Page |1        International Association of Risk and Compliance                      Professionals (IARCP)      1200 G Str...
Page |2Agathe Côté: Modelling risks to the financial systemRemarks by Ms Agathe Côté, Deputy Governor ofthe Bank of Canada...
Page |3OCC Updates Stress Testing ImplementationTimelineThe Office of the Comptroller of the Currency (OCC)today announced...
Page |4Understanding better…Information Operations, Electronic Warfare, Computer NetworkOperationsInformation Operations -...
Page |5NUMBER 1Agathe Côté: Modelling risks to the financialsystemRemarks by Ms Agathe Côté, Deputy Governor ofthe Bank of...
Page |6System-wide risk has been a focus of attention at the Bank of Canada, andat other central banks, for some time.Ten ...
Page |7The multiple dimensions of systemic riskSystemic, or system-wide, risk goes beyond individual institutions andmarke...
Page |8System-wide surveillance requires that we regularly assess the importanceof various types of systemic risk.How we j...
Page |9This indicator has been shown to provide some leading information as apredictor of banking crises, and has been pro...
P a g e | 10Identifying sources of risk is essential, but so is determining thelikelihood that these risks will materializ...
P a g e | 11The simulations take into account changes over time in individual debtlevels, as well as changes in household ...
P a g e | 12Using HRAM, we estimate that if interest rates were to rise to 4.25 percent by mid-2015, the share of highly i...
P a g e | 13To this end, we have been working for several years on developing aMacro Financial Risk Assessment Framework (...
P a g e | 14A key lesson from the model is that failure to account for either fundingliquidity risk or interbank exposures...
P a g e | 15Compared with other approaches that use market-based data, such as theasset-pricing approach, the transmission...
P a g e | 16Our household simulation model is aimed directly at understanding howthe distribution of debts, assets and inc...
P a g e | 17NUMBER 2Solvency IIIn 2011, EIOPA focusedon preparing the final set of regulatory measures for Solvency II, th...
P a g e | 18Finally, since the creation of EIOPA’s Insurance and ReinsuranceStakeholder Group, EIOPA has benefited from th...
P a g e | 19Consumer protection and financial innovationEIOPA has considered, from day one, consumer protection as acorner...
P a g e | 20group and solo supervision. In 2011, around 89 insurance groups withcross border undertakings were registered ...
P a g e | 21In line with this objective, EIOPA’s FSC set up its first (pilot) riskdashboard in October 2011, containing a ...
P a g e | 22In December 2011, EIOPA put out for public consultation a set of datareporting templates necessary for regular...
P a g e | 23EIOPA is part of a European System of Financial Supervision (ESFS), thepurpose of which is to ensure supervisi...
P a g e | 24To account for the specific conditions in the national markets and thenature of the financial institutions, th...
P a g e | 25existence of convergent supervisory practices from Solvency II’s first dayof entry into force.Pre-consultation...
P a g e | 26Internal Governance Supervisory Review and ReportingCommittee (IGSRR)The Internal Governance, Supervisory Revi...
P a g e | 27These initiatives involved practical meetings between operationalsupervisors and training activities.Task Forc...
P a g e | 28• ‘Report on pre-enrolment information’ as part of a wider OPCmandate on Packaged Retail Investment Products (...
P a g e | 29In 2011, the Committee on Consumer Protection and FinancialInnovation (CCPFI) supported EIOPA in fulfilling th...
P a g e | 30Oversight Working GroupsReview PanelAt the beginning of 2011, the Review Panel , using the experience andlesso...
P a g e | 31catastrophes, including the impact of the Japanese earthquake in March2011 and the subsequent devastating tsun...
P a g e | 32Update on Solvency II• Solvency II is a new regulatory framework providing supervisors withthe appropriate too...
P a g e | 33In addition, OMDII also includes transitional measures allowing gradualimplementation of Solvency II.This exte...
P a g e | 34During 2011, EIOPA also identified those areas in which it is essential tohave guidelines in place before the ...
P a g e | 35Areas in which EIOPA prepared draft standards and guidelinesduring 2011:• Solvency capital requirements for st...
P a g e | 36members of the European Economic Area participated voluntarily in thissimulation exercise, providing detailed ...
P a g e | 37For most business lines, the report published in December 2011 facilitatedjoint recommendations for amendments...
P a g e | 38industry representatives on zoning and reinsurance standards, as well ason catastrophe risk guidelines.Technic...
P a g e | 39Informal pre-consultations were held on draft standards and guidelinesconcerning the valuation of assets and l...
P a g e | 40Own fundsInformal pre-consultations were held on draft standards and guidelinesfor ancillary own funds and the...
P a g e | 41This satellite exercise is often referred to as the “lowyield stress test”, andwhile it was planned in conjunc...
P a g e | 42(6) of the participating groups and undertakings would not meet theMCR.The satellite exercise was launched aft...
P a g e | 43Risk dashboardIn October 2011, the EIOPA FSC set up its first (pilot) risk dashboard, inline with the framewor...
P a g e | 44These are macro risk, credit risk, market risk, funding and liquidity risk,profitability and solvency interlin...
P a g e | 45In March EIOPA published its report on the functioning of colleges, andalso the targets to be achieved during ...
P a g e | 46• The exchange of the QIS5 and stress test results in most of the Collegesenhanced the quality of the discussi...
P a g e | 47EIOPA staff’s commitment to the Colleges focused primarily on thefollowing issues:• To explain EIOPA’s role in...
P a g e | 48A seconded national expert in crisis management was appointed inMarch 2011, and work then commenced on the dev...
P a g e | 49Regulatory tasksIn 2012, EIOPA will deliver draft implementing and regulatory technicalstandards as well as gu...
P a g e | 50supervisory aspects of the pre-application of internal models andsupervisory powers to obtain information and ...
P a g e | 51Later in 2012 a simulation exercise to test the operation of the newframework will be carried out.EIOPA will a...
P a g e | 52List of the Members and Observers of the EIOPA Board ofSupervisors     _______________________________________...
P a g e | 53 _____________________________________________________________International Association of Risk and Compliance...
P a g e | 54NUMBER 3                                         Board of Governors of the Federal Reserve System             ...
P a g e | 55Refinancing risk eased during the past year as 37.1 percent of SNCs willmature over the next three years compa...
P a g e | 56    Adjusted for losses, nonaccrual loans declined to $81 billion from     $91 billion, an 11.1 percent reduc...
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
Monday September 3 2012 - Top 10 Risk Management News
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  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,Is part of your job to predict the future?Do you live in the new forward looking perspective in risk management?In 1964, Arthur C. Clarke, science fiction writer, inventor and futuristobserved:“Trying to predict the future is a discouraging and hazardous occupation,because the prophet invariably falls between two chairs.If his predictions sound at all reasonable, you can be quite sure that in 20,or at most 50 years, the progress of science and technology has made himseem ridiculously conservative.On the other hand, if by some miracle, a prophet could describe the futureexactly as it was going to take place, his predictions would sound soabsurd, so far-fetched, that everybody would laugh him to scorn.”Read more at Number 7!Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2Agathe Côté: Modelling risks to the financial systemRemarks by Ms Agathe Côté, Deputy Governor ofthe Bank of Canada, to the Canadian Association forBusiness Economics, Kingston, Ontario, 21 August2012.Solvency IIIn 2011, EIOPA focusedon preparing the final set of regulatory measures for Solvency II, the draftstandards and guidelines.Credit Risk in the Shared National CreditPortfolio Declines, but Remains HighThe credit quality of large loancommitments owned by U.S. bankingorganizations, foreign bankingorganizations (FBOs), and nonbanksimproved in 2012 for the third consecutive year, according to the SharedNational Credits (SNC) Review for 2012.Progress note on the Global LEIInitiativeThis is the first of a series of notes on the implementation of the legalentity identifier (LEI) initiative. The G-20 in Los Cabos endorsed the FSBrecommendations and asked the Board to take forward the work tolaunch the global LEI system by March 2013. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3OCC Updates Stress Testing ImplementationTimelineThe Office of the Comptroller of the Currency (OCC)today announced it is considering changes to theimplementation timeline for the company-run stresstesting required by the Dodd-Frank Wall StreetReform and Consumer Protection Act.Security First: New NIST Guidelines onSecuring BIOS for ServersFrom NIST Tech Beat: August 21, 2012The National Institute of Standards and Technology (NIST) isrequesting comments on new draft guidelines for securing BIOS systemsfor server computers.Understanding threatsStatement by Dr. Kaigham J. GabrielDeputy Director, Defense Advanced Research Projects AgencySubmitted to the Subcommittee on Emerging Threats and CapabilitiesUnited States House of RepresentativesFSA statement regarding CRD IV implementationCRD IV has been under discussion between theEuropean Parliament, European Commission and Council of Ministers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4Understanding better…Information Operations, Electronic Warfare, Computer NetworkOperationsInformation Operations - The integrated employment of the corecapabilities of electronic warfare, computer network operations,psychological operations, military deception and operations security, inconcert with specified supporting and related capabilities, to influence,disrupt, corrupt or usurp adversarial human and automated decisionmaking while protecting our own.An interesting article about China. We will beglad to discuss other opinions in our nextnewsletter.China’s Slowdown May Be WorseThan Official Data Suggestby Janet Koech and Jian Wang _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5NUMBER 1Agathe Côté: Modelling risks to the financialsystemRemarks by Ms Agathe Côté, Deputy Governor ofthe Bank of Canada, to the Canadian Association forBusiness Economics, Kingston, Ontario, 21 August2012.***IntroductionIt has become a summer tradition for the Bank of Canada to address theCanadian Association for Business Economics.This year it is my pleasure and I thank you for the kind invitation.An audience of colleagues and fellow economists offers me anopportunity to delve into a complex subject, and one that is particularlytimely: financial system risk.We continue to see today the enormous costs to the global economy of thefinancial crisis that started five years ago.Of the many lessons we have learned from the crisis, a key one is this: weneed to pay more attention to the stability of the financial system as awhole.This means understanding better how risks get transmitted acrossfinancial institutions and markets, and understanding better the feedbackloop between the financial system and the real economy.From a policy perspective, this means taking a system-wide approach tofinancial regulation and supervision.Major reforms of the global financial system now under way address thisneed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6System-wide risk has been a focus of attention at the Bank of Canada, andat other central banks, for some time.Ten years ago, the Bank issued the first edition of its semi-annualFinancial System Review in which it identifies key sources of risks to theCanadian financial system and highlights the policies needed to addressthem.A year later, in 2003, we organized our annual conference on the theme offinancial stability.In the wake of the global financial crisis, the Bank has intensified itsresearch efforts in this area.In particular, a priority is to improve the theoretical and empirical modelswe use to analyze elements of the financial system that can lead to theemergence of risks and vulnerabilities.With more finely tuned quantitative models and tools, the Bank will bebetter able to identify risks on a timely basis so that the private sector andpolicy-makers can take corrective action to support financial stability.Let me acknowledge upfront that this task is complex.While macroeconomic models have long been used to guide monetarypolicy decisions by central banks, models of financial stability andsystemic risk are much less advanced.In my remarks today, I want to talk about the progress that we have madeat the Bank in modelling risks to the financial system.I will start by briefly describing the notion of systemic risk and variousapproaches used to identify and measure it.I will then discuss two state-of-the-art quantitative models that we havedeveloped to improve our assessment of risks to the Canadian financialsystem. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7The multiple dimensions of systemic riskSystemic, or system-wide, risk goes beyond individual institutions andmarkets.It is the risk that the financial system as a whole becomes impaired andthat the provision of key financial services breaks down, with potentiallyserious consequences for the real economy.Systemic risk manifests itself in different ways.There is a time dimension, which refers to the accumulation ofimbalances over time, and a cross-sectional dimension, which refers tohow risk is distributed throughout the financial system at a given point intime.Procyclicality is the key issue in the time dimension.It reflects the tendency to take on excessive risk during economicupswings – too much punch from the punchbowl, if you will – and tobecome overly risk averse during the downturns.Procyclicality makes the financial system and the economy morevulnerable to shocks, and increases the likelihood of financial distress.Risk concentrations and interconnections are the key issues in thecross-sectional dimension.Financial institutions can have similar exposures to shocks or be linkedthrough balance sheets.As a result, losses in one institution can lead to fears of contagion thatamplify the adverse effects of the initial shock.For instance, uncertainty about the viability of counterparties can lead tohoarding of liquidity, which may seem like an appropriate action for theindividual institution but can have disastrous consequences for thefinancial system as a whole. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8System-wide surveillance requires that we regularly assess the importanceof various types of systemic risk.How we judge a particular risk will be based on the probability that it willlead to financial system distress, and on the extent of its impact shouldthat distress materialize.Early-warning indicatorsA fundamental challenge is to detect the risks arising from both globaland domestic sources in an environment with a vast number of potentialindicators.Therefore, one direction of research at the Bank has been to isolate thekey signals from this broad information set by identifying a smaller groupof variables that can serve as early-warning indicators of emergingimbalances.Since financial crises in Canada have been rare, international data areused to help establish numerical thresholds for each domestic indicator.For example, if international evidence suggests that credit growth above acertain rate tends to be associated with increased risk, then a period withcredit growth above the threshold would suggest an elevated probabilityof financial stress.Selecting the level of thresholds involves a difficult trade-off between falsealarms and failure to signal an event, so in practice the early-warningindicators are used mainly to identify areas where more detailedinvestigation may be warranted.They provide an objective, practical starting point to detect the buildup ofimbalances in the financial system.One early-warning indicator that we regularly track is the deviation of theaggregate private sector credit-to-GDP ratio from its trend (thecredit-to-GDP gap), which serves as a rough measure of excessiveleverage across the financial system (Chart 1). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9This indicator has been shown to provide some leading information as apredictor of banking crises, and has been proposed by the BaselCommittee on Banking Supervision (BCBS) as a useful guide fordecisions about when to activate the countercyclical capital buffer – animportant macroprudential policy instrument in the Basel III agreement.Given the complexity of systemic risk, it is unrealistic to expect a singlemeasure or indicator to serve all purposes.Combining indicators can produce better signals with fewer false alarmsand undetected crises.For example, research shows that combining the Credit - to - GDP gapwith a measure of real estate prices produces an indicator that performsbetter than either variable on its own.Our own work at the Bank reinforces findings elsewhere that aggregateprivate sector credit and real estate prices are among the most reliableindicators of financial stress. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10Identifying sources of risk is essential, but so is determining thelikelihood that these risks will materialize.Therefore, another important aspect of ongoing research is thedevelopment of statistical models to help us forecast the probability that acrisis will occur based on a group of indicators.Macro stress testsEarly-warning indicators are useful to gauge the probability of financialstress, but a thorough assessment also requires an analysis of what couldhappen if the risk materializes.This is the goal of macro stress testing.A good part of the Bank’s efforts in recent years has been devoted todeveloping and refining stress-testing models.This class of models takes a large but plausible macroeconomic shock asa starting point and analyzes its impact on the balance sheets of banks orother sectors of the economy.The Bank now has two main stress-testing models to help monitor risksto the financial system.These models can also be used to assess the potential impact of policytools or regulatory actions in mitigating financial system risks.Assessing risks from elevated household debtThe first, the Household Risk Assessment Model, or HRAM, is amicrosimulation model that assesses how the debt burden of Canadianhouseholds can affect financial stability.Using microdata from household balance sheets, the model allows us toestimate how various shocks would affect the distribution of debt withinthe household sector. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11The simulations take into account changes over time in individual debtlevels, as well as changes in household wealth from savings andfluctuations in the value of financial assets.Tracking the asset side of household balance sheets gives us a moreaccurate picture of systemic risk since changes in wealth affecthouseholds’ ability to pay their debt.Household vulnerabilities depend not only on the average level of debt,but also on how debt is distributed across individuals.One strength of the model is precisely its ability to account for thisdistribution.For instance, while record-low interest rates in recent years havecontributed to a relatively low aggregate household debt-service ratio, theshare of Canadian households that are considered most vulnerable –those with a debt-service ratio equal to or higher than 40 per cent – hasclimbed to above-average levels, as has the proportion of debt held bythese vulnerable households (Chart 2). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12Using HRAM, we estimate that if interest rates were to rise to 4.25 percent by mid-2015, the share of highly indebted households would risefrom slightly above 6 per cent in 2011 to roughly 10 per cent by 2016, whilethe proportion of debt held by these households would rise from 11.5 percent to about 20 per cent over the same period.So while the aggregate household debt-service ratio paints a somewhatrosy picture, taking into account distributions gives us a clearer and morecautionary indication of how vulnerable our financial system actually is tohousehold debt.Another strength of the model is that it provides a flexible tool forsimulating the impact on household solvency of a wide range of potentialshocks, such as an increase in unemployment.HRAM indicates that household loans in arrears would more than doubleunder a severe labour market shock similar to that observed in therecession of the early 1990s.Despite the model’s strengths, we continue to enhance our analysis byimproving HRAM.Expanding the behavioural aspects of the model is one way to do this.For instance, the model currently allows distressed households to paytheir debts by selling their liquid assets, but not their homes.Work is also under way to improve the design of the shock scenarios.Results of stress tests using HRAM are regularly reported in the Bank’sFinancial System Review and constitute an important element of ouroverall assessment of the risks associated with household finances.Assessing contagion effects in the banking systemHRAM provides invaluable information on vulnerabilities in thehousehold sector, but the Bank is also interested in assessing risks morebroadly within the Canadian financial system. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13To this end, we have been working for several years on developing aMacro Financial Risk Assessment Framework (or MFRAF).Drawing on detailed data from bank balance sheets, MFRAF is aquantitative model that tracks the contribution of individual banks tosystemic risk.Traditional stress-testing models focus exclusively on solvency risk, andestimate the overall risk to the financial system by simply aggregatingcredit (or other asset) losses that would materialize at individual banks inthe event of a severe shock.MFRAF goes beyond this traditional approach by taking into accountlinkages among banks arising from counterparty exposures – or networkspillover effects – as well as funding liquidity risk, that is, the risk ofmarket-based runs on banks.The financial crisis illustrated the significant risks associated with adeterioration of funding liquidity.The collective reactions of market participants led to mutually reinforcingsolvency and liquidity problems at banks around the world.As funding liquidity evaporated, many well-capitalized institutions had totake writedowns on illiquid assets, or sell them at a loss, creatinguncertainty in the market about their solvency and adding to thedownward pressure on asset prices.MFRAF has been built to integrate funding liquidity risk as anendogenous outcome of the interactions between solvency concerns andthe liquidity profiles of banks.This strong microeconomic foundation constitutes a major innovation inmacro stress-testing models.MFRAF also incorporates network externalities caused by the defaults ofcounterparties, with the size of a counterparty’s interbank exposuresincreasing the likelihood of spillover effects. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14A key lesson from the model is that failure to account for either fundingliquidity risk or interbank exposures could lead to significantunderestimation of the risks to the financial system as a whole if thebanking system is undercapitalized and relies extensively on theshort-term funding market.Importantly, the loss distributions generated by the model exhibitfat tails, a key feature of the actual distribution of financial system risks(Chart 3).The fact that the model is able to replicate this important stylized factdemonstrates that it has significant potential as a tool for assessingsystemic risk.Nevertheless, while MFRAF is already somewhat complex, the layers ofinteraction will need to be further augmented.For instance, the model misses any negative feedback that could occurbetween heightened risks to the banking system and the real economy.The model could also be expanded over time to include other types offinancial institutions and markets. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15Compared with other approaches that use market-based data, such as theasset-pricing approach, the transmission channel in models like MFRAFis transparent, and this improves our interpretation of results.Because of this “story-telling” ability, many central banks have begun touse this type of framework in their financial stability analysis.In addition to assessing risks, MFRAF can be used to examine the meritsof policy or regulatory initiatives such as capital and liquidity rules.As the model becomes more refined, the objective is to use it more tocomplement other existing macro stress-testing exercises and to sharpenour analysis and communication of risks in the Bank’s Financial SystemReview.ConclusionLet me conclude.The Bank of Canada is conducting extensive research into findingmethodologies and tools to identify and measure systemic risk.While work in this area is extremely complex, the Bank has madesubstantial progress in recent years.We now have two state-of-the art models. And with HRAM, the Bank ofCanada is one of the few central banks at the leading edge of usingmicrosimulation models to assess vulnerabilities in the household sector.Our efforts to build these models have provided us with importantlessons.First, distributions matter – we cannot rely solely on aggregate data:distributional features and complex interactions are very important forassessing risks.This means developing models that capture these effects. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16Our household simulation model is aimed directly at understanding howthe distribution of debts, assets and income affects financial stability.MFRAF uses information about the interconnections of individualfinancial institutions because these can lead to non-linear network effectsthat are also important for assessing systemic risks.Second, predicting behaviour under stress conditions is very difficult.Models need to be able to handle a variety of “what-if” scenarioscorresponding to different assumptions about behaviours under stress.Finally, we need to consider the many different sources of risk to thefinancial sector and take into account their cumulative effects andinteractions; otherwise we may underestimate risks.Obviously, quantitative measures alone will never be enough to get acomplete picture, especially since the financial system evolves rapidly.Intelligence gathered from discussions with the financial sector, as wellas information shared with other policy-makers and supervisors here inCanada and in the international community, will always be critical to theoverall assessment of the risks.While we are making progress, it is important to remember that financialsystem modelling is still in its infancy.The goal – understanding, preventing, and reducing systemic |risk –deserves our attention, diligent research and hard work. It has been mypleasure to share some of the Bank’s efforts with you today. Thank youvery much. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 17NUMBER 2Solvency IIIn 2011, EIOPA focusedon preparing the final set of regulatory measures for Solvency II, thedraft standards and guidelines.One of the main achievements of EIOPA in 2011 was the report on theFifth Quantitative Impact Study (QIS5) summarising the potentialimpact of the detailed implementing measures to be drafted for theSolvency II regulatory framework.QIS5 has been the most ambitious and comprehensive impact study evercarried out in the financial sector, with the direct involvement of morethan 2500 entities and 100 supervisors from member states and EIOPA,working together for almost a full year.EIOPA launched official public consultations in 2011 in two areas inwhich early discussion with and preparation by the industry areparticularly important.These consultations were on the draft standards and guidelines onreporting and disclosure, and on guidelines on Own Risk and SolvencyAssessment (ORSA).At the end of 2011, EIOPA submitted additional advice to the EuropeanCommission on the calibration of the non-life underwriting risk module.In the area of catastrophe risk, EIOPA made its final recommendation forthe implementing measures on a number of outstanding non-life andhealth catastrophe risk issues.Several task forces concluded their work in 2011, resulting in thepublication of the following reports: “Calibration of the Premium andReserve Risk Factors in the Standard Formula of Solvency II” and the“Report of the Task Force on Expected Profits arising from FuturePremiums”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18Finally, since the creation of EIOPA’s Insurance and ReinsuranceStakeholder Group, EIOPA has benefited from their expertise and widerange of views and interests, and actively involved its members in majoraspects of Solvency II.Occupational pensionsThe main focus of EIOPA’s work on occupational pensions in 2011 wasdeveloping EIOPA’s response to the Call for Advice from the EuropeanCommission on the review of Directive 2003/41/EC on the activities andsupervision of institutions for occupational retirement provision (IORPDirective).The work on the Call for Advice was organised in four sub-groups, allworking in parallel, but all reporting to the Occupational PensionsCommittee (OPC).In 2011, EIOPA also completed number of survey-based reports onreporting requirements, risks related to DC schemes and pre-enrolmentinformation.These surveys were conducted to provide a common technical basis forresponding to the Call for Advice.During 2011, EIOPA carried out two public consultations on its draftadvice.The first between 8 July 2011 and 15 August 2011 on selected aspects of theCall for Advice.The second, between 25 October 2011 and 2 January 2012 on the entiredraft advice.EIOPA also submitted during the year 2011 its input to the ESRB on datarequirements for IORP and published its recurrent report on marketdevelopments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19Consumer protection and financial innovationEIOPA has considered, from day one, consumer protection as acornerstone of its work and an area where a difference has to be made,and EIOPA has been proactive in the area of consumer protection andfinancial innovation.In the course of 2011, the Authority prepared “The Proposal forGuidelines on Complaints- Handling by Insurance Undertakings”, theReport on Best Practices by Insurance Undertakings in handlingcomplaints and finalised a “Report on Financial Literacy and EducationInitiatives by Competent Authorities”.EIOPA also collected data on consumer trends among its members toprepare an initial overview, analysing and reporting on those trends.The Authority also provided relevant input to the EuropeanCommission’s revision of the Insurance Mediation Directive (IMD) bycarrying out an extensive survey of sanctions (both criminal andadministrative) provided for in national laws for violations of IMDprovisions.External commitment, including benefiting from the expert input ofEIOPA’s two Stakeholder Groups and holding EIOPA’s first ConsumerStrategy Day, was also crucial to EIOPA achieving its goals in 2011.Colleges of Supervisors and cross-border crisis management andresolutionEIOPA’s tasks go beyond pure regulatory work, and include concreteoversight responsibilities, including an enhanced role as members of thedifferent colleges of supervisors.The overall strategic target of EIOPA’s College work is to consolidate theposition of the European Economic Area (EEA) supervisory communityvis-a-vis insurance groups operating across borders for the benefit of both _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20group and solo supervision. In 2011, around 89 insurance groups withcross border undertakings were registered in the EEA.During the year, Colleges of Supervisors having at least one actualmeeting or teleconference were organised for 69 groups.A total of 14 national supervisory authorities acted as group supervisors toorganise the events.During the setup phase in the first year after its establishment, EIOPAattended College meetings and/or teleconferences of 55 groups.In early 2011, a set of interim procedures for dealing with emergencysituations was developed by EIOPA in conjunction with the other ESAs.A seconded national expert in crisis management was appointed inMarch 2011, and work then commenced on the development of apermanent crisis management framework by EIOPA.Key to this was the development of a strategic policy on crisismanagement.In the end of 2011 a Task Force on Crisis Management delivered acomprehensive, decision-making framework on crisis pre-emption andcrisis management.Financial stabilityThe common theme of EIOPA’s financial stability initiatives in 2011 wasto identify, at an early stage, trends, potential risks and vulnerabilitiesstemming from micro and macroeconomic developments, and, wherenecessary, to inform the relevant EU institutions.This was achieved by specific and regular market monitoring,information sharing and discussions on mitigating measures in theFinancial Stability Committee (FSC). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21In line with this objective, EIOPA’s FSC set up its first (pilot) riskdashboard in October 2011, containing a common set of quantitative andqualitative indicators that help to identify and measure systemic risk.This dashboard is to be developed further as a joint effort of the ESAs andthe ESRB.In the course of 2011 EIOPA has been an active member of the ESRBSteering Committee that was established in order to assist in thedecision-making process of the ESRB.EIOPA also was taking part in the ESRB Advisory Technical Committee(ATC) and its technical subcommittees with the main focus onidentifying potential systemically important issues in the sectors ofinsurance and IORPs.Furthermore, EIOPA participated in the joint ATC and AdvisoryScientific Committee (ASC) expert group dealing with the regulatorytreatment of sovereign exposures.In 2011, the three ESAs and the ESRB signed a joint “Agreement on theestablishment at the ESRB Secretariat of specific confidentialityprocedures in order to safeguard information regarding individualfinancial institutions and information from which individual financialinstitutions can be identified”.EIOPA also began designing a database of current and historical data forIORPs and insurance and reinsurance undertakings in the EuropeanUnion.During 2011, EIOPA conducted harmonised, pan-European core andlow-yield stress tests for the insurance sector in cooperation with theESRB, ECB and EBA.In June and December 2011, EIOPA published its two semiannualFinancial Stability Reports containing an assessment of the economicsoundness of the European insurance, reinsurance and IORPs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22In December 2011, EIOPA put out for public consultation a set of datareporting templates necessary for regularly assessing sectoral risk andmonitoring financial developments once Solvency II enters into force.EIOPA OverviewIntroductionThe European Insurance and Occupational Pensions Authority (EIOPA)was established as a result of the reforms of the structure of supervision ofthe financial sector of the European Union (EU) that followed thefinancial crisis of 2007, as the crisis demonstrated that the pre-existing3L3 Committees (CEIOPS, CEBS and CESR) had reached their limit.Before and during the financial crises of 2007 and 2008, the EuropeanParliament called for a move towards greater European supervisoryintegration in order to ensure a true level playing field for all players at thelevel of the European Union and to reflect the increasing integration ofthe financial markets of the EU.In response to the global financial crisis, the European Commissiontasked a High Level Group (Committee of Wise Men), chaired by MrJacques de Larosiere, to consider how the European supervisoryarrangements could be strengthened, both to better protect EU citizensand to rebuild trust in the financial system.Among its many conclusions, the Group stressed that supervisoryarrangements should not only concentrate on the supervision ofindividual firms, but also place emphasis on the stability of the financialsystem as whole.Following the recommendations of the Committee of Wise Men, theEuropean Commission initiated a reform, which was supported by theEuropean Council and the European Parliament.As a result, the supervisory framework was strengthened to mitigate therisk and severity of future financial crises. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23EIOPA is part of a European System of Financial Supervision (ESFS), thepurpose of which is to ensure supervision of the EU financial system.The ESFS comprises the three European Supervisory Authorities (ESAs):the European Banking Authority (EBA), based in London, the EuropeanSecurities and Markets Authority (ESMA), based in Paris, and EIOPA,based in Frankfurt, as well as the European Systemic Risk Board (ESRB),based in Frankfurt, and the competent or supervisory authorities in theEU Member States as specified in the legislation establishing the threeESAs.EIOPA’s main goals are:• To better protect consumers, thus rebuilding trust in the financialsystem;• To ensure a high, effective and consistent level of regulation andsupervision, taking account of the varying interests of all Member Statesand the different nature of the financial institutions;• To achieve a greater harmonisation and coherent application of the rulesapplicable to the financial institutions & markets across the EuropeanUnion;• To strengthen oversight of cross-border groups;• To promote a coordinated European Union supervisory response.EIOPA’s core responsibilities are to support the stability of the financialsystem, ensure the transparency of markets and financial products andprotect policyholders, pension scheme members and beneficiaries.EIOPA is commissioned to monitor and identify trends, potential risksand vulnerabilities at the micro-prudential level, across borders andacross sectors.EIOPA is an independent advisory body to the European Parliament, theCouncil of the European Union and the European Commission. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24To account for the specific conditions in the national markets and thenature of the financial institutions, the European System of FinancialSupervision is an integrated network of national and Europeansupervisory authorities that provides the necessary links between themacro and micro prudential levels, leaving day-to-day supervision to thenational level.EIOPA is governed by its Board of Supervisors, whose members are theheads of the relevant national authorities in the field of insurance andIORPs in each Member State.The European Union’s national supervisory authorities are a source ofexpertise and information in the field of insurance and IORPs.Policy Working GroupsThe majority of Policy Working Groups dealt with insurance andreinsurance-related issues, in particular Solvency II.Two other Working Groups in the policy area dealt with IORPs(IORP Directive) and equivalence-related issues.Solvency II Working GroupsThe Solvency II project is completely reshaping the supervisory andregulatory framework for insurance and reinsurance companies, bringinga modern risk oriented, economic and principle based set of rules.One of the main tasks for EIOPA in the coming years is to prepare thenew supervisory regime for insurance and reinsurance undertakings andparticularly to conduct all the necessary work for implementation of theEU Directive on the taking-up and pursuit of the business of insuranceand reinsurance (Solvency II).During 2011, the Solvency II Working Groups developed draft standardsand guidelines which are likely to be required by the Omnibus IIDirective, and which EIOPA considers as essential for ensuring the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25existence of convergent supervisory practices from Solvency II’s first dayof entry into force.Pre-consultations with selected stakeholders were held as part of thecontinuous informal discussion with stakeholders while awaitingconfirmation of the formal legal basis for public consultation on thestandards.Each Working Group contributed to EIOPA’s training programme forsupervisors and, where relevant, Working Groups were involved in thediscussions conducted by the European Commission on implementingmeasures.Working Groups contributed to those areas of each other’s work thatrequired a cross-working group perspective, such as governance orreporting.Insurance Groups Supervision Committee (IGSC)The Insurance Groups Supervision Committee (IGSC) focused ondeveloping draft technical standards and guidelines for the convergentimplementation of Solvency II in the areas of group solvency calculations,intra-group transactions and risk concentration, the cooperation andexchange of information in Colleges, and the treatment of third countrybranches.Financial Requirements Committee (FinReq)The Financial Requirements Committee (FinReq) focused on developingdraft technical standards and guidelines for the convergentimplementation of Solvency II in the areas of own funds, technicalprovisions, and the standard formula for capital requirements, includingthe use of undertaking-specific parameters.FinReq contributed to the development of calibration factors for non-lifeunderwriting risk and catastrophe risk. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 26Internal Governance Supervisory Review and ReportingCommittee (IGSRR)The Internal Governance, Supervisory Review and Reporting Committee(IGSRR) focused on developing draft technical standards and guidelinesfor the convergent implementation of Solvency II in the areas of system ofgovernance, including Own Risk and Solvency Assessment (ORSA),transparency and accountability of supervisory authorities, publicdisclosure and supervisory reporting, and valuation of assets andliabilities (other than technical provisions).Public consultation on the ORSA guidelines and reporting and disclosurerequirements was launched at the end of 2011.IGSRR also started working on guidelines for external audit, thesupervisory review process, capital add-ons, and the extension of therecovery period in the exceptional fall in financial markets.IGSRR prepared EIOPA’s contribution to the International FinancialReporting Standard (IFRS) setting process and to the EU endorsementprocess.Internal Models Committee (IntMod)The Internal Models Committee (IntMod) focused on developing drafttechnical standards and guidelines for the convergent implementation ofSolvency II in the areas of tests and standards for full and partial internalmodels, requirements for the approval process, and the policy forintroducing changes to the model.In order to increase supervisory convergence and to prepare industry andsupervisors for the use of internal models under Solvency II, IntModimplemented initiatives for enhancing supervisory consistency acrossEurope in the pre-application process for internal models, and forensuring adequate cooperation between supervisors when assessinginternal models. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27These initiatives involved practical meetings between operationalsupervisors and training activities.Task Force on Expected Profits arising from Future Premiums(EPIFP)This task force was created to develop a common understanding of theelement of expected profits included in future premiums (EPIFP) so as toadvise the Commission on the drafting of implementing measures afterthe fifth quantitative impact study (QIS5).It was composed of representatives of industry, the EuropeanCommission and EIOPA members and discussed possible ways ofharmonising the calculation of EPIFP under Solvency II.EIOPA submitted a report to the European Commission whichultimately only represented the views of its own members.Occupational Pensions Committee (OPC)The main focus of the Occupational Pensions Committee (OPC) workbetween April 2011 and the end of the year was developing EIOPA’sadvice to the European Commission on the review of the IORP Directivein response to the Call for Advice.Beyond this, OPC own initiative projects in 2011 included the publicationof a number of survey - based reports as follows:• ‘Report on reporting requirements to supervisory authorities forIORPs’• ‘Report on market developments 2011’• Two reports on risks relating to members of defined contributionpension schemes (risks faced by members and mechanisms mitigatingthose risks) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28• ‘Report on pre-enrolment information’ as part of a wider OPCmandate on Packaged Retail Investment Products (PRIPs) and pensionsOther inputs included a contribution to a report on the EuropeanSystemic Risk Board (ESRB) data requirements in respect of IORPs.Equivalence CommitteeIn January 2011, the Equivalence Committee was set up with its main taskbeing to respond to requests from the European Commission for finaladvice, after full consultation, on the equivalence of third countries’supervisory systems.On 26 October 2011, upon request of the European Commission, EIOPAdelivered its final advice, after full consultation, on the Solvency IIequivalence assessments of the supervisory systems in the followingcountries:- Switzerland,- Bermuda and- Japan.The supervisory systems of Switzerland and Bermuda were assessed withreference to reinsurance, inclusion of the third country undertaking in thegroup solvency calculation and group supervision, while the supervisorysystem of Japan was assessed only with reference to reinsurance.The equivalence assessment was based on respective questionnairesfilled in by the relevant supervisory authorities (Swiss FinancialSupervisory Authority – FINMA; Bermuda Monetary Authority – BMA;and the Japan Financial Services Authority – JFSA), followed by adesk-based analysis using EIOPA’s methodology, and onsite visits byEIOPA experts to each of the three countries.Regulatory Working GroupsCommittee on Consumer Protection and Financial Innovation(CCPFI) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29In 2011, the Committee on Consumer Protection and FinancialInnovation (CCPFI) supported EIOPA in fulfilling the requirement laiddown in its Regulation of taking a leading role in the area of consumerprotection and financial innovation, as follows:• preparing “Guidelines on Complaints-Handling by InsuranceUndertakings” and “Report on Best Practices by Insurance Undertakingsin handling complaints”.• preparing the “Report identifying Good Practices for Disclosure andSelling of Variable Annuities”.• finalising the “Report on Financial Literacy and Education Initiativesby Competent Authorities”.• collecting data on consumer trends among its members so as to preparean initial overview, analysing and reporting on those trends.• carrying out an extensive survey of sanctions (both criminal andadministrative) provided for in national laws for violations of IMDprovisions.Task Force on Insurance Guarantee Schemes (TF-IGS)This task force met in the course of 2011 to prepare the report on thecross-border cooperation mechanisms between IGSs in the EU.In accordance with EIOPA’s mandate to contribute to assessing the needfor a European network of IGSs that is adequately funded and sufficientlyharmonised, the report was EIOPA’s input to the EuropeanCommission’s policy - making on IGSs.It summarised the findings from a mapping exercise of the existingmechanisms on cross-border cooperation between the IGSs of MemberStates, and provided general recommendations to the EuropeanCommission in the area of cooperation between IGSs and with theirsupervisors. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30Oversight Working GroupsReview PanelAt the beginning of 2011, the Review Panel , using the experience andlessons learned from its first peer review exercise completed in 2010,reviewed the methodology for peer reviews in line with the EIOPARegulation.In the middle of the year, the Review Panel started work on three peerreview projects on supervisory practices for pre-application of internalmodels, supervision of branches of EEA insurance undertakings, andsupervision of IORPs.These peer reviews are due to be completed in 2012.Task Force on Crisis ManagementIn 2011 a Task Force on Crisis Management was established to developEIOPA’s structures for crisis prevention, management and resolution.In December 2011, this task force delivered a comprehensive,decision-making framework that was endorsed by the Board ofSupervisors.This framework sets out in detail the processes that EIOPA will follow indischarging its crisis pre-emption and crisis management responsibilitiesunder the EIOPA Regulation.Financial Stability Working GroupsFinancial Stability Committee (FSC)The Financial Stability Committee (FSC) focused on monitoring andanalysing developments in the insurance and IORPs sectors.This included in particular the impact of sovereign debt situation in someEuropean countries and also that of other events such as natural _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31catastrophes, including the impact of the Japanese earthquake in March2011 and the subsequent devastating tsunami.Furthermore, the FSC developed a 2011 stress test exercise for theEuropean insurance sector, including a subsequent satellite exercise for alow-yield environment.The FSC also developed and implemented the EIOPA risk dashboardbased on quarterly information collected from national supervisors.The FSC contributed to the work of the cross-sector risk subcommittee ofthe Joint Committee.FSC also contributed to the two half-year Financial Stability Reportsmonitoring both sectors (IORPs and insurance undertakings), whichwere also submitted to the EU Economic and Financial Committee(EFC) and the ESRB.Corporate support Working GroupsInformation Technology and Data Committee (ITDC)In 2011, the IT and Data Committee (ITDC) focused on developingEIOPA’s IT and data strategy and, following on from this, it worked onIT specifications and implementation plans.The IT strategy set out the IT-related goals needed to fulfil EIOPA’smission.The Board of Supervisors adopted the IT and data strategy reports at itsOctober 2011 meeting and mandated EIOPA to implement the IT-relatedgoals set out therein.The Board of Supervisors required the ITDC to produce high - level andoutline IT plans and specifications, with particular focus on an EIOPA ITimplementation plan. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32Update on Solvency II• Solvency II is a new regulatory framework providing supervisors withthe appropriate tools for assessing the overall solvency of insurance andreinsurance undertakings by quantitative and qualitative means, thusimproving understanding and management of these undertakings’ risks.• It is based on three pillars: quantitative requirements (pillar I);governance, risk management and supervisory review (pillar II); andsupervisory reporting and public disclosure (pillar III).• The framework directive was published on 17 December 2009.• The Omnibus II Directive is under discussion in the EuropeanParliament and Council of the European Union following the legislativeproposal from the European Commission on 19 January 2011.• Implementing measures have been discussed between the EuropeanCommission and Member States since the end of 2009.• Standards are being drafted by EIOPA to be endorsed by the EuropeanCommission.• Guidelines are being drafted by EIOPA to ensure the convergentapplication of the regulation.• Date of entry into force of Solvency II: 1 January 2014.Omnibus II Directive and implementing measuresFollowing the creation of EIOPA, the Solvency II Directive requiredrevision to reflect the new supervisory structure; these revisions will formpart of the Omnibus II Directive (OMDII).OMDII will introduce into the Solvency II Directive the necessaryregulatory and supervisory powers for EIOPA to discharge itsresponsibilities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33In addition, OMDII also includes transitional measures allowing gradualimplementation of Solvency II.This extension means that the beginning of the regime would be alignedwith the end of the financial year for most insurance undertakings.During 2011 EIOPA continued to provide technical and analytical supportto the Commission and gave further input to clarify its previous advice onthe development of the implementing measures for Solvency II.While deliberations were taking place in the European Parliament andthe Council of the European Union on OMDII, the Commission,Member States and stakeholders also examined the draft implementingmeasures.Key areas under discussion were the sustainability of long-term insuranceguarantees, the volatility of elements in undertakings’ solvency balancesheets, and reporting and disclosure requirements.Standards and guidelinesIn 2011, EIOPA focused on preparing the final set of regulatory measures,the draft standards and guidelines.Solvency II will be one of the first projects to benefit directly fromEIOPA’s regulatory powers to draft standards and subsequently to ensureconsistent implementation of legislation through binding mediation andoversight of Colleges of Supervisors.Until there is agreement on the proposals for OMDII Directive, EIOPAwill not have complete certainty on the scope of its powers for drafting thestandards for Solvency II and the detail of the regulatory provisions whichthe standards and guidelines are intended to support.Consequently, it was important for EIOPA to monitor the various OMDIIproposals and thus identify the standards which the Authority expects itwill have to draft before Solvency II enters into force on 1 January 2014. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34During 2011, EIOPA also identified those areas in which it is essential tohave guidelines in place before the entry into force of Solvency II.EIOPA is committed to effective consultation and communication withits stakeholders to improve the quality of the regulatory provisions andassist the industry in preparing for the new regime.Subject to the conclusion of the negotiations on OMDII and theimplementing measures, EIOPA plans public consultation on thepackages of draft standards and guidelines during 2012.In 2011, EIOPA launched official public consultations in two areas inwhich early discussion with and preparation by the industry areparticularly important.These consultations were on the draft standards and guidelines onreporting and disclosure, and on guidelines on Own Risk and SolvencyAssessment (ORSA).In other areas, EIOPA continued its informal pre‑ consultations withselected stakeholders (European Insurance and Reinsurance Federation(CEA), Association of Mutual Insurers and Insurance Cooperatives inEurope (AMICE), Chief Risk Officers (CRO) Forum and Chief FinancialOfficers (CFO) Forum, Groupe Consultatif Actuariel Europeen), thushaving an ongoing dialogue with the industry ahead of the publicconsultation.A number of other initiatives were set up specifically to improve EIOPA’scooperation and exchange of information with its stakeholders.Several task forces completed their work in 2011, which resulted in thepublication of the “Report on the Calibration Factors in the StandardFormula of Solvency II” and the “Report of the Task Force on ExpectedProfits arising from Future Premiums”.Finally, following the creation of EIOPA’s Insurance and ReinsuranceStakeholder Group, EIOPA actively involved its members in majoraspects of Solvency II. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35Areas in which EIOPA prepared draft standards and guidelinesduring 2011:• Solvency capital requirements for standard formula as well as forinternal model users; own funds; valuation of technical provisions;valuation of assets and liabilities.• Group supervision.• Supervisory transparency and accountability, reporting and disclosure,external audit.• Governance, ORSA.• Supervisory review process; capital add-ons; extension of recoveryperiod (‘Pillar 2 dampener); finite reinsurance; special purpose vehicles.Quantitative Impact Study 5One of the key achievements of EIOPA in 2011 was completion of thereport on the Fifth Quantitative Impact Study (QIS5) in March 2011.The results of the QIS5 exercise were taken into account in discussionson the implementing measures and are being reflected in the drafting ofstandards and guidelines.The QIS5 exerciseIn March 2011, EIOPA delivered to the European Commission a report onthe results of the fifth pan-European quantitative impact study organisedto inform policymakers on the potential effects of the detailedimplementing measures which are being drafted for the Solvency IIregulatory framework.More than 2 500 individual undertakings and 160 groups from the 30 _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 36members of the European Economic Area participated voluntarily in thissimulation exercise, providing detailed quantitative and qualitative inputson the various elements of the future regulation.The study confirmed that overall the industry remained well capitalisedunder the draft provisions and options tested.The study gathered useful input on transitional provisions fordiscounting, the grandfathering of specific elements of own funds, andthe transitional equivalence of third-country regimes, for example.Valuable insight was gained about the characteristics of internal modelsunder development by undertakings, the difficulties in calculating theloss - absorbing capacity of technical provisions and deferred taxes, andthe potential impact of the introduction of an illiquidity premium in thevaluation of technical provisions.The study also covered the treatment of participations; it gatheredinformation on the relevance of expected profit in future premiums, andon the group solvency assessment under the consolidation and deductionand aggregation methods.The study results highlighted the areas in which further work would bedesirable.This was then initiated by EIOPA as follows: definition of contractboundaries in the valuation of technical provisions; the need to reducecomplexity in certain areas; developments in the calibration ofcatastrophe risk; and the treatment of long-term guarantees in the contextof Solvency II.A particular topic – the refinement of factors used in non-lifeunderwriting and health non - similar to life underwriting risk modules –was addressed by specific data collection in the QIS5 exercise.The data were analysed using a methodology drawn up by a task force ofsupervisors, actuaries and industry representatives. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37For most business lines, the report published in December 2011 facilitatedjoint recommendations for amendments of the factors used in the QIS5exercise.EIOPA’s current and future work on the development of draft technicalstandards and guidelines for Solvency II will benefit greatly from thelessons learned during the QIS5 exercise, in particular by enhancing thepracticability and feasibility of the rules for a single rule book of standardsand guidelines to ensure convergent application of the new system.Standard formula capital requirementsEIOPA prepared draft standards and guidelines on the approval processand data quality for undertaking-specific parameters for soloundertakings and groups; methods for the calculation ofundertaking-specific parameters for solo undertakings; theloss-absorbing capacity for deferred taxes and technical provisions; andstandard capital requirements for health underwriting risk.Informal pre - consultations will be launched and further draft standardsand guidelines developed in 2012.One key area in which EIOPA delivered further advice to theCommission was the calibration of the non-life underwriting risk module.The advice was based on a European-wide data request to the industrylaunched in September 2010, and on discussions with industryrepresentatives and the European Commission to consider the mostappropriate calibration methodologies.The results of this work were published in December 2011.In the area of catastrophe risk, following discussions with the industry,EIOPA made its final recommendation on a number of outstandingnon-life and health catastrophe risk issues for the implementingmeasures.In the second half of 2011, EIOPA continued working with _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 38industry representatives on zoning and reinsurance standards, as well ason catastrophe risk guidelines.Technical provisionsInformal pre-consultations were held on actuarial guidelines for thevaluation of technical provisions.EIOPA began developing the draft standard on the risk-free interest ratecurve and contract boundaries.For the first time, the European Commission tested in QIS5 a risk-freeinterest rate term structure which included a so-called illiquiditypremium.The term structure was based on an adjusted swap rate, and a newextrapolation method was applied for long maturities.During 2011, discussions continued on adjustments to the risk-free ratefollowing the QIS5 results and on the sustainability of long - terminsurance guarantees.EIOPA participated in these discussions organised by the EuropeanCommission with Member State and industry representatives.Proposals emerged from Member States and industry on newadjustments, the so-called counter-cyclical premium and the matchingpremium.These proposals were analysed by EIOPA in the context of developing astandard for the risk - free rate that EIOPA will define and publish.Discussions are expected to continue in 2012.Valuation of assets and liabilities (excluding technicalprovisions) _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39Informal pre-consultations were held on draft standards and guidelinesconcerning the valuation of assets and liabilities.This included guidelines on the use of mark-to-model techniques and thecompatibility of International Financial Reporting Standards (IFRS) withSolvency II.During 2011, EIOPA also contributed to the process of IFRSstandard-setting and subsequent EU endorsement of those standards.Reporting and disclosureIn 2011, EIOPA launched a public consultation on its draft guidelines andstandards for reporting and disclosure.This marked the end of an ongoing and fruitful process of informalconsultation with stakeholders since 2009.Due to the importance of harmonised reporting requirements for theSolvency II project, and also for other areas of EIOPA’s work, such asfinancial stability and the level of preparation that will be required fromthe industry, one of EIOPA’s key aims is to arrive at stable reportingrequirements as soon as possible.Further discussions on specific aspects of the reporting templates and thefrequency of reports are expected to continue in the first half of 2012.Governance and risk management requirementsInformal pre-consultations were held on standards for governance,including ORSA (the latter issue was also subject to public consultationlater on). EIOPA began developing draft standards and guidelines ontransparency and accountability of supervisory authorities and thesupervisory review process, capital add-ons and extension of the recoveryperiod in deteriorating market conditions as well as on external audit. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40Own fundsInformal pre-consultations were held on draft standards and guidelinesfor ancillary own funds and the classification of own funds.Further work was carried out on the treatment of participations andring-fenced funds.Internal modelsInformal pre-consultations were held on draft standards and guidelinesfor the following: application processes for internal models; policies forchanging the model; partial internal models; use tests; expert judgments;probability distribution forecasts (PDF); and consistency between themethodology used for the PDF calculation and the methodology used forvaluation of assets and liabilities (e.g. the calculation of technicalprovisions, approximations for calibrations, profit and loss attributions,validation policy and validation tools, documents and the use of externalmodels).Following the publication in 2010 of guidelines supporting thepre-application process for internal models, EIOPA monitored theactivities of supervisors and industry, using this opportunity to check theday-1 applicability of internal models.This included informal practical meetings of supervisors involved in thepre-application process.Insurance stress testAt the end of March 2011, EIOPA launched the second Europe-widestress test for the insurance sector, which was followed in mid-August bya satellite exercise assessing the effects of a prolonged period of lowinterest rates. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41This satellite exercise is often referred to as the “lowyield stress test”, andwhile it was planned in conjunction with the core stress test, its launchwas postponed to ease the workload of participating undertakings.In accordance with its regulation, EIOPA shall conduct stress testexercises for the insurance and IORPs sectors at least once a year.The 2011 core and low-yield stress test exercises were to assess thestrength of individual institutions and evaluate the overall resilience of theindustries to several clearly defined adverse economic and financialmarket environments.The core stress test was launched in March 2011 based on data as of 31December 2010, and the aggregated results of the exercise were publishedin July 2011.Of the 221 insurance and reinsurance groups and undertakings covered,58 groups and 71 single entities reported results to EIOPA, representingapproximately 60% of the whole European insurance market.The results of the stress test exercise confirmed that the insurance marketin Europe as represented by the 129 participating entities is robust and iswell prepared for potential future shocks.Data showed that approximately 10% (13) of the groups and undertakingswhich responded did not meet the minimum capital requirement (MCR)in the adverse scenario.A total of 8% (10) failed to meet the MCR in the inflation scenario.Overall, EIOPA identified the main drivers of the results as adversedevelopments in equity prices, interest rates and sovereign debt markets.On the liability side, non - life risks were more critical, triggered byincreased claims inflation and natural disasters.Risks from sovereign bond exposures were covered separately in asupplementary test and the results showed that approximately 5% _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42(6) of the participating groups and undertakings would not meet theMCR.The satellite exercise was launched after the EIOPA 2011 core stress testexercise.This was to analyse the risks that European insurers would face in ascenario where interest rates remained low for a prolonged period of time,and to understand the development of insurers’ capital positions inadverse economic conditions, as well as to evaluate the overall stabilityof the insurance market.79It was targeted at those insurers that are exposed to interest-rate sensitiveproducts, since a low-interest scenario would significantly jeopardise theability of these undertakings to meet the performance guaranteesprovided in certain insurance contracts.For this reason, compared to the scope of the core stress test, the sampleof reporting undertakings was slightly reduced to 82 in total.Otherwise, the setup of the low-yield stress test was identical to the coretest, i.e. valuations were based on Solvency II/QIS5 technicalspecifications, and the reference date was 31 December 2010.Based on these results, EIOPA concluded that, on average, the industrywould be adversely affected by a prolonged period of low yields.Depending on the particular shape that such a low-yield curve would takeand where the low yields were located along the curve, results suggestthat 5%-10% of the insurers included in the test would face severeproblems in the sense that their solvency ratio would fall below 100%.In addition, an increased number of insurers would see their capitalposition deteriorate with solvency rates only slightly above the 100%mark, meaning they could become vulnerable to other potential externalshocks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43Risk dashboardIn October 2011, the EIOPA FSC set up its first (pilot) risk dashboard, inline with the framework of the joint group on the cooperation between theESAs and the ESRB on systemic risk.As part of the new European supervisory legislation, EIOPA, the otherESAs and the ESRB are called upon to “develop a common set ofquantitative and qualitative indicators (risk dashboard) to identify andmeasure systemic risk”.This dashboard should be constructed as a joint effort of the ESAs andthe ESRB to give a structured view of risks to the financial sector and thusto facilitate a regular assessment of these risks and possible mitigationpolicies.It is envisaged that the risk dashboards of the various institutions bediscussed at ESRB meetings (General Board and/or Advisory TechnicalCommittee) to assess systemic risk.The two main outputs required are risk vulnerabilities and solvencyprofitability (meaning the ability to withstand shocks).A first pilot risk dashboard has been approved by EIOPA but is still in adevelopment phase and needs to be further refined and finalised aftercompletion of the quality control phase.As far as the methodology is concerned, the EIOPA risk dashboard isbased both on public sources (market data) and the confidential quarterlyfast-track reporting from the 30 largest European insurance groups and itcontains both quantitative and qualitative indicators.Data availability for dashboard purposes is expected to further improvewith the introduction of Solvency II reporting from 2014 onwards.A set of some 50 quantitative indicators form the basis of the riskassessment, and these are mapped into aggregated categories that arealso used by the other ESAs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44These are macro risk, credit risk, market risk, funding and liquidity risk,profitability and solvency interlinkages and imbalances, and a specificcategory for insurance risk.The risk dashboard is then obtained through the mechanical aggregationof these indicators and additional expert judgment which is important forfiltering out noise from the data and producing credible risk assessments.The risk dashboard will be shown in the form of a graph with colourcoding.In addition to work on the risk dashboard, EIOPA launched severalinitiatives during 2011 to improve market monitoring.For example, a daily financial market monitor was launched, and this isnow produced and circulated among EIOPA Staff and EIOPA FSCMembers.A more comprehensive bi-weekly briefing containing risk assessmentsand market analysis was also developed, and regular production of thisbriefing is planned for 2012.OversightDuring 2011 EIOPA undertook significant work in relation to insurancegroups under the current regime (Solvency I), whilst in parallel preparingitself for the Solvency II framework.This has included initiatives to harmonise and streamline groupsupervision for cross-border groups and enhance co-operation betweensupervisors within the Colleges of Supervisors.EIOPA has started to attend the meetings of Colleges of Supervisorssince the beginning of 2011, and this has been a vital mechanism forhelping supervisors to prepare for the entry into force of Solvency II, inparticular with regard to the pre-applications for internal models. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45In March EIOPA published its report on the functioning of colleges, andalso the targets to be achieved during 2011, as included in EIOPA’s 2011Action Plan for Colleges of Supervisors.The overall strategic target of EIOPA’s College work is to consolidate theposition of the EEA supervisory community vis-a-vis the cross-borderoperating insurance groups for the benefit of both group and solosupervision.The focus is on combining and leveraging the knowledge and forces ofthe national supervisory authorities in the EEA to form a strong and equalsupervisory counterpart to the mostly centrally organised and managedundertakings.In this respect, EIOPA as a member of the Colleges of Supervisors(“Colleges”) promotes communication, cooperation, consistency, qualityand efficiency in the Colleges.In 2011, 89 insurance groups with cross-border undertakings wereregistered in the EEA.During the year, Colleges of Supervisors with at least one physicalmeeting or teleconference were organised for 69 groups.A total of 14 national supervisory authorities acted as group supervisors toorganise the events.Some 6 Colleges were chaired by the Swiss Financial Market SupervisoryAuthority (FINMA) as group supervisor.During the setup phase in the first year after its establishment, EIOPAattended College meetings and/or teleconferences of 55 groups.The main conclusions from EIOPA’s observation in the Colleges in 2011are as follows:• Substantial efforts were made by supervisors in preparing, organisingand contributing to the College; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46• The exchange of the QIS5 and stress test results in most of the Collegesenhanced the quality of the discussions and improved the supervisors’common understanding of the undertakings’ risk exposure and solvencyposition;• Similarly, the discussion of financial conglomerate aspects, whererelevant, helped to improve College members’ awareness of the financialstrength of the groups as a whole;• Concerns or legal constraints in some Member States relating to theexchange of confidential information hampered the scope and quality ofdiscussions in the Colleges;• Differences observed between the Colleges regarding:- Scope, content and the frequency of information exchange in theColleges,- Preparation and focus of presentations and discussions with the firms’representative are areas for improvement in implementing an EEA-wideconsistent, coherent and effective supervision for cross-border groups;• The emergency infrastructure test was successfully completed by mostof the Colleges;• The Colleges are making great efforts to prepare for the implementationof the Solvency II Directive, in particular the pre-application process foruse of an approved internal model.Participation in Colleges by EIOPA staffDuring 2011, five full-time equivalent staff were recruited to constituteEIOPA’s College team.A coordinator had been appointed at the beginning of 2011 to prepare astrategy for EIOPA and to kick off EIOPA’s participation in the Colleges. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47EIOPA staff’s commitment to the Colleges focused primarily on thefollowing issues:• To explain EIOPA’s role in the Colleges;• To gain experience from participating in College meetings for the firstyear;• To monitor the collaboration of College members regarding theappropriate information exchange and the discussion of relevant topics inthe College;• To provide input into the agenda and stimulate information exchangewithin Colleges on stress test results and the dialogue on risk exposure,financial strength and resilience to adverse economic and financialmarket developments;• To provide regular updates on the working assumptions in light of thestill pending decisions on the Solvency II timelines;• To act as a link between the Colleges and Solvency II Working Groupsand provide practical input into Solvency II policy work.During 2011, EIOPA staff observed overall significant differences in thelevel of information exchange.Areas for improvement include in particular a continuous and effectiveinformation exchange, as well as discussion and assessment of risks bytaking a more prospective view.EIOPA’s Action Plan 2012 for Colleges was established taking intoaccount the experience and conclusions from College work in 2011.Crisis ManagementIn early 2011, a set of interim procedures for dealing with emergencysituations was drawn up by EIOPA in conjunction with the other ESAs. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48A seconded national expert in crisis management was appointed inMarch 2011, and work then commenced on the development of apermanent framework for crisis management for EIOPA.Key to this was the development of a strategic policy on crisismanagement that was presented to the Board of Supervisors in June 2011.The Board of Supervisors recognised the need to put a robust frameworkin place at an early stage, and an ad hoc Board of Supervisor’s task forcewas created to develop this framework.In December 2011, the task force delivered a comprehensive,decision-making framework which was endorsed by the Board ofSupervisors.This framework sets out in detail the processes that EIOPA will follow indischarging its crisis pre-emption and management responsibilitiesunder the EIOPA Regulation.A small standing group was created, comprising EIOPA members andstaff, that will consider on a regular basis whether EIOPA needs to actunder the Regulation and what actions it may take.This approach is seen as the most efficient way of carrying out regularmonitoring and preparing Board of Supervisors’ decisions on crisismanagement issues.EIOPA Work Programme 2012In 2012 EIOPA will already operate as a fully-fledged European agency,however many of the processes and procedures have to be refined oradapted to the growing organisation and new responsibilities.The Work Programme sets out the goals and deliverables for the secondyear of operations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49Regulatory tasksIn 2012, EIOPA will deliver draft implementing and regulatory technicalstandards as well as guidelines in the different work streams, according tospecific needs to complement the principles and regulations issued by theEuropean Commission.The concrete scope and timing of these deliverables depend on the finaldecision on the Omnibus II Directive (OMDII) as well as on the approvalof the final Delegated Acts implementing Solvency II.In 2012, EIOPA will prepare its final advice to the European Commissionon the review of the Directive on the activities and supervision ofinstitutions for occupational retirement provision (IORP Directive).EIOPA will then develop specifications and carry out a targetedquantitative impact study (QIS) exercise in order to support theCommission’s proposal for a revised IORP Directive.EIOPA will contribute to the revision of the Insurance MediationDirective (IMD), by providing a respective advice to the EuropeanCommission.Supervisory tasksEIOPA will continue to participate in the work of Colleges of Supervisorsand will specifically promote frequent information exchange anddiscussion on risks.To promote the exchange of information in a safe and sound mannerwithin Colleges of Supervisors, EIOPA will give priority to its work on theimplementation of a common IT solution for the secure exchange ofinformation within Colleges, also in crisis times, with the aim to have thetool ready in 2012.In the course of 2012 EIOPA will launching three peer reviews on thefollowing topics: supervision of branches of EEA insurance entities, _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50supervisory aspects of the pre-application of internal models andsupervisory powers to obtain information and intervention regardingIORPs.Consumer Protection and Financial InnovationEIOPA will further develop and pursue its leading role in promotingtransparency, simplicity and fairness in the market for consumer financialproducts and services across the internal market.This will be done by developing more standardised and comparableinformation about the risks and costs of products, relevant regulatoryrequirements and complaints handling procedures.The CCPFI will continue its monitoring and assessment of new orinnovative financial activities, release good practices reports and, wheredeemed appropriate, make proposals for the adoption of guidelines andrecommendations with a view to promoting the safety and soundness ofmarkets and convergence of regulatory practice.Financial StabilityEIOPA will carry out a harmonised, pan-European stress test for theinsurance sector in cooperation with the ESRB, the ECB and EBA.In autumn 2012 EIOPA will deliver an annual assessment of sectordevelopments, highlighting implications for financial stability, with aprovisional report in the spring of 2012, outlining main market trendssince the end of 2011.The Authority will also further develop and monitor a risk dashboard incooperation with the ESRB and other ESAs.Crisis managementEIOPA will continue to develop its crisis management framework withthe focus on the pre-emption element and analytical tools to be used indecision- making. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51Later in 2012 a simulation exercise to test the operation of the newframework will be carried out.EIOPA will also contribute to the work of the European Commission indeveloping crisis management proposals for insurance, along with thework of the IAIS on resolution tools for systemically important insuranceundertakings.External RelationsEIOPA’s view is elaborated with the Members’ support and set forth inthe relevant committees of IAIS. Particular focus will be given to raiseEIOPA’s voice in the IAIS Executive Committee and to promote theCommon Framework for the Supervision of Internationally ActiveInsurance Groups (ComFrame).At the same time, EIOPA will continue to develop its internationalrelations by holding regulatory dialogues and maintaining a close contactwith third countries including the US, China, Japan and Latin America.EIOPA will also continue to assist the European Commission inpreparing equivalence decisions pertaining to supervisory regimes inthird countries by way of producing final, fully consulted upon advice.Joint CommitteeIn 2012 the Joint Committee will further developits work in the sub- committees on financialconglomerates, on cross sector developments,risks and vulnerabilities on anti-moneylaundering and on consumer protection andfinancial innovation.The exchange of information with the ESRBwill also be further developed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52List of the Members and Observers of the EIOPA Board ofSupervisors _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54NUMBER 3 Board of Governors of the Federal Reserve System Federal Deposit Insurance Corporation Office of the Comptroller of the CurrencyFor immediate releaseAugust 27, 2012Credit Risk in the SharedNational Credit PortfolioDeclines, but Remains HighThe credit quality of large loancommitments owned by U.S.banking organizations, foreignbanking organizations (FBOs), andnonbanks improved in 2012 for thethird consecutive year, according tothe Shared National Credits (SNC) Review for 2012.A loan commitment is the obligation of a lender to make loans or issueletters of credit pursuant to a formal loan agreement.The volume of criticized loans remained high at $295 billion comparedwith levels before the financial crisis, but declined 8.1 percent from 2011.A criticized loan is rated special mention, substandard, doubtful, or loss.Reasons for improvement in credit quality included better operatingperformance among borrowers, debt restructurings, bankruptcyresolutions, and ongoing access to bond and equity markets.Despite this progress, poorly underwritten loans originated in 2006 and2007 continued to adversely affect the SNC portfolio.While the overall quality of underwriting of SNCs that were originated in2011 was significantly better than in 2007, some easing of standards wasnoted, specifically in leveraged finance credits, especially compared withthe relatively tighter standards present in 2009 and the latter half of 2008. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55Refinancing risk eased during the past year as 37.1 percent of SNCs willmature over the next three years compared with 63.4 percent for the sametime frame in the 2011 SNC Review.The federal banking agencies expect banks and thrifts to originatesyndicated loans using prudential underwriting standards, regardless oftheir intent to hold or sell them.SNCs that are poorly underwritten will be subject to regulatory criticismor classification during annual SNC reviews.The federal banking agencies expect to finalize revised guidance onleveraged lending to form the basis of the agencies supervisory focus andreview of supervised financial institutions involved in leveragedlending.Although nonbank entities, such as securitization pools, hedge funds,insurance companies, and pension funds, owned the smallest share ofloan commitments, they owned the largest share (62.4 percent) ofclassified credits (rated substandard, doubtful, or loss).In other highlights of the review:  Total SNC commitments increased 10.6 percent from the 2011 review to $2.79 trillion. Total SNC loans outstanding increased $125 billion to $1.24 trillion, an increase of 11.2 percent.  Criticized assets represented 10.6 percent of the SNC portfolio, compared with 12.7 percent in 2011.  Classified assets declined 8.8 percent to $196 billion in 2012 and represented 7 percent of the portfolio, compared with 8.5 percent in 2011.  Credits rated special mention, which exhibited potential weakness and could result in further deterioration if uncorrected, was largely unchanged at $99 billion in 2012, representing 3.6 percent of the portfolio. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56  Adjusted for losses, nonaccrual loans declined to $81 billion from $91 billion, an 11.1 percent reduction.  The distribution of credits across entities--U.S. banking organizations, FBOs, and nonbanks--remained relatively unchanged. U.S. banking organizations owned 43.2 percent of total SNC loan commitments, FBOs owned 36.9 percent, and nonbanks owned 19.8 percent. The share owned by nonbanks declined for the second consecutive year. Nonbanks continued to own a larger share of classified (62.4 percent) and nonaccrual (66.4 percent) assets compared with their total share of the SNC portfolio. Institutions insured by the Federal Deposit Insurance Corporation owned 13.4 percent of classified assets and 9.5 percent of nonaccrual loans.  The media and telecommunications industry group led other industry groups in criticized volume with $66 billion. Finance and insurance followed with $34 billion, then utilities with $30 billion. Although these groups had the largest dollar volume of criticized loans, the three groups with the highest percentage of criticized loans were entertainment and recreation (28.3 percent), media and telecommunications (24.6 percent), and transportation services (22.7 percent). Each of these industry groups saw declines in the share of criticized loans from a year ago.The SNC program was established in 1977 to provide an efficient andconsistent review and analysis of SNCs.A SNC is any loan or formal loan commitment, and any asset such as realestate, stocks, notes, bonds, and debentures taken as debts previouslycontracted, extended to borrowers by a federally supervised institution, its _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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