Monday September 24 2012 - Top 10 Risk Management News

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Monday September 24 2012 - Top 10 Risk Management News

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Monday September 24 2012 - Top 10 Risk Management News

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Member,As you can read at Number 4 of our list, economic activity hascontinued to expand at a moderate pace in recent months.Growth in employment has been slow, and the unemployment rateremains elevated.Household spending has continued to advance, but growth in businessfixed investment appears to have slowed.The housing sector has shown some further signs of improvement, albeitfrom a depressed level.Inflation has been subdued, although the prices of some key commoditieshave increased recently.Longer-term inflation expectations have remained stable.But…Economic growth might not be strong enough to generate sustainedimprovement in labor market conditions.Strains in global financial markets continue to pose significant downsiderisks to the economic outlook. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2To support a stronger economic recovery and to help ensure thatinflation, over time, is at the rate most consistent with its dual mandate,the Federal Open Market Committee has agreed to increase policyaccommodation by purchasing additional agency mortgage-backedsecurities at a pace of $40 billion per month.The Committee also will continue through the end of the year its programto extend the average maturity of its holdings of securities as announcedin June, and it is maintaining its existing policy of reinvesting principalpayments from its holdings of agency debt and agency mortgage-backedsecurities in agency mortgage-backed securities.These actions, which together will increase the Committee’s holdings oflonger-term securities by about $85 billion each month through the end ofthe year, should put downward pressure on longer-term interest rates,support mortgage markets, and help to make broader financial conditionsmore accommodative. The Committee will closely monitor incoming information on economicand financial developments in coming months.If the outlook for the labor market does not improve substantially, theCommittee will continue its purchases of agency mortgage-backedsecurities, undertake additional asset purchases, and employ its otherpolicy tools as appropriate until such improvement is achieved in acontext of price stability.Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Bank for International SettlementsCore principles for effective bankingsupervisionSeptember 2012The Basel Committee on Banking Supervisionhas completed its review of the October 2006Core principles for effective bankingsupervision and the associated Core principlesmethodology.The revised Core Principles were endorsed bybanking supervisors at the 17th InternationalConference of Banking Supervisors held in Istanbul, Turkey, on 13-14September 2012.Stress Testing ModelSymposiumFederal Reserve Bank of BostonAddress by Deputy Governor MatthewElderfield, to the Irish Funds IndustryAssociation _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |42012 Monetary Policy ReleasesInformation received since the FederalOpen Market Committee met inAugust suggests that economicactivity has continued to expand at amoderate pace in recent months.Growth in employment has been slow,and the unemployment rate remains elevated.Economic Activity, Prices, and Monetary PolicySpeech at a Meeting with Business Leaders in YamaguchiRyuzo Miyao. Member of the Policy BoardThe U.S. Economic Outlook and Implications forLatin AmericaDennis P. LockhartPresident and Chief Executive OfficerFederal Reserve Bank of AtlantaLatin American Chamber of Commerce and the WorldAffairs Council _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5Basel ii / iii in RussiaThe Bank of Russia considers it necessary to create legislativefundamentals in Russia for introducing all the standards of bankingregulation and banking supervision established by the Basel Committeeon Banking Supervision (BCBS).These include legislation empowering the Bank of Russia to setrequirements for credit institutions’ corporate governance, risk andcapital management systems, to exercise consolidated supervision, to useprofessional judgment in supervisory practices, and also to definedisciplinary action against members of executive bodies and boards ofdirectors (supervisory boards) for faults in the activity of their creditinstitutions.The Importance of StrongRisk Management: InsightsFrom The ExaminationWorldBy Jason C. Schemmel, Community and Regional supervisory examinerwith the Federal Reserve Bank of Richmond _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6Islamic finance developments in PakistanKeynote address by Mr Kazi Abdul Muktadir,Deputy Governor of the State Bank of Pakistan,at the Islamic Finance news (IFN) Roadshow 2012,KarachiRegulatory reform: getting it doneRemarks by Mr Stefan Ingves, Governor of SverigesRiksbank and Chairman of the Basel Committee onBanking Supervision, at the 17th InternationalConference of Banking Supervisors, Istanbul _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7NUMBER 1Bank for International SettlementsBIS, Core principles for effective bankingsupervisionSeptember 2012The Basel Committee on Banking Supervisionhas completed its review of the October 2006Core principles for effective bankingsupervision and the associated Core principlesmethodology.The revised Core Principles were endorsed bybanking supervisors at the 17th InternationalConference of Banking Supervisors held in Istanbul, Turkey, on 13-14September 2012.Both the existing Core Principles and the associated assessmentmethodology have served their purpose well in terms of helping countriesto assess their supervisory systems and identify areas for improvement.While conscious efforts were made to maintain continuity andcomparability to the extent possible, the revised document combines theCore Principles and the assessment methodology into a singlecomprehensive document.The revised set of twenty-nine Core Principles has also been reorganisedto foster their implementation through a more logical structure,highlighting the difference between what supervisors do and what theyexpect banks to do:Principles 1 to 13 address supervisory powers, responsibilities andfunctions, focusing on effective risk-based supervision, and the need forearly intervention and timely supervisory actions.Principles 14 to 29 cover supervisory expectations of banks, emphasisingthe importance of good corporate governance and risk management, aswell as compliance with supervisory standards. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8Important enhancements have been introduced into the individual CorePrinciples, particularly in those areas that are necessary to strengthensupervisory practices and risk management.As a result, certain "additional criteria" have been upgraded to "essentialcriteria", while new assessment criteria were warranted in otherinstances.Close attention was given to addressing many of the significant riskmanagement weaknesses and other vulnerabilities highlighted in thefinancial crisis.In addition, the review has taken account of several key trends anddevelopments that emerged during the last few years of market turmoil: - the need for greater supervisory intensity and adequate resources to deal effectively with systemically important banks; - the importance of applying a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analysing and taking pre-emptive action to address systemic risk; and - the increasing focus on effective crisis management, recovery and resolution measures in reducing both the probability and impact of a bank failure.The Committee has sought to give appropriate emphasis to theseemerging issues by embedding them into the Core Principles, asappropriate, and including specific references under each relevantPrinciple.In addition, sound corporate governance underpins effective riskmanagement and public confidence in individual banks and the bankingsystem.Given fundamental deficiencies in banks corporate governance that wereexposed during the crisis, a new Core Principle on corporate governancehas been added by bringing together existing corporate governancecriteria in the assessment methodology and giving greater emphasis tosound corporate governance practices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9Similarly, the Committee reiterated the key role of robust marketdiscipline in fostering a safe and sound banking system by expanding anexisting Core Principle into two new ones dedicated respectively togreater public disclosure and transparency, and enhanced financialreporting and external audit.As a result of the Committees review, the number of Core Principles hasincreased from 25 to 29.There are a total of 39 new assessment criteria, comprising 34 newessential criteria and 5 new additional criteria.In addition, 34 additional criteria from the existing assessmentmethodology have been upgraded to essential criteria that representminimum baseline requirements for all countries.A consultative version of the revised Core Principles was issued for publicconsultation in December 2011.The Committee appreciates the constructive comments received andthanks those who have taken the time and effort to express their views onthe consultative document. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10Core Principles for Effective Banking Supervision (The BaselCore Principles)Executive summary1. The Core Principles for Effective Banking Supervision (CorePrinciples) are the de facto minimum standard for sound prudentialregulation and supervision of banks and banking systems.Originally issued by the Basel Committee on Banking Supervision (theCommittee) in 1997, they are used by countries as a benchmark forassessing the quality of their supervisory systems and for identifyingfuture work to achieve a baseline level of sound supervisory practices.The Core Principles are also used by the International Monetary Fund(IMF) and the World Bank, in the context of the Financial SectorAssessment Programme (FSAP), to assess the effectiveness of countries’banking supervisory systems and practices.2. The Core Principles were last revised by the Committee in October2006 in cooperation with supervisors around the world.In its October 2010 Report to the G20 on response to the financial crisis,the Committee announced its plan to review the Core Principles as part ofits ongoing work to strengthen supervisory practices worldwide.3. In March 2011, the Core Principles Group was mandated by theCommittee to review and update the Core Principles.The Committee’s mandate was to conduct the review taking into accountsignificant developments in the global financial markets and regulatorylandscape since October 2006, including post-crisis lessons for promotingsound supervisory systems.The intent was to ensure the continued relevance of the Core Principlesfor promoting effective banking supervision in all countries over time andchanging environments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 114. In conducting the review, the Committee has sought to achieve theright balance in raising the bar for sound supervision while retaining theCore Principles as a flexible, globally applicable standard.By reinforcing the proportionality concept, the revised Core Principlesand their assessment criteria accommodate a diverse range of bankingsystems.The proportionate approach also allows assessments of compliance withthe Core Principles that are commensurate with the risk profile andsystemic importance of a broad spectrum of banks (from largeinternationally active banks to small, non-complex deposit-takinginstitutions).5. Both the existing Core Principles and the associated Core PrinciplesMethodology (assessment methodology) have served their purpose wellin terms of helping countries to assess their supervisory systems andidentify areas for improvement.While conscious efforts were made to maintain continuity andcomparability as far as possible, the Committee has merged the CorePrinciples and the assessment methodology into a single comprehensivedocument.The revised set of twenty-nine Core Principles have also been reorganisedto foster their implementation through a more logical structure startingwith supervisory powers, responsibilities and functions, and followed bysupervisory expectations of banks, emphasising the importance of goodcorporate governance and risk management, as well as compliance withsupervisory standards.6. Important enhancements have been introduced into the individualCore Principles, particularly in those areas that are necessary tostrengthen supervisory practices and risk management.Various additional criteria have been upgraded to essential criteria as aresult, while new assessment criteria were warranted in other instances. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12Close attention was given to addressing many of the significant riskmanagement weaknesses and other vulnerabilities highlighted in the lastcrisis.In addition, the review has taken account of several key trends anddevelopments that emerged during the last few years of market turmoil: - the need for greater intensity and resources to deal effectively with systemically important banks; - the importance of applying a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analysing and taking pre-emptive action to address systemic risk; - and the increasing focus on effective crisis management, recovery and resolution measures in reducing both the probability and impact of a bank failure.The Committee has sought to give appropriate emphasis to theseemerging issues by embedding them into the Core Principles, asappropriate, and including specific references under each relevantPrinciple.7. In addition, sound corporate governance underpins effective riskmanagement and public confidence in individual banks and the bankingsystem.Given fundamental deficiencies in banks’ corporate governance that wereexposed in the last crisis, a new Core Principle on corporate governancehas been added in this review by bringing together existing corporategovernance criteria in the assessment methodology and giving greateremphasis to sound corporate governance practices.Similarly, the Committee reiterated the key role of robust marketdiscipline in fostering a safe and sound banking system by expanding anexisting Core Principle into two new ones dedicated respectively togreater public disclosure and transparency, and enhanced financialreporting and external audit.8. At present, the grading of compliance with the Core Principles is basedsolely on the essential criteria. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13To provide incentives to jurisdictions, particularly those that areimportant financial centres, to lead the way in the adoption of the highestsupervisory standards, the revised Core Principles will allow countries theadditional option of voluntarily choosing to be assessed and gradedagainst the essential and additional criteria.In the same spirit of promoting full and robust implementation, theCommittee has retained the existing four-grade scale of assessingcompliance with the Core Principles.This includes the current “materially non-compliant” grading that helpsprovide a strong signalling effect to relevant authorities on remedialmeasures needed for addressing supervisory and regulatory shortcomingsin their countries.9. As a result of this review, the number of Core Principles has increasedfrom 25 to 29.There are a total of 39 new assessment criteria, comprising 34 newessential criteria and 5 new additional criteria.In addition, 34 additional criteria from the existing assessmentmethodology have been upgraded to essential criteria that representminimum baseline requirements for all countries.10. The revised Core Principles will continue to provide a comprehensivestandard for establishing a sound foundation for the regulation,supervision, governance and risk management of the banking sector.Given the importance of consistent and effective standardsimplementation, the Committee stands ready to encourage work at thenational level to implement the revised Core Principles in conjunctionwith other supervisory bodies and interested parties.I. Foreword to the review11. The Basel Committee on Banking Supervision (the Committee) hasrevised the Core Principles for Effective Banking Supervision (CorePrinciples). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14In conducting its review, the Committee has sought to balance theobjectives of raising the bar for banking supervision (incorporating thelessons learned from the crisis and other significant regulatorydevelopments since the Core Principles were last revised in 2006) againstthe need to maintain the universal applicability of the Core Principles andthe need for continuity and comparability.By raising the bar, the practical application of the Core Principles shouldimprove banking supervision worldwide.12. The revised Core Principles strengthen the requirements forsupervisors, the approaches to supervision and supervisors’ expectationsof banks.This is achieved through a greater focus on effective risk-basedsupervision and the need for early intervention and timely supervisoryactions.Supervisors should assess the risk profile of banks, in terms of the risksthey run, the efficacy of their risk management and the risks they pose tothe banking and financial systems.This risk-based process targets supervisory resources where they can beutilised to the best effect, focusing on outcomes as well as processes,moving beyond passive assessment of compliance with rules.13. The Core Principles set out the powers that supervisors should have inorder to address safety and soundness concerns.It is equally crucial that supervisors use these powers once weaknesses ordeficiencies are identified.Adopting a forward-looking approach to supervision through earlyintervention can prevent an identified weakness from developing into athreat to safety and soundness. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15This is particularly true for highly complex and bank-specific issues (egliquidity risk) where effective supervisory actions must be tailored to abank’s individual circumstances.14. In its efforts to strengthen, reinforce and refocus the Core Principles,the Committee has nonetheless remained mindful of their underlyingpurpose and use.The Committee’s intention is to ensure the continued relevance of theCore Principles in providing a benchmark for supervisory practices thatwill withstand the test of time and changing environments.For this reason, this revision of the Core Principles builds upon thepreceding versions to ensure continuity and comparability as far aspossible.15. In recognition of the universal applicability of the Core Principles, theCommittee conducted its review in close cooperation with members ofthe Basel Consultative Group which comprises representatives from bothCommittee and non-Committee member countries and regional groupsof banking supervisors, as well as the IMF, the World Bank and theIslamic Financial Services Board.The Committee consulted the industry and public before finalising thetext.General approach16. The first Core Principle sets out the promotion of safety andsoundness of banks and the banking system as the primary objective forbanking supervision.Jurisdictions may assign other responsibilities to the banking supervisorprovided they do not conflict with this primary objective.6 It should not be an objective of banking supervision to prevent bankfailures. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16However, supervision should aim to reduce the probability and impact ofa bank failure, including by working with resolution authorities, so thatwhen failure occurs, it is in an orderly manner.17. To fulfil their purpose, the Core Principles must be capable ofapplication to a wide range of jurisdictions whose banking sectors willinevitably include a broad spectrum of banks (from large internationallyactive banks to small, non-complex deposit-taking institutions).Banking systems may also offer a wide range of products or services andthe Core Principles are aligned with the general aim of catering todifferent financial needs.To accommodate this breadth of application, a proportionate approach isadopted, both in terms of the expectations on supervisors for thedischarge of their own functions and in terms of the standards thatsupervisors impose on banks.Consequently, the Core Principles acknowledge that supervisors typicallyuse a risk-based approach in which more time and resources are devotedto larger, more complex or riskier banks.In the context of the standards imposed by supervisors on banks, theproportionality concept is reflected in those Principles focused onsupervisors’ assessment of banks’ risk management, where the Principlesprescribe a level of supervisory expectation commensurate with a bank’srisk profile and systemic importance.18. Successive revisions to existing Committee standards and guidance,and any new standards and guidance will be designed to strengthen theregulatory regime.Supervisors are encouraged to move towards the adoption of updated andnew international supervisory standards as they are issued. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17Approach toward emerging trends and developments(i) Systemically important banks (SIBs)19. In the aftermath of the crisis, much attention has been focused onSIBs, and the regulations and supervisory powers needed to deal withthem effectively.Consideration was given by the Committee to including a new CorePrinciple to cover SIBs.However, it was concluded that SIBs, which require greater intensity ofsupervision and hence resources, represent one end of the supervisoryspectrum of banks.Each Core Principle applies to the supervision of all banks.The expectations on, and of, supervisors will need to be of a higher orderfor SIBs, commensurate with the risk profile and systemic importance ofthese banks.Therefore, it is unnecessary to include a specific stand-alone CorePrinciple for SIBs.(ii) Macroprudential issues and systemic risks20. The recent crisis highlighted the interface between, and thecomplementary nature of, the macroprudential and microprudentialelements of effective supervision.In their application of a risk-based supervisory approach, supervisors andother authorities need to assess risk in a broader context than that of thebalance sheet of individual banks.For example, the prevailing macroeconomic environment, businesstrends, and the build-up and concentration of risk across the banking _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18sector and, indeed, outside of it, inevitably impact the risk exposure ofindividual banks.Bank-specific supervision should therefore consider this macroperspective.Individual bank data, where appropriate, data at sector level andaggregate trend data collected by supervisors should be incorporated intothe deliberations of authorities relevant for financial stability purposes(whether part of, or separate from, the supervisor) to assist inidentification and analysis of systemic risk.The relevant authorities should have the ability to take pre-emptive actionto address systemic risks.Supervisors should have access to relevant financial stability analyses orassessments conducted by other authorities that affect the bankingsystem.21. This broad financial system perspective is integral to many of the CorePrinciples. For this reason, the Committee has not included a specificstand-alone Core Principle on macroprudential issues.22. In supervising an individual bank which is part of a corporate group, itis essential that supervisors consider the bank and its risk profile from anumber of perspectives: on a solo basis (but with both a micro and macrofocus as discussed above); on a consolidated basis (in the sense ofsupervising the bank as a unit together with the other entities within the“banking group”) and on a group-wide basis (taking into account thepotential risks to the bank posed by other group entities outside of thebanking group).Group entities (whether within or outside the banking group) may be asource of strength but they may also be a source of weakness capable ofadversely affecting the financial condition, reputation and overall safetyand soundness of the bank. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19The Core Principles include a specific Core Principle on the consolidatedsupervision of banking groups, but they also note the importance ofparent companies and other non-banking group entities in anyassessment of the risks run by a bank or banking group.This supervisory “risk perimeter” extends beyond accountingconsolidation concepts.In the discharge of their functions, supervisors must observe a broadcanvas of risk, whether arising from within an individual bank, from itsassociated entities or from the prevailing macro financial environment.23. Supervisors should also remain alert to the movement, or build-up, offinancial activities outside the regulated banking sector (the developmentof “shadow banking” structures) and the potential risks this may create.Data or information on this should also be shared with any otherauthorities relevant for financial stability purposes.(iii) Crisis management, recovery and resolution24. Although it is not a supervisor’s role to prevent bank failures,supervisory oversight is designed to reduce both the probability andimpact of such failures.Banks will, from time to time, run into difficulties, and to minimise theadverse impact both on the troubled bank and on the banking andfinancial sectors as a whole, effective crisis preparation and management,and orderly resolution frameworks and measures are required.25. Such measures may be viewed from two perspectives:(i) The measures to be adopted by supervisory and other authorities(including developing resolution plans and in terms of informationsharing and cooperation with other authorities, both domestic andcross-border, to coordinate an orderly restructuring or resolution of atroubled bank); and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20(ii) Those to be adopted by banks (including contingency funding plansand recovery plans) which should be subject to critical assessment bysupervisors as part of their ongoing supervision.26. To reflect, and to emphasise, the importance of crisis management,recovery and resolution measures, certain Core Principles include specificreference to the maintenance and assessment of contingencyarrangements.The existing Core Principle on home-host relationships has also beenstrengthened to require cooperation and coordination between home andhost supervisors on crisis management and resolution for cross-borderbanks.(iv) Corporate governance, disclosure and transparency27. Corporate governance shortcomings in banks, examples of whichwere observed during the crisis, can have potentially seriousconsequences both for the bank concerned and, in some cases, for thefinancial system as a whole.A new Core Principle, focused on effective corporate governance as anessential element in the safe and sound functioning of banks, hastherefore been included in this revision.The new Principle brings together existing corporate governance criteriain the assessment methodology and gives greater emphasis to soundcorporate governance practices.28. Similarly, the crisis served to underline the importance of disclosureand transparency in maintaining confidence in banks by allowing marketparticipants to understand better a bank’s risk profile and thereby reducemarket uncertainties about the bank’s financial strength.In recognition of this, a new Core Principle has been added to providemore direction on supervisory practices in this area. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21Structure and assessment of Core PrinciplesStructure29. The preceding versions of the Core Principles were accompanied by aseparate assessment methodology that set out the criteria to be used togauge compliance with the Core Principles.In this revision, the assessment methodology has been merged into asingle document with the Core Principles reflecting the essentialinterdependence of Core Principles and Assessment Criteria and theircommon usage.The Core Principles have also been reorganised: Principles 1-13 addresssupervisory powers, responsibilities and functions, and Principles 14-29cover supervisory expectations of banks, emphasising the importance ofgood corporate governance and risk management, as well as compliancewith supervisory standards.This re-ordering highlights the difference between what supervisors dothemselves and what they expect banks to do. For comparability with thepreceding version, a mapping table is provided in Annex 1.Assessment30. The Core Principles establish a level of sound supervisory practicethat can be used as a benchmark by supervisors to assess the quality oftheir supervisory systems.They are also used by the IMF and the World Bank, in the context of theFinancial Sector Assessment Programme (FSAP), to assess theeffectiveness of countries’ banking supervisory systems and practices.31. This revision of the Core Principles retains the previous practice ofincluding both essential criteria and additional criteria as part of theassessment methodology. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22Essential criteria set out minimum baseline requirements for soundsupervisory practices and are of universal applicability to all countries.An assessment of a country against the essential criteria must, however,recognise that its supervisory practices should be commensurate with therisk profile and systemic importance of the banks being supervised.In other words, the assessment must consider the context in which thesupervisory practices are applied.The concept of proportionality underpins all assessment criteria even if itis not always directly referenced.32. Effective banking supervisory practices are not static.They evolve over time as lessons are learned and banking businesscontinues to develop and expand.Supervisors are often swift to encourage banks to adopt “best practice”and supervisors should demonstrably “practice what they preach” interms of seeking to move continually towards the highest supervisorystandards.To reinforce this aspiration, the additional criteria in the Core Principlesset out supervisory practices that exceed current baseline expectationsbut which will contribute to the robustness of individual supervisoryframeworks.As supervisory practices evolve, it is expected that upon each revision ofthe Core Principles, a number of additional criteria will migrate tobecome essential criteria as expectations on baseline standards change.The use of essential criteria and additional criteria will, in this sense,contribute to the continuing relevance of the Core Principles over time.33. In the past, countries were graded only against the essential criteria,although they could volunteer to be assessed against the additional _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23criteria too and benefit from assessors’ commentary on how supervisorypractices could be enhanced.In future, countries undergoing assessments by the IMF and/or theWorld Bank can elect to be graded against the essential and additionalcriteria.It is anticipated that this will provide incentives to jurisdictions,particularly those that are important financial centres, to lead the way inthe adoption of the highest supervisory standards.As with the essential criteria, any assessment against additional criteriashould recognise the concept of proportionality as discussed above.34. Moreover, it is important to bear in mind that some tasks, such as acorrect assessment of the macroeconomic environment and the detectionof the build-up of dangerous trends, do not lend themselves to a rigidcompliant/non-compliant structure.Although these tasks may be difficult to assess, supervisors should makeassessments that are as accurate as possible given the informationavailable at the time and take reasonable actions to address and mitigatesuch risks.35. While the publication of the assessments of jurisdictions affordstransparency, an assessment of one jurisdiction will not be directlycomparable to that of another.First, assessments will have to reflect proportionality.Thus, a jurisdiction that is home to many SIBs will naturally have a higherhurdle to obtain a “Compliant” grading10 versus a jurisdiction which onlyhas small, non-complex deposit-taking institutions.Second, with this version of the Core Principles, jurisdictions can elect tobe graded against essential criteria only or against both essential criteriaand additional criteria. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24Third, assessments will inevitably be country-specific and time -dependent to varying degrees.Therefore, the description provided for each Core Principle and thequalitative commentary accompanying the grading for each CorePrinciple should be reviewed in order to gain an understanding of ajurisdiction’s approach to the specific aspect under consideration and theneed for any improvements. Seeking to compare countries by a simplereference to the number of “Compliant” versus “Non-Compliant” gradesthey receive is unlikely to be informative.36. From a broader perspective, effective banking supervision isdependent on a number of external elements, or preconditions, whichmay not be within the direct jurisdiction of supervisors.Thus, in respect of grading, the assessment of preconditions will remainqualitative and distinct from the assessment (and grading) of compliancewith the Core Principles.37. Core Principle 29 dealing with the Abuse of Financial Servicesincludes, among other things, supervision of banks’ anti-moneylaundering/combating the financing of terrorism (AML/CFT) controls.The Committee recognises that assessments against this Core Principlewill inevitably, for some countries, involve a degree of duplication withthe mutual evaluation process of the Financial Action Task Force(FATF).To address this, where an evaluation has recently been conducted by theFATF on a given country, FSAP assessors may rely on that evaluation andfocus their own review on the actions taken by supervisors to address anyshortcomings identified by the FATF.In the absence of any recent FATF evaluation, FSAP assessors willcontinue to assess countries’ supervision of banks’ AML/CFT controls. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25Consistency and implementation38. The banking sector is only a part, albeit an important part, of afinancial system and in conducting this review of its Core Principles, theCommittee has sought to maintain consistency, where possible, with thecorresponding standards for securities and insurance (which havethemselves been the subject of recent reviews), as well as those foranti-money laundering and transparency.Differences will, however, inevitably remain as key risk areas andsupervisory priorities differ from sector to sector. In implementing theCore Principles, supervisors should take into account the role of thebanking sector in supporting and facilitating productive activities for thereal economy.II. The Core Principles39. The Core Principles are a framework of minimum standards for soundsupervisory practices and are considered universally applicable.The Committee issued the Core Principles as its contribution tostrengthening the global financial system.Weaknesses in the banking system of a country, whether developing ordeveloped, can threaten financial stability both within that country andinternationally.The Committee believes that implementation of the Core Principles by allcountries would be a significant step towards improving financialstability domestically and internationally, and provide a good basis forfurther development of effective supervisory systems.The vast majority of countries have endorsed the Core Principles andhave implemented them.40. The revised Core Principles define 29 principles that are needed for asupervisory system to be effective. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26Those principles are broadly categorised into two groups: the first group(Principles 1 to 13) focus on powers, responsibilities and functions ofsupervisors, while the second group (Principles 14 to 29) focus onprudential regulations and requirements for banks.The original Principle 1 has been divided into three separate Principles,while new Principles related to corporate governance, and disclosure andtransparency, have been added.This accounts for the increase from 25 to 29 Principles.41. The 29 Core Principles are:Supervisory powers, responsibilities and functions• Principle 1 – Responsibilities, objectives and powers:An effective system of banking supervision has clear responsibilities andobjectives for each authority involved in the supervision of banks andbanking groups.A suitable legal framework for banking supervision is in place to provideeach responsible authority with the necessary legal powers to authorisebanks, conduct ongoing supervision, address compliance with laws andundertake timely corrective actions to address safety and soundnessconcerns.• Principle 2 – Independence, accountability, resourcing andlegal protection for supervisors:The supervisor possesses operational independence, transparentprocesses, sound governance, budgetary processes that do not undermineautonomy and adequate resources, and is accountable for the dischargeof its duties and use of its resources.The legal framework for banking supervision includes legal protection forthe supervisor. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27• Principle 3 – Cooperation and collaboration:Laws, regulations or other arrangements provide a framework forcooperation and collaboration with relevant domestic authorities andforeign supervisors.These arrangements reflect the need to protect confidential information.• Principle 4 – Permissible activities:The permissible activities of institutions that are licensed and subject tosupervision as banks are clearly defined and the use of the word “bank” innames is controlled.• Principle 5 – Licensing criteria:The licensing authority has the power to set criteria and rejectapplications for establishments that do not meet the criteria.At a minimum, the licensing process consists of an assessment of theownership structure and governance (including the fitness and proprietyof Board members and senior management) of the bank and its widergroup, and its strategic and operating plan, internal controls, riskmanagement and projected financial condition (including capital base).Where the proposed owner or parent organisation is a foreign bank, theprior consent of its home supervisor is obtained.• Principle 6 – Transfer of significant ownership:The supervisor has the power to review, reject and impose prudentialconditions on any proposals to transfer significant ownership orcontrolling interests held directly or indirectly in existing banks to otherparties. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28• Principle 7 – Major acquisitions:The supervisor has the power to approve or reject (or recommend to theresponsible authority the approval or rejection of), and impose prudentialconditions on, major acquisitions or investments by a bank, againstprescribed criteria, including the establishment of cross-borderoperations, and to determine that corporate affiliations or structures donot expose the bank to undue risks or hinder effective supervision.• Principle 8 – Supervisory approach:An effective system of banking supervision requires the supervisor todevelop and maintain a forward-looking assessment of the risk profile ofindividual banks and banking groups, proportionate to their systemicimportance; identify, assess and address risks emanating from banks andthe banking system as a whole; have a framework in place for earlyintervention; and have plans in place, in partnership with other relevantauthorities, to take action to resolve banks in an orderly manner if theybecome non-viable.• Principle 9 – Supervisory techniques and tools:The supervisor uses an appropriate range of techniques and tools toimplement the supervisory approach and deploys supervisory resourceson a proportionate basis, taking into account the risk profile and systemicimportance of banks.• Principle 10 – Supervisory reporting: The supervisor collects, reviews and analyses prudential reports andstatistical returns from banks on both a solo and a consolidated basis, andindependently verifies these reports through either on-site examinationsor use of external experts. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29• Principle 11 – Corrective and sanctioning powers ofsupervisors:The supervisor acts at an early stage to address unsafe and unsoundpractices or activities that could pose risks to banks or to the bankingsystem.The supervisor has at its disposal an adequate range of supervisory toolsto bring about timely corrective actions.This includes the ability to revoke the banking licence or to recommendits revocation.• Principle 12 – Consolidated supervision:An essential element of banking supervision is that the supervisorsupervises the banking group on a consolidated basis, adequatelymonitoring and, as appropriate, applying prudential standards to allaspects of the business conducted by the banking group worldwide.• Principle 13 – Home-host relationships:Home and host supervisors of cross-border banking groups shareinformation and cooperate for effective supervision of the group andgroup entities, and effective handling of crisis situations. Supervisorsrequire the local operations of foreign banks to be conducted to the samestandards as those required of domestic banks.Prudential regulations and requirements• Principle 14 – Corporate governance:The supervisor determines that banks and banking groups have robustcorporate governance policies and processes covering, for example,strategic direction, group and organisational structure, control _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30environment, responsibilities of the banks’ Boards and seniormanagement, and compensation.These policies and processes are commensurate with the risk profile andsystemic importance of the bank.• Principle 15 – Risk management process:The supervisor determines that banks have a comprehensive riskmanagement process (including effective Board and senior managementoversight) to identify, measure, evaluate, monitor, report and control ormitigate all material risks on a timely basis and to assess the adequacy oftheir capital and liquidity in relation to their risk profile and market andmacroeconomic conditions.This extends to development and review of contingency arrangements(incuding robust and credible recovery plans where warranted) that takeinto account the specific circumstances of the bank.The risk management process is commensurate with the risk profile andsystemic importance of the bank.• Principle 16 – Capital adequacy:The supervisor sets prudent and appropriate capital adequacyrequirements for banks that reflect the risks undertaken by, and presentedby, a bank in the context of the markets and macroeconomic conditionsin which it operates.The supervisor defines the components of capital, bearing in mind theirability to absorb losses.At least for internationally active banks, capital requirements are not lessthan the applicable Basel standards. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31• Principle 17 – Credit risk:The supervisor determines that banks have an adequate credit riskmanagement process that takes into account their risk appetite, riskprofile and market and macroeconomic conditions.This includes prudent policies and processes to identify, measure,evaluate, monitor, report and control or mitigate credit risk (includingcounterparty credit risk) on a timely basis.The full credit lifecycle is covered including credit underwriting, creditevaluation, and the ongoing management of the bank’s loan andinvestment portfolios.• Principle 18 – Problem assets, provisions and reserves:The supervisor determines that banks have adequate policies andprocesses for the early identification and management of problem assets,and the maintenance of adequate provisions and reserves.• Principle 19 – Concentration risk and large exposure limits:The supervisor determines that banks have adequate policies andprocesses to identify, measure, evaluate, monitor, report and control ormitigate concentrations of risk on a timely basis.Supervisors set prudential limits to restrict bank exposures to singlecounterparties or groups of connected counterparties.• Principle 20 – Transactions with related parties:In order to prevent abuses arising in transactions with related parties andto address the risk of conflict of interest, the supervisor requires banks toenter into any transactions with related parties on an arm’s length basis;to monitor these transactions; to take appropriate steps to control or _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32mitigate the risks; and to write off exposures to related parties inaccordance with standard policies and processes.• Principle 21 – Country and transfer risks:The supervisor determines that banks have adequate policies andprocesses to identify, measure, evaluate, monitor, report and control ormitigate country risk and transfer risk in their international lending andinvestment activities on a timely basis.• Principle 22 – Market risks:The supervisor determines that banks have an adequate market riskmanagement process that takes into account their risk appetite, riskprofile, and market and macroeconomic conditions and the risk of asignificant deterioration in market liquidity.This includes prudent policies and processes to identify, measure,evaluate, monitor, report and control or mitigate market risks on a timelybasis.• Principle 23 – Interest rate risk in the banking book:The supervisor determines that banks have adequate systems to identify,measure, evaluate, monitor, report and control or mitigate interest raterisk in the banking book on a timely basis.These systems take into account the bank’s risk appetite, risk profile andmarket and macroeconomic conditions.• Principle 24 – Liquidity risk:The supervisor sets prudent and appropriate liquidity requirements(which can include either quantitative or qualitative requirements orboth) for banks that reflect the liquidity needs of the bank. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33The supervisor determines that banks have a strategy that enablesprudent management of liquidity risk and compliance with liquidityrequirements.The strategy takes into account the bank’s risk profile as well as marketand macroeconomic conditions and includes prudent policies andprocesses, consistent with the bank’s risk appetite, to identify, measure,evaluate, monitor, report and control or mitigate liquidity risk over anappropriate set of time horizons.At least for internationally active banks, liquidity requirements are notlower than the applicable Basel standards.• Principle 25 – Operational risk:The supervisor determines that banks have an adequate operational riskmanagement framework that takes into account their risk appetite, riskprofile and market and macroeconomic conditions.This includes prudent policies and processes to identify, assess, evaluate,monitor, report and control or mitigate operational risk on a timely basis.• Principle 26 – Internal control and audit:The supervisor determines that banks have adequate internal controlframeworks to establish and maintain a properly controlled operatingenvironment for the conduct of their business taking into account theirrisk profile.These include clear arrangements for delegating authority andresponsibility; separation of the functions that involve committing thebank, paying away its funds, and accounting for its assets and liabilities;reconciliation of these processes; safeguarding the bank’s assets; andappropriate independent internal audit and compliance functions to testadherence to these controls as well as applicable laws and regulations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34• Principle 27: Financial reporting and external audit:The supervisor determines that banks and banking groups maintainadequate and reliable records, prepare financial statements in accordancewith accounting policies and practices that are widely acceptedinternationally and annually publish information that fairly reflects theirfinancial condition and performance and bears an independent externalauditor’s opinion.The supervisor also determines that banks and parent companies ofbanking groups have adequate governance and oversight of the externalaudit function.• Principle 28 – Disclosure and transparency: The supervisor determines that banks and banking groups regularlypublish information on a consolidated and, where appropriate, solo basisthat is easily accessible and fairly reflects their financial condition,performance, risk exposures, risk management strategies and corporategovernance policies and processes.• Principle 29 – Abuse of financial services:The supervisor determines that banks have adequate policies andprocesses, including strict customer due diligence rules to promote highethical and professional standards in the financial sector and prevent thebank from being used, intentionally or unintentionally, for criminalactivities.42. The Core Principles are neutral with regard to different approaches tosupervision, so long as the overriding goals are achieved.They are not designed to cover all the needs and circumstances of everybanking system. Instead, specific country circumstances should be more _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35appropriately considered in the context of the assessments and in thedialogue between assessors and country authorities.43. National authorities should apply the Core Principles in thesupervision of all banking organisations within their jurisdictions.Individual countries, in particular those with advanced markets andbanks, may expand upon the Core Principles in order to achieve bestsupervisory practice.44. A high degree of compliance with the Core Principles should fosteroverall financial system stability; however, this will not guarantee it, norwill it prevent the failure of banks. Banking supervision cannot, andshould not, provide an assurance that banks will not fail. In a marketeconomy, failures are part of risk-taking.45. The Committee stands ready to encourage work at the national levelto implement the Core Principles in conjunction with other supervisorybodies and interested parties.The Committee invites the international financial institutions and donoragencies to use the Core Principles in assisting individual countries tostrengthen their supervisory arrangements.The Committee will continue to collaborate closely with the IMF and theWorld Bank in their monitoring of the implementation of theCommittee’s prudential standards.The Committee also remains committed to further enhancing itsinteraction with supervisors from non-member countries. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36NUMBER 2Stress Testing ModelSymposiumFederal Reserve Bank of Boston__________________________________________________Note: You MUST download the excellent presentations at:http://www.bostonfed.org/StressTest2012/index.htm__________________________________________________The Federal Reserve and Board of Governors are organizing asymposium on best practices and challenges as they relateto stress testing.The goal of the symposium is to improve ourunderstanding of how to develop a robust stress testingframework.Some of the questions that will be discussed include what are the topthree "must have" elements of a robust stress testing framework? Whattype of scenarios should the supervisory and company-run stress testconsider?What are quantitative approaches to modeling pre-provision net revenueby business line?Notes:As part of the central bank, the Federal Reserve Bank of Boston promotessound growth and financial stability in New England and the nation.The Bank contributes to local communities, the region, and the nationthrough its high-quality research, regulatory oversight, and financialservices, and through its commitment to leadership and innovation.The Boston Fed, the First District of the Federal Reserve System, servesthe New England region - Connecticut [except Fairfield County], Maine,Massachusetts, New Hampshire, Rhode Island, and Vermont. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37NUMBER 3Address by Deputy Governor MatthewElderfield, to the Irish Funds IndustryAssociationThank you very much, IFIA, for the invitation tospeak at this years conference. IFIA plays animportant role in the Irish international financialservices sector and it is my pleasure to be here today to share somethoughts about the regulatory agenda for the funds industry.Before I do that, can I take a momentto acknowledge the significantcontribution that has been made byGary Palmer, as the outgoing CEO ofIFIA, to the growth and success of the funds industry in this country andto thank him publicly for the good working relationship he developedwith the Central Bank. Let me also welcome Gary’s successor and say thatI look forward to maintaining a good dialogue with Pat Lardner: indeed,that has already begun.IFIA is an important representative body because the funds industry is animportant sector for Ireland. You are all well versed on the key statisticsthat illustrate this, in terms of assets under management (€1.2 trillion) ornumber of employees in the sector (some 12,000 or so).One statistic that is not so readily accessible – and required a bit ofdigging around – is the number of investors in Irish regulated funds orfunds supported by Irish fund administrators.There are in fact over 1.3 million such investors – a very significantnumber indeed.That shows the importance of the Irish market place in providing aservice to investors across Europe and the world.And, indeed, it shows the important responsibility that we both have – asindustry and regulator – in ensuring high standards of investor protection. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38These investors place trust in the Irish system of regulation and ourreputation for maintaining high standards is vital to the success of theinternational financial services sector including the funds industry.The key message I have for you today is that getting the regulatoryframework right for investor protection is important for the reputation ofthe IFSC and the success of the funds industry.I want to explain that we have an opportunity to revisit and improve thatframework in Europe and domestically, with respect to our regulatoryprocesses, and by enhancing our approach to supervision.The starting point for approaching regulation of the fund sector should bean acceptance that funds are different.The traditional concerns of the prudential supervisor do not apply to thefunds industry.Nor do the traditional consumer protection issues relating to the salesprocess apply directly: these are not relevant to the fund or funds serviceprovider per se, but are picked up elsewhere in terms of the regulatoryframework applying to investment firms and intermediaries.Instead, our concern is one of investor protection along a number ofdimensions: ensuring that the investment that is available has anappropriate risk profile for the type of customer involved; ensuringadequate disclosure to investors so they can make an informed choiceabout risk. addressing operational risks related to valuation or protectionof assets; and, reducing the risk of fraud and other financial crimeproblems.There is also a new dimension to funds regulation, going beyond investorprotection and considering the systemic risks posed by particular aspectsof the sector, which I will return to at the end of these remarks.This different regulatory focus correctly argues for a different supervisoryapproach.This involves clear standards around investment products, which as youknow are mostly set at a European level. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39As a supervisor, it means the focus of effort is on the authorisation processand ensuring robust arrangements are in place regarding the approval ofnew funds and ensuring adequate disclosure.Our supervisory model is also designed to place the emphasis of our workon the fund service providers – both administrators and custodians –rather than on the individual funds themselves.Bearing this supervisory model in mind, let’s explore the individualelements and consider what changes are afoot - and what scope there is tore-engineer the current regulatory framework.European DevelopmentsIt is right that we should start at the European level.The EU is of ever increasing importance to the funds industry.The volume of initiatives from Europe in financial services generally, butwith respect to funds in particular, seems at times overwhelming.The structure of regulation and standard-setting in Europe hasundergone fundamental changes, with the advent of the Europeansupervisory authorities including ESMA.And the rules that now emerge from Europe tend to have direct bindingeffect on financial services firms, rather than being transposed andsometimes modified by national authorities.The trend is for more Europe, affecting more parts of financial servicesregulation, with less national discretion.This means that engagement in Europe is more important than ever.At the Central Bank of Ireland our strategy has been to develop specialistpolicy teams responsible for key areas of European directives andregulations, to invest more time in the European and internationalpolicy-making processes, to be more focused in our goals and to get inearly, trying to influence European developments while they are still atthe formative stage. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40It is important that industry also raises its game on engagement inEurope and I would encourage IFIA to carefully re-examine its strategyfor European advocacy to ensure it is having maximum impact.The need for engagement is immediate and pressing – and in the shortterm Ireland will have a central role to play as Presidency of the EU in thefirst half of 2013.This will be a big responsibility and will involve a number of complicatedand high-profile portfolios, such as banking union and resolution andMIFID II.And in the funds industry there will also be important portfolios,including UCITS V and UCITS VI.We expect the AIFMD to have mostly completed the EU legislativeprocess by the time our Presidency begins, although certain technicalstandards will remain to be issued.The finalisation of Level II requirements for the sector is imminent andsome important issues remain unresolved.The ball is currently in the Commissions court. A lot of disappointmenthas been expressed that some of the issues that were heavily debated inESMA - and where we believe sensible proposals were reached - havebeen revisited and changed.I can understand that sense of frustration.For example, we think its important to recognise that the business modelof the funds industry involves a significant degree of delegation andoutsourcing of activity.We hope that the final Level II text being developed by the Commissionreflects the very reasonable concerns that have been expressed bystakeholders and regulators in this area.In terms of UCITS V, there is still considerable debate on the appropriateliability regime for custody.I think it should be accepted that there will be alignment of the liabilityregime in UCITS V with the standards in AIFMD. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41Given the substantial obligations which depositories will be asked tocomply with under AIFMD, we believe that UCITS V should mirror theserequirements, no more, no less.Also, the Central Bank will seek to ensure that Ireland’s rigorous butstreamlined approach to the licensing and supervision of depositories isreflected in UCITS V.On UCITS VI, we are at an earlier stage in the process of consultation.One central area of debate will be whether to revisit the types of assetseligible for investment in the UCITS structure.Our initial thinking at the Central Bank is that it would be inappropriateto restrict the current set of eligible assets or to impose generalrestrictions on OTC derivative instruments.However, the current “no look through rule” does deserve furtherexamination in relation to particular areas such as indices, where we haveseen the eligible asset restrictions arguably being circumvented.ESMA has already done some good work in its recent guidelines on theuse of indices, but there may be more that can be done.We can also expect the output from the debate on shadow banking andsystemic risk in the money market funds industry to feature heavily inUCITS VI.As I mentioned, I will come back to this topic of shadow banking a bitlater.Domestic DevelopmentsEurope will clearly be the main driver of the regulatory framework for thefunds industry in Ireland.But there is also, as you know, a domestic regulatory framework in placethat is not derived from EU law and which in many cases predates it.The implementation of the AIFMD provides an opportunity to revisit thisframework. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42We are working hard on AIFMD implementation with the goal ofproviding certainty to industry as soon as possible.My colleague Gareth Murphy, who spoke to you last year, is chairing aworking group on AIFMD implementation involving representativesfrom the Department of Finance and industry.We will be consulting publicly on proposals very shortly.This process provides an opportunity to revisit our domestic frameworkfor non-UCITS funds.Let me take a little time to explain our approach and highlight one or twoissues under active discussion.We believe it is important to use the implementation of the AIFMD as anopportunity for a systematic rethink of our non-UCITS regime.Our current domestic regime has evolved piecemeal over many years inresponse to particular concerns and without any relevant EU standards torefer to.We now need to be prepared - in light of the implementation of this majorpiece of European legislation - to re-examine those elements of theexisting domestic framework.Our approach will be informed by the principals included in theTaoiseachs strategy for the international financial services sector, namelythe need to carefully re-examine the case for domestic standards whichexceed EU requirements, in terms of establishing that they are in thepublic interest.We are prepared to retain additional domestic standards if we believe thepublic interest test is met.But our starting point is of a rigorous case-by-case reassessment of theexisting domestic framework to see whether these domestic requirementsneed to be retained.For example, one issue under discussion is whether we should establish anew category of fund based purely on the minimum standards of theAIFMD. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43This would provide a clear choice of a fund that is being managed in away fully compliant with the relevant EU standards for pass-porting fundmanagement without any additional domestic requirements on the fund,except as directly required by existing Irish law.This would be a major initiative and we want to see the matter very fullyconsidered before we decide on it.As an alternative, or perhaps even in addition, we are also undertaking arigorous reassessment of our non-UCITS qualifying investor regime.To what extent should the domestic standards for the QIF regime beadjusted to reflect the AIFMD?We are itemising the differences between the AIFMD requirements andthe QIF regime for funds and reviewing each in turn.For example, our current domestic regime sets specific requirements ondirected brokerage programmes.These requirements can be dis-applied in light of AIFMD where rules onconflicts of interest, best execution and annual account disclosureprovide adequate comfort to investors.This would seem to be a sensible area for potential adjustment.There are a number of other areas to be considered, which will each beexamined in turn.The introduction of the directive also provides an opportunity to revisitthe promoter regime for non-UCITS.The AIFMD now imposes significant requirements on fund managers,which would appear to meet many of the objectives of our currentdomestic promoter framework.We also believe there may be scope for us to provide additional guidanceon what we expect of directors when a fund runs into financial oroperational difficulties.In that context, we plan to consult on proposals to remove the currentpromoter regime at least for qualifying investor non-UCITS. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44I should caution that our domestic framework for non-UCITS will remainin place where we believe it is in the public interest to do so.But were serious about rigorously and systematically challengingourselves as to which particular provisions are indeed appropriate toretain.This is a very big job. While we will have done a lot of work before goingto consultation, we will not have finalised our views on all these matters.We will present what we hope will be seen to be a well-consideredapproach, but we are very much open to submissions.Our public consultation will offer you a real opportunity to challenge anyaspect of the envisaged approach. I urge you to take that opportunity.Before I finish on the question of domestic regulation let me say a wordabout the important role that industry bodies can play in supporting goodstandards.I would like to commend IFIA and the funds industry more generally forrising to the challenge of developing its corporate governance code forfund service providers.This has helped raise standards in a pragmatic and sensible way.It has helped improve governance in the industry and provided a practicalframework regarding the number of directors at funds.You will have noted that a leading funds jurisdiction was heavily andprominently criticised for its approach to multiple directorship.By tackling this issue head-on in its corporate governance code, IFIA hashelped bolster the international reputation of the Irish fund sector.I should note that we will be revisiting our existing statutory codes forbanks and insurance companies next year.We will use that process to review the success and take-up of the IFIAcode.Also on the horizon, MIFID II will be coming into force before too longand will be prompting a reassessment of corporate governance standards _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45for investment firms, which of course would include a number of fundservice providers.AuthorisationIf the starting point of the regulatory model for funds is about getting therulebook right - both in Europe and here in Ireland - it is equallyimportant to get the process of reviewing fund applications right.I tend to get very good feedback from industry sources about the qualityof our authorisation and approval process for funds, not just here inDublin but when I speak to industry participants in London and NewYork as well.But we think there is scope to get better yet.Mindful of industry expectations and also of the need to ensure aneffective and efficient use of resources, the Central Bank regularlyreassesses its internal processes and turnaround times for fundauthorisations.However, in this area, we still rely extensively on manual processes andhandling hard copies of documents.We want to move towards the receipt of information in electronic format.And we want to develop automated workflow processes to make us moreefficient.This is not just a matter of automating existing processes, but ofchallenging ourselves to ensure our process is as efficient as possible.We want to decompose the "as is" process for funds authorisation andrigorously assess it, challenging its individual component parts, beforeconstructing our "to be" process under this re-engineering exercise.Our intention is to engage closely with industry and to seek your advice:tell us which aspects of the current process could work even better.I caution that it will take a little time to implement these changes.We dont want to rush and destabilise the current platform which isworking well. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46But we are committed to making improvements in efficiency without lossof effectiveness.These improvements go hand-in-hand with the introduction of onlinereporting by individual funds which we consulted on in June.The industry itself can play its part in improving the authorisationprocess.Sometimes the quality of applications can be uneven and incomplete.At other times some stakeholders - often those highly inventive andover-exuberant lawyers - can test the boundaries of what is an acceptableinterpretation of European law without giving sufficient consideration tothe difficult legal and policy questions involved.The funds industry continues to grow. Innovation is a key feature of itsprogress. Change is a positive driving force for all of us.While there will always be a natural tension between financial regulationand product innovation, the Central Bank is committed to proper andactive engagement with industry to resolve issues.We regularly take stock of our approach, drawing on the output ofquarterly meetings with IFIA, bi-lateral engagement with law firms andregular contact with fund promoters and investment managers at homeand abroad.And we press matters with our colleagues in Europe when necessary.SupervisionWhat then of our approach after authorisation, namely to supervision?In our view, the structure of the industry here in Ireland and the risks thatit poses to the Central Bank’s objectives means that the principal (but notexclusive) focus of our supervisory effort should be on the fund serviceproviders.These are the management companies, fund administrators andcustodians that are so important in ensuring the key elements of investorprotection, such as accuracy of valuation and safeguarding of assets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47Indeed, it is impractical (or at least prohibitively expensive) to have closesupervisory engagement with all individual funds.This supervisory model is reflected in our PRISM system, which is thenew framework for risk-based supervision that the Central Bank hasimplemented for all firms operating in the Irish financial services sector.PRISM operates by calculating an impact categorisation of our more than10,000 regulated entities to allow us to decide on the level of engagementand therefore resources we will apply to any individual firm.Under PRISM, fund service providers tend to have a higher impactcategorisation, with more subsequent engagement from supervisors (andwill therefore pay more).As part of the introduction of the PRISM process there have been a fewstructural changes in the way Supervision is operated by the CentralBank.On the ground, the differences you will note if your firm is in this categoryare more effective liaison with your direct supervisory team as well asmore frequent on-site visits with yourselves by my staff.I will be asking my supervisors to look more closely at where thoseinvestor protection and financial stability risks I talked about earlier exist,including challenging assumptions that lie behind business models andstrategies in the sector and the governance, systems and controls thatunderpin them.In contrast, each individual fund, in itself, has a limited potential impacton financial stability and investors in the event of failure - and so, each ofthe more than 5,000 funds domiciled in this jurisdiction - cannot andshould not expect the same level of supervisory engagement as affordedto the fund service providers.Our supervisory model, however, does provide capacity for us to react totriggers and problems that emerge in individual funds as well as randomspot-checks.We will also increasingly rely on the use of our thematic supervisory tool,namely examining a specific issue across a cross-section of institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48Shadow BankingWhile individual funds may be low impact entities in our supervisorymodel, the funds industry is of course a high impact sector viewedcollectively.This is not just a question of investor protection.Increasingly, the interest of the international regulatory community isdirected at the level of systemic risk posed by particular parts of the fundsindustry, namely money market funds.The backdrop to this interest is the risk of investor runs on money marketfunds as a result of a threat of breaking the buck and the onward impactof such a run on the markets in which those money market funds areinvested.As you are no doubt aware, this is clearly on the regulatory agenda at theG20, in IOSCO, at the European Commission and also in the US at theSEC.A few concluding thoughts on the regulatory agenda in this area.My first high-level message, is that the industry in Ireland must beprepared for change.During the financial crisis, investor runs on MMFs led to a disruption inthe flow of finance to the real economy and necessitated dramaticinterventions by public financial authorities.The Central Bank believes that regulatory reform should focus on theneed to reduce the probability of investor runs, to curb implicit supportfrom sponsors and to reduce the need for support from the taxpayer.In order to avoid disruptive industry shifts, my preference is forinternational alignment between Europe and the US in this area.It appears that the SEC will not be driving further regulatory reform in theshort term.European action may be needed to drive matters forward. IOSCO alsohas an important role to play. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49But it is critically important that the U.S. perspective continues to bearticulated and heard.The optimal outcome remains a shared perspective across the Atlantic onreducing the risk of runs in this sector and we must do everything we canto ensure that we can continue to move towards that goal.What action should Europe take now?Market conditions in European Prime MMFs which are earning negativeyields may pre-empt the conclusions of the FSB and other policydecision-makers. As you know, some promoters are contemplating new structures whereinvestors earn negative returns.We should see how this plays out and in particular the investor responseto the structures that the promoters offer.In the meantime, consultation exercises on this very question are welladvanced and the Central Bank has actively engaged in this debate.Having regard for the experience of MMFs during the financial crisis andmore importantly for the low risk appetite of MMF investors for capitallosses, the Central Bank’s view is that a mandatory switch from constantnet asset value to variable net asset value does not adequately address thefundamental problem of whether an investor run on a money market fundmay take place - though we would acknowledge it may affect the dynamicof that run.Substantial reform can be achieved through a range of measures such ascapital buffers, dilution levies for exiting investors and tighter liquiditymeasures.Indeed, it would appear that one of the recommendations of IOSCO -which was mandated by the FSB to look at MMFs as part of the ShadowBanking system - is to seek tighter rules on the liquidity of MMFs so as toensure that there is enough liquidity to meet redemptions.It is worth noting that the SEC addressed this with their MMF reforms in2010. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50The other key issue exposed by the financial crisis was that investorsexpected sponsors to support MMFs where assets show excessivevolatility to the downside.This in turn put pressure on the liquidity position of the sponsoringinstitution which was invariably a bank with access to a central bankliquidity window.Future reform of the MMF industry should ensure that any insurance thatthis ‘recourse to sponsor’ provides is properly charged to MMF investors.In this regard, one of the other IOSCO recommendations is likely to bethe mandatory requirement of gates as a redemption tool, which to ourthinking would be sensible.Where support from a sponsor is implicit it should be made explicit,though it is worth acknowledging that this may have implications for thecapital requirements of the sponsor.Whatever the detail of the reforms for money market funds, change iscoming and it will be significant.As I said, my key message is to engage in the debate and be prepared toadapt.ConclusionThe more than 1.3 million investors who rely on the Irish fund sectorhighlight the need for robust standards of investor protection in ourmarket.Funds may be different from other financial services sectors, but it is stillvitally important to get the right regulatory framework in place so thatinvestor protection is assured.This will improve the reputation of Ireland as an international financialservices sector and support the success of the funds industry.There is an opportunity to re-examine the different elements of thatregulatory framework for investor protection: the standards in place at aEuropean level and domestic level, the processes the Central Bank uses to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51authorise new funds, the supervisory framework applied to the sector, andthe emerging standards relating to Shadow Banking.As I have explained, the Central Bank is committed to a level of highengagement with Europe in crafting that framework - and to rigorouslyreassessing our domestic framework, processes and supervisoryapproach.We would encourage IFIA and the Irish fund sector to play its part in thisprocess by contributing to the regulatory dialogue at the European andIrish level, by offering constructive ideas to address the changingregulatory priorities of the post financial crisis world, and by maintaininghigh standards of practice in the Irish market that ensure a continuedreputation for high standards of investor protection. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52NUMBER 42012 Monetary Policy ReleasesInformation received since the FederalOpen Market Committee met inAugust suggests that economicactivity has continued to expand at amoderate pace in recent months.Growth in employment has been slow, and the unemployment rateremains elevated.Household spending has continued to advance, but growth in businessfixed investment appears to have slowed.The housing sector has shown some further signs of improvement, albeitfrom a depressed level.Inflation has been subdued, although the prices of some key commoditieshave increased recently.Longer-term inflation expectations have remained stable.Consistent with its statutory mandate, the Committee seeks to fostermaximum employment and price stability.The Committee is concerned that, without further policyaccommodation, economic growth might not be strong enough togenerate sustained improvement in labor market conditions.Furthermore, strains in global financial markets continue to posesignificant downside risks to the economic outlook.The Committee also anticipates that inflation over the medium termlikely would run at or below its 2 percent objective. To support a stronger economic recovery and to help ensure thatinflation, over time, is at the rate most consistent with its dual mandate,the Committee agreed today to increase policy accommodation bypurchasing additional agency mortgage-backed securities at a pace of $40billion per month. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53The Committee also will continue through the end of the year its programto extend the average maturity of its holdings of securities as announcedin June, and it is maintaining its existing policy of reinvesting principalpayments from its holdings of agency debt and agency mortgage-backedsecurities in agency mortgage-backed securities.These actions, which together will increase the Committee’s holdings oflonger-term securities by about $85 billion each month through the end ofthe year, should put downward pressure on longer-term interest rates,support mortgage markets, and help to make broader financial conditionsmore accommodative. The Committee will closely monitor incoming information on economicand financial developments in coming months.If the outlook for the labor market does not improve substantially, theCommittee will continue its purchases of agency mortgage-backedsecurities, undertake additional asset purchases, and employ its otherpolicy tools as appropriate until such improvement is achieved in acontext of price stability.In determining the size, pace, and composition of its asset purchases, theCommittee will, as always, take appropriate account of the likely efficacyand costs of such purchases. To support continued progress toward maximum employment and pricestability, the Committee expects that a highly accommodative stance ofmonetary policy will remain appropriate for a considerable time after theeconomic recovery strengthens.In particular, the Committee also decided today to keep the target rangefor the federal funds rate at 0 to 1/4 percent and currently anticipates thatexceptionally low levels for the federal funds rate are likely to bewarranted at least through mid-2015. Voting for the FOMC monetary policy action were: Ben S. Bernanke,Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke;Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah BloomRaskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L.Yellen. Voting against the action was Jeffrey M. Lacker, who opposedadditional asset purchases and preferred to omit the description of the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54time period over which exceptionally low levels for the federal funds rateare likely to be warranted. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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