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  • 1. P a g e | 1International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.risk-compliance-association.comTop 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped theweeks agenda, and what is nextDear Member,TodayI will start withthe job description thatmademy day: BaselII/ III and SolvencyII riskspecialist, Mandarin Speaking!!!Basel III Risk Specialist - Mandarin SpeakingLeading Global Investment Bank, LondonALeading Global Investment Bank isExpandingtheRegulatoryRisk Function withthehire of aBaselIII Risk Specialist for their London Group.- Basel III RegulatoryRisk Specialist- LeadingGlobal Investment Bank- Mandarin Speaking- London, UK- 50,000+ Excellent Bonus BenefitsAsakeymember oftheriskgroupyou will becommunicatingextensively withseniormanagement on a global scaleincludingdirect contact withsenior management inHong Kong and Shanghai and will thereforerequireMandarinspeakingskillsat business APillar 3 Disclosure??level proficiency.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 2. P a g e | 2An expert in regulatoryframeworks,you will have practicalunderstandingof Basel II/ III and knowledgeof SolvencyII ICAAP isalsohighly preferred.This is a mid-level positionwithin the group and will require a minimumof 3 years industry experiencewithin theLondon and/ or InternationalFinancial Markets.It is never toolate tolearn Mandarin. Islookseasy!Amazingjobdescription…Just one slight problem withthisjobdescription:You cannot haveknowledgeof SolvencyII ICAAP … simplybecausethere isnothing likea SolvencyII ICAAP… perhapsthey mean SolvencyII ORSA(OwnRiskand SolvencyAssessment, the Pillar 2 document).It remindsme another job description, wheretheyrequired 5+ years ofBasel III experience. Provided that BaselIII wasendorsed at the end of2010,theycould hire someone after 2015…Another development:Auditors… it is your turn tosuffer the consequencesof the crisis…According to the BIS,The recent financial crisisnot onlyrevealedweaknessesin risk management, control and governanceprocessesatInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 3. P a g e | 3banks,but alsohighlightedthe needtoimprove thequalityof externalauditsof banks.Giventhecentralrolebanksplayin contributingtofinancialstability, andthereforethe need for market confidencein the qualityof external auditsof banks financial statements,the Basel Committee is issuingforconsultationthis guidanceon external auditsof banks.This document describes,through sixteenprinciplesand explanatoryguidance,supervisoryexpectationsregardingaudit qualityand how thatrelatestothe external auditors work in a bank.Read moreat Number 1below.Welcometo the Top 10list.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 4. P a g e | 4External auditsof banksGiven the central role banksplay in contributingtofinancial stability, and thereforethe need for marketconfidencein thequalityof external auditsof banksfinancial statements,the Basel Committeeis issuingfor consultationthis guidanceon external auditsofbanks.This document describes,through sixteenprinciplesand explanatoryguidance,supervisoryexpectationsregardingaudit qualityand how thatrelatestothe external auditors work in a bank.Meeting of the G20 Finance Ministersand Central Bank GovernorsUpdate by theIASB and FASBConvergence projectsThis report is a high-level update on thestatusand timelineof theremainingconvergenceprojects.ToG20Ministersand Central BankGovernorsProgressof Financial Regulatory ReformsInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 5. P a g e | 5EIOPAThe new Risk DashboardFocusing on Low- and Moderate-IncomeWorkingAmericansGovernorSarah Bloom RaskinBoard of Governorsof the Federal Reserve System AttheNational CommunityReinvestment CoalitionAnnual Conference,Washington, D.C.Islamic capital and money marketsWelcomingremarksby Mr Peter Pang, DeputyChiefExecutive, Hong Kong MonetaryAuthority, at theworkshopon ―Islamic capital and moneymarkets‖, Hong KongInterview with Gabriel Bernardino, Chairman ofEIOPA, conductedbyNatašaGajski Kovačić, Svijet osiguranja(Croatia)International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 6. P a g e | 6Reviewing filings for smaller publiccompaniesTheseslideswerepresented at the Forums onAuditingin theSmall BusinessEnvironment hostedbythe PCAOB during 2012.The Global Financial Sector—Transformingthe LandscapeBy ChristineLagarde, ManagingDirector, International MonetaryFund, FrankfurtFinanceSummitManaging structural risks in the Swedishbanking sectorSpeechby Mr Stefan Ingves,Governor of theSverigesRiksbank and Chairman of the BaselCommitteeon Banking Supervision, atAffärsvärlden‘s―Bank & FinansOutlook‖, StockholmInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 7. P a g e | 7External auditsof banksTherecent financialcrisisnot only revealedweaknessesin risk management, controland governanceprocessesat banks, butalsohighlighted theneed to improvethequalityof external auditsof banks.Given the central role banksplay incontributingto financial stability, andthereforethe need for market confidenceinthequalityof external auditsof banksfinancial statements,the Basel Committeeis issuingfor consultation this guidanceonexternalauditsof banks.This document describes,through sixteenprinciplesand explanatoryguidance,supervisoryexpectationsregardingaudit qualityand how thatrelatestothe external auditors work in a bank.Implementation of theprinciplesand the explanatoryguidanceisexpectedto improve thequalityof bank auditsand enhancetheeffectivenessof prudential supervisionwhichis an important element offinancial stability.This document setsout supervisoryexpectationsof how:- externalauditorscandischargetheirresponsibilitiesmoreeffectively;- audit committeescan contributetoaudit qualityin their oversight oftheexternal audit;- an effectiverelationship betweentheexternal auditorand thesupervisor, which allowsgreater mutual understanding about therespectiverolesand responsibilitiesof supervisorsand externalInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 8. P a g e | 8auditors,can leadtoregular communication of mutuallyusefulinformation;and- regular and effective dialogue between the banking supervisoryauthorities and relevant audit oversight bodies can enhance thequalityof bank audits.Thisdocument enhancesand supersedesthe CommitteesguidanceTherelationship betweenbanking supervisorsand banks external auditors(2002) and External audit qualityand banking supervision(2008).In additiontothe proposed guidance, the Committeeispublishingaletter tothe InternationalAuditing andAssurance StandardsBoard(IAASB) on areaswhereit believesInternational StandardsonAuditingcould be enhanced.Serving asan observer on the Basel Committeegroup that developed therevisedguidance,theIAASBprovidedhelpful and meaningful input tothiseffort.Commentson the proposalsshould be submittedby Friday 21June2013bye-mail to: baselcommittee@bis.org.Alternatively, comments may be sent by post to: Secretariat of the BaselCommittee on Banking Supervision, Bank for InternationalSettlements,CH-4002Basel, Switzerland.All commentsmay bepublishedon thewebsiteof the Bank forInternational Settlementsunlessa comment contributor specificallyrequestsconfidential treatment.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 9. P a g e | 9External auditsof banks1. Executive summary1.Therecent financial crisisnot onlyrevealed weaknessesin riskmanagement, control and governanceprocessesat banks, but alsohighlighted theneed to improve thequalityof external auditsof banks.Giventhecentralrolebanksplayin contributingtofinancialstability, andthereforethe need for market confidencein the qualityof external auditsof banks‘financial statements, the Basel Committeeon BankingSupervision(the Committee) is issuingthis document on external auditsof banks.It forms part of theCommittee‘scommitment tohelp improve auditqualityat banks.Thisdocument enhancesandreplacesTherelationship betweenbankingsupervisorsand banks‘external auditors(January 2002) and Externalaudit qualityand banking supervision(December 2008).2.Implementationof the 16principlesand observation of theexplanatoryguidancein thisdocument are expectedtoimprove the qualityof bankauditsand enhancetheeffectivenessofprudential supervision, whichwillthen contributetofinancial stability.Throughtheseprinciplesand explanatoryguidance, the documentdescribessupervisoryexpectationsregardingaudit qualityand howthatrelatestothe external auditor‘swork in a bank.This document specificallysetsout supervisoryexpectationsof how:(a)external auditorscan discharge their responsibilitiesmore effectively;(b)audit committeescan contributetoaudit qualityin their oversight oftheexternal audit;(c)an effectiverelationshipbetweentheexternal auditor and thesupervisor,which allowsgreater mutual understandingabout theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 10. P a g e | 10respectiverolesand responsibilitiesof supervisorsand externalauditors,can lead toregular communication of mutuallyusefulinformation;and(d) regular and effective dialogue between the banking supervisoryauthorities and the relevant audit oversight bodies can enhance thequalityof bank audits.3. Thedocument alsonotestheCommittee‘scontinued commitment toworkthrough international bodies toenhanceaudit quality.2. Introduction, application, structure and the Committee‘sinternational engagementIntroduction4.Thebankingsectorisuniqueamongsectorsof theeconomy becauseitplays a central rolein contributing to thefinancial stabilityof and theprovision of financial resourcesto theeconomy.This sector includesmajor global banksthat are systemically importantbanks(SIBs), the failure of one or moreof whichcould triggera globalfinancial crisis.In addition, bankshavea uniqueoperatingmodel.5.Supervisorsare primarilyconcerned withmaintainingthestability of thebankingsystem and fosteringthesafetyand soundnessof individualbanksin order tomaintain market confidenceand protect theinterestsofdepositors.Consequently, toenhancethe effectivenessof supervision, supervisorshavea keen interest in the qualitywithwhichexternal auditorsperformbank audits.Buildingeffectiverelationshipswith external auditorscan alsoenhancebankingsupervision.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 11. P a g e | 116.An external auditor plansand performs theaudit of a bank‘sfinancialstatementsto obtain reasonableassuranceabout whetherthe financialstatementsasa wholeare free from material misstatements, whether duetofraud or error, and areprepared, in all material respects, in accordancewith an applicablefinancial reportingframework.In many ways, thesupervisor and the external auditor havecomplementaryconcernsregardingthesamematters.For example, the audit of financial statementsmay help identifyweaknessesin internal controlsrelatingtofinancial reportingat a bankwhichmay, therefore,inform supervisoryeffortsin this area andcontributeto a safeand sound bankingsystem.7.Although the focusof thisdocument ison thequalityof theauditperformed by the external auditor, an audit in accordancewithinternationallyaccepted auditing standardsis conducted on thepremisethat the management and, whereappropriate, thosecharged withgovernancehave acknowledgedcertainresponsibilitiesthat arefundamental to theconduct of the audit.Theaudit of the financial statementsdoesnot relievemanagement orthosecharged withgovernanceof their responsibilities.8.TheBasel Committee on Banking Supervision‘sCore PrinciplesforEffectiveBankingSupervision (September 2012,Core Principles)providea framework of minimum standardsfor sound supervisorypracticesandare considereduniversallyapplicable.Core Principle27 focuseson prudential regulationsand requirementsforbanksin relation to financial reportingand external audits.This guidanceset out in this document is consistent withCore Principle27.9.Theapplicationand thestructure of each sectionin this document aredescribedbelow,followedby an outlineof the key internationalInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 12. P a g e | 12relationshipsbetweenthe Committeeand other groupsrelevant toexternalauditing.Application10.This document appliesto the followingentitiessubject toa statutoryaudit:- all banks, includingthosewithin a bankinggroup;- holdingcompanies whosesubsidiariesarepredominantlybanks;and- holding companiessubject to prudential supervision whosesubsidiariesare predominantlybanks.All of thesestructuresarereferredtoasbanksorbankingorganisationsinthisdocument.11.Theimplementation of the principlesset forth in this documentshould be proportionate tothe size, complexity, structure, economicsignificanceand riskprofile of the bank and thegroup (if any) towhichitbelongs.TheCommitteerecognisesthat some countrieshavefound it appropriatetoadopt legal frameworksand standards(eg for listedfirms), aswell asaccountingand auditingstandards, whichmay be more extensiveandprescriptivethantheprinciplesandexplanatoryguidanceset forthherein.Such frameworksand standardstend tobe particularlyrelevant for largeror publicly traded banks or financial institutions.12.This document hasbeen prepared withthefull awarenessthatsignificant differencesexist in national institutional, legislativeandregulatoryframeworksamongst jurisdictions,includingaccountingandauditingstandards,supervisorytechniquesand institutional corporategovernancestructures.Supervisorsshouldclearlycommunicatethe recommendationscontainedhereinto the banks theysuperviseand their respectiveexternal auditors,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 13. P a g e | 13andarticulatethemeasuresbanksandexternalauditorsshouldundertaketomeet thesebest practices,wherepossible.13.Theprinciplesset out in thisdocument should be applied inaccordancewiththenational legislationand corporategovernancestructuresapplicablein each country.14.Thefollowingtermsare used in thisdocument, with themeaningsspecified:- Financial statement audit –An audit of a bank‘sfinancial statementsbyan external auditor in accordancewithinternationallyacceptedauditingstandards.- Statutoryaudit –An audit carried out tocomply withtherequirementsof particular legislationor regulations.In some jurisdictions,this may includeonlythe financial statementaudit.In other jurisdictions,this may alsoincludeextended reportingbyexternal auditorson matterssuch asinternal controlsand regulatoryreturns.- External auditor – The audit firm and theindividual auditengagement team members.Where relevant, specific referencesaremadetothe audit firm or theindividual audit engagement team membersin certain paragraphs.- Bankingsupervisoryauthority– The body responsiblefor promotingthesafetyand soundnessof banks and thebanking system in aparticular jurisdiction, includingthepersonswhoare involved withsupervisorypolicy settingand policyissues,includingpoliciesregardingaccountingand auditing.- Supervisor – The group of supervisorypersonnel at a bankingsupervisoryauthoritywhoaredirectlyinvolved withthesupervision/ examinationof a specific institution.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 14. P a g e | 14- Board and senior management – The governance structure at a bankcomposed of a board and senior management.TheCommitteerecognisesthat there aresignificant differencesinthelegislativeand regulatory frameworksacrosscountriesregardingthesefunctions.Somecountries usea two-tier structure, wherethe supervisoryfunctionof the board is performed by a separateentityknown asasupervisoryboard, whichhasnoexecutivefunctions.Other countries, bycontrast, usea one-tier structurein whichtheboardhasa broader role.Still other countries have moved or aremoving to an approachthatdiscouragesor prohibitsexecutivesfrom serving on theboard orlimitstheir number and/ orrequires theboard and board committeestobe chairedonlyby non-executiveboard members.Given thesedifferences, this document doesnot advocate a specificboardstructure.Theterms―board‖ and ―senior management‖ are onlyused asa waytorefer tothe oversight function and themanagement functioningeneral and should be interpretedthroughout the document inaccordancewiththeapplicablelaw withineach jurisdiction.- Audit committee – A specialised committee established by theboard, the mandate, scope and working procedures for which are setout in a charter or other instrument.As stated in the BCBS paper on Principlesfor enhancingcorporategovernance(October 2010), toincreaseefficiencyand allowdeeperfocus in specificareas,boardsin many jurisdictionsestablish certainspecialisedboard committees– the audit committeebeing one ofthem.Thepaper further recommendsthat, for largeand internationallyactivebanks, an audit committeeor equivalent should be required.It alsooutlinesthe overall responsibilitiesof the audit committee.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 15. P a g e | 15- Thosechargedwith governance – Theperson(s) or organisation(s)with responsibility for overseeingthestrategic direction of theentityand obligationsrelatedto the accountabilityof the entityasdefinedbyinternationallyaccepted auditingstandards.Such person(s) or organisation(s)is (are) typically the board ofdirectors.Where the board of directorsestablishesan audit committeein abank to assist it in meetingitsresponsibilitiesbychargingthe auditcommitteewith specific tasksand responsibilities, in suchcircumstancesthe audit committeecan be viewedastaking on theroleof thosechargedwithgovernancein relation to thosespecifictasksand responsibilities.StructureThe external auditor and audit quality15.Audit qualityincludesdeliveringan appropriate, independentprofessional opinionon the financial statements,in compliancewithinternationallyaccepted auditing standards.Internationally accepted auditing standards require the external auditorto possess and demonstrate certain attributes while applying a rigorousaudit process.16.Given that internationallyaccepted auditingstandards are applicabletoall entities,Section4of thisdocument buildsupon thesestandardsandlaysout thesupervisoryexpectationsof theexternal auditorregardingtheaudit of a bank.Moreover,Section 4highlightsthe keyareaswheresignificant risksofmaterial misstatement in banks‘financial statementsoften arise, whichthereforerequire theauditor‘sparticularattention for a qualityaudit.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 16. P a g e | 16Engagement between the external auditor and the auditcommittee17.Regular and effectiveengagement and communication betweentheexternalauditor and the audit committeecontributetoaudit quality.18.Amongst itsother responsibilities, theaudit committeeisresponsiblefor overseeing thebank‘sexternal auditor.Asoundlyconstitutedaudit committeecanplayakeyrolein contributingtoaudit quality.Section 5 discussesthe audit committee‘sresponsibilitiesin relationtotheoversight of, and its relationshipwith, theexternal auditor.Engagement between the supervisor and the external auditor19.Effectivecommunication betweenthesupervisor and theexternalauditorenhancestheeffectivenessof supervisionof the bankingsector.This relationship will then alsocontributeto audit quality.20.Thesupervisor and the external auditor have a mutual interestinbuildingand maintainingan effectiverelationship, which fostersregularcommunicationof useful information.Section 6providesprinciplesand explanatory guidancefor facilitating aneffectiverelationshipbetweenthe supervisor and theexternal auditor atthelevelsof thesupervisedbank, the audit firm and theaccountingprofession asa whole.Engagement between thebanking supervisory authority and theaudit oversight body21.Thebanking supervisory authorityand the relevant audit oversightbody sharea strongmutual interest in ensuringqualityindependentaudits.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 17. P a g e | 17Regularandeffectivedialoguebetweenthebankingsupervisoryauthorityandthe audit oversight body at a national level can assist in identifyingand dealingwithkeyissuesin relationtotheconduct of bank audits.Section 7setsout theprinciplesfor facilitatingeffectivecommunicationbetweenthese bodies.22.Supervisorsare in a uniqueposition toidentify audit qualityissuesatboth theindustry and individual audit level.Regular and effectiveengagement betweenthe supervisorand therelevantaudit oversight bodymay enablethesupervisortoprovide timelyfeedbackon suchissues.Additionally, the supervisor may, if necessary, take action toaddressissuesraisedby theaudit oversight body.The Committee‘s international engagement on externalauditing23.Approachesfor dealingwithsupervisoryconcernsabout thequalityoftheaudit of an individual bank may differ acrossjurisdictions,but allapproachesshould be designed to contributeto enhancing audit quality.In its effort to promote audit quality, the Committee engages in regulardialogue and discussion with the relevant international stakeholders onexternalaudit matters.Thesestakeholdersinclude, but arenot limitedto, the following:- theFinancial StabilityBoard (FSB), whoseobjectivesincludetheenhancement of the effectivenessof banking supervision;- theMonitoringGroup, which is responsiblefor advancing thepublicinterest in areasrelatedtointernationalaudit quality;- thePublic Interest Oversight Board (PIOB), which is responsibleforimprovingthe qualityand public interest focusof the internationalstandardsformulated bystandard-settingboardsoperatingunder theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 18. P a g e | 18auspicesof the International FederationofAccountants(IFAC) intheareasof audit and assurance, education and ethics,includingoversight of thepublic interest activitiesof three of theIFAC‘sindependent standard-setting boards and their respectiveconsultativeadvisory groups;- theconsultativeadvisorygroupsof the InternationalAuditing andAssurance StandardsBoard (IAASB) and theInternational EthicsStandardsBoard forAccountants(IESBA), whichare responsiblefordeveloping international auditingand ethics standards respectively;- theInternational Forum of Independent Audit Regulators(IFIAR), which is responsiblefor improving audit qualityglobally, includingthrough independent inspectionsof auditorsand/ or audit firms;and- theGlobal Public Policy Committee(GPPC), which is comprised ofrepresentativesfrom the six largest international accountingnetworksand focuseson public policyissuesfor the accountingprofession.24. The objectiveof thisdialogueis toenabletheCommitteeand therelevant international stakeholderstoidentify and discussrelevant issuesandtopics on a timelybasis sothat supervisors, external auditorsandaudit oversight bodiescan take appropriate action.As such, thesediscussionsshould addressnot onlycurrent issuesandtopics, but alsoemergingareasand trendsthat raiseconcern.3.Overview of the principles- Principle1: The external auditorof a bank should have bankingindustryknowledgeand competencesufficient to respondappropriatelytothe risks of material misstatement in thebank‘sfinancial statementsand toproperlymeet any additional regulatoryrequirementsthat may be part of thestatutory audit.- Principle2: The external auditorof a bank should be objectiveandindependent in fact and appearancewithrespect to thebank,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 19. P a g e | 19consistent withthe more stringent requirementsapplicabletopublicinterest entitiesin internationallyaccepted ethical standards.- Principle3: The external auditorshould exerciseprofessionalscepticism whenplanningand performingthe audit of abank, having due regard tothe specific challengesin auditing abank.- Principle4:Audit firms undertakingbank auditsshould complywiththemore stringent requirementson qualitycontrol applicableto listedentitiesin internationallyacceptedqualitycontrol standards,havingdue regard tothe complexityof a bank audit.- Principle5: Theexternal auditorof a bank shouldidentify and assesstherisksof material misstatement in the bank‘sfinancialstatements,takingintoconsideration thecomplexitiesof bankingactivitiesand the need for banks tohave a strong controlenvironment.- Principle6: The external auditorof a bank should respondappropriatelytothe significant risks of material misstatement in thebank‘sfinancial statements.- Principle7: The audit committeeshould have a robust processforapproving, or recommendingfor approval, theappointment, reappointment, removal and remunerationof theexternal auditor.- Principle8: The audit committeeshould monitor and assesstheindependenceof theexternal auditor.- Principle9: The audit committeeshould monitor and assesstheeffectivenessof theexternal audit.- Principle10: The audit committeeshould have effectivecommunicationwiththeexternal auditor toenablethe auditcommitteetocarry out itsoversight responsibilitiesand to enhancethequalityof the audit.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 20. P a g e | 20- Principle 11: The audit committee should require the external auditorto report to it on all relevant mattersto enable the audit committee tocarryout its oversight responsibilities.- Principle12: The supervisor and the external auditor shouldhave aneffectiverelationshipthat includesappropriate communicationchannelsfor the exchangeof information relevant to carrying outtheir respectivestatutoryresponsibilities.- Principle13: The external auditor should report tothesupervisormattersthat are likely tobe of material significancetothefunctionsof the supervisor.- Principle14: There should be open, timelyand regularcommunicationbetweenthebankingsupervisoryauthority, theauditfirm and the accountingprofession asa wholeon keyrisksandsystemic issuesaswell asa continuousexchangeof viewsonappropriateaccountingtechniquesand auditingissues.- Principle15: There should be regular and effectivedialoguebetweenthebanking supervisoryauthority and the relevant audit oversightbody.- Principle16: The banking supervisoryauthorityand theauditoversight body should observe appropriateconfidentialityrequirementswhen sharing information.4. Supervisory expectationsrelevant to the external auditor andthe external audit of financial statements25.External auditsof financial statementsperformed in accordancewithinternationallyaccepted auditingstandards enhancetheconfidenceof allusers,includingsupervisors,in thereliability of the auditedfinancialstatementsand thequalityof theinformation provided.26.Auditsof banks should be performed in accordancewithinternationallyaccepted auditing standards.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 21. P a g e | 21As these standardsare not industry-specific, for a qualityauditsupervisorsexpect external auditorsnot onlyto complywithinternationallyaccepted auditing standardsbut alsototailor their auditworkin response to thesignificant risksand issuesapplicableto banks.27.External auditorsarerequired tocomplywithapplicablejurisdictionaland, whererelevant, internationallyaccepted ethical standards.However,given thecomplexityand systemic risksassociatedwithbanks, the external auditorof a bank should followthe most stringentrulesfor independenceunder thesestandards.Similarly, theexternal auditor of a bank should alsofollowthemoststringent standardson qualitycontrol at the engagement level.28.PartAof this section describesthesupervisor‘sexpectationsasa userofthebank‘sfinancialstatements,specificallywithrespecttotheexternalauditor‘sknowledge, competence, objectivity, independence,professionalscepticismand qualitycontrol over the bank‘saudit.Part B identifies areaswheresupervisorsbelieve there is often asignificant risk of material misstatement in a bank‘sfinancial statementsand factorstowhichthesupervisorexpectsthe external auditor topayattention whenauditingthoseareas.29.While theprimary focus in this section is on thefinancial statementaudit, particularlyin Principles5 and 6, the external auditor may identifymattersin thecourseof the audit that areof interest tothesupervisorandthereforeshould beconsideredfor communicationto thesupervisor.Examplesof such mattershave been included in Section 6.30.In some jurisdictions,aspart of the statutory audit, the externalauditormay alsoundertakeadditional work toprovideassuranceoninternalcontrolsor other aspectsof a bank‘soperations.Theprinciplesset out in this section providea relevant referencefor theperformanceof such additional work.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 22. P a g e | 2231.Theprinciplesand explanatoryguidanceset out in this sectionprovidea frameworkfor the supervisor‘sinteractionswiththe externalauditor,the audit committeeand therelevant audit oversight body.Theoutcome of theseinteractionswill inform thesupervisor‘sviewsastothequalityoftheexternalaudit and contributetothesupervisoryprocess.Theseprinciplesand explanatoryguidancealsoprovide a framework toassist the audit committeein selectingthe external auditor and inassessingthe external auditor‘sknowledge, competence, objectivityandindependenceaswell asthe effectivenessof the audit process.A.The supervisor‘s expectationsof the external auditor of abankKnowledge and competencePrinciple1: Theexternal auditor of abank should havebanking industryknowledgeand competence sufficient torespond appropriately totherisksof material misstatement in thebank‘sfinancial statementsand toproperlymeet anyadditional regulatory requirementsthat maybepart ofthestatutory audit.32.Given thecomplexityand diversity of banking activities, and the legaland regulatory framework in whichbanks operate, the external auditor ofa bank should have specialised knowledgeand competencein auditingbanksand should use expertsasappropriate.Knowledge33.Theresourcesrequired toperform theaudit should be suchthat theaudit engagement team, asa whole,has:- proficient knowledgeand understandingof, and practicalexperiencewith, the banking sector, associatedbanking industry and bank -specific risks, and the operationsand activitiesof banksand bankaudits.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 23. P a g e | 23Theaudit engagement team may acquire this proficiencythroughspecific training, participation in bank auditsor workin the bankingsector;- proficient knowledgeof applicableaccounting, assuranceand ethicalstandards, industrypractice and relevant guidancesuch asInternationalAuditing PracticeNote (IAPN) 1000;- proficient knowledge of relevant regulatory requirements in the areasof capital and liquidity, and a general understanding of the legal andregulatoryframework applicabletobanks;and- proficient knowledgeand understandingof IT relevant to bankaudits.34.In addition, theexternal auditorshould consider whethertheauditengagement team should includespecialistswitha high degree oftechnicalaccountingknowledgerelevant to banking, particularlygiventhecomplexityof the requirementsof theapplicablefinancial reportingframeworkpertainingto accountingestimates,includingloan lossprovisions,fair valuemeasurements,andanyareasknowntobesubjecttodifferinginterpretationor inconsistent or developing practices.Competence35.Audit firms should have documented policies and procedures that setminimum competency criteria for members of a bank‘s audit engagementteam.36.Supervisorsmay have the ability toinfluencethe competencyrequirementsfor external auditors.Whereregulationsandstandardsin particularjurisdictionsdonot includespecific competencyrequirementsfor banks‘external auditors,thesupervisormay encourage professional and regulatorybodies to introducerequirementsregarding trainingin, and experiencewith, bank auditingand accountingsothat the audit engagement teamsfor bank auditsarecomprised of sufficientlycompetent staff.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 24. P a g e | 2437.Competenceis particularlyimportant in underpinningan externalauditor‘sabilityto exerciseprofessionaljudgment and carry out keyaspectsof the audit, such asidentifying and assessingthe risksofmaterial misstatement and designingand implementingappropriateresponsestothoserisks.Use of experts38.In someinstances,suchastheauditingofcertaincomplexaccountingestimates,more specialised knowledgemay be required to support theaudit engagement team,egadditionalexpertisebeyond thatpossessedbytheaudit engagement team‘smembersin afieldother thanaccountingorauditing.Examplesof such areasare valuation of complex financialinstruments,commercial propertyvaluationsand evaluation of highlycomplex IT environments, particularlyin areassubject to significantrisksof material misstatement.39.Internationallyacceptedauditingstandardsset out requirementsforthenature, timingand extent of audit procedureswhichthe externalauditorshould perform to assessthe competence, capabilitiesandobjectivityof the expertsthe external auditor may use.Theseareimportant factorsin consideringthe reliabilityof theinformation or resultsproducedby the expert.Objectivity and independencePrinciple2: Theexternal auditor of abank should beobjective andindependent in fact and appearance withrespect to thebank, consistentwiththemorestringent requirementsapplicabletopublic interestentitiesin internationallyaccepted ethical standardsObjectivityInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 25. P a g e | 2540.Objectivityis a fundamental ethical principleand a keyelement ofaudit quality. It requires that theexternal auditor‘sjudgment is notaffected by conflictsof interest.As objectivityis a state of mind that in most casescannot be directlyobserved by usersof financial statements, it is important for the externalauditortobe independent in both fact and appearance.Independence41.Independence is freedom from situations and relationshipsin which areasonably informed third party would conclude that an external auditor‘sobjectivityisimpaired.Jurisdictional and internationallyaccepted auditingstandardsandinternationallyaccepted ethicalstandardslayout frameworksfor externalauditorsto identify and respond tothreatsto independence.42.Theexternal auditorof a bank must complywith the applicablejurisdictional and internationallyaccepted ethical standards.Furthermore,the Committeebelievesthat the external auditor of a bankshould complywith themore stringent independencestandards forpublic interestentities.Tothe extent that any of theruleswithinany one of thesestandardsonethics ismore restrictivethan the correspondingrule in theotherstandardson ethics,the external auditor must complywith themorerestrictiverule.43.Independenceshould be observed not only in the context of thebankthat is beingaudited but alsowith respect to thebank‘srelated entities.44.External auditorsof a bank should complywith applicablejurisdictional requirementson therotationof membersof theauditengagement team.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 26. P a g e | 2645.Theaudit engagement team members, the audit firm and, whenapplicable,network audit firmsshould complywith the independencerequirementsof both thehome jurisdictionand the overseasregulatoryauthority(in thecasewherethe bank is ultimatelyregulatedby anoverseasauthority).46.When assessingwhetheranyrelationshipor circumstanceposesathreat to an external auditor‘sindependence,theexternal auditor shouldevaluatenot just thespecific ruleson independence,but alsothesubstanceof the threat to independence, and how a reasonablyinformedthird partywouldperceivethe threat and its effect onthe externalauditor‘sobjectivity.Theprovision of significant non-audit servicesby the audit firmand, when applicable, networkaudit firmsto the bank beingauditedmayparticularlyaffect a third party‘sperceptionof the externalauditor‘sindependence.Such situationsshould be carefullyevaluated for threatsto the externalauditor‘sobjectivityand perceived independence.47.Thesupervisor expectstheexternal auditor toconsider activelypotential threatsto theauditor‘sindependence,specificallythe threat ofself-review, whendiscussingaccountingmatterswiththe management.For example, complex transactionsmay be structured toachieveaparticular accountingtreatment and/ or regulatory outcome.When anexternal auditor discusseswithor providesadvice tomanagement on such matters, the external auditor must exercisecaresoasnot to take on a management role or responsibility.Professional scepticismPrinciple 3: The external auditor should exerciseprofessional scepticismwhen planning and performing the audit of a bank, having due regard tothespecific challengesin auditing abank.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 27. P a g e | 2748.Professional scepticism is defined as―an attitudethat includesaquestioningmind, beingalert toconditionswhichmay indicate possiblemisstatement due toerror or fraud, and a critical assessment ofevidence‖.Professional scepticismshould manifest itselfnot onlythrough theauditorobtaining corroboratingevidencefor management‘sassertions,but alsochallengingmanagement‘s assertions, activelyconsideringwhetherthere are alternativeaccountingtreatmentsthat arepreferable to thoseselectedby management, and documentingtheapproach, theevidenceobtained, the rationaleappliedand theconclusionsreached.Throughout the audit, the auditor should ―adopt aquestioningapproachwhenconsideringinformation and forming conclusions‖.49.Exercisingappropriate professional scepticismiscriticallyimportantin auditsof banksbecauseof thenumber and significanceof accountingestimatesand thepotential for limitedobjectiveevidencesupportingthoseestimates.Professional scepticismis particularlyimportant whenauditing areasthat:(a)involvesignificant management estimatesand judgmentsbecausetheseare more proneto management bias;(b) involvesignificant non-recurringor unusual transactions;or(c)are more susceptibleto fraud and errorsbeingperpetuated due toweakinternal controls.50. Specific areaswhereprofessional scepticism should be exercised bytheexternal auditorof a bank includeimpairment calculations,fair valuemeasurementsand goingconcern assessments,includingassessmentsofsolvencyand liquidity.Otherexamplesmayincludecomplextransactionsstructuredtoachieveaparticular accountingtreatment and/ or regulatory outcome by theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 28. P a g e | 28management wherethe audit engagement partner hasor ought to havereasonabledoubt that the proposed accountingtreatment and/ orregulatoryoutcome isconsistent withtherelevant financial reportingframeworkor regulatory requirements.In this context, theexternal auditorshould actively challengemanagement‘sassumptionsand judgmentsand form independent views.This includeschallengingevidenceobtained from management thatcorroboratesmanagement‘sview.51.Where a bank consistentlyutilisesvaluationsthat are at the high or lowend of a range of acceptablevaluationsor whenthere areother indicationsof possiblemanagement bias, theexternal auditorshould considerthisintheoverall risk assessment of thebank and shouldinform thosechargedwithgovernance, whereappropriate.52.Theevidenceoftheextent ofprofessionalscepticismexercisedshouldbedemonstrable and understandablethroughaudit documentation thatdescribeshow, whyand what conclusionswerereached by the externalauditor.In this regard, internationallyaccepted auditing standards establishminimum requirementsfor audit documentation.Quality controlPrinciple4:Audit firmsundertakingbank auditsshould complywiththemorestringent requirementson qualitycontrol applicabletolistedentitiesin internationallyaccepted qualitycontrol standards, having dueregard to thecomplexityof abank audit.53.Audit firms must complywith the applicablejurisdictional andinternationallyaccepted standardson qualitycontrol.Furthermore, the Committeebelievesthat the external auditor of a bankshould complywith themore stringent requirementson qualitycontrolInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 29. P a g e | 29applicabletolistedentitiesin internationallyacceptedqualitycontrolstandards.Tothe extent that anyof the ruleswithinany one of thesequalitycontrolstandardsismorerestrictivethanacorrespondingruleintheotherqualitycontrol standards, theexternal auditor must comply withthe morerestrictiverule.54.Theaudit of a bank should be subject to an engagement qualitycontrol review (EQCR) performed internallybytheaudit firm prior totheissuanceof the audit opinion.Theengagement qualitycontrol reviewer should have theappropriateknowledgeand competencetoreview bank audits.Thereviewer should exerciseprofessional scepticismin assessingthequalityof audit evidenceand whethertheauditor‘s judgmentsareappropriate.55.EQCR should be part of a broader firm-level internal system of qualitycontrol that emphasises quality and consultation and creates a culture ofcompliancewith auditingand ethical standards.56.Wherea networkof audit firms isinvolved in the audit of a bank, theindividual audit firmswithinthe networkshould applyqualitycontrolprocessesthat complywiththis document.In such cases, theleadaudit engagement partner should be responsiblefor the performanceof a qualityaudit by all the teamsreportingto it.In doing so, the lead partner may placereliance on theprocessesbywhichqualitycontrol is exercised withinthe networkfirmsthat report toit.For example,theleadaudit engagement partnerof agroupaudit mayrelyon thefirm‘s processesfor(a) ensuring that each audit engagement team memberInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 30. P a g e | 30(i)acquiresthe appropriateskills,knowledgeand experienceto performbank auditsand(ii) complieswithindependencerules,and(b) monitoringadherencetothe audit firm‘s policiesand procedures onqualitycontrol.57. The involvement of theengagement qualitycontrol reviewerthroughout the audit, and the outcome of the qualitycontrolreview, should be evident in the audit workingpapers.Any significant discussionsbetweentheengagement qualitycontrolreviewerand the audit engagement team, particularlyin areaswhereviewsmay have differedand astohow conclusionswerereached, shouldbefullydocumented in theaudit workingpapers.Thusin jurisdictionswherethe supervisor hasaccessto theexternalauditor‘sworkingpapers,the qualitycontrol review wouldalsobe at thesupervisor‘sdisposal.B. Supervisory expectationsof the audit of a bank‘sfinancialstatementsIdentifying and assessing significant risks of materialmisstatement specific to a bank‘s financial statementsPrinciple5:Theexternal auditor of abank should identify and assesstherisksof material misstatement in thebank‘sfinancial statements, takingintoconsideration thecomplexities of bankingactivities and theneed forbanksto have astrongcontrol environment.Identifying potential risks58. Banks are exposed to a varietyof risksthat can potentiallyaffect theresultsof their operationsor financial condition.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 31. P a g e | 31Theseinclude, but are not limited to, credit risk, market risk, liquidityrisk, operational risk and regulatory risk.New risksmay emergeor the significanceof each risk may changeovertimeasa result of various factorsthat may be driven by changedcircumstancesor developmentsboth internal and external to thebank.59.In designing and performingthe audit of a bank, the external auditorshould assessthe inherent and control risk to determinethe risk ofmaterial misstatementsat thefinancial statement and assertionlevels.By doing so, the external auditor gains an understanding of internalcontrols that are relevant to the audit, and particularly of the controlenvironment designedby the bank.60.Torespond totheassessedrisk of material misstatement, an externalauditorfollowsan audit strategy that includesboth substantiveproceduresand control testing.Given the nature of bank activities, includingthoseinvolvinga highvolume of transactions,banks implement controlsdesignedtoaddressrisksposed to the organisation.As a result, the external auditor of a bank should perform extensive testsof controlsover financial reportingto assesswhether,and towhatextent, the auditorcan rely on them.Materiality61.An understanding of the concept of materiality and determination ofmateriality thresholds is needed in order to establish the auditstrategy, and identify and assesswhether a risk of material misstatementexistsin the financial statements.62.Thedetermination of what is material tothefinancial statementsasawholeisa matter for the external auditor‘sprofessional judgment aboutmisstatementsthat could reasonablybe expectedtoinfluenceeconomicdecisionsof userstaken on the basis of the financial statements.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 32. P a g e | 3263.Theexternal auditorshould exercisecaution whenevaluatingidentifiedmisstatements.Thesemisstatementscould be an indicatorof widerissueswithinthebank whichcould potentiallylead tomaterial misstatementsin thefinancial statementsasa whole.Therefore, individual misstatementsshould not be dismissedsolelybecausetheyare below the level of materiality set for planningpurposes.64.For individual account balances, specific classesof transactionsordisclosures,internationallyacceptedauditingstandardsrequire theexternalauditor todeterminea lowerlevel of materialityfor thoseparticular account balances, classesof transactionsor disclosures,if theexternalauditor believesthat ―misstatementsof lesseramountsthanmaterialityfor the financial statementsasa wholecould reasonablybeexpectedto influencetheeconomic decisionsof users takenon the basisof the financial statements‖.This is particularlyrelevant for auditsof banksbecausecertain financialstatement itemsareused in the calculationof keymetricsused by a widerangeof usersof thefinancial statements.For example, regulatory ratios such as the leverage ratio, liquidity ratioand capital adequacy ratio are calculated based on account balances inthefinancial statementsor are derived from the financial statements.Assessing the risksof material misstatementInternal control and its components65.According to internationallyaccepted auditingstandards, internalcontrol componentsare the control environment, risk assessmentprocess, informationand communicationsystems and processes,controlactivitiesand monitoring of controls.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 33. P a g e | 3366.Asstatedin the BCBSPrinciplesfor enhancingcorporate governance, arobust internal control environment is critical to the strength of a bank‘sgovernancesystem and itsability tomanagerisk.Consequently, whenobtainingan understanding of thebank‘sinternalcontrol environment, the external auditorshould, amongst otherconsiderations:- assessthe ―tone at the top‖, ie whethermanagement, withtheinvolvement of thosecharged withgovernance,ispromoting arobustcontrol environment;- determine whether the control environment extends to all types ofoperations and service offerings and encompasses all subsidiariesandbranchesof thebanking group;- understand thebank‘sapproach tooutsourcing/ offshoring ofbusinessactivitiesandfunctionsand assesshowinternal control overtheseactivitiesis maintained;and- obtain an adequateunderstandingof the organisationof keycontrolfunctionswithin the bank and itssubsidiaries.At a minimum, key control functionsincludetheinternal audit, riskmanagement, complianceand other monitoringfunctions.67.Compensation arrangements at a bank may be a good indicator of theculture within the organisation because they can influence the behaviourof the bank‘spersonnel and the qualityof corporategovernance.Theexternal auditorshould payparticular attentiontothe risksofmaterial misstatement in thefinancial statementsdue tofraud, particularlywhere banksemploycompensation arrangementsthat mayencourage excessiverisk-takingor other inappropriatebehaviour amongst their personnel.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 34. P a g e | 34Control activities68.Internationallyacceptedauditingstandardsrequire the externalauditortoobtain anunderstanding of control activitiesrelevant totheaudit which, intheauditor‘sjudgment, arenecessarytoassesstherisksofmaterial misstatement and toestablishthe audit strategy.Theassessment of thecontrol activitiesover financial reporting is criticalfor the designof further audit proceduresresponsivetoassessedrisks.When identifying and assessingrisksof material misstatement andassessingcontrols,the external auditor should take account of thefollowingfactors:- the knowledgeand competenceof thosein charge of financialreporting and of other control functionshaving an impact onfinancial reporting;- the nature of hedgingstrategiesemployed by thebank which, ifcomplex, improperlystructuredor inadequately monitored, can haveaccountingand solvency implications;- the useof complex financial instrumentsinvolving significantestimatesof fair value;- theprovisionofcustodial servicestoretail and/ orinstitutionalclientsandtheproceduresin place toavoid co-minglingof client andproprietaryassets;- the volume of transactionsby type of activityand/ or presenceofsignificant non-routinetransactions;- theuseand monitoring of internal accounts;- the structure and complexity of IT systems for conducting businessand for facilitating efficient business and financial reporting, as theymay lead to increased risk of fraud or error, particularlywhere there ispotential for individual override of the control system or the potentialfor fraudulent transactions to go undetected due to the sophisticationand complexityof theIT systems;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 35. P a g e | 35- thenumber, scope and geographicaldispersion of subsidiariesandthenecessityfor complex consolidationprocedures;- theexistenceof significant transactionswith related parties;and- theuseof off-balancesheet financingarrangements,suchasspecialpurposeentities(SPEs) and other complex structures.69.Banking supervisorsand those chargedwithgovernance, such astheaudit committee,need to be satisfiedthat the internal control iscommensuratewiththenature, volume and complexityof thebank‘sactivitiesand isorganised in accordancewith regulatory and legalrequirements.Theinternalcontrolofabank mustberobustandreliableinorder tocopewith stressed environments.Significant deficiencies in internal control whichhave been identified bytheexternal auditorshould be communicated in writingto thosechargedwith governanceand senior management, and other deficienciesininternalcontrol should becommunicatedtotheseniormanagement at anappropriatelevel of responsibilityon a timelybasis.In addition, theCommitteebelievesthat theexternal auditor shouldcommunicatein writingall mattersthat are likely tobe significant totheresponsibilitiesof thosecharged withgovernance in overseeingthestrategic direction of the entityor theentity‘sobligationsrelatedtoaccountability.Such mattersmay includesignificant decisionsor actionsbymanagement that lack appropriateauthorisation.Internal audit70.Theinternal audit function is an important element of the overallinternalcontrol environment.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 36. P a g e | 36It providesassurancetotheboard ofdirectorsandsenior management onthequalityand effectivenessof a bank‘sinternal control, risk managementand governance systems and processes.Theworkof internalauditorscanhelpexternalauditorsassessthequalityof the internal control processesand identify risks.71.Whether ornot theexternalauditorexpectstousethework ofabank‘sinternalauditors, providedthere is noreasontodoubt theirknowledge,competenceand objectivity, theexternal auditorshouldengagewith, and seek information on key internal audit findingsfrom, theinternalauditors.Thismayprovidevaluableinput intotheexternalauditor‘sunderstandingof the entityand itsenvironment and aid in identifying and assessingrisksof material misstatement.Theexternal auditorshould consider readingrelevant internal auditreportsif theinformation obtained from engagingwiththe internalauditorsindicatesissuesthat may have an impact on the financialstatement audit.72.Theexternal auditor‘sobservationson and, whererelevant, evaluationof a bank‘sinternalaudit function areof particular interesttothe auditcommitteeand the bank‘ssupervisor given the rolean effectiveinternalaudit function plays in maintaininga robustcontrol environment in abank.Responding to significant risksof material misstatementspecific to a bank‘sfinancial statementsPrinciple6:Theexternal auditor of a bank should respond appropriatelytothesignificant risks of material misstatement in thebank‘sfinancialstatements.73.Having identifiedand assessedthe risksof materialmisstatement, internationallyacceptedauditingstandardsrequire theauditortoidentifyanyareaswherethereis a significant risk of materialmisstatement.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 37. P a g e | 37Paragraphs78-98below set out keyaudit areasof a bank‘sfinancialstatements,wherethere is often a significant risk of materialmisstatement.74.In addition totheareasset out in paragraphs78-98, there are otheritemsin a bank‘sfinancial statementswhoseregulatorytreatment couldgiverise to incentivesfor management biasin the recognitionormeasurement of such items.Asaconsequence,thereisagreaterriskofmaterialmisstatement oftheseitemsin the financial statements.This may lead toinappropriateapplicationof regulatory rulesto theseitemsand a material misstatement of thebank‘scapital position.Examplesof such itemsare deferred tax assets,investmentsinunconsolidatedentities, pension fund assets,and theclassificationoffinancial instruments.External auditorsshould thereforebe alert toanylikelihoodthat thetreatment of such itemsin the financial statementsis influencedbymanagement biastowardsadesiredregulatoryoutcomeandconsiderthisin their risk assessment of thebank.External auditorsshould alsobe awarethat management biasmaychangeover time depending on, for example, the extent to which thebank isabletomeet itsregulatoryrequirements.External auditorsshould evaluateestimateswhichmay be subject tothisbias, and any potential audit differencesotherwiseidentified, in thecontext of theimpact on regulatorycapital or regulatory capitalratios,consistent withparagraph 64.75.Areas of significant risk of material misstatement particularlyrequirean external auditor toapplyprofessional judgment and experience.Internationallyaccepted auditing standardsrequire that theexternalauditorobtain sufficient appropriate audit evidence51regarding theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 38. P a g e | 38assessed risks of material misstatement, through designingandimplementingappropriate responsestothoserisks.76.Internationallyacceptedauditingstandardsrequire special auditconsiderationfor areaswheresignificant risksof material misstatementare identified.Given that theseareasare associatedwith issuesthat the external auditoridentifiesashighly important for the bank, these areasare worthyofdiscussion withthose chargedwithgovernance.77.As the categoriesof what may be a significant risk for a bank maychangeover time, the list of audit areasprovided in paragraphs78-98ofthisdocument asareaswherethere isoften a significant risk of materialmisstatement is not intended to be comprehensive.Loan lossprovisioning78.Loan lossprovisioning is generallymaterial for a bank‘sfinancialstatementsand the calculationof capital and keyperformancemetrics.Themeasurement of loanlossprovisionsin accordancewithinternationallyaccepted accountingprinciplesinvolvescomplexjudgmentsabout credit riskwhich may besubjectivein nature.79.Thefactorsthat the external auditor needstoconsider in identifyingand assessingthe significant risksof material misstatement in relationtoloanlossprovisioningand the relatedallowancefor loan lossesinclude:(a)Theestimationtechniquesusedtocompute provisionsand howthetechniquesvary among and withinbanks.(b)How management hasassessedthe effect of estimationuncertaintyonthelevel of provisioning, and the effect suchuncertaintymay have on theappropriatenessof therecognised provision and thesufficiencyof therelatedallowancefor loanlossesin the financial statements.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 39. P a g e | 39(c)All knownand relevant impairment indicatorsfor loanexposureswhichincludepreviouslyunexpectedadversedevelopmentsinthemarket oreconomicenvironment, adversemovement in interestrates,restructuring, inadequateunderwritingpoliciesadopted by thebank, overduepayments, failure of the borrower tomeet budgetedrevenuesor net income, covenant breachesand forbearance.(d)Whether thebank hassought perspectivesand data from differentfunctionswithin the bank, includingrisk management, credit andinternalaudit, aswell asreliable sourcesexternaltothe bank, includingpeer data and regulator perspectivessoasto consider all relevant andavailableinformation in assessingimpairment.(e)Accounting rulesfor provisioningmay differ from the provisioningrules that applyfor regulatory reportingor capital purposes.It may thereforebecustomary for banksto have different processesandsystemsto generateloan lossprovisionsfor accounting purposesand forregulatorypurposes.Further, there can be material differencesin the applicationof the sameset of accountingand/ or regulatory rulesby individual banks.Largedifferencesbetweenprovisionsfor accountingpurposesand forregulatorypurposesmay indicatea risk of material misstatement of theaccountingprovision.In addition, whilst for regulatory capital purposesunder theBaselframeworkthe accountingloan lossprovision for internal ratings-basedapproach(IRB) portfoliosis replacedbythe regulatoryexpectedlossprovision, the level of the accountingprovisionmay neverthelesshaveanimpact on thelevel or the composition of regulatory capital, due tothetreatment of the tax effect of provisionsand the allocationof any excessprovision to capital tiers.External auditorsshould be alert toany management bias in this area.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 40. P a g e | 40(f) Disclosuresshould enableuserstoassessthe loan lossprovisioningmethodologyapplied by thebank, regardinghow it relatestocredit riskforthat bank, andhowit compareswithmethodologiesappliedacrossthebankingsector.Financial instruments measured at fair value80.Abank‘sportfolioof financial instrumentsmeasured at fair valuecanrangefrom ―plainvanilla‖ financial instrumentswhichare frequentlytraded in liquid marketswithobservablemarket prices, and involve lessmeasurement uncertainty, tothose whicharecustomised, complex, andwherethe valuationis basedon significant unobservable inputswith asubstantial amount of management judgment.Financial instrumentsmeasured at fair value alsoincludefinancialinstrumentsthat aresubjecttoan impairment assessment which is a keyarea of judgment.81.Where there arechangesin the composition of a bank‘sportfolio offinancial instruments– whetherdue tochangesin customer demand, thebank‘sapproach to managingrisk and liquidity, or changesin prudentialregulation– thebank willneedtoevaluateanyaccountingimplicationsofthechanges.82.Accounting standardscontain requirementson recognition;initialand subsequent measurement (includingimpairment); reclassificationfrom fair value toamortised cost;presentation;and disclosures.Becausethese requirementsarecomplex, theymay be difficult tointerpret and apply, and thereforethe external auditor often needstoutilisemore complex and wider-rangingaudit proceduresto obtainsufficient appropriateaudit evidencetosatisfyhim/ herselfthat thefinancial statementsare not materiallymisstated.Theclassificationof an individual financial instrument may beparticularlyimportant for achievinga favourableregulatoryoutcome.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 41. P a g e | 4183.In adoptinga sceptical approach to management‘sassumptionsregardingthevaluation of financial instrumentsfor whichtherearesignificant unobservableinputs, IAPN 1000,Special considerations inauditingfinancial instruments,setsout specificaudit proceduresthat maybefollowedin auditingfinancial instrumentsmeasured at fair value.Liabilitiesincluding contingent liabilitiesarising fromnon-compliance with lawsand regulations, and contractualbreaches84.Non-compliancewith, or material breachesof, the prudentialframework,conduct requirements, legal requirementsor contractualagreementscould lead to legal or supervisory actionsagainstabank, therebyexposingthebank topotential litigationand/ ortheimpositionof substantial penalties.Such eventsmay require recognitionof provisions, contingent liabilitiesand/ orqualitativedisclosuresin the bank‘sfinancial statements.Further, any adverse impact on the bank‘s reputation resulting from thisnon-compliance could have consequences for the bank‘s going concernassessment.85.In the courseof theaudit, the external auditor should remain alert toactual or suspectedbreachesof prudential regulations,particularlythosethat are likely tobeof material significancetothe functionsof thesupervisor.As noted in Section 6 below,55if theexternal auditor identifiesanysuchbreachesof materialsignificance,theauditorshouldnotify thesupervisorimmediately.Disclosures86.Anumber of factorshave contributedto an increaseddemand fromusersfor more relevant and extensivequalitativeand quantitativedisclosures.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 42. P a g e | 42Theseincludethe increasedcomplexityof businesstransactions,includingoff-balancesheet transactionsand non-recognition of assetsand liabilities, and increaseduseof fair value andother accountingestimates,with significant uncertaintiesand changesin measurement attributes.87.While accounting standards specify disclosure objectives, thestandards may not always prescribe in all circumstances specificdisclosuresto meet thoseobjectives.Therefore, there may be a substantial amount of judgment in assessingwhetherdisclosuresarepresentedfairlyinaccordancewiththedisclosureobjectivesin the relevant accountingframework.88.Increasedtransparencythrough fairlypresentedpublic disclosuresenhancesmarket confidence.It is thereforeimportant that thebank provide disclosureswhichpresentthebank‘sfinancial condition, the riskstowhichit is exposed and howtheyare managed, and aremeaningful and responsiveto changesinmarket conditionsand perceived risks.89.In respondingtothe significant risksin this area of audit, theexternalauditorhasan important role to playin encouraging consistent andmeaningful disclosureswhich present thebank‘sfinancial condition in awaythat isinformativeand understandableto usersof financialstatements.90.In the courseof itsaudit work, the external auditor should be alert toanyindicationsthat disclosuresin financial statementsare not consistentwith the bank‘sprudential information such ascapital adequacyandliquiditypositiondisclosureswithinthe financial statements.Going concern assessment91.Agoing concerngivesriseto twoseparate issues:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 43. P a g e | 43(a)whetherthegoingconcernbasisofpreparation offinancialstatementsis appropriate; and(b)theexternalauditor‘sevaluationof thebank‘sassessment of itsabilitytocontinuetomeet itsobligationsfortheforeseeablefuture(forat least12monthsafter thedate of thefinancial statements) and whetherthere arematerial uncertaintiesin thisregard that should be disclosedin theapplicableaccountingframework.92.Theworkthe external auditor performs to assessthe going concernstatusof a bank isdifferent from that likelyto beperformed for anon-bank entitybecauseof the contractual termsof bank assetsandliabilities(maturitymismatch), the potential for regulatoryintervention, and theimpact that thesignallingof anyuncertaintyoverthebank‘sabilityto continueasa goingconcern could have on the short-termviability of thebank.93.Examplesof reasonsthat make the goingconcern assessment of abank uniqueareasfollows:(a)Current emerging risks and concernsspecific to the bank or thebankingindustry asa wholemay have an impact on the historical trendsfor the specific bank in sucha manner that the historical trendsmay notreflectthelikely trend over the next year.For example, during periodsof market turmoil, normal sourcesoffundingmay nolonger be available, asdepositspayable on demand mayrun off more quickly than historical experiencewouldcontemplateandsuch depositsmay be difficult to replace.(b)As banks arehighlyleveraged, a small changein asset valuationmayhavea substantial impact on the adequacyof a bank‘sregulatory capital.Marketrisksmaybesuchthat financialinstrumentsheldat fairvaluemaybesubject to substantial changesin valuein the short term and significantvolatility over the longer term.Adecreasein regulatory capital may result in a downgradeby ratingagenciesmakingfunding more expensiveand possiblyharder toobtain.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 44. P a g e | 4494. Given theseand other risks, banks are requiredtomeet liquidityrequirementsand capital ratios set by thebank supervisory authority.There should be equal emphasison the evaluation of liquidityandsolvencyof thebank for the period over which the going concernassumption hasbeen assessed:(a)Liquidity: Factorsto assessincludethereasonablenessand reliabilityof the cashforecast for at least12monthsafter the date of thefinancialstatements,liquidityrisk disclosures,regulatory or contractualrestrictionson cash, loancovenants,and pension funding.(b)Solvency: Given thepotential adverse impact of capital adequacyconcernson theconfidencein abank and, asa consequence,on thebankoperatingasa going concern, the external auditor will need toconsidertherobustnessof thebank‘ssystem for managing capital.In addition, theexternal auditorwill need to considerthe capital positionin relationtothe current and any knownfuture capitalrequirements,definitionsof capital resources,and challengesof raisingcapital.This is particularlycriticalwherecapital levelsare strained, accesstocapital resources isrestricted or where, for example, the bank‘sannualreport or internal capital projectionsincludeambitiousprojectionsofimprovementsin capital levels.95. In respondingto thesignificant risksin this area of audit, andassessingmanagement‘sassertion that a bank isa going concern, factorswhicharenecessarytoconsider are:(a)therobustnessof thebank‘sown systemsand controlsfor managingliquidity, capital and market risk;(b)theprudential informationthat isreportedtosupervisorscoveringthebank‘ssolvencyand capital;(c) anyexternal indicatorsthat reveal liquidityor fundingconcerns;andInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 45. P a g e | 45(d) the availability of short-term liquiditysupport.96.Given the aboverisksand thepossiblesystemic implications,if thereare anysignificant doubtswhichmay causematerial uncertaintyover thebank‘sabilityto continue asa going concern, and if the external auditorconsidersreferring tothegoing concernissue in theaudit report, theexternalauditor should promptlycommunicatethis fact to thesupervisors.Securitisations– SPEs97.Thebanking sector is involved in activitiessuch assponsoring (ororiginating) structuredproducts/transactionsthat supportmaturity, credit and liquiditytransformationrisksmore often than otherindustrysectors.Thesponsoring bank doesnot ordinarilyfund such activities.Thefunding isgenerallyprovidedby other parties.However,thesponsoring bank may be exposed to riskssuch asreputational risk in the event of thesponsoredentityencounteringfinancial or operational difficulties.98.Such activitiesrequire special considerationby the external auditorand are of interest to the supervisorfor the followingreasons:(a) Accounting concern –Accounting frameworksare oftenprinciples-based, whichmayresult indifferent treatmentsofeachofthesecomplex transactions.In addition, becausetheseare highly structured products, theiraccountingtreatment may vary based on the factsand circumstancesofeach transaction, egwhereSPEsare tailored toremain off the bank‘sbalancesheet.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 46. P a g e | 46In theseinstances, it is necessaryfor theauditortoevaluatethejudgmentsmadeby themanagement and consider whethertheaccountingtreatment is appropriate and thedisclosuresare sufficient.(b)Regulatoryconcern – Becauseof thecomplexityof thesecuritisationandthechain of financial intermediation, thesponsoring bank in an―originateto distribute‖ model may underestimatethereal risktransferred or therisk retained on itsbalancesheet (includingreputationrisk and conflictsof interest in caseof defaultson the securitisedassets).Even so, the originatormay be ableto benefit from an off-balancesheettreatment for the assetsunderlying thesetransactionsand hencemay notberequired tohold additional regulatorycapital unlessspecificallyrequiredby thesupervisor.Theexternal auditorshould be alert towhenthe supervisorrequiresadditional capital even though the off-balancesheet accountingtreatment applied bythebank isappropriate.(c)Interconnectivity– Increasesthecorrelationbetweenbanks and othernon-bankingsectors, whichcan add to theglobal systemic risk.5. Supervisory expectationswith regard to a bank‘s auditcommittee and itsrelationship with the external auditor99. The BCBS‘s paper on the Internal audit function in banks (June 2012)and its paper on Principles for enhancing corporate governance (October2010) describethe main responsibilitiesof a bank‘saudit committee.Theaudit committee has, amongst others, a number of responsibilitieswith respect to the external auditor and the statutoryaudit.Theaudit committee approves, or recommendsto the board of directorsfor approval, the appointment, reappointment, dismissal andcompensation of the external auditor.Theaudit committeealsomonitorsand assessesthe independenceof theexternalauditor.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 47. P a g e | 47100.Theaudit committeeoverseesthebank‘sstatutoryaudit process.Key aspectsof the audit committee‘swork encompassthe assessment oftheeffectivenessof theexternal audit process.Theaudit committee should require that senior management take thenecessarycorrectiveactionstoaddressthefindingsandrecommendationsof theexternal auditorin a timelymanner.101.Thediscussion below focuseson theaudit committee‘sresponsibilitiesin relationtotheoversight of, and itsrelationshipwith, the external auditor topromote and support the integrity, objectivityand independenceof theauditor, the qualityof theexternal audit and thecompetenciesthat underpin that quality.Toenablethe audit committeeto carry out itsoversightresponsibilities, which alsocontributeto the effectivenessof the auditprocess,theprinciplesin thissection promote effectivetwo-waycommunicationbetweenthe audit committeeand theexternal auditor.It is important to note that all the discussionsbelow stem from animportant overarchingprinciple:namely, that thereshould be afrank, open workingrelationship and a high level of mutual respectamongst all partiesinvolved.102.Theprinciplesand explanatoryguidancein this section form thebasisfor the supervisor‘smonitoring of theeffectivenessof theauditcommitteein itsoversight of the external auditor.Appointment of the external auditorPrinciple7:Theaudit committee shouldhave arobustprocessforapproving, orrecommendingfor approval, theappointment, reappointment, removal and remuneration of theexternal auditor.103.Theaudit committeehastheprimary responsibility for approving, orrecommending to theboard of directorsfor approval, theappointment, reappointment, removal and remunerationof the externalauditor.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 48. P a g e | 48In doing so, the audit committeeshould determine appropriatecriteriaforselectingthe external auditor and regularlyassesstheknowledge, competence,independence(seePrinciple8below) of theexternalauditor andeffectiveness(seePrinciple9below)of theexternalaudit, havingdueregard to the guidancein Section 4.104.Theaudit committee‘sproceduresfor approving or recommendingtheapproval of the external auditor should alsoincludea risk assessmentof the likelihood of thewithdrawalof theexternal auditor from theaudit, and how thebank wouldrespond tothat risk.105.Theaudit committeeshould contributea section tothebank‘sannual report whichexplainsthe approach taken regarding therecommendation of the appointment or reappointment of theexternalauditor,and should includesupporting information onthe tenure of theincumbent auditor.106.If the board of directorshasapproval responsibilitieswith respectto the external auditor, but doesnot accept the audit committee‘srecommendation, it should includein theannual report, and in anypapersrelatingto theappointment/ reappointment/ dismissal of theexternalauditor, a statement explainingtheaudit committee‘srecommendation and the reasonswhytheboard of directorshastaken adifferent position.107.Theaudit committeeshould assesstheoverall qualityof the externalauditor,prior toitsfirstappointment and at least annuallythereafter.Tothat end, the audit committeeshould request that the external auditorreport on theexternal auditor‘sown internal qualitycontrolprocedures,including the audit firm‘s EQCR process, and any significantmattersof concerns arisingfrom theseprocedures.Theaudit committee should alsoconsider, whereavailable, the externalaudit firm‘s annual transparencyreport and any inspectionreportson theaudit firm issuedby the relevant oversight body.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 49. P a g e | 49108.Theaudit committeeshould maintain anunderstandingandknowledgeof:- thestructure and governance of the audit firm;- thecurrent nature of the audit environment, includingany overseasjurisdictionswherethebank operates;- significant issues and concerns raised by the relevant audit oversightbody regarding the audit firm, and the auditor‘s action in addressingtheseconcerns, to understand how these shortcomingsmay affect thequalityof theaudit of the bank;- thenature of bankingregulatory actionsand conditionsthat couldhavean impact on theexternal auditor‘sworkon thebank, includinganyregulatory actionsand conditionsspecific tothe bank beingaudited, or to actionsand conditionsthat the supervisoris imposingon all banks(for example, through newlyimplemented regulationsand policies);and- public lessonslearnedfrom any recent external audit failuresassociatedwiththebank‘saudit firm and how thefirm hasdealt withthem sothat similar deficienciesdo not occur.109.Theaudit committeeshould alsosatisfyitselfthat the level of theaudit feesis commensurate with the scope of workundertaken.Where fee reductionsare offeredand accepted, the audit committeeshould seek assurancethat thesereductionsdonot implyaninappropriateincreasein thematerialitylevel tobe applied by theexternalauditor, or a narrowingof the external auditor‘sproposed scopeof the audit, or a reduction in the attentionwhichwill be given to eachbusinesscomponent and thesignificant audit risksidentified.110.Theaudit committeeshould discussand agreeto theterms of theengagement letter issued by the external auditor prior tothe approval oftheengagement.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 50. P a g e | 50Where relevant, theaudit committeeshould agree toan engagementletter that hasbeen updatedtoreflect changesin circumstances, suchasthosearisingfrom changesin legal requirementsand changesin thescopeof the external auditor‘swork asa result of revisionstointernationallyaccepted auditing standardswhichhave arisen sincethepreviousyear.111.If the external auditor resigns or communicatesan intentiontoresign, the audit committeeshould followup on thereasons/explanationsgivingrise to such resignationand considerwhethertheaudit committeeneedstotakeanyactionin responsetothosereasons.Independence of the external auditorsPrinciple8:Theaudit committee shouldmonitorand assesstheindependence of theexternal auditor.112.Theindependenceof the external auditor is one of the mainprerequisitesfor an adequatelevel of audit quality.As such, the audit committeeshould understand theapplicableindependencerequirements.Theaudit committee should have proceduresto monitor and assesstheindependenceof theexternal auditor at least annually, taking intoconsiderationrelevant national laws,regulationsand professionalrequirements.Theassessment should alsoinvolve a consideration of all relationshipsbetweenthebank andtheaudit firm (includingtheprovisionofnon-auditservices) and any safeguardsestablishedby the external auditor.113.Where the audit firm hasbeen theexternal auditor of thebank formanyyears, there may be a perceptionthat there is a familiarity orself-interest threat tothe external auditor‘sobjectivityand independencein itsaudit of the bank.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 51. P a g e | 51However, when the bank changes its external auditor, there is a risk thatthe depth of understanding of the bank and its activities and systemswillbelost.This may affect thenew external auditor‘sabilityto identify risks ofmaterial financial statement misstatementsand respond to themappropriately, and hencemay detract from thequalityof theaudit.114.Audit committeesshouldhave a policy in placethat stipulatesthefrequencywithwhichthere should be a tender for theexternal auditcontract.Thepolicyshould alsocall for the audit committeetoconsiderperiodicallywhetherthereshould be a limit tothelength of an externalauditor‘stenure asthebank‘sexternal auditor given thepotential impactof audit firm rotation on independenceand audit quality.115.Audit committeesshouldunderstand the audit firm‘s policy onrotation of members of the audit engagement team and the audit firm‘scompliancewith anyjurisdictional or other localregulatory requirementsin this regard.116.As describedin Principle2, theaudit committee shouldseekassurancethat the audit engagement team membersand their firmand, when applicable, thenetwork external auditorshavenofinancial,personal, businessor other relationshipswith the bank whichcould adverselyaffect theauditor‘sactual or perceivedindependenceand objectivity.The audit committee should seek from the external auditor, at least on anannual basis, information about the audit firm‘s policies and processes formaintaining independence and monitoring compliance with the relevantindependencerequirements.117.Audit committeesof banks should develop a formal policywhichgovernstheacceptanceof non-audit servicesprovidedby theauditor.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 52. P a g e | 52Amongst other provisions,thepolicyshould includecriteria for thetypesof non-audit servicesthat the external auditor may provideor isprohibited from providing, and rulesstipulatingwhen advanceapprovalbythe audit committeeis required for the auditor‘s performanceofnon-audit services.Thepolicyshould be reviewedperiodicallyand complianceshould bemonitored, takingintoaccount the contentsof Section 4 of thisdocument.118.Where non-audit servicesare providedby the external auditor, theaudit committeeshould monitor and establishthat theprovision of suchservicesdoesnot impair theexternal auditor‘sobjectivityandindependence,takingintoconsiderationvariousfactorsincludingtheskillsand experienceof the external auditor,safeguardsin place tomitigateanythreattoobjectivityandindependence,andthenatureofandarrangementsfor non-audit fees.119.Where the external auditor providesnon-audit servicestothebank, the bank‘sannual report shouldexplain toshareholdersthe natureof and thefeearrangementsfor thenon-audit servicesreceived, andhowauditor independenceissafeguarded.Effectivenessof the external auditPrinciple9:Theaudit committee shouldmonitorand assesstheeffectivenessof theexternal audit.120.At the start of each audit, the audit committee should considerwhetherthe audit approach is appropriate, includingconsiderations ontheaudit scope, the level of materiality, areasof focusand whetherplannedaudit proceduresaddresstheareasof significant risk for thebank, in particular thoseareasdescribedin Section 4 of this document.121.Theaudit committeeshould consider whethertheproposedresourcesto executetheaudit plan are reasonablegiven thescope of theaudit engagement, the nature and complexityof the bank‘soperations,and itsstructure and activities.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 53. P a g e | 53Theaudit committee should understand thenature and extent of auditworkthattheexternalauditorintendstorelyuponwheretheaudit workisperformed by network firm personnel or other audit firms.122.Theaudit committeeshould obtain confirmation from the externalauditorthat there is adequateknowledge, competenceand expertisewithintheaudit engagement team and that theaudit will beconducted incompliancewithinternationallyaccepted auditingstandards, aswell asanyapplicablelawsand regulations.123.Theaudit committeeshould discusswith the external auditor thefindingsof the latter‘swork.In the courseof itsmonitoring, the audit committee should:- Obtain anunderstanding of the external auditor‘sview on any majorissuesthat aroseduring the audit (includingthoseissuesthat weresubsequentlyresolved aswell asthose that have been leftunresolved), in particular the external auditor‘sexplanationof thesignificant judgmentstheaudit engagement team madeand theconclusionsit reached.This should includethe discussionswithmanagement and thejudgmentsinvolved, the rangeof possibleoutcomesand, whereavailable,a comparisonof thebank‘spositionwiththat of itspeergroup (on an anonymous basis), includinga comparison withpreviousperiodson such major issues;- Obtain an understandingof the rationalebehind thefinal conclusionsdrawnby theaudit engagement partner on significant accountingand auditingmatters,particularlyin thosecircumstanceswheretheaudit engagement partner‘sconclusionsdifferedfrom thoseof theengagement qualitycontrol reviewer;and- Review thenature and levelsof misstatementsidentifiedduring theaudit, obtainingexplanationsfrom management and, wherenecessary, the external auditor asto whycertain errorsmight remainunadjusted.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 54. P a g e | 54124.Theaudit committeeshould alsodiscusswiththe external auditortheaudit representation lettersbeforesignature bythe board ofdirectors/ senior management and give particular consideration tomatterswherespecific representation hasbeen requested.Theaudit committee should consider whetherthe information providedon each of the itemsin therepresentation lettersis completeandappropriatebased on its own knowledge.125.As part of the ongoingmonitoring process, the audit committeeshould discusswiththe auditorthemanagement letter(or equivalent)and any other audit-relatedreportsprovidedtothebank.In particular, the audit committee should discuss with the externalauditor any significant deficiencies identified in the bank‘s controlenvironment and in itsinternal control over financial reporting.126.At the end of theaudit engagement period, the audit committeeshould:- consider whethertheaudit firm hasfolloweditsaudit plan andunderstand the reasonsfor any changes,includingchangesinperceivedaudit risksandtheworkundertakenbytheexternalauditortoaddressthoserisks;- obtain feedback about the conduct of theaudit from keybankpersonnel involved, eg theheadsof financeand internal audit; and- report tothe board of directorson theeffectivenessof the externalaudit process.127.Theaudit committeeshould seek toobtain information from theexternalauditor on themain findingsof audit qualityreviewsof thebank‘saudit and the audit firm‘s qualitycontrol systemsby auditoversight bodies.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 55. P a g e | 55Relationship between the audit committee and the externalauditorPrinciple10: Theaudit committeeshould have effective communicationwith theexternal auditortoenabletheaudit committee tocarryout itsoversight responsibilities andtoenhancethequalityof theaudit.128.Thefoundationfor an effectiverelationshipis regular, timely, openandhonestcommunicationbetweentheaudit committeeandtheexternalauditor.Regular dialoguebetweenthetwopartiesshould be held throughout thereporting cycle of the bank.129.Whileboth cooperation and challengesare needed betweentheexternalauditor and the audit committeefor the external audit to beeffective, theneedfor cooperationshouldneverprevent robust challengesfrom being made whenneeded.Such challengesarea keyresponsibilityof the audit committeeand arepart of theproductive dialogueon key judgmentsthat can result instronger and deeper understanding of and viewson thepositionsof allparties.130.In ordertoreinforcetheaudit committee‘seffectivenessandenhancethequalityof the audit, the audit committeeshould consider invitingtheexternalauditor toattend audit committeemeetings(except whendiscussingmattersin relationto theassessment of the externalauditor), even if there are noitemsexplicitlyrelevant to theexternal auditon theagenda.Theexternal auditor‘sattendanceshould facilitatethe exchangeof viewson businessperformance, risk and other topics.Further,toenhanceaudit quality, theaudit committeeshouldconsider, ifnecessary, assistingthe external auditor togain accessto anyothercommitteemeetingsthat the external auditor determinesto be relevantfor the auditor‘swork.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 56. P a g e | 56131.Theaudit committeeshould havethe right and authoritytomeetregularly– in the absenceof executivemanagement – withthe externalauditor.This will enablethe audit committeetounderstand and discussall issuesthat mayhavearisenbetweentheexternal auditorandbank managementin thecourseof theexternal audit and how theseissueshavebeenresolved.In addition, thesemeetingsshould addressany other mattersthat theexternalauditor believestheaudit committeeshould be awareof in ordertoexerciseitsresponsibilities.132.The audit committee should discusswith the auditor any mattersarising from the statutory audit that may have an impact on regulatorycapital or disclosures.This may includediscussionof theinteraction between the accountinginformation and theregulatory information, eg accountingimpairmentchargesversusregulatory expectedlosses,or the consistencyof thebank‘sPillar 3 reporting withits annual report.133.Theaudit committeeshould discusswiththe external auditor anysignificant issuesidentified in the course of theaudit, in particular inareaswhich could be relevant to future financial statements,topromoteearlydiscussion and planning.This includesupcoming changesin accountingstandards or regulationsandtheconsequencesof material transactions.134.Theaudit committeeshould alsocommunicateto the externalauditormattersthat are likely tobe of significant influenceon theconduct of thestatutory audit.Such mattersmay encompasssubjectsthat the audit committeebelieveswarrant particular attention, significant communicationswiththesupervisor,or other mattersthat the audit committeeconsidersmayinfluencethe audit of the financial statements.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 57. P a g e | 57Reporting by the external auditor to the audit committeePrinciple 11: The audit committee should require the external auditor toreport to it on all relevant mattersto enable the audit committee to carryout itsoversight responsibilities.135.In some jurisdictions,aspart of the statutory audit, the auditorsarealsorequired by law or regulationstoexpressan opinion on the controlenvironment of thebank and provideadditional reportingof mattersidentifiedaccordingly.Theexplanatoryguidancein the followingparagraphsonlycoversreporting to the audit committee that maybe required in thecontext ofthefinancial statement audit.136.Theaudit committeeshould expect the external auditor tocommunicatepromptly tothe audit committeeany significant auditfindingsnoted in thecourseof the audit and any significant problemsencounteredin carrying out theaudit.137.Upon completion of the audit work,the external auditor shouldreport tothe audit committeeon the outcome of theaudit in writing.Thecontentsof thesewrittenreportsshould be aligned withtherequirementsset by internationallyaccepted auditingstandardsformatterstobe communicatedtothosecharged withgovernance, therecommendationsmadein this document, and any additionalrequirementsunder applicablelawsand regulations.138.In addition totheabove, wherenot already covered by therecommendationsin other partsof thisdocument and therelevantauditingstandards, theaudit committeeshould requestthat the externalauditorreport toit in writingon other significant matters,includingthefollowing:- Key areasof significant risk of material misstatement in thefinancialstatements,in particular on critical accountingestimatesor areasofmeasurement uncertainty(eg loan lossprovisioningand valuationInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 58. P a g e | 58uncertainties), includingpotential valuation bias and consequentialeffectson earnings,compensation structuresand regulatory ratios.- Areas of significant management and auditor judgment, includingjudgmentspertainingto therecognition, de-recognition, measurement or disclosureof relevant itemswithin thefinancial statementsand, whererelevant, judgmentsabout materialuncertaintiesthat may cast doubt on an entity‘sability to continueasa going concern (includingconsiderationof liquidity/fundingissuesof the entity).- Outsourcingof keyexternal audit work(egwithrespect to auditsofsubsidiaries)toanother audit firm or use of external expertstoassistwith the external audit.- Significant internalcontrol deficienciesidentifiedin thecourseof thestatutoryaudit.- Mattersthat arelikelytobesignificant totheresponsibilitiesof thosechargedwith governancein overseeingthe strategicdirectionof theentityor the entity‘sobligationsrelated toaccountability.- Areas of financial statement disclosures, for the bank itselfandrelativetoitspeers,whichthe auditorbelievescould beimproved, includingthe resultsof discussionswithmanagement.139.For thepurposesof complying withthe requirementsofinternationallyacceptedauditingstandards, wheresignificant mattersarecommunicated tothe audit committee,the external auditor should alsodetermineif these mattersneed tobe communicatedto theboard ofdirectors.6. The relationship between the supervisor and the externalauditor140.This section setsout theprinciplesthat promote effectiverelationshipsthat will enableregular communication of mutuallyusefulinformation in thecontext of a statutoryaudit between:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 59. P a g e | 59- the supervisor and the external auditor at the supervised banklevel, regardless of whether the communication is mandatory(SubsectionA– Principles12and 13); and- thebanking supervisoryauthority and the audit firm, and theaccountingprofession asa wholethat is not specific to an individualbank (Subsection B – Principle14).141.Thekey objectiveof having effectiverelationshipsbetweenthepartiesreferredtoaboveistoenhancetheeffectivenessof thesupervisionof the bankingsector.Thisrelationshipwillthenalsocontributetothequalityofexternalaudits.142.An effectiverelationship should enableeach partyto carry out itsrespectivestatutoryresponsibilitieswhilenot implying that eitherparty isresponsiblefor or should or can perform thestatutoryresponsibilitiesoftheother party.A. Effective relationship at the supervised bank level143.Theexternal auditorcan provide thesupervisor withvaluableinsightintovariousaspectsof a bank‘soperationsand management‘sattitudetotheapplicationof keyaccountingpolicies,judgmentsand modelsadopted.Conversely, the external auditormay obtain helpful insightsfrominformation originatingfrom the supervisorwherethe supervisorprovidesan independent assessment in areassignificant tothe externalaudit and may focusattentionon specificareasof supervisoryconcerns.In certain jurisdictions,the supervisor may alsorequest the externalauditortoperform specificassignmentsthat gobeyond the statutoryaudit workof theauditor.Principle12: Thesupervisor and theexternal auditorshould have aneffective relationship that includesappropriatecommunication channelsInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 60. P a g e | 60for theexchange of information relevant tocarrying out their respectivestatutory responsibilities.144.Supervisorsand external auditorsshould havean open andconstructiverelationship, withconfidencein each other that informationexchangedwill be treated appropriately and confidentially.145.For an effectiverelationship toexist, the engagement betweenthesupervisorand the external auditor should involve individualswhoareknowledgeable,informed and empoweredby their respectiveorganisationstoexchangeinformation.146.Thesupervisor may benefit from theresultsof the external auditor‘sworkbecausein many respectsthetwopartieshave complementaryconcernsregardingthesame mattersalthoughthefocusof their concernsis different.Similarly, the external auditor may benefit from insightsthat thesupervisorcan communicate.However,in order todischargetheir respectivestatutoryresponsibilities, each party should not use theworkof theother asasubstitutefor its ownwork and the supervised entityshould remain themain sourceof information for their respectivework.147.Theterms, natureandscopeofthisrelationshipcanbedeterminedinindividualjurisdictionsandshouldbecleartoboth thesupervisor andtheexternalauditor – for example, through guidanceissued by the bankingsupervisoryauthority.Accessto communication with the bank148.Theexternal auditor‘sworkgivesrise to theauditor‘sreport on theannual/ consolidatedfinancial statementswhichis oftenused forprudential supervisory purposes.When performinga financial statement audit in accordancewithinternationallyaccepted auditing standards, the external auditorInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 61. P a g e | 61communicates with management and/ or those charged with governanceabout significant matters relating to financial reporting or supplementarymatters,and these communicationsmaybe accessed by thesupervisor.In thesamemanner,in certainjurisdictions,theexternalauditormayalsohaveaccesstothe supervisor‘scommunicationstothebank.149.Giventhebenefitsthat may ensue, whencommunicatingwithmanagement and/ orthosechargedwithgovernanceofthebank, boththesupervisorand the external auditor should consider communicatingmattersthat mayalsobeofmutual interesttoeachother inwritingsothattheyform part of thebank‘srecordsto whichthe other party should haveaccess.Direct communication at the supervised bank level150.In addition, effectivecommunicationshould be establishedthroughoneor a combination of direct writtenand oral communicationchannels,asdictatedby thecircumstances.151.Writtencommunicationchannelsmayincludeextendedaudit reportson theaudited financial statements,whicharesubmitted to thesupervisorand arenot available tothe public.In certain jurisdictions, these reportsmay be part of the external auditor‘sstatutory audit work and mayalsocover assignmentsrelated to prudentialsupervisoryrequirements.152.Oral communication channelsmay includebilateral meetingsbetweenrepresentativesof the supervisor and the external auditor,andmay beformal or adhoc.In additiontobilateral meetings, trilateral meetingsinvolvingrepresentativesof the supervisor, the external auditor and thosechargedwith governanceat thesupervisedbank can alsobe held.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 62. P a g e | 62153.Whilst not excludingany other effectivecommunicationchannels,bilateral and trilateral meetingsare examplesof soundpracticecommunication channels, particularlyfor SIBs.Communication of matters outside the scope of the externalauditor‘sduty to report/ alert154.Thecommunication channelsdescribed in paragraphs150-153,canbea helpful source of information for thesupervisorabout mattersthatare outsidethe scope of the external auditor‘sduty to report/ alertdiscussed in Principle13 and on whichthe supervisorscan reasonablyexpect theauditorstoform aviewinthecourseoftheiraudit ofthebank‘sfinancial statements.155.Thecontentsof theexternal auditor‘scommunication couldcover allissuesthat thesupervisor might consider relevant in carrying out itsfunctions.Such issuesmay includecurrent, emerging and thematic issues,andentity-specific and sector-wideissues.Theexternal auditorshould remain alert to the fact that theseissuesmayalsofall withinthe scope of the external auditor‘sduty toreport/alert.156.In addition todiscussingwiththe supervisor areaswherethere isoften a significant risk of material misstatement in the financialstatements,Section4includesexamplesofareaswheremattersofinteresttothesupervisormaybeidentifiedbytheexternalauditorin thecourseofthefinancial statement audit and thereforeare relevant forcommunicationto the supervisor.Examplesof thesemattersare:- Where a bank undertakestransactionsto achieve a particularaccountingor regulatory outcome such that the accountingtreatment is technicallyacceptable,but it obscuresthe substanceofthetransaction.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 63. P a g e | 63- Where a bank consistentlyutilisesvaluationswhichare at theextremeendsof a range of acceptablevaluationsor there are otherindicationsof possiblemanagement bias.- Significant deficiencies in internal control processesand theirobservationson mattersthat are significant tothe responsibilitiesofthosecharged withgovernancein overseeingthestrategic directionof the entityor theentity‘s obligationsrelated toaccountability.This may includewhererelevant, their observationson theeffectivenessof theinternal audit function, the riskmanagementfunctionand thecompliancefunction (wherenot already requiredbystatute).- Actual or suspectedbreachesof prudential regulationsnoted in thecourse of the audit.- Indicationsthat disclosuresin financialstatementsarenot consistentwith published prudential information.157.Annex 1tothis document providesexamplesof thepotential contentof the extended audit reportsdescribed in paragraph 151.Annex 2tothis document providesguidanceon thetimingand examplesof the potential content of themeetingsbetweenthe supervisorand theexternalauditor, ascircumstancesmay dictate.158.Where bilateral and trilateral meetingsare held, particularlyin thecaseof SIBs, thetimingand content of thesemeetingscould be alignedwith the typical phasing of the bank‘sexternal audit and/ or thesupervisoryassessment of thebank.Of particular importancearethe planningand concludingphasesof theexternal audit.Themeetingsshould focuson the keyissuesand judgmentswithinthescopeof the external auditor‘sstatutoryaudit work.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 64. P a g e | 64159.Theform, frequency and content of the communication describedinthisdocument betweenthesupervisor and the external auditorof thesupervisedentitywill varydependingonthejurisdictionalcircumstances,the characteristicsand circumstancesof thebank, and thesupervisorymodel adopted in therelevant jurisdiction.Safe harbour available to external auditors160.External auditors are required by internationally accepted ethicalstandardsto treat much of the information received while carrying outtheir functionsasconfidential.Theexistenceof a legal provisionthat protectsexternal auditorsfromdisciplinaryproceedings,anyprosecution and liabilitieswhenmakingdisclosurein good faith tothe supervisor (safeharbour) permitsauditorstoshareinformation withthe supervisorwithout contraveningtheir dutyof confidentiality.161.In communicationson mattersthat fall outsidethe scope of the dutytoreport/ alert discussed in Principle13and whichmay be of interesttothesupervisor,whereasafeharbour doesnot exist, it isreasonableforthesupervisorto expect the external auditortocommunicatethesemattersthrough thebank or directlywith thebank‘sconsent.Gatewaysavailable to supervisors162.If appropriateconfidentialityrulesare in place, the supervisormaydecidetocommunicate bank-specific informationtothe external auditorwhentheinformation-sharingwill helpinitssupervisorywork andinturnassist the external auditor in conductinga qualityexternal audit.163.Before disclosing any information to the external auditor, supervisorsshould carefully consider how sensitive the information is and the extentto which disclosing the information to the external auditor would supportthesupervisor dischargingits duties.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 65. P a g e | 65Principle13: Theexternal auditorshould report tothesupervisormattersthat arelikely tobeof material significance tothefunctionsof thesupervisor.Communication of matters within the scope of the externalauditor‘sduty to report/ alert164.When required by thelegal or regulatory frameworkor by a formalagreement or protocol, theexternal auditorshould promptlycommunicatemattersof material significanceto thesupervisor(referredtoas―dutyto report/ alert‖ matters).165.On manyoccasions,the external auditor will have already identifiedanddiscussed thesematterswith the bank‘smanagement and/ or thosechargedwith governanceasappropriate.However,it is not sufficient for the external auditor torely on thebank tonotify the supervisor when there is a dutyon the part of the externalauditortoreport to/ alert the supervisor directlyon such matters.166.Lawsor regulationsprovidethat external auditorswhomake anysuch disclosurein good faith tothe supervisorcannot be held liableforbreach of a duty of confidentiality.Thefollowingareexamplesofmattersthat mostjurisdictionsprescribeaswithinthe scope of the external auditor‘sduty to report/ alert:- information that indicatesthe bank‘sfailure tofulfil one of therequirementsfor a banking licence;- a serious conflict within thebank‘sdecision-makingbodies or theunexpected departure of a manager in a key function;- information that may indicatea material breach of lawsandregulationsor thebank‘sarticlesof association, charter or by-laws;- material adverse changesin the risksof thebank‘sbusinessandpossiblerisksgoing forward;andInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 66. P a g e | 66- a refusal tocertify thefinancial statementsor the expressionofreservationsin theaudit report (other than a clean opinion) by theexternal auditor.167.It is alsousual practicefor the external auditor tonotify thesupervisorof theexternal auditor‘sintent to resign or thebank‘sremovalof the external auditor from office.B. Effective relationship at the levels of the audit firm and theaccounting profession asa whole168.Toassist in effectivesupervision of banks,it is important to identifysystem-wide,macroprudential riskswhichmay havean impact onbanks.In the courseof their work,thebankingsupervisoryauthorityandexternalaudit firms obtain information which, whenreviewedin itsentirety, can assist in identifying changingand emerging keytrendsanddevelopmentsthat may beindicativeof emerging systemic risk.169.Audit firmsmayalsoidentify emerging issuesover inconsistent orinappropriateapplication of accounting standardswhich, if identifiedearly, permit external auditorsand supervisorsto take timelyremedialaction.Principle14: There shouldbe open, timelyand regular communicationbetween thebankingsupervisory authority, theaudit firm and theaccountingprofession asawholeonkeyrisksand systemicissuesaswellasacontinuousexchange ofviewsonappropriateaccounting techniquesand auditingissues.170.Thebanking supervisory authorityand external audit firms shouldhaveregular discussionsonexisting andemergingkeyrisksandsystemicissuesat the national level, asthe exchangeof such informationismutuallybeneficial.Thecommunicationshould be open and in an environment that allowsafrank exchangeof viewsand ideas.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 67. P a g e | 67If circumstancesdictate, ad hocmeetingsshouldbe held to discussmattersrequiringurgent action to alloweach party totakeappropriateaction in a timelymanner.171.There should be periodic meetingsat the national level betweenthebankingsupervisoryauthorityand audit firms and professionalaccountancybodiestodiscussexistingand emerging keyrisksandsystemic issues.172.Keyrisks may beidentifiedfrom discussionson:- theappropriatenessof accountingtechniquesfor newlydevelopedfinancial instruments,other aspectsof financial innovationandsecuritisation;and- existingissuessuchasmarket opacity, and impairment evaluationsfor a particular asset class.Thesediscussionson keyriskscould be indicativeof systemic issues.Theycould alsoassistin achieving banks‘adoption of the mostappropriateaccountingpoliciesand their consistent application.173.It is advisablefor banking industry associationsto be involvedindiscussionson thesetopics.7. The relationship between the banking supervisory authorityand audit oversight body174.Supervisoryauthoritiesoften useauditedinformation, either directlyor asa basisfor regulatory information.In many jurisdictions,audit oversight bodies are responsibleforindependentlymonitoring thequalityof statutoryauditsaswell asauditfirms‘policies and proceduressupportingaudit quality.Therefore, banking supervisoryauthoritiesand audit oversight bodieshavea strong mutual interestin ensuringqualityauditsbythe firms.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 68. P a g e | 68175.Topromoteeffectivedialoguebetweenthe bankingsupervisoryauthorityand theaudit oversight body, their respectiverolesshould beclearlyunderstood.Thebanking supervisoryauthority‘sfocusis on the safetyand soundnessof the institutionsunder itssupervisionand thestabilityof thefinancialsystem asa whole.Theaudit oversight body‘s main roleis tomonitor thequalityof auditsinorder to protect the interestsof investorsor further the public interest.176.Tofacilitate effectivedialoguebetweenthe bankingsupervisoryauthorityand theaudit oversight body, it is alsobeneficial tohave anappropriateframework (eg through a memorandum of understandingbetweenthe twoparties) for cooperationand information-sharingbetweenthe twobodies, subject tothe confidential obligationsof bothpartiesand the relevant lawsof thejurisdictionin which theyare located.This may includetheform, frequencyand content of thedialogue.Thecooperationframeworkshould enable the banking supervisoryauthorityto take appropriateactionstoaddresstheidentified issuesortopics.Principle15: There shouldbe regular and effective dialoguebetween thebankingsupervisoryauthorityand therelevant audit oversight body.177.Where there is an audit oversight body, the banking supervisoryauthorityshould establishregular dialoguewiththe relevant auditoversight body to deal withrelevant issuesin relation to theconduct ofauditsof thebanksunder supervision.178.Effectivedialoguecan be establishedthrough both formal (egscheduledregular meetings) and informal channels(eg adhocdiscussions).There should be an open and constructivetwo-waydialoguebetweenthetwoparties.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 69. P a g e | 69179.Meetingsbetweenthe bankingsupervisoryauthorityand the auditoversight body should take placeasfrequentlyasdeemed necessary toenablethem toinform eachother of topicsor issuesof mutual concernorinterest arisingfrom theperformanceof their dutiesthat could be ofrelevancetothe other authority, subject torelevant legal constraints.180.Informationexchangesbetweenthe twopartiescould includetherobustnessof the audit of certain areasparticularlyrelevant tothebankingsupervisoryauthority, such asloan lossprovisioning, or theauditor‘sconsiderationof the internal controlsor risk managementproceduresof banks.Thediscussionsmay alsoincludeany issuesor topics identified bytheaudit oversight body in thecourseof itsinspectionsrelatingtoauditsoffinancial institutions(includingaudit deficiencies), and the auditoversight body‘s responsetosuch issues, includingfollow-upwithexternalaudit firmsand anycorrectiveactionsor other stepstaken by theaudit oversight body or external auditorstofurther strengthen externalauditsof financial institutions.181.Thebanking supervisoryauthoritymay alsodiscusswiththe auditoversight body areaswherethere can bea significant risk of materialmisstatement, their concernsabout thequalityof the audit of a particularfinancialinstitutionoranysignificant mattersofconcernin relationtothebank‘sexternal auditor or audit firmsin generalwhichmayberelevant totheworkof theaudit oversight body.182.Although identifying audit deficienciesis not aprimary focusof thebankingsupervisoryauthority‘s work, on becoming awareof mattersthatmay require actionby theaudit oversight body, thebanking supervisoryauthorityshould consider communicatingsuch matterstotheauditoversight body.183.Thediscussionsshould not be restrictedto current issuesor topicsbut should alsoincludeany significant thematicor emergingtopics.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 70. P a g e | 70184.Depending on the outcome of the dialogue between the bankingsupervisory authority and the audit oversight body, wherepermitted, actions taken by the banking supervisory authority couldinclude:- raisingissuesidentified by theaudit oversight body withindividualbanksor their external auditorsand encouraging remediationoftheseissueswhereappropriate;and- initiatinga cross-sectorthematic review toanalyse the impact ofissuesor topicsidentified by the audit oversight body.Principle16: Thebankingsupervisory authority and theaudit oversightbodyshould observe appropriateconfidentiality requirementswhensharinginformation.185.Informationshared betweenthebanking supervisoryauthorityand the audit oversight body is likelytobe subject tolegalconfidentiality requirements.186.Where information is subject to a confidentialityrequirement, theauthority/body receivingthe information should handleit in accordancewith thoserequirements,and should consider:- consultingtheauthority/ body providing the information beforedisclosingthe informationtoany third party; and- notifying the other party if it receivesa request or demand to providetheinformation on any basispotentiallyenforceablein law.Annex 1Guidance on the content of extended reportsprovided by theexternal auditors to supervisorsIn certain jurisdictions,it isa well-establishedpracticethat externalauditorssubmit tothesupervisoran extendedreport (theso-calledInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 71. P a g e | 71long-form audit report) on the audited financial statementsof banks.Thesereportsform part of the statutoryaudit work.Thefollowingisalist ofexamplesofthepotential content ofsuchreports,whichis not meant tobe exhaustive.Contentsrelating to the audit of the financial statements:- descriptionof the annual audit mandate, the audit strategy and theaudit procedures;- descriptionand assessment of the significant accountingandvaluation methods, including structuredand complex accountingactivities(egasset-backedsecuritiestransactions,saleand leasebacktransactions,useof specialpurposeentities, andbarter transactions);- descriptionof significant eventsthat took placeduring theyearunder review;- descriptionof material changestothe legal, financial andorganisational basisof thebank (eg changestothe legal form, thecapitalstructure,thecompanystructure,theorganisationalstructure,thecompositionoftheboard,thestructureofbankingoperationsandfinancial servicesprovided, the linesof business,and therelationswith affiliatedparties);- descriptionof the internal controlsover significant proceduresandinternalcontrol functions(eg riskmanagement, compliance,internalaudit, audit committee, and management informationsystems);- assessment of businessperformance;- assessment of the development of thenet asset position, especiallythenature and extent of off-balancesheet assetsand liabilities;- commentsand explanationon individual balancesheet itemsandprofit and lossaccounts,takingtheprincipleof materialityintoconsideration;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 72. P a g e | 72- commentson whetherthebalancesheet itemshavebeen properlyvalued, thevaluationadjustmentsand provisionsareappropriateandthereportingrequirementshavebeen fulfilled;- descriptionof material agreementsand pendinglegaldisputeswherethesemay have adverseeffectson thenet assetposition;- descriptionof the contentsand assessment of the enforceabilityoflettersof comfort issued;- assessment of the earningsposition, includinga descriptionof themost important sourcesof and factorsfor generatingearnings;- assessment of the risk situation, the proceduresfor determiningriskprovisioningand theadequacyof risk provisioning;- descriptionof majorfeaturesand material risks of the lendingbusiness, includingrisk concentrationsand thewaytheyaredealtwith withinthebank;- descriptionof general credit linesand noteworthyloans(egsignificant non-performingloans,loansfor whichsizeableloanlossprovisionsarenecessaryor werenecessaryin theconcluded financialyear, significant loansto board members,and loansfor whichanexceptional type of collateral hasbeen provided);- follow-upon seriousirregularitiesand weaknessesobserved duringpreviousaudits;and- summary of the keyfindingsand resultsof the audit.Contentsrelating to special prudential supervisoryrequirements:- assessment of the adequacyof risk management, includingtheinternalcontrol system and the internalaudit and compliancefunctions;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 73. P a g e | 73- analysisof the bank‘sexposure tocredit risk/counterpartyrisk, market risk, interest rate risk, settlement risk, foreign exchangerisk, liquidityrisk, profitability riskand operational risk;- analysisof the amount and compositionof the bank‘sownfundsthathaveto be reported tothesupervisor;- assessment of theappropriatenessof procedures for thepreparationof prudential returns;- assessment of the appropriatenessof measurestaken by thebank todeterminethelevel of own funds, its liquidityratio and itssolvencyratio;- assessment of the liquiditypositionand the liquiditymanagementsystem of thebank;- descriptionand assessment of the provisionsfor preventingmoneylaunderingand terrorist financing;and- descriptionand assessment of the provisionson conduct of businessrules.Annex 2Guidance on the timing and content of meetings betweensupervisors and external auditorsThis annex providesguidanceon the timingand examplesof thepotential content of meetingsbetweensupervisorsand externalauditors,ascircumstancesmay dictate.Theexamplesincludetypesof mattersof supervisoryinterest on whichexternalauditorscanreasonablybeexpectedtoform views, but whichfalloutsidethe usual ―dutytoreport/ alert‖ obligations.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 74. P a g e | 74Planning stage- Riskassessment and scope – assessmentsin light of theexternalenvironment and thefirm‘s performance,businessmodel and riskappetite.- Recent supervisory risk assessmentsand other supervisoryreviewsifappropriateconfidentialityrulesare in place.- Audit strategy/approach and viewson materiality.- Observationson internalcontrols(eg governanceeffectiveness, control environment, application controlsandmonitoring controls).- Fraud due to deficienciesin the control environment.- Viewsand judgmentson keyriskareasbasedon audit/ supervisoryworkperformed todate (whereconfidentiality rulespermit), includingspecific significant transactions,materialvaluationsand impairment decisions,methodologies andassumptions.- Assessment of risksrelatingtothe goingconcern assumption.- Accounting policy application and changes.- Sourcesof potential management bias.- Culture and tone set from thetop.- Issuesfrom previousyears and howthe firm had addressedthem.- Extent of workon internal controlsover regulatoryreporting, includingcapital.Pre-close- Update on all areascovered in previousmeetings.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 75. P a g e | 75- Adequacy and reliability of disclosuresin light of statutoryreportingrequirementsand risks, transactions, judgments,and assumptionsdiscussed in thisand previousmeetings.- Critical accountingestimatesand indicationsof management bias.- Analysis of management‘sgoing concern assessment.- Content of (anticipated) reportingtothosecharged withgovernance.- Unadjusted differencesand the auditor‘sevaluation in light ofmateriality.- Material control weaknessesidentifiedin thebank‘sfinancial andregulatoryreportingprocesses.- Viewson the control environment around regulatory reportingandcalculationof capital resources.- Possiblemodificationstothe audit report.- Additional mattersarisingfrom the audit.OthersAdditional meetingsmay beheld asappropriate during the audit phase,and after the conclusionof the audit todebrief on mattersconsideredduringtheannual audit cycle and toconsideranyassessment of risksandanticipated issues.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 76. P a g e | 76Meeting of the G20Finance Ministers andCentral Bank GovernorsUpdate by the IASB andFASBConvergence projectsThis report is a high-level update on thestatusand timelineof theremainingconvergenceprojects.This includesan update on the impairment phaseof our joint projecton financial instruments(included in theappendicesto thisreport).BackgroundIn thepasttenyears,sincetheUS FinancialAccounting StandardsBoard(FASB) and theInternationalAccounting StandardsBoard (IASB) (theboards) signed theNorwalkAgreement in 2002, wehavemaderemarkableprogressin improving and converging major globalaccountingstandards.In 2006,theboardsagreeda Memorandum of Understanding (MoU) thatidentifiedseveral short-term and longer-term convergenceprojectsthatwouldbring the most significant improvementstoIFRSand US GAAP.TheMoU wasupdated in 2008and thenagain in 2010.Achievements and challengesMost of theshort-term projectsand several of the longer-term projectshavebeen completed or are nearingcompletion.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 77. P a g e | 77In 2012theboardsmade significant progresson the remainingjointprojectsand theycontinueto appreciatethe importanceof developingconverged accountingstandards.The boards have achieved converged solutions for Revenue Recognitionaccounting and will be exposing converged proposals for accounting forLeases.There have, however, been some challengestodeveloping completelyconverged solutions,especiallyfor the Impairment and InsuranceContractsprojects.For theImpairment project, it hasbeen a challengetobring together thedifferent perspectivesof the boards‘respectivestakeholdersand thedifferent marketsin which such stakeholdersconduct their primarybusinessactivities.While the goal continuesto be thedevelopment of a converged Standardfor impairment, theextent of future convergencein this project willdepend, in part, on the feedback that isreceivedduring theboards‘respectivecomment periods.However,it isalsoimportant tonotethat under bothsetsofproposalstheprovisionsfor loanlossescontinue to be based on the same informationset, updated for changesin lossexpectations.Developinga converged solution for theInsuranceContractsprojectmaybemore difficult.IFRS doesnot currentlyincludeaccountingrequirementsfor insurancecontracts,sothe IASB needsa final Standard urgentlyand will beundertakinga targetedre-exposure of itsproposals.TheFASBhasexistingmodelsfor insurancecontractsbut will initiallybeexposingproposed amendmentsfor public comment in mid-2013.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 78. P a g e | 78The difference in the scope of the questionsin these exposure documentsand the need for the IASB to issue timely guidance will make achieving afullyconverged solution for the InsuranceContractsproject challenging.Financial instrumentsClassification and MeasurementDuring 2012,theboards workedtogether toeliminatedifferencesin theirrespectiveclassification and measurement models and haveconvergeddecisionsin thefollowingareas:•Contractual CashFlow CharacteristicsAssessment: a financial assetwouldbe eligiblefor a measurement categoryother than fair valuethrough profit or lossif the contractual terms of the financial asset giverise tocashflowsthat aresolelypaymentsof principal and interest on theprincipalamount outstanding, whereinterestisconsiderationforthetimevalueof money and for credit risk.•BusinessModelAssessment: the assessment of thebusinessmodelwouldapplyto thosefinancial assetsthat ‗pass‘the assessment of thecontractual cash flow characteristics.Financial assetswouldqualify for amortisedcost accountingif the assetsare held withina businessmodel whoseobjectiveis to hold theassetsinorder tocollect contractual cashflows.Thefrequencyand nature of saleswouldprohibit some financial assetsfrom qualifying for amortised cost.•Fair value through other comprehensive income: financial assetswouldbemeasured at fair valuethrough other comprehensive income if they‗pass‘the assessment of thecontractual cashflow characteristicsand areheld within abusinessmodel whoseobjectiveinvolvesboth holding thefinancial assetstocollect contractual cash flowsand sellingfinancialassets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 79. P a g e | 79•Fair value through profit or loss would be the residual measurementcategory that would include all assets that ‗fail‘ the assessment of thecontractual cash flow characteristics.Given the different stagesof development of theclassificationandmeasurement phasesof their respectiveprojects,(the IASB ismakinglimitedamendmentsto IFRS9 Financial Instrumentswhereasthe FASBis proposingcompletely new guidance), theboards‘exposure documentswill not be identical.TheIASB publishedits Exposure Draft in November 2012.Theseproposed amendmentswereintended tofurther align theboards‘classificationmodels, addresssome of the insurancecommunity‘sconcernsabout theinteractionwithaccountingfor insurancecontracts,and clarifytheexisting classificationand measurementrequirementsfor financial assets.Thecomment period ended on 28 March 2013.TheFASB expectstoissuea secondExposure Draft on classification andmeasurement in February 2013and will conduct outreach withstakeholdersduring the exposure period.Thecomment period will end on 30April 2013.Theboardsareplanningtobeginjoint redeliberationsabout thefeedbackreceivedon theproposalslater thisyear.Thetiming of theissuanceof final requirementswill dependon thenature and extent of thefeedback received.Impairment (Loan LossProvisioning)This is probablythemost important phaseof our project tooverhaul theaccountingfor financial instruments.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 80. P a g e | 80While theboards workedjointlytodevelopan‗expectedloss‘approachtoimpairment, USstakeholdersraised numerousconcernsabout earlydraftsof the so-called ‗three-bucket‘approach.Themost significant concernsrelated to theuseof twodifferentmeasurement approaches—aportion of the expected lossesfor all new orpurchasedfinancial assetsand a full lossrecognitionapproach forfinancial assetsthat have exhibited ‗more than insignificant deterioration‘.TheFASB believedit wasnecessarytoaddresstheseconcernsbeforemoving toan Exposure Draft.Toaddressthese concerns,the FASB developed a different expectedlossmodel wherebyat each reportingdate, an entitywouldrecognise anallowancefor credit lossesfor itscurrent estimateof all expectedcreditlosseson financial assetsheld at the reportingdate.Thesame objectiveappliesto all financial assetsheld in anyperiod;however, themeasureof the allowancewouldbe commensurate withthecurrent assessment of risk for the financial assetsheld.In late December 2012the FASB publisheditsExposureDraft.TheFASB‘s comment period endson 30April 2013.The IASB decided to maintain the concept of the ‗three-bucket‘ approachbut will revise it to addressconcerns that had been raised about the pointat which full lifetimeexpectedlossesshould be recognised.Therevised model will result in an initial recognition of a portionof thelifetimeexpected losses, withfull lifetimeexpectedlossesbeingrecognisedonlyonce a financial asset significantlydeteriorates(ie tothepoint that an economic lossissuffered beyond the level that wasoriginallyanticipated and priced intothefinancial asset).TheIASB isawareof the importanceof publishingitsproposalsassoonaspossible,andwillpublishanExposureDraft in thefirst quarter of 2013.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 81. P a g e | 81There will be a 120-daycomment period.Theboardsappreciatethe importanceof converged requirementsin thisarea and continueto have open linesof communication.However, asnoted above, challengesto achievinga converged solutionincludebringing togetherthe different needsof the respectiveboards‘stakeholdersand thedifferent marketsin whichsuch stakeholdersconduct their primary businessactivities.It isalsoimportant tonote, however,that underboth setsof proposalstheprovisionsfor loanlossescontinue to be based on the same informationset, updated for changesin lossexpectations.Theboardswill continue todiscussdevelopmentsastheymoveforward, and participate in each other‘soutreach during both boards‘exposure periods.Thecomment periodswill have some overlap and the boards willconsider public commentson both approachesduring redeliberations.The timing of the issuance of final requirementswill depend on thenature and the extent of feedback received, but the boards expect tocompletedeliberationsin 2013.HedgeAccountingTheobjectiveof theIASB‘s project isto improve hedgeaccountingbymore closelyaligningthe accountingwitha company‘s risk managementactivities, therebyimproving financial reporting.As previouslydiscussed, theHedgeAccounting phaseof theFinancialInstrumentsproject is not a joint project.However,the FASB sought commentsfrom itsstakeholderson theIASB‘s HedgeAccounting Exposure Draft, and will consider these andthedecisionsreached during redeliberationsin conjunction withInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 82. P a g e | 82feedback on its own proposals, whenit recommencesitshedgeaccountingdeliberations.Other projectsLeasesLease obligationsare widelyconsidered to be asignificant source of offbalancesheet financing.Theobjectiveof theLeasesproject is toimprove financial reportingbylessorsand lessees,in particular by recognisingleaseson thebalancesheet.Theboardshave completeddiscussionson the Leasesproject and haveagreedto re-exposethe revisedproposalsfor identicalstandards on leaseaccounting.Theboardsplan to publish exposuredraftsin thesecond quarter of 2013with a 120-daycomment period.During the comment period, the boards will conduct additional outreachwith users of financial statementsand withentitiesthat undertake leaseactivities.Theboardsplan to jointlyredeliberatetheproposalslater thisyear. Thetimingof theissuanceof the final requirementswill depend on thenature and extent of thefeedback received.Revenue RecognitionTheobjectiveof this project isto improve financial reportingby creatingidenticalstandards on revenue recognitionthat clarify theprinciplesthatcan be applied consistentlyacrossvarioustransactions,industriesandcapital markets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 83. P a g e | 83Theproject appliestoall contractswithcustomers(exceptleases, financial instrumentsand insurancecontracts).In December 2012theboardscompleted thesubstantiveredeliberationsof the recognitionand measurement principlesin the 2011ExposureDraft.Theboardsplan to redeliberatethe remainingtopics, includingthescope, disclosure,transition and effectivedate, in the first quarter of 2013and issuefinal standards in mid-2013.Insurance ContractsTheobjectiveof this project isto eliminateinconsistenciesandweaknessesin existingpractice and toprovide a singleprinciples-basedStandard to account for all insurance contracts.While theboardsareworkingtogetherontheInsuranceContractsprojecttheyhave reached different decisionson severalbasicmatters.For example, while both boards have agreedtomeasure the insuranceliability using a current measure of the estimated cost tofulfil theobligation, theboards havereacheddifferent decisionson several aspectsof the model, includingthe recognitionof changesin estimate, theinclusionof a risk margin in the measurement of the liability and thetreatment of acquisition costs.Theboardsfinalisedtheir joint discussionsin January 2013.TheobstaclestofindingaconvergedsolutionfortheInsuranceContractsprojectmay be difficult to overcome.In particular, thedifferent decisionsreachedby theboardsare a result ofdifferent startingpoints(IFRS currentlydoesnot includeaccountingrequirementsfor insurancecontractssotheIASB needsa final Standardurgently, whereastheFASB isproposingamendmentstoitslong-standinginsurancemodel).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 84. P a g e | 84Due to theimportanceof theproject and in view of the extensivedebatetheIASB hasundertaken over theyears, the IASB will onlyseek feedbackon five keymatterswhichhave significantlychanged sincethe 2010Exposure Draft.TheIASB hopesthat this approach will avoid further unduedelays infinalisingthis much-needed Standard for insurancecontracts.TheIASB planstopublish this Exposure Draft in thefirst half of 2013.TheFASB plansto publish its first Exposure Draft in mid-2013.Investment EntitiesTheInvestment Entityproject was,in themost part, jointlydeliberated.However,the FASB is addressing the accountingfor investment entitiesmore broadlythan theIASB did, asthe latter‘sfocuswassolely on anexemption from consolidation.Consequently, the boards‘ final requirementswill be similar but notidentical.TheIASB issueditsfinal requirementsin October 2012.TheFASBplanstofinaliseitsredeliberationsandissueafinalStandardinthe first half of 2013.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 85. P a g e | 85ToG20Ministersand Central BankGovernorsProgressof Financial Regulatory ReformsFinancial market conditionshave improved over recent months.Nonetheless, medium-term downsiderisksremain, given weak growthprospectsand high levelsof public and private sector debt in manyeconomies.Therecent improvement in financial market conditionsowesmuch tocentral bank actions, in particular, the accommodativemonetarypolicyaimed at stimulatingthe economic recovery.As a consequence, market participants‘appetitefor risk hasincreased, but this hasnot yet translated intoa robust recovery in realinvestment.Thebeginningof thereturn of risk appetitetofinancial markets– whileintendedand welcome – raisesanumber of issues.First, market participantsand authoritiesneed to be on guard againstmispricing of risk and valuationsof assets.Second, the importanceof timelycompletion of thereformstoover-the-counter(OTC) derivativesmarketsand the shadow bankingsystem hasincreased.Third, historicallylowinterest ratesinmanycountriesposechallengesforinstitutional investorswith long-datedliabilitiesand may leavemarketparticipantsmore vulnerable tounanticipatedmovementsin the yieldcurve.Financial institutionsand supervisorsshould continuetoassesstheresilienceofthefinancialsystem throughregular stresstesting, notablyofInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 86. P a g e | 86credit and interestraterisk, and completetheprocessof balance-sheetrepair.1.Reportssubmitted for thismeetinga.Regulatory factors affecting the availability of long-termfinanceAs part of the diagnosticworkyou requestedof the internationalorganisations,the FSBhasprepared an assessment of the effect of theG20financial reform programme on the availability of long-terminvestment finance.ThereformsincludeBaselIII, OTC derivativesmarket reforms, andchangesaffectingtheregulatory and accountingframeworkforinstitutional investors.Thegeneral conclusion is that, while there may be some short-termadjustment effects,the most important contribution of the financialreform programme tolong-term investment financeis to rebuildconfidenceand resiliencein theglobal financial system.As a result, thesereforms should substantiallyenhancethefinancialsystem‘s capacityto intermediateinvestment flowsthrough the cycle atall investment horizons.Hence, the G20regulatoryreforms are unambiguouslysupportive oflong-term investment and economic growth.Thesubmissionsof FSB members found littleevidencethat theregulatoryreformshavehad a notableimpact on long-term financingtothispoint.This is not surprisinggiven the fact that the reform processisstill at anearlystage.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 87. P a g e | 87Several featuresof thereformsaredesignedto avoid major unintendedconsequences:the long phase-in period for reforms; theongoingimplementationmonitoring; and, in certain cases,the flexibilityto adjustrules during the observation period.Thefinancial reform programme is not specificto theregulation oflong-term finance.Nevertheless, the reforms will change the incentives of some financialinstitutions and the costs of certain transactions, which may affect thecomposition of long-term finance.In particular, institutional and other long-horizoninvestorsare expectedtoassume a greater role in funding long-term assetsand more of thisinvestment may be intermediatedvia capital marketsrather than thebankingsystem.There arethree areasfor specific follow-upby the FSB.First, there should be ongoing monitoring to identify any regulatoryfactors that may disproportionately affect the provision of long-termfinancesothat theycan be addressed.Second, the FSBcould workwith otherstoexaminewhetherregulatoryfactorsmayconstraintheability ofnon-bankstoexpandtheirprovisionoflong-term finance.Third, the FSB can contributeto thework of other internationalorganisationstohelp promote the development of longer-term domesticsavingsand thecapacityof domesticfinancial systemstointermediatethem, particularlyin emergingmarket and developing economies(EMDEs).b. Update on accounting convergenceTheChairsof the InternationalAccounting Standards Board and the USFinancialAccounting StandardsBoard havewrittenyou on their workonconvergenceof accountingstandards.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 88. P a g e | 88ThetwoBoardsexpect tomake progresson thetwokey outstandingissuesof impairment of loans, wheretheyexpect to completetheirdeliberationsin 2013, and insurancecontracts, whereboth Boards will beholdingpublicconsultationsthis year.Of thesetwooutstandingissues,the need for convergenceon a newforward-lookingexpectedlossapproach to provisioningis of mostimmediateconcern for end-usersand from a financial stabilityperspective.We note withconcern the delaysin convergencetodate.We thereforerecommendthat theG20asktheIASB and FASB topreparebyend-2013a roadmapfor converging to a common approach forimpairment and for achievingthe G20objectiveof a singleset of highqualityaccountingstandards.2. Priorities and work plansa. Creating continuousmarketsTheFSB remainsfullycommittedtotherapid completionof the G20‘sagreedreformsto OTC derivativesmarkets.As you are aware, thesecomplex reformsaretakingsomewhat longerthan originallyplanned.TheFSB will submit for your April meetingits latestprogressreport onimplementation, includinga comprehensivestock-takeof reformsasofend-2012,estimatesof theextent towhichtransactionsarebeingcentrallyclearedand reportedto trade repositories, and an overview of theremainingissuestobe resolved.It is important that all jurisdictionspromptlycompletethenecessarychangestolegislativeand regulatoryframeworksto put thesereformsintopractice.Tomaintain momentum, I have asked FSBmember jurisdictionstoconfirm beforetheSeptember Summit that the legislationand regulationInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 89. P a g e | 89for reportingto traderepositoriesare in place,and alsothestepstheyaretakingtocompletetheimplementationof other OTC derivativesreforms.Ministersmay wishtotake a particular interest in progressin theirjurisdictionsto ensure timely compliance withtheseimportant reforms.TheFSB haspreviouslyidentified regulatoryuncertaintyasthemostsignificant impediment tofull and timelyimplementationof theOTCderivativesreforms.Toreducethis uncertainty, regulatorsareworkingtogether toidentifyand addressconflicts,duplication and gapsin thecross-borderapplication of rules.Theywill provideanupdateinApril ontheir progressand next steps,anda report totheSummit on how theidentified cross-border issueshavebeen resolved.Internationalpoliciesin remainingimportant areaswill alsobepublishedbytheSummit.Theseincludecapital requirementsfor exposurestocentralcounterparties, marginingstandardsfor non-centrallyclearedtransactionsand guidance on resolutionof central counterparties.Standard settersareundertakingan assessment of the incentivestocentrallyclear transactionsthat thesestandardscreate and will adjustthem asnecessarytoensure a robust system.TheFSB will alsoreport at the Summit the findingsof a newmacroeconomicimpact assessment of theOTC derivativesregulatoryreforms.Standard settersarealsodeveloping international guidanceon authorities‘accesstotraderepositorydata, includingin suchawaythat it can beaggregated acrosstrade repositories.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 90. P a g e | 90This guidance, whichwill be issuedfor consultationshortly and finalisedbytheSummit, will be important for ensuring that authoritiescan useinformation from traderepositoriesin their oversight of OTC derivativesmarketsand assessment of systemic risk.MinistersandGovernorswillwishtoensurethereiseffectivecross-borderaccessto thisinformation, whichisvital tothemonitoringof emergingfinancial vulnerabilities.The global Legal Entity Identifier (LEI) system will enhance the usabilityof the data; the Regulatory Oversight Committee as the governance bodyof the global LEI system wasestablishedin January2013.EstablishingtheGlobalLEI Foundationisthekeynext steptolaunchthesystem in March2013.TheFSB continuestooffer strong support to theLEI initiativeand theFSB Secretariat will serve asROC LEI Secretariat for the initial period.b. Strengthening the oversight and regulation of shadowbankingAs you will recall, theFSB deliveredtoyou lastNovember an initial set ofrecommendationstostrengthenthe oversight and regulationof shadowbanking.We have receiveduseful feedback through a public consultationon theinitial recommendations.TheFSB isrefiningthe recommendationsrelatingto securitieslendingand repos, and thoserelatingto the policymeasuresfor shadowbankingentitiesother than money market funds.The recommendations will address bank-like risks to financial stabilityemerging from outside the regular banking system while not inhibitingsustainablenon-bank financingmodelsthat do not posesuch risks.Theapproach is designed tobe proportionateto financial stabilityrisksInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 91. P a g e | 91by focusing on those activities that are material to the system, using as astarting point those that were a source of systemic risk during the crisis.We will deliver certain recommendationsto the St Petersburg Summit.Thesemeasuresshould be viewed asthestart of a broader processsincetheyaddressthespecific risksthat aroseduring thecrisis and weallrecognisethe ability of the shadow bankingsector toinnovate.c. Building resilient financial institutionsIn January, agreement wasreachedbytheGroupofGovernorsandHeadsof Supervision on the LiquidityCoverageRatio(LCR) to be applied tobanks.Theagreement expandsthe rangeof high-qualityliquid assetsthat canbeincluded in theLCR and incorporatesevidence-basedassumptionsabout liquidityoutflowsin timesof stress.TheLCR will be introducedin 2015asplanned, withthe minimumrequirementsbeginningat 60% and reaching100%by 2019toallowtheglobal banking system sufficient time toadjust.d.Ending ―too-big-to-fail‖Progressisbeing madeby the IAIS in developingand testing amethodologyfor identificationof global systemically important insurers(G-SIIs), and in developing appropriatepolicy measures.This work should be completed in the second quarter of 2013.An identificationmethodology for non-bank G-SIFIs will be issuedforconsultationin the secondhalf of 2013.Although implementationof theG-SIFI frameworkhasmuch farther togo, wewill deliver an assessment totheSt. Petersburg Summit of theprogressmade in developing crediblepoliciesfor ending too-big-to-fail(TBTF).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 92. P a g e | 923. Implementation of reformsBasel IIIConsistent implementationof Basel III is fundamental to strengtheningtheresilienceof theglobal banking system, maintainingmarketconfidencein theregulatory reformsand providinga level playing fieldfor internationallyactivebanks.The27member jurisdictionsof the Basel Committeeon BankingSupervision(BCBS) continuetomake progresstowardimplementation;11had issued final regulationsby12 February 2013and the remaining 16jurisdictionshave tableddraft regulations(seeAnnex to this letter).TheEuropeanUnion andtheUnitedStatespublisheddraft regulationsin2012and intend tofinalisethem over thecourse of 2013.TheFSB and BCBSwill prepare a full update on countries‘adoption ofBasel III in domesticregulationfor your April meeting.Thecountriesthat havemissedtheJanuary 2013start date are workingtofinalisetheir regulationsand are expected to meet the 2019timelineforfull implementation.Several more memberswill undergoa consistencyassessment of theirfinal regulationsby theBCBS in 2013.By end-2013,all jurisdictionsthat are the home regulator toglobalsystemicallyimportant banks(G-SIBs) will have been subject to anassessment of their Basel III implementation.Other jurisdictionswill be subject to regulatory consistencyassessmentsshortlythereafter.TheBCBS hasconcluded an initial examination of the internationalconsistencyin the application of theBasel III risk weightingschemefortradingbook assets.Asimilar review is underwayregarding the banking book.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 93. P a g e | 93Theanalysisforbanks‘tradingbooksindicatesthat supervisorydecisionsandvariationsin banks‘models contributetothesubstantial differencesinbanks‘calculationsof market risk.(Theaveragerisk weightingof tradingassetsfor most banksin thestudyvaried between15% and 45%.)Thestudyalsoshowsthat banks‘public disclosuresare insufficient forunderstandinghow much of thesevariationsin banks‘reportedriskweightingsof assetsare owingtodifferinglevelsof actual risk versusthatowingtoother factors.This situation is unacceptable,and the studyhighlightsthreepolicyoptionswhichare beingaddressed in the BaselCommittee‘songoingwork:(i)Improving banks‘public disclosures, buildingon therecommendationsof theEnhanced DisclosureTaskForce;(ii)Narrowingdownmodellingchoicesfor banks;and(iii) Further harmonisingsupervisorypracticesover approval of models.Resolution regimes and G-SIFI resolution plansAn effectiveand credibleresolution regime for SIFIs is a criticalcomponent of the policy frameworkfor ending TBTF.Full implementationof theFSBKeyAttributesof EffectiveResolutionRegimeswill provideauthoritieswiththepowersand toolsnecessaryforthispurpose.We will shortlyconcludethe first peer review of FSB members‘implementationof theKeyAttributes.Theworkunder thereview confirmsthat reformsare underwayin manyjurisdictionsto align national statutoryregimes withthe FSB KeyAttributes, but that significant work remains.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 94. P a g e | 94We are developing an assessment methodology to assist countries withtheir implementation, and to provide a basis for future peer reviews andIM F and World Bank assessments.Themethodology will be testedin pilot assessmentsby the IMF andWorld Bank later thisyear and publishedin the second half of 2013.TheFSB and itsmemberswill alsothis year addressthe specific aspectsof resolutionof insurersand financial market infrastructuresand theprotectionof client assetsin resolution.By June 2013,resolution strategiesand plansshould be in placefor allG-SIFIs designated in November 2011.Toassist this processthe FSB haspubliclyconsulted on specific aspectsof recovery and resolutionplanningand isnow finalisingitsguidance.Progressin ending TBTF is contingent on the feasibilityand credibilityof putting theseresolutionplansintooperation.We will launchin thesecond half of 2013a first round of assessmentsunder the G-SIFI ResolvabilityAssessment Processtoevaluatetheprogressmade.Reducing the reliance on Credit Rating Agency (CRA) ratingsTheFSB hasrecentlylaunched a thematic peer review to assistitsmembersto fulfil their commitmentsunder the roadmap forimplementingthe FSBprinciplesfor reducingreliance on CRA ratings.This will includea stock-take of referencestoCRA ratingsin nationalauthorities‘lawsand regulationsand of actionsbeing taken toremove orreplace thesereferences.Thefindingswill feed intotheprogressreport on CRAs for theSummit,while thepeer review will be completed by early2014.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 95. P a g e | 95Monitoring the impact of reformson EMDEsTheFSB will organisea workshopfor EMDEs in the first half of 2013tosharelessonsand experienceson implementingagreed financial reformsand on undertakingex anteassessmentsof their impact.FSB members withsignificant experiencein undertakingsuchassessmentswill be asked topresent their methodologies.TheFSB will report the findingsof theworkshopand other relevantmonitoring processesat theSt. PetersburgSummit.4. FSB resources, capacity and governanceFinally, I am pleased to report that theFSB hasnow been establishedwith a legal personality.Alongside this,a rollingfive-year agreement under which theBISwillhost and provideresourcesfor the FSB hasbeen activated, and aninstitutional mechanism for theFSB‘sfinancial and resourcegovernanceestablished.TheFSB hasalsoadoptedProcedural Guidelinesfor itsoperational andadministrativeactivitiesand practices.Theseareimportant stepstowardsimplementationof the G20recommendationsat Cannesand LosCabostoplace theFSB on anenduringorganisational footing, withstrengthenedgovernance, greaterautonomy in resource use and enhanced capacitytocoordinatethedevelopment and implementation of financial regulatorypolicies,whilemaintainingstrong linkswiththe BIS.TheFSB will next elect new chairs for three of its Standing Committeesandbegin a review of the composition of their memberships.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 96. P a g e | 96FollowingtheSt. Petersburg Summit, theFSB will set in train a review ofthestructure of itsrepresentation, whichweenvisagetobe completedunder theAustralian Presidencyof theG20.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 97. P a g e | 97International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 98. P a g e | 98The new Risk DashboardInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 99. P a g e | 99International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 100. P a g e | 100International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 101. P a g e | 101International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 102. P a g e | 102EIOPA Risk Dashboard – Background noteExecutive SummaryEIOPA publishesa Risk Dashboard on a quarterly basis, in accordancewith itsobligationsunder the EIOPARegulation1and followingaframeworkdeterminedin cooperationwiththeotherESAs, theESRB andtheECB.TheRisk Dashboard is based on mechanical aggregation of indicatorsand additionalexpert judgment if deemed necessary.Besidespubliclyavailablemarket data, extensiveuseismadeofcompanydata whichisreportedby 30largeand important insurancegroupsfromtheEEA and Switzerlandunder EIOPA‘squarterly fast-track reporting.Withinthe common structure agreed upon by theESAs, the ESRB andtheECB, theRisk Dashboard isdesignedto be flexible, soEIOPA canreact quicklyto upcoming risks whichare deemed necessaryto becovered.EIOPA expectstheDashboardto graduallyevolve further, takingfeedback by the addresseesof this product intoaccount.ContextAspart of thenewEuropeanlegislation, EIOPA aswellastheotherESAsandthe ESRB arecalledupon to ―develop a common set of quantitativeandqualitativeindicators(risk dashboard) to identify and measuresystemic risk‖.Thelegislationfurther stipulatesthat thesedashboardsshould beconstructed in cooperationbetweentheESAsand ESRB.In response to this requirement, the ESAs, together with the ESRB andthe ECB have determined a set of general features for all dashboards tofollow:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 103. P a g e | 103- Eachriskdashboardwillbeconstructedbasedonthesameset ofriskcategories:macro risk, credit risk, market risk, fundingand liquidityrisk, profitabilityand solvencyrisk and risks resultingfrominterlinkagesand imbalances.Furthermore,each institutionhasthe option to add categoriestoallowfor sector specific risks (e.g. insurancerisk).- It wasnoted that all RiskDashboardsshould be constructed on aflexiblebasisin order toalloweach authority toreflect themostimminent risksidentified.- Further development and implementationof the Risk Dashboardsshould betaken forward individuallyby each of the authoritiesconcerned.However,the ESAs and ESRB shouldcontinueto worktogethercloselyin thisregard to ensure interplay regardingthe underlyinginformation presented e.g. consistencywhenthe same indicator isused in different Risk Dashboards.ApproachWork on theEIOPARisk Dashboardhassincebeen brought forwardbythe Financial StabilityCommittee of EIOPA.In definingthe methodology for theRisk Dashboard, theCommitteehasconsideredthe approachtaken by other institutionsin thefield of riskassessment, for instanceby theIMF2.TheRiskDashboardhasbeencreatedtogiveastructuredviewof riskstotheinsurancesectorandtheenvironment in whichit operates, in order tofacilitate a regular assessment of theserisksand possiblemitigatingpolicy actions.In creatingit, carehasbeen taken tokeep the dashboard asconcise,forward-lookingand flexibleaspossible.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 104. P a g e | 104Furthermore,it is worthnoting that the dashboard is designed asahigh-level tool showingthe most relevant trendsand riskson a macrolevel.As significant differencesbetweenindividual institutionsexist, thefindingspresented are not alwaysapplicableto all EU insurers.MethodologyIndicatorsAset of currently40quantitativeindicatorsforms thebasisof the riskassessment presented.These indicators, which signal potential risks and vulnerabilities for theEuropean insurance sector as well as its resilience, are generated usingboth supervisoryand publicly availabledata.This data is used – and in some casescombined – asthe basisof the riskassessment for each indicator.Given that thedistribution of risks and vulnerabilitiesisat least asimportant asitscentral tendency, therisk indicatorsare, wherepossible,assessed by taking both themedian and outliers(e.g. 10th or90thpercentiles) of theunderlying sampleintoaccount.Basedon this informationan initial risk score for each indicatorisderived.Thesescoresbasicallyserve asproxies whencombining variousriskindicatorsto an assessment for the overarchingrisk category.Risk categoriesTheindicatorsaremapped to aggregatedcategoriesof(1)macro risk,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 105. P a g e | 105(2) credit risk,(3) market risk,(4) funding & liquidityrisk,(5) profitability & solvency,(6) interlinkages& imbalancesand(7) insurancerisk.Basedon theindividual risk scoresfor eachunderlying indicatoranaggregated risk score for each categoryisgeneratedby either- an unweightedaverage(for categories4, 6 and 7);- a weightedaverage referring to a long-term averageof actualportfolio holdings(for categories2 and 3);- a sub-aggregationwithin some indicatorsof a risk categoryand anaggregationof these―sub-riskscores‖ byusing the simpleaverage ofor category1witha split in (1a) real-economyrisks and (1b) theriskinessof the insurancesectorasperceivedby financial marketparticipants,ofor category3 witha split in (3a) asset siderisksand(3b) ALM matchingrisks, ofor category5 witha split in (5a) lifebusiness,(5b) non-life businessand (5c) total business.For a quick and comprehensiveinterpretationthe overall risk score arevisualizedthrough four color codesin theRisk Dashboard.Quarterlychangesare representedthrough arrows.Risk assessmentThemechanicallyestimatedrisk scoresper categoryform thebasisof therisk assessment in theRisk Dashboard.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 106. P a g e | 106Thesescoresare complemented by other information availableon risks,e.g. from stresstest results,topical risk analysesor other availabledata.If necessary, this informationisused toadjust the scores.This way, it is ensured that all availableinformation is used for the riskassessment and themost completepicture is generated.However,decisionsto changethemechanicallyaggregated scores(i.e.expert judgment) are documented to ensure transparencyof this process.Toensure flexibility, theRiskDashboardcontainsspacetoelaboratefurther on themost prominent risksin a ‗user-defined‘non-mechanicalway.Additional dimensionsof each risk (e.g. thepotential impact aswell astimingaspects) have been derived partiallyon expert judgment aswell.Expert judgmentExpert judgment isconsideredcrucial for complementingor substitutingthe mechanical processof the risk assessmentsand for makingforward-lookingstatementsabout the expected evolutionof risks.Theprocessfor adjustingthe initial risk scores(both upwardanddownward adjustment) by expert judgment isintendedtobe transparentandused consistentlyover time.Any uncertaintyin the assessment and/ or element of judgment that willinfluencethe final assessment, such asriskmitigatingfactorswill bemadeexplicit and will be documented.Thetransparencyand documentation requirementsshould ensure asufficient level of confidencein theexpert judgment.This confidencein expert judgment isimportant in order toproducecrediblerisk assessments.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 107. P a g e | 107This confidenceshould be further maintainedby trackingtheadjustedassessmentsagainst actual experienceor new information that becomesavailable.Such ―realitychecking‖ is especiallyimportant wherethe expertjudgment leadstosignificant deviationsfrom themechanical assessmentor whereit hasa material impact on the overall assessment output.Data sourcesData for theRiskDashboard isobtained from both public sources(market data) and thequarterly supervisory reporting of 30largeEuropean insurancegroupstoEIOPA(fast-track reporting).Data availabilityfor RiskDashboardpurposesis expectedtoimprovesubstantiallywiththeintroduction of SolvencyII reporting.IndicatorsusedMacro riskAs macro risks are obviously the major domain of the ESRB‘sRiskDashboard, EIOPA‘scontribution focusesmainlyon insurance-linkedaspects.Besides consensusforecastsof GDP growth, development of consumerpricesand unemployment rates,this section thereforeencompassesthefinancial markets‘perception of the healthinessand profitabilityof theEuropean insurancesector.For this purpose, relative stock market performances of Europeaninsurance indices against the total market are assessed, as well asfundamental valuations of insurance stocks (price/ earningsratio, price/ book-value ratio), CDS spreads and ratings/ratingoutlooks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 108. P a g e | 108Market riskMarket risk is, for most asset classes,assessed by analysing both theinvestment exposure of the insurancesector and an underlying riskmetric.Theholdingsgive a picture of thevulnerabilityof the sector toadversedevelopments;the riskmetric givesa picture of thecurrent level ofriskiness.For equity investments, the relevant risk metrics are the implied volatilityas a short-term indicator and the price/ book-value ratio as medium-termindicator.Also for property investmentsthe valuation comesin asa risk metric, viathecurrent yield of commercial real estateinvestments.In addition, thecurrent level of long-term interest ratesand someasset-liability matchingindicatorsareassessed, e.g. by comparing thedurationof thebondportfolio (includingtheeffectof derivativeholdings)with the duration of technical provisions.Thedifferencebetweenguaranteed interest ratesand investment returnscompletestheassessment in this risk category.Credit riskFor measuringcredit risk theholdingsof credit asset classesarecombinedwith risk metricsapplicablefor theseasset classes.For instance, the holdingsof government securitiesare combinedwiththecredit spreadson European sovereigns.Such indicatorsarealsoconstructed for the holdingsof bank bonds(secured and unsecured) and non-financial corporatebonds.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 109. P a g e | 109Liquidity and funding riskGenerallyspeaking, insurersare lessprone to liquidityrisk thanbanks.Asindicators,thelapserateofthelife insurancesectorhasbeenusedwitha high lapseratesignalinga potential risk.Furthermore, holdingsof cash& depositsare used asa measure of theliquiditybuffer available,both in absolutetermsand asa share of lessliquidassets.Thelastindicatorusedistheissuanceof catastrophebonds, whereaverylowvolume of issuanceand/ or high spreadssignal a reduction in demandwhichcould form a risk.Profitability and SolvencyNinerisk indicatorswereconsidered in the determination of the riskscore for this category.While the return on equity providesan overall assessment of theprofitabilityin thewholesector, a more detailedbreakdownofprofitabilitytrendsisavailableby analysing the combined ratio and thereturn to premiumsfor non-life businessand the return on assetsfor lifeinsurers.Solvencyratios for both life and non-life insurerscompletethe picture inthisrisk categoryaswell astheyear-on-year changein capital&reserves.Interlinkages and ImbalancesUnder this section various kindsof interlinkagesare assessed, bothwithinthe insurancesector,namely betweenprimary insurersandreinsurers,betweenthe insurancesectorand the banking sector, aswellasvia derivativeholdings.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 110. P a g e | 110In addition, asan indicatoron imbalancesthe debt/ equityratioof theinsurancesector hasbeen included.Insurance RisksAs indicatorsfor insurancerisksgrosswrittenpremiumsof both life andnon-life businessare an important input.Both significant expansion and contraction are taken asindicatorsofrisksin the sector; theformer due to concernsover sustainability and thelatterasan indicator of widespreadcontraction of insurancemarkets.Premiumsare alsoanalysed in comparison to insurers‘capital&reserves(insuranceleverage).Information on insurance lossesdue tonatural catastrophesroundsupthisrisk category.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 111. P a g e | 111International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 112. P a g e | 112International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 113. P a g e | 113International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 114. P a g e | 114International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 115. P a g e | 115International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 116. P a g e | 116GovernorSarah Bloom RaskinBoard of Governorsof the Federal Reserve System AttheNational CommunityReinvestment CoalitionAnnual Conference,Washington, D.C.Focusing on Low- and Moderate-IncomeWorkingAmericansI am delightedtobe here at the National CommunityReinvestmentCoalition(NCRC) Annual Conferencetoday, and to be gathered withsomanypeoplewhohave been workingfor decadestostrengthencommunities and the integrityof our nationseconomicinstitutionsandfinancial practices.Thoseof you involved in communitydevelopment and communityreinvestment know all too well the trauma and hardship experiencedbylow-incomecommunities over thelast several years.You know it in a waythat is lost on peoplewhosecommunitieshave notbeen sobadlybatteredby theseeconomicstorms.ThatswhyIm lookingforwardthismorning tosharing withyou myperspectiveon the importanceof focusingon thesituationand prospectsof low- and moderate-incomeworkingAmericans.In my remarks, I will start by discussingthetypes of jobsbeinggeneratedin the current recovery.Certainly, thepaceof recovery in employment hasimproved, but itsimportant tolookat thetypesof jobsthat arebeingcreatedbecausethosejobswill directlyaffect thefortunesand challengesof householdsandneighborhoodsaswell asthe courseof the recovery.I will thensuggest that wethink about how theabsence of a substantialnumber of new high-paying jobs, whencombined withchangesin theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 117. P a g e | 117landscapefor financial services,affectsaccessgenerallytoaffordable,sustainablecredit.Finally, I will exploresomeof the monetary, supervisory, and regulatorytouchpointsin whichthe situation and prospectsof low- andmoderate-incomeworkingAmericanscan be addressed.ChallengesPosed by Labor Market ConditionsTheGreat Recession standsout for themagnitudeof job lossesweexperienced throughout thedownturn.Thesefactorshavehit low- and moderate-incomeAmericansthehardest.Thepoverty rate hasrisen sharply sincethe onset of the recession, after adecadeof relativestability, and it now standsat 15percent--significantlyhigher than the averageover thepast threedecades.And thosewhoarefortunateenough to have held ontotheir jobshaveseen their hourlycompensation barelykeeppace withthe cost of livingover thepast three years.While todays 7.7 percent unemployment rate is a marked improvementfrom the 10 percent rate we reached in late 2009, it is still higher than theunemployment rate for the 24 years before the Great Recession, a span oftimeover whichtherate averagedabout 6 percent.Moreover,the governments current estimateof 12 million unemployeddoesnot includenearlya million discouraged workerswhosay theyhavegivenup lookingfor workand 8 million people whosaythat they areworkingpart timeeven though theywouldprefer a full-time job.Abroader measure of underemployment that includestheseand otherpotential workersstandsat 14.3 percent.About two-thirds of all job lossesresultingfrom the recession wereinmoderate-wageoccupations,such asmanufacturing, skilledconstruction, and office administration jobs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 118. P a g e | 118However,theseoccupationshave accounted for lessthan one-quarter ofsubsequent job gains.Thedeclinesin lower-wageoccupations--suchasretail salesand foodservice--accountedfor about one-fifthof job loss, but a bit more thanone-half of subsequent job gains.Indeed, recent job gains have been largely concentrated in lower-wageoccupations such as retail sales, food preparation, manual labor, homehealth care, and customer service.Furthermore, wagegrowthhasremained more muted than istypicalduring an economic recovery.Tosome extent, the rebound isbeing drivenby thelow-paying nature ofthejobsthat have beencreated.The slow rebound also reflects the severe nature of the crisis, as the slowwage growth especially affects those workers who have become recentlyre-employed followinglongspellsof unemployment.In fact, while averagewageshavecontinuedtoincreasesteadily forpersonswhohaveremainedemployed all along, theaveragewagefornewhires have actuallydeclinedsince2010.Thefacesof low-wageAmericansare diverse.Theyincludepeopleof varying employmentstatus,race, gender, immigration status,and other characteristics.Many suchAmericansare attached to theworkforceand aredeeplycommitted to both personal successand to making a contribution tosociety.For purposesof reference, in 2011, lowwagewasdefined as$23,005peryear or $11.06per hour.Today, about one-quarter of all workersare considered"lowwage."International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 119. P a g e | 119Theyare sanitationworkers,office receptionists,and nursingassistants;theyaresinglemothersof threewhoworry:How will I beabletosendmychildren tocollege?What if my landlordraises the rent this year?Tensof millionsofAmericansare thepeople whoaskthemselvesthesequestionsevery day.This diversegroup of workersfacesnumerousbarriers whentrying toaccessthelabor market or advancein their current positions.Many of thesebarrierswereidentifiedin an initiativethat the FederalReservesCommunity Development function launched in 2011.Over thecourseof a year, Reserve Banksacrossthecountry hosted aseries of 32 regionaldiscussionsaimed at examiningthecomplex factorscreatingchronic unemployment conditionsand identifying promisingworkforcedevelopment solutions.The kinds of problems faced by low-wage workers are familiar to all ofyou and have long been part of the structural conditions of poverty andnear-poverty inAmerica.We know, for example,that locationpresentsthornychallengesfor manylow-wageworkers.Withinmetropolitanareas,jobsarenot spreadout evenlyandjobcreationtendstobe depressed in low-incomecommunities.As a result, many low-wageworkersfacelong commutes and seriouscommuting difficultiesdue to lessreliabletransportationand aninadequatetransportationinfrastructure.Moreover,a number of low-wageemployees worknon-standardhours,exacerbatingboth transportationand childcareissues,aswellaspersonal health problems.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 120. P a g e | 120Traditionally, manyworkersfind jobsthroughsocial networksandthrough personal connectionsthat theyhave tothe labor market.But, becauselow-incomeindividualsare typically lessmobile, moreisolated, andlesssociallyconnectedthanotherpeople,theyareoftenleftout ofthesocial networksthat, in practice, lead to jobsfor mostAmericans.Addressing TheseChallengesAmong thoseresponding to thesechallengesare innovativelocalpractitionerswhoare implementingprograms designed toexpand jobopportunitiesfor low-wageworkers.ConsiderImpact Servicesin Philadelphia, an organizationthat buildsrelationshipswiththelocalbusinesscommunityto better understandtheir hiring needsandthendevisesprogramsthat supplythosefirmswithappropriatelyskilledworkersfrom thecommunity.TheNational Fund for Workforce Solutionsis another example. Thisorganizationworkswith localcommunities to organizefundingcollaborativestosupport regional industries.More Recent Challengesfor Low-Wage WorkersSoprogressis beingmade, thankstocoalitionslike these acrossthecountry that are workingfor practical changesat the communitylevel.But the 21st century labor market is increasinglycomplex;it continuestogeneratenew challenges.For example, growthin sectorssuch asgreenindustries and advancedmanufacturingis creatingjobs, but thesejobsmay demand differentskills.Accesstoreliable informationbecomescriticalfor workerswhoareconsideringanew job, and must carefullyweightheskillsandcredentialsrequiredby potential employerswiththecostof training and thelikelihoodof gainingemployment.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 121. P a g e | 121And, more andmore, employers arerequiringpost-secondarycredentials.Today, a high school diplomaaloneislesslikely toqualify an individualfor a job witha path towardmeaningful advancement. And, asdemandfor more credentialsincreases, workerswholack thosecredentialswillfind it increasinglydifficult togain upward mobility in the job market.Contingent WorkMany employers are looking to make the employment relationship moreflexible, and soare increasingly relying on part-time work and a variety ofarrangementspopularlyknownas"contingent work."Thistrend towarda more flexibleworkforcewill likely continue.For example, while temporary work accounted for 10percent of job lossesduring the recession, these jobs have accounted for more than 25 percentof net employment gains since the reces•sion ended.10 In fact, temporaryhelp is rapidly approaching a new record, and businesses use of staffingservicescontinuestoincrease.Contingent employment is arguablya sensibleresponsetotodayscompetitivemarketplace.Contingent arrangementsallowfirmstomaximizeworkforceflexibility inthefaceof seasonal and cyclical forces.Theflexibility may be beneficial for workerswhowant or need time toaddresstheir familyneeds.However,workersin thesejobsoften receivelesspayand fewerbenefitsthan traditional full-timeor "permanent" workers,are much lesslikely tobenefit from the protectionsof labor and employment laws,and oftenhaveno real pathwayto upwardmobilityin the workplace.Many workerswhohold contingent positionsdosoinvoluntarily.Department of Labor statisticstell usthat 8 millionAmericanssaytheyare workingpart-timejobsbut wouldlike full-timejobs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 122. P a g e | 122Thesearethe peoplein our communitieswhoare "part time bynecessity."As businessesincreasetheir relianceon independent contractorsand part-time,temporary, andseasonalpositions,workerstodaybearfarmore oftheresponsibilityand riskfor managingtheir careersand financialsecurity.Indeed, the expansionof contingent work hascontributed totheincreasinggap betweenhigh- and low-wageworkersand totheincreasingsenseof insecurityamong workers.Flexibleand part-time arrangementscan present great opportunitiestosomeworkers,but thesubstantial increasein part-timeworkersdoesraisea number of concerns.Part-time workers are particularly vulnerable to personal shocks due tolower levels of compensation, the absence of meaningful benefits, andeven a lack of paid sick or personal days.Not surprisingly, turnover is high in thesepart-time jobs.Accessto CreditTheeconomic marginalizationthat comeswiththegrowthof part-timeand low-payingjobsis exacerbatedby inadequateaccessto credit formanyworkingAmericans.Ideally, peoplechronicallyshort of cashwouldhave accesstosafeandsoundfinancial institutionsthat could providereliable and affordableaccessto credit aswell asgood savingsplans.Unfortunately, many workingAmericanshave no practical accesstoreasonablypriced financial productswith safefeatures,much lessthekind of safeand fair credit that isavailableto wealthier consumers.WorkingAmericanshave several core financial needs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 123. P a g e | 123Theyneed asafe, accessible,and affordablemethod todeposit or cashchecks,receivedeposits,pay bills, and accrue savings.Theymayalsoneedaccesstocredit totidethem overuntil theirnext cashinfusionarrives.Theymay be comingup short on paying their rent, their mortgage, anemergencymedical expense,or an unexpected car repair.Theymay want accessto a savingsvehiclethat, down the road, will helpthem pay for theseitemsand for educationor further training, or start abusiness.And many want some form of non-cash payment method to conducttransactionsthat are difficult or impossibleto conduct using cash.Productsand servicesthat servethesecore financial needsare notconsistentlyavailableat competitiveratesto workingAmericans.Thosewith lowand moderate incomesmay have insufficient income orassetsto meet the relativelyhigh requirementsneeded to establishacredit history.Others may haveproblemsin their credit history that inhibit their abilitytoborrow on competitiveterms.Many workerssimplymay not havebanks in their communities, or maynothaveaccesstobanksthat actuallycompetewitheachotherin termsofpricing or customer service.There is a growingtrend towardgreater concentration of financial assetsat fewerbanks.In my mind, this raisesdoubtsabout whetherbankingserviceswill continueto be providedat competitive ratesto all incomelevelsof customerswherevertheymay live.According to a study of bank branch locationspublished by NCRC in2007, there are more persons per branch in low- and moderate-incomecensustractsthanin moderate- and upper-incomecensustracts.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 124. P a g e | 124While branch-buildinghasbeen on the rise, indicationsare that theincreasein the number of bank officeshasnot occurred evenlyacrossneighborhoodsof varying income.In fact, a significant number of low- and moderate-incomefamilieshavebecome--orare at risk of becoming--financiallymarginalized.Thepercentageof families earning$15,000per year or lesswhoreportedthat theyhaveno bank account increased between2007and 2009suchthat more than one in four familieswasunbanked.Familiesslightlyfurther up the income distribution, earningbetween$25,000and $30,000per year, are alsofinanciallymarginalized:13percentreport beingunbanked and almost 24 percent report being underbanked.This combination of economic insecurityand financial marginalizationhasincentivizedmore low- and moderate-incomefamiliestoseekoutalternativefinancialserviceproviderstomeet their financial needs.Someof the providersthey find, such ascheck-cashersand outfitsfurnishingadvance loanson paychecks, can lead unwaryworkersintovery deep financial holes.In light of thesechallenges,I ask questionsthat have been asked before:What can economic policy do to reduceunemployment, economicmarginalization, and thefinancial vulnerabilityof millionsoflower-incomeworkingAmericans?There is no simplecure totheseconditions,but government policymakersneedtofocusseriouslyontheproblems, not simplybecauseof notionsoffairnessand justice, but becausethe economysability toproduce a stablequalityof livingfor millionsof people isat stake.Our country cannot achieveprosperitywithout addressingthepowerfulundertowcreatedbyflatwagesandtenuousfinancialsecurityforsomanymillionsofAmericans.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 125. P a g e | 125TheRole of Monetary PolicySohow can the Federal Reserve addressthesechallenges?Let me startwith monetary policy.Congresshasdirectedthe Federal Reserve to usemonetary policy topromotemaximum employment and pricestability.TheFederal Reserves primary monetary policy tool is itsabilitytoinfluencethe level of interestrates.Federal Reserve policymakers pushed short-term interestratesdownnearlyto zero asthefinancial crisisspread and the recessionworsenedin2007and 2008.By late 2008, it wasclearthat still more policy stimuluswasnecessarytoturn the recessionaround.TheFederal Reserve could not pushshort-term interestratesdownfurther, but it could--anddid--usetheunconventional policytoolstobring longer-term interest ratessuchasmortgageratesdown further.Fed policymakers intend to keep interestrateslowfor a considerabletimetopromoteastrongereconomicrecovery, asubstantialimprovementin labor market conditions,and greater progresstowardmaximumemployment in a context of price stability.Both anecdotal evidence and a wide range of economic indicators showthat these attempts are working to strengthen the recovery and that thelabormarket is improving.Nonetheless,and again, themillionsof peoplewhowouldprefer toworkfull time can find onlypart-timework.While the Federal Reserves monetary policy tools can be effectiveinpromotingstronger economicrecovery and job gains, theyhavelittleeffect on thetypes of jobsthat arecreated, particularlyover thelongerterm.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 126. P a g e | 126So, whilemonetary policy can help, it doesnot addressall of thechallengesthat low- and moderate-income workersare confronting.That said, theexistingmandate regardingmaximum employmentrequirespolicymakers on theFederal Open Market Committee(FOMC)tounderstand labor market dynamics, whichobviouslymust includeanunderstandingof low- and moderate-incomeworkers.Regulatory and Supervisory TouchpointsIn addition tomonetary policy, theFederal Reserves regulatoryandsupervisorypolicieshave the potential to addresssome of thechallengesfaced by low-incomecommunitiesand consumers.TheFederal Reserve is required by law--byvirtueof the Bank HoldingCompanyAct--to approve variousapplications,such asmergers,acquisitions,and proposalstoconduct new activities.This statutory review requires an explicit consideration of public benefitsand the effects of the proposed transaction on the convenience and needsof the communitiestobe served.This assessment is, asmany of you know, a critical opportunityforcommunityinput and analysis.Indeed, aspeoplewiththeir feet firmly plantedon the ground incommunities acrossAmerica, you probablyremember JamesQ. Wilsonstheoryof "broken windows" in communitypolicing:Movein quicklywhenvandalism and disorder first start toappear--even if it isonlyabroken window or graffiti on a stop sign--orelseface losingthe wholeneighborhood asdisrespect for thelaw rapidlyspreads.The"broken windows" strategyiseverybit ascompellingwhenit comestoaddressingthe disorder that comesfrom sloppypracticesby financialinstitutions.If banking practicesare underminingtheabilityof the economicallymarginalizedtobecomefinanciallyincluded and toaccessthecredit theyInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 127. P a g e | 127need in an affordableway, regulatorsmust move in quickly tostop thedisorder and repair the brokenwindowsof financial intermediation.Bank supervisorsshould be prepared to respond totheearliestsignsoftroubleby requiringoperationallychallengedbanksto addressproblemsquicklyand completely.If correctionsare made, thenthe regulatorscan move on. If not, then theregulatorsneed to escalateenforcement.Swift and decisivecorrectiveaction isnot alwayshow federal bankregulatorshave respondedtobroken windowsin thepast.In my view, for example, regulators responsetothe rampant,long-runningproblemsin loan-servicingpracticesat largefinancialinstitutionswasnot swift and wasnot decisive.Thepoint is that federal regulatorsmust listencarefullyto communityinput and analysis in order tokeep track of wherewindowsare breakingand howtheyare beingbroken.And theymust carefullystudy and take responsibilityfor analyzingcommentsprovided by organizationssuch asthe NCRC whenconsideringthepublic benefit of an application.Both theexam processand theapplicationprocessmust bestrengthenedaskey venuesfor federal regulatorsto incorporatethe voicesof affectedcommunities;Id liketo see usreviseand strengthenthese processestoincludethe analysis in these voices.The Role of BusinessNow letsshift back to the privatesector.In particular,tothequestion of whetherbusinessescan becompetitiveinthecurrent marketplaceand still providea pathwayout of poverty for theiremployees.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 128. P a g e | 128TheHitachi Foundation recentlyset out toanswerthisquestion byidentifying firmsthat providedupward job mobilityfor their employees.Theyfound that theidentifiedemployersshowednoteworthyconsistencyin how theytrain and educateworkers,develop career ladders,and craftsupportivehuman resourcespoliciesand other motivators.Theyalsofound some evidenceto indicate that the companiesbenefitedfrom strategic and financial returnswhiletheir lower-wageworkersalsobenefitedfrom increasedearningsand careeradvancement."Anchor institutions," suchashospitalsand universities,which arefirmlyrootedin their locales,canalsobepowerfulenginesforjobcreationin their communities.Anchorsmay includecultural institutions,health carefacilities,community foundations, faith-basedinstitutions,publicutilities, and municipal governments.Theseinstitutionshavethepotential togeneratelocaljobsthroughtargeted procurement purchasesof food, energy, supplies,and servicesfrom localbusinesses.This can be a substantial, positive development in thelocaleconomy.TheEvergreen Cooperative in Cleveland, Ohio, is an exampleof anetworkof worker-ownedbusinesses,launchedin low-incomeneighborhoods,tosupport localanchor institutions.Thecooperativeswereinitiallyestablishedto provide servicesto localhospitalsanduniversitiesthat hadagreedtomaketheir purchaseslocally.This model is effectivebecauseit capitalizeson localproduction, andbecauseit forgesa local businessdevelopment strategythat effectivelymeetsmany of theanchor institutions own needs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 129. P a g e | 129Role for Community-Based OrganizationsClearly, the challengesfacinglow-wageworkersaremulti-facetedandcomplex.In additiontothechallengesthat workforcedevelopment andcommunityorganizationshaveaddressed for years, structural changesin theeconomyheightenobstacles,make thestakeshigher if wefail to conquerthem, and, therefore, require new levelsof opennessand creativitybypolicymakers.Youaretheidealaudienceforthismessagebecauseyou knowhowtolinkfederal policymaking witheconomic empowerment.NCRC hasgrowntoan association of more than 600community-basedorganizationsthat promoteaccesstobasic bankingservicestocreateandsustainaffordablehousing, jobs,and vibrant communitiesfor Americasworkingfamilies.Community-based organizationslike many of thoserepresentedin thisroom will need toconsider how to workwith low-wageworkersto bridgeinformation gapsby expanding workersnetworks, providinglegitimateinformation, and identifying new job opportunities.But finally, thepressure that community-based organizationsexert onfinancial regulatorsmust continue.Accesstocredit is an enduringchallenge, and the obstaclesandproblems--all the"broken windows" you seeon the block--mustbereported and explained.Theymust be understood by the federal policymakers whoareresponsiblefor enforcingour countrys lawsand regulationsin the realmof accessto credit;by thefederal policymakers whoengagein theconductof monetary policy; and by thefederal policymakerswhoseactionscontributetotheshapingof thelandscapefor financial servicesin thiscountry.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 130. P a g e | 130Your voices--whether you arereporting, documenting, monitoring, analyzing, proposing, or evenprotesting--mustbe heard.Your voicesare crucial toalertingpolicymakers tothe significantdevelopmentsand emerging trendsin thenations communitiesthat mustbeconfronted--andconfronted in aswift and decisiveway--if weare tomake prosperitya national agenda that toucheseveryAmerican.Thank you.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 131. P a g e | 131Islamic capital and money marketsWelcomingremarksby Mr Peter Pang, DeputyChiefExecutive, Hong Kong MonetaryAuthority, at theworkshopon ―Islamic capital and moneymarkets‖,Hong KongDistinguishedguests,ladies andgentlemen,1.It is my great pleasure towelcomeyou to thisIslamic financeworkshop.We are particularlygrateful toMr. Mohd. Radzuan, Mr.Azidy and Mr.Azahari, the expertsfrom Malaysia, whohave flownall thewayto HongKong toshare withus their knowledgeon Islamiccapital and moneymarketsand their valuableexperiencein developing these criticalcomponentsof Islamicfinance.I wouldalsolike tothank Mr. Najmuddin of Bank Negara Malaysiaforbringing the Malaysian delegation here.Twofast developing asset classesin the global markets2. This workshopcomesat a very opportunetime asHong Kong islookingto develop Islamic financeasa waytodiversify our financialplatform and further enhanceour capabilityasan international financialcentre.In my view, tobe a truly international financial centre, one needstodevelop a conduciveplatform for the twofast developing asset classesintheglobal markets– Islamic financial productsand RMB-denominatedinvestment assets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 132. P a g e | 1323.Thedevelopment of Islamicfinancialmarketshasbeenphenomenalinthepast twodecades.Thesizeof global Islamic financeassetsmade a quantum leap from onlyUS$150billion in themid-1990sto US$1.3trillion at the end of 2011.Although the investment climate hasbeen clouded by the USsub-primecrisisand the European sovereign debt problems in recent years, theglobal sukuk market is poweringahead.Indeed, last year was the best year for the global sukuk market onrecord, with sukuk issuances growing by more than 60% year-on-year, taking the outstanding sukuk amount to a new height of US$240billion.According to some market estimates,the size of theglobal Islamicfinanceindustry hasthepotential toincreasefive-fold from the currentlevel tosome US$6.5 trillion by 2020.34.Thedevelopment of RMB-denominatedinvestment productsisequallyimpressive.In a short space of 6 years, the size of the RMB dim sum bond market inHong Kong hasgrown from a modest amount of 10billion yuan in 2007 to237billionyuan at the end of 2012.OffshoreRMB financial productshave alsobecome morediversified, expanding from onlyRMB bondsto RMB equities, RMBinvestment funds, RMB A-share exchange-tradedfunds(ETFs) aswell asRMB insuranceproducts.Thegrowth momentum of the offshore RMB financial marketsisexpectedto pick up further, asmore and more financingand investmentactivitiescan now be conducted in RMB, especiallyfollowingtheintroduction by theMainlandauthoritiesof the arrangementsfor inwardand outwarddirectinvestmentsin RMB and theRMB Qualified Foreign InstitutionalInvestors(i.e. RQFII) scheme.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 133. P a g e | 1335.Hong Kong is fortunatetohave made a good start in offshore RMBbusiness.Sincethe introductionof offshore RMB businessin 2004, wehavedeveloped a widevariety of RMB denominatedfinancial products.In particular, theoffshoreRMB bond market in Hong Kong is by far thelargest in theworld.We alsopossessthelargest RMB liquiditypool outsideof MainlandChina.As at the end of 2012, the aggregate amount of RMB customer depositsand certificatesof depositshasreacheda high of 720billionyuan.Notwithstandingthese, whenit comestoIslamic finance, Hong Kong isa relativenewcomerand wouldneed tocatchup in thisarea.Legislative exercise to promote the development of sukukmarket6.In developing Islamicfinance, weare takinga stepby stepapproach.As a first step, our current focusis toput in placethe supporting legalinfrastructure.Specifically, the HKSAR Government is set tochangethetax lawsinHong Kong tofacilitatethe development of the sukuk market.In termsofeconomicsubstance,sukuk arenodifferent from conventionalbonds.However,sinceIslamic lawprohibitsthepayment and receipt of interest,sukuk are often structured withthe useof special purpose vehiclesandmultipletransfersof underlying assets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 134. P a g e | 134This may result in additional tax liabilitiesand hence higher issuancecostsfor sukuk when compared withconventional bondsunder theexistingtax regime.7.It is thereforenecessarytorefine our tax lawstoprovidea taxframeworkfor sukuk that is comparable to the one applying toconventional bonds.But thisdoesnot mean that weare goingto confer special tax favoursontheIslamicfinancesector;rather, our aim is tolevel theplaying field sothat financial instrumentsof similar economic substancewill be givensimilar tax treatments.8.On this, I am very pleased to seethat an amendment bill hasbeenintroduced intotheLegislativeCouncil earlier thisyear.Thebill adoptsa prescriptiveand religion-neutralapproach, and coversfive of the most common types of sukuk globally.Productsthat can meet thekey featuresand qualifying conditionsspecified in thebill will be given tax treatmentssimilar tothosecurrentlyaffordedtoconventional bonds.This meansthat sukuk issuersand investorsalike will no longer besubjecttoadditional tax and stamp duty chargesover and above whattheywouldneed to pay for conventional bonds.So, passageof thebill will beaverypositivestepforwardin furtheringthedevelopment of Islamicfinancein Hong Kong.Synergy betweenHong Kong and Malaysia9.With the legal infrastructuretobe in place soon, the next importantstep will be todevelop the Islamicfinancial marketshere.We definitely have a lot to learnfrom Malaysia in respect of productdevelopment and market operation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 135. P a g e | 135As I seeit, Hong Kong and Malaysiaeach hasdifferent edgesin thefinancial servicesindustry, and thepotential synergy betweenthe twoplacesin developingtheIslamic financial marketsistremendous.10.Malaysiais undoubtedlyan important leadingcentre in theglobalIslamic financeindustry that hasaccumulatedvast experiencesandinvaluableexpertise over thepast three decades.It has developed a well-diversified Islamic financial market, offering a fullsuite of products covering sukuk, Islamic equities, Islamic funds, IslamicETFs, etc.Its sukuk market isby far thelargest in the world, accountingfor morethan 70% of global sukuk issuanceslast year.It hasalsoput in placewell-developedfinancial infrastructurewhichcanfacilitate localand overseasmarket players alike in conductingIslamicfinancial transactions.11.On theotherhand, Hong Kongasaninternationalfinancialcentrehasdeveloped a deep and highlyliquid capital market with a diversebaseofinvestorscoming from all around the world.Moreimportantly, withHong Kong‘sunique roleasa gatewaytoMainlandChina and a leadinghub for offshoreRMB business, HongKong can offer an ideal platform tolink Islamic and RMB financingtogetherbydevelopingfinancialproductsthat areShariah-compliantand, at the same time, denominated in RMB.ThroughHong Kong‘s platform, international investorsin theIslamicworldcan easilytap the appealing growthstoryof the Mainland.This is especiallygiventhe fact that many investorsare now activelylookingfor investment opportunitiesin Asia, particularlyMainlandChina, to diversify their investment portfolios.At the same time, Mainland issuerscan alsomake useof our platform toreach out to the increasinglywealthyinvestorbasein the Islamicworld.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 136. P a g e | 13612.Clearly, there is a strongfoundation for both sidestowork together tocomplement each other, grow the pie bigger and achievea win-winproposition in developing Islamic finance.For thisimportant reason, the HKMAenteredintoa Memorandum ofUnderstanding (MoU) with Bank Negara Malaysiain 2009tostrengthenmutual co-operationin the areaof Islamicfinance.We are very pleased to have worked closelywith Bank Negara Malaysia toput together and bring thisworkshop toHong Kong under the frameworkof the MoU.Buildinga deeptalent pool is crucial for further development of theIslamic financeindustry.Workshopsof this kind will undoubtedlyhelp topromote marketawarenessand knowledgeof Islamic finance, while alsoprovidinganexcellent forum for market playersto exchangeviewsand businesscontacts.We will continue to workcloselywiththeTreasury MarketsAssociationto raisethe expertise in Islamic financein Hong Kong.13.Apart from ourcontinuouseffortstoput inplaceaconduciveplatform, it is alsocrucial for market playerstomaximize their readinessto grasp theopportunitiesbrought bythedevelopment of Islamicfinancein Hong Kong.After all, market players will be the oneswhodrive the growthof themarket ultimately.So, I highly encourageyou all to gear up for the new opportunities aheadof us.On this,I am pleasedtonotethat somefinancialinstitutionshavealreadystartedtoget readyby mobilizingtheir staff in the MiddleEast orMalaysiato Hong Kong, aswell asprovidingtrainingto their staff inHong Kong.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 137. P a g e | 137Thefact that you arehere today isalsoa good indicationthat you arekeentoprepare yourselves.I hope you wouldtake the most out of this workshop.14.Thank you.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 138. P a g e | 138Interview with Gabriel Bernardino,Chairman of EIOPA, conductedbyNatašaGajski Kovačić, Svijet osiguranja(Croatia)In thebest scenario, thebeginningof SolvencyIIimplementation should be either in 2015 or2016,asMr. Bernardino hasrecentlysaid.He addedthat thedate dependson thelength ofthelegal and political process.Previouslyit wasannounced that fullimplementation of SolvencyII will happen at thebeginningof 2014?What is thereasonof thedelay of SolvencyII?First of all let me give you an overview of theEUlegalprocessthat precedestheimplementationofSolvencyII.We have a Level 1 text – the Solvency IIDirective, which was adopted in 2009, it is aprinciplesbased document.TheLevel 2text will contain detailed rulesof theSolvencyII regime.This document iscalledImplementingMeasuresandwill be prepared by theEuropeanCommission.Finallywehave Level 3 & TechnicalStandards, whichconcernspurelytechnicalmattersand require supervisoryexpertiseratherthanstrategicInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 139. P a g e | 139decisionsor policy choices.TheTechnical Standardsare tobe preparedby EIOPAand then adoptedbytheEuropean Commission.TheEU trilogueparties (theEuropean Commission, the EuropeanParliament and theCouncil of the EU) still need to decidethe scope andthelegal basisfor theTechnicalStandardsthat EIOPAhastodraft.This decision will be introducedin the socalledOmnibusII Directive.Onlyafter the finalizationof the OmnibusII Directive, the Commissionwill come up withtheImplementingMeasuresand EIOPA– withTechnical Standards.Last year the trilogueparties agreedthat a final decision on theOmnibusII Directivecan be taken onlyafter EIOPAconductstheLong TermGuaranteeAssessment (LTGA).EIOPA supportsthisapproach becausebeforemoving forward withSolvencyII weindeed need toagree on a sound and prudent regimefor the valuation of long term guarantees.On 28 January 2013welaunchedthisstudy and hope to present itsfindingsand our conclusionsin June 2013.Afterwardsweexpect that theOmnibusII Directivewill be finalized.Someinsurance companiescomplainthat theSolvencyII scheme favorsbiggerinsurerswhohavetheresourcestoeasilyadjust tothenewregime.Theycomplainthat thecost of preparation aretoobig already.How doyou comment that?No, SolvencyII is a neutral framework.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 140. P a g e | 140Already the level 1text statesthat the Directiveshould not betooburdensome for small and medium sizedinsurance companies.And oneof themeanstoachievethisobjectiveistheproper applicationoftheproportionalityprinciple.In ourworkrelatedtothedraftingof TechnicalStandards,wealwaystakeintoaccount proportionalityaspectsthat are relatedtothesize, complexityor risk profile of insurance companies.As regardsthe costsof preparation, let‘saskourselves:dowewant tokeepthe existingSolvencyI regime?No, becauseSolvencyI is not risksensitive, it containsvery fewqualitativerequirementsregardingriskmanagement and governanceanddoesnot providesupervisorswith adequate information on theundertaking‘srisks.Comparing to thecurrent regime, SolvencyII has a clear benefit – it is arisk& basedregime, it helpscompanies tobetterunderstandandmanagetheir risks.SolvencyII is a huge step in termsof transparencyasit will bringharmonizedreportingframework and reliabledisclosure.I am convinced that SolvencyII will provide an appropriatebasisforincreasedpolicyholder protection and will contribute toreinforcingfinancial stabilityin general.Thecostsof preparationwillbehigher forthecompanies thatwant touseinternalmodels for thecalculationsof their capital requirement.That will not be thecasefor thevast majorityof companiesin theEU.Doyou think that Europeaninsurersareprepared forthetransition toSolvencyII?Wheredoyou expect thebiggest problemsto occur?International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 141. P a g e | 141We are confident about thepreparation level of insuranceundertakings.At the same time wewant tousethedelayin SolvencyII implementationfor tackling possibleproblemsin a consistent and convergent wayandhereI wouldlike tomentionEIOPAOpiniononinterimmeasuresrelatedtoSolvencyII, whichweissuedin December last year.In this document weindicatedthat weseea great necessityin suchinterim measuresbecausethere is a riskthat due tothe delayof a finalagreement on SolvencyII, a number of European supervisorsmaydecidetodevelop national solutionsin order toensure sound risksensitivesupervision.Soinsteadof reaching consistent and convergent supervisionin theEU, different national solutionsmay emergetothedetriment of a goodfunctioninginternalmarket.EIOPA will develop Guidelinesthat are addressed to the nationalcompetent authoritiesand that are related to such stableelementsofSolvencyII that areunlikely tobeinfluencedby thefinalized OmnibusIIDirective.TheseGuidelineswill cover the system of governance, includingriskmanagement, ORSA, pre applicationof internal models, and reporting tosupervisors.I must saythat our initiativetodevelop the Guidelineswasapproved byEIOPA Board of Supervisors(BoS), whichconsistsof all thenationalsupervisoryauthoritiesof theEuropeanEconomicArea andalsoreceiveda very positivefeedback from the European Commission.In April wehope tohave the firstdraft Guidelinesready.Afterwardswewill put them out for a public consultation.After thepublic consultationtheGuidelineswill be finalizedand will betabledto EIOPABoard of Supervisorsin Autumn 2013.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 142. P a g e | 142As of 2014theGuidelinesare supposed tostart tobeimplemented, however weare fullyawarethat it will not be possibleforthesupervisorstocomplywitheverything asof 1January 2014.Sohereagain wetakeintoaccount theproportionalityprinciple:whilepreparingtheGuidelinesweare considering their gradualimplementation.TheGuidelinesare focused on thepreparation for Solvency II.With this step wewill ensure a smoother transition to the newregime, both by undertakingsand supervisors.Croatia is about tojoin theEU thusJuly– what big changescan weexpect in insuranceworld?As all the other EU members,Croatia will have to comply withthe EUlegislationand, thus, for examplewith EIOPA Guidelinesrelatedtotheinterim measuresfor theSolvencyII implementation or withtheGuidelineson complaintshandlingby insuranceundertakingsthat weissuedin 2012.I am confident that themembership in theEU will open to Croatianinsurancemarket thepossibilitiesfor future growth, while theEuropeanSystem of FinancialSupervisionwillcontributetopreservingthefinancialstability and enhancingconsumer protection in theCroatian insurancemarket.Are you familiar withtheworkof insurersin Croatia?How doyou cooperate withour national supervisoryauthorityHanfa?Yes,theinformationexchangeamongcompetent supervisorsandEIOPAis oneof thepurposesfor whichtheEuropean System of FinancialSupervision(ESFS) wascreated.As regardsthe cooperation, EIOPAstartedto prepare the groundInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 143. P a g e | 143for welcomingthe Croatian Financial ServicesSupervisoryAgency(HANFA) toour Board of Supervisorsalready in 2011.In 2012HANFA became an observer of theBoS and started thepreparatorywork in order to complywithall the necessaryrequirements.Themembersof theHANFA Board and its staff members alreadyactivelyparticipatein EIOPAactivitiessuch asthe meetingsof EIOPABoard of Supervisors, variouscommitteesand workinggroupsandEIOPA trainingsand seminars.Soon the HANFA will become a votingmember of EIOPABoard ofSupervisors.Thetasksof our BoSare wideranging.TheBoS isthe main decision making body of EIOPA, it adoptsall theopinions,recommendationsand decisionsissued by our Authority;approvesour budget, annual and multi annual workprogrammesandannual reports.SoNational SupervisoryAuthorities closely participatein theworkofEIOPA and are awareof all our initiativesand achievements.Is theresomekind of special treatment towardsnewmembersinEIOPA, dotheyhave some period of adjustment?No, the preparation startedwell in advance and no special transitionperiod for theCFSSAwill be needed.When Croatia becomespart of theEU, what will your authoritiesininsurancepoliticsinCroatia be?EIOPA is responsibleto develop technical standards,that will becomemandatoryand guidelinesthat HANFA will need to complyor explain.Sothe regulatoryframeworkwill be influencedby EIOPA.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 144. P a g e | 144Furthermore,EIOPAhasthepower to investigatepossiblebreachesoftheEU Legislationin EIOPA‘s scope of activities.If EIOPAmakesa conclusion that the Breach of theEU indeed tookplace,theAuthority will issuea recommendationaddressedtotherespectivenational supervisor.In some limitedcasesEIOPAaction can be appliedtotheindividualcompanies.Butthismight happenonlyincasethenationalauthoritydoesnot complywith actionsrecommended by EIOPAor the European Commission.In thiscasetheChairmanofEIOPAhasaright toproposetotheBoardofSupervisorsan individual decision addressed to a financial institutioninwhichrequiringthenecessaryactiontocomplywithitsobligationsundertheUnion law.Such a decisionmay require the cessation of any practice.Many insurersoperate ontheEuropeanand global level sotheyaresometimesconfronted withdifferent supervisory regimesorpractices;howcan that beresolved?Thefirst step is tobuild up a harmonized prudential framework in theEU.That is thepurposeof the Solvency II.Secondlyweneed toassure that day to day supervisionof financialinstitutionsis done withina consistent framework.EIOPA will develop a SupervisoryHandbook that wouldwork asaguidebook for supervisionin SolvencyII, settingout good practicesin alltherelevant areasof supervision.This handbook will foster theimplementationof a more consistentframeworkfor the conduct of supervision.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 145. P a g e | 145Furthermore,there isa strong role for the collegesof supervisors.In the end of 2012,91insurancegroupswith cross&borderactivitywereidentifiedin the European EconomicArea (EEA).Collegesrepresent a very important tool of group supervision becausetheyprovide necessaryplatform for the gatheringand dissemination ofinformation especiallyin caseof concernsor emergencysituationsthatoccur.Collegeshelp todevelop a common understandingof the risk profile ofthegroups, toachievecoordinationof supervisory review and riskassessment at a group level aswell asto establishsupervisoryplans forthemitigationof risks at a Group level.TheRegulation establishing EIOPAempoweredour Authority toparticipateinthecollegeswithaviewtostreamliningthefunctioningandtheinformation exchangewithincolleges.Thestrategic goal of our collegework is toset up consistent, coherentand effectiveEEA-widesupervision of cross-borderinsurancegroupsforthebenefit of both group and solosupervision.Every year weset a yearly actionplan for collegesand alsopublish ourannual reportson thefunctioning of colleges.In the courseof 2012, EIOPAattendedalmost all collegemeetingsfor 75insurancegroups.We contributed to the workof collegesby developing a catalogueforregular information exchangeand by providingspecific presentationsincollegesabout EIOPA‘s regular assessment of risksfacedby the EEAinsuranceindustry.How will SolvencyII applyto pension funds?What can pension fundsexpect out of SolvencyII?International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 146. P a g e | 146Right now & nothing. Thereview of theIORP Directive is a differentprocessand is in a different stage.We believethat occupational pension fundsalsoneed to have a muchmore risk based regulation.As part of the process to advise the European Commission on the reviewof the IORP Directive,, we conducted the first Quantitative Impact Studyfor occupational pensions.But sufficient time needstobe taken toget the right approach.At the moment wehavethree main conclusions.First, is that the requirementsand principlesthat wehavein Solvency IIon thegovernancesideshould alsobe applied tooccupational pensionfunds.Theprinciples,especiallythe requirementsabout riskmanagement, arevery much relevant for occupational pension funds,too.But of coursetheyshould be applied using a proportionalityprinciple.Thesecond conclusionis about transparency.SolvencyII improvesinformation not onlyfor supervisorsbut alsofor alltheexternals parties.We recommended theCommission for examplethat in caseof definedcontribution schemesa key information document shouldbegiventothepotential and alreadyexistingmembersof thepension plan.This document should outlinecosts,charges,commissionsand risks.Thethird conclusion is that alsoin theoccupational pension fundsyoushould havean economicvaluation of assetsand liabilities.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 147. P a g e | 147Weneedtoprevent thesituationwhenaproblem isfaced, but it istoolatetosolve it.At the same time I usedtorepeat that weare very much against acopy&paste exercisefrom SolvencyII to IORP Directive.We dorealize thedifferencesbetweeninsurancecompaniesand IORPsandthesedifferencesshould necessarilybe takenintoaccount.Your opinionontherolethat insurance companiesdealing withlifeinsurancehave in providingforwellbeingof elderlypeople?Insurancecompaniescan and do play a particularlyrelevant roleinprioritizingsecurityand long term savings.Lifeinsurersare experts in risk management, theyareused todeal withdemographic, biometricand investment risks.Theyare very well placed tooffer good solutionsfor retirement savings.Due to thisimportant role, regulationand supervision aremuch relevantto ensurethat insuranceundertakingshave robust solvencyand that theyprovidepolicyholderswithtransparent information about theproductsandtheir risks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 148. P a g e | 148Interview with CarlosMontalvo, Executive Director of EIOPAConducted by Victoria Tozer Pennington, theRiskUniverse (the UnitedKingdom)Therecentlyannounced further delay toOmnibusII havebeen greetedwith dismayby firmseager toseethefinal rulestoSolvencyII.How doyou account forthedelays and what is your advice tofirms?CarlosMontalvoRebuelta:Acredibletimelinefor the implementationofSolvencyII is a must have.Regardlessof theseuncertainties, there isa strongneed for risk-basedsupervision.This need hasbeen onlyreinforced by the lessonstaken from the currentcrisis.In order words,the ideaand theprinciplesof SolvencyII are more actualand valid than ever.Our advicetothe firms is not towait until the politicaldiscussionsareover, but touse the timein order tobetter prepare for Solvency IIinternally: tomakesure that the Boards of firmskeep consideringSolvencyII a priority; and totake advantage of theinformation that theyare already collecting, aspart of such exercise, in termsof betterunderstandingtheriskstheyface, and how to addressthem.In the absenceof a final agreement on SolvencyII in the scheduledtimeline, EIOPAhasexpressedan opinionin order toensureandenhancesound risk based supervision and preparethe industry for thefinal SolvencyII Directive.Instead of reaching consistent and convergent supervisionin theEU, different national solutionsmay emerge tothedetriment of agoodfunctioninginternalmarket.In order toavoid thisscenario EIOPAdecidedtodevelop guidelinesandInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 149. P a g e | 149totake a lead in thepreparatoryprocessaimed at a consistent andconvergent approach withrespect tothepreparation of SolvencyII.EIOPA Guidelineswill allowsupervisorsand undertakingstobe betterpreparedfor the applicationof the new regulatory framework.Tocut alongstoryshort,theguidelinesareanexcellent wayforall partiesto use theextra timeof thedelayasa wayto be better preparedforimplementation.How have theindividual Member Statesof theEuropean Unionprogressed withtheir adoption of SolvencyII andareyou confident allwill beabletoimplement thefinal rulesontime?Montalvo:The Member Statescan and must successfullyimplementSolvencyII and theyhave alreadystartedto make necessarypreparationsfor it.Some stepsin the right direction have already been taken, there is a goodwork already in progress, but there are still challenges with regards to thewholeimplementation processboth for companies and supervisors.Ignoring them wouldbe irresponsible.In your opinionhowwill SolvencyII serve to reducecost, complexityand riskfor insurancefirms?Montalvo:First of all, it is not possibleto eliminateor even reduce risks.Theinsurancebusinessis a risk-relatedbusinessthat by itsnature isbased on taking, managingrisksand making profit out of thoserisks.TheobjectiveofSolvencyII isnot toreducerisks, but toallowcompaniestoproperlyunderstand, priceand managetheriskstheyface.SolvencyII will enhancebetter understandingof the risks, and suchunderstandingwill help companiesto better managetherisksandtherefore, to make better decisions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 150. P a g e | 150This will createan immediatebenefit totheundertakings.As regardscomplexity, complexityis particularlychallengingfor smallandmedium-sizedenterprises.SolvencyII is more complex than it wasoriginallyforeseen.Beyond theprincipleof proportionalityand itsapplication, wehavecurrentlyon our tablesuch initiativesaslookingfor the calculationof theSolvencycapital requirements(SCR) and developing an IT tool tofacilitate it, or a toolkit toconvert data required intoXBRL.We acknowledgetheproblem and together with industrywewant to findwaystotackle theexcessof complexityof the framework, becausecomplexityshould never be an obstacletotheclear benefitsof SolvencyII.Whyare insurershaving such difficultycommunicating theimpact ofSolvencyII to thebusiness?Montalvo:SolvencyII providesfirmswithalot of relevant informationforthem torun their business, and to dosoin a more sound manner.But thisalsoimplieschangesand it is always challengingto explain thebenefitsof change, tosend the messagethat wemay havetochangeourapproachto certain risks, products… that are embedded in the normalfunctioningof thecompany, simply becausetheycan threatenthe firmitself.Compliancewiththerulebook iscertainlynot thedriver towardsSolvencyII, asit only bringsthe downsideof it, costsand complexity, but not theupside,namely qualityinformation, understanding of risks and thesubsequent opportunities.Therefore, a changeof approach, in termsof both action andcommunication, should takeplace todeal withthedescribedsituation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 151. P a g e | 151Therearesignificant data management issuesconnected with SolvencyII;doyou recognise thechallengesfirmsface and what advice doyouhavein thisarea?Montalvo:We are awareof the challengesoriginatedby reportingrequirementsand weare workingin order tominimize thisburden forcompanies.Thedata challengescome from twosources: the valuationof the activityusinga harmonised market consistent approachand the detailedrequirementsfor public disclosureand supervisory reporting.Themarket consistent valuation is a high_level principle, which wassetearlyon in the process(Article 75of theSolvencyII Directive).EIOPA recognisedfrom thestart thedatachallengethat undertakingwillfaceand hasexpended maximum effort toallowundertakingsto startpreparingthemselves,by consultingon the detailed expectationsregardingpublic disclosureand supervisoryreporting.Theimplied advice remainsthesame: continue (or urgentlystart for thelate comers) toprepare your internal systemstobe readyon time.EIOPA hasalsorecentlylaunched an IT development project (Tool forUndertaking) to make sure that all undertakingswill have accesstoatleast one costlesspossibility tocreate theSolvencyII reportingsubmissionsexpected by supervisors.The ORSA[Own Risk and Solvency Assessment] remains a challenge formany insurers, which has not been helped by a lack of detailed guidancefromtheregulators.Given howmuchfirmsarestrugglingwiththis,doyou expect to offermoreguidanceoncethefinal rulesarepublished?Ifso,whenand on whichareas?Montalvo:The ORSAprocessmust be owned bythe company.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 152. P a g e | 152We indicatethe aim of ORSAbut cannot providevery detailed guidancebecausewedon‘t want tointervenein the management processesofcompanies and totell them how exactlytheyshould conduct theORSA.At the same time weunderstand theconcernsof industry and preciselybecauseof this, wealready conducted public consultation on ourpreliminaryviewson the ORSA.And this isnot theend of our workon ORSA, but a link tothe workweare doing in terms of supervisoryreview processand other areas.We plan to continueinvolving the industryon how to enhanceunderstandingand howto makethe ORSAanoperativetoolkit for thecompanies, a toolkit that wouldallow them to understand their solvencyposition, theirriskchallengesandthecontinuityoftheirbusiness,beyonda one year time horizon.In termsofsupervision, theORSAshouldbebrought toaqualitativelevelandthat is what EIOPAisalsoworkingon.Afinal point I think appropriateto raiseon ORSAis itsuseasa waytoimposeadd-onsbysupervisors.If wewoulddoso, it wouldbe a one and done exercise, wewouldneverrealisticallybe able topretend that undertakingswould perform, for theirown internal purposes,a seriousORSAexercise,but a complianceboxtickingone.Arecent survey showedthat althoughfirms (in theUK specifically) arewellontheir well to implementingtheir internal models, sourcessaythat thebigger issueof passing theusetest could beaproblem.Doyou have anyadvice on preparingfor theusetest?Montalvo:Internalmodelsgobeyond asimpletoolkit to calculate capitalrequirementsbecausetheyare a fundamental management toolkit.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 153. P a g e | 153On thebasisof this, sinceday one, theusetest became a cornerstoneofthewholeprocess.As part of the usetest, undertakingsneed to demonstrate that the internalmodel is widely used in terms of decision making and plays an importantrole in their system of governance, and that the model at all times reflectstheriskprofile of theundertaking.EIOPA is developingguidelinesthat will clarifytherequirementsrelatedtothe usetest.Theseguidelineshave alreadybeen pre-consulted withselectedstakeholders.One of the most crucial points is that national supervisory authorities(NSAs) should asses individually the compliance with the use test foreach undertakingindividuallyaccordingto the requirements.Although there areminimum requirementsfor theusetest, there is nodetailed and completelist of usesthat theundertakingshavetoabidewith.EIOPA recognisesthat theusesof the internal model will vary fromundertakingtoundertaking.NSAswill assesscompliancewithrequirementsbasedonproportionality.Someusesmay not be materiallyimportant tothe undertakinggiven thenature of their business.DoesEIOPAhave anyinformation onthepreferred blendofscenariosand lossdata from amodellingperspective?Montalvo:Internalmodelsbydefinition are tailored tothespecificneedsof individual companies.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 154. P a g e | 154On that basisEIOPAcannot have anyconcretepreferred approach whenit comestoblend of scenarios and lossdata and in general to internalmodelsastheyare specificto companies.It isuptotheundertakingtojustifyitsownapproachandmethodologytothe supervisoryauthority aspart of the approval processof the useof aninternalmodel for thecalculation of thesolvencycapital requirement.This justification includesdemonstrating both that the approach isadequatetakingintoaccount thespecific risk profile of theundertaking, and that the internal models requirementsrelatedtotestand standardsare fulfilled.Froman operational risk lossdata point of view, firms arecopingwithadearth of data and scaling issuesusingexternal lossdata.Has EIOPAdone anywork on this area or can you offer some advice tofirms on the issue of the preferred use of internal and external lossdata, sourcesof lossdata, and scalingproblems?Montalvo:EIOPAor more precisely, itspredecessorCEIOPShasperformed several studiesin order tocalibratetheOperational RiskCapital Charge.Thestudies werebased on different sample sizes(number and size ofundertakings) in different Member States.Thefinal calibrationwasbasedon the analysisof larger sampleof data.It is important to note that the resultsare not far different from thoseproduced by other analyses.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 155. P a g e | 155Reviewing filings for smaller publiccompaniesTheseslideswerepresented at the ForumsonAuditing in the Small BusinessEnvironment hostedbythe PCAOB during2012.Participantswereauditorsfrom smallerregisteredpublic accounting firms.Theslidesare intendedtoprovidea samplingof issuesthat the Staff oftheDivision of CorporationFinance(―CF‖ or the ―Division‖) frequentlyencounterswhenreviewingfilingsforsmallerpublic companiesaswellasan overview of developmentswithin theDivision.Commentsissuedby the CF Staff may be different from thoseincludedhere based upon individual factsand circumstances.Theslidesare accompanied by detailed notesthat provide additionalcontext.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 156. P a g e | 156The Division assists the Securities and Exchange Commission (the―Commission‖) in executing its responsibility to oversee corporatedisclosuresto the investingpublic.Companiesare required to comply withregulationspertainingtodisclosurethat must be made when securitiesarepublicly sold and thenon a continuingand periodic basis.The Division Staff reviewsthe disclosure documents, provides companieswith assistance interpreting the Commissions rules, and recommends totheCommission new or revisedrulesfor adoption.TheDivision reviewsdocumentsthat publicly-held companiesarerequiredto file withthe Commission.Thesedocumentsdiscloseinformation about the companies financialcondition and businesspracticestohelpinvestorsmakeinvestmentdecisions.Throughthe Divisions review process, theStaff checkstosee ifpublicly-held companies are meeting their disclosurerequirementsin aneffort to improve thequalityof the disclosure.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 157. P a g e | 157The Division provides administrative interpretations of the Securities Actof 1933, the Securities Exchange Act of 1934, and the Trust Indenture Actof 1939,and related rulesand regulations.TheStaff providesinterpretativeguidancetoregistrants, prospectiveregistrants,and thepublic tohelp them comply withthe law and relatedregulations.For example, a company might askwhetherthe offering of a particularsecurity requires registrationwith theSEC.TheDivision may communicateitsguidanceorally, or the Division usesno-actionlettersand interpretiveletterstoprovideguidanceon theregulationsin a more formal manner.Additional information about the Commission‘simplementationof theDodd-Frank Wall Street Reform and Consumer ProtectionAct can befound at http:/ / www.sec.gov/ spotlight/ dodd-frank.shtml.The JumpstartOur BusinessStartups(JOBS) Act, whichwasenactedonApril5, 2012,made several significant changesto the securities laws.TitleI oftheJOBSAct, whichwaseffectiveimmediatelyuponenactment, createsa new category of companycalledan ―emerginggrowthInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 158. P a g e | 158company,‖ whichis definedasa companywithtotal annual grossrevenuesof lessthan $1billion during its most recentlycompleted fiscalyear and haseither(1)not yet had or(2)had after December 8, 2011, its first saleof common equitysecuritiespursuant to an effectiveregistration statement under the SecuritiesAct of1933.Acompany retainsitsstatusasan emerginggrowthcompanyuntil theearliest of thefollowing:•Thelast day of the fiscal year of theissuer during which it had totalannual grossrevenuesof $1billion or more (the Commissionis requiredtoindex this amount for inflation every five years);•Thedate it isdeemedto be a largeacceleratedfiler under Commissionrules (includinga public float of $700million or more);•Thedate on whichit hasissued more than $1billion in non-convertibledebt in thepreviousthree years; or•Thelast day of the fiscal year followingthe fifth anniversary of the firstregisteredsaleof common equitysecuritiesof the issuer.Accommodationsavailableto EGCsincludethe following, dependingontheir factsand circumstances:•Confidential submission•Financial reportingaccommodationsrelated to:•Number of years of financial statementspresented•MD&A•Selectedfinancial dataInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 159. P a g e | 159•Delayin adoption of new or revised accountingstandardsuntil thedatethat a non-issuer wouldbe required to comply withsuch standards•Exemption from auditor attestation on internal controlsover financialreporting (SOX 404(b))•OtherAdditional information about theJOBSAct can be found athttp:/ / www.sec.gov/ divisions/ corpfin/ cfjobsact.shtml.Additional information about the Commission Statement in Support ofConvergenceand GlobalAccounting Standardscan be found athttp:/ / www.sec.gov/ spotlight/ globalaccountingstandards.shtml.TheFinal Staff Report on theWork Plan for the ConsiderationofIncorporatingInternational Financial Reporting StandardsintotheFinancial ReportingSystem for U.S. Issuerscan be found athttp:/ / www.sec.gov/ spotlight/ globalaccountingstandards/ifrs-work-plan-final-report.pdf.TheDivision of CorporationFinanceFinancial Reporting Manual canbefound at:http:/ / www.sec.gov/ divisions/ corpfin/ cffinancialreportingmanual.shtml.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 160. P a g e | 160Thesummary of updatescan be found athttp:/ / www.sec.gov/ divisions/ corpfin/ cffinancialreportingmanual.pdf#changes.TheCorporationFinanceComplianceandDisclosureInterpretationscanbefound at http:/ / www.sec.gov/ divisions/ corpfin/ cfguidance.shtml. CFDisclosureGuidanceTopicscan be found athttp:/ / www.sec.gov/ divisions/ corpfin/ cfdisclosure.shtml#cfguidancetopics.SEC CF Staff Review of Common Financial ReportingIssuesFacingSmallerIssuers(Dec. 2011) slidescan be found athttp:/ / www.sec.gov/ news/ speech/ 2012/ spch020912co.pdf.As required by theSarbanes-OxleyAct of 2002, the Division undertakessome level of review of each reporting company at least onceevery threeyears and reviewsa significant number of companiesmore frequently.In addition, theDivisionselectivelyreviewstransactional filings–documentscompaniesfilewhentheyengagein publicofferings,businesscombination transactions,and proxysolicitations.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 161. P a g e | 161Topreservetheintegrity oftheselectivereviewprocess,theDivisiondoesnot publicly discloseits review criteria.This Division continuestoexceed theSarbanes-Oxleyreview mandate.CF Staff conductedover 5,000company reviewslast year.TheDivision‘scommentsare in response to a company‘s disclosureandotherpublic informationandarebasedontheCF Staff‘sunderstandingofthat company‘s factsand circumstances.Makesure you understand thetype of responseweare lookingfor.We usuallyissuethreetypes of comments:(1)request for additional information;(2) request for additional or clarifyingdisclosurein a future filings;or(3)request for amendment of the filingtorevisefinancial statementsordisclosure.If you donot understandwhichtypeofcomment weissued, giveusacall.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 162. P a g e | 162Acompany is generallyexpected torespond in writingto each commentin a letter from the CF Staff.Acompany‘s explanationor analysis of an issuewill often satisfactorilyresolve a comment.Depending onthe nature of the issue, theCF Staff‘sconcern, and thecompany‘sresponse, theCF Staff may issueadditional commentsfollowingits review of the company‘s responsetoits prior comments.This comment and responseprocesscontinuesuntil theCF Staff and thecompany resolvethecomments.In some cases,it may be necessarytoamend a previouslyfiled report orother filingsasthe result of comments.Oncewecompleteour review, wetypicallysend the companya letterindicatingwehave completed our review and have no further comments.TheSEC publiclyreleasescomment lettersand responselettersnoearlierthan 20businessdaysfollowingthecompletionof thereview of thefiling.In theevent that acompanydoesnot respond toa comment letteror staffinquiries,wewill considerwhat additional actionsmay be necessaryinorder to resolvethe issuesraised in our comment letter.If weareunabletosatisfactorilycommunicatewiththecompany, wemayeventuallyissuea ―review terminationletter‖ that includesa tendaydeadlinefor response.This letter explainsthat, in the event thecompany doesnot provide aresponse, the staff will considerhow to resolveany outstandingissues.Among other things,wemaydecidetoreleasepublicallycomment lettersand responselettersrelatingtodisclosure filesit hasreviewedto ensurethat wefulfill our investorprotectionresponsibilities.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 163. P a g e | 163All correspondencemust be filed on EDGAR.If you donot want certain partsof your response to be releasedpubliclyafter completion of the review process, consider discussingwith yourlegal counsel how torequest confidential treatment of a portion of yourresponseunder Rule83.Companiesare allowedtorequest that certain information receiveconfidential treatment, but you can not request that toomuch or all ofyour responsebe providedtousconfidentially.Check our website,whichincludeshelpful informationabout requestingconfidential treatment.It may beeasier to respond to commentsif you havedocumentedyoursignificant accountingdecisionsalongwiththeliteratureyou reliedupon,thealternativesconsidered, and the basisfor your conclusions,contemporaneouslywith the transaction.Goingthrough thisprocessat thetimeof thetransactionwill allowyou torespond more efficientlyand effectivelytoCF Staff comments.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 164. P a g e | 164Our comment lettersrequest that you respond tothe letterwithin tenbusinessdays.If you are unabletorespond withinthis timeframe,pleasecall us todiscussa potential extension. In some circumstanceswemay ask to havetheextension request in writingand submittedto EDGAR.Companiesshould respond to all commentsin the letter, includingallparts of the comment.We sometimessend a followup letter sincesome portionsof our originalcomment letter werenot fullyaddressed.If you donot understand what isbeingasked in thecomment letter, pickup thephone and call us.Our phonenumbersare located in the lastparagraph of our commentletters.We generallyappreciateif you could schedulea conferencecall inadvance.It allowsustime to preparefor thecall - sowecan make thecall asproductiveaspossible.We alsoencourage you to inviteall interestedpartiesto the first call toeliminate theneed torepeat informationin anysubsequent calls.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 165. P a g e | 165This is not a pre-determined list of staff focus.When wereview a registrant‘sfilings weare literally―reviewingthatregistrant.‖Any commentsthat result arespecific tothe registrant, includingitscurrent circumstances,what is happening in itsindustry and anyotherrelevant factors.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 166. P a g e | 166Reversemergersrefersto a privateoperating company merging withapublic shell company.This method of registration isreported on a Form 8-K rather than a 1933Act registration statement.There areseveral accounting and reportingcomplexitieswiththesetransactions.Theycanbeproblematicin thereviewprocessbecauseat thetimetheCFStaff reviewsthesetransactions, theForm 8-K hasalreadybeen filed andthetransactionhasbeen consummated.In certain circumstances,thedue date or filing date of theForm 8-K, whicheveris earlier, occursafter the end of theprivate company‘smostrecentlycompletedannual or quarterlyperiod, but beforefinancialstatementsfor that annual or quarterlyperiod wouldbe requiredtobepresentedin a Form 10.In thesecircumstancesthe financial statementsof the privateoperatingcompany required by Items2.01(f) and 9.01of Form 8-K may not includetheprivate company‘s most recentlycompletedannual or quarterlyperiod.The registrant, however, remains subject to Exchange Act Rules 13a-1and 13a-13, or 15d-1 and 15d-13, requiring annual and quarterlyreports, respectively.Theregistrant must fileitsapplicableannual and quarterly reports.Additionally, theregistrant must file an amended Form 8-K withthefinancial statementsof theprivate operatingcompany‘s mostrecentlycompleted annual or quarterlyperiodprior tothe date of thereverserecapitalization, asapplicable, withinthenumber of days applicablebased on the shell company‘sfiling status(60, 75, and 90days for annualperiodsand 40, 40, and 45 daysfor interim periodsfor largeaccelerated, accelerated, and non-acceleratedfilers, respectively) after theprivateoperating company‘s period end.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 167. P a g e | 167Unlessthe same audit firm audited both the registrant and theaccountingacquirer, a reversemerger alwaysresultsin changeofaccountantsfor purposesof Item 4.01of Form 8-K.While thehistorical financial reportingfor pre-transactionperiodsmaychangeto that of the privateoperatingcompany oncethe transactionhasoccurred, the registrant hasnot changedin this transaction. It is still thepublic shell company, and thereforeis not a newlypublic company forpurposesof SOX 404.However,CF Staff hasissued a CDI toprovide guidancetocompaniesthat find themselvesin this situation.It acknowledgesthat it might not alwaysbe possibleto conduct anassessment of the privateoperatingcompany or accountingacquirer‘sinternalcontrol over financial reportingin the period betweentheconsummation dateof a reverseacquisitionand thedate ofmanagement‘sassessment of internal control over financial reportingrequiredby Item 308(a) of Regulation S-K.It alsorecognizesthat in many of thesetransactions, such asthoseinwhichthe legal acquirer is a non-operatingpublic shell company, theinternalcontrolsof the legal acquirer may no longer exist asof theassessment date or the assets, liabilities, and operationsmaybeinsignificant whencomparedtotheconsolidatedentity.Therefore, CF Staff doesnot object if theregistrant excludesmanagement‘sassessment of internal controlsover financial reporting(―ICFR‖) in the Form 10-K coveringthe fiscalyear in whichthetransactionwasconsummated.However,thisCDI wouldnot applyif the company had to fileanamended Form 8-K under theRule13a-1interpretationdiscussed above.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 168. P a g e | 168This slideprovidesan exampleof the reportingunder theCF StaffInterpretation of Rule 13a-1discussed on theprior slide.In SEC ReleaseNo. 33-8587,theSEC determined that investorsinoperatingbusinessesnewlymerged withshell companies should obtainthesame level of informationasprovided for reporting companies thatdid not originateasshell companies.Therefore, theyare required toincludeequivalent information asif theywereregisteringunder theExchangeAct. Accordingly, theCF Staff lookstothe accountingacquirers eligibility asa smaller reportingcompany atthetime of thereverseacquisition for purposesof the disclosurestobeprovided in the Form 8-K.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 169. P a g e | 169Undercurrent accountingliterature,theacquisitionof aprivate operatingcompany by a non-operatingpublic shell companyisconsidered bytheCF Staff tobe a capital transaction in substancerather thana businesscombination (it isoutsidethe scope of FASB ASC Topic 805).That is, the transactionmay be viewedasa reverserecapitalization —issuanceof stock by the private operatingcompanyfor the net monetaryassetsof the public shell company accompanied by a recapitalization.In order toreflect thechangein capitalization, earningsper share shouldberecast for all historical periodstoreflect theexchangeratio.Thecommon stockaccount of the publicshell continuespost-merger, while theretained earningsof theshell companyshould beeliminated asthehistorical operationsaredeemed to be thoseof theprivateoperatingcompany.Wheretheregistrant isapublicshellcompanyrequiringtheForm10-leveldisclosurein theForm 8-K, the privateoperatingcompany‘sfinancialstatementsmust be auditedby a PCAOB-registered firm and auditedinaccordancewithPCAOB standards.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 170. P a g e | 170Slides18 through 20provide a summarizedexampleof reportingfor a―back door‖ registrationstatement accounted for asa recapitalization.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 171. P a g e | 171CF Staff continuestoissuecommentson theevaluation of disclosurecontrolsand procedures in quarterlyand annual reporting.Item 307requirescompaniesto ―disclosetheconclusionsof theregistrant‘sprincipal executiveand principal financialofficers…regardingthe effectivenessof theregistrant‘sdisclosurecontrolsand procedures…‖International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 172. P a g e | 172Registrantsshould be awarethat the definition of disclosurecontrolsandproceduresisbroader thanthedefinitionof internalcontrol over financialreporting (internal control over financial reportingis generallysubsumedin disclosurecontrolsand procedures) soit is possiblethat disclosurecontrolsand procedures can be ineffectiveevenwhile internal control overfinancial reporting is effective.However,the CF Staff may askthe companytosupport a conclusionthatdisclosurecontrolsand proceduresare effectivewheninternal control overfinancial reporting is ineffective.While there is significant overlap betweenthe definition of disclosurecontrolsand procedures and internal control over financial reporting, theconclusionsrelatedtointernal control over financial reportingareseparateand distinct from theconclusionsregardingtheeffectivenessofdisclosurecontrolsand procedures.In this regard, therulesrequire that registrantsexplicitlystatewhetherinternalcontrol over financial reportingis effectiveor ineffectivewithnoqualifying languageor scopelimitations.TheCF Staff generallyaskscompaniesto amend their filingswhenitappearstheyhave not completed an assessment, they havenot disclosedtheir conclusionon effectiveness, or theyhave concluded that internalInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 173. P a g e | 173control over financial reportingis effectivewhen material weaknessesexist.From acomplianceperspective, companiesthat aresubjecttotheauditorattestation requirement or voluntarily comply must discloseall fourelementsrequired by Item 308(a) of Regulation S-K (non-acceleratedfilersand EGCs must only disclosetheelementsrelevant for theirpurposes).As it relatestotheframework, theCommission specified thecharacteristicsof a suitablecontrol framework and identifiedthe―InternalControl– IntegratedFramework (1992)‖ createdbyCOSO asan exampleof a suitableframework.TheCommissionGuidanceRegardingManagementsReport on InternalControl Over Financial Reporting Under Section 13(a) or 15(d) of theSecuritiesExchangeAct of 1934or ―Management‘sGuidance‖ highlightstwoother frameworksthat meet thecharacteristicsoutlinedin theadoptingrelease and encouragescompanies toexamineand selectaframeworkthat may be useful in their own circumstances.TheCF Staff continuestocomment on and observe areaswheredisclosuresof material weaknessescan be improved.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 174. P a g e | 174Disclosuresof material weaknessesare most useful if theyprovide sometransparencyintothepervasivenessand impact a particular materialweaknesscould have on the financial statements.TheCF Staff often seesmaterial weaknessesthat arenarrowlyfocused ononeparticular financial statement lineitem in whichan error wasdiscovered.For example, a company may disclosethat it hasmaterial weaknessesrelatedtoitsaccountsreceivable.Not onlydoesthisdisclosurenot specificallyaddresstheinternalcontrolsin whichthere are weaknesses,it doesnot consider the impact that theweaknesscould have on other financial statement lineitems.Similar questionsmay alsoarisethrough a review of remediationdisclosures.For example, the remediation disclosures may indicate that the registrantis improving internal controls that go well beyond and impact more areasthan the narrow material weaknessdisclosed.Thedisclosuresrequired by Item 308(c) of Regulation S-K pertainingtochangesin internal control over financial reportingare intendedtoalertinvestorsto circumstancesthat may createrisk through their effect onregistrants‘internalcontrol.Sincethese disclosuresare required on a quarterlybasis, theyare helpfulin providing timely information that mayspeak tothequalityof acompany‘s financial reporting in any given period and provide an updatefromthecompany‘smost recent annualevaluationofinternalcontroloverfinancial reporting.TheCF Staff may issuecommentswhenthere is―boilerplate‖ disclosurethat therehavebeennomaterial changesin theperiodinsituationswhereconclusionshave changedfrom oneyear to the next or other identifiableeventsexist, such aslayoffs, changein an outsourcingarrangement, orchangesin accountingpolicy.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 175. P a g e | 175If a company‘s conclusion on effectiveness changes from ineffective toeffective, the company shouldconsider disclosing the reasons for thosechanges.There area number of registrantsthat conduct all, or substantiallyall, oftheir operationsin foreign countries.Theseregistrantsincludedomestic companies that are required topreparetheir financial statementsin accordancewithU.S. GAAP andforeignprivateissuersthat elect to prepare their financial statementsinaccordancewithU.S. GAAP.In certain situations,wehave issuedcommentstounderstand how thesecompanies have preparedtheir financialstatementsand assessed theirinternalcontrol over financial reporting.In certain cases, companieshave hadtoamend their filingsto disclosethelack of U.S.GAAP knowledgewithin the company asa materialweakness.Our commentsfocuson such issuesas:the existenceand extent ofeducation and ongoing trainingrelatingtoU.S.GAAP; professionalqualificationsof membersof theaccountingstaff, such asa U.S. CPAInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 176. P a g e | 176license;and professional experienceof members of the accountingstaff,either asan auditor or preparer of U.S. GAAP financial statements.If the companyusesan outsideconsultant toassist it, the staff may askabout that relationship and the consultant‘squalifications.We sometimessee audit reports in EDGAR filings that doNOT containtheauditingfirm‘s signature.TheStaff believesthat readersshould be ableto easily determinethenameof the firm that audited a registrant‘sfinancial statementsandtherefore, wewill request amendmentsfor anyfilings that do not complywith the requirementsof Regulation S-X, whichrequiresa signature.As a result of Regulation S-T, such signature should be in typed form.We havenoticed a fair number of audit reportsreferring to ―auditingstandardsof the PCAOB‖ instead of ―thestandardsof thePCAOB.‖Use of theword―auditing‖ impliesthat the auditordid not complywithother standards, such asthe PCAOB‘sprofessional practicestandardsandtheSEC‘sindependencestandards.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 177. P a g e | 177ThePCAOB requiresan issuer‘sauditor torefer tothe ―standards of thePCAOB.‖However, thePCAOB doesnot precludean auditor of a non-issuerfromissuingan opinion in accordancewith―theauditing standardsof thePCAOB,‖ unlesstheissuer‘s principal auditor makesreferenceto theaudit report coveringthe non-issuer.Auditor association with cumulative amounts from inception included ina registrant‘s or its predecessor‘s annual financial statements is requiredaslong asthe registrant or itspredecessor is in thedevelopment stage.This is premisedon the fact that U.S.GAAP identifiesthese amountsas―additional information,‖ rather than supplemental informationthat isnot required tobe audited.Whereanauditorassumesresponsibilityfortheaudit oftheentiretyofthecumulativeamountsfrom inception, thecurrent auditor‘sreport wouldnot refer tothe workof a predecessor auditor.Alternatively, a current auditor may rely on theworkof a predecessorauditor(or predecessorauditors) with respect todiscretereportingperiodsthat arepart of the cumulativeamountssinceinception, in whichcasethe current auditor‘sreport must includea referenceto thepredecessorauditor(s) and identify the periodsauditedby thepredecessorauditor(s)in the introductoryparagraph of the audit report, and refer tothereport of the other auditor in expressing thecurrent auditor‘sopinion.When a current auditor refersto a predecessor auditor (or predecessorauditors)the filingmust includethepredecessorauditors‘report(s)and, whereapplicable,consent(s).If the PCAOB revokestheregistration of an audit firm, audit reportsissuedby that firm may nolonger be included in a registrant‘sfilingsmadeon or after thedatethe firm‘s registration is revoked, even if thereport wasissuedbefore thedateof revocation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 178. P a g e | 178Financial statementspreviouslyaudited by a firm whoseregistration hasbeen revoked wouldneed to be reauditedby a PCAOB registered firmpriortoinclusionin futurefilingsorif includedin aregistrationstatementthat hasnot yet been declaredeffective.Thetest for SRC statusis:-Public float < $75million on lastbusinessday of Q2, or-If public float = $0, <$50 million annual revenuesIf an issuer fails toqualify asan SRC, it is not eligible for SRC statusuntil:-Public float < $50million on lastbusinessdayof Q2, or- If public float = $0, < $40million annual revenuesIf a companynewlyqualifiesasa smallerreporting company based upon its second quarterpublic float, it may elect to providethe scaleddisclosurestarting with itsnext quarterly report on Form 10-Q.While the company can provide the scaled disclosure immediately, it isstill considered an accelerated filer through the end of the fiscal year, atwhichtimeit becomesa nonacceleratedfiler.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 179. P a g e | 179SRC Statusin Transitionto Other Reporting CompanyStatus- Publicfloat > $75million on last businessday of Q2- If public float = $0, > $50million annual revenuesWhile thethresholdsmay align withthe thresholdsfor filer status(i.e., nonacceleratedoraccelerated), thetestisfor different purposesandtheremay be circumstanceswherea smallerreporting companyisanacceleratedfiler or wherea larger reporting company is a nonacceleratedfiler.If a company is required to exit smaller reporting companystatus, it maycontinueto report asa smaller reportingcompany through the filing oftheannual report on Form 10-K for that year.However,whilethiscompany may still provide scaled disclosurein theForm 10-K, if the companyisan acceleratedor largeacceleratedfiler itmust followthosedeadlinesfor theForm 10-K for that year and includetheattestationreport on internal control over financial reporting requiredbySection404(b) of theSarbanes-OxleyAct.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 180. P a g e | 180The Global Financial Sector—Transforming the LandscapeByChristineLagarde, ManagingDirector, International MonetaryFund, Frankfurt FinanceSummitBonjour! Guten Tag! Good day.It is a pleasuretobe back in Germany andtobe a part of thisyear‘sFrankfurt FinanceSummit. I wouldliketo thank Dr. LutzRaettig, the Chairman of the Board ofFrankfurt Main Finance, for invitingme toparticipate.Let mealsothank JensWeidmannforhisverykindwordsofintroduction.It isindeedanhonortospeaktodayabout financial sector reform, hereinFrankfurt—forcenturies thecenter of commerce and financein theheartof Europe.This year‘s Summit examines―howregulationandcrisismanagementwill changetheworld‘sfinancial landscape‖.This is exactlywhat weare all workingtowards:a new financiallandscape.Historyshowsthat financial crisesoftenalter the financial sectorlandscape.Theterrain that emergesusuallyfeaturesrestructuredbalancesheets, astronger regulatory framework, and oftena different population of banks.We can point toexamplessuch asthosein theNordic andAsiancountriesafter crisesin the1990s.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 181. P a g e | 181But therearealsoexampleswheretherewaslittlefundamentalchange, orwhereimprovementsweakenedover time asthe architecturefailed tokeepup withinnovation.Take theUnited States─ barely20years had elapsed betweentheresolutionof the Savingsand Loan crisisand thesub-prime debacle.While thesewerevastlydifferent crises, asweretheir spillovers(unfortunately), real estatelendingand the failure of regulation andsupervision werecommon denominators.Theindustrydid not learntheright lesson.Here weare, more than five yearsintothis crisis;hasthe ―landscape‖been transformed?In other words,havewebuilt a stronger system?Not yet.We have madeprogress, but there is more to do.Our jobtoday aspolicymakers and regulatorsis to bring about changethat is more effectiveand permanent; that resultsin a robust set of banksand alsoreducesthe frequencyand severityof systemic busts.I wouldlike tofocustodayon what webelieveisneeded tobring thisabout.Each isanecessary, but onitsown, not sufficient conditionforsuccessfultransformation.1) Global regulatory reform─howclose are weto a solid set of rules?2) Balancesheet repair and bankingunion ─necessaryand worthwhileInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 182. P a g e | 1821. Global Regulation: Reform and ReinforcePolicymakers and regulatorsaround theworldand in Europe have laidout a comprehensivereform agenda.Many long nightswerespent burning themidnight oil tonegotiateagreementson regulation.I participatedin justa few of those ―nuitsblanches‖.I can tell you, what Otto Von Bismarck said istrue: ―Lawsare likesausages,it is better not toseethem beingmade.‖But the sausage-makingdid happen, and hasproduced some historicachievements.Agreementson global bank capital and liquidityregimes,and FSBstandardson EffectiveBankingSupervision and ResolutionRegimesaremajor stepsforward.Here in Europe, deeper policycommitmentshave greatly reducednear-term stability risks.My main concern is that progressis uneven.This risksun-doingsome of our achievements.Thepaceof implementation hasbeen adjusted intentionallytosupportbankson themend, but delaysalsoreflect difficultiesin agreeingonthewayforward, and pushback from industryaverseto changingoutmodedanddangerousbusinessmodels.Let me addresssome of thekey regulatoryissues,beginningwith bankcapital and liquidity:Capital and liquidityMuch hasbeen doneboth oncapital rulesand liquiditystandardsaswellassettingcapital surchargesfor globallysystemically important banks.We are, however, worried about uneven implementation of theserules,particularlythe delayof Basel III in major jurisdictions.Different ratesof implementation could contributeto dilution of overallminimum standards.Thesedelays affect longer term businessdecisions, strainingcreditmarketsand spillingover to the real economy.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 183. P a g e | 183The IMF is also worried about national differences in the calculation ofthe riskiness of assets—the very basis for determining the capital needsof all banks, and thesuccessof thenew rules.Recent studies by theU.K. authorities,the BaselCommittee, and theEuropean BankingAuthorityhave found a widevariation in bank riskweightswithsimilar risk profiles.In an interconnectedworld, the lowestcommon denominator isconnected to all.AccountingProgresswithaccountingstandardsis alsomixed.For example, on this same issueof risk measurement, the twomainaccountingbodies, the InternationalAccounting StandardsBoard andU.S. FinancialAccountingStandardsBoard, havenot reachedagreementon a common approach for asset impairment, that is, whethertobaseiton expected or incurredlosses.This is not just an academicexercise.As you know, it materially affects the assessment of asset quality andvaluation, which of course informs investors and regulators about aninstitution‘sfinancial strength.Toobig to fail and resolutionWhat about resolution and thebig banks?TheFSB led the initial progress,and theUnitedStatesand theUnitedKingdom recentlymoved forwardon coordinatingcontingencyplanswhenwindingdownfailing crossborder banks.But some banksarestill considered―too-important-to-fail,‖ duetotheirsize, complexity, and interconnectedness.This is unacceptable.TheIM F estimatestheimplicitsubsidyavailabletobig banksintermsoflowerborrowingcostsat about 0.8percentagepoints.Othershaveusedthistoderiveadollar figurefor thefivelargestbanksintheU.S. of about $64billion, roughly equivalent to their typical annualprofits— a gift from thetaxpayer.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 184. P a g e | 184While thismay be a simplistic approach, it highlightsthe socialdimension of the issue.Pressure to addressthe moral hazard from this problem and facilitateresolutionhasfosteredthedevelopment of regionalinitiativestolegislatebankingactivitiesorring-fenceoperations,such astheLiikanen, VickersandVolckerproposals, andthesoon-to-belegislatedGermanandFrenchreforms.While well-intentioned, theseseparate planscould underminecommongoalsof harmonizingglobal standards if they are not well coordinated.Thebottom lineis that wehave yet to fix ―too-big-to-fail‖.We needto forgeahead on three frontstoaddressthe root causeof thisproblem:(1)regulation, like systemic surcharges;(2) intensivesupervision;and(3)frameworksfor orderlyfailure and resolution, nationallyand acrossborders.In the coming months, jurisdictionsneed to spell out planstoresolveeach systemic institution, regardlessof itssize, inter-connectednessandcomplexity.In additiontocross-border collaboration arrangements, thisrequiresanabilityto imposedisciplineon the managers,shareholdersand juniordebt holdersof largefailed banks, usingbridge banksor other resolutiontoolstopreservethe liquidityof borrowers,depositorsand othercounterparties.Over thecounter derivativesProgresson reform of derivativemarketsis tooslow.We all agree that wider useof clearing houses—central counterparties—will raise transparency of over-the-counter markets and make the systemsafer.However,noauthorities have met thedeadlinesto implement reforms.First, available data showsthat the increasein the valueof centrallyclearedcontractshasbeen modest.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 185. P a g e | 185For example, asof September 2012,only10 percent of all credit defaultswapswerecontractedthrough central counterparties.Second, data islimited, and almost nonexistent for commodity, equityand foreign exchangeasset classes.This is a problem weneed to address.Recent headlinessuggest that banks‘internal risk management systemsare not keeping up with derivativeinnovation.For example, the lossby JPMorganChaseof over $6 billionin theso-calledLondon Whale casedemonstratesthedaunting complexityofassessingrisks in thesebig institutions,and the glaring failure of riskmanagersand policymakersin this area.ShadowbankingBack in 2009, whenI waswiththeG-20FinanceMinisters,wemade thepoint that regulationneededtocover ―all markets,all products,and alloperators‖On shadowbanking, however, I am afraid there is not much progresstoreport.This is worrisomesinceregulatorswerelargely in the dark before thecrisishit and sincethen, I suspect that fundshavebeenmigratingtonewunregulated activities.For example, wehave anecdotal evidence—becausethere isnoofficialdata—that tradingis moving to unregulatedhedgefunds.While ―Guidance‖ on the monitoring and regulation of money marketfundshasbeenpublished, there is littleconsensuson actualimplementation.There is other workin the pipeline at theFSB, but weneed toseemoreconcreteprogress.CompensationCompensation?Thishasbeen in theheadlineslately, particularlyinEurope.Mark Carney stressed recently that ―an important lesson from the crisiswas that compensation schemes encouraged individuals to take on toomuch long-term riskand tail risk‖.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 186. P a g e | 186From a financial stability perspective, thelevel and structureofcompensation must align incentiveswithrisk profiles, and ultimatelywith performance.Thecommon goal here is to make sure that the structure ofcompensation curbsincentivesfor excessiverisktaking.The financial sector has a duty to live up to the highest ethical standards.To that end, the FSB forged consensus on compensation practices sometimeago.We fully support theseprinciplesand encourage all jurisdictionstoimplement them.Impact in EuropeTogether with Outright Monetary Transactions and other liquiditysupport from the ECB, these reforms have helped to calmmarkets,particularlyin Europe.Borrowers,however,particularlysmall businessand households,havenotyet felt the impact, and ratesof lendingto the real economy havenot yetincorporatedthisframeworkof strongerdiscipline,nor thepath towardsbankingunion.Somefinancial systems are still facingpressure and negativefeedbackloopsbetweensovereigns and thereal economy continue.Tofix this, troubledbanksneedto be recapitalizedor wounddown. Thisbringsmetothesecondaspect ofanewlandscape—balancesheets.2. Balance Sheet Repair and Banking Union – Necessary andWorthwhileBalanceSheet Repair: TheMissing Link in theQuestforRecoveryIt is possiblethat delays in agreement on regulatory reformsreducedthedriveto deal with needed balancesheet repair and bank resolution.Or has insufficient balancesheet repair acted asa brakeon reformprogress?Either way, weneed to move beyond thischickenand egg question andtackleboth balancesheet repair and regulatory reform simultaneously.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 187. P a g e | 187Further progresson the regulatoryreform agenda is essential, but to getcredit flowingin support of a recovery, bankshavetobe in a financialpositionto respond.Again wecan point tosomeprogress:U.S. and European banks havesubstantiallyincreasedtheir capital ratios.During 2007-2012,the number of credit institutionsin Europe declinedbyabout 5percent (20bankswereresolvedand60bankshaveundergonedeep restructuring).But more needstobedone.Many banksare still shackled by the leftovereffectsof the crisis.This is theweaklink in thechain of recovery.We still seefragmentationin funding conditions—adirect result ofconcernsabout thequalityof bank assets—whichis impairingthe credittransmissionto thereal economy.In addition, peripheral euro areabanking systems remain relativelyweak,with capital buffersstill lowrelativeto impaired assets.Thesebanksare lessable toabsorb losses,which worsensthe drag onnew lending.This chokesoff credit to viablefirms and reinforcesweaknessesincorporatesectors,perpetuating―zombie‖ companiesaswell aszombiebanks.There is a wayout of this adversespiral:clean up balancesheetsand usea common backstop—theEuropean Stability Mechanism(ESM)— forsystemic cases.Enhanced disclosure and credibleasset qualityreviewswill help restoreconfidenceand banks should be urged todeleverageby raisingequityand cutting businesslinesthat are no longer viable.CountryauthoritiesandtheSingleSupervisoryMechanism(SSM) shouldundertake selectiveasset qualityreviews.For direct recapitalizationby the ESM, modalitiesand governancearrangementsshould be establishedassoon aspossible.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 188. P a g e | 188BankingUnion in Europe—Necessaryand WorthwhileOf coursethis ispart of thebigger picture ─ full banking union inEurope.What exactlydowemean by ―bankingunion‖?We mean a singlesupervisoryand regulatory framework, a singleresolutionmechanism andresolutionauthority, andacommon safetynetthat includesdeposit insuranceand lender of last resort capabilities.This integratedoversight frameworkisthelogical extensionof anintegratedbanking system, but it alsoplaysa central role in theglobalprocessof transformation.In many waysit representsa microcosm of the aimsof the globalregulatoryreform agenda.Bankingunion will move responsibilityfor supervision and potentialfinancial support toa shared level whichwouldhelp contain systemicrisksand curb moral hazard.This would removedestructive incentivesfor deposit flight andfragmentation, andweakentheviciousloopof risingsovereignand bankborrowingcosts.TheIMF recentlyreleasedtwoimportant paperson theseissues,includinglast week the inaugural Financial System StabilityAssessment for theEuropean Union.And I wouldencourage you totake a look at them.Let me firstrecognizetheconsiderableprogressonbankingunionsofar:agreement on theSingleSupervisoryMechanism;proposalsbytheEC toharmonizeregulationson capital (CRR ─ the Capital RequirementsRegulation, and CRD-IV, theFourth Capital RequirementsDirective), onresolutionregimes, and for national deposit insuranceschemes;agreement todraw on the ESM to recapitalize banks, withECBsupervision;and finally, commitment toa SingleResolutionMechanismwith backstoparrangementstorecoup taxpayer support over time.―To do‖ listPolicymakers need toplow ahead with their ―todo‖ list.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 189. P a g e | 189Recent agreementsare major stepstowardsa new landscape, but followthrough will be critical.This meansswift adoption of thevariousdirectives,and ensuring thattheyare in full compliancewith global accords, namely BaselIII and theFSB ―KeyAttributes‖.Other prioritiesincludeendowingthe singlesupervisor withrequisiteresourcesand authority; implementingthecommon resolution andsafetynetswitha coherent, crediblebackstop; and settingup theresolution authorityand insurancefund with accesstocommonbackstops.Full embraceofthisUnion-widearchitectureisneededtoensuredurablefinancial stability, but alsotosustain the currencyunion and thesinglemarket for financial servicesin Europe.This includesseveringthe link betweenweaksovereignsand futurebankingsector risks, otherwise,the impact of new rulesand institutionson economicgrowth, and on the citizensof Europe, will be limited.Conclusion: enlightened stewardsof the financial systemLet me conclude:I asked earlierif the financial landscapebeentransformed?I wouldsay not yet.I believe that weare makingprogress,but it is mostly in thewiringandtheplumbing—essential elementsof a solid structure, but under thesurface.Thestructure isstill half-built and not safe.Weak banks are still a drag on growth.Balancesheet repair needstobe tackledat the same time asregulatoryreform, in a mutuallyreinforcing manner.Finishingthe businessin both areasis necessaryto reap the fruits ofhard-wongainsin regulatoryreform and torestorethefull functioningofthefinancial sector sothat it can doitsjob of intermediatingfundstoborrowersand support growth.I am an optimist, drawinginspiration from Martin Luther, whosaid―Everything that isdone in the worldis done by hope.‖International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 190. P a g e | 190…. But I am alsoa realist.Immanuel Kant, oneof the greatest German philosophers,said that―using reason without applying it toexperienceonlyleadstotheoreticalillusions‖.Thefree exerciseof reasonby the individual wasa theme of theEnlightenment.Hopefully, weare moving towardan ―Enlightened‖ era in global financeand regulation, one based on experienceand reason.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 191. P a g e | 191Managing structural risks in the Swedishbanking sectorSpeechby Mr Stefan Ingves,Governor of theSverigesRiksbank and Chairman of theBaselCommitteeon BankingSupervision, atAffärsvärlden‘s ―Bank & FinansOutlook‖, StockholmTodayI intend tospeak about theRiksbank‘sview of the structural risksin theSwedishbankingsector and how theycan be managed.As so often in recent years, I will take the crisis of 2007–2009, and the riskreassessments that banks, investors, researchers and decision-makers allover the world were forced to make as a result of the crisis, as my startingpoint.I will begin by saying a few wordsabout the international work onregulationsthat arose asa consequenceof the crisis.Then I will go intoa littlemore detail about the structure and specialcharacteristicsof theSwedishbanks.On thebasisof this, I will present my view of thepossibleimplicationsoftheimplementationand follow-up of theBasel III regulationsfor theSwedishbanks.The risks associated with banking operations need to be limitedFirst, however,I wouldlike togiveyou asmall exampleoftheriskswearetalkingabout.TheUS mortgagecrisisbecameacutein 2007and marked thestart of theglobal financial crisis.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 192. P a g e | 192At that time, the capital adequacyratio, that isthe amount of capital inrelationtorisk weightedassets,in themajor Swedishbanksaveragedaround 7per cent.This means that for every SEK 1000 in risk-weighted assets, the banksfunded their operationswith SEK 70 of their own money and with SEK930in borrowedmoney.This is in fact a rather generouscalculationand includescapital thatturned out be of dubiousquality.Decisionshad alsobeenmade at that time that allowedthe banks tousetheir owninternal riskmodelstoa greater extent tocalculatetheir capitaladequacyrequirements.Thebanks werethusable to substantiallyreducethe risk weightsof theirassets,includingmortgages, in the long term.Themajor banks‘internal risk modelsindicated that therisksassociatedwith mortgage lendingwereextremelylow.In several casesthis meant that the risk weight of a typical mortgagecould easilybe aslow as6 per cent, whichmeant that only 6 per cent ofthemortgage wouldneed to be covered.With a capital adequacyratio of 7per cent and a risk weight formortgagesof6percent, thismeant that abank couldfundeachSEK 1000ofamortgageloanwithSEK 996inborrowedmoneyand SEK4in itsownmoney.Theriskthebank itselftookwhenit lent SEK 2millionforthepurchaseofa housethuscorrespondedtoSEK 8 000of itsown capital.There werein fact transitional regulationsthat initiallymeant that thebankswerenot abletocalculatesoliberally, but theseweretheregulationsthat wouldapply in thelonger term and thusthosethat thebanksand investors,and oftenthe authorities,primarilyfocusedon.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 193. P a g e | 193Given that thebanks, in Swedenand in other countries, onlyneeded asmall amount of capital, and given that it wasoften assumed that theywerebacked by government guarantees,it washighly profitablefor themtotake substantial risks.Thebanks themselvescarriedonly a small part of theserisks, while itturned out that thebanks‘customersand the taxpayers had tocarry themajor part.In several countries– Spain, Irelandand Denmark for example, inadditiontothe UnitedStates– wehaveseen how substantial fallsin thepricesof the banks assets, mainlyin theform of mortgages, have ledtomajor economic problems.Thepoint is that therisk capital that thebanksand their shareholdersprovideislimited to the value of thesharecapital.But society‘s risksare greater than this.Amainstreamassessment in economicresearchisthat a national crisisinthefinancial system coststhe economy around 60per cent of GDP.In Sweden, this wouldbe equivalent toover SEK 2 000billion, or morethan SEK 200000per Swede.This is more than twoand a half timesthejoint stock market value of thefour major Swedishbanksat theturn of the year 2012/ 2013.In Sweden, wesucceeded in managingtheacutephaseof the financialcrisisin 2008and 2009in a waythat made it possibleto limit the coststosociety.Onecontributingfactorwasprobablythat thecrisisof the1990swasfreshin themindsof thebanksand they thuslimitedtheir risk-takingmorethan might otherwisehave beenthecase, at least with regard totheiroperationsin Sweden.As weknow, not all countrieswereaslucky.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 194. P a g e | 194Thenegativeeffectsof the crisisarestill in evidencein largeparts of theworld–not least inseveralcountriesincentralandsouthernEurope– andwill probablyremain sofor sometime to come.In retrospect, it is easytonote that thecombination of shortcomingsintheregulationsand theprofit motivesof theparticipantson the financialmarketscontributedtooneoftheworst financialcrisesofthemodernera.Thedetailsregardingthebuild-upofrisk andthecourseof thecrisishavebeen described several timesand I will not repeat them here.It is enough this time to note that banks with a limited amount of capitaland bankswith a high degree of market funding proved to be vulnerablewhenthe storm broke.Theseinsightsfrom the crisislie behind the regulatoryworkthat is nowunderwayin Swedenand abroadtoday.There is broad agreement that risk-takingin thebanking sector must belimitedand that itscostsmust be taken intoaccount by thebanksandtheir investorstoa greater extent.Important stepshavebeentakenin thisdirectionin theglobal agreementon future standardsfor regulationsin thebankingsectorsreferredto astheBasel III Accord.Theworlds‘banks will be saferwhenthisis implemented, which willbenefit everyone.Basel III increasesthe safety marginsin the systemTheBasel III regulationsrepresent theintroductionof much-neededstandardsthat will require the bankstohold more and better capital.Theminimum requirement for CET 1capital, that issharecapital andretainedearnings,will be raised to 4.5per cent of the riskweightedassets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 195. P a g e | 195In additiontothe minimum requirementstherewill be a capitalconservation buffer, a countercyclical capital buffer and a buffer forsystemically-important banks, whichall sharpenthe requirementsfor thelevel of CET 1capital.In total, theBasel III Accord will represent a capital-adequacyrequirement of 7 to 12 per cent of CET 1capital depending on howimportant thebank isin a global systemic perspectiveand where thecountrys economy isin the credit cycle.This is a much higher level than previously.Thecountercyclical capital buffer isparticularlyinteresting.This will be built up in good times, whencredit growth ishigher thannormal, withthe aim of creatingairbagsto protect the bankingsector introubledtimes.Sofar, this istheinstrument on which international agreement hasbeenreached in the field of macroprudential policy, that isa policythatcomprisesmeasuresto prevent financial crises that aredirectedat thesystem asa whole.Aleverageratio requirement will alsobe introduced underwhich, irrespectiveof risk weights,a banks assetsmay not exceed 33timesitsowncapital.A leverage ratio requirement represents an extra safety measure that alsolimits the banks‘ possibilities to use internal risk models to actually keeprisk weightsdown.Basel III alsosetsquantitativestandardsfor the banks‘liquidity, ashort-term (LiquidityCoverage Ratio, LCR) and a long-term (Net StableFundingRatio, NSFR).Theshort-term measure meansthat everybank should havesufficientliquidassetsto survive for at least 30 daysin a stressed scenario.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 196. P a g e | 196Thelong-term measure, in principle, limitsthe gap betweenthe maturityof a bank‘sassetsand thematurityof itsliabilities.The standards stipulated in the Basel III Accord will be implemented innational legislation during the 2010s and should be implemented in theirentiretyby 2019,with several interim targetsalongthe way.Establishingbetter regulationson thebanks‘capital and liquidityrepresentsa major step forward.However,in a widerperspectivewecannotethat even in the future theworlds‘bankswill havecapitalthat onlyamountstoafewpercentoftheirassets.Thisisalmost withinthemargin of errorforavaluationof thetotal assets.Theequity/assetsratiointhebankingsectorisonlyonefifth, orevenonetenth, of that for companiesin other sectors.However,a central element of the Basel III Accord isthat thestandardsare minimum regulations– countriesthat want to imposestricterrequirementsmay and should do so.We have alreadyseen casesof this – for examplein the United States,theUnitedKingdom and Switzerland.Decisionshave alsobeen made in both the UnitedStatesand theUnitedKingdom on more structuralmeasurestoprotect thecentral functionsofthefinancial sector, for examplethrough theDodd-FrankAct and thefollow-upof the VickersReport.In the EU, the LiikanenReport hastaken up the issueof ring-fencing, that is separatingthe different operationsof thebanks fromeach other.Thereason is that thefinancial systems are different in different parts oftheworld.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 197. P a g e | 197It is thereforeimportant to design regulationsthat aretailored to thebankingsystem that hastocomply withthem.We alsoneed tomaintain a respectabledistancetothe minimumregulations.Consideringwhat weknow about theSwedishbankingsystem, there aregood reasonsfor ensuring that Swedishbankscomplywiththeglobalstandardsby a broad margin.The Swedish banking system is specialIt is thusimportant toput the Swedishbankingsystem intoperspective.Thetotal domestic and foreign assetsof the four major banking groupsamount to 400per cent of Swedens GDP.In other words,out bankingsystem is huge.Relativelyspeaking, it is on a par withthebankingsystem in theUnitedKingdom, for example.TheSwedishbankingsystem is alsohighlyintegrated, whichmeansthatproblemsin one bank can easily lead toa crisisof confidencefor theentire system.If wewerehit by a financial crisis,the coststosocietycould thusbeveryhigh.With this in mind, I intendto focusin more detail on twovulnerabilitiesin theSwedishfinancial system that areinterlinked.Thefirst isthe indebtednessof the Swedishhouseholds.Thesecond is thebanks‘funding in foreign currenciesand theirdependenceon thecurrency-swapmarket.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 198. P a g e | 198TheSwedish mortgage market hasstructural weaknessesAn issuethat hasbeenwidelydiscussed recentlyis theindebtednessoftheSwedishhouseholdsand the risk of a fall in housing prices.Experiencein several countries hasshownthat indebtednessand thedevelopment of housing pricesarethe main explanationsof whysomecountriesare hit harder than othersduring economic crises.Similarly, crisesthat are preceded by a credit and housingboom tend tobelonger and more severethan other economiccrises.Afall in housingpricesmaylead householdstosaveratherthan consumein ordertocompensate forthefactthat thevalueoftheirhomeshasfallen.If many householdsbehavein thisway, this may weakeneconomicactivity, increaseunemployment and create loanlossesin thebankslendingto companies.This, for example, is what hashappened in our neighbouringcountryDenmark in recent years.What wecan note isthat the credit conditionsfor mortgageschangedintheearly 2000s.Interest-onlymortgagesbecame increasinglycommon at thesametimeasthe loan-to-valueratios increased.Thebanks alsobegan to fund mortgagesby issuingso-calledcoveredbondson the financial marketsto an increasingextent.Easy accessto inexpensivefundingin combination with a high demandfor mortgagesled torapid credit growth.Now, thedebtsof theSwedishhouseholdsare high in both historicalandinternational terms.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 199. P a g e | 199Although the rate of credit growthhassloweddown and loan-to-valueratios have fallen– the mortgage cap introducedin 2010hasprobablycontributedtothis – there arestill structural weaknesseson the Swedishmortgagemarket.For instance, the mortgage survey recentlypublishedbyFinansinspektionenidentifiesone such weakness:approximatelyhalf ofall new mortgagesare interest-onlyloans.This increasesthescope for thehouseholdsto take larger loans,whichinturn increasesthe debt stock.Figure 1showshousehold debt in relation to disposableincome.It alsoillustrateshow indebtednessin thehousehold sector growsunderdifferent assumptionsabout amortisation.This raisesa number of questionsabout the future.For example, how will the averageloan-to-valueratioin thebanksmortgagestocksdevelop whenolder mortgagesare paid off and newinterest-onlymortgagesare paid out?What will the long-term consequencesof a weakor non-existentamortisation culture be for peoples private finances,the nationaleconomyand expectationsof economicpolicy?Thesearequestionsthat weare consideringand that wewill analysefurther together withFinansinspektionen.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 200. P a g e | 200The banks‘ extensive market funding in foreign currenciesmakesthe system vulnerableAnother structural weaknessin the Swedishbanking system isthat thedegreeof market funding is high.Wecanseethis,forexample,bylookingat lendinginrelationtodeposits.Lending is significantlyhigher in the Swedishbankingsystem than inmanyother European countries (seeFigure 2).ThisispartlybecauseSwedestoalargeextent saveinfundsratherthaninbank accounts.Another reasonis that Swedishbanks retain their mortgage loansonInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 201. P a g e | 201their balancesheets,whilebanksin many other countries ―sell‖ them orsecuritisethem.Swedishbanks arethushighlydependent on the capital marketstofundtheir lending.Alargeproportion, almost 45 per cent, of the fundingfrom thecapitalmarketsis in foreign currencies.This borrowingfundsassetsin both Swedishkronor and foreigncurrencies.This dependenceon market borrowingin foreign currenciesgivesrise totworisks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 202. P a g e | 202Thefirst relatestothe extent towhichparticipantsare prepared tobuythebanks‘mortgage bondsand when necessaryconvert borrowinginforeign currencies toSwedishkronor.Thesecond lies in thefact that thematuritiesfor assetsand liabilitiesinforeign currencydiffer.Few counterpartiesfund thelong-term lendingin SwedishkronorTheborrowingin foreigncurrenciesalsofundslendinginSwedishkronortosome extent, for examplefor housing purposes.TheSwedishbankstypically fund their mortgage loansby issuingcoveredbondsfor whichthemortgagesact ascollateral.Alargeproportion of thesebondsareissuedin foreign currencies,mainlyeuroand USdollars.The reason that the banks have chosen to get funding on the foreignmarketsis probably that they want to spread their sources of fundingacrossdifferent markets.This is alsosomething that the credit-ratingagencies encourage.It hasalsooftenprovedtobeaninexpensivemethodoffundingmortgageloans.However,broadeningtheinvestorbasemayalsomeanthat it consistsofalarger percentageof volatileinvestors.ProblemsontheSwedishhousingmarket maythereforeleadtothebanksfindingit difficult to refinance their mortgageloans.We actuallybelievethat thebanks can managerather substantial fallsinthemarket valueof housing, but if theinvestors assessment is that therisk have increasedtheymay choosenot tobuy theSwedishbanksbonds, despitethefact that they only entail a minor credit risk.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 203. P a g e | 203Such concernsmay alsomake other typesof market fundingmoreexpensiveand more inaccessibleif theinvestorschoosetoreduce theirexposurestothe Swedishbanking sector.We sawexamplesof thisin the autumn of 2008, whenforeign investorswishedtooffloadSwedishmortgagesecuritiesand the market demandfor more liquid instruments, particularlySwedishgovernmentsecurities, increased.The Swedish National Debt Office then carried out extra issues oftreasury bills and provided loans through reverse repos in coveredmortgagebonds.At the same time, the Riksbank expanded its listof approvedforms ofcollateral.All in all, this meant that in principlethe government assumed theriskthat layin the outstandingstock of Swedishmortgage loans.In order to convert borrowing in foreign currencies to lending in Swedishkronor without taking a currencyrisk, the banks usuallyconduct currencyswaps.In simpleterms, this is done like this:ASwedishbank borrowseurosinGermanyat a maturityof five years.However,asthe bank doesnot reallyneed theeurosbut needskronor tofund mortgage loansto Swedishhouseholds, the bank hasto exchangetheeurosfor kronor.Toprotect itselfagainstthecurrencyrisk, thebank entersintoa currencyswapin whichthe eurosare exchangedfor kronor todayunder anagreement toexchangethekronorbacktoeuroat apredeterminedrateinfive years‘time.In this waythe bank matchesthe currenciesof itsassets(the mortgages)and itsliabilitiesand therebyeliminatesthe currencyrisk.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 204. P a g e | 204TheSwedishbanksare thusdependent on acquiringkronor in thelong-term from a counterparty in a currencyswap.Theycan in principledo this in three ways:through a foreignbank, another Swedishbank or an insurancecompany.Today, it isoften a foreign bank that actsasthecounterpartyin theseswaps.Theforeign banksdonot themselvesusuallyhave any natural accesstoSwedishkronor.Theythereforefundpart oftheirlendingin kronorbyborrowingkronorintheshort-term from other Swedishbanks.However,theriskisthat foreign investorswillleavetheSwedishmarket ifproblemsarise, astheSwedishkrona is a small currency.Therearealsoreasonsfor believingthat thenumber of foreign banksthatact ascounterpartiesto the Swedishbanksis limited.Moreover,participatingin the swapmarket is oftennot acentral part oftheoperationsof theforeign banks.This in turn hasconsequencesfor liquidityand pricing on theswapmarket.We sawan exampleof this whenthe last extraordinaryloan that theRiksbank had offered thebanks during the crisis matured in the autumnof 2010.Uncertaintythen aroseon the moneymarket, and consequentlyswapcounterparties abroad whohad acquiredshort-term funding in kronorthrough Swedishbanks became lesswillingto enter intoswapagreementswith Swedishbanks.It thusbecamebothmore expensiveandmore difficult for Swedishbankstoconvert foreign currencyintoSwedishkronor at long maturities.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 205. P a g e | 205Toa certain extent, Swedishbanks alsoact ascounterpartiesto eachother in the swaps.However,from the perspectiveof theSwedishbankingsystem this isreallyonly a matter of redistributingthematurityrisk.Thefact that thebanks act ascounterpartiestoeachother alsoforgesthelinkswithin theSwedishbanking system even tighter.Anatural counterparty for the Swedishbankscould be theSwedishlifeinsuranceand pensioncompanies.Thesecompanies have long-term liabilitiesin kronor in the form ofpension savingsthat theypartly invest in assetsabroad.At present, thesecompaniesare not activeon the long-termcurrencyswapmarketsto anygreat extent.TheSwedishbanksare thereforedependent on a tight circleofcounterparties on thecurrencyswapmarkets.Asmall and concentratedmarket meansin turn that there is aconsiderable risk of disruptionsand contagion effects.Long-term assetsand short-term fundingin foreign currenciescreaterisksSwedishbankshavesubstantial assetsin foreign currenciesandalsohavea deposit deficit, that is theyare dependent on market funding.As a largepart of thismarket funding is short term, a liquidityrisk inforeign currencyalsoarises.TheUS dollar is a currencyfor whichthis risk is clear.Followingthecollapseof Lehman Brothers,whenthe dollar market waspracticallyclosedfor a while, the Riksbank neededtolend theequivalentofalmost 250billionkronorinUSdollarstothebankingsystem topreventtheliquidityrisk spreadingto the real economy.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 206. P a g e | 206However,astheRiksbank cannot createliquidityin foreign currencies inthesamewayasit can in Swedishkronor, there arelimitson thesizeoftheliquidityrisksthebankscantakeinforeigncurrencieswithout posingrisksto financial stability.There arethereforegood reasonsfor thebanksto examinethematchingof the maturitiesof their assetsand liabilitiesin foreign currencies.Themarket for bank certificatesin kronor hasshrunk.It is not only long-term funding that takesplacein foreign currencies.Alargepart of thebanks‘short-term fundingalsotakesplacein foreigncurrencies,mainlyUSdollarsand euros.TheSwedishbanksare, for example, important counterpartiesfor USmoney-market funds.Swedenis the second-largestEuropean market for themoney-marketfunds– larger thantheUnited Kingdom or Germany.Although thisindicatesahighlevelof confidencein theSwedishbanks,italsoentails risks.During the crisis, wesawthat the money-market fundswereamong themore volatile investors.Ahigh degreeof fundingfrom themoney market fundsalsomakes thebanksdependent on US regulatoryframeworksand legislativeprocesses.For short-term funding in Swedishkronor there isa market for bankcertificates.However,thismarket hasshrunk (seeFigure 3).We may wonderwhythismarket hasdeclined sodramaticallywhenitseemsthat there should be incentivestomaintainit.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 207. P a g e | 207Athrivingdomestic market for bank certificatesin kronor wouldincreasethebanks scope for diversification.Their dependenceon marketsin foreign currenciesand on theswapmarket wouldbe reduced.Although these markets usually work well and Swedish banks currentlyhave a good reputation among investorsthis does not always need to bethecase, aswesawin 2008and 2009.We should of coursethink about how to createa liquid market for bankcertificatesin kronor.Oneproblem is that thebenefitsof sucha market fall to thebankscollectivelywhile thecostsin the form of higher borrowingcostsfall toeach bank individually.In this perspectiveit may benecessarytoinvestigate whetherthe coststhat each individual bank paysfor itsshortterm funding in foreigncurrenciesreflectsthe truecoststothe Swedishfinancial system andSwedishsociety.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 208. P a g e | 208Swedish conditionsrequire a complement to the reform agendaTheSwedishbankingsystem is thusmarked by a number ofcharacteristicsthat make it somewhat special in an internationalperspective– characteristicsthat either increasethe risk of problems ortheeconomic coststosocietyif problemsarise in thebanking sector.There are therefore good reasonsfor establishing a safe margin – arespectable distance – to the minimum regulations in the Basel IIIAccord.As you know, wehavealreadytaken several stepsto strengthentheSwedishbanking system, over and abovethe commitmentsthat Basel IIIentails.In November 2011, the Riksbank, the Ministryof FinanceandFinansinspektionenannounced that thefour major SwedishbankswouldInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 209. P a g e | 209meet the capital adequacy requirementsof 10per cent of therisk-weightedassetsfrom 1Januarythis year and of 12per cent from 1January 2015.All of the four major banksnow have CET 1ratiosthat are higher than 10per cent accordingtothedefinition in Basel III.Three of the banks are alsoabove 12per cent.TheSwedishauthorities have alsosaid that thebanks should meet theshort-term liquiditymeasure in BaselIII (the LCR) both in total andseparatelyfor the euro and theUS dollar.This requirement hasbeen compulsory for the eight largest Swedishbankssince1January thisyear.TheRiksbank hasalsorecommendedthe banksto improve their publicinformation on liquidityrisks and the degree of encumbered assets.This is becausegreater transparencyincreasesboth confidenceandmarket discipline.I am pleased to say that the banks‘ public reporting has improved in linewith the Riksbanks recommendations, although some work still remainstobe done (seeTable1).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 210. P a g e | 210Thesemeasureshave contributedtotherelativestabilityof the Swedishbanks.But I don‘t think wehave finished yet.Thefinancial system is important, and the risksin thesystem must beconstantlyreviewed.Let me giveyou some examplesof areasthat I believewill need tobeinvestigated.As I mentioned earlier, theSwedishbanks‘high dependenceon marketfundingentailsanincreasedriskthat theywill sufferliquidityproblemsina stressedsituation.It is of coursealwayspossiblefor theRiksbank tolend Swedishkronor, but it isunreasonablefor the bankstotake liquidityrisksbasedon theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 211. P a g e | 211expectationthat theRiksbank will provideextraordinary loansif thingsdonot goaccordingto plan.Theabilityof thebanks tocomply withthe LiquidityCoverageRatio intheBasel III Accord should thereforebeinvestigated.The differences in the maturities of the banks‘ assets and liabilities inforeign currencies that I described above are also a potential source ofconcern in more troublingtimes.TheRiksbank cannot after all offer unlimitedliquidityin anyothercurrencythan our own.As you know, the Riksbank hasthereforerecentlystrengtheneditsforeign-exchangereservesothat in a situationin which theforeign-exchangemarket is seriouslydisruptedtheRiksbank will be abletoprovideextraordinary loansin USdollarsand euros.Theaim of course is to strengthen the Riksbank‘spreparednesstosafeguard thebasic workingsof the financial system and thereby help ustoavoid major economiccosts.Given that all the Swedishbanksbenefit from the Riksbank‘sforeign-exchangereserve, it would not be unreasonablefor themtosharethe costsof maintainingit.If wecan pricethis in an effectivewayit will alsogive the banks anincentiveto reducetheir own currencyrisks.Thiswouldreducetheriskstofinancial stability in theSwedisheconomy.It is of coursenosecret that weare alsolookingat mortgageloansfromtheasset sidein thebanks‘balancesheets.As I have alreadypointedout, thebanks‘risk weightsarevery low.Finansinspektionenintendstobeginapplyingarisk-weightfloorof15percent for the banks‘portfoliosof Swedishmortgage loans.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 212. P a g e | 212TheRiksbank supports theproposal for a risk-weight floor of 15per cent.We alsobelieve that there aregood reasonsfor analysing whetherthisfloorneedstobe raisedeven further.Oneimportant reason is that the public sectorand non-financialcompanieswouldhavetobear a largepart of theriskif thedebt-servicingabilityof the householdsweretoweaken.I have alsospoken about the risksarisingfrom the fact that a largeproportion of the mortgageloansare interest-onlyloans.In this context, theSwedishBankers‘Association‘srecommendation thatall mortgagesthat exceeda loan-to-valueratioof 75per cent should beamortised is of coursewelcome, although one may ask whetherthis isenough.Mortgageswereamortised toa greater extent a few decadesago, at thesametime asinflation automaticallyreduced the real debt ratio.I believe that more amortisationmay beneeded, especiallyin thecurrentsituationwithlow and stableinflation.However,beforetheauthoritiesimposeamortisationrequirementsit maybeworthreviewingother aspectsof the provision of loans.Oneexamplemay behow different amortisation alternativesarepresentedtothe borrowers.Another may betodemand that theborrowershavethefinancial scopetoamortisetheir loansat a certain rate.Theimportant thingis to restore an amortisationculture sothat thehouseholds‘marginsare safeguarded and the economy is protected.TheRiksbank focuseson theseissuesbecausewewishto safeguardtheSwedishfinancial system.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 213. P a g e | 213All our analysisand all our measuresaim to reducethe riskof Swedenincurringmajor economic costswhen thebanking sector getsintotrouble.As a complement, Swedenalsoneedstoput a clear framework formacroprudential policy in place.Theglobal financialcrisisdemonstratedtheneed to complementtraditional financial supervision – microsupervision – whichfocusesonrisksin individual institutions,with supervisionthat focuseson therisksin thefinancial system asa whole.In January, the Financial CrisisCommissionpresented an interim reportwhichproposed how responsibilityfor macroprudential policycould beallocatedin Sweden.We will thereforeneedto consider the Riksbanksstanceon thisissue. Aguidingprinciplefor usis that thebody that is given responsibilityformacroprudential policy needsa clearmandate withboth theright andobligationtotakeactionagainstrisksthat ariseandappropriatetoolsthatcan be usedtolimit the risks.Thediscussionof macroprudential policyalsocomprisestheissueof theRiksbank‘sbalancesheet, and particularlythe foreign-exchangereserve.As you know,theinquiryconductedby Harry Flam recentlypresenteditsproposals.Here too, theRiksbank is in the processof formulating its stance.The public are entitled to expect that the authoritiesact toprevent and manage financial crises in the best possible wayAll of the thingsI have talked about here are measures that aim to reducethe risk of a financial crisisrecurring, or to limit the damage if a financialcrisisneverthelessbreaksout.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 214. P a g e | 214Theinternational processthat hascome to expressionin theBasel IIIAccord is creatingbetter regulationsfor thebanks in all countries.This alsobenefitsushere in Sweden.Over and above this,however, wehave to managethe Swedishbankingsystem and itsspecial characteristics.Swedenis a small open economy withits owncurrencyand large banks.We needspecial regulations.This meansthat we, like a number of other countries, want toproceedmorequicklyandimposestricterrequirementsthanthoseintheBaselIIIAccord.However,the measureswehavetaken sofar have alreadyclearlystrengthenedtheSwedishbanks.Thefinancial sector is central in every modern society.We cannot afford recurringcrisesthat threaten thebasic functionsof thefinancial sector.Thepublic are entitledto expect that theauthoritiesact to prevent andmanagefinancial crisesin the best possibleway.Regulationsthat cover the special characteristicsand structural risks oftheSwedishbankingsectorare central instrumentsin thework topromotefinancial stability.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 215. P a g e | 215DisclaimerThe Association tries to enhancepublic accessto information about risk andcompliancemanagement.Our goal is to keep this information timely and accurate. If errorsarebrought to ourattention, wewill tryto correct them.This information:- is of a general nature only and isnot intended to addressthe specificcircumstances of any particular individual or entity;- should not be relied on in the particular context of enforcement or similarregulatoryaction;- is not necessarily comprehensive, complete, or up to date;- is sometimeslinked to external sites over which theAssociation has no controland for which theAssociation assumesnoresponsibility;- is not professional or legal advice (if you need specific advice, you shouldalwaysconsult a suitably qualified professional);- is in no wayconstitutive of an interpretative document;- doesnot prejudge the position that the relevant authoritiesmight decidetotake on the same mattersif developments, including Court rulings, were to lead it torevisesomeof the viewsexpressedhere;- doesnot prejudgetheinterpretationthat theCourtsmight place onthemattersat issue.Pleasenote that it cannot be guaranteed that theseinformation and documentsexactly reproduce officially adopted texts.It isour goal to minimize disruption causedby technical errors.However some data or information may have been created or structured in files orformats that are not error-free and we cannot guarantee that our service will not beinterrupted or otherwiseaffectedby such problems.The Association acceptsno responsibility with regard to such problemsincurred asaresult of using this site or any linked external sites.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 216. P a g e | 216Certified Risk and Compliance Management Professional(CRCMP) distance learning and online certification program.Companies like IBM, Accenture etc.consider the CRCMP a preferredcertificate. You may find more if yousearch (CRCMP preferred certificate)using any search engine.The all-inclusive cost is $297.What is included in the price:A. The official presentations we usein our instructor-led classes (3285 slides)The 2309 slides are needed for the exam, as all the questions arebased on these slides. The remaining 976 slides are for reference.You can find the course synopsis at:www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htmB. Up to 3 Online ExamsYou have to pass one exam.If you fail, you must study the officialpresentations and try again, but you do not need to spend money. Upto 3 exams are included in the price.To learn more you may visit:www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdfC. Personalized Certificate printed in full colorProcessing, printing, packing and posting to your office or home.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  • 217. P a g e | 217D. The Dodd Frank Act and the newRisk Management Standards (976slides, included in the 3285 slides)The US Dodd-Frank Wall Street Reformand Consumer Protection Act is themost significant piece of legislationconcerning the financial servicesindustry in about 80 years.What does it mean for risk andcompliance management professionals?It means new challenges, new jobs, newcareers, and new opportunities.The bill establishes new riskmanagement and corporate governanceprinciples, sets up an early warningsystem to protect the economy from future threats, and brings moretransparency and accountability.It also amends important sections of the Sarbanes Oxley Act. Forexample, it significantly expands whistleblower protections under theSarbanes Oxley Act and creates additional anti-retaliationrequirements.You will find more information at:www.risk-compliance-association.com/Distance_Learning_and_Certification.htmInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com