomerate should also take into accountthat the sectoral rules allow institutions to risk weight and not deductsome cross-sector holdings.For this reason, in order to ensure the elimination of multiple gearing atthe level of conglomerate, point 3 of Article 14 requires the deduction ofholdings that are neither consolidated nor eliminated (by deduction) atsectoral level, where those holdings are in entities belonging to theinsurance sector.Point 4 describes the treatment of unconsolidated non-significantinvestment holdings where those holdings are in entities belonging toinsurance entities.Point 5 describes the treatment of other holdings, specifying that otherholdings are treated according to sectoral rules (see the table in AnnexII).SOLVENCY 2 VALUATION CRITERIA (Points 8)For insurance parts of the conglomerate, given that Article 75 of Directive2009/138/EU sets out specific valuation rules for assets and liabilities,point 8 of Article 14 specifies that assets and liabilities for those entitieswithin the conglomerate should follow the valuations calculated for thepurpose of Directive 2009/138/EU.This point is aimed at ensuring that the calculation of the elements ofown funds at the level of conglomerate is consistent with sectoral rules. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 43RECALCULATION OF LIMITS AND THRESHOLDS,TAKING INTO ACCOUNT REMOVAL OF HOLDINGS(Points 9)Once the accounting consolidation has been carried out, as well as theother provisions already mentioned, amounts of CET1 attributable toconglomerate entities that are subject to CRR at sectoral level, as well asamounts of holdings belonging to such entities that are neither deductednor consolidated, will change.So the calculations based on CET1 in Article 45 of CRR, which measurethe threshold for the deduction of deferred tax assets and significantinvestments, should be recalculated.The recalculation should take into account the effect on CET1 of theconglomerate accounting consolidation process, proportionalconsolidation in accordance with point 7, the removal of holdings in point3, and any other factors stemming from the conglomerate calculation thathave led to a change in CET1 .In the calculation according to Article 45 of CRR for an entity or group ofentities, the deferred tax assets and significant investments to be takeninto account are only those belonging to that entity or group of entitieswithin the conglomerate.These rules are provided for in point 9.MULTI-LAYER CONGLOMERATES (Points 10, 11 and 12)This Regulation recognises that financial conglomerate structures maybe very complex and involve different layers (see graph example below). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 44In cases like this, where a banking group controls an insurance group,which – in turn – controls a bank, in order to calculate the limits orthresholds provided at sectoral level, the data of the banking group at thetop of the group shall not be calculated jointly with the data belonging tothe bank (B) controlled by the insurance group.In this case, bank (B) calculates a threshold on its Deferred Tax Assets.Bearing in mind that the Directive states the elements eligible for thecalculation of the own funds are those that qualify in accordance with therelevant sectoral rules, point 10 calls for the relevant groupings at sectorallevel to be maintained also at the conglomerate level for the purposes ofcalculating limits and thresholds.SOLVENCY REQUIREMENTS (Point 13)Finally, point 13 specifies that the calculation of solvency requirements isbased on the sum of sectoral and notional requirements, except for theprovision included in Article 11 (no capital charge for holdings that areconsolidated or deducted at the conglomerate level). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 45See also the Annex - Summary of the treatment of holdings andparticipations for the purpose of the calculation of the own funds of theconglomerate.Article 15Method 2 Calculation criteria1. For the purpose of calculating Method 2 as set out in Annex I part II ofthe Directive:(a) The proportional share applicable to own funds and solvencyrequirements shall relate to the proportion of the subscribed capital whichis directly or indirectly held by the parent undertaking or undertakingwhich holds a participation in another entity of the group;(b) The book value of participations in other entities of the group shall bethe book accounting value for the parent undertaking or for theundertaking that holds a participation in another entity of the group;(c) Where the own funds of a holding is subject to a prudential filter, thefiltered amounts shall be:i) Added to the book value mentioned in b), if the filtered amountincreases regulatory capital; orii) Deducted from the book value mentioned in b), if filtered amountdecreases regulatory capital.(d) For the purpose of point (c), the filtered amounts pertains to the netamount affecting own funds of the holding.2. For bank-led and investment firm-led conglomerates, significantinvestments in a financial sector entity pursuant to Article 40 of the CRR,if the entity belongs to the insurance sector as defined in Article 2(8) ofthe Directive, shall be:(a) Fully deducted, where the holding is not a participation as defined inArticle 2(11) of the Directive, and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 46(b) Treated according to Method 2, where the holding is a participation asdefined in Article 2(11).3. For insurance-led conglomerates, participation as defined in Article2(11) of the Directive shall be considered for the application of point 1.4. For the purpose of the first point, to eliminate the intra-group creationof own funds, the eligible amount of intra-group investments in anycapital instruments that are eligible as regulatory capital, respectingrelevant sectoral limits, shall be eliminated.EXPLANATORY TEXT for consultation purposesPoint 1(c) addresses cases where prudential filters affect the own funds ofa participation for prudential purposes by adding back unrealised lossesor subtracting unrealised gains, for example in the case of a holding heldin the Available For Sale category.If this is the case, the effect of the prudential filter should be reversed [byadjusting the book value of the participation to be deducted].Without this reversal the filtering of unrealised gains would undulyreduce own funds after deduction of accounting book value, while thefiltering of unrealised losses would unduly flatter own funds after thededuction of accounting book value.Referring to the formula in the Annex: if, because of the application of aprudential filter the Own Funds term xi(OFi-REQi) changes, then itseffect should be neutralized by an offsetting adjustment in the book valueterm: BVi.See also the Annex - Summary of the treatment of holdings andparticipations for the purpose of the calculation of the own funds of theconglomerate. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 47Article 16Method 3 Calculation criteria1. The competent authorities may permit the financial conglomerate touse a combination of methods 1 and 2, only where the financialconglomerate can demonstrate to the competent authorities that itsrequest has been made:(a) Further to its best effort to apply either, Methods 1 or 2; and(b) Having regard to the cases in Article 6 (5) of the Directive.2. If several entities are collectively of non neglible interest, the competentauthorities shall take this into account in assessing the request to useMethod 3.3. The application of the specific combination of Methods 1 and 2 toentities within the financial conglomerate that was permitted bycompetent authorities shall be applied in a consistent manner over time.4. The coordinator shall consult the other relevant competent authoritiesbefore taking a decision on whether to permit the use of the combinationof methods 1 and 2.EXPLANATORY TEXT for consultation purposesArticle 6 (5) (a) (b) and (c) of the Directive states:“(a) If the entity is situated in a third country where there are legalimpediments to the transfer of the necessary information, withoutprejudice to the sectoral rules regarding the obligation of competentauthorities to refuse authorisation where the effective exercise of theirsupervisory functions is prevented;(b) If the entity is of negligible interest with respect to the objectives ofthe supplementary supervision of regulated entities in a financialconglomerate; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 48(c) If the inclusion of the entity would be inappropriate or misleadingwith respect to the objectives of supplementary supervision.However, if several entities are to be excluded pursuant to (b) of the firstsubparagraph, they must nevertheless be included when collectively theyare of non-negligible interest.”TITLE IVFinal provisionsArticle 17This Regulation shall enter into force on the twentieth day following thatof its publication in the Official Journal of the European Union.This Regulation shall be binding in its entirety and directly applicable inall Member States.Done at Brussels,For the CommissionThe President[For the CommissionOn behalf of the President[Position] _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 49ANNEX ICalculation methodology for Method 2 – Deduction andaggregation method1. General principlesThe calculation of method 2 shall be carried out on the basis of theregulatory reporting required under the applicable accounting frameworkof each of the entities in the group following the formulaic expressionbelow:where own funds (OFi) exclude intra-group capital instruments.The supplementary capital adequacy requirements (scar) shall thus becalculated as the difference between:(1) The sum of the own funds (OFi) of each regulated and non-regulatedfinancial sector entity (i) in the financial conglomerate; the elementseligible are those which qualify in accordance with the relevant sectoralrules; and(2) The sum of the solvency requirements (REQi) for each regulated andnon-regulated financial sector entity (i) in the group (G); the solvencyrequirements shall be calculated in accordance with the relevant sectoralrules; and the book value (BVi) of the participations in other entities (i) ofthe group.In the case of non-regulated financial sector entities, a notional solvencyrequirement shall be calculated according to Article 11. Own funds andsolvency requirements shall be taken into account for their proportionalshare (x) as provided for in Article 6(4) and in accordance with Annex I. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 50The difference shall not be negative.ANNEX II- Summary of the treatment of holdings andparticipations for the purpose of the calculation of the own fundsof the conglomerate _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 51V. Accompanying documentsa. Draft Cost- Benefit Analysis / Impact Assessment1. IntroductionAccording to CRDIV/CRR proposals, the EBA, EIOPA and ESMA(hereafter the ESAs) through the Joint Committee, shall develop draftregulatory technical standards with regard to the conditions of theapplication of the Article 6(2) of the Directive, and shall submit thosedraft regulatory technical standards to the Commission by 1 January 2013.The Technical Standard describes how institutions following theconsolidation methods set out in this Directive shall calculate own fundsin the parent institution in a financial conglomerate.The standard introduces restrictions on which elements of own funds insubsidiaries and other participated entities of a financial conglomeratecan be used in the calculation of own funds.The main rationale underpinning this Technical Standard is to avoid an“inflated” calculation of own funds of cross-sector financialconglomerates.This Technical Standard focuses on harmonising the calculation offinancial conglomerates’ own funds.2. Problem definitionA lesson learned from recent financial crises is that the regulation ofsupplementary supervision, in particular the current set of rules ondetermining own funds at the conglomerate level, deserves a thoroughrethink.For example, in the recent past it became clear that parent institutionscould report strong levels of own funds, giving an impression of a robustsolvency. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 52In some cases that impression turned out to be misleading as significantamounts of own funds were, in practice, locked-in in the subsidiaries.This consequently rendered the Directive’s assumption of availability offunds at the conglomerate level rather uncertain - because of a lack ofharmonisation of rules on conglomerate own funds.This affects the ability of conglomerates’ own funds to absorb losses,which makes financial conglomerates more fragile than figures on ownfunds would suggest.Multiple gearingUncertainties in the application of the methods for determining ownfunds at the conglomerate level may have led to undesirable levels ofmultiple gearing.This Technical Standard therefore builds upon the Directive andcontributes to achieving its objective to eliminate the multiple use ofelements eligible for the calculation of own funds at the level of thefinancial conglomerate (see for example Recital 7, Article 31 point 2, andAnnex I, section I of the Directive).Methods to determine Own funds at the FinancialConglomerate Level.Uncertainties in the guidance about the choice of methods fordetermining own funds at the conglomerate level may have led to anarbitrary combination of the methods that are offered under Annex I ofthe Directive.This Technical Standard therefore provides additional clarity on thecalculation methods for conglomerate own funds.3. Objectives of the Technical StandardThe objective of this Technical Standard is to achieve a more consistent _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 53harmonisation of the calculation methods of Own Funds listed in Annex Iof Directive.This should translate in increased efficiency and effectiveness ofconglomerate supervision by competent authorities, more clarity on theavailability and transferability of own funds for the conglomerate, as wellas tightly controlled levels of multiple gearing.4. OptionsAnnex I of the Directive, describes three methods to calculate aconglomerate’s own funds.This Technical Standard concentrates on the application of thesemethods.There is not a wide selection of options available for this TechnicalStandard. Any choice made with respect to this Technical Standardderives from the text of relevant Directives, predominantly the sectoraldirectives, CRR/CRD4 and Solvency II.The guiding principles used by this Technical Standard to achieve moreconsistent harmonisation of calculation methods mentioned in Annex I ofthe Directive are:1. To offer clarity in rules regarding transferability and availability ofconglomerate own funds,2. To eliminate the multiple use of elements eligible for the calculation ofown funds at the level of the financial conglomerate,3. To avoid double deduction of items and amounts from own funds, and4. To respect sectoral rules. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 54Method 1Method 1 is based on consolidated position of the conglomerate in orderto avoid multiple gearing.For this purpose, the RTS requires the elimination of all intra-groupcreation of own funds; the scope of the group is defined according toarticle 2, point 12 of the Directive.Adjustments are required to sectoral rules in the treatment of bankingcross holdings and some instructions not included in the Directive areprovided for unregulated entities.According to the Directive provisions, the capital requirements arecalculated as sum of sectoral requirements without the elimination ofintra-group transactions.Method 2The description of this method in its current form is already quiteprescriptive and unambiguous.However, this Technical Standard elaborates on two issues that may leadto disharmonised interpretations:i. The proportional share applicable to own funds and solvencyrequirements;ii. The interpretation of the book value of participations in other entitiesof the group.With respect to the latter issue, this Technical Standard uses the bookvalue from the accounts of the parent as a starting point, but appliesadjustments to any book values subjected to prudential filters in order tosafeguard consistency in the calculation of this method’s deduction ofbook value. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 55The method requires, according to the general principle of avoidinginappropriate creation of intra-group own funds, the deductions of all theintra-group investments in capital instruments eligible according tosectoral rules.This provision ensure also an equivalence between this method ofcalculation of the own funds and the others allowed according to theDirective.Method 3The use of combination of methods 1 and 2 is limited only to the caseswhere the use of either method 1 or method 2 solely would not beappropriate due, for example, to the lack of information on specificentities within the group.The use of method 3 shall need the permission of the competentauthorities or the coordinator after consultation of the relevant othercompetent authorities.The combination method 3 shall be applied in a consistent manner overtime.The supervisory consent is needed in order to prevent regulatoryarbitrage.5. ImpactsThis technical standard’s objective is to achieve a more consistentharmonization of the methods mentioned in Annex I of the Directive.This may limit the degree of freedom with respect to the ways ofcalculating own funds of conglomerates.The expected impact compared to the sectoral rules for insurance-ledconglomerate that apply method 1 of the Directive, where the scope of theinsurance group under Solvency II is not the same as the financialconglomerate under the Directive (see Article 7), is due mainly to the lineby line consolidation of the items of the banking subsidiaries and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 56banking joint controlled entities instead of the consolidation proceduresprovided under the Solvency 2 framework.In the case the scope is the same or difference is not material,insurance-led conglomerate applies Solvency 2 rules as they will bedefined in the implementing measures Solvency 2.For banking-led and investment firm-led conglomerate the mainexpected impact compared to the sectoral rules is due to theconsolidation of the insurance subsidiaries and joint controlled insuranceentities that are risk weighted or deducted according to CRR.Both insurance and banking group shall also adjust, where applicable, theamount of the threshold and parameters used for their eligibility limits(for example, thresholds on Deferred Tax Assets and on deduction ofholdings under Article 45 of CRR), considering the effect of theconsolidation of cross sector holdings at conglomerate level.Insurance, bank and investment firm-led conglomerates shall take intoaccount of limits to transferability and availability of own funds asforeseen in the Technical Standard.A cost factor relates to the alignment of the entities to the requirements ofthis Technical Standard.Such costs may arise if current national regulations need to be amendedto comply with the Technical Standard.Another cost factor may arise in the cases where competent authoritiesare called upon to approve the use of Method 3.Lastly, this Technical Standard may also affect the business model for agroup to organize itself as a financial conglomerate.There are a number of expected benefits related to this TechnicalStandard. They are:i. More consistency in the selection and application of the methods of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 57Annex I of the Directive;ii. Increased efficiency and effectiveness of conglomerate supervision;iii. More clarity on the amount, availability, and transferability of ownfunds within a financial conglomerate;iv. More effective loss absorption of the capital held by conglomerates;v. An increased standardization of the use of the methods, leading tolower costs of their application; andvi. A contribution to greater financial stability.b. Overview of questions for Consultation1. What are the cost implications of a requirement for conglomerates tofollow the clarifications for calculating own funds and solvencyrequirements described in this paper?If possible, please provide estimates of incremental compliance cost thatmay arise from the requirements, relative to following the Directive in theabsence of the Regulatory Technical Standards.2. How, in your opinion would the proposed clarifications impact onconglomerates’ business models?3. How far would the suggested clarifications change current marketpractices?4. Are the Technical Principles in Title II sufficiently clear? If not, whatareas require further clarification?5. Are there any areas of ambiguity in the way that the TechnicalPrinciples in Title II apply to the three consolidation methods?6. Are there any areas of ambiguity in the way that Method 1 needs to becarried out? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 587. How much of an operational burden is the use of consolidatedaccounts of the conglomerate as a starting point for Method 1? Is there analternative more straightforward method/way to eliminate theintra-group creation of own funds?8. Do you foresee any problems in applying sectoral rules to own fundsunder Method 1? If so, what refinements to the method would youpropose?9. Are they any areas of ambiguity in the way that Method 2 needs to becarried out?10.For the purpose of assessing the transferability of “funds” to entitiessubject to CRR, under Article 4, is “three calendar days” a sufficienttimeframe in a period of stress? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 59NUMBER 3Cryptographic Key Management Workshop 2012Purpose:NIST is conducting a two-day Key Management Workshop on September10-11.The subject of the workshop is the technical and administrative aspects ofCryptographic Key Management Systems (CKMSs) that currently existand may be required for U.S. Federal use in the future.The first day will review the DRAFT NIST Special Publication 800-130(“A Framework for Designing CKMS”) and the DRAFT NIST SpecialPublication 800-152 (“A Profile for U.S. Federal CKMS”) and solicitcomments from the workshop participants on the DRAFT documents.The second day will focus on CKMS capabilities in future securityproducts and services in new U.S. Federal Information Systems.Input from Workshop participants will be solicited regarding the utilityand feasibility of these capabilities as well as suggestions for othertechnical capabilities required in future CKMSs.Call for Presentations During the development of SP 800-130 (the Key ManagementFramework) and SP 800-152 (the Profile document), NIST identified anumber of properties as particularly hard problems associated with secureCryptographic Key Management Systems (CKMS). These problemsinclude:- Cryptographic- Agility- Scalability- Anonymity- Unlinkability _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 60- Unobservability- Usability- Compromise recovery- Multi-level security domains- Negotiating and enforcing domain security policies, including a Policy Language for enabling negotiation and enforcement- Interaction between domains, each with its own security policiesThe second day of the workshop will focus on these and other hardproblems.NIST requests the submission of abstracts for presentation about theseand other problems associated with key management systems.Start Date: Monday, September 10, 2012End Date: Tuesday, September 11, 2012Location: NIST-Gaithersburg, MD - Administration Building/LectureRoom BAudience: Industry, Government, AcademiaFormat: WorkshopAll attendees must be pre-registered to gain entry to the NIST campus.Photo identification must be presented at the main gate to be admitted tothe conference. International attendees are required to present a passport. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 61NUMBER 4Short Selling Regulation UpdateMarket Maker & Primary DealerExemption Notification ProcedureThe European Securities andMarkets Authority (ESMA) ispublishing this notice to alert financial market participants to itsupcoming consultation on the market making and authorised primarydealer exemption under the EU’s Short Selling Regulation (SSR) and theprocedure to be followed by firms and regulators in dealing withnotifications of intention to use the exemption.The SSR becomes applicable from 1 November 2012, but allowsparticipants to notify securities regulators of their intention to use theexemption from 1 September 2012.To ensure a level playing field between market participants, consistencyof market practice and convergence of supervisory practices across theEEA Member States ESMA intends to publish a consultation paper onguidelines on market making activities and on the common approach tothe application of the exemption in mid-September, being finalised after 1November.Without prejudice of the outcome of the consultation, the intention is thatthis consultation paper is used as an interim benchmark by securitiesregulators for the application of the exemption and by marketparticipants in their notification to competent authorities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 62NUMBER 5PreliminaryAnnual Report onU.S. Holdings ofForeign SecuritiesPreliminary datafrom an annualsurvey of U.S.portfolio holdings offoreign securities atyear-end 2011 were released.Final survey results, which will include additional detail as well asrevisions to the data, will be reported on October 31, 2012.The survey was undertaken jointly by the U.S. Department of theTreasury, the Federal Reserve Bank of New York, and the Board ofGovernors of the Federal Reserve System.A complementary survey measuring foreign holdings of U.S. securitiesalso is conducted annually.Data from the most recent such survey, which reports on securities heldon June 30, 2012, are currently being processed.Preliminary results are expected to be reported on February 28, 2013.Overall Preliminary ResultsThe survey measured the value of U.S. holdings of foreign securities atyear-end 2011 of approximately $6.8 trillion, with $4.5 trillion held inforeign equities, $2.0 trillion held in foreign long-term debt securities(original term-to-maturity in excess of one year), and $0.4 trillion held inforeign short-term debt securities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 63The previous such survey, conducted as of year-end 2010, measured thevalue of U.S. holdings of $6.8 trillion, with $4.6 trillion held in foreignequities, $1.7 trillion held in foreign long-term debt securities, and $0.4trillion held in foreign short-term debt securities.[1] The stock of foreign securities for December 31, 2011, reported in thissurvey may not, for a number of reasons, correspond to the stock offoreign securities on December 31, 2010, plus cumulative flows reported inTreasury’s transactions reporting system.The final report on U.S. holdings of foreign securities as of end-year 2011will contain an analysis of the relationship between the stock and flowdata. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 64 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 65NUMBER 6Dr Andreas DombretMember of the Executive Boardof the Deutsche BundesbankForeign banks betweenfinancial crisis and financialstabilitySpeech held to mark the 30thanniversary of the Association ofForeign Banks in Germany1 IntroductionLadies and gentlemenLet me begin by offering the Bundesbank’s warm congratulations to you,Mr Winter, and all the members of the Association of Foreign Banks inGermany on its jubilee 30th anniversary.Thirty years is quite a long period of time – nearly one-third of a century –and something of a landmark.As the old saying used to go, “Never trust anyone over 30”.That catchphrase was popularised by the 1968 student movement – thestudents who used it are now themselves over 60!Trust is indeed the key word. Its importance is being learned bygovernments and banks alike as the sovereign debt and financial crisistightens.So it is a good thing that the day-to-day dealings between the bankingassociations and individual banks, on the one hand, and central banksand supervisory authorities, on the other, are characterised by mutualconfidence and trust – notwithstanding the necessary arm’s-lengthrelationship between central banks and supervisory authorities, on theone hand, and banks and their associations, on the other. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 66I can say that because I have worked in both camps.I was once a foreign banker myself. Since joining the Bundesbank in 2010,I have had a chance to see things from the other perspective.I would like to take this opportunity to thank you for the constructivecooperation I have been privileged to enjoy with all banking associationsover the past two years.I hope that this cordial relationship will continue in future – includingafter the possible emergence of a new, overarching single Europeansupervisory body.If it is carefully conceived and constructed, it could make an importantcontribution to safeguarding financial stability.And it might well refashion the current triangular relationship betweenbanks, supervisors and central banks.Let me nail my colours to the mast right away: I do not believe that it isabsolutely essential for the central bank to have ultimate supervisoryresponsibility in order to capitalise on the synergies provided by centralbanks’ macroeconomic and macroprudential expertise.The crucial requirement is the efficient exchange of information.2 Stimulating competitionIn his book Fault Lines - How Hidden Fractures Still Threaten the WorldEconomy, former IMF chief economist Raghuram Rajan argues that afault line is created when two different financial systems based ondifferent principles interact.He is referring to the contrasting cultures of the capital markets andrelationship banking.Financial market integration has certainly increased the possibilities ofcontagion.However, I do not believe that the “fault line” necessarily runs along theborder between the capital market and relationship banking. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 67Seen from the perspective of a universal bank, drawing a rigid distinctionbetween capital market orientation and a banking philosophy seems ahuge oversimplification.Germany’s universal banks came through the financial crisis pretty wellon the whole.And the contacts between foreign banks and German banks havestimulated and enlivened competition, benefiting both groups of banks.Moreover, it should be noted that the foreign banks operating inGermany, which each bear the specific hallmarks of their home country,are probably the most heterogeneous group of banks included in theBundesbank’s statistics.How important are foreign banks in Germany’s banking system? Formany foreign banks, traditional banking activities account for just a smallpart of their business.This makes their market share – currently 12.9% measured in terms oftotal assets – all the more remarkable.This trend has been driven by the arrival of new banks through mergers aswell as growth, particularly in deposit business and instalment loans.The approximately 30,000 members of staff employed by foreign banks atthe German financial centre do make quite a meaningful impact onemployment.These figures point to a significant influence.In some business lines, especially those involving the capital markets,foreign banks have a much more prominent position than in traditionalbanking fields.Today, it is hard to imagine M&A activity in Germany without theinfluence of the Anglo-American banking culture.Foreign banks play an important role in advising and assisting onGerman corporate bond issues; the same goes for IPOs and capitalincreases. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 68The financial crisis has naturally also led to the market withdrawal ofindividual foreign banks.On the whole, however, it has thankfully not triggered a mass exodus offoreign banks from Germany – unlike in some other countries.For a long time, foreign banks struggled to gain a foothold in the Germanmarket.Banks that accept deposits and grant loans normally had to begin bysetting up a branch network as a prerequisite for winning new customers.The creation of the single market in Europe has made things mucheasier.The European Passport made it possible to set up branches anywhere inthe EU without requiring additional authorisation.However, barriers to market entry still remained.These included the high overhead costs of creating a branch network, thechallenge of finding skilled staff, the continued strong importance ofbrand names, and the justifiably high reputation of German banks amongGerman clients.In this tough business environment, foreign banks wanting to expandinto Germany had to rely on innovation and cost-efficiency.They were given a helping hand by liberalisation and the technologicaladvances of the internet in the 1990s; this gave foreign banks a fast andlow-cost channel for communicating with customers.And they seized their chance. Some foreign banks therefore set up shopas online banks to conduct deposit business but also to engage inbusiness with standardised consumer loans.For retail customers this translated directly into a larger product range atlower prices.That is good both for customers and for competition.Providing advice and expertise to enterprises is a key investment bankingservice, and one from which German firms have benefited. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 69That requires putting down roots in the real economy and offering a realservice.And the last few years have taught us that foreign banks with roots in thereal sector are unlikely to pull out in times of financial crisis.Integrated financial markets per se enhance economic growth and ourprosperity.Foreign banks in Germany constitute a part of this financial marketintegration.The downside of integration is that market players are much moreinterconnected, which means that crises spill over more quickly from onecountry to another.This can lead to dislocations. However, that is simply the reality oftoday’s financial world.3 Capital: the key to greater trustHaving, or building up, sufficient capital is essential, particularly in thecurrent climate. And it is also crucial to restoring confidence and trust.In its last Financial Stability Review, the Bundesbank wrote that, in timesof systemic stress, “the task of restoring confidence is not merely theresponsibility of an individual bank but also a call to arms for the systemas a whole.”This demands not just adequate capitalisation of national bankingsystems but also convincing Europe-wide solutions.I’ll make no bones about it: a level of capitalisation that just meets theminimum supervisory requirements would fall far short of what is needed,in my view.I think it was the UK economist Charles Goodhart who told the followingtale to illustrate the dangers of minimalist compliance.A weary traveller arrives at a rural railway station.To his delight, he sees exactly one taxi waiting there and asks the driverto take him to his destination. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 70To his amazement, the cabdriver tells him: “I would love to take you therebut cannot, I’m afraid.”“Why not?”, he asks, flabbergasted.“There is a local bye-law that says a taxi has to be here at all times.”“But a taxi is here.”“Ah yes, but if I take you home, there would no longer be a taxi waitinghere. That would violate the bye-law.”This is what can happen with statutory minimum requirements.Only capital in excess of the minimum requirements is available to trulyand independently absorb business risk.In an actual crisis, it is only this capital that can be used to buy the timeneeded, for instance, to write down impaired assets, adjust portfolios orrestructure business units.In an ideal world, of course, such buffers should be built up beforesystemic events occur.That is the rationale behind capital cushions. They provide a certainbreathing space before institutions are forced to unload risky assets andcurb their lending.If the buffers are too small, however, the pressure to deleverage during ashock can become overwhelming and cyclical movements may beamplified.This is where public capital assistance comes into play. In theory, itprovides a counterweight and reduces deleveraging pressure.4 Getting the basics right: aspects of a European system ofbanking supervisionThe reality can be much rougher, however, for a euro-area country that isstruggling to cope with the close interlinkages between the sovereigndebt crisis and the banking crisis. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 71The stability of the banking sector is then called into question becausethe country is no longer regarded as being fully capable of resolving itsbanking crisis unassisted.For such cases, the EFSF has clear rules according to which othereuro-area countries can step in to help that country. The affected countryremains the partner for the donor countries’ assistance.By providing such assistance, the donor countries are already taking onconsiderable risks.Extending this risk-sharing role, as is being proposed in connection witha banking union – in the form, for example, of a European restructuringfund or a European deposit insurance scheme – would necessitate farmore extensive intervention in countries’ national sovereignty and in theirfiscal and economic policies.I hope you will agree with me that joint liability must not be allowed to beintroduced covertly through the back door.Instead, joint liability must be predicated on two basic principles. One isthe unity of liability and control.As long as control rests with nation-states, liability must rest there, too.This is important to avoid promoting excessively risky business modelsthat threaten financial stability.Moreover, no incentives should be created to build a bloated financialindustry in individual countries that is way out of proportion to the size ofthe real economy.The other principle that must be observed is taking the appropriate stepsin the right order.The logical sequence requires, first, further moves towards Europeancontrol, which in turn necessitate democratic legitimacy andaccountability.I am firmly convinced that all concrete proposals must be informed bythese considerations and guided by these principles. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 72Moreover, many important details remain to be clarified. Theseremaining uncertainties have perhaps contributed to the intensity of therecent public debate on this topic.In a situation marked by uncertainty it can even happen that one or twoeconomics professors sign both a petition and the correspondingcounter-petition.And this does not even have to be a contradiction if the two countervailingpositions depart from different assumptions concerning the principlesand the details of their implementation.One of the questions regarding a possible pan-European bankingsupervision regime that still needs to be clarified is the range of countriesthat will be subject to it: should it cover all EU member-states or only theeuro-area countries?Given the interlinkages between financial institutions throughout the EUand against the background of the single market, I see merits inintegrating all EU member-states in a European supervisory structure.This would strengthen the single market, it would be consistent with theSingle Rule Book, and it would help to create a level playing field.Taking this logic further, it would make sense in principle for all banks tobe supervised by this European authority.In line with the principle of subsidiarity, the European supervisoryauthority could then delegate the supervision of systemically unimportantbanks to national authorities, subject to the proviso that such banks couldthen be brought back into the fold of European supervision on acase-by-case basis.I believe a Europe-wide prudential regime would definitely benefit fromthe operational involvement of national supervisory agencies.Such involvement, in fact, may well be essential.A key issue for central banks is the precise nature of their involvement inEuropean banking supervision. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 73There can be little doubt that they ought to play a role, given their wealthof macroeconomic and macroprudential expertise, as this is the only wayto exploit synergies.The question, however, is how this can be best accomplished. I believethat central banks do not necessarily need to assume ultimateresponsibility for supervision.The key imperative is, rather, for supervisory agencies and central banksto cooperate efficiently and, above all, to exchange information.In my view, this would be consistent with central bank involvement inoperational supervision.In this manner, potential conflicts with ensuring the independence ofmonetary policy can be avoided and the credibility of central banksmaintained.It follows from this that an agency other than the ECB could be givenultimate responsibility for supervision. Supervisory powers implyextensive rights of intervention which, in turn, require direct democraticlegitimacy and accountability.Thus if the central bank were to have ultimate sovereign responsibility, itsindependence would have to be constrained.And let us not forget either that monetary policy decisions can alsoimpact on banks’ robustness.This might well cause a conflict of objectives.All of these arguments are, I believe, sound reasons not to transferultimate responsibility to the ECB but, instead, to a different authorityheaded by a council in which the banks’ home countries are adequatelyrepresented.Such representation should reflect the size of each country’s bankingindustry.In such a set-up, the ECB would undoubtedly play a particularlyimportant and wide-ranging advisory role. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 74Whatever solution is ultimately implemented, I am firmly convinced thatmonetary policy and prudential supervision should be kept as far apart aspossible.If a European supervisory regime is based on the right principles and itsdetailed workings are well thought out and implemented, it has a goodchance of making a major contribution to financial stability.5 ConclusionsThose are a few thoughts that I wanted to share with you going forward.Your anniversary has undoubtedly come at a critical juncture for theworld of finance.The sovereign debt and banking crisis will probably keep us occupied forquite some time to come.The problems are deep rooted. The future will tell how well we have beenable to cope with the challenges of our time.However, of this I am convinced: if the right measures are taken, a verygood solution will emerge in the end.On this note, I would like to congratulate you once again on yourlandmark anniversary and thank you for being such an attentiveaudience. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 75NUMBER 7A. Economic activity and prices in Japan andmonetary policySpeech by Mr Yoshihisa Morimoto, Member of thePolicy Board of the Bank of Japan, at a meeting withbusiness leaders, Ishikawa, 2 August 2012.I. Recent financial and economic developmentsA. Global financial markets and overseas economies1. Global financial marketsI would like to start with developments in global financial markets andoverseas economies, which affect Japan’s economy.Global financial markets have recently been characterized by a repetitivepattern of rising and declining pessimism reflecting developments in theEuropean debt problem.From the middle of 2011 toward the end of the year, strains in marketsincreased due to concerns over the sustainability of public finances inperipheral countries.From the turn of 2012 toward early spring, there were phases of easingstrains due to the introduction of measures to strengthen fiscal disciplinein the member states of the European Union (EU), the decision on thesecond financial support program for Greece by the euro area memberstates and the International Monetary Fund (IMF), and the agreement toraise the lending capacity of the European Financial Stability Facility(EFSF) and the European Stability Mechanism (ESM).Nevertheless, markets became nervous again from early spring: there wastalk of a euro crisis due to the turmoil in the domestic political situation inGreece, and in Spain yields on 10-year government bonds temporarily _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 76rose above 7 percent due to concerns about the stability of its financialsystem.Subsequently, a new government was inaugurated in Greece, and the EUand Eurozone summits at the end of June emphasized the need tostrengthen growth and agreed to take steps to establish a singlesupervisory body for eurozone banks with a view to making it possible forthe ESM to recapitalize banks directly.These decisions raised hopes that the vicious circle between uncertaintyover Spain’s financial system and increasing government debt would bebroken, and markets temporarily regained stability.This situation, however, did not last long.At present, yields on 10-year Spanish government bonds are hovering ataround 7 percent.On the other hand, interbank funding markets have generally been stablesince the beginning of 2012 due to the abundant liquidity provision by theEuropean Central Bank (ECB).It appears, however, that it will take some more time until uncertaintiesare dispelled over the fiscal and economic structural reforms as well asover measures regarding the financial system in Europe.Thus, developments in the European debt problem continue to warrantcareful attention.2. Overseas economiesUnder these circumstances, overseas economies have shown someimprovement, albeit moderate, but on the whole they have not emergedfrom a deceleration phase.By region, economic activity in the euro area continues to be sluggish,despite signs of a pick-up in exports, because domestic demand in thearea has been stagnant. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 77Peripheral countries in particular have fallen into a vicious circle, inwhich the downturn in economic activity due to fiscal austerity measuresand the deterioration in financial conditions lead to a further worsening ofthe financial conditions of governments and financial institutions.As a result, disparities between economic sentiment in core countriessuch as Germany and in peripheral countries are widening.For example, the unemployment rate in Germany stands at around 5percent, which is a historical low since the reunification of East and WestGermany, while in Spain it has reached well over 20 percent and the youthunemployment rate is in excess of 50 percent.Moreover, the deterioration in the economies of peripheral countries isaffecting business sentiment in core countries, and thus the Europeaneconomy is likely to remain sluggish for the time being.Next, the U.S. economy is generally continuing to recover at a moderatepace.Private consumption has been firm due in part to an increase in realpurchasing power reflecting the decline in gasoline prices, and thehousing market has shown some signs of picking up.Business fixed investment has recently maintained its uptrend against thebackground of solid corporate profits.However, signs of weakness have been observed in business sentiment,and the momentum of growth in employment has recently been slowing.Furthermore, amid persisting strains from balance-sheet adjustments,households and firms are not likely to increase their spending due toconcerns over the adverse impact of the European debt problem as well asuncertainty regarding the “fiscal cliff,” that is, fiscal spending cutsscheduled to be implemented at the beginning of 2013 and the handlingof tax cuts set to expire at the end of 2012. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 78Taking these factors into account, the U.S. economy is likely to recover atonly a moderate pace.Emerging and commodity-exporting economies still have not emergedfrom a phase of sluggishness, but on the whole these economies havemaintained relatively high growth backed by firm domestic demand.The pace of growth in the Chinese economy has slowed reflecting thedeceleration in private real estate investment as a result of monetarytightening earlier, but there are also signs that the slowdown is bottomingout, such as the increasing trend in exports and bank lending.The Chinese government has accelerated approvals for infrastructureinvestment and introduced subsidies for energy-saving electricalappliances and other goods.With the pace of consumer price inflation decelerating, the authoritieshave also started stimulating the economy on the monetary front,lowering the benchmark lending rates for two consecutive months.Looking ahead, the growth rate of the Chinese economy is unlikely toreach dramatic levels, but it is likely to rise gradually as these policymeasures start producing effects.In the NIEs and the ASEAN economies, exports have been affected bythe slowdown in Europe and China, but domestic demand has been firmon the whole, and production has been recovering moderately.As for the outlook, including other emerging economies such as Brazil,the growth rate of emerging and commodity-exporting economieswill likely increase gradually reflecting accommodative financialconditions and a recovery in real purchasing power following a decline ininflation rates. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 79B. Japan’s Economy1. Economic activityI will now explain the current state of, and outlook for, Japan’s economybased on the overseas economic developments I have just outlined.Until the beginning of autumn 2011, Japan’s economy picked up steadilyfollowing the plunge caused by the Great East Japan Earthquake, whichstruck just as the economy was recovering from the Lehman shock.Thereafter, however, it remained more or less flat on the whole untilaround the early spring of 2012 mainly due to the adverse effects of theslowdown in overseas economies and the appreciation of the yen.More recently, with domestic demand remaining firm – led byreconstruction-related demand and private consumption – and exportscontinuing to show signs of picking-up, economic activity on the wholehas started picking up moderately.The firmness in domestic demand is attributable to the following factors.Demand for restoration and reconstruction of social infrastructure and ofdisaster-stricken facilities and homes has led to increases in publicinvestment, business fixed investment, and housing investment.Reconstruction-related demand has also been underpinned by changes inthe behavior of firms and households triggered by the disaster.Examples are efforts to strengthen the earthquake resistance of buildingsand facilities and to bolster business continuity systems, investment inthe area of new energy sources, and the purchase of energy-savingproducts.Meanwhile, private consumption has been boosted by pent-up demand,that is, a recovery in demand following the temporary restraint due to theeffects of the disaster, and by policy measures such as subsidies forpurchasers of environmentally friendly cars. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 80Private consumption has also been pushed up by an increase in spendingon products and services provided by businesses targeting the elderlyreflecting firms’ efforts to enhance their line-up in this area.Although considerable uncertainty remains regarding the outlook,Japan’s economy, with domestic demand remaining firm and overseaseconomies emerging from their phase of deceleration, is expected toreturn to a moderate recovery path, as also shown in the June 2012 Tankan(Short-Term Economic Survey of Enterprises in Japan) and the RegionalEconomic Report.Given this situation in demand at home and abroad, the economy is likelyto register a relatively high rate of growth in fiscal 2012, supported by agradually increasing momentum in the virtuous circle of growth inproduction, income, and spending.In fiscal 2013, with overseas economies continuing to see relatively highgrowth on the whole, the economy is expected to be firm, although thegrowth rate is expected to be somewhat lower than that in fiscal 2012,because the positive effects from reconstruction-related demand willgradually diminish.In the Bank of Japan’s projection released in July 2012, the median of thePolicy Board members’ forecasts for Japan’s real GDP growth rate is 2.2percent for fiscal 2012 and 1.7 percent for fiscal 2013.2. PricesNext, I will talk about price developments.International commodity prices softened somewhat from autumn 2011,reflecting the slowdown in the global economy.After a slight rise in early spring of 2012, especially in crude oil pricesagainst the backdrop of heightened geopolitical risk, they then fell backagain through June 2012, and remained more or less flat thereafter. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 81Most recently, prices of crude oil have bottomed out, while those of grainshave risen due to unseasonable weather.As for the outlook, international commodity prices as a whole areexpected to rise at a moderate pace in line with the growth in overseaseconomies.Under these circumstances, the year-on-year rate of change in thedomestic corporate goods price index (CGPI) has recently been negative.The CGPI is expected to decline moderately for the time being and thenstart to rise slowly reflecting the expected moderate increase ininternational commodity prices and the improvement in the negativeoutput gap.Turning to the consumer price index (CPI) for all items less fresh food,the year-on-year rate of change since summer 2011 has been around 0percent and is expected to stay at this level for the time being.Assuming that medium- to long-term inflation expectations remainstable, the year-on-year rate of change in the CPI is expected to graduallyrise to a range of above 0.5 percent and less than 1 percent in fiscal 2013 asthe negative output gap improves.Thereafter, it will likely be not too long before the rate reaches the Bank’scurrent “price stability goal in the medium to long term” of 1 percent.In the Bank’s projection released in July 2012, the median of the PolicyBoard member’s forecasts for the year-on-year rate of increase in the CPI(all items less fresh food) is 0.2 percent for fiscal 2012 and 0.7 percent forfiscal 2013.C. Risks to the baseline scenarioThe baseline scenario for Japan’s economy described thus far is subject toboth upside and downside risks.By far the most important risk is uncertainty regarding the outlook for _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 82overseas economies, and particularly the European debt problem.Although concerns about the stability of Spain’s financial system hadtemporarily subsided thanks mainly to the agreement reached at the EUand eurozone summits, in order to fundamentally resolve the debtproblem it is nevertheless necessary in Europe to break the underlyingnegative feedback loop among fiscal balances, the financial system, andeconomic activity.At the same time, it is crucial that countries on the European periphery,whose international competitiveness has declined, steadily work on fiscaland economic structural reforms.Moreover, as part of the efforts toward deeper integration in the euro area,discussions are ongoing within the EU with the aim of establishing abanking union and a fiscal union, and I believe it is important to pressahead with these steps.In this situation, if reforms make steady progress, this would strengthenmarket confidence, which in turn would push up global economicgrowth.However, in core countries such as Germany, there are concerns that thefinancial burden of providing support to peripheral countries through, forexample, greater fiscal integration would increase.Hammering out concrete steps, therefore, is likely to involve a great dealof complication.If in the meantime the European debt problem worsens, or theconsiderable sense of uncertainty continues for a prolonged period, thiscould weigh on the economic recovery in other areas such as the UnitedStates and China.External demand for Japan’s exports is expected to once again becomethe driving force of Japan’s economy after the earthquake-relatedreconstruction demand peaks out, but if exports remain sluggish, avirtuous circle may not take hold. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 83For this reason, overseas economic developments warrant close attention.Next, risks stemming from domestic factors include uncertainty withregard to reconstruction-related demand as well as both upside anddownside risks in how medium- to long-term growth expectations will beaffected by the supply and demand balance of electricity and byinnovation in energy-related technology.Another issue is the sustainability of Japan’s public finances, concernsover which restrain consumer spending due to anxiety about the futureand affect long-term interest rates.Given that social security spending will continue to exert upward pressureon fiscal expenditure, it is necessary to push ahead with structural reformof public finances on both the expenditure and the revenue side andmaintain the public’s confidence in fiscal discipline.Efforts to restore Japan’s public finances are underway and are somethingthat I will keep a close eye on.Both upside and downside risks persist also in import prices, particularlyinternational commodity prices.II. Monetary policyNext, I would like to turn to the Bank’s conduct of monetary policy underthe current economic situation.In order for Japan’s economy to overcome deflation and return to asustainable growth path with price stability, efforts to strengthen theeconomy’s growth potential and support from the financial side are of theutmost importance.Based on this recognition, the Bank is currently providing support to raiseJapan’s growth potential through its fund-provisioning measure tosupport strengthening the foundations for economic growth, while at thesame time pursuing powerful monetary easing continuously by steadilyproviding funds through, for example, purchasing financial assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 84Moreover, the Bank is doing its utmost also to ensure stability infinancial markets.In what follows, I will explain the Bank’s measures in greater detail.A. Pursuit of powerful monetary easingI will begin with the Bank’s pursuit of powerful monetary easing.In October 2010, the Bank introduced the comprehensive monetaryeasing policy, and has been easing financial conditions continuouslysince then.The comprehensive monetary easing policy consists of three measures:the implementation of a virtually zero interest rate policy by setting thetarget for the policy rate, the uncollateralized overnight call rate, ataround 0 to 0.1 percent; the purchase of financial assets andfunds-supplying operation through the Asset Purchase Program(hereafter the Program); and the clarification of the policy time horizon,that is, the clarification that these measures will remain in place until theBank judges that price stability is in sight.In this context, financial conditions in Japan have continued to ease.The overnight call rate has been below the 0.1 percent level.With regard to long-term interest rates, yields on Japanese governmentbonds (JGBs) with a remaining maturity of three years or less are0.1 percent, and those on 10-year government bonds are at the lowest levelin about nine years.Firms’ funding costs have also declined moderately, as shown, forexample, by the fact that the average contracted interest rate on new loansand discounts is in the region of only 1 percent. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 851. Clarification of the policy time horizon based on “the pricestability goal in the medium to long term”At the Monetary Policy Meeting held in February this year, the Bankintroduced “the price stability goal in the medium to long term” as a partof its efforts to further clarify its determination to overcome deflation.“The price stability goal in the medium to long term” is the inflation ratejudged by the Bank to be consistent with price stability sustainable overthe medium to long term.At present, the Bank judges “the price stability goal in the medium tolong term” to be within a positive range of 2 percent or lower in terms ofthe year-on-year rate of change in the CPI and, more specifically, sets agoal of 1 percent for the time being.On this basis, the Bank has stated that for the time being it will aim toachieve the goal of 1 percent inflation in terms of the year-on-year rate ofincrease in the CPI through the pursuit of powerful monetary easing,which I mentioned earlier.As you can see, by presenting its commitment regarding the policy timehorizon, the Bank has further clarified its determination to pursuemonetary easing.2. Expansion of the Asset Purchase ProgramThe Program currently implemented by the Bank was established tofurther enhance monetary easing by encouraging a decline in longer-terminterest rates and various risk premiums in a situation where there waslittle room for a further decline in short-term interest rates.Established on the Bank’s balance sheet, the Program is used to purchasevarious financial assets – such as government securities, CP, corporatebonds, exchange-traded funds (ETFs), and Japan real estate investmenttrusts (J-REITs) – and to conduct fixed-rate funds-supplying operation.Since the establishment of the Program, the Bank has expanded its size _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 86successively, including in February and April of this year, so that theoutstanding amount of asset purchases would reach about 65 trillion yenby around the end of 2012 and about 70 trillion yen by around the end ofJune 2013, thereby contributing to the pursuit of powerful monetaryeasing.Furthermore, in April, in order to encourage a decline in longer-terminterest rates, the Bank decided to extend the remaining maturities ofJGBs and corporate bonds to be purchased under the Program from “oneto two years” to “one to three years.”And in July, the Bank decided to remove the minimum bidding yields foroutright purchases of treasury discount bills (T-bills) – which hadpreviously been 0.1 percent per annum – and of CP in order to ensure thatthe outstanding amount of asset purchases under the Program wouldreach the planned amount.For the same reason, the Bank also revised the categories of assetspurchased and loans provided through the Program.The outstanding amount of the Program stood at 53 trillion yen as of July20, and the Bank will continue to proceed with powerful monetary easingby steadily increasing the outstanding amount of the Program by about17 trillion yen by around end-June 2013.It is expected that the effects of the continuing purchases of financialassets under the Program will strengthen further as the economy recovers.B. The Bank’s efforts to support strengthening the foundationsfor economic growthI will now talk about the fund-provisioning measure to supportstrengthening the foundations for economic growth (hereafter theGrowth-Supporting Funding Facility).The Bank introduced this measure in June 2010 to support strengtheningthe foundations for economic growth for the purpose of providing supportfor the critical challenge of enhancing the growth potential of Japan’s _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 87economy, and has been providing long-term funds at a low interest rate tofinancial institutions in accordance with their efforts in terms of lendingand investment for strengthening the foundations for economic growth.The maximum duration of loans is four years, and the loan rate iscurrently set at 0.1 percent.The initial ceiling of the outstanding amount of loans was set at 3 trillionyen. Subsequently, in June 2011, the Bank introduced a new lendingarrangement of 500 billion yen for the measure, through which it extendsloans to financial institutions for their equity investments and asset-basedlending (ABL).The loans for ABL allow financial institutions to use their expertise toidentify and lend to potential growth firms without conventional collateralor guarantees.In March 2012, the Bank decided to further enhance theGrowth-Supporting Funding Facility by(1) Increasing the ceiling for the outstanding amount of loans from 3trillion yen to 3.5 trillion yen;(2) Establishing special rules for another new lending arrangement of 500billion yen for small-lot investments and loans; and (3) establishingspecial rules for a new U.S. dollar lending arrangement of 12 billion U.S.dollars – equivalent to 1 trillion yen – using the U.S. dollar reserves alreadyheld by the Bank, for foreign currency-denominated investments andloans.The outstanding balance of the total loans disbursed by the Bank,including those extended under the special rules, stood at approximately3.2 trillion yen as of the beginning of June.The first disbursement of U.S. dollar loans under the special rules is totake place in September. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 88A breakdown of financial institutions’ individual investment and lendingfor strengthening the foundations for economic growth in the period April2010–March 2012 by designated business area shows that almost 30percent of the total funds was provided to “environment and energybusiness” and almost 20 percent was provided to “medical, nursingcare, and other health-related business,” but funds were also provided tobusiness areas falling under the category of “others,” such as lending orinvestment to revitalize local industries.A wide range of financial institutions have been making a variety ofefforts targeting their specific customer base or the region they serve,such as establishing new dedicated funds to support economic growth, sothat the amount of lending and investment actually provided by financialinstitutions using the Growth-Supporting Funding Facility greatlyexceeds the amount of loans disbursed by the Bank.The Bank, with its steady disbursement of loans, will continue to supportthe flow of funds to growth areas in order to contribute as much aspossible as the central bank of Japan toward strengthening thefoundations for economic growth.C. Measures to ensure financial market stabilityIn addition to pursuing the measures just described, the Bank has beendoing its utmost to ensure financial market stability by making use ofvarious funds-supplying operations.Immediately after the earthquake in March 2011, the Bank providedample funds on an unprecedented scale, exceeding the amount providedimmediately following the Lehman shock.When the European debt problem worsened at the end of November 2011,the Bank lowered interest rates on U.S. dollar funds-supplying operationsas part of coordinated measures among six major central banks in orderto ensure stability in financial markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 89At the same time, the central banks agreed to establish bilateral swaparrangements enabling the provision of liquidity in any of their currenciesin addition to the already available U.S. dollar.III. Issues related to strengthening the growth potential ofJapan’s economyA. The importance of strengthening the growth potential toovercome deflationEarlier, I touched on the Bank’s efforts to support strengthening thegrowth potential of Japan’s economy.Let me elaborate on the challenges we face in strengthening the growthpotential.Japan’s economic growth rate has been trending down due to the effectsof the low birth rate and the aging of the population as well as to a declinein its international competitiveness.Consumption and investment have been restrained as a result of a declinein households’ and firms’ growth expectations, so that aggregatedomestic demand has remained below the aggregate supply capacity ofthe economy for a prolonged period, exerting downward pressure onprices.With economic activity picking up, the output gap – that is, the differencebetween aggregate supply capacity and aggregate demand – has recentlybeen narrowing.Nevertheless, aggregate demand continues to fall short of aggregatesupply capacity by about 2 percent.While price developments are subject to various factors, includingdevelopments in international commodity prices, in order for Japan’seconomy to overcome deflation it is important to address the problem of _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 90insufficient demand, which is the key factor underlying deflation inJapan.At the same time, in order to achieve sustainable economic growth amidthe low birth rate and aging of the population, it is important to maintainsufficient supply capacity to meet new sources of demand.B. Capturing global demand and creating demand throughinnovationTo resolve the problem of insufficient demand, it is essential to captureglobal demand, including demand from emerging economies, and to taplatent demand both at home and abroad.With respect to capturing global demand to overcome the shortage ofdemand at home, in addition to making efforts to increase exports it isimportant to increase income from overseas investment.While income from foreign direct investment is not included in GDP, itdoes contribute to gross national income (GNI).Moreover, advances in the international division of labor likely contributeto strengthening the economy’s growth potential through the associatedincrease in exports of related goods and the shift of the domestic laborforce into areas with growth potential.Tapping latent demand, the other essential element in addressinginsufficient demand, also requires efforts on a continuous basis.Markets for new types of goods and services usually grow only slowly atthe initial stage.They then enter a phase of rapid growth until demand is saturated andgrowth slows again.In order to maintain the growth potential of the economy as a whole, it istherefore important to continuously secure demand both at home andabroad. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 91To this end, it is necessary to accelerate innovation that taps latentdemand for goods and services and consequently creates demand, whichwill give depth to areas with growth potential.The demographic change resulting from the low birth rate and the agingof the population is also prompting changes in the demand structure.For example, consumption expenditure by households headed by aperson aged 60 years or older, including the baby-boomer generation,now accounts for more than 40 percent of total private consumption.Therefore, an important challenge is to supply goods and services thatmeet the needs of this generation in a timely manner.Corporate profits and business sentiment at Japanese firms have been onan improving trend recently.This reflects not only the positive effects of subsidies andearthquake-related reconstruction demand, but in my view also showsthat firms’ active efforts to tap latent demand and address socialchallenges are paying off.Examples are businesses targeted at the elderly and in the areas ofinformation and telecommunications as well as environment and energy,where challenges in terms of energy creation, energy saving, and energystorage need to be addressed with urgency.For example, in the automobile industry, environmentally friendly cars –such as hybrid cars with better environmental efficiency – have beenselling briskly, and it is expected that related markets, such as those forrechargeable batteries, will also expand.In the field of information and telecommunications, smartphones arecoming into widespread use, providing the infrastructure for not only thedistribution of digital books and music but also a whole range of newservices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 92One example is the use of the Internet and the Global Positioning System(GPS) to provide services such as giving information on cafes andrestaurants in the vicinity and guiding smartphone users there.In the convenience store industry, the number of stores was said to benear saturation at one time.However, by expanding the range of products and services aimed atwomen and the elderly, such as introducing home deliveries, conveniencestores have been able to increase their sales per store.Looking ahead, it is extremely important that efforts toward innovationdo not come in spurts but are sustained across a wide range of fields.C. Maintaining the labor supply and improving productivityIn order to strengthen Japan’s growth potential, it is also important toensure that supply capacity is commensurate with demand.While the recent employment situation has been on an improving trend,labor supply still exceeds demand.There still remain problems that need to be solved, such as the extremelysevere employment conditions for the young.However, Japan’s working age population will continue to decline, and inthe medium to long term labor supply may fall short of demand.Economic growth can be decomposed into two components: the rate ofgrowth in the number of workers and that in productivity per worker.Assuming that the labor force participation rate remains unchanged, thenegative growth contribution of the decline in the number of workers isforecast to increase to around 1.0–1.5 percent by the 2030s.Meanwhile, the average annual increase in labor productivity has beenaround 1 percent in recent years, so if things remain the same, Japan’spotential growth rate will fall into negative territory. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 93In order to mitigate the impact of these developments as much aspossible, with regard to the labor force, it is important to increase labormarket flexibility to allow workers to change industries more easily and toboost labor market participation of the elderly and of women who wish towork but are not currently working.On the other hand, regarding labor productivity growth, this is actuallyquite high in Japan when compared with other major countries and maybe difficult to raise further.However, since labor productivity is the ratio of aggregate value added tolabor input costs, productivity growth could be improved if growth areasprovide sufficient opportunities for the creation of high-value-addedgoods and services, so that firms can generate sufficient profits.This could then produce forward momentum through generating income,thus mitigating the impact of the decline in the working-age population.Given that Japan has a low birth rate and the fastest aging population inthe world, achieving such a strengthening of the growth potential isextremely difficult and represents a challenge that requires the efforts ofthe nation as a whole, since it requires raising demand, labor supply, andproductivity to the limits of Japan’s potential.Based on this perspective, the Japanese government has compiled the“Strategy for Rebirth of Japan” to create an environment allowing firms tomeet the challenges of the task.The strategy places priority on eleven areas.These areas include “green innovations,” which focuses on Japan’s aimto lead the world in the energy revolution and create new industries andemployment related to this field;“life innovations” with the aim of turning businesses related to medicalservices and nursing care into growth industries, fostering new relatedindustries and markets, and developing markets overseas; humanresources development; and turning Japan into a tourism nation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 94In order to boost the efforts undertaken by firms, support from thefinancial side is essential, in addition to the creation of the rightenvironment.With this in mind, the Bank will continue exerting itself in its roletogether with firms, financial institutions, and the government. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 95B. Market intelligence, market information andstatistics in central bankingKeynote Speech by Mr Kiyohiko G Nishimura, DeputyGovernor of the Bank of Japan, to the 6th Irving FisherCommittee Conference, Bank for InternationalSettlements, Basel, 29 August 2012.1. Introduction: statistics, market informationand Irving FisherIt is a privilege for me to address this keynote speech before thedistinguished members of the Irving Fisher Committee.I am particularly thrilled, since the name Irving Fisher strikes a chord inmy heart.Irving Fisher is an iconic figure at Yale University, where I earned mydoctorate.In fact, he received the first Ph.D. in economics ever granted by Yale,in the year 1891.I vividly remember his life-size portrait hung above the mantelpiece of the19th century mansion house, gazing solemnly at faculty members andgraduate students.No new words are needed to attest to his monumental contributions tomicroeconomics, macroeconomics and monetary theory.He was also influential in laying the foundations of economic statistics, asexemplified in his popular The Making of Index Numbers.In fact he was not content with just theory: he went on to found by himselfthe Index Number Institute that engaged in computing commodity priceindices, and thus became one of the most popular providers of marketinformation at the time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 96Unfortunately, however, he failed to recognize the significance of theStock Market Crash of 1929.Just three days before the crash, he wrote that stock prices were at apermanently high plateau.And even after the crash, he continued to assure investors that a recoverywas just around the corner.This might testify to his failure in “market intelligence”, in detecting thesigns of a fundamental change in the market place.In his latter days, though not immediately appreciated by the public andthe profession, he presented a remarkable theory of debt deflation as anexplanation of the Great Depression.In fact, this masterful piece of work is the precursor of the vast literatureconcerning financial stability, which is especially relevant in economicpolicy making in the aftermath of the financial crisis of 2008.What then can we central bank statisticians learn from these dramatic upsand downs in the life of Irving Fisher?In fact, this is the subject of this speech.In particular, I argue that, although reliable macroeconomic statistics areof course necessary for policy making, even good statistics are sometimesgrossly insufficient to guide economic policy, especially when a seismicchange occurs in the market and the economy.The recent financial crisis is an example of such change.Thus, central bankers should incorporate “market intelligence”, which Iwill explain later, and non-statistical market information, into theirarsenal of statistics. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 97So a central bank statistician should be more than simply a compiler ofwell-defined statistics: they should become a sort of sleuth or intelligenceagent, detecting signs of future developments that may change the world.I proceed as follows.Section 2 outlines the value of economic information from the perspectiveof policy decision making.A key theme here is “market intelligence”, which is the active gatheringand analysis of market information through central banking activities.To understand the importance of market intelligence, I present threeexamples, with respect to the past, the present, and the future.Section 3 presents a lesson from the past.I examine the so-called Paribas Shock of 2007, and argue for the absolutenecessity of “proactive” market intelligence to avoid this type of financialcrisis.Section 4 describes the current achievements of market intelligence in anarea of pressing importance: property price statistics.I show that it is possible to get reliable, unbiased information bycombining various existing market information sources, even thoughindividually they may have their own biases.Section 5 concerns the future: detecting problems in shadow banking.Shadow banking involves a complicated structure, so it is necessary tograsp its “interconnectedness” to gauge the magnitude of potentialproblems.As an example, I explain the Bank of Japan’s attempt to reveal theinterconnectedness of the Tokyo money markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 98Section 6 contains some concluding remarks on market intelligence andcentral bank statistics.2. Economic information and policy makingContemporary central banking faces two major challenges; one related toaccountability, and the other to effective communication.First, central banks should be accountable for their policies.This is all the more important for those central banks that haveindependence in determining their monetary policy.Accountability means policy should be evidence-based, that is, based onclear reasoning relying on substantiated data.Second, central banks should be effective communicators.Markets and economies have become increasingly susceptible to changesin economic agents’ expectations.To ensure that policy is effective, central banks must communicate withthe public in a persuasive manner.Here again, data supporting policy decisions become important.Thus, for accountability and effective communication, “numbers” orstatistics become increasingly important.Moreover, data here means not only quantitative data; qualitative data areequally as important.Knowns and unknowns in Central Bank policyTo understand the nature of the economic information central bankswant to know, the following three-way classification may be helpful. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 99The first type of information concerns “known knowns”.Here “knowns” are whatever happened in the past.Thus, known knowns are information about what happened, and typicalknown knowns are contained in statistics.The second type is “known unknowns”.Here unknowns are those things that are happening at present or that willemerge in the future.They are known unknowns, since we already know that they arehappening or will happen.You may have come across the word “now-cast”, which is an “estimate”of what is happening now, used in contrast with a “forecast” whichpredicts future events.A “now-cast” is a typical example of a “known unknown”.Finally, there is the third type, called “unknown unknowns”, thingspreviously unknown but potentially having a significant effect on theeconomy.Here I quote Donald Rumsfeld, the former U.S. Secretary of Defense,whose enigmatic statement gives perhaps some indication of their nature:“But there are also unknown unknowns – the ones we don’t know wedon’t know.And if one looks throughout the history of our country and other freecountries, it is the latter category that tend to be the difficult ones.”Keeping in mind this three-way categorization, let me ask the followingquestion: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 100What kind of information does a central bank policy maker want to knowwhen he or she decides on policy?And, in what way is it related to the three-way categorization?First of all, in contemplating appropriate aggregate demand managementpolicy, the central bank policy maker wants to know the momentum ofactivity in the economy and financial markets.However, this is not in itself sufficient.The experience of the recent financial crisis has shown that the centralbank policy maker should also be aware of the signs of previouslyunknown factors, unknown but potentially significant changes in theeconomy and financial markets.In fact, with respect to the former, i.e. macroeconomic momentum, wehave made significant progress.There have been improvements in the comprehensiveness, accuracy andtimeliness of macroeconomic statistics related to aggregate demandmanagement.We now have a rich array of data, both quantitative as in GDP and CPIfigures, and qualitative as in business surveys.Not only public but also private institutions produce and disseminatetheir own data.These are either known knowns (type 1), or known unknowns (type 2).Statistics provide valuable information about known knowns, and theybecome the foundation for estimating known unknowns.However, statistics are grossly insufficient when it comes to detectingunknown unknowns (type 3). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 101Central-bank policy makers are frequently frustrated by deficiencies inthe statistics available, which they find inadequate in helping them detectpotential problems in the economy.Perceived deficiency is especially keen in financial information.It should be noted that financial stability is now seen as a prerequisite foreconomic stability.Moreover, policy makers are alarmed by the increasingly strong negativefeedback seen in recent years between financial malaise and economicstagnation.The rapid development of financial factors confounds the problem ofdetecting malign symptoms.Thus, guarding against previously unknown but potentially devastatingfactors has become one of the most important issues for policy makers.Thus, in November 2009, the G20 Finance Ministers and Central BankGovernors requested statisticians to fill the so-called data gaps.Twenty recommendations were submitted in the G20 Data GapsInitiative (DGI) in order to establish timely reporting schemes fordetecting both known unknowns (type 2), and unknown unknowns (type3) .The key to guarding against unknown unknownsA central bank’s intelligence activities are the key to guarding againstunknown unknowns.These consist of two parts.The first is so-called “market intelligence”: the central bank’s dailytransactions with financial institutions, which provide various kinds ofinformation about market participants, developments in financialproducts, as well as other “news”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 102These pieces of market information are valuable in creating a timely andaccurate view of particular institutions and the market as a whole.The gathering and analyzing of this information is the core of “marketintelligence”.The second part of the central bank’s intelligence activities is monitoringand feedback.Qualitative or supervisory information can be obtained from regularsupervisory dialogue with regulated entities.They have valuable information, and by analyzing it thoroughly we get agrasp of the details of market information, which is then fed back to theseinstitutions if necessary.It should be noted here that information coming from individual financialinstitutions may include subjective or in some cases biased content,regardless of whether it is market information or information acquiredthrough regulatory monitoring.We should be aware of these biases, and good market intelligence isneeded to gauge the extent of such bias and to compensate for it.3. Lessons from the past: necessity of proactive marketintelligenceLet me now turn to three examples of central bank intelligence.The first example is its failure in the past.This is the so-called Paribas Shock of August 9, 2007, the precursor of theglobal financial crisis of 2008.On July 10, 2007, S&P and Moody’s announced that they would bereviewing the ratings of several residential mortgage-backed securities(RMBS) backed by subprime housing loan assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 103As a consequence, the AAA ratings of asset-backed commercial paper(ABCP) backed by these RMBS would also be downgraded accordingly.This looked like a minor change in a marginal market of the US financialsystem.Unfortunately however, within just one year, it became the epicenter of aglobal financial crisis.To understand the problem, we should be aware of the special role ofmoney market funds (MMFs) in the United States.US MMFs were considered to be extremely safe financial assets.One of the primary reasons for this was that MMFs were only allowed toinvest in AAA-rated assets.Therefore, when ratings were downgraded for ABCP, MMFs did notreinvest in ABCP.Then, funds that originated ABCP and used it to raise money foundthemselves in fund-raising difficulties: funds under the Bear Stearnsumbrella went bankrupt; BNP Paribas moved to freeze its affiliatedfunds’ new applications and redemptions.These funds were the structured investment vehicles (SIV) created bybanks to issue ABCP.When these SIVs were unable to find funding sources, their parent bankswere forced to provide liquidity enhancement instead.At that time, nobody knew for certain which banks’ SIVs were on thebrink of extinction, and which banks had serious liquidity problems.Banks, which frequently lend each other money, suddenly became awareof counterparty risk, the risk that the other party in a transaction mightsuddenly go belly up. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 104They began to worry that some bank somewhere might suddenly beunable to secure liquidity and fail.Indeed, on August 9, a liquidity crisis actually occurred, with liquiditydrying up quickly in the interbank market.Many European banks were among those facing liquidity difficulties.Chart 1 shows an unprecedented spike in the three month LIBOR-OISspread, showing the heightened risk premium in the European interbankmarket.A liquidity crunch in interbank markets started, and it spreadimmediately to the United States (Chart 2).Confronted with this situation, the European Central Bank (ECB)promptly announced that it was prepared to supply massive amounts ofliquidity into the short-term money market.This was the event that came to be known as the Paribas Shock. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 105Lesson: necessity of proactive market intelligenceThe circumstances surrounding the Paribas Shock naturally beg thequestion: Was this event avoidable? Or at least, was there any telling signthat this type of event was just around the corner?As the description of the event shows, there are four important pieces ofinformation that the policy makers should have known and which wouldhave helped prevent this event.The first is the asset position of the MMFs: their composition and quality.MMFs held a large amount of AAA-rated ABCPs of SIVs whose parentswere European as well as US banks.These ABCPs were backed by US subprime loans, so that if the subprimeloans were downgraded then these ABCPs would also be downgraded.The second vital information is possible side effects of the legalconstraints upon the MMFs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 106MMFs could hold only AAArated assets so that, if US subprime loanswere downgraded, MMFs could not reinvest in ABCPs of the SIVs.The third and most crucial information policy makers should have had isknowledge of banks’ involvement in their SIVs.To what extent were those banks obliged to support their SIVs withliquidity injections?Here it was not only a question of contractual arrangements, butreputations were also at stake.The fourth piece of vital information is knowledge about theinter-connectedness among banks in the interbank market.It is clear that existing statistics and routine market intelligence weregrossly insufficient to gather the above four pieces of vital information.To my knowledge, few, if any, market participants flagged the alarms thatshould have been raised by any of these four points.No statistics ever pointed out the danger.However, there were several, though obscure, signs flagging a possibleproblem, so that a market intelligence unit alarmed by these signs mighthave detected the problem and could have helped policy makers avoid thedisaster.In particular, there was a telling sign in the statistics about US MMFs.Chart 3 shows an upward trend in the total assets of the US MMFs in thefirst half of 2007.The growth rate of MMFs was fast, though it did not look extraordinary.However, if you look at the share of “safe assets”, it actually declinedfrom the start of the year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 107So, this chart shows that by looking into these figures, one might havefound some sign of abnormal risk taking in non-safe assets, includingABCP.Thus, if in addition, the market intelligence unit had detected the heavyinvolvement of banks in their SIVs issuing these ABCP, the unit mighthave sensed a possible danger of liquidity crisis in the interbank market,and might have been able to help the authorities prevent the crisis.In fact, after the Paribas Shock, the safe asset share jumped considerablyand the total assets also skyrocketed, showing the strong flight to safetythat devastated the ABCP market, and the ABS market in general.To sum up, it is not clear whether the liquidity crisis in the summer of2007 could have been avoided.However, proactive market intelligence, that is, detection of possibleproblems in the market based on careful monitoring of marketdevelopments and thorough analysis of market statistics, might havehelped contain if not avoid the turmoil in the interbank market, and thusmight have ultimately lessened if not negated the severity of the financialcrisis of the following year. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 108Bearing this in mind, the Fed and other central banks, as well as privateinstitutions, have begun to collect and compile a wide range of statisticsthat capture securitization.In particular, Chart 4 shows details of the asset composition of US MMFs.The chart indicates that MMFs may have already increased investment incommercial papers in 2006, the year before the Paribas Shock.4. Present achievement: best use of existing market informationLet me now turn to the second example, which is the present achievementof market intelligence.This is about property prices, and the issue is the timing of the availabilityof market information.The financial crisis of 2008 was triggered by the bubble and subsequentbust in US house prices.There is a wealth of evidence detailing the close relationship betweenproperty price bubbles and financial crises. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 109International panel studies show more than two-thirds of 46 systemicbanking crises were preceded by house price boom-bust patterns, while35 out of 51 house price-bust episodes were followed by a crisis.However, we have not had access to good property price indexes, basedon sound economic foundations and comparable between countries andjurisdictions.Frustrated by this deficiency, in November 2009, the G20 Ministers andCentral Governors designated property price indexes as one of the mostimportant data gaps to be filled.To rectify the problem, several conferences were held under theleadership of Eurostat, which gathered a wide range of experts onproperty prices from theory to data compilation.Based on these conferences and public comments, the Handbook onResidential Property Price Indices has been drafted, and the finalizedversion of the Handbook will be published very soon.Moreover, many countries and jurisdictions are now preparing their ownproperty price indexes in accordance with the recommendations of theHandbook.In fact, I have learned that Japan’s Ministry of Land, Infrastructure,Transport and Tourism has almost completed the development of a newseries of residential property price indexes using the procedurerecommended in the Handbook, and the Ministry is about to startpublishing new statistics just this morning.Issue of timelinessThis is a great leap forward indeed towards having reliable and accurateproperty price information.However, from the policy maker’s viewpoint, the situation is still far fromsatisfactory. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 110It should be emphasized that, for a policy maker, timely information is asimportant as, or in some cases more important than, reliable and accurateinformation.According to this criterion, many property price indexes are not helpful inimmediate policy making, since they inevitably lag behind marketmovements.To see why, let me give you the example of a typical Japanese propertytransaction.Property transactions follow a series of stages several weeks apart fromeach other, and each stage usually entails different prices, namely:the initial asking price, P1;the offered price, P2;the contract price, P3;and the price that is filed with the land registry office, P4.My collaborators and I have been able to get a unique data set of a largenumber of property transactions in Greater Tokyo which illustrates thesefour stages.Here I will present the results based on this data set.Chart 5 depicts the timeline graphically. From P1 to P2 takes on averageten weeks, form P2 to P3 five and a half weeks, and finally from P3 to P4fifteen and a half weeks.Thus, from P1 to P4 takes almost thirty one weeks, more than a half year.We should also take into account the time taken to collect and compilethe information, which is itself likely to be substantial, as in the case ofGDP and CPI data. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 111Thus, if the authorities use the most reliable transaction price data of P4,it will probably take almost a year.From the policy maker’s viewpoint, this is often too late.To get the timeliest information about property market conditions, earlierreporting of P1, the initial asking price, is preferable.However, this is the asking price, not the transaction price.There might be a substantial bias in this asking price data because aseller wants to sell at a higher price, even though it may take much longerto strike a deal or he is never able to sell.In fact, Chart 6 shows the price distribution of P1, P2, P3 and P4.As expected, the initial asking price P1 has a higher average than the priceP4 at the registry office (though there is the caveat that the samplepopulation of P1 is not exactly the same as that of P4).Thus, we face an apparent trade-off: if you want timely information thenyou use P1, but it has non-negligible bias. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 112If you want accurate information, then you use P4, but it has alreadybecome somewhat stale information by the time it is available.Best use of market informationThere is, however, an important way around this dilemma.It should be noted that the Handbook recommends hedonic qualityadjustment in property price indexes based on detailed micro and macromarket information.There are various ways to conduct hedonic quality adjustment, amongwhich a hedonic quantile regression approach is one of the mostsophisticated and robust.Remarkably, after applying this quality adjustment to both P1 and P4 ofour data set, we find the quality-adjusted price distribution based on P1 isvery close to, and almost indistinguishable from, the quality-adjustedprice distribution based on P4.Let us look at Chart 7, the quantile-quantile plots of two distributions.In the quantile-quantile graph, if two distributions are identical then theplotted line is on the 45 degree line. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 113The upper chart illustrates the result of raw or unadjusted data of P1(initial asking price) and P4 (registered transaction price).This chart clearly shows the upward bias in the initial asking price relativeto the registered transaction price.However, when quality is adjusted using a hedonic quantile regressionmethod, the bias seems almost to have vanished, as shown in the lowerchart.In a nut-shell, the result of this study shows that the initial asking pricedata, the timeliest of all price information, can be used as reliableinformation about property prices, so long as quality is appropriatelyadjusted using a hedonic quantile regression method.So we can benefit from the best use of market information, with respect toboth reliability and timeliness. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 1145. Guarding against future problems: shadow banking and basicinformation gatheringSo far, we have examined the importance of market intelligence and thebest use of market information in the past and the present.I am now looking towards the future, and considering what is needed toguard against future problems.The pressing problem that comes first to mind is that of shadow banking,a problem in the past, but still a potential problem in the future.Since regulations on banks are to be tightened further, new types ofshadow banking may appear, little known at present but potentiallythreatening to financial stability in the future.Modern shadow banking activities are largely based on financial markets,and hence are likely to create innovation there.They change themselves rapidly in response to changes in marketconditions and regulations.Moreover, they have broad interconnectedness with banks and otherfinancial institutions.Given this situation, in what way should central banks gather valid andvital information about them?Here again, I believe that the key is to utilize various sources of marketintelligence alongside other sources of information.Furthermore, I would like to stress that the intelligence work should beproperly followed by the establishment of new statistics about shadowbanking. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 115Various approaches of market intelligenceLet me explain the efforts of the Bank of Japan in this respect.The Bank monitors shadow banking entities and activities throughvarious channels.The nature and scope of the Bank’s monitoring are depicted in Chart 8.Amongst these channels, direct monitoring of major shadow bankingentities is of course the most significant.Thus, the bank has increased the number of staff directly monitoringmajor securities companies.However, it is practically impossible to conduct dialogues with allfinancial institutions of a shadow banking nature, and moreover, shadowbanking activities tend to change rapidly with developments in financialmarkets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 116It should be noted that shadow banking entities are deeply involved infunding and investment with various financial institutions.So indirect monitoring through banks, monitoring through the paymentsand settlements system, and market intelligence through marketparticipants all become important.The Bank also closely watches shadow banking activities insecuritization, securities lending and repos.For instance, we have started direct monitoring of hedge funds andinvestment trusts as well using market intelligence through marketparticipants much more than before.Furthermore, although we do not directly monitor finance companies,since large finance companies are owned by banks, we monitor them bymonitoring the banks.It is then crucial to cross-check the information gathered.Chart 9 illustrates the point. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 117In this regard, it is important to monitor banks as counterparties ofshadow banking entities.This is because bank activities are interconnected with shadow bankingactivities.Market information in the financial markets is also particularly valuable.Central banks are especially well-positioned to collect valuableinformation on the activities of participants in financial markets, sincethey not only gather information relevant to monetary policy, but theyalso operate payment and settlement systems.Information on market practices and financial innovations can oftenprovide early warning of risks, and hence are especially important amongthe various kinds of market intelligence.The case in point is found in the subprime mortgage crisis in the UnitedStates.Securitized products were originated with financial engineering anddistributed without appropriate risk assessment.This was partly due to an overly optimistic assessment of riskdiversification.However, this risk became increasingly visible in the market as themarket evolved into a new phase.Feedback of market intelligenceAnother important role of market intelligence is to feed information backto the market, and thus to find potential information gaps to be filled.For example, based on market intelligence, the Bank of Japan designsand compiles the “Tokyo Money Market Survey”, which providesan overall quantitative assessment of the money markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 118The survey depicts, among other things, the current interconnectednessamong financial institutions through repo transactions, as is shown inChart 10.This chart shows that securities companies borrow specific JGBs throughSC repos mainly to cover their short position in bond trading.Most of their short-term money is funded through GC repos from trustbanks, while some funds come from banks and money market dealers.This kind of quantitative understanding provides both new perspectivesfor central bank business and wider grounds for dialogue with financialinstitutions and market participants.In fact, the result of these dialogues will be examined and used byfinancial institutions to develop more sound business practices.Also, the feedback of any relevant information will be reflected in the nextsurvey data.Starting this year, we will begin to conduct this survey regularly. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 119Overall, market intelligence is absolutely crucial for central banks inmaintaining the stability of the financial system.I believe that this flexible system of monitoring shadow banking entitiesand activities, based on market intelligence, can provide a good pilotstudy for other central banks to consider when they want to identifyemerging risks and vulnerabilities in their own countries andjurisdictions.6. Concluding remarksLet me now come to my conclusion.As we all know and feel, central banks around the world have facedserious challenges, especially since the financial crisis of 2008.Financial stability is now clearly marked as an essential prerequisite foreconomic stability, and it is thus the responsibility of central banks tomaintain this stability.Moreover, the financial turmoil following the collapse of LehmanBrothers, and still lingering somewhat in the global market, has clearlyproved that existing statistics are not sufficient for policy making, inparticular policy making involving financial markets.Financial markets are fast moving and “mutate” in many ways in arelatively short period of time.Therefore, I have argued in this speech that gathering and thoroughlyanalyzing market information, which is often described as marketintelligence, is of the utmost importance and should be utilizedproactively alongside conventional economic statistics.The reason I have stressed market intelligence, or more specifically,central bank intelligence, is that central banks have a clear comparativeadvantage in extracting valuable and vital information, especially fromfinancial markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 120Central banks are the unique organization that transacts with the widestrange of financial market participants.I have explained how this market intelligence works in the case of shadowbanking in Japan.The most important point is to extend these intelligence activities to newfinancial institutions and products to detect possible problems.The existing framework at the Bank of Japan is versatile and canincorporate new elements relatively easily.However, problems remain about the depth or intensity of theseintelligence activities: that is, the quantity and quality of informationcurrently available may not be sufficient for detecting possible risks.Thus, we are only at the starting line, and there is still a long way to go.Finally, I should emphasize that market intelligence has significantlyimproved central banks’ economic statistics, and will continue to do so inthe future.We have learned from the failures in the summer of 2007, that we mustextend the coverage and improve the quality of statistics concerningnon-depository financial institutions.We can also take advantage of new methods and new information sourcesto get the best use of market information in constructing timely statistics,as shown in the case of property prices.In closing, I would like to emphasize again the point I stated in theIntroduction, the point that I would most like to convey to you.Central bank statisticians should be more than good statisticians, simplymaintaining the quality of existing statistics. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 121They should also be good sleuths or intelligence agents, detecting signsof future developments that may change those statistics, and thus maychange our world.Thank you for your kind attention. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 122NUMBER 8News Release - The dogand the frisbee – paper byAndrew Haldane31 August 2012In a paper given at the FederalReserve Bank of Kansas City’s 36th economic policy symposium inJackson Hole, Wyoming, Andrew Haldane – Executive Director forFinancial Stability and member of the Financial Policy Committee –explores why the type of complex financial regulation developed overrecent decades may be sub-optimal for crisis control.In doing so, he draws out a number of public policy lessons.The paper is co-written with a Bank colleague, Vasileios Madouros.Andrew Haldane presents evidence from a range of real-world settings todemonstrate that decision-making in a complex environment can benefitfrom the use of simple decision rules of thumb.He argues that complex rules often: have punitively high costs ofinformation collection and processing; rely on “over-fitted” models thatyield unreliable predictions; and can induce defensive behaviour bycausing people to manage to the rules.He argues that regulatory responses to financial crises, past and present,have been to increase complexity with: “...a combination of more riskmanagement, more regulation and more regulators”.As the Basel Accords have evolved over time, he notes, so has opacity andcomplexity associated with increasingly granular, model-basedrisk-weighting.Meanwhile, detailed rule-writing in the form of legislation has increaseddramatically, as has the scale and scope of resources dedicated toregulation. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 123Andrew Haldane uses a set of empirical experiments to measure theperformance of regulatory rules, simple and complex.He finds that simple rules such as the leverage ratio and market-basedmeasures of capital outperform more complex risk-weighted models andmultiple-indicator measures in their crisis-predictive performance.He says that: “The message from these experiments is clear andconsistent.Complexity of models or portfolios generates robustness problems whenunderstanding a complex financial system over plausible sample sizes.More than that, simplicity rather than complexity may be better capableof solving these robustness problems.”Andrew Haldane considers five policy lessons that financial regulationcan draw from these findings.First, he suggests that the Basel framework could take: “...a moresceptical view of the role and robustness of internal risk models in theregulatory framework...simplified, standardised approaches to measuringcredit and market risk, on a broad asset class basis, could be used.”Second, he says the leverage ratio could be placed on an equal footingwith capital ratios, an approach taken by the Bank of England’s FinancialPolicy Committee, and market-based indicators of capital adequacyadded to regulators’ and investors’ indicator set.Third, Andrew Haldane calls for a fresh approach to financialsupervision, one which is less rules-focussed and more judgment-based.He notes that this approach: “...will underpin the Bank of England’s newsupervisory model when it assumes prudential regulatory responsibilitiesnext year.”To be effective, he says that will require more experienced regulatorsworking to a smaller, less detailed rulebook.He adds that greater simplicity and consistency in disclosure practicescould also strengthen market discipline. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 124Fourth, he considers the case for tackling complexity directly and atsource.He says that recent events have re-demonstrated the problems that arisein risk-managing large, complex banks: “At present, no explicitregulatory charge is levied on those complexity externalities.Doing so would help protect the system against failure, while providingexplicit incentives to simplify balance sheets.”Finally, Andrew Haldane notes that, while quantity-based restrictionssuch as the Independent Commission on Banking proposals in the UKand the Volcker rule in the US are robust to complexity and uncertainty,they risk being mired in detail in their implementation.He argues that cleaner solutions could be considered, or that the marketcould lead by encouraging banks to sell-off assets and reduce complexity.Andrew Haldane says that: “Modern finance is complex, perhaps toocomplex...As you do not fight fire with fire, you do not fight complexitywith complexity.Because complexity generates uncertainty, not risk, it requires aregulatory response grounded in simplicity, not complexity.”That would require “ about-turn from the regulatory community fromthe path followed for the better part of the past 50 years.”But when it comes to financial regulation, concludes Andrew Haldane,“...less may be more”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 125NUMBER 9VII Annual Seminar on Risk, FinancialStability and BankingSão PauloA very interesting presentationWhat caused the Global FinancialCrisis? _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
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  • P a g e | 138NUMBER 10Central Bank of Ireland PublishesJuly 2012 Money and BankingStatisticsThe Central Bank of Ireland published the July 2012 Money and BankingStatisticsLoans and other creditLoans to households continued to decline during July 2012 and were 3.6per cent lower on an annual basis, following a decline of 3.7 per cent forthe year ending June 2012.Lending for house purchase was 2.1 per cent lower on an annual basis inJuly 2012, while lending for consumption and other purposes declined by7.8 per cent over the same period.Lending to households declined by €471 million during the month of July,following a net monthly increase of €55 million in June.Developments in July were mostly driven by a decline in loans forconsumption of €225 million.Loans for house purchase also fell by €157 million, while loans tohouseholds for other purposes declined by €88 million.The monthly net flow of loans to households averaged minus €227 millionin the three months ending July 2012, which consists of average net flowsof minus €102 million in loans for house purchase, minus €73 million inloans for consumption purposes, and minus €52 million in lending forother purposes.Lending to Irish resident non-financial corporations (NFCs) declined by3.4 per cent in the year ending July 2012, following an annual decline of 2.9per cent in June 2012.On a monthly basis, loans to NFCs decreased by €297 million during July,following a decrease of €399 million in June. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 139The monthly net flow of loans to NFCs averaged minus €345 million inthe three months ending July 2012, compared with an average of minus€354 million in the three-month period up to end-June 2012.Short-term loans to NFCs with an original maturity of up to one year,which includes the use of overdraft facilities, increased by €162 millionduring July 2012.This followed a decline of €571 million in June.Longer-term loans with an original maturity over five years also increasedduring July, by €214 million, while medium-term NFC loans fell by €673million.On an annual basis, longer-term NFC loans with an original maturityover five years fell by 0.2 per cent in July 2012.Short-term NFC loans continued to increase, as loans with an originalmaturity up to one year grew by 0.6 per cent in the year ending July 2012.Meanwhile, NFC lending between one and five years original maturitydeclined by 10.6 per cent over the period.Credit institutions’ holdings of debt and equity securities issued by theIrish private sector increased by €122 million during the month of July2012, with an annual rate of change of minus 10.5 per cent.This follows a decline of 10.9 per cent for the year ending June 2012.The increase in holdings of private-sector securities during July reflectsdevelopments in holdings of debt securities issued by Other FinancialIntermediaries (OFIs).Deposits and other fundingIrish resident private-sector deposits were 0.8 per cent lower on an annualbasis at end-July 2012, compared with a decline of 2.5 per cent over theyear ending June.Deposits from households were 0.1 per cent lower on an annual basis inJuly, while deposits from Insurance Corporations and Pension Funds(ICPFs) and OFIs fell by 3 per cent. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 140Deposits from NFCs increased by 0.1 per cent over the same period.There was a month-on-month increase of €1.9 billion in Irish residentprivate-sector deposits during July 2012.This increase was dominated by developments in the OFI sector wheredeposits increased by €1.4 billion, partly reflecting inter-affiliatetransactions.NFC deposits also increased by €465 million during July, while depositsfrom ICPFs increased by €216 million.Household deposits fell by €159 million over the same period.Private-sector overnight deposits increased by €1.4 billion during July2012, largely reflecting developments in the OFI sector where overnightdeposits increased by €1 billion.Overnight deposits from the NFC sector also increased in July, by €533million, while ICPF overnight deposits grew by €47 million.Household sector overnight deposits declined by €248 million during themonth.Household deposits with agreed maturity up to two years increased by€214 million during the month of July 2012.Deposits in this category from OFIs and ICPFs also increased during themonth, by €223 million and €124 million, respectively.NFC deposits with agreed maturity up to two years fell by €60 millionover the same period.Private-sector deposits from non-residents increased by €1.5 billionduring July 2012, predominantly reflecting developments in theIFSC-based banks.There was a decrease of €678 million in deposits from other euro areaprivate-sector residents during the month, while private-sector depositsfrom non-euro area residents increased by €2.2 billion.Total non-resident private-sector deposits were 5.3 per cent lower on anannual basis at end-July 2012, with deposits from other euro area _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 141private-sector entities being 8.5 per cent lower, and those from thenon-euro area private sector 3.3 per cent lower.Total deposits from non-residents, including deposits from MFIs, generalgovernment and the private sector, fell by €5.7 billion during July 2012,largely driven by developments in deposits from affiliated non-residentcredit institutions.Credit institutions’ borrowings from the Central Bank as part ofEurosystem monetary policy operations declined by €3.9 billion in July2012.The outstanding stock of borrowings from the Eurosystem by Irishresident credit institutions amounted to €84.4 billion at end-July.Domestic market credit institutions accounted for €71.9 billion of thistotal outstanding stock.A number of credit institutions have issued debt under the EligibleLiabilities Guarantee scheme and have retained the bonds concerned fortheir own use.For methodological reasons these are not included in the Money andBanking Statistics tables.At end-July 2012, the outstanding amount of these bonds was €10.1 billion. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 142Certified 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 use in our instructor-led classes(3285 slides)The 2309 slides are needed for the exam, as all the questions are based onthese slides. The remaining 976 slides are for reference.You can find the course synopsis Up to 3 Online ExamsYou have to pass one exam.If you fail, you must study the official presentations and try again, but youdo not need to spend money. Up to 3 exams are included in the price.To learn more you may _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  • P a g e | 143C. Personalized Certificate printed in full color.Processing, printing, packing and posting to your office or home.D. 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 the mostsignificant piece of legislation concerningthe financial services industry in about 80years.What does it mean for risk andcompliance management professionals? Itmeans new challenges, new jobs, newcareers, and new opportunities.The bill establishes new risk management and corporate governanceprinciples, sets up an early warning system to protect the economy fromfuture threats, and brings more transparency 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-retaliation requirements.You will find more information _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)