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Risk management presentation June 17 2013
 

Risk management presentation June 17 2013

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International Association of Risk and Compliance Professionals (IARCP) ...

International Association of Risk and Compliance Professionals (IARCP)
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    Risk management presentation June 17 2013 Risk management presentation June 17 2013 Document Transcript

    • 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,Did you know that ―Economicsis a highlysophisticated field of thought that is superb atexplainingtopolicymakers preciselywhythechoicesthey made in the past werewrong. Aboutthefuture, not somuch.‖Whosaid that?ChairmanBen S.Bernanke, at the BaccalaureateCeremony at PrincetonUniversity.Thetitleof his speech:The TenSuggestionsMr. Bernanke, are you jealousof thisTop 10list?Whydid you develop exactly 10suggestions?His speech is very interesting. We can even findmore about meritocracy:―Ameritocracyis a system in which thepeoplewhoare theluckiest intheir health and genetic endowment;luckiest in terms of family support,encouragement, and, probably, income; luckiest in their educational andcareer opportunities;and luckiest in somanyother waysdifficult toenumerate--these are the folkswhoreap the largest rewards.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 2Theonly wayfor even a putative meritocracyto hope to passethicalmuster,tobeconsideredfair, isif thosewhoaretheluckiest in all of thoserespectsalsohave thegreatest responsibilitytowork hard, to contributetothebetterment of theworld, and to share their luck withothers.‖Well, I will spend the weekendthinkingabout it, especiallythemethodology, howtheycan ―sharetheir luck withothers‖.As a consultant, I must developa stepbystep luck-sharingmethodology.Well, I think it is better tomake it ―principles-based‖ instead of―rules-based‖.I already have some ideas.Theprocesswill have 3Pillars.Pillar 1:Luck Quantification.Pillar 2: Internal Luck AdequacyAssessment Process, and luckstress-testing.Pillar 3: Luck Transparency.It looksabit like Basel iii … I know...Accordingtothe―if all youhaveisahammer, everything lookslike anail‖principle, wecan use a Basel iii approach almost everywhere.WewilluseaMonteCarlosimulationtoquantify the―luckiest in somanyother waysdifficult toenumerate‖ part, asMr. Bernanke said.MonteCarlois a nicequantitativerisk analysistechnique.We will simplygenerate 20,000,000luck scenarios, wewill find the rangeof possibleoutcomesand their probabilities, then wewill find aprobabilityweightedluckaverage, and wewill calculate theLaR (Luck atRisk).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 3Yes,you canusethe Basel III model. Youwill simplyreplace the―risks‖with ―opportunities‖.Inbanking, wehavepositiveand negative(forourprofitability) inputs.Inour luck-sharingmethodology wehave only profitableinputs.Instead of inflationweput inheritance– the passingon property, titlesetc. upon the death of relativeswehave never met. You get thepicture.Insteadofmarket risk (andtheCredit ValuationAdjustment amendment)weput opportunitytoinvest in Google-like firms whentheyare stillyoung.Thebest part:TheProbability ofDefaultfor anycounterpartyiszero– weare lucky, remember?And, I have onlystarted thinkingabout it. Read moreat Number 1below.Another very interestingstory, about banksand insurancefirms:―Thechangesin banking regulation make more important the roleofinsurersasprovidersof long-term bank funding‖This is the opinion or Gabriel Bernardino, Chairman of EIOPA (EIOPAis the European Insurance and Occupational Pensions Authority, one ofthreeEuropean SupervisoryAuthorities).He alsodiscussesa reallyimportant problem for insurers:The lowinterest rates, that …―On the liabilitiesside, theylead toan increasein firms‘obligationsintoday‘s termsand, consequently, toa deteriorationof their financialposition.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 4On the assetsside, low interestrateshave an adverse impact oninvestment resultsand increasethe reinvestment risk of assets.‖Themorel of thestory: Many insurershave a real problem withthelowinterest rates.Read more at Number 3 below.Welcometo the Top 10list.BestRegards,GeorgeLekatisPresident of the IARCPGeneral Manager, ComplianceLLC1200G Street NW Suite800,Washington DC 20005,USATel: (202) 449-9750Email: lekatis@risk-compliance-association.comWeb: www.risk-compliance-association.comHQ:1220N. Market Street Suite804, Wilmington DE19801,USATel: (302) 342-8828International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 5ChairmanBen S.BernankeAt the BaccalaureateCeremony at PrincetonUniversity, Princeton, New JerseyThe Ten Suggestions―I wrote recentlytoinquire about the statusof my leavefrom theuniversity, and the letter I got back began, "Regrettably, Princetonreceives many morequalified applicantsfor facultypositionsthan wecanaccommodate."‖Thematic Review on ResolutionRegimesPeer Review ReportFinancial Stability Board (FSB) member jurisdictionshave committed,under the FSBCharter and in the FSBFramework for StrengtheningAdherence toInternational Standards, toundergoperiodic peer reviews.Tofulfil this responsibility, theFSB hasestablisheda regular programmeof country and thematicpeer reviewsof itsmember jurisdictions.Interview with Gabriel Bernardino, Chairman ofEIOPAConductedby Dr. Matthias Schoder, WirtschaftsForum(Germany)International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 6Global liquidity: where do westand?Speechby JaimeCaruana, General Managerof theBank for International Settlements,preparedfor theBank of Korea International Conference2013on"Assessing global liquidityin a globalframework", Seoul.Implicationsof the Single SupervisoryMechanism on the European System ofFinancial Supervision: the EBAperspectiveIntervention of Andrea Enria, Chairman of the EBAEuropean Commission - Public hearing on financialsupervision in the EU - BrusselsTheconstruction of theSingleSupervisory Mechanism (SSM) and thewholeproject of theBanking Union areusually justifiedon the basisoftheshortcomingsof the institutional framework for theSingleCurrency,whichhavebeen soclearlyexposed during thesovereign debt crisis.Internationalization of the RMB and therole of Macao asa financial platformAddress by MrAnselmo Teng, Chairman of theMonetaryAuthority of Macao, at the―2013Internationalizationof RMB Global Forum‖,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 7jointlyorganised by theShanghai Instituteof the International FinancialCentre of the Shanghai Universityof Financeand Economicsand theCentre for International Financeand Regulation (Australia), Shanghai.The Digitisation of our EconomiesNeelie Kroes, Vice-President of the EuropeanCommission responsiblefor the DigitalAgenda, 11thEuropean BusinessSummit, Brussels―Our world isgoingonline‖.Digital "to-do" list: new digital priorities for2013-2014TheEuropean Commission hasadopted seven new prioritiesfor thedigital economy and society.Thedigital economyis growingat seventimesthe rateof the rest of theeconomy, but this potential is currentlyheld back by a patchypan-Europeanpolicyframework.Todays prioritiesfollowa comprehensivepolicy review and placenewemphasisonthemosttransformativeelementsof theoriginal2010DigitalAgenda for Europe.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 8Understanding Supervisory CollegesVice Chair Janet L. YellenAt the InternationalMonetaryConference, Shanghai,ChinaRegulatory Landscapes: AU.S. Perspective―Ill summarizetheconsiderable progresssince2008tomake the global financial system more resilient,andthen offer my viewson what more should bedone‖.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 9ChairmanBen S.BernankeAt the BaccalaureateCeremonyat PrincetonUniversity, Princeton, NewJerseyThe Ten SuggestionsIts nicetobe back atPrinceton.I find it difficult to believethat its been almost 11years sinceI departedthesehallsfor Washington.I wrote recentlytoinquireabout the statusof my leavefrom theuniversity, and the letter I got back began, "Regrettably, Princetonreceives many morequalified applicantsfor facultypositionsthan wecanaccommodate."Ill extend my best wishestothe seniorslater, but first I want tocongratulate theparentsand familieshere.As a parent myself, I know that puttingyour kid through college thesedays isnowalk in thepark.Someyears agoI had a colleaguewhosent three kidsthrough Princetoneven though neither he nor his wife attendedthis university.He and his spousewereveryproud of that accomplishment, astheyshould havebeen.But my colleague also used to say that, from a financial perspective, theexperience was like buying a new Cadillac every year and then driving itoff a cliff.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 10I should saythat he alwaysadded that he woulddo it all over again in aminute.So, well done, moms, dads, and families.This is indeed an impressiveand appropriate settingfor acommencement.I am sure that, from thislectern, any number of distinguished spiritualleadershave ruminatedon thelessonsof the Ten Commandments.I dont have that kind of confidence,and, anyway, coveting yourneighborsox or donkey is not theproblem it used to be, soI thought Iwouldusemy few minutestodaytomakeTenSuggestions,ormaybe justTen Observations,about the worldand your livesafter Princeton.Pleasenote, thesepointshavenothingwhatsoever todowith interestrates.My qualificationfor making such suggestions, or observations,besideshavingkindlybeen invited to speak today by President Tilghman, is thesame asthe reasonthat your obnoxiousbrother or sister got togoto bedlater--I am older than you.All of what followshasbeen road-testedin real-life situations,but pastperformanceisnoguaranteeof future results.1.Thepoet Robert Burnsonce said somethingabout thebest-laidplansof miceand men gangingaft agley, whatever"agley" means.A more contemporary philosopher, Forrest Gump, said something similarabout life and boxesof chocolatesand not knowing what you are going toget.Theywereboth right.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 11Lifeis amazinglyunpredictable;any 22-year-old whothinksheor sheknowswheretheywill be in 10 years, much lessin 30, is simplylackingimagination.Look what happened to me:Adozen years agoI wasmindingmy ownbusinessteachingEconomics101inAlexander Hall andtrying tothink ofgood excusesfor avoidingfacultymeetings.Then I got a phonecall . . . In caseyou are skeptical of Forrest Gumpsinsight, heres a concretesuggestion for each of thegraduating seniors.Take a few minutesthe first chanceyou get and talk to an alumparticipatingin his or her 25th, or 30th, or 40th reunion--you know,somebodywhowasnear the front of theP-rade.Ask them, back when theyweregraduating 25, 30, or 40years ago, wheretheyexpected to be today.If you can get them toopen up, theywill tell you that todaytheyare happyand satisfied in variousmeasures, or not, and their personal stories will befilledwithhighsand lowsand in-betweens.But, I am willingtobet, thoselife storieswill in almost all casesbe quitedifferent, in largeand small ways, from what theyexpectedwhen theystartedout.This is a good thing, not a bad thing; whowantstoknow the end of astorythats only in itsearlychapters?Dont be afraid to let the drama playout.2. Doesthe fact that our livesare soinfluencedby chanceand seeminglysmall decisionsand actionsmean that there is no point toplanning, tostriving?Not at all.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 12Whatever life may havein storefor you, each of you hasa grand, lifelongproject, and that is the development of yourself asa human being.Your familyand friendsandyour timeat Princetonhavegivenyou agoodstart.What will you dowithit?Will you keep learningand thinkinghard and criticallyabout the mostimportant questions?Will you become an emotionallystronger person, more generous, moreloving, more ethical?Will you involve yourself actively and constructively in the world?Many things will happen in your lives, pleasant and not sopleasant, but, paraphrasing a Woodrow Wilson School adage from thetimeI washere, "Wherever you go, there you are."If you are not happywith yourself, even the loftiestachievementswontbring you much satisfaction.3. The concept of successleadsme to consider so-calledmeritocraciesandtheir implications.We havebeen taught that meritocraticinstitutionsand societies are fair.Puttingasidethe realitythat nosystem, includingour own, is reallyentirelymeritocratic, meritocraciesmay be fairer and more efficient thansome alternatives.But fair in an absolutesense?Think about it.Ameritocracyisasystem in whichthepeoplewhoaretheluckiestintheirhealth and geneticendowment;luckiestin termsof family support,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 13encouragement, and, probably, income; luckiest in their educational andcareer opportunities;and luckiest in somanyother waysdifficult toenumerate--theseare thefolkswhoreap the largest rewards.Theonly wayfor even a putative meritocracy tohope to passethicalmuster,tobeconsideredfair, isif thosewhoaretheluckiest in all of thoserespectsalsohave thegreatest responsibilitytowork hard, to contributetothebetterment of theworld, and to share their luck withothers.As the Gospel of Luke says(and I am sure my rabbi will forgive me forquotingthe New Testament in a good cause):"From everyone to whommuch hasbeen given, much will be required;and from the one to whommuch hasbeen entrusted, even more will be demanded" (Luke12:48,New Revised Standard Version Bible).Kind of grading on thecurve, you might say.4. Whois worthyof admiration?Theadmonition from Luke--which is shared by most ethical andphilosophicaltraditions,bythe way--helpswiththis question aswell.Thosemostworthyofadmirationarethosewhohavemadethebest useoftheir advantagesor, alternatively, coped most courageouslywiththeiradversities.I think most of uswouldagreethat people whohave, say, littleformalschoolingbut laborhonestly and diligentlyto help feed, clothe, andeducatetheir familiesare deserving of greater respect--andhelp, ifnecessary--thanmany peoplewhoare superficiallymore successful.Theyre more fun to have a beer with, too. Thatsall that I know aboutsociology.5. Since I havecovered what I know about sociology, I might aswell saysomethingabout political scienceaswell.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 14In regardtopolitics,I havealwayslikedLilyTomlinsline,inparaphrase:"I try tobe cynical, but I just cant keepup."We all feel that waysometime.Actually, havingbeen in Washingtonnow for almost 11years, asImentioned, I feel that wayquite a bit.Ultimately, though, cynicism is a poor substitutefor critical thought andconstructiveaction.Sure, interestsand money and ideologyall matter, asyou learned inpoliticalscience.But my experienceisthat most of our politiciansand policymakers aretryingtodotheright thing, accordingtotheirownviewsandconsciences,most of the time.If you think that thebad or indifferent resultsthat toooften come out ofWashington areduetobasemotivesand bad intentions,you are givingpoliticiansand policymakers waytoomuch credit for beingeffective.Honesterrorinthefaceofcomplex andpossiblyintractableproblemsisafar more important source of bad resultsthan are bad motives.Forthesereasons,thegreatest forcesin Washingtonareideas,andpeoplepreparedto act on thoseideas.Publicservice isnt easy.But, in theend, if you are inclined in that direction, it is a worthyandchallengingpursuit.6. Having taken a stab at sociology and politicalscience, let me wrapupeconomicswhile Im at it.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 15Economicsis a highlysophisticated field of thought that is superb atexplainingto policymakers preciselywhythechoicesthey madein thepast werewrong.About the future, not somuch.However,careful economicanalysisdoeshave one important benefit,whichis that it can help kill ideasthat are completely logicallyinconsistent or wildlyat variancewiththedata.This insight coversat least90 percent of proposed economic policies.7.Im not going to tell you that money doesnt matter, becauseyouwouldnt believeme anyway.In fact, for toomany people around theworld, money isliterallyalife-or-deathproposition.But if you are part of the lucky minoritywith the ability tochoose,remember that moneyis a means, not an end.Acareer decision basedonlyon money and not on love of theworkor adesireto make a differenceis a recipe for unhappiness.8.Nobody likes tofail but failure is an essential part of life and oflearning.If your uniform isnt dirty, you havent been in the game.9.I spoke earlier about definitionsof personal successin anunpredictableworld.I hopethat asyou developyour owndefinitionof success,you willbeabletodo so, if you wish, witha closecompanion on your journey.In making that choice, remember that physical beautyis evolutions wayof assuring usthat the other person doesnt have toomany intestinalparasites.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 16Dont get me wrong, I am all for beauty, romance, and sexualattraction--wherewouldHollywood and MadisonAvenue be withoutthem?But while important, thosearenot theonlythingstolookfor in a partner.Thetwoof you will have a long trip together, I hope, and you will needeach others support and sympathy more timesthan you can count.Speakingassomebodywhohasbeenhappily marriedfor 35years, I cantimagineany choicemore consequential for a lifelongjourneythan thechoiceof a traveling companion.10.Call your mom and dad once in a while.Atime will come whenyou will want your own grown-up, busy, hyper-successful children tocall you.Also, remember whopaid your tuition to Princeton.Thosearemy suggestions.Theyre probablyworth exactlywhat you paid for them.But theycome from someonewhosharesyour affection for this greatinstitution and whowishesyou thebest for thefuture.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 17Thematic Review on ResolutionRegimesPeer Review ReportForewordFinancial Stability Board (FSB) member jurisdictionshave committed,under the FSBCharter and in the FSBFramework for StrengtheningAdherence toInternational Standards, toundergoperiodic peer reviews.Tofulfil this responsibility, theFSB hasestablisheda regular programmeof country and thematicpeer reviewsof itsmember jurisdictions.Thematic reviewsfocuson the implementation and effectivenessacrosstheFSBmembership of international financial standardsdeveloped bystandard-settingbodiesand policiesagreedwithintheFSB inaparticulararea important for global financial stability.Thematic reviewsmay alsoanalyseother areasimportant for globalfinancial stabilitywhereinternational standardsor policiesdo not yetexist.Theobjectivesof thereviewsare toencourageconsistent cross-countryand cross-sectorimplementation;to evaluate (wherepossible) the extenttowhichstandards and policieshavehad their intended results;and toidentify gapsand weaknessesin reviewedareasand tomakerecommendationsfor potential follow-up(includingvia the developmentof new standards) by FSB members.This report describesthe findingsof thefirst peer review on resolutionregimes,includingthekey elementsof the discussion in the FSBResolution SteeringGroup and theFSB StandingCommitteeonStandardsImplementation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 18Thedraft report for discussion waspreparedby a team chairedby MartinJ.Gruenberg (US Federal Deposit InsuranceCorporation), comprisingAlessandra deAldisio (Bank of Italy), Bader T. Alsudairi (Saudi ArabianMonetaryAgency), Felton C. Booker (US Federal Reserve Board),ChristineHauner (BaFin Germany), KatharinaHartmann (GermanFederal Ministryof Finance), Junichi Kashiyama (Japan FinancialServicesAgency), Barry King (UK Financial ServicesAuthority), VincentLee (Hong Kong MonetaryAuthority), Mike Mercer (Canada DepositInsuranceCorporation), Geof Mortlock(Australian Prudential RegulatoryAuthority), Liu Qin (People‘sBank of China), RetoSchiltknecht (FINMASwitzerland), Virginia Rutledge (InternationalMonetaryFund), and David Scott (World Bank). David Hoelscher,CostasStephanou and Ruth Walters (FSB Secretariat) providedsupporttothe team and contributedto thepreparation of the peer review report.Definitions of key termsused in the report―Bail-in within resolution‖ – restructuringmechanismsto recapitaliseafirm in resolution or effectivelycapitalisea bridge institution, underspecifiedconditions,through thewrite-down, conversion or exchangeofdebt instrumentsand othersenior orsubordinatedunsecuredliabilitiesofthefirm in resolution into, or for, equityor other instrumentsin thatfirm, theparent company of that firm or a newlyformed bridgeinstitution, asappropriateto legal frameworksand market capacity.―Bail-out‖ – anytransferof fundsfrom public sourcestoa failed firm or acommitment by a public authoritytoprovidefundswith a view tosustainingafailedfirm (for example,bywayof guarantees)that resultsinbenefit tothe shareholdersor uninsured creditorsof that firm, or theassumptionof risksbythepublic authoritythat wouldotherwisebebornebythe firm and itsshareholders,wherethe value of thefundstransferredis not recoupedfrom the firm, itsshareholdersand unsecured creditorsor, if necessary, the financial system more widely, or wherethe publicauthorityis not compensatedfor the risksassumed.―Bank‖ – anyfirm that takesdepositsorrepayable fundsfrom thepublic,and that isdefinedbythe relevant national legislationasa bank.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 19―Bridgeinstitution‖ – anentity, authorisedorlicensedinaccordancewithanyapplicablerequirementsunder national law,that is establishedtotemporarily take over and maintain certain assets,liabilitiesandoperationsof a failed firm aspart of theresolution process.―Earlytermination rights‖ – contractual acceleration, termination or otherclose-out rightsin financial contractsheld by counterparties of a firm thatmaybetriggeredontheoccurrenceof anevent orcircumstancesset out inthefinancial contract, such asan insolvencyevent or the entryintoresolutionof thefirm.―Entry intoresolution‖ – theformal determination by the relevantauthorityor authoritiesthat a firm meetsthe conditionsfor entry intoresolution and that it will be subject toresolution powers.―Financial contract‖ – anysecuritiescontract, commoditiescontract,forwardcontract, repurchaseagreement, optionscontract, swapagreement and any similar agreement that, in every case,is explicitlyidentifiedunder thelegal framework of the jurisdictionassubjecttodefinedtreatment inresolutionand insolvency(forexample,inrelationtoearlytermination rightsor topreserve theeffect of nettingagreements)that is distinct from other (non-financial) contracts.―Financial conglomerate‖– anygroup of companiesunder commoncontrol or dominant influence,includingany financial holdingcompany,that conductsmaterial financial activitiesin at least twoof theregulatedbanking, securitiesor insurancesectors.―Financial firm‖ or ―financial institution‖ – anyentitytheprincipalbusinessof whichis theprovision of financial servicesor theconduct offinancial activities,including, but not limitedto, deposit-taking, creditintermediation, insurance, investment or securitiesbusinessor operatingfinancial market infrastructure.―Financial group‖ – a group composed of entitieswhoseprimaryactivitiesare financial in nature.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 20―Financial market infrastructure(FMI)‖ – a multilateral system amongparticipatingfinancial institutions,includingtheoperator of the system,used for the purposesof, clearing, settlingor recording payments,securities,derivativesor other financial transactions.It includespayment systems, central securitiesdepositories, securitiessettlement systems, Central Counterparties(CCPs), and traderepositories.―Firm in resolution‖ – a firm in relation towhichresolution powersarebeingexercised.Where resolution powershavebeen exercised in relation to a firm, thatfirm isconsideredtobe―in resolution‖ foraslongasit remainssubject tomeasurestaken or supervisedby a resolution authorityor toinsolvencyproceedingsinitiatedby the resolution authority.―Group‖ – a parent company (whichmay be a holding company) and itsdirect and indirect subsidiaries, both domestic and foreign.―Holdingcompany‖ or―financialholdingcompany‖ (ofafinancialgroupor conglomerate) – a companythat is formed tocontrol financial firms.This concept coversintermediateor ultimatecontrol.―Home jurisdiction‖ – the jurisdiction where the operationsof a financialfirm or, in the case of a G-SIFI, its global operations, are supervised on aconsolidatedbasis.―Investment firm‖ or ―Securitiesfirm‖ – anynon-deposit-takinginstitution that conductsinvestment or securitiesbusinesson a regularbasis,including:safeguarding and administeringinvestmentsorsecurities;dealingin investmentsorsecuritiesasprincipal;anddealingininvestmentsor securitiesasagent.For thesake of brevity, theterm ―investment firm‖ is used in thismethodology, and should be construedwidelytocover anyfirm that isclassified asan investment firm or a securitiesfirm, includingbroker-dealers,under the applicableregulatoryregime.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 21―Intervention‖ or ―official intervention‖ – anyactions,includingformalcorrective action, taken by supervisoryor resolution authoritiesinresponseto weaknessesin a financial firm prior toentry intoresolution.―Legal framework‖ – the comprehensivelegal system for a jurisdictionestablished by anycombination of the following:a constitution;primarylegislationenacted by a legislativebody that hasauthorityin respect ofthat jurisdiction;subsidiarylegislationadoptedunder theprimary legislationof that jurisdiction;or legal precedent and legalproceduresof that jurisdiction.―Protectionscheme‖ – anyscheme or fund that protectsdepositors,insurancepolicy holders or investors, asthe casemay be, from specifiedlossesthat theymight otherwiseincur asa result of thefailure of afinancial firm.―Public ownership‖ – ownershipor control of an entityby a publicauthorityor other emanation of the State.―Resolution‖ – anyaction takenby a public authority in respect of a firmthat meetsthe conditionsfor entry intoresolution, includingin particulartheexerciseof a resolution powerspecified in KA3, with or withoutprivate sectorinvolvement, withthe aim of achievingone or more of thestatutoryobjectivesof resolution.Resolutionmay includethe application of proceduresunder insolvencylaw to partsof a firm in resolution, in conjunction withtheexerciseofresolutionpowers.―Resolution authority‖ – an authority that, either alone or together withother authorities, is responsible for the resolution of firms established initsjurisdiction(includingresolution planning functions).Referencesin thisdocument toa―resolutionauthority‖ shouldbereadas―resolutionauthorities‖ in appropriatecases.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 22―Resolutionpowers‖ – powersavailable topublic authoritiesunder thelegal frameworkand resolutionregime for the purposesofresolution, includingin particular those set out in KA3.―Resolution regime‖ – the elements of the legal framework and thepolicies governing the application of resolution powers by nationalauthorities.This may consist of sector-specificstatutesand rules,or mayconsist of asingleregimecoveringall firms.TheKAs areneutral asto the form of theregime, providedthat all firmsthat could be systemically significant or criticalin the event of failure aresubjecttoan effectiveresolution regime.―Systemically important financial institution‖ – a financial institutionorgroup that, becauseof its size, complexityand systemicinterconnectedness,would, in the view of therelevant authorities, causesignificant disruption to thedomestic or broader financial system andeconomicactivityif it weretofail in a disorderlymanner.―Systemically significant or critical‖ – an activity or operation issystemicallysignificant or critical if itsinterruption, suspension ordiscontinuationcould lead toa disruption of servicesvital for thefunctioningof thefinancial system or real economyExecutive SummaryBackgroundTheglobal financialcrisisdemonstratedthe urgent need toimproveresolution regimessoasto enableauthoritiestoresolvefailingfinancialinstitutions(FIs) quickly without destabilisingthe financial system orexposingtaxpayers tolossfrom solvencysupport.Followingthecrisis, the FSBpublishedthe KeyAttributesof EffectiveResolutionRegimesfor Financial Institutionsaspart of the packageofpolicy measurestoaddressthemoral hazard risksposed bysystemicallyimportant financial institutions(SIFIs).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 23TheKeyAttributes(KAs) set out the coreelementsof effectiveresolutionregimesthat applytoany financial institutionthat could be systemicallysignificant or criticalif it fails.Resolution regimeshave been identifiedasa priorityareabythe FSB.As a result, the implementation of the KAs by FSB member jurisdictionswill undergointensivemonitoring and detailed reporting.Toensure timelyand effectiveimplementation, the FSB will carry out aniterativeseriesof peer reviewson the implementation of theKAs.Theobjectiveof this first peer review is toevaluate FSBjurisdictions‘existingresolution regimes and any plannedchangesto thoseregimesusingthe KAs asa benchmark.Thereview comparesnational resolution regimes both acrossindividualKAs (focusingprimarilyon KAs that cover core provisionsof thoseregimes) and acrossdifferent financial sectors(banking, insurance,securities,and financial market infrastructure(FMIs)).It providesrecommendationsfor future work by the FSBand itsmembersin support of an effective and credible resolution regime for SIFIs, whichis a critical component of the policyframework for ending too-big-to-fail.Main findingsWhile major legislativereformshave alreadybeen undertaken by someFSB jurisdictions(particularlythosedirectlyaffectedby the financialcrisis) to develop new, or reviseexisting, resolutionregimes,it is clearthat implementationof theKAsis still at an earlystage.Thisisnot surprisingastheKAs areanew internationalstandard and thereforms neededtoimplement them may involve significant legislativechanges.Several FSB jurisdictionsare in theprocessof adoptingthose reformstofurther strengthen their resolution regimes.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 24For example, theproposedEuropean Union (EU) Directiveon recoveryand resolution for banks and investment firms, onceapproved, willrepresent a major stepforwardin aligningthe resolution regimesof EUmember stateswiththe KAs.Resolution regimesacrossFSBmember jurisdictionsexhibit a broadrange of practicesin terms of scope, mandatesand powersof authorities.This is tobe expected.TheKAs do not prescribethespecific form of theresolutionregime orparticular type of resolution authorityaslong asthat regime isconsistentwith the KAs.However, jurisdictionssometimeshavedifferent interpretationsof whatconstitutesa ‗resolution regime‘ and itsrelationship toordinaryinsolvencyregimesand powersfor ordinarysupervisorypurposes.This divergencein interpretation can make it difficult to draw definitiveconclusionsabout the alignment of national powersacrossdifferentsectorswiththe KAs.Additional clarificationand guidance on the applicationof theKAs isthereforenecessarytoassist jurisdictionsin implementation, facilitatemonitoring, and ensure consistencyin assessmentsof compliancewiththeKAs.Anumber of featuresof resolution regimesin FSBjurisdictionsarebroadly consistent withthe KAs.In particular, all jurisdictions are able to use some of the resolutionpowersspecified in KA 3 in relation to banks, although they are notexercisedin all casesby administrativeresolution authorities.Nearlyall jurisdictionshaveavailableoneorbothoftheresolutionpowersspecifiedin KA3 for insurers(portfolio transferand run-off), although inseveral casesthosepowersare exercisedby a court-appointedadministratoror liquidatorin the context of a windup.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 25Most jurisdictionsaccompanyresolution powerswithsome of thesafeguardsspecifiedin KA5, such asrespect for the hierarchyof claimsand a right for creditorsto judicial review of resolution actions.Finally, many jurisdictionsreport that theycan achieveat leastsome oftheobjectivesof theKAs through existingsupervisorypowers– forexample, powerstodevelop recovery and resolutionplans(RRPs) or torequireresolvabilityassessmentsfor certain FIs.Nevertheless, there aresignificant divergencesfrom, or inconsistencieswith, the KAs that need tobe addressed.Moreover,additional clarification and guidanceon the application of theKAs is needed in a number of areastofacilitateprogress.Themain areaswherefurther enhancement of resolution regimesbynational authorities, or additional guidancebytheFSB and relevantstandard-settingbodies (SSBs), may be necessaryare asfollows:Comprehensive resolution powersfor banks – KAs 1and 3 (seerecommendation 1a):Although resolution regimesare generallymoredeveloped for banksthan for other financial institutions,few jurisdictionshaveequippedadministrativeauthorities withthe full set of powerstoresolve banksset out in KA3.For example, very few authoritieshave the statutorypower both towritedownand to convert liabilitiesof a failinginstitution(bail-in withinresolution).Moreover,in some casesresolutionactionsmay require court approval orthecooperationof thefailing firm or itsshareholders,while inother casesresolution actions,such asthe transfersof assetsand liabilities,arecarried out by an administratorthat may neither be mandated to achievetheobjectivesin theKAs nor subject todirectionby theresolutionauthority.Resolutionregimesfor non-bank FIs – KA1(seerecommendations1band 2b): Resolution regimesaremost advanced for banksandInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 26progressivelylesssofor insurers,securitiesor investment firmsandFMIs,whereboth mandatesandpowersfall wellshort of thestandardsintheKAs.Thisin part reflectsthelessadvancedstateofguidanceontheapplicationof the KAsto thosesectors.For example, in many FSB jurisdictionsthere is nodesignatedadministrativeresolutionauthorityfor securitiesor investment firmsandFMIs.Powersfor non-bank FIs are often supervisoryin nature and donotachievethe outcomesspecified in the KAsor are limitedtofirmliquidationor windup at theinstigationof the supervisoror, in somecases,through some form of speciallyadapted insolvencyregime.Powerstoresolvefinancial groups– KA1.1(seerecommendations1c, 1d,2c and 2d): Most FSB jurisdictionslack powersto take control oftheparent or affiliatesof a failed FI, problem for G-SIFIs that tend tohaveintegratedand highlycomplex structures.Further clarityas to the nature of powersneeded for FHCs, non-regulatedoperational entities and branchesof foreign FIs would also be desirable toensure a consistent approach.In addition, few jurisdictionshavein placeacoordinationframeworkthatdesignatesa lead authority wheretwoor more domesticresolutionauthoritiesare responsiblefor resolvingdifferent entitiesof a financialgroup within thesame jurisdiction.Cross-border effectivenessof resolution measures– KA7 (seerecommendations1eand 2e): The financial crisisdemonstrated theneedtostrengthen arrangementsfor cross-border cooperation in dealingwithfailing FIs.However,national legal frameworksfor cross-border cooperation inresolution are, overall, lesswell-developedacrossall sectorsthan otherareasof the KAs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 27Onlya few jurisdictionscurrentlyempowerand encouragetheirresolution authoritiesthrough statutorymandatestocooperate andcoordinatewhereverpossiblewith foreign resolution authorities.Moreover,the abilityof existingmechanismsin many jurisdictionstogiveeffect to foreign resolutionactionsremainsunclear.Very few jurisdictionshave provisionsfor expedited(administrativeorcourt-based) proceduresforrecognitionandenforcement ofactionstakenbyforeign authorities.This is a major weaknesssinceit may undermine the legal certaintyofresolutionactionsin relationtoassetsand liabilitiesin other jurisdictionsandtherebyjeopardisethe effectiveimplementation of resolutionstrategiesfor cross-border groups.Information sharingfor thepurposesof resolution – KAs7.6, 7.7and 12(seerecommendation1f):Few FSB jurisdictionshaveclearanddedicatedstatutoryprovisionsfor domesticauthorities toshare confidentialinformation with foreign resolution authorities.While most jurisdictionsrely on existingpowersto disclosenon-publicinformation for supervisorypurposes,thesepowersmay not besufficientlybroad toallowsuch informationto be shared withalldomesticand foreign authoritiesthat are not supervisorsbut have aresponsibilityfor planningor carrying out resolution.Unlesshome and host authoritieshavethe capacitytoshare suchinformation, it is unrealisticto expect them tomeaningfullydiscusscross-border resolution strategiesand plansor tocooperateeffectivelyina crisis.Treatment of financial contractsin resolution – KA4 (seerecommendation 1g): Resolution authorities in most jurisdictionseitherlack powersto imposea temporary stayon the exerciseof contractualacceleration or earlytermination rightsinfinancialcontractsthat arisebyreason onlyof entry intoresolution or in connection withthe exerciseofInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 28resolutionpowersor, wherethepowerexists,it is not subject tosuitablesafeguards.Funding– KA6 (seerecommendation2f):Funding arrangementsdiffergreatly acrosssectorsand jurisdictions.Most jurisdictionsrelyon privately funded protectionfundstofinanceresolution actions,but it is not clear whether such arrangementsareadequateor appropriatein scaleor scope.Publicfinancial support thereforeremainsan important component ofresolution fundingarrangementsfor SIFIs. Mechanismsfor the recoveryof public fundsare not well developed, while conditionson their use arelargelyabsent.Recovery and resolution planningand actionsto improve resolvability–KAs 10and 11(seerecommendations1h,1i and 2g):In most jurisdictions,thereis noexplicit requirement in statuteor rules for RRPs for domesticSIFIs.Moreover,most authorities lack thepowerto require firms tomakechangestotheir organisational and financial structuressolelyin order toimprovetheir resolvabilityand in advance of resolution.Operational capacityto resolvecomplex SIFIs– KA2 (seerecommendation 2h): Howevergood a resolutionregime might look instatute, it will not beeffectiveunlessthe national authoritiesresponsiblefor resolutionhave the operational capacity– including staff with theappropriatelevel and rangeof expertise, and adequate resources – toresolve complex financial groupsand SIFIs.This critical dimension cannot be verifiedin a desktop exercisesuchasthepeer review and will need to be assessedin on-siteIMF-WorldBankcountry assessmentsusing suitablecriteria in theassessmentmethodologyfor theKAs.Rigorousmonitoring of implementationprogressin aligningresolutionregimesin FSB jurisdictionswiththe KAs(seerecommendation3):International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 29Several FSB jurisdictionsare implementingor consideringreformstotheir resolution regimes.Given the early stage of those reforms, a rigorous monitoring frameworkneeds to be developed to ensure comprehensive reporting of progress byjurisdictionsin aligningtheir resolutionregimes with the KAs.While future ―deep dive‖ peer reviewswill be useful in that regard, theyshould be complementedby regular reports using a standardisedtemplate to enhancethe reportingof implementation progressbyjurisdiction, sector and KA.RecommendationsBasedon theabovefindingsof thepeer review, there are three setsofrecommendationsfor implementation by theFSBitselfor relevantmember jurisdictions(seebelow).Work on some of therecommendationsaddressed tothe FSB is alreadyunderway.Most of therecommendationsthat involve actionsbynational authoritiescan – and should – beimplementednowwithout waitingfor additionalFSB guidance.Jurisdictionsmay consider establishing a phased reform program toaddressthe issuesidentified below.In some cases,earlyworkon resolution planningand resolvabilityassessments,includingthe introductionof resolutionplanningrequirementsto all firms that could havean impact on financial stabilityin theevent of failure, may reveal specificweaknessesor gapsin thepowersneededfor effectiveresolutionand therebyassist jurisdictionsinthedevelopment of such a program.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 30Recommendation 1:Full implementation of the KeyAttributes(KAs)FSB member jurisdictionsshould undertake the followingactionstointroduce,or revisetheir existing, resolution regimesfor financialinstitutionsin order tofullyimplement the KAs:a.Reviewing, and revising asneeded, resolution regimesfor bankstoensure that all the powersset out in KA3, includingpowerstotransferassetsand liabilitiesand powersto write-downand convert debt withinresolution, areavailableto administrativeresolutionauthorities;b.Reviewingthe adequacyand effectivenessof resolution regimesfornon-bank FIs, and adopting any necessary reforms toensure thatadministrativeresolutionauthoritieswith adequate powersaredesignatedfor thoseinstitutions;c.Extendingthe scope of resolution regimestofinancial holdingcompanies, non-regulated operational entitiesthat are significant to thecritical functionscarried out within the group, and branchesof foreignfinancial firms;d.Wheremultipleresolutionauthoritiesexist, strengtheningcoordinationframeworksand designatinga lead authority for resolving domesticentitiesof thesame group;e.Enhancingthe mandatesand capacityof resolution authoritiestocooperateand coordinatemeasuresacrossborders;f.Reviewingthedomestic legal frameworkfor information sharing, andrevisingit asneededto ensure that domestic authoritiescan shareinformation with all relevant domesticand foreign authorities forplanningand carrying out resolution;g.Introducingpowersto impose a temporarystay on the exercise ofcontractual acceleration or earlytermination rightsin financialcontracts,subject tosuitablesafeguardsasdescribedin KA4 andAnnexIV to theKAs;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 31h. Introducinga RRP requirement for all domesticallyincorporated firmsthat could be systemically significant or criticalif theyfail; andi. Empoweringsupervisoryor resolution authorities torequire financialinstitutionsto adopt changesto their structure, organisation or businesspracticeswhereit isnecessaryto improve their resolvability.Recommendation 2:Additional clarification and guidance onthe application of the KAsTheFSB should provideadditional clarificationand guidanceon theapplication of the KAs to assistjurisdictionsin implementation, facilitatemonitoring, and ensure consistencyin assessmentsof compliancewiththeKAs, by:a.Clarifying thenature of resolution powersascomparedwiththeordinarycorporateinsolvencyregimeandpowersfor ordinarysupervisorypurposes;b.WorkingwithSSBs to develop guidanceon the featuresand powersnecessaryfor resolution regimesin each non-bank financial sector tomeet the standardsof the KAs;c.Developing guidance on the nature of powersneeded for FHCs,significant non-regulatedoperational entities,and branchesof foreignfinancial firms;d.Developingguidanceand identifying good practicesfor coordinationwheretwoor more domestic resolution authorities are responsibleforresolving entitiesof the same financial group;e.Takingstock of mechanismsto giveeffect to foreign resolutionmeasures– such asadministrativeand judicialpowersof recognitionandcontractual mechanismsrequiringcounterpartiestorecognise theexerciseof powersbya foreign resolutionauthority– and evaluatingtheireffectiveness(e.g. in terms of timingand predictability) in theimplementationof cross-border resolution strategies;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 32f.Takingstock of resolution fundingarrangementsacrossjurisdictionsandidentifying good practicessothat temporarypublic fundingdoesnotgiverisetomoral hazard andissubjecttoconditionsand mechanismsforrecoveryfrom privatesector sources;g.Clarifying thenature and scope of the powersthat authoritiesshouldhaveto require firms to take measurestoimprove their resolvability; andh.Ensuring that theassessment methodology for the KAscontainssuitablecriteria toassesstheoperational capacityof resolutionauthorities.Recommendation 3: On-going implementation monitoringTheFSB should undertake monitoring and reportingon theimplementationof theKAsby:a.Developing a standardised reporting templatetofacilitatethe analysisof implementationprogressby jurisdiction, sector and KA;b.Undertaking follow-up peer reviews focused on resolution powers,cross-border cooperation and information sharing, and recovery andresolutionplanning; andc.Carrying out, in coordination with relevant SSBs, peer reviewson theapplication of the KAs toindividual non-banking sectors(insurance,investment and securitiesfirms, FMIs) once relevant guidanceby thosebodies isissued.I. Introduction1.BackgroundTheglobal financialcrisisdemonstratedtheurgent need toimproveresolution regimessoasto enableauthoritiestoresolvefailingfinancialinstitutionsquicklywithout destabilisingthefinancialsystem orexposingtaxpayers to lossfrom solvencysupport.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 33Followingthecrisis, a number of jurisdictionshave adopted, or arecurrentlypreparing, legislationto strengthentheir resolutionregimes,while some progresshas alsobeen madein establishingcrisismanagement groups(CMGs) for global systemicallyimportant financialinstitutions(G-SIFIs)and enhancingcross-bordercooperation.TheFSB adopted theKeyAttributesof EffectiveResolution RegimesforFinancial Institutionsin November 2011aspart of thepackageof policymeasuresto addressthemoral hazard risks posedby SIFIs.TheKeyAttributes(KAs) represent anew internationalstandard that setsout thecore elementsof effectiveresolutionregimesthat applyto anyfinancial institutionthat could be systemically significant or criticalif itfails (seeBox 1).Work is ongoingacrossa number of resolution-relatedwork streams.Theseincludethe development bythe FSBof an assessmentmethodologyfor theKAs whichcontainsexplanatorymaterial andadditional guidanceon variousaspectsof recovery and resolutionplanning;and workby the relevant standard-settingbodies(SSBs) –namely, the Committeeon Payment and Settlement Systems (CPSS) andtheInternational Organisationof Securities Commissions(IOSCO), andtheInternationalAssociation of InsuranceSupervisors(IAIS) – on,respectively, the applicationof the KAs tofinancial market infrastructure(FMI) and insurers.Resolution regimeshave been identifiedasa priorityareaunder the FSBCoordination Frameworkfor ImplementationMonitoring.As a result, the implementation of the KAs by FSB member jurisdictionswill undergointensivemonitoring and detailedreporting.Toensure timelyand effectiveimplementation, the FSB will carry out aniterativeseriesof peer reviewson the implementation of theKAs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 34Box 1:KeyAttributes of Effective Resolution Regimes forFinancial InstitutionsTheKeyAttributesset out thecoreelementsthat theFSBconsiderstobenecessaryfor an effectiveresolution regime.Their implementationshould allowauthoritiesto resolve financialinstitutionsin an orderlymanner without taxpayer exposure tolossfromsolvencysupport, while maintainingcontinuityof their vital economicfunctions.Theyset out essential featuresin twelveareasthat should bepart of theresolution regimesof all jurisdictions,whichrelate to:1. Scope2. Resolutionauthority3. Resolution powers4. Set-off, netting, collateralisation, segregation of client assets5. Safeguards6. Funding of firms in resolution7. Legal framework conditionsfor cross-border cooperation8. CrisisManagement Groups(CMGs)9. Institution-specificcross-border cooperationagreements(COAGs)10. Resolvabilityassessments11.Recovery and resolution planning12. Accessto information and informationsharing.Not all resolution powersset out in the KeyAttributesare suitablefor allsectorsand all circumstances.Topromoteeffectiveand consistent implementationacrossjurisdictionstheFSBwill continueto workwithitsmembersto develop furtherguidance,takingintoaccount the need for implementation toaccommodatedifferent national legal systems and market environmentsand sector-specificconsiderations(e.g. insurance, FMIs).TheKeyAttributesalsocontain specific requirementsfor resolvabilityassessments,recovery and resolution planning, and the development ofInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 35COAGs betweenhome and host authorities, whichmust be met forG-SIFIs.AnnexesI toIV of thedocument providemore specific guidancetoassistauthoritiesin implementingthe KeyAttributes with respect to:• COAGs (Annex I)• Resolvabilityassessments(Annex II)• Recovery and Resolution Plans(Annex III)• Temporarystays on earlyterminationrights(Annex IV).2. Objectives and scope of the reviewTheobjectiveof thepeer review isto evaluate FSB member jurisdictions‘existingresolution regimes and any plannedchangesto thoseregimesusingthe KAs asa benchmark.Thereview providesa comparativeanalysis of the overall legal,institutional and policy frameworkof existingresolution regimes, bothacrossindividual KAsand acrossdifferent financial sectors(banking,insurance,securities or investment firms, and FMIs).In doing so, the review hasmade useof the draft assessmentmethodologyfor theKAs that iscurrentlyunder preparation.Thebroadscopeof thereviewismotivatedbythefact that it isthefirst ina number of proposed thematic peer reviewsin this area.Sincethe KAswereonlyrecentlydevelopedasan international standard,their effectiveimplementationwill require substantial follow-upworkbynational authorities, SSBs and firms, includinglegislativechangesinmanyjurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 36The review focuses primarily on those KAs that cover the core provisionsof national resolution regimes applicable to any financial institution thatcould be systemicallyimportant or critical if it fails.TheseareKA1(scope of resolution regime), KA2 (existence, mandateand governanceof resolution authorities), KA3 (resolutionpowers)andKA6 (fundingarrangementstosupport resolution).Thepeer review alsocoversother provisionsin national resolutionregimesin lessdepth soastoavoid unnecessaryoverlapswithworkundertaken by other FSB workstreams.TheseincludeKA4(legalframeworkgoverningset-offrights, contractualnetting, collateralisationarrangements,and segregation of client assets),KA5 (existenceof safeguards), KA7 (legal frameworkfor cross-bordercooperation), and KA12(accesstoinformationand information sharing).KA10 (resolvability assessments) and KA11(recovery and resolutionplanning) arecoveredonlyasregardstowhethernationalauthoritieshavedeveloped frameworksfor carrying out resolvabilityassessmentsandrecoveryand resolution planningfor financial institutions(FIs) in theirjurisdiction.Thereview doesnot examinethe implementationof thoseattributesforindividual G-SIFIs and doesnot includeKA8 (crisismanagementgroups) and KA9 (institution-specific cross-border agreements) thatapplyonlyto G-SIFIs.Thedepth of coverageacrosssectorsreflectsdifferencesin reformstoresolution regimesand progressin policyworkby relevant SSBsacrossthosesectors.Asignificant part of the review is dedicatedto banking, sincemost of theresolution-relatedreformsin recent yearshave been focusedon thatsector.Thereview givesdueconsiderationtosectoral specificitiesandrecognisesthat not all powersand characteristicsof resolution regimesInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 37set out in the KAsare suitableor relevant for all sectorsand under allcircumstances.The primary source of information for the peer review is the responses toa questionnaire by FSB member jurisdictions, which was mostly based onessential criteria set out in thedraft assessment methodology.Thereview alsomadeuse of availablereportsor guidanceby SSBsrelatingtoresolution-relatedconsiderationsfor specificsectors.Thereport and itsAnnexesare structured asfollows:•SectionII andAnnexAreviewtheresolution-relatedactionsundertakenin responsetothe global financial crisis, includinglessonslearned andlegislativereformsinitiatedduring or in the aftermath of thecrisis;•Section III describesthe main featuresof existingresolution regimes,organisedby KeyAttribute, and issupplemented by further detail inAnnexesB and D;•Section IV andAnnex C summariseplannedresolution regimereformsbyFSB jurisdictions;and•SectionV summarisesthekey findingsand providesrecommendationstopromote thetimelyand consistent implementationof theKeyAttributes.II. Actionsundertaken in response to the financial crisisDuring the financial crisisthat began in 2007, most FSB memberjurisdictionstook policy measuresto support and enhanceconfidenceintheir domestic financial system.Anumber of thosejurisdictionsalsotook actions– often on an ad hocbasis– tointervenein, resolve, restructure or wind up financialinstitutions(FIs) deemed systemically significant.Most of theaffectedFIs werebanks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 38In some cases,thebankswererelativelysmall and domesticallyoriented, but weredeemed to be systemic in theprevailingfinancialmarket environment.Most of thosejurisdictionstook action under existingsector-specificpowersto restructureand wind-up failingFIs.In a number of casesthosepowersand authoritiesprovedinadequate, leadingsome jurisdictionstoadopt emergencylegislationto enablethe necessaryresolution actions.In the United Kingdom (UK), emergencylegislationenabled theresolutionof several banksthrough nationalisation, thetransfer ofdepositsand assetstothird partiesand the establishment of bridge banks;thetime-limitedemergencylegislationwassubsequentlyreplaced with anew statutoryspecial resolution regime.In the United States(US), emergencylegislationenabled thepurchaseoftroubledassetsfrom FIs.Germanyrecapitalisedbankswith state fundsand restructuredthem, includingby transferringbad assetstoasset managementcompanies(AMCs) through a newlyestablishedagencythat providedthenecessaryfundingand acted asumbrella for theAMCs.TheNetherlandsadoptedlegislation for therecapitalisationor transfer ofassetsand liabilitiesof banksor insurerstoanother FI or a bridgeinstitution and the interventionin a parent or holding company.TheSwissauthoritiesreinforcedthe capital base of a systemic bank bysubscribingto mandatory convertiblenotesand financingthetransfer ofsomeof thebank‘silliquid assetsto a special purpose vehicle;theseactionswereimplementedthrough emergencylegislation.Franceadoptedlegislationallowingstatefinancial support tobeprovidedtoFIs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 39Russia adopted a special resolution regime for systemically importantbanks empowering the deposit insurer to provide capital and liquiditysupport.Spainadopted legislationestablishinganewresolution authority withthepowertorecapitaliseand restructure banks;several smallerbanksweregranted capital and liquiditysupport, and weresold to other bankswithassistancefrom the resolutionauthorityin the form of asset guaranteesand capital and liquiditysupport.Financingfor the resolution and restructuring of failing FIs came frompublic sources– generallynational governmentsandcentral banks– withonlylimited recourseto the privatesector.France, Netherlandsand the UK reliedsolely on treasury financing.Russiarelied on contributionsbythe treasuryand loansby thecentralbank totheresolution authority.Somejurisdictions,includingFrance, Germanyand Spain, establishedspecial public entitiesto provide fundingand expertise.Afew jurisdictionsalsoreported theuseof private sector fundsforresolution actions,mainlyasa result of using industry-funded depositinsurancefunds.TheUS relied on a combination of treasury, central bank and depositinsurer funds.Most jurisdictionsintend to recoup financial assistanceby thesaleof FIsand assetsacquired in thecourseof resolution actionsand toreplenishdeposit insurancefundsthrough industrycontributions.Thefinancialcrisishighlightedtheneedtosignificantlyenhanceexistingresolution regimesin FSB jurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 40Implicit relianceon public support wasshownto be a policy thatpenalisedtaxpayers, contributedtomoral hazard and wasnot viableinthelong term.Many jurisdictionsrecognisedthe need toenhanceresolution powers,undertake more formal recovery and resolution planning, strengthenarrangementsfor domestic and cross-border cooperationin dealing withfailing FIs, and develop mechanismstorecoupany publicfundsused inresolution.Somejurisdictions,particularlythosethat weredirectlyaffectedby thefinancial crisis,drew the lessonthat the general corporateinsolvencylawwasnot suitablefor resolving systemic FIs, and have alreadyundertakenmajor legislativereforms todevelop new, or revise their existing,resolution regimes.These reforms include measures to introduce new resolution tools and toexpand resolution authority to non-bank financial institutions (see AnnexA).Several other jurisdictionsare implementingor consideringreformstotheir regimes(seesection IV).III. Key featuresof resolution regimesThis section summarises the key featuresof resolution regimesof FSBmember jurisdictionsby individual KA.This summary iscomplemented byAnnexesB and D, whichrespectivelyset out selected and detailed featuresof resolution regimesin FSBjurisdictions.1. Scope of resolution regimes (KA 1)KA1requiresthat all financial institutionsthat could be systemicallysignificant or criticalin the event of failure, includingbanks, securitiesInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 41and investment firms, insurersand FMIs, be subjecttoa resolutionregimethat hasthe featuresset out in theKAs.In order tobecapableof resolvingfinancialgroups,thoseregimesshouldextendto branchesof foreign FIs, financial holding companies (FHCs),and non-regulatedoperationalentitiesthat are significant to thebusinessof a financial group.All FSB jurisdictionsreport that theyhave specific powersto restructureand/ orwindup banksthat are distinct from ordinary corporateinsolvency(seeTable1Ain Annex D), although theextent towhichthesector-specificregimesdiffer from ordinary corporateinsolvencyis notalwaysclear.Eight jurisdictionsreport that theuseof certain powersisrestrictedtosystemicallyimportant banks.Most jurisdictionsalsohave speciallyadapted insolvencyregimesforinsurancefirmsthat typically rely on a combination of ordinaryinsolvencylaw supplemented by powersfor supervisoryauthorities(seeTable1B in Annex D).Resolution regimesfor securitiesor investment firms and FMIs are evenlesswell established.ThirteenFSBjurisdictionsindicatethat theyhave specific powerstorestructure and/ or wind up securitiesor investment firmsoutsideofordinarycorporateinsolvency(seeTable1CinAnnex D), whileonlyeightjurisdictionsreport having sector-specificpowersin placeforrestructuring and/ orwindingupall orsomeclassesofFMI (seeTable1Din Annex D).Three of thosejurisdictions18notethat, wherecertain FMIs (suchasCCPs) are authorised asbanks, theyarecurrentlywithinthescopeof thatjurisdiction‘sbank resolution regime.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 42Work is ongoing by CPSS and IOSCO to clarify how the KAs should beapplied to FMIs, so as to provide a basis for jurisdictionsto design andimplement resolution regimesfor this sector.It should be emphasised, however, that sector-specific powerstorestructure and/ or wind up FIsare not necessarilyalignedwith theKAs.In many cases,the reportedpowersare supervisory in nature, require theconsent of shareholdersor are limitedtoliquidationor windingup of thefirm at the instigationof the supervisor or, in some cases, through someform of speciallyadapted insolvencyregime.Thiswasespeciallythecasein relationtotherangeof powersavailableinmanyjurisdictionsin respect of insurers, securitiesor investmentfirms, and FMIs.Thesetypes of powersare useful supplementstothe core resolutionpowersoutlinedin KA3 but do not constituteon their own a resolutionregimethat meetsthestandardsof theKeyAttributes.While manyjurisdictionsreport that theyhave specific powerstorestructureand windup holdingcompaniesthat areregulatedasbankingor insurancegroups,only eight of them havethe abilityto usethosepowersfor FHCsthat are not themselvesa bank or other regulatedinstitution.Such a restriction wouldlimit the resolution strategiesavailableto dealwith a financial group, and appropriateresolutionpowersshouldthereforeapply more broadlytonon-regulated FHCs.In most FSB jurisdictions,theresolutionframework cannot be appliedtonon-regulatedoperational entitieswithin a financial group.Authoritiesin only seven jurisdictionshave directpowersin relationtonon-regulatedoperational entitiesthat can be exercised in theresolutionof the wholeor a part of thefinancial group or conglomeratetowhichthoseentitiesbelong; the nature of thosepowersalsovariesacrossjurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 43Non-regulatedoperational entitiesmayprovideservicesthat arenecessaryfor thecontinuityof systemically important functionscarriedout withinthe group, and a lack of appropriate powersin relationto suchentitiesmay result in an abrupt withdrawalof those servicesthatjeopardisesthe resolution objectiveof maintainingthosefunctions.In a majorityof cases,authoritiesreport that theyhave powersoverbranchesof foreign financial institutions.In some cases, thosepowersare limitedtoactionsunder theordinarycorporateinsolvencyregime (such asthepower toring-fencelocalassetsand realisethem tomeet the claimsof creditorsof thebranch) under thejurisdictionor supervision of domesticcourts.In many jurisdictions,powersin respect of branchesare much lesscomprehensivethanthose available for locallyincorporatedentities(seeKA7).2. Resolution authority (KA2)KA2requiresjurisdictionstohavea designated administrativeresolutionauthority(or authorities) that is (are) operationallyindependent andadequatelyresourced.Thestatutoryobjectivesand functionsof resolutionauthoritiesshouldrequirethem topursue financial stability, protect depositors,insurancepolicy holdersand investors(asappropriate); avoid unnecessarydestruction of value;and consider thepotential impact of their actionsonfinancial stabilityin other jurisdictions.Where there is more than one resolutionauthorityin a jurisdiction, theirrolesshould be clearlydefinedand coordinated, and theresolutionregimeshould identifya lead authority tocoordinateresolutionof amulti-sectorfinancial group withinthat jurisdiction.Responsibilityand powersfor the resolution of (at least some) FIsareconferred on one or more public authorities in all FSB memberjurisdictions(seeTable1).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 44Thedivision of resolutionpowersand responsibilitiesbetweenthoseauthoritiesvariesconsiderably:theKAsarenot prescriptiveinthisregard.Many jurisdictionsconfer the primary responsibilityand powersfor theresolutionof bankson supervisory authoritieswithdifferent degreesoffunctional separation, whilethe resolutionauthority is separate from themain sectoral supervisor in onlya minority of cases.While all FSB jurisdictionsreport that their resolution authoritiesareoperationallyindependent, thishasnot been verified in the peer review.For theinsurancesector, almost all FSB jurisdictionscurrentlyhaveprudentialsupervisorsthat canintervenein troubledorfailinginstitutionsin a variety of ways(such aslicensewithdrawal, appointment ofadministrator,or court petition for windingup), although mostjurisdictionsrequire the courtsto appoint an administratoror liquidatortocarry out the resolution.In many FSB jurisdictions,there isno administrativeauthorityresponsiblefor restructuringand windingup securitiesor investmentfirmsand FMIs.This reflectsthelimitedscope and powersfor resolving systemicallyimportant non-bank SIFIs under theexistingregimes(seethe discussionin KAs 1and 3).Theinvolvement of public administrativebodies in thosesectorsrelatestotheir role asmarket conduct or oversight authorities,withmeasurestoaddressor managefailinginstitutionstypicallylimited to standardinsolvencyprocedures.Indeed, in many caseswherejurisdictionsreport theexistenceof aresolution authorityfor securitiesor investment firms and FM Is, thatauthorityis actuallya supervisorthat isonly able toexercisecertainpowersunder a sector-specific regime for restructuring or windingup, butdoesnot havetheadministrativeresolution powersspecified in KA3.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 45As previouslynoted, there are a few exceptionswherethe responsibleauthorityhaspowersin relationto certain categoriesof FMI that aresimilar to thosefor other types of FI.TheKAs recognisethat not all attributesand resolution powersarerelevant for all financial sectors;howeverthedesignation of anadministrativeauthorityorauthoritieswiththeresponsibility, powersandmeansto resolvesystemically important firmsis an essential element ofan effectiveregime acrossall sectors.While resolution measuresmay be implementedby an administratorthatis appointed and supervised by a court (asis thecasein several FSBjurisdictions), the objectivesof that administrator should be aligned withKA2.3.In thosejurisdictionswithmultipleresolutionauthorities, nearlyallreport havingsome form of coordinationarrangementsin placebetweentheauthorities,although the adequacyof thosearrangementshasnotbeen analysed in the peer review.However,several jurisdictionsdonot appoint a ‗lead authority‘tocoordinatetheresolution of domesticentitiesof the samegroup.Theresponsesof somejurisdictionsindicatethat theboundariesbetweentherespectiverolesand responsibilitiesof those authoritieswithresolution functionsare not alwaysclear, whichmay hamper effectiveresolution.Very few jurisdictionshave statutory objectivesin placefor theirresolution authoritiesthat arefullyalignedwiththeKAs.However,many such authorities(includingprudential supervisors,market conduct authorities, central banks, financeministries,depositinsuranceand other protectionschemes) may havebroaderresponsibilitiesrelatedto financial stability, and the objectivesrelatingtotheir rolein resolution may not necessarily be reflectedin a separatestatuteor other public policydocument.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 46Although nearlyall authoritieshave formal objectives(oftennot relatedspecificallyto their resolution functions) tomaintain financial stabilityandprotect depositorsor policyholders, most do not have mandatestoavoid destruction of value (beyond maximisingrecoveriesin liquidation)or toconsider theimpact of resolution actionson other jurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 473. Resolution powers(KA 3)KA3 setsout therangeof resolutionpowersthat should be availableinresolution regimes.Theseincludepowersto transfer assets, rightsand liabilitiesof, or sharesin, failing institutionsto a purchaser, bridgeinstitutionor assetmanagement company(AMC);towritedownandconvert debt ofthefirminresolution(bail-in);toappoint anadministrator;andtooperatethefirmin resolution and takeactionsnecessarytorestructureor winddown itsoperations.Authoritiesresponsiblefor resolving insurersshould alsohavepowerstotransferportfoliosand ―run-off‖ theinsurance businessof a firm inresolution.All powersshould beexercisablewithout any requirement for creditorconsent or shareholderapproval.Regimesshould provide for resolution tobe triggered when a firm is, or islikely to be, no longer viable, and before it is balance-sheet insolvent andtheequityhasbeen fullywipedout.MostFSB jurisdictionsreport that theyareabletoprovidefortimelyentryintoresolution or theexerciseof resolution powersat or before thepointof non-viability, and before thefirm isbalance-sheetinsolvent. In mostcases,thereportednon-viability triggersfor insurers,securitiesorinvestment firmsand FMIs applylater than for banks,which may be duetothe fact that theyreflect triggersavailableunder corporateinsolvencyregimes.Jurisdictionsreport that resolution powersare considerably moredeveloped for banks(seeTable2) than for insuranceand, especially, forsecuritiesor investment firms and FMIs.While some of the resolution powersspecified in theKAsmay not benecessarytoresolvecertain typesof non-bank FIs,no special powersInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 48(outsideordinary insolvency) are availablefor securitiesor investmentfirmsand FMIs in most jurisdictions.In all FSB jurisdictions,a supervisoryor resolution authorityhasthepowertoappoint anadministratoror toapplytothecourt for such anappointment (seeTable2 in Annex D).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 49Thepowersof that administratorvary, but most jurisdictionsreport thattheadministratorhasa widerangeof powers,includingto operatethefirm and to manageor dispose of its assets.In some cases,thepowersof the administrator are restricted tothepowersof the firm‘s management, whichsuggests that the administratorcannot overrideshareholders‘rightsfor actionsthat require shareholderapproval under the constitution of theFI or applicablecorporate law.In other cases,the administratorhasthesamepowersastheappointingauthority, or the authorityis ableto confer such powerson theadministrator.Most jurisdictionsalsoprovidefor powerstotransferassetsand liabilitiesfrom a failed bank.However,in many casesthosepowersare exercisedby the appointedadministratorand it is not clear whetherthe administratorcan bemandatedtoachievetheobjectiveslaid out in theKAs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 50It is also not clear in all caseswhether transfer powers can be exercised (ifnot sanctioned by the court) without the need for shareholder approval orcreditorconsent.Transferpowersaregenerallylesswell-establishedin thecaseof insurers,and even lesssoin the caseof securities or investment firmsand FMIs.In a majorityof jurisdictions,authoritieshave the power to establish andoperatea bridge institution, although that poweris not alwaysbasedonexpressstatutoryauthority.In most caseswheretheuseof a bridgeinstitutionisavailable, it is usedonlyforbanks;relativelyfew jurisdictionsreporthavingbridgepowersforinsurers,securitiesor investment firmsor FMIs.Similarly, in amajorityof jurisdictions,authoritieshave the powertoestablishan asset management company, and totransfer assetsof afailing entityintoit although, aswithbridgeinstitutions,this powerislargelyconfined tothe banking sector.Bail-in within resolution, ascontemplated by the KAs, requirespowersthat enableauthoritiesto:(i)writedown equityin and unsecured creditorclaims againsta firm inresolutiontotheextent necessaryto absorb the lossesof thefirm; and(ii)convert all or partsof unsecured creditor claimsintoequityof thefirm inresolution, its parent company or any successor in resolution (such as abridge institution).Onlytwojurisdictionsreport that bothpowersareconferredbystatuteontheir resolution authority, while another jurisdictionreportsthat it is abletoboth writedown and convert liabilitieswithin resolution usingotherpowers.Several other jurisdictions report that they can achieve, at least to somedegree, the economic effect of bail-in through existing powers, such astransfer and bridge bank powers,although thosepowersaloneare notInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 51fullyequivalent tothebail-inwithinresolutionpowerthat is specifiedintheKAs.Powersfor a resolution authority towritedownand convert liabilitiesaregenerallynot availablefor insurers,securitiesor investment firms andFMIs.In some cases, jurisdictions reported that the use of (at least some)resolution powers requires the cooperation of the failing firm or itsshareholders.This is not consistent withthe concept of a resolutionpower under theKAs and is insufficient for thepurposesof a resolution regime.It is critical for effectiveresolution that all resolution powersbeexercisableby authoritieswithout any needfor shareholder consent ortriggeringany other third partyrights(subjecttothe safeguardsdescribedin KAs 4 and 5).This is becauseresolution authoritiesmust be ableto take action, whichmay includeinterferingwiththird partyrightsquickly and without theconsent of shareholders,creditorsor other stakeholdersof thefirm.At least one of the twospecific resolution powersfor insurers(portfoliotransferand ‗run-off‘) is availablein nearlyall FSB jurisdictions,althoughin some jurisdictionsthe powersare onlyexercisableby the liquidatorininsolvencyproceedings.In many jurisdictions,resolutionpowersare distributedacrosstwoormore authorities.In other jurisdictions,includingsome that have a singleresolutionauthority, the exerciseof resolution powersmay require a court order orconfirmationtobe effective.While thisis not inconsistent withthe KAs, a requirement for courtapproval may impederapid interventionand the abilityto achievetheInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 52specifiedobjectivesof resolution, and may be uncertain astotheoutcome.This is recognised by KA 5.4, whichrequires authoritiestotake accountof the timeneeded for court processesin resolutionplanning soasnot tocompromiseeffectiveimplementationof resolution measures.However,anassessment ofthat requirement wasbeyond thescopeofthispeer review.4. Set-off, collateralisation, segregation of client assets(KA4)KA4 requires that resolution authoritieshave the powerto imposeatemporarystay on theexercise of accelerationand earlyterminationrightsinfinancial contractsthat aretriggeredbyentry in resolutionortheexerciseof resolution powers.That stayshouldbesubjecttothesafeguardsspecifiedinAnnex IV totheKAs, includingstrict limitationintheperiod ofthestay, applicationofthe‗no cherry-pickingrule‘, and preservationof earlyterminationrightstriggeredby defaultsother than entry intoresolution(such asa failure tomake payment or deliver margin).Onlyfour jurisdictionscurrentlyprovide for the imposition of a temporarystay on the exercise of contractual acceleration or early termination rightsin financial contracts(seeTable2).In all of thosejurisdictions(except for theUS in caseswherethe FDIChasbeen appointedasreceiver) thepower is limitedtobanks, while onlythreejurisdictionsprovide for safeguardsfor counterpartiestofinancialcontractscomparable to thosespecifiedinAnnex IV to the KAs.Where a power toimposeastay on earlytermination rightsin financialcontractsisnot accompaniedbyadequatesafeguards,thisfailstoachievetheintended balancebetweeneffectivetransfer powersin relation tofinancialcontractstopreservevalueandcontinuityof criticalservicesandminimisingdisruption to counterparties.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 535. Safeguards(KA 5)KA5 setsout a number of legal safeguardsfor personsaffectedbyresolution actions,and in particularcreditorsof a firm in resolution.These require respect for the hierarchy of claims in resolution; departurefrom the principle of equal treatment of creditors of the same class onlyinaccordance with specified principles; rights to compensation for creditorsthat are worse off in resolution than they would have been in liquidation;and a right tojudicial review of resolution actions.Almost all memberjurisdictionsreportthat their legalframeworksrequireresolution authoritiesto respect the hierarchyof claimswhen exercisingresolutionpowers(seeTable4 inAnnex D), although it is not clear inevery casewhetherthoseframeworksapply outside of corporateinsolvency.Only a few FSB jurisdictions report that resolution authorities have thepower to depart where necessary (e.g. for reasons of financial stability)from the general insolvency principle of equal treatment of creditors ofthesameclass(pari passu).Very few jurisdictionsprovidean explicit statutoryright to compensationfor any creditorthat is worseoff in resolutionthan wouldhave been thecasein liquidation, and set out a mechanism for administeringany suchcompensation.This right wouldbe particularlyrelevant wherethe regime alsopermitsdeparture from theprincipleof equal treatment of creditorsof thesameclass(and that departure resultsin somecreditorsbeingworseoff than inliquidation) or in theunlikely circumstancethat insolvencywouldhaveresultedin lessdestruction of valuethan the resolution action that wastaken.There aredifferencesacrossFSBjurisdictionsin therightsto judicialreview of resolution actionsand the formsof redressavailableunder theirlegal frameworks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 54Themajorityof jurisdictionsprovide a right to such judicial review eitherunder general administrativelaw or asan explicit right under theresolution regime and, in most cases,remediesother than monetarycompensation areavailable.In such cases,thelegalframeworkneedstostrike anappropriate balancebetweenprotected legal remedieson the onehand and the certaintyofresolution and the effectivenessof themeasurestaken on theother.6. Funding of institutionsin resolution (KA6)KA6 requires jurisdictionstohave adequate arrangementsfor fundingresolution from private sources(such asdeposit insuranceor resolutionfunds) or temporary public funding.In order toreducemoral hazard, any provision of temporarypublicfundingshould be subject to conditionsand mechanismsfor recoveryfrom thefirm itself, its creditorsor theprivatesector.In general, resolution funding arrangementsare available for banks, butlesssofor insuranceand securitiesfirms, and are largely non-existent forFMIs(seeTable5 inAnnex D).Arrangementstofund the resolution of banksare generallybasedon amix of private and public sources.Amajorityof jurisdictionsreport theexistenceofprivate sectorsourcesoffundingfor resolution purposes, although their current adequacyforresolving failing SIFIs hasnot been examined.Specifically, three FSBjurisdictionshaveprivatelyfundeddedicatedresolution funds, while fifteen jurisdictionshave a deposit insurancesystem (fundedeither ex anteor ex post by industry levies) that may bedrawnon to fund bank resolution, in additionto pay-out.Where a deposit insurancefund can be used to support resolutionmeasures,it is generallysubject to conditionssuch aslimitationson thepurposefor whichthosefundsmay be used or capsin the amount thatInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 55can be used for a specific resolution (e.g. no more than theamount thatwouldhave been available topay out depositors).Policyholder or investment protection fundshave been establishedinsome jurisdictionsbut play a limitedrolein fundingresolution forinsuranceor securitiesor investment firms.Fourteen jurisdictionshave a protection fund for insurancepolicyholdersor investors,but several of them restrict usetocompensation ofpolicyholders or investorsin a liquidationscenario and donot allowthefund to be usedfor financingthe resolution.No jurisdictionsreportedhaving a resolution fund dedicated to FMIs.Notwithstandingtheexistenceof privatesourcesof funding, publicfinancial support remains an important component of resolution fundingarrangements.While themajorityof FSB jurisdictionsindicatethat public fundingforresolutionmeasuresis available, particularlyfor banks, in only one casethistakesthe form of a dedicated, publiclysourcedresolution fund.Mechanisms for recovery of public funds from shareholders, participantsor creditors of the failed firm, or the wider financial industry, are lesswelldeveloped, although several jurisdictionshave facilitiesfor appropriationsorleviestorecouponanexpostbasisanypublic fundsusedinresolution.In addition, conditionson the useof public funds(for example, arequirement that lossesshould be borne by shareholdersand unsecuredcreditors)are largely absent.7. Legal framework for cross-border cooperation (KA 7)KA7 requires that resolution authoritiesare empoweredand encouragedbystatutorymandateto achievea cooperativesolution withforeignauthoritieswhereverpossible,includingby exercisingpowersin relationtobranchesof foreign FIsto support foreign resolution measuresandInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 56sharinginformationwith foreign authorities for the purposesof planningand carrying out resolution.Legislative frameworks should not contain provisions whereby automaticactionsin relation to a firm are triggered by the initiation of insolvency orresolutionproceedingsin another jurisdiction.Tofacilitatecooperation, jurisdictionsshouldprovidefor transparent andexpeditedprocessestogive effect toforeign resolutionmeasures,eitherbywayofproceduresformutual recognitionorbyusingpowersunderthedomesticframeworkto take measuresthat support and complement theforeign resolution in relationsto localoperationsof the firm.Theresolutionregime shouldalsoconfer powersover branchesof foreignfirms, whichmay beused either tosupport resolution measurescarriedout by thehome resolution authorityor, in exceptional cases, to takemeasureson itsowninitiativetoprotect domesticfinancial stability.National legal frameworksfor cross-bordercooperation in resolutionare, overall, lesswell-developedacrossall sectorsthan other areasof theKAs(seeTable6 inAnnex D).In most FSB jurisdictions,there are few or norelevant statutoryprovisionsfor coordinationand cooperation for the effectiveresolutionof cross-border firms.Thelegal frameworkof most jurisdictionsneither requires nor prohibitscooperation withforeign resolution authorities.Eight jurisdictionshavestatutoryprovisionsthat explicitlyempowerorstronglyencourageresolution authoritiesto cooperatewith foreignauthorities, whileseveralothersindicatethat it istheir policytocooperatewherepossible.No jurisdictionhascomprehensiveobligationsfordomesticauthoritiestoavoid takingresolutionactionsthat may have an adverseeffect onthefinancial stabilityof other jurisdictions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 57Authoritiesin EU member statesare required to considerthe impact oftheir actionson financial stabilityin other EU states.No jurisdictionsreport that their legal framework containslegislativetriggersthat require automatic actionsin relationtoa firm for whichtheyare a host jurisdictionwhenthehome jurisdictioninitiatesresolution orinsolvencyproceedingsor undertakesanyother official intervention inrespect of that firm.While the legal frameworksin the majorityof FSB jurisdictionsdonotprovidefor differential treatment of creditors(includingdepositorsandpolicyholders) by location of their claim or the jurisdiction in whichtheclaim is payable, there is provision for differential treatment of certainclaims – in most cases,deposits– under the insolvencyor resolutionregimeof eight jurisdictions.About a third of FSB jurisdictionshave mechanisms for giving legal effectto decisions by foreign authorities, but the majority of those are based onapplication tothe court.While court-based processesare not precluded by the KAs, theyaregenerallylesswell-adaptedto meetingthe objectivesof KA7 thanadministrativeproceduresin that theymay be more time-consumingandtheoutcome lesspredictable.Very few jurisdictionshave provisionsfor administrativerecognitionandenforcement by the resolution authorityof resolutionactionstaken byforeign authorities.In only one of thosejurisdictionsdoesthenational resolution authorityhavethe powerto recognisethetransferby thehome country resolutionauthorityof local assetsand liabilitiesof a foreign bank, and make thattransfer effectiveunder locallaw.Most jurisdictionsreport that theyhave some powersover branchesofforeign banks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 58However, in most cases, those powersstem from the domestic insolvencyframework or are much less comprehensive than the powers available forlocallyincorporatedbanks.Domestic authoritiesmay be able tousethosepowersto supportresolution actionstaken by the home authority, but the legal frameworkgenerallydoesnot make that explicit or set anyconditionstotheexerciseof such powersindependentlyof home state action.8. Resolvability assessments (KA10)KA10 requires jurisdictionsto undertakeregular resolvabilityassessments,at least for G-SIFIs.Theresolvabilityassessmentsshould beconducted in accordancewiththeguidanceset out in Annex II tothe KAs, and in coordination withother authoritiesresponsiblefor the firm in question.Supervisoryor resolutionauthoritiesshould havepowersto require firmstoadopt appropriate measureswherenecessaryto improve theirresolvability.Onlyone jurisdictionhasin placea formal statutoryrequirement forresolvabilityassessmentstobe carried out (see Table3).Home jurisdictionsof G-SIFIs report that, in theabsenceof formalrequirements,supervisorscan usegeneral supervisory powersandprocessesto carry out such assessments.Few host jurisdictionsof G-SIFIs report that theyundertake resolvabilityassessmentsat thisstage,althoughsomeindicatetheir intentiontodoso.A few other jurisdictions also report that they are planning to undertakeresolvability assessments as a core part of domestic resolution planningwork.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 59Where resolvability assessments are being carried out or planned, thefocus is generally on global or domestic systemically important banks(G-SIBs and D-SIBs respectively) rather than on a wider rangeof FIs.Onlytwojurisdictionscurrentlyrequire resolvabilityassessmentsforinstitutionsfrom other financial sectors.Given the lack of a formal statutoryframework or rules,few jurisdictionshaveestablishedguidanceabout howresolvabilityassessmentsshouldbeconducted or the consequencesif firmsare not assessed asresolvable.In most FSB jurisdictions,supervisoryauthoritieshave some powerstoasksupervised institutionstomakechangestotheir businessorganisationand legal structure, but thepurposesfor and circumstancesunder whichauthorities can exercise such powersvary acrossjurisdictionsand financial sectors.Afew jurisdictionsreport that their supervisoryauthority hasa broadrange of powersto take necessary measurestoensure financialstability, and that theexerciseof thosepowersis not restrictedtospecificcircumstancesbased on distressof the institutionin question.However,it is not clearwhethertheauthority can actuallyrequirechangessolelytoimprove resolvabilityof a firm, asspecifiedin theKAs.In other jurisdictions,thepowersto require certain actionscan onlybeexercised, or may more readily be used, after a firm fails tomeet specificregulatoryrequirements,comesclosetomeetingthe conditionsforresolution, isfacinginsolvency, or is alreadyin resolution.Given the intrusivenature of requirementstotakemeasuresto improveresolvabilityand thefact that, where necessary, theyshould take effect inadvanceofanydeteriorationinafirm‘scondition, aclearpowertorequirechangesexplicitlyfor the purposesof improving resolvability isnecessary.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 60International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 619. Recovery and resolution planning (KA11)KA11requiresjurisdictionstoput in placea processfor on-goingrecoveryand resolution planningfor domesticallyincorporatedfirmsthat could besystemicallysignificant or critical in theevent of failure.RRPsshould contain the essential elementsset out in Annex III to theKAs, and home resolution authoritiesof G-SIFIs should coordinatewiththefirm‘s CMG toproducea group resolutionplan.Although few jurisdictionshave formal statutory requirementsfor RRPs,manyaredeveloping suchplansfor G-SIBsand D-SIBs.Currently, jurisdictionsthat are home authoritiesof G-SIBshavestartedworkingon the development of RRPsthrough supervisorypolicy, andmanyjurisdictionshaverequired firmsto prepare recovery plansunderexistingsupervisorypowers.Recovery and resolution planningin FSB jurisdictions– whetherundertaken currentlyor under development – is predominantlyfocusedon banks.Only two jurisdictions have a framework for RRPs for other categories offinancial institution, while another jurisdiction is developing RRPs undergeneral supervisorypowers.Many jurisdictionsreport that theyhavelegal frameworksin placeforauthoritiestoapprove firms‘recovery plans,and some emphasised thatauthoritieshavethepowertorequirechangestosubmittedrecoveryplansif they are not satisfiedwiththem.For jurisdictionswherethere is no formal requirement for RRPs, thesourceof powersto require changesis not clear, although somejurisdictionsstated that their general supervisory framework providesthenecessarypowers.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 6210.Accessto information and information sharing (KA12)KA12 requires jurisdictionsto ensure that nolegal, regulatory or policyimpedimentshinder thedisclosureof firm-specificinformationtodomesticand foreign authoritiesfor thepurposesof planningandcarrying out resolution, irrespectiveof whetherthoseauthoritieshavesupervisoryfunctions.Domestic authoritieswithresolutionfunctionsaregenerallyabletosharenon-publicinformation witheach other.Thisgeneral principleis subjecttoa few exceptions,wherethesharing ofconfidential information withnon-supervisory domesticauthoritiesforboth planningand carrying out resolution is either not permitted; limitedtospecificcircumstances,such asthe entry of a firm intoresolutionorconditional on a decision to undertake a resolutioninvolvingpublic funds.Where powerstodiscloseinformation are limitedor conditional in thatway, this may prevent authorities from sharinginformation for thepurposesof resolution planningand assessingresolvability.Cross-border information sharing is considerablymore restricted. EightFSB jurisdictionsallowdomestic authoritiestoshare non-publicinformation with foreign resolution authoritiesthat are not supervisors.In many cases,informationcan be shared cross-border betweensupervisoryauthoritiesusingexistingsupervisorygateways, but not asreadilythrough other channels.Supervisorygatewaysare not, however,sufficientlybroad toallowconfidential informationtobesharedwithall foreignauthoritiesthathavea responsibilityfor planningor carrying out resolution of thefirm inquestion.In most cases,jurisdictionsdonot require a memorandum ofunderstanding(MoU) asa condition for disclosure of information underInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 63existinggateways,but a number of jurisdictionsindicatedthat a MoUwasin practice a prerequisiteor seen asdesirable.IV. Planned reforms to resolution regimesSomejurisdictionshavealreadyundertakenmajor legislativereformssincethe financial crisistodevelop new or reviseexistingresolutionregimes(seesection II andAnnex A).Severalother FSBjurisdictionshaveeithersubmittedformal reform planstothe national legislatureor for public consultation, or have reformsunder development (seeAnnex C).This is necessitatedby thefact that in most casesthe relevant legislationpre-datestheKAs. The reformsaim at a range of objectives,including:(i)Strengtheningthepowersavailable for the resolution of financialinstitutions;(ii) Expandingresolutionregimestonon-bank financial sectors;and(iii) Aligning resolution regimeswiththeKAs.Many of thesejurisdictionsarebasingtheir draft legislation on selectedelementsof the KAs.Jurisdictionsare at varying stagesof thereform process.Ninejurisdictionshaverecentlyenactedrelevant legislationand arepreparingimplementingrulesand regulations.In most cases,thesereformsapplyto the banking sector and donotestablishor extend resolution powersfor non-banks.Eight jurisdictionsand theEuropean Commission (for the EU) haveissueddocumentsfor publicconsultationor arepreparing draftlegislationto further strengthentheir resolution regimes,includingbyInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 64extendingthe regimeto insurers,securities or investment firms and/ orFMIs.In addition, ninejurisdictionsare consideringa variety of additionalreforms totheir resolution regimes.Several other jurisdictionsreport that theyare planning to introducereforms requiring recovery and resolution plansfor financial institutionsthat could have a systemic impact.The proposed EU Directive on recovery and resolution, once approved,will represent a major step forward in aligning the resolution regimes ofEU member stateswiththe KAs.Thenew Directivewill apply to banksand investment firms, and toholdingcompaniesof those firms.TheDirectiveintroducescore resolution objectivesand a set of commonresolutionpowersfor all EU members, includingthetransfer of assetsand liabilities, establishment of a bridgebank, and powersto write downliabilitiesand toconvert them toequity.It alsorequires resolution authoritiestohave the power toimposeatemporarystay on theexercise of earlytermination rightsunder financialcontractswhena firm entersintoresolution.TheDirectivewill alsorequireresolvabilityassessmentsandrecoveryandresolutionplansfor banksand investment firms.V. Conclusions and recommendations1. ConclusionsThefinancial crisishighlightedtheneedtosignificantlyenhanceexistingresolution regimesin FSB jurisdictions.While major legislativereformshave alreadybeen undertaken by someofthosejurisdictions(particularlythosedirectlyimpacted by thefinancialInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 65crisis) to develop new, or reviseexisting, resolution regimes,it is clearthat implementationof theKAsis still at an earlystage.Thisisnot surprisingastheKAs areanewinternationalstandard and thereforms neededtoimplement them may involve significant legislativechanges.Resolution regimesacrossFSBmember jurisdictionsexhibit a broadrange of practicesin terms of scope, mandatesand powersof authorities.This is tobeexpected.TheKAs do not prescribethespecific form of theresolutionregime orparticular type of resolution authorityaslong asthat regime isconsistentwith the KAs.However,the responsesto thequestionnaire indicatethat jurisdictionshavedifferent interpretationsof what constitutesa ‗resolution regime‘and itsrelationship toordinary insolvencyregimes and powersforordinarysupervisorypurposes(seerecommendation2a).This divergencein interpretation can make it difficult todraw definitiveconclusionsabout the alignment of national powersacrossdifferentsectorswiththe KAs.Additional clarificationand guidanceon the applicationof theKAs isthereforenecessarytoassist jurisdictionsin implementation, facilitatemonitoring, and ensure consistencyin assessmentsof compliancewiththeKAs.Anumber of featuresof resolution regimesin FSBjurisdictionsarebroadly consistent withthe KAs.In particular, all jurisdictions are able to use some of the resolutionpowersspecified in KA 3 in relation to banks, although they are notexercisedin all casesby administrativeresolution authorities.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 66Nearlyall jurisdictionshaveavailableoneorbothoftheresolutionpowersspecifiedin KA3 for insurers(portfolio transferand run-off), although inseveral casesthosepowersare exercisedby a court-appointedadministratoror liquidatorin the context of a windup.Most jurisdictionsaccompanyresolution powerswithsome of thesafeguardsspecifiedin KA5, such asrespect for the hierarchyof claimsand a right for creditorsto judicial review of resolutionactions.Finally, many jurisdictionsreport that theycan achieveat leastsome oftheobjectivesof theKAs through existingsupervisorypowers– forexample, powerstodevelop RRPsor torequire resolvability assessmentsfor certain FIs.Nevertheless, there aresignificant divergencesfrom, or inconsistencieswith, the KAs that need tobe addressed.Moreover,additional clarification and guidanceon the applicationof theKAs is needed in a number of areastofacilitateprogress.The rest of this section sets out conclusions in respect of areas wherefurther enhancement of resolution regimes by national authorities, oradditional guidanceby theFSBand relevant SSBs, may benecessary.Comprehensive resolution powersfor banks – KAs1and 3 (seerecommendation 1a)Although resolutionregimesaregenerallymore developedfor banksthanfor other financial institutions,few jurisdictionshave equippedadministrativeauthoritieswith the full set of powersto resolve banksasset out in KA3.For example, very few authoritieshave thestatutory powerboth towritedownand to convert liabilitiesof a failinginstitution(bail-in withinresolution).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 67In addition, in somecasesresolution actionsmay require court approvalor the cooperationof the failing firm or itsshareholders,whilein othercasesresolution actionssuch asthetransfer of assetsand liabilities,arecarried out by an administratorthat may neither be mandated to achievetheobjectivesin theKAs nor subject todirectionby theresolutionauthority.Resolution regimes for non-bank FIs – KA 1(seerecommendations 1b, 2b)Resolutionregimesaremost advancedforbanksandprogressivelylesssofor insurers,securitiesor investment firms and FMIs, wherebothmandatesand powersfall well short of the standardsin the KAs.Thisin part reflectsthelessadvancedstateofguidanceontheapplicationof the KAsto thosesectors.For example, in many FSB jurisdictionsthere is nodesignatedadministrativeresolutionauthorityfor securitiesor investment firmsorFMIs.Powersfor non-bank FIs are often supervisoryin nature and donotachievethe outcomesspecified in the KAsor are limitedtofirmliquidationor windup at theinstigationof the supervisoror, in somecases,through some form of speciallyadapted insolvencyregime.It is important for financial stabilitythat resolutionpowersare expandedtothosesectors.Powersto resolve financial groups– KA 1.1(seerecommendations 1c, 1d, 2c, 2d)Most FSBjurisdictionslack powerstotake control of theparent oraffiliatesof a failedFI, particularlyif the FHC or significant operationalaffiliatesare unregulated.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 68This is a particular problem for G-SIFIs that tend tohave integratedandhighly complex structures.Further clarityas to the nature of powersneeded for FHCs, non-regulatedoperational entities and branchesof foreign FIs would also be desirable toensure a consistent approach.In addition, few jurisdictionshavein placeacoordinationframeworkthatdesignatesa lead authoritywheretwoor more domesticresolutionauthoritiesare responsiblefor resolvingdifferent entitiesof a financialgroup within the same jurisdiction.Thelack of a designated lead authoritymay adverselyimpact theeffectivenessof resolving adomestic mixed-activityfinancialgroup.Cross-border effectivenessof resolution measures– KA 7 (seerecommendations 1e, 2e)Thefinancial crisisdemonstratedthe need to strengthen arrangementsfor cross-border cooperation in dealing with failing FIs.However,national legal frameworksfor cross-border cooperation inresolution are, overall, lesswell-developedacrossall sectorsthan otherareasof the KAs. Onlya few jurisdictionscurrentlyempowerandencouragetheir resolution authoritiesthrough statutorymandatestocooperateand coordinatewherever possiblewithforeign resolutionauthorities.Moreover,the abilityof existingmechanismsin many jurisdictionstogiveeffect to foreign resolutionactionsremainsunclear.Very few jurisdictionshave provisionsfor expedited(administrativeorcourt-based) proceduresfor recognition and enforcement bytheresolution authorityof actionstaken by foreign authorities.This is a major weaknesssinceit may undermine the legal certaintyofresolutionactionsin relationtoassetsand liabilitiesin other jurisdictionsInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 69andtherebyjeopardisethe effectiveimplementation of resolutionstrategiesfor cross-border groups.Information sharing for the purposesof resolution – KAs 7.6, 7.7and 12 (see recommendation 1f)Few FSB jurisdictionshave clear and dedicated statutoryprovisionsfordomesticauthoritiesto shareconfidential informationwith foreignresolution authorities.While most jurisdictionsrely on existingpowersto disclosenon-publicinformation for supervisorypurposes, thesepowersmay not besufficientlybroad to allowsuch informationto be shared withalldomesticand foreign authoritiesthat are not supervisorsbut have aresponsibilityfor planningor carrying out resolution.Unlesshome and host authoritieshavethe capacitytoshare suchinformation, it is unrealisticto expect them tomeaningfullydiscusscross-border resolution strategiesand plansor tocooperateeffectivelyina crisis.Treatment of financial contracts in resolution – KA 4 (seerecommendation 1g)Resolution authoritiesin most jurisdictionseither lack powersto imposeatemporarystay on the exerciseof contractual acceleration or earlytermination rightsin financial contractsthat ariseby reason onlyof entryintoresolution or in connection withthe exerciseof resolution powersor,wherethe powerexists,it isnot subject tosuitablesafeguards.Funding – KA 6 (see recommendation 2f)Fundingarrangementsdiffer greatly acrosssectorsand jurisdictions.Most jurisdictionsrelyon privately funded protection fundstofinanceresolution actions,but it is not clear whether such arrangementsareadequateor appropriatein termsof scaleor scope.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 70Publicfinancial support thereforeremainsan important component ofresolution fundingarrangementsfor SIFIs.Mechanismsfortherecoveryofpublicfundsarenotwelldeveloped, whileconditionson their use are largely absent.It isimportant that fundingarrangementsdonot giverisetomoralhazardandthat any temporarypublic fundingis subject toconditionsandmechanismsforlossabsorptionbyequityandunsecureddebt claims, andrecoveryof public funding from the financial sector.Recovery and resolution planning and actionsto improveresolvability – KAs10and 11(see recommendations1h, 1i, 2g)In most jurisdictions,there isnoexplicit requirement in statute or rulesfor RRPs for domesticSIFIs.Moreover,most authorities lack thepowerto require firms tomakechangestotheir organisational and financial structuressolelyin order toimprovetheir resolvabilityand in advance of resolution.Both of thesefindingsare inconsistent with therequirementsof the KAs(KA11.1and 10.5 respectively).Operational capacity to resolve complex SIFIs– KA2 (seerecommendation 2h)Howevergood a resolution regimemight look in statute, it will not beeffectiveunlessthenational authoritiesresponsiblefor resolutionhavetheoperational capacity– includingstaff with the appropriate level and rangeof expertise, and adequateresources– toresolvecomplex financialgroupsand SIFIs.This critical dimension cannot be verifiedin a desktop exercisesuchasthepeer review and will need to be assessedin on-siteIMF-WorldBankcountry assessmentsusing suitablecriteria in theassessmentmethodologyfor theKAs.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 71Rigorous monitoring of implementation progressin aligningresolution regimesin FSB jurisdictions with the KAs (seerecommendation 3)Several FSB jurisdictionsare implementingor consideringreformstotheir resolution regimes.Given the early stage of those reforms, a rigorous monitoring frameworkneeds to be developed to ensure comprehensive reporting of progress byjurisdictionsin aligningtheir resolutionregimes with the KAs.While future ―deep dive‖ peer reviewswill be useful in that regard, theyshould be complementedby regular reports using a standardisedtemplate to enhancethereportingof implementationprogressbyjurisdiction, sector and KA.2. RecommendationsBasedon theabovefindingsof thepeer review, there are three setsofrecommendationsfor implementation by theFSBitselfor relevantmember jurisdictions.Theycomprise:•Actionsby national authorities to ensurethat their resolution regimesare fullyaligned withthe KAs;•Actionsby theFSBtodevelop additional guidance or toprovideclarification in the assessment methodology for the KAsto facilitateconsistent implementation acrossjurisdictions;and•Actionsby theFSBand relevant SSBstopromoteeffectiveimplementationmonitoring in this area.Work on some of therecommendationsaddressed tothe FSB is alreadyunderway.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 72Most of therecommendationsthat involve actionsbynational authoritiescan – and should – beimplementednowwithout waitingfor additionalFSB guidance.Jurisdictionsmay consider establishing a phasedreform program toaddressthe issuesidentified below.In some cases,earlyworkon resolution planningand resolvabilityassessments,includingthe introductionof resolutionplanningrequirementsto all firms that could havean impact on financial stabilityin theevent of failure, may reveal specificweaknessesor gapsin thepowersneededfor effectiveresolutionand therebyassist jurisdictionsinthedevelopment of such a program.Recommendation 1:Full implementation of the KeyAttributesFSB member jurisdictionsshould undertake the followingactionstointroduce,or revisetheir existing, resolution regimesfor financialinstitutionsin order tofullyimplement the KAs:a.Reviewing, and revising asneeded, resolution regimesfor bankstoensure that all the powersset out in KA3, includingpowerstotransferassetsand liabilitiesand powersto write-downand convert debt withinresolution, areavailableto administrativeresolutionauthorities;b.Reviewingthe adequacyand effectivenessof resolution regimesfornon-bank FIs, and adopting any necessary reforms toensure thatadministrativeresolutionauthoritieswith adequate powersaredesignatedfor thoseinstitutions;c.Extendingthe scope of resolution regimestofinancial holdingcompanies, non-regulated operational entitiesthat are significant to thecritical functionscarried out within the group, and branchesof foreignfinancial firms;d.Wheremultipleresolutionauthoritiesexist, strengtheningcoordinationframeworksand designatinga lead authority for resolving domesticentitiesof thesame group;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 73e.Enhancingthe mandatesand capacityof resolution authoritiestocooperateand coordinatemeasuresacrossborders;f.Reviewingthedomestic legal framework for information sharing, andrevisingit asneededto ensure that domestic authoritiescan shareinformation with all relevant domesticand foreign authorities forplanningand carrying out resolution;g.Introducingpowersto impose a temporarystay on the exercise ofcontractual acceleration or earlytermination rightsin financial contracts,subjecttosuitablesafeguardsasdescribedin KA4 andAnnex IV to theKAs;h.Introducinga RRP requirement for all domesticallyincorporated firmsthat could be systemically significant or criticalif theyfail; andi. Empoweringsupervisoryor resolution authorities torequire financialinstitutionsto adopt changesto their structure, organisation or businesspracticeswhereit isnecessaryto improve their resolvability.Recommendation 2:Additional clarification and guidance onthe application of the KAsTheFSB should provideadditional clarificationand guidanceon theapplication of the KAs to assistjurisdictionsin implementation, facilitatemonitoring, and ensure consistencyin assessmentsof compliancewiththeKAs, by:a.Clarifying thenature of resolution powerscompared withthe ordinarycorporateinsolvencyregime and powersfor ordinarysupervisorypurposes;b.WorkingwithSSBs to develop guidance on the featuresand powersnecessaryfor resolution regimesin each non-bank financial sector tomeet the standardsof the KAs;International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 74c.Developing guidanceon thenature of powersneededforFHCs,significant non-regulatedoperational entities,and branchesofforeign financial firms;d.Developingguidanceand identifying good practicesfor coordinationwheretwoor more domestic resolution authoritiesare responsibleforresolving entitiesof the samefinancial group;e.Takingstock of mechanismsto giveeffect to foreign resolutionmeasures– such asadministrativeand judicialpowersof recognitionandcontractual mechanismsrequiringcounterpartiestorecognise theexerciseof powersbya foreignresolutionauthority– and evaluatingtheireffectiveness(e.g. in terms of timingand predictability) in theimplementationof cross-border resolution strategies;f.Takingstock of resolution funding arrangementsacrossjurisdictions,and identifying good practicessothat temporarypublicfundingdoesnot giverisetomoral hazard andissubjecttoconditionsandmechanismsfor recoveryfrom privatesector sources;g.Clarifying thenature and scopeof the powersthat authoritiesshouldhaveto require firms to take measurestoimprove their resolvability; andh.Ensuring that theassessment methodology for the KAscontainssuitablecriteriatoassessthe operational capacityof resolutionauthorities.Recommendation 3: On-going implementation monitoringTheFSB should undertake monitoring and reportingon theimplementationof the KAsby:a.Developing a standardised reportingtemplatetofacilitatethe analysisof implementationprogressby jurisdiction, sector and KA;b.Undertaking follow-up peer reviews focused on resolutionpowers, cross-border cooperation and information sharing, andrecovery and resolutionplanning; andInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 75c. Carrying out, in coordination with relevant SSBs,peer reviewson theapplication of the KAs to individual non-banking sectors(insurance,investment and securitiesfirms, FMIs) once relevant guidance by thosebodies isissued.Annex A: Recent Major Legislative Reforms in FSBJurisdictionsAustraliaLegislationwasenacted in 2008and 2010to strengthen the crisisresolutionpowersavailabletoAPRA, includingwithrespect topowersofdirection, businesstransfer powers,statutorymanagement for authoriseddeposit-takinginstitutions(ADIs), and judicial management for generaland life insurers.As a result of this legislation,APRA can facilitaterecapitalisationof adistressedADI or insurer in a manner that by-passesthe normalrequirementsand processesfor shareholder consent.APRA can alsoappoint a statutorymanager toassume control andimplement a widerangeof open and closedresolutions.ThelegislativechangesalsoenableAPRA toestablish a bridgeADI orinsurer.The Australian government released a discussion paper in September2012 with proposals for further reforms to APRA‘s crisis managementpowers.TheGovernment is alsoconsideringtherecommendationsmadeby theCouncil of Financial Regulatorson strengtheningresolution powersinrespect of FMIs and will consult further with stakeholdersbeforefinalisingany legislation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 76GermanyTheGerman RestructuringAct entered intoforce on January1, 2011andincludedthree main elementsfor restructuring entities:(i)procedural provisionsfor a two-stagerestructuring procedure forcredit institutions;(ii) regulationsregarding thetransfer orders;and(iii) theestablishment of a RestructuringFund.In addition, BaFin‘spreventativeprudential instrumentswerestrengthenedand extended; for example, BaFin wasgiven thepowertoappoint a special representativeto an institutionduring earlystagesof acrisis.Restructuringprocedure:Twonew procedureswereintroduced fordistressedinstitutions, a restructuringprocedure and a reorganisationprocedure.Therestructuringprocedure cannot affect third partyrights.TheFederal Financial SupervisoryAuthority (BaFin) assesseswhethertheplan complies with thelegal requirements, is plausibleand therelevant advisoris competent.On apositiveassessment, BaFin submitstheplantotheHigherRegionalCourt.Thesecond procedure is reorganisation:thisapplies wherethe creditinstitutionbelievestherearenoalternativesorthestabilityofthefinancialsystem at risk and isable toaffect third party rights(e.g. liquidation,deferral or partial write down of liabilities,debt to equityswaps,sharecapital reduction, capital increase,spin-offs).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 77Both proceduresareinitiated by the credit institutionat itsowndiscretion.Transferorder: TheGerman BankingAct providesfor thetransferof thewholebusiness,or apartial transferof theassetsand liabilities.It extendsthemeasuresavailabletoBaFin tostabilisea bank if thenon-viabilityofthat bank presentsa risk to the stability of the financial system, withouttheconsent of the bank‘smanagement, creditorsand shareholders.Thetransfer order may be issued only if the stabilityof the financialsystem at risk and thesystemic risk cannot be eliminatedin any othermanner.TheFinancial Market StabilisationAuthority (FMSA), in coordinationwith BaFin, is responsiblefor measuresfollowinga transferorder,includingthe establishment of a bridgebank, measuresnecessaryto giveeffect tothe transferof assetsand liabilitiesof the failed institutiontothebridge bank and thevaluation of assets.RestructuringFund:Almost all credit institutionsin Germanyhave tocontributetothe fund.Thefund can useitsfinancial capacityto establishbridgebanks and theacquisition of shares, issue guaranteesand adopt recapitalisationandother measures.TheRestructuringFund is administeredand thedecisionson allocationof itsresourcesare taken by FMSA.MexicoAmendmentsto existinglaws(Banking Law,Law toRegulate FinancialGroups,Bank SavingsProtection Law) since2006have createda bankresolution framework that allowsfinancial authoritiestointervene introubledbanksand undertake resolutionactionssuch asthetransfer ofassetsand liabilitiesand theestablishment of a bridge bank.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 78Theframeworkalsoestablishesa special procedure for dealingwithinstitutionswhosefailure could have systemic consequences.In March 2013, this framework was strengthened by amendments to the―Amparo Law‖, the effects of which are that resolution processes can nolonger be suspended by a request for judicial review.Thoseamendmentsprovidethat courts may onlygrant a suspensionwhensocial interestsand public interest provisionsare not affected, butspecify that such interestsand provisionswouldbe affectedby, amongother things,thesuspension of resolutionmeasuresfor financial entitiesthat are takenby theauthoritiesin order toprotect depositorsor thestability of thepayment system.NetherlandsTheDutch resolution frameworkwasbroadened to addressthe risksposed by systemically relevant banks.TheDutch InterventionAct for Financial InstitutionsauthorisestheDutch Central Bank (DNB) to adopt a TransferPlanfor thetransfer ofbank deposits,(other) assetsand liabilitiesof a bank or insurancecompany, or issued sharesin thecapital of a bank or insurancecompany.ATransferPlanmaybeadoptedwhenabank orinsurancecompanyfacesdifficultiesrelatingtosolvency, liquidityor compliancewith regulatory‗technicalprovisions‘that cannot be reversedin a timelymanner.Theresolutionpowersof theDNB are limitedtolicensedbanks andinsurers,and donot applytoforeign branchesof European EconomicArea banks or tosecuritiesor investment firms.If the stabilityof thefinancial system is at risk, the Minister of Financemay intervenein a financial firm or itsparent company or expropriateassetsor liabilitiesof a bank, insurancecompany, another financialfirm, or theparent company.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 79Theresolutionpowersof theDutch Ministerof Financeapply to all―financial undertakings‖ defined as:(i) a bank;(ii) a management company;(iii) a collectiveinvestment scheme;(iv) an investment firm;(v) a paymentsserviceprovider;(vi) a depositary;(vii) a clearinginstitution;(viii) a risk acceptingentity;(ix) a financial serviceprovider;(x) a financial institution;(xii) a pension depositary;(xiii) an insurer; or(xiv) a money transaction office.Thescopeof applicationisnot limitedbyaninstitution‘ssizeorsystemicimportance.Nevertheless, thesystemic relevanceis consideredwhen selectingresolutionoptions.Thesystemic criterion, however, is not an institution‘ssize or systemicimportance, but rather thesystemic relevanceof the failure.SpainFollowingthefinancial crisis, the Spanish government strengthenedthedeposit insuranceagency(FGD), whichisable to providefinancialsupport in resolution, and in June2009created the Bank ResolutionAuthority (FROB) toassist the reorganisationof the bankingindustry.In addition, an asset management company(Sareb) has recentlybeenestablished withthemain purpose of takingover and managingrealestateand relatedproblem assetsfrom the banks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 80Anew legal framework for bank resolution entered intoforceon 31August 2012.Theframeworkaimsat improvingtheregimethat hadbeenin forcesince2009, and takesintoaccount the EU legislative proposal on therecoveryand resolution of banks and investment firms.Under the new framework,the FROB is ableto providetemporaryfinancial support for therestructuring and resolution of banksindifficulties.Support during the restructuringperiod may taketheform of guarantees,loans,subordinateddebt, or acquisitionof assetsor capital injections.TheFROB alsohasthe authoritytodraw up plansfor the resolution ofnon-viablebanksthat specifyoneor more of thefollowingactions:saletoa third partypurchaser;transfer of assetsto a bridgebank or Sareb; andliability management exercises(althoughthepowertorestructure debt islimitedtosubordinatedliabilitiesand expires in June 2013).Moreover,the FROB hasthepowertotake over managerial functionsofbanksin resolution.SwitzerlandFollowingthefinancial crisis, the SwissBankingAct wasrevised in 2011and 2012to includespecificrequirementsfor systemically importantbanksand additional restructuringprovisions.TheBankingAct providesfor earlyinterventionrightsand an acceleratedrestructuring and resolution procedure under thelead of FINMAincluding, in particular, bail-in powersand powersto transfer assetsandliabilitiestoanother legal entity.The Banking Ordinance has also been amended to address recovery andresolution planning and improvements to the resolvability of systemicallyimportant banks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 81In addition, FINMAissued the Bank InsolvencyOrdinanceat the end of2012to bring together thedifferent provisionson bank bankruptcyandrestructuring, therebycreatingan effectiveand coherent set ofregulations.United KingdomTheBankingAct 2009created a SpecialResolutionRegime(SRR) thatreplacedemergencylegislationintroducedinordertodealwiththefailureof banksand building societies.TheSRR gave the Bank of England (BoE) a keyrolein implementingaresolution, allowingtheauthoritiesto:•transfer all or part of a bank‘sbusinesstoa privatesector purchaser;• transfer all or part of a bank‘sproperty toa bridge bank;• placeabank intotemporarypublic ownership(theTreasurys decision);•applyto put a bank intotheBank InsolvencyProcedure for rapiddepositorpay-out or transfer toanother financial institution.Under the Banking Act, the Financial Services Authority, in consultationwith the BoE and the Treasury, makes the decision to put a bank into theSRR.The Treasury decides whether to put a bank into temporary publicownership, and the BoE, in consultation with the other authorities,decideswhichof thetools to useand implementsthe resolution.TheFinancial ServicesAct, whichreceivedRoyal Assent in December2012,extendstheresolutionregimetoinvestment firms, CCPsand relatedgroup companies(includingthoseof banks).TheAct will take effect oncethesecondarylegislationhasbeen finalised.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 82United StatesTheDodd-FrankAct wasenacted in July2010toenhancethesupervisionof financial institutions—particularlylargebank and non-bank financialcompanies—and require certain financial institutions(includingthosedeemed to be systemically important) todevelop resolution plans tofacilitate a rapid and orderly resolutionunder the US BankruptcyCode.Under the reforms,the Federal Deposit InsuranceCorporation‘s(FDIC)resolution authorityis significantlyexpanded.TheDodd-Frank Act alsoprovidesa frameworkfor better coordinationbetweenauthoritiesthrough the establishment of an interagencycouncil—theFinancial Stability Oversight Council—todetect and deteremergingthreatstothe financial system.Theorderly liquidationauthority under TitleII of the Dodd-FrankActincludesbroad authoritiesto restructure and wind-upfailingfinancialcompanies that meet certain systemic criteria.Thepowersgranted to the FDIC asreceiverunder TitleII of theDodd-FrankAct areanalogousto thosetheFDIC usestoresolve failedinsureddepositoryinstitutionsunder the FDI Act.Theseinclude:(i)An immediatesource of liquidityfor an orderly liquidation, whichallowscontinuation of essential functionsand maintainsasset values;(ii)Theability tomake advancedividendson creditorclaimsand promptdistributionsto creditorsbased upon expected recoveries;(iii)Theabilityto continue key, systemically importantoperations, includingthrough theformation of one or more bridgefinancialcompanies; and(iv)Theabilitytotransferall qualified financial contractswitha givencounterpartyto another entity(such asa bridgefinancial company) andInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 83avoid their immediateterminationand liquidationto preservevalue andpromotestability.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 84Interview with GabrielBernardino, Chairman of EIOPAConducted by Dr. MatthiasSchoder, WirtschaftsForum(Germany)1)Mr. Bernardino, howdoyou personallyexperience Frankfurt asoneof thefinancialhubsin Europe?PersonallyI enjoy very much Frankfurt. It is avery internationallyoriented city and itslocationin theheart of Europeisperfectforouractivityasa financial sector supervisor.I feel at homein Frankfurt even though I wouldwelcomea littlebit moreof sun!As EIOPAChairman, I wouldlike tothank the City of Frankfurt and theStateof Hessen, for their welcomeand support. EIOPAgreatlyenjoysbeingin Frankfurt, whichis continuouslygainingglobal importanceasafocal point for regulation and supervision of the global financial system.We look forwardtocontinuingin a spirit of enhancedcooperation in thefuture.2) Looking at EIOPAasanewauthority in Frankfurt and Europe, hasitalreadyestablished in theexisting financial market structure?EIOPA wasbuilt in 2011aspart of thenewEuropeanSystem of FinancialSupervision.In thesetwoyearsEIOPA establisheditselfasasupervisoryauthorityand Ibelieve it is nowadaysrecognized by thedifferent stakeholdershasanimportant independent voicein the financial market supervisorystructure,both at theEuropean and global levels.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 85EIOPA is alsopart of the European Systemic Risk Board and hasestablisheda particularimportant cooperationwiththeEuropean CentralBank, namelyin the area of financial stability.Thisis of courseeasier tooperationalize duetothefact that theECB andEIOPA have both their seatsin Frankfurt.I am particularlyhappythat the recent IMF assessment recognized thatwhile ―thenew European system of financial supervisionhasonlybeenoperatingfor twoyears, achievementshavealreadybeen obtained‖ andthat ―EIOPA‘s rolein the area of consumer protection hasbeenproactive‖.FurthermoreI am particularlyhappy that the IMF considersthat ―a highlevel of transparencycharacterizesthe EIOPA‘s actions‖.3) SolvencyII isoneofthetopprioritiesof EIOPA. What must bedoneinorderto moveforward Solvency II regulation?Thisyear will be a crucial year for SolvencyII.Followingtheagreement by theEU political institutions,EIOPAlaunchedthelong-term guaranteeassessment (LTGA) that aimsto testvariousmeasuresthat have been discussedin the political negotiations.EIOPA supportsthisapproach becauseit is essential for policyholderprotectionand financial stabilitythat SolvencyII appropriatelyreflectsthelong-term financial position and risk exposure of undertakingscarrying out insurance businessof a long-term nature.We need a robust frameworkthat wouldprice correctlyany optionsembedded in thecontractsand that capturesthetrueeconomic realityoftheasset-liability position of insurers.We needto recognisethat guaranteeshave a price, there is no―freelunch‖.We are encouragedby thelevel of participation in thedifferentInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 86member states:more than 400 undertakingsincludingbig, medium andsmallerplayerswill be runningtheexercise.We plan topresent theLTGAfindingsaswell asour conclusionsin June.I am confident that EIOPA‘sindependent supervisoryassessment willprovideareliablebasisforaninformedpoliticaldecisiononthelong-termguaranteemeasurestobe included in SolvencyII.On top of the LTGA, EIOPA sees it as of key importance that there willbe a consistent and convergent approach with respect to the preparationof SolvencyII.Sowhat exactlyarewedoing?We will issueGuidelinesthat will ensurethat national supervisoryauthoritieswill put in place certain important aspectsof thenewprospectiveand risk based supervisoryapproachfrom the 1st of January2014.TheseGuidelineswill cover a number of fundamental areasfor theeffectivepreparationforSolvencyII:System ofgovernance,includingriskmanagement;Forwardlookingassessment of theundertaking‘sownrisk;Submissionof informationtoNational Supervisors;Pre-applicationofinternalmodels.It isuptonational supervisorstodeterminehowtocomplywithEIOPA‘sGuidelinesby incorporating them intotheir regulatory or supervisoryframeworkin an appropriatemanner.Also due proportionalityshould be appliedduring the preparation phaseandthat will be reflected in the guidelines.It is important to note that weare not anticipatingSolvency II, butpreparingsupervisorsand undertakingsfor thenew regime in aconsistent way.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 87We are workingin closecooperationwiththeEuropean Commission andwith EIOPA‘s Insuranceand ReinsuranceStakeholder Group.Furthermore, all theinterestedparties will be ableto providetheirfeedback on the Guidelinesduring the public consultationthat will startin April. We plan tofinalize the Guidelinesin autumn 2013.4) ThanSolvencyII canbeunderstoodas"improvement whilerunning"?Solvency II was built with the objective of an increased policyholderprotection, using the latest international developments in risk-basedsupervision, actuarial scienceand risk management.In themeantimethefinancialcrisishadanumber ofconsequencesonthediscussionson SolvencyII.Someof them weredealt earlyin theproject and resulted inimprovementstotheregime, some are still creatinguncertaintieson thefinal design and calibrationof the regime.Thehuge market volatilityproved tobe a challengein amarket-consistent regime, especiallyfor long-term guarantees.Thesovereigncrisisled to questionson the concept of the risk-freerate.Thechangesin banking regulationmake more important theroleofinsurersasprovidersof long-term bank funding.Thelowinterestratescenario is threateningsome insurancebusinessmodels.Without diminishingall thesechallenges,I believeit is time to move on.This reform isimportant and is needed.In order tokeep themomentum and to be consequent with all thefinancial and human resourcesalreadydedicated to thisproject both bysupervisorsand the industry weneed to move forward.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 88It is alsoimportant tomention that SolvencyII hasbeen viewedinternationallyasa referencein risk-based regulation of insurance andthat many countrieshave considered elementsfrom SolvencyII whiledeveloping their own regimes.5)How doyouestimatethesituationofespeciallyGermaninsurersfacinglowinterest ratesand thechallengesof SolvencyII?Persistent low interestratesaffect insurersin different waysin differentcountries.On the liabilitiesside, t h ey lead to an in crease in firms‘ ob ligationsint oday‘s terms an d , con sequ en t ly, t o a det eriorat ion oftheir fin ancial position.On the assetsside, low interestrateshave an adverse impact oninvestment resultsand increasethe reinvestment risk of assets.Thisproblem isevenmore pronouncedwhereguaranteedratesof returnshavebeen offered to policyholders.Theaccountingmethodologyused, beit market valuation orhistoric costaccounting, doesnot changetheunderlying challenge,but hasanimpacton the relativespeedat whichthe impact of a prolonged period of lowinterest rateswouldbecome visible.In a risk-basedprudential regime like SolvencyII, which usesmarketvalues,the impact wouldbe more transparent.This is whyit is important that insurersdonot store up risksthat maycrystalize suddenlywiththe implementationof Solvency II.Unsustainablebusinessmodels in particular should facechallengefromsupervisorsat an earlystageand it isexpectedthat insuranceundertakingsshould be encouraged toresolvetheir ownproblems.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 89National competent authorities should actively engage with insuranceundertakings in exploring private sector measures to address the risksraisedby a prolonged periodof lowinterestrates.Theyshould take intoconsideration themaintenanceof thestability offirmsand policyholder interestsin this engagement.In order totacklethe long-lastinglow interest ratesEIOPArecentlypublishedan Opinion in whichwerecommend the supervisorstointensifythemonitoring and supervisionof those insurancecompaniesthat have greater exposure totherisksposed by lowinterest ratesand toactivelyassessthe potential scope and scale of the risksarisingfrom lowinterest rates.EIOPA will coordinate a further exerciseto quantify thescaleand scopeof the risksarisingfrom such an environment.BycoordinatingtheseactionsEIOPAiscommittedtoensureaconsistentsupervisoryapproach and a fair and equitabletreatment topolicyholders.In this regard, it should be stressedthat private sector solutionsarefundamental but theycannot take advantageof theinformationasymmetry and must be designed in a waythat doesnot misleadpolicyholders.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 90Interview with Gabriel Bernardino, Chairman of EIOPA,conducted by MichaelFaulkner, InsuranceRisk (theUnited Kingdom)Whyaretheguidelinesnecessary?We are in a situation whereweare moving closer tothe dateofimplementationof SolvencyII.We all know that wehave final decisionsthat need tobe taken at thepoliticallevel later this year, mostly on elementsrelatingtopillar 1,andwhat wesee is that the preparation for SolvencyII is staringtoevolve inthedifferent countriesin Europe.If there is not a consistent wayof doingthis, wemay find, whenwestartthe implementation, there may be varying degreesof preparation andvarying elementsbeing implementedin thedifferent countries.Sowetook thesetwoelementsintoaccount: first that weneed to preparein a convergent wayand second weneed to keep the momentum in theworkthat hasalreadybeen done on Solvency II.We issued an opinion in December and theobjectiveisto keep themomentum goingand tokeep supervisorsand companies preparingthemselvesin a waythat meanswewill be in a better shapewhenSolvencyII is enacted.Towhat extent arethese measuresdriven byconcernsthatinconsistencies areemergingintheelementsof SolvencyII that somenational regulatorsare introducing?When you are livingin a SolvencyI worldwhereyouve got so manydifferencesand wheneverybody canhave theopportunitytoincludenewelementsin their regimes,national competent authorities of coursewillstart toincludeelementsof risk-basedsupervision.As time goesby if wedont have any push to have a consistent andconvergent approach, wewill have a situation wherewestart to seesomedifferences.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 91We alreadyseesome of them emergingfor good reasonsasnationalsupervisorsneed to start implementingelementsof risk-basedsupervision, but it is better todoit in a convergent way.Theother aspect is that wewant tomake theseimprovementsin a waywhichis consistent with what weexpect to have in SolvencyII whenwestart toimplement it.That is whywhenyou look at our guidelines,you seethat there are areaswheresome countrieshave alreadyimplemented certain measures.If wedont doit right now, in 2years‘timewewouldhavemoredivergences.Sothe idea is tohave preparednesswithinconsistency.Sothere arealreadyconcerns that divergent practicesare emerging?Wearein SolvencyI, soof courseeverybodyisinputtingelementsin theirSolvencyI regimes,pickinghere and there from Solvency II, soif wedont doanything wewill have a much worsesituationin terms of theinternalmarket.Thatswhat wewant to avoid.Given thedelaystoSolvencyII, somemaysaythat this is about keepingEiopa relevant?It is not theguidelinesthat give Eiopa relevanceit istheRegulationestablishingEIOPA, and wehave a dutyunder this Regulationto fosterconsistencyand convergencein regulationand supervisorypracticesinEurope.What wearedoing isour duty.Therearechallengesin makingthiswork. Oneis implementingthemeasures at thenational levels assomenational supervisoryauthoritieswill havetoput in place primarylegislation. That will makeit difficult toInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 92haveaconsistent implementation of theguidelinesacrossEurope.Theguidelinesare toworkon a ‗complyor explain‘basisand by naturetheyare preparatoryfor theimplementationof SolvencyII.We havebeen quiteclear in our communicationwhenwelaunched theconsultation:weunderstand that compliancewithguidelineswill bedifferent in different countriesdependingon whathasalreadybeen done.It dependson their legal frameworkbecausesome countrieswill easilyincorporatethe guidelinesintotheir regulatory frameworkassupervisorsare ableto dothat and they will changetheir supervisory rulesorguidelines.Other countrieswill probablyneed to havesome legislativechangeto dothis.We are quiteawareof that but what wewant is tohave thispreparatoryphaseasa phasing-in.Wearenot expectingtohaveall theguidelinesbeingcompliedwithbyallthe national authorities on January 1, 2014.What we expect is that national authorities will start on January 1, 2014 toimplement in their own national framework these guidelines and then wewill seean evolution.That is whyweincludedvery clearlya progressreport that nationalsupervisorswill need to send to Eiopa on an annual basistoanalyse howthesepreparationsare being made in thedifferent countries.Theseguidelinesfocuson preparation and weknow that thetimingswillbedifferent timingsin different countries.Theaim isto have the same level of preparednessfrom supervisorsandthe industry at the end of thisexercisewhenSolvencyII is implementedtohave a much bigger level of preparednessfrom supervisorsand theindustry.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 93Eiopa doesnot havethepowersto compel NSAsto adopt this.Are youconcerned that somecountrieswill not comply?This process is decided by the national supervisors in the Board ofSupervisors, so I expect national supervisors will make all efforts tocomplywiththeguidelines.We understand thepreparatorynature of the guidelinesand that differentcountrieshavedifferent powerstointroducetheseguidelines,sowealsoknowthat the pace of phasing-in guidelineswill be different at nationallevel.But there isa clearwishfrom national authoritiestousetheseguidelinesasthe basisfor their preparationsfor SolvencyII.As it isin the regulations,the guidelinesworkon a ‗complyor explain‘basisand wewill have communicationsfrom NSAs if theycomplyorintendto complyand thenthere will be the progressreport on an annualbasis.What if theychoosenot tocomply?It is comply or explain and this will be a transparent process.There will be reasonsand weexpect toreceivetheir information andexplanationswhyit isnot possible.It is not a question of having a penalty.But that will only happen in extreme situationsbecausethereis awillingnessfrom thesupervisorycommunitytomove in a consistent way.Did all supervisorsindicate they are supportive?Theguidelineswereput out forconsultationastheywereapprovedbytheBoard of Supervisors.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 94We had discussionssinceNovember and the Guidelinesrepresent aresult of a long workby peopleat EIOPAand national supervisors.Thedecision whentostart the consultationis a decision by the Board ofSupervisors‘members.Tobe approved theconsultation needssimplemajorityof theBoard, butwhenweissueguidelines,qualified majority [of theboard] will beneeded.How manysupervisorsvoted against theconsultation?We had full Board support for the consultation.We had more peoplewhowerecompletelyhappywith the final outcome[thanthosewhowerenot], but that is thenature of the process.Consultationisconsultationandwewill see[the outcome] whenweissuetheguidelineslater on.But dont focuson this, that isnot theissue.At the end [of the process] wewill issueguidelinesor other instrumentswhicharevoted in by [qualified] majority.It will be implementedon a ‗complyor explain‘basis.How doyou get firms tofollowtheguidelines?What istheincentive forinsurerstocomplywith theguidelinesasthey areimplemented?We are talkingabout preparatory measures;weare talking about puttingin supervisory moves[relatingto] elementsof pillar II and somesubmissionof information.Theobjectiveis not that supervisorswill analyse the information asif SolvencyII werein force.Theenforcement will be in relationtothecurrent regime# SolvencyI.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 95We want tobe sure that companies do thepreparation for SolvencyII, sowhentheysubmit information on the asset side, on thecapitalrequirementsand all the calculationsin there, the objectiveisthatsupervisorswill look at it, understand it and will analyse thequality[ofthesubmission] and will providefeedback tothe company on thequalityof the information.SowhenSolvencyII starts, wewill not have the same kind of problems.When a supervisoryregime is changed, especiallyon the informationside,[the quality] willnot be100%in thefirstsubmission, you willneedtohavea qualitycheck and adialogue and thats what wewant to providebeforethefull implementation.Thatswhywewant to have at least oneannual report before the start ofSolvencyII and alsotostart to get some quarterly information twoquartersbeforetheimplementationof SolvencyII.Thatswhywesaythat it is not becauseof theseguidelinesthat therewillbeenforcement, it is for supervisorsand companies toincreasethe levelofpreparedness.It is about helpingall thepreparation to be made and, thus,tocontributetoSolvencyII implementation.It is not just for undertakingsbut for supervisors.We expect national supervisorswill alsostart to analyse and review theinformation theyreceivefrom companiessothat theyarebetter preparedwhenSolvency II starts.Doyou envisageaction against firmsif theydont comply?The implementation of the guidelines isup to national supervisors so weare not telling how the national supervisors will implement them in theircountries.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 96For example, you could have countrieswhichare more advanced andwhichhaveincorporatedtheseintotheir legal requirements,sotheyhaveenforcement powers.I am not expectingthat thosewill go back on what theyhaveimplemented in their regimes.That is not the purposeof theseguidelines;weare not issuingtheseguidelinesin order togive enforcementspowersbeforethe directiveisfullytransposed, weare issuingtheseguidelinesin order tohavecompanies and supervisorsbetter preparedbeforeSolvencyII starts.Thefocusis not enforcement, the focusis on improving thequality.In that sense I dont really seewhyboth national supervisorsand theindustrywill not be in a shapetocomplywith theseguidelinesasit isintheir owninterests.We have all elementsin terms of proportionalityand phasing-in in here,soI wouldsayit is a win#win situation at the end of the dayand will putusin a much better situation when Solvency II is in force.We could end up with inconsistenciesbetween different member states,with some a lot further ahead in implementation and others a lot furtherbehind?We are in a situation now whereweare seeingevolution anddevelopmentsin Member States,sothissituation isalreadythere.Theguidelineswill bring more consistencyand more convergence.But let me be frank and clear, it is not just because a European authorityissues guidelines or technical standardsthat implementation will be 100%equal in all the countries.That is wheresupervisionenters;that is the biggest challenge.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 97If you believethat thebiggest challengeisto have a singlerulebookthenthink again asthe biggest challengeis tohave a consistent supervisoryapproachon how toimplement thissinglerulebook.I don‘t have the expectationthat by having guidelines,everyone willbehavein thesame way.That isnot realitysothat iswhywehaveanumberof elementsin termsofmonitoring.We will not only receivean indicationfrom authoritiesif theywant tocomplybut wewill alsohave a progressreport on an annual basiswherewewill get informationabout what theprogresstowardstheimplementationof theguidelinesand that is thetool wewill use forcheckingconsistency.We have other toolsin termsof implementation of consistent supervisoryapproach, for example,EIOPA is startingto develop a supervisoryhandbook wherewewill develop a number of good practicesin differentareasof SolvencyII;howtoapproach theimplementationof the newregime;how to assessthe risks.This is long-term work.If peoplethink that you will have immediateconsistencyin all thesupervisorypracticesthenthat iswishfulthinking;it is goingtobetough,its going to take some years.But wearestartingon theright track sothat everything wecando, wearedoing and I am quiteoptimisticthat wewill implement SolvencyII in awaywhichis consistent.It will not be always100%completelyequal in all the countriesbecausewehave different markets, productsand culturesat a supervisorylevel.You cannot change the culture in one or two years, this will take time; butthere is a clear vision and objective from Eiopa as to where we want to bein three, four, fiveyears‘and I think weare goingto get there.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 98On thedetails of theproposed measures, somepeoplehaveexpressedsurpriseat howfar theyhave gone. Someexpressconcernson thereporting side– therearealot of requirements.Wehavebeenworkingonharmonisationof reportingfor SolvencyII for anumber of years.We have extensivelyused publicconsultations;wehave workedwith allthestakeholdersand integrateda huge number of elementscomingfromour stakeholderssowehad, at the end of last year, a stablepackageoftemplates.What weare askingfor right now is a minor part of the reportingrequirements;theseare just thebasicelementsof Solvency II.Sowhenpeoplesaythere wereexpectingless, I dont know what is less.We have just covered thefundamental elements;namely reportingon theasset side, on technicalprovisions, on thebasicelementsof ownfundsand capital requirements.All of the other moretechnicaldetails and granular information were notaskingfor it right now.This is predicated on astablePillar1.There is ariskof that not beingachieved bytheendof theyear. Howwill that affect theguidelines?We all need to work with assumptions.Our assumption isthat in order tohave this submission of informationin2015,wewill need tohave a stablePillar 1at theend of this year or thebeginningof next year.That is our assumption.If the world evolvesin a different direction, then wewill revisethisdeadline.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 99But it is our duty right now tobe transparent and have a clearcommunicationwithour industry and tosaythat theexpectationfromsupervisorsand the current timingsis that in 2015wecould havethe firstsubmission of information.But if, at thepolitical level, there are different decisions,then wewillchangethis.But I think it is a questionof transparency.If there arefurther delays, could theseguidelinesbecomethedefactoSolvencyII regime?That is not our intention and that it is not on our tableright now.Theseguidelinesareof a preparatory nature and are duetobe thereduring thepreparatory phase.When this phaseisfinished, wewill publish thetechnical standardsandtheproper guidelinesfor theSolvencyII regime.What wewantedisnot tofirst dosomethingandthenin a coupleof yearstodo somethingcompletely different.It is important that during the preparatory phasepeople know withsufficient detail and proper transparency, what the expectationsofsupervisorsare asit will help them bebetter prepared.I don‘t think it is interestingto do these‗what if‘ scenarios.If at theend of the year or thebeginning of next year wedont have apoliticaldecisionon Solvency II, then I will gladlytalk again and I amsure I can provideinformationon what weintend to do aswewill haveways toevolve, but that isnot the scenario right now.The current scenario is that we will have a political agreement and thatSolvency II will be implemented, and I believe it isstill possible to haveSolvencyII starting in 2016.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 100If that isnot thecase, thenlaterintheyear ornext year wewill seewhat todo.How is theLTGAprogressing?Companieshavesent informationtonationalsupervisorsandnowthereisperiod of analysis.We expect that around 500undertakingsparticipated in the exercise.Sothere wasa good level of participationconsideringthat the exerciseis very much focused on long-term guarantees.We are reviewingand analysing theresultswhichwewill do at EIOPAduring May, and in June wewill make our report.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 101Global liquidity: where do westand?SpeechbyJaimeCaruana, GeneralManageroftheBank for InternationalSettlements,preparedfor the Bank of KoreaInternationalConference2013on"Assessinggloballiquidityin a global framework", Seoul.I wouldlike tothank GovernorKim for hiskind invitationtospeak to the Bank of KoreaInternational Conference.Thetopic of thisconferenceis very special tothe BIS.We havepaid closeattentionto global liquidityin thepast few years andhavecontributed to recent international effortsto understand itbetter,includingthoseof the2011CGFS WorkingGroup chaired by Jean-Pierre Landau1and the G20groups.TheBIShassubsequentlyreported to the G20on global liquidityspillovers.TheBank of Korea hascontributed actively tothiswork, and GovernorKim in particularhasremindedusall, many times,in manymeetings,ofthe importanceof closeinternational cooperation among central bankson thistopic.I shall start my remarkswithsome wordson the concept of globalliquidityand the reasonstomonitor it.I will thentry tocharacterise today‘s global financial conditions:thestubbornlyhigh levelsof debt in the advanced economiesand thestill-risinglevelsof debt in some advanced and emergingmarketeconomies.Then I shall review quantityand priceindicatorsof global liquidity.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 102Finally, I shall turn tothecurrent, unprecedentedlevelsof monetaryaccommodation and thechallengesthat thedesirable interest ratenormalisationcould pose.With regard topolicy, I shall make threesuggestions.First, in most of theadvancedeconomieshit by the crisis,banks,householdsand firmsneed to redoubletheir effortsto deleverageand torepair their balancesheets, while policymakers must redoubletheireffortsto enact far-reaching reforms.Crucially, progresswith repairs and reforms wouldalsoallow centralbanksto normalisemonetary policy in a manner consistent with a returntosustainableand balancedgrowth.Second, therearelate-cyclerisksinsomeoftheadvanced(lessaffectedbythecrisis)and emergingmarket economiesthat havebeen experiencingcredit booms.In thesecases, authoritiesshould continue to augment themacroprudential policiesadopted todatewith policies tobuild upfinancial resilience.And third and more generally, policymakers need tostrengthenprudential policiesthat anticipate and meet the challengesposed by theinevitableand desirablenormalisation of global interestrates.What is global liquidity?Global liquidityis an elusiveconcept used in a variety of ways,andrigorousanalysisof it is challenging.Given the current focuson financial stability, let me define it here assimplythe―easeof financing‖ in theinternational financial system.Despiteitsconceptualdifficulties,globalliquidityisworthmonitoringforat leasttwomain reasons.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 103First, experienceshowsthat the endogenousbuild-upof financialvulnerabilitiesmay take a long time and is difficult topredict.But at some point, systemic liquiditystresscan emerge very quicklyandthreaten the stabilityof theglobal financial system.Thesekindsof dynamicspoint to theneedto monitor global conditionsandtobereadytotakedecisionsevenunderuncertaintyandinacomplexsystem.Waitingfor irrefutableevidencemay prove costly.Central banksplayan important role in the generationof global liquiditybut, ultimately, easeof financingreflectsthe abilityand willingnessofmarket participantstoprovidefunding or totradein securitiesmarkets.In turn, their abilityand willingnessaredetermined by privateperceptionsof risk, and by risk appetite, aswell asby broader financialand economicconditions.Second, while global conditionsmatter for domesticpolicymaking,domesticpolicy decisionsinfluenceglobal conditions.We at theBISremain convinced that policymakers should take intoaccount howtheirdomesticpoliciesaffectglobalconditionsaswellasthefeedback effectsthereof.Easy financingconditionscan showup in a rapid growthof creditextendedunder weak underwritingstandards.Excessiverisk-takingand rapid credit growthcan weakenthefinancialsystem through lowercredit qualityaswell asthroughexcessiveleverage,maturitytransformation and currencymismatches.Easy financingcan show up in lessdeleveragingand repair thanusualafter a balancesheet crisis.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 104Proper analysisof global liquiditythereforerequires monitoring of avarietyof indicators.Theseincludepricesand quantities,and stocksand flows, at both thedomesticand international level.Deleveraging and leveraging in the global economyIn order tocharacteriseglobal financial conditions,let me start withcredit stocksand flows.Overall, wesee a particularlydifferentiatedpicture, simultaneousslowdeleveragingand leveraging, that is a combination of different trends:- Stock measuresindicatethat outstandinglevelsof both domesticandinternational debt, public and private, are overall substantiallyabovetheir pre-crisislevelsin every region.Overall, G20 countrieshave seentheir total debt increaseby morethan 30% sincethe beginning of the crisis(Graph 1).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 105- Bank credit growthisslowor negativein Europeand growingmodestlyin the UnitedStates, but it is showingstrong growthincountrieslessaffectedby the crisis, such asinAsia and LatinAmerica.- Growthin foreign currencycredit (eg dollar credit outsidethe UnitedStates) and in international bank credit pointsto more expansionaryconditionsin some regions.- Finally, global bond marketshave been very dynamic at historicallylowyields.Theoutstanding stock of non-financial corporate bondsininternational marketshasincreased sharply sincethebeginning of2012.Fiveyears after the onset of the crisis,householdsand firms in theeconomiesmost affected haveadjustedtheir balancesheetslessthan onewouldhave expected given the experienceof previouscrises(Graph 2).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 106Theexception is theUnitedStates.There, the household sector hasdeleveragedthrough paydowns,write-offsand income growth.Asaresult, theratioofhouseholddebt todisposableincomeintheUnitedStateshasfallenback tothe levelsof theearly2000s,and the ratio ofoverall private debt toGDP has improved.But public debt hasincreased markedly.In Europe, countriesthat experiencedpropertyandcredit booms, suchasthe United Kingdom and Spain, have seen some deleveragingin theirhousehold debt.However,in Europe, overall privatedebt has barely fallenin relationtoGDP, even aspublic sectorindebtednesscontinuestorise.Despitean unprecedentedeasing of monetary policy, and despitefiscaldeficitsbeing historicallyhigh, balancesheet repair by theprivate sectorlags.In emerging Asia, on average, private credit in relation to GDP remainswell below the levels in advanced economies, but it is trending towardsthepeak reached before theAsian financial crisisof the late 1990s.Notably, real estatemarketshave shownstrongprice gainsin a numberof economiesin the region.As a result, policymakers in someAsian economiesmay facethe risksoffinancial strainsassociatedwiththe later stagesof the financial cycle,whencredit and pricegainsslow down and eventuallyreverse(Graph 3).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 107Policymakers in theregion havebeen leaningagainst such late-cyclerisks.In many casestheyhave usedmacroprudential policies.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 108Nevertheless, they wouldbe well advisedto use the current conditionstocontinueto maketheir financial systems more resilient.Let me now completethispicture withthe other trendsthat I mentionedat the outset.Dollar and euro credit to non-residents growing at double-digitratesForeigncurrencycredit in dollarsand euros– includingboth bank loansandbonds– is growingto residentsof the rest of theworld.AccommodativemonetarypolicyintheUnitedStateshasbeenassociatedwith a very gradual recovery in credit growthtoUShouseholdsandbusinesses.Meanwhile, dollar credit to non-US residents hasbeen growingat arelativelyrapidpaceandnowtotalsabout $7trillion, or13%oftheGDPoftheworldex United States.Its growthreached a high of almost 20% in 2011, fell back in 2012,but ismoving up again and is at 10% in thelatestdata (Graph 4).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 109Dollar credit outside the United States is growing at double-digit rateseven though many countries have adopted macroprudential policies orcapital controlsthat raisethe effectiveinterestrateon dollars.For instance, China hasimposed bank-by-bank quotason bringingindollars,whichhasdriven up interest ratesfor dollar loansin China towellaboveglobal levels.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 110Despitethat,foreigncurrencycredit extendedbybanksin Chinain the12monthstoApril 2013rose by 35%.Growthhasalsoresumed for euro-denominatedcredit to businessesandhouseholdsoutsidethe euro area.Currentlyat about 15%, the rateis even fasterthan that for dollar debtoutsidethe UnitedStates.However,the outstanding amount of foreign euro credit, currentlyequivalent to$2.5trillion, impliesthat it hasnot grown asmuch in dollar(or euro) terms.Global bank deleveragingAggregate international bank credit toboth banksand non-banks hasstoppedgrowingor even gonenegative, asthe deleveragingof bankshasbeen more intensein the cross-border component (Graph 5).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 111By sector, theshrinkageof international bank credit is concentratedintheinterbank market.Geographically, it reflectsmainlythe weaknessin credit growthtoEurope and tosome extent to the United States.By contrast, international bank credit toAsia and Latin America hasgrownmore strongly(Graph 6).As a result, the weaknessin aggregate internationalbank credit doesnotindicategloballytight financingconditions.Ease of financing in global bond marketsFinally, let me mention the dynamism in global bond markets. Thisisthe market where the global easeof financeis mostevident.Thereturn of equityand bond volatilitytothelow precrisislevelshassupported the demand for credit riskin bond markets(Graph 7).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 112Riskappetitehasreturned to pre-crisislevels(Graph 8).Corporateand emergingmarket bond yields are low (Graph 9, althoughspreadshave not reached pre-crisislows).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 113Non-investment grade, first-timesovereignissuershave seen bidsforbond issuesat 10timesthe issuanceamount.Outstandingemergingmarket corporatebonds– mostlyin the majorcurrencies– are growingrapidly(Graph 10).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 114Similarly, major economieshave at timesseen strongoutflowsintoequitiesand bondsof emerging market economies(Graph 11).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 115Unprecedented monetary easeLet me now leavetheanalysisof credit stocks and flowsand move tomonetary indicators.Monetaryindicatorspoint to unusual policy accommodationamid a stillweakand uncertaineconomicoutlook.By loweringpolicy ratestonear zero and expandingtheir balancesheets,central banksin the major economieshave bid up bond pricesandpushed the corresponding yieldswell below levelsimpliedby expectedshort-term rates.As a result, the priceconditionsfor risk-takingand privateliquiditygeneration arelargelyin place.For their part, central banks in emergingmarket economieshavefolloweda different path.Theyraised policy ratesin 2010–11asglobal trade recoveredandinflationarypressuresbecame evident.But starting in the latterhalf of 2012,theyhave been loweringtheir policyrates.As a result, not only are short-term interestrateson average substantiallynegativein real termsin the advancedeconomies,but theyare alsoaboutzero (and in some casesbelow zero) in emergingmarket economies(Graph 12).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 116Themajor central bankshavealso hugely expanded their balancesheets.Central banksof advanced economieshold assetsthat have risenfromabout $4trillion justbeforethe crisisto $10trillion today (Graph 13).Yet broad money – that is, bank depositsbacked by loansand securitiesholdingsof banks– hasgrownslowly.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 117In other words,themoney multiplier in major advanced economies hascollapsed, asit did in Japan in the early2000s(Graph 14).Thelarge-scalebond purchasesbymajor central bankshavehelped topushnominal bond yieldsdown relativetoprospectivenominal GDPgrowth.Thegap is very striking for advanced economies, in contrast tothesituationbeforetheglobal financial crisis(Graph 15).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 118Bond yieldsin emergingmarket economiesfell well short of expectednominalgrowthevenbeforethecrisis,in part becauseof thegapbetweensingle-digit bond yieldsand double-digit nominal growthin China.But inrecent years, thisgaphaswidenedfor emergingmarket economiestoo.Toappreciatejust howunusual global bond market pricingis,wehavetolookat the term premium.Admittedly, the calculation requires a certain amount of econometricheavy lifting, so different analysts can reasonably produce somewhatdifferent results.But in their work, my colleaguesfind a substantiallynegativetermpremium in major bond markets(Graph 16).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 119Put more simply, this suggests that, given central bank removal of bondsfrom private hands, the term premium – the extra reward for bearing theprice risk and inflation risk of holding a fixed rate bond – has flipped intoa penaltythat the investor must pay.What this means is that exit from the currently accommodative monetarypolicy stanceposeschallengesin twodimensions.Thefirst isthe familiar one of managing expectationsof policy ratesetting.When will ratesstart to rise?How fast will theyrise?Or better, how will the rate of their rise depend on macroeconomicconditions?The other is the unfamiliar one of managing the term premium as centralbankssignal anychange of policy in relation to purchasesor salesof bondduration.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 120Thevery successof pushingtheterm premium down intonegativeterritoryhascreatedthe riskof its sudden rise, even if central bankssucceedin communicatingtheir intended pathsfor short-term policyrates.Aglobal steepeningof yield curvescould hit thecapital of financialinstitutions,totheextent that theyhold their government‘sdebt, andworsendebt sustainability.All thisunderscorestheimportance– both formarket participantsandfortheauthorities– of beingprepared for eventual exit from theextraordinarilyaccommodativeglobal monetary conditions.While central bankssurelyhaveall the toolsnecessaryto technicallyengineeran exit and will doubtlessdotheir utmost to communicateproperlywithmarket participants,it cannot be takenfor granted that theprocesswill be smooth.Policy challengesLet me summariseand draw three general policy implications,recognisingthat there are significant differencesfrom countrytocountry.Overall, thestock of international and domestic credit remainshigh,implying that privatesector deleveragingis not yet completein themajoradvancedeconomiesmost affectedby thecrisis.And increasedleveragingin other advanced economiesand in emergingmarket economiessuggestsvulnerabilitiesbuilding in some regions.At the same time, indicatorsof financingconditionsand risk appetitearepointing to increased risk-takingin somemarkets.While unprecedentedmonetary easinghashad difficultyin boostingbroader money and bank lendingin thedomesticeconomiesthat ittargeted, it hasincreasedforeign currencycredit in dollarsand eurostonon-residents,and pusheddown yields in global bond marketsto theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 121point whereinvestorsare paying a term premium rather than receivingaterm premium.Hence,the global easeof financeismost evident in global bond markets:thoseare themarketswherevolatility hasbeen compressed topre-crisislevels,risk appetitehas returned, sovereign and corporatebond yieldshavereached record lowlevels, lendingconditionshave been weakened,outstandingemerging market corporatebondshave grownrapidlyandportfolio capital flowshave at timesbeen strong.In termsof policy, I have threegeneral suggestions.First, privatesector deleveragingand balancesheet repair need tocontinuein crisis-affectedeconomies,and policymakers thereneed topresson withstructural reforms.Balancesheet recessionsare special, and more action on thesefrontsisrequired for a balancedrecovery.Moreover,such actionwill allowcentral banksto normalisemonetarypolicy in a manner consistent with a return to sustainableand balancedgrowth.Second, in emergingmarket economiesand some advancedeconomiesthat have been lessaffectedby the crisis,but have experienced creditbooms, the financialcycle may be reachingcriticalstages.Policymakers and market participantsthere can usethecurrentconditionsto continue to focuson making their financial systemsmoreresilient.Finallyand more broadly, authoritiesand market participantsmustrecognisethe challengesinherent in the inevitableand desirableinterestrate normalisation and seek tomake their financial firms and marketsresilient in the faceof potential strains.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 122Implicationsof the Single SupervisoryMechanism on the European System ofFinancial Supervision: the EBAperspectiveInterventionofAndrea Enria, Chairman oftheEBAEuropean Commission - Public hearingonfinancial supervisionin the EU - BrusselsTheconstructionoftheSingleSupervisoryMechanism(SSM) and the wholeprojectof the Banking Union areusuallyjustifiedon the basisof the shortcomingsof theinstitutional framework fortheSingle Currency, whichhavebeen soclearlyexposed during thesovereign debt crisis.However,I wouldlike to start from a different observation point, that oftheSingle Market.During the last threeyears wehave witnesseda dramaticprocessofrenationalisation of bankingbusiness, whichhasdeeplydamaged thefunctioningof theSingleMarket.As a result of the political decision torely exclusivelyon the nationalsafetynetsto providesolvencysupport tothebanks, both marketparticipantsand national authoritieshave takenactionsthat havesegmentedtheSingle Market along national lines.Bank capital and liquidityarenow allocatedon a country basis and cross-border groupshave achieved a much closermatchingof assetsandliabilitiesin each jurisdiction.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 123Thestrong reduction in cross-borderbankinghasbeen driven inparticular bythecollapsein exposurestobanksin other jurisdictions.This partly reflectsthereluctanceof banksto lend to each other and theemergenceof sovereign risk asa main element in banks behaviour.But although I lack robust empirical evidence, I am fairlysure that animportant driver isalsoa sharp contractionin the transfersof capital andliquiditywithin cross-border groups, from theparent company tosubsidiariesin other MemberStatesand theother wayround.We are witnessingwhat I wouldcall a "soft break-up" of crossbordergroupsalong national lines.This meansthat cross-bordergroupsare not functioning anymore aschannelsfor integratingtheretail bankingmarket,recycling savingsfromcountriesin surplustomeet the financing needsof small and mediumenterprisesand householdsin other MemberStates.TheSingleMarket isfailing tofulfill its main function.TheSSM isprovidingaprompt and stronginstitutionalresponse,andtheright one.If properlycompleted witheffectiveand integratedmechanismsforresolution - the so-calledSingleResolution Mechanism - thenewinstitutional framework could go a longwayin establishinga Europeansafetynet and cuttingthe link betweenbanksand their sovereigns.I donot think that the Europeanisation of deposit guaranteeschemesintheir paybox function is essential tomove forward, although somemechanism for theintegrationof nationalschemesis essential in alongerterm perspective, alsovia reinsuranceobligationsfor localschemes, asrecentlysuggested by Daniel Gros.But wesurely need a European authoritywhich can mobilisepooledprivateresourcescontributed by the banks themselvesand relyon theliquiditysupport and thefiscal backstop of the European StabilityInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 124Mechanism (ESM), toensure that effectiverestructuringand resolutioncan occur at the European level.Howevereffectivethis response, though, it will only cover thebankingbusinesswithintheMember Statesthat will join the SSM.Theresponsibilityfor supervision and resolution, and theconnectedmechanism for support, will not cover all the Member States.Repairingthe SingleMarket, and avoiding a rift between Member Statesthat will join theSSM and thosethat will not, requires that anumber ofadditional stepsare taken, all strengtheningother componentsof theEuropean System of Financial Supervision (ESFS), for whichat themoment I do not seethenecessarypoliticalcommitment.First, weneed a renewedand enhanced effort for the SingleRulebook.Truly unified rulesare thenecessaryconditionsto restoretrust amongstcompetent authoritiesand allowjoint execution of supervision oncross-border groups.Awide degreeof discretion left to national authoritiescould open theroom for theuse of rule-makingto de factoringfencenational markets.Alot of progressis beingmade in establishinga SingleRulebookinbanking, and the EBA is closeto finalisinga significant number ofstandardslinkedtothe new legislation on capital requirements(theso-calledCRD4-CRR).But there are still important areasof flexibility that need further action.There is the flexibility grantedfor the exerciseof macroprudentialresponsibilities.This is huge - up to500 basis pointsin the capital ratio, with further roomallowed in defining the liquidity buffers - but warranted, to tackle bubblesthat could develop in national markets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 125Here it isessentialthat EU-widemechanismsaredevisedtoconstraintheexerciseof thisdiscretionand make sure that it iseffectivelyemployed tocontrast macroprudential risks, and not aimed at trappingcapital andliquidityin domestic jurisdictions.Moreover,there istheflexibility granted toaddresssmallerinstitutionsoperatingon a localbasis,especiallysavingsand cooperativebanks.Also this type of flexibilityis warranted, asthe rules should abideto theprincipleof proportionalityand reflect thespecificitiesof differentbusinessmodels.But theprincipleof proportionalityshould be applied on an EU-widescaleand in nocaseshould simplyoffer carve-outsto common rulesforcertain categoriesof intermediaries,in order to avoid generatingde factobarriers toentry in localmarkets.There aretheelementsof flexibility grantedjust toreflect different policystancesof Member States.For instance, I am particularlyconcerned of the discussionof the draftDirectiveon Bank Recovery and Resolution, wheretherequest forflexibilitycould have twovery detrimental effects:(i)it could put at risk the level playing field in thetreatment of differentclassesof creditors,thusallowingfor the use of the regulatory lever toreducethe cost of funding for domestic players; and(ii)it could maintain differencesthat could turn out to be an obstacleininterconnectingnational resolution regimesand ensure a smooth andjoined-upapproachtocross-border groups.In all theseareastheintroductionof theSSM should be a positiveforce,pushingfor greater uniformityof the regulatory framework.TheEBA hasalreadydeveloped itsadvisoryrole, identifying areaswheretruly common rulesare warranted.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 126Perhapsthisroleshould be further codified, to provide a strongerunderpinningto theEBA astheguardian of the SingleRulebook.Thesecond area in whichtheSSM callsfor further action at theSingleMarket level is theconvergence in supervisorypracticesand cooperationbetweenauthorities.Steven Maijoor hasalready mentionedthe need to step up theeffortsforsupervisoryconvergencein theprevioussession.Theurgencyisevenhigher inbanking, wherethestaff of theECB andallthenational authorities joiningthe SSM will have toconduct theirsupervisorytasksaccordingto a common manual.Thetask to develop a SingleSupervisoryHandbook for thewholeEU,attributedtotheEBA, recognisestheimportancethat keychaptersof themanual aretrulycommon acrossthe SingleMarket.TheEBA hasalreadystartedtoworktosome of thesechaptersof theHandbook, in thearea of supervision of businessmodels,and will soonmove tothemethodologies to conduct riskassessments,asset qualityreviewsand attributescorestorecovery plans.Thediscussion on theHandbook hasfocusedmainlyon thelegal nature,andthedraft legislativeprovisionspoint out clearlythat it will not belegallybinding.Howeverthis missesthepoint, whichis the actual commitment of allcompetent authoritiestodefinejointlythemethodologiesand applythemin their day-to-day practice.Having common rulesand common supervisory practiceswill not ruleout thepossibility for tensionsbetweenhome and host supervisors.Theintroduction of theSSM will significantlysimplify home-hostrelations,but wehave to remind ourselvesthat almost all largecross-bordergroupshaveestablishmentsbothinsideandoutsidetheeuroarea.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 127TheEBAhassofar conductedamajor effort, withinsupervisorycolleges,through formal and informal mediation, and alsovia investigationsonbreachesof EU law,topush forwardstronger cooperation and jointdecisions.This strand of the EBAwork is somewhat obscure, but essential for therepair of the SingleMarket.Finally, the greatest challengewill be in the construction of acomprehensiveand credibleframeworkfor cross-border bank resolution.If the SRM coversonlythe countries joiningtheSSM, asit islikely, thechallengewill be toavoid that some degree of segmentation remainsintheSingle Market, asa consequenceof the divergent underlying safetynetson whichEuropean cross-border groupswill rely.Oncecompleted, theBanking Union should thuscontrast this trend ofnational segmentationand provide a robust underpinningfor anintegratedEuropeanbanking market.Tothis end, the SRM should be accompanied not only by a commonresolutiontoolkit for the wholeUnion but alsoby clear and bindingcriteria, agreed among the parties involved, for smoothlymanage thecrisis and resolutionof cross-border groups.Recent experienceshowsthat voluntary agreementsare not enough:whena crisis materializesthestrong incentivesto diverge from theoriginalagreementsneedtobeset-offbycredible,bindingarrangements.For thispurpose, aEuropeanAuthority should ensure that theseagreementsareput in placeunder acommon umbrellaandare effectivelyenforced in a crisis,for the wholeSingleMarket.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 128Internationalization of the RMBand the role of Macao asa financialplatformAddress by MrAnselmo Teng, Chairman of the MonetaryAuthority ofMacao, at the―2013Internationalizationof RMB Global Forum‖, jointlyorganisedby the Shanghai Instituteof the International Financial Centreof the Shanghai Universityof Financeand Economicsand the Centre forInternational Financeand Regulation(Australia), Shanghai.DearDelegates, Ladies andGentlemen,1) First of all, I wouldlike to expressmy gratitudetothe ShanghaiInstituteof theInternational Financial Centre of the Shanghai Universityof Financeand Economics for invitingme to thisforum.At the moment, the internationalizationof theRMB not onlyattractstheattention of the Mainlandcommunity, but alsoglobal financial markets.I am very pleased to take this opportunitytodaytopresent some of ourviewson this important topic and the roleof Macaoasa financialplatform.The internationalization processof the RMB2) Over theyears, in order to deepen further financial reforms, theRMBinternationalisationprocesshasbeen graduallyimplemented.In the 12th Five-Year plan, the Central Government hasclearlystatedthestrategic plan of ―expansion of RMB cross-borderuseand gradualrealisationof RMB capital account convertibility‖.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 129In recent years, to steadily and consistentlypromotethe RMBinternationalisation, the People‘sBank of China (PBOC) and relevantgovernment agencieshave broadened theflow-backchannel for theRMB, increased thescopefor RMB cross-borderuseand opened upRMB foreign direct investment toforeign enterprises.3)After theeruptionof theglobal financialcrisisin 2008/09,however,theinternational financial landscapehasundergone significanttransformation.While theworldwouldwelcomeChina‘scurrencyreform towardsfreeconvertibility, concernsfordestabilisingcapital flows, against abackdropof prolonged adoption of quantitative easingpoliciesby advancedcountries,have notablyheightened.International organisationssuch asthe IMF holdsa more ―practical‖positionthat capitalcontrolsarealegitimatepart of thetoolkit tomanagecapital flowsin certain circumstances,especiallyfor Emerging-MarketEconomies.With proper control of systemic risk in mind, thedegreeof stabilityof theinternational financial system wouldcorrespondinglyaffect the paceofthecurrencyreform in China.Relaxation of capital control towardsfree convertibilityand hencetheinternationalizationof theRMB, whileI believewouldremain theultimategoalsof thecurrencyreform, wouldproceed at a gradual pace,ensuring thestability, safetyand soundnessof the Chinesefinancialsystem.4)From the perspectiveof the theory of international finance, therealisationof currencyinternationalisationhingeson twoparameters,namely(i) freeconvertibility of the currency; and(ii) useof the currencyin international tradeand financial transactions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 130Thefirst parameter fallsintothe scope of a country‘smonetaryandexchangerate policieswhile thesecond isdirectlyrelated to a country‘ssharein international trade and financial activities.In July2009,thePBOC and relevant ministriesoftheStateCounciljointlypromulgated the ―Management of Cross-Border RMB Trade SettlementPilot Programme‖, whichwasa pivotal step of the endeavour of thegovernment topromote the internationalizationof theRMB.With the incessant expansion of thepilot units, virtuallyall Mainlandenterpriseswhichare qualifiedtoimport and export can havea free handin using theRMB tosettleall transactionswiththeir trade partnersglobally.An update of the RMB businessin the Macao SpecialAdministrative Region (MSAR)5)With the rapid development of the economy, there is an acceleratedeconomicintegrationbetweenthe Mainlandand Macao.As a result, RMB businessdevelopsquicklyin Macao.At the moment, RMB depositsin Macaoaccountsfor about 10% of thedepositsin thebanking system.There is a markedprogressin the RMB cross-bordertrade settlementdespitea slowstart.Cross-border trade settlement transactedin 2011increasedsubstantiallyby10 timesfrom 2010and the volume in 2012continuedtorecord anincreaseof over 60%.In thefirst quarterthisyear, thesubstantialgrowthcontinued;thevolumeof cross-border trade settlement roseby almost 80% and already reached40%that of last year.6)TheMonetaryAuthorityof Macao,in thecourseofmanagingthefiscalreserveof the government, hasinvested in theonshore market throughInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 131theCIBM quota(i.e. China Interbank Bond Marketquota) grantedbythePeople‘sBank of China.We alsoinvest in theRMB offshoremarket in Hong Kong asasupplement to the onshore RMB portfolio.From a more global perspectiveand lookingahead, along withanincreasingweight in theRMB in global trade settlement and a risinginvestment interestsfrom abroad, the internationalizationpath of thecurrencywouldleadtomore market opportunities, both for the domesticmainlandinvestorsand offshore international investors.The economic situation and the banking sector of Macao andhow the RMB businessevolves7) Under theauspicesof theCentral Government, theMacaoeconomyhasenjoyed rapid growth.Sinceitsreturn totheMotherland, theoverall economy of Macaohasbeen expandingat a compound rate of 12.4%.In 2012,per capitaincome exceeded USD76,000.As a special administrativeregion, the economy of Macaocan beclassifiedassmall, but it canandshouldcontributetotheprocessrelatingtothe ―internationalization‖ of the RMB.As a matter of fact, Macaois alwaysan advocateof freemarketsystem, there is noexchangecontrol;the financial marketsandinstitutionsoperatefreely; thereis freeflowof fundsintoand out of theMSAR, whichtogether laid down the foundation of itsfine system.There are29banksoperating in the Macaobanking system.Theyare of different origins;the Mainland, ChineseTaipei, HKSAR, Singapore, theUS, the UK and Portugal.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 132As at 31/ 03/ 2013,non-performingloanratio wasa meagre 0.14%, profitfor the first quarter of 2013wasup 27.4% year-on-year, CAR (Capitaladequacyratio) wasaround 15%.Therearegoodrisksmanagement, corporategovernance,internalcontroland effectivesupervision in thebankingsystem.Thebankshave long been enjoying security and stability.Apart from servicinglocalneeds, Macaobanksare makinguseof Macaoasa platform in developingcross-borderfinancial businesswithothernationsand regions.This hasin fact provided facilityand foundation for the―internationalization‖ endeavour of theRMB.Particularly, Macao bankshave accumulated ample experiencein theoperation and management of RMB business.Asearlyasin 2004,Macaobecameoneofthepilot areasforRMB offshorebusinesswhile thePBOC appointeda clearingbank for RMB businesstobanksthat offer individual RMB businessin Macaorelatingtodeposit, exchange, remittanceand bank card.In July2009, Macao bankswereallowedtoconduct settlement forcross-border tradesdenominatedin RMB.At the moment, RMB is freely circulatedin Macao like other currencies.As long asthe fundswill not flow back tothe Mainland, banksin Macaohavea freehand in handlingall types of RMB businessto cater totheneedsof the market.Besides, theReal Time GrossSettlement System of MacaohasinterfacecapabilitieswiththeMainlandand will surelyfacilitatecrossborderclearingfor theRMB.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 133TheroleofMacao asatradeplatform betweentheMainland andPortuguese speaking Countries8)On a more international perspective,Macao hasbeen exploitingitsspecial geographical and historical conditionsin performing itsliaisonplatform function for economic cooperation betweenChina andPortuguesespeakingcountries, namelyAngola, Brazil, CapeVerde, EastTimor, Guinea-Bissau, Mozambique,Portugal and SãoTomé e Principe.Theyhave a total population of more than 200million and endowedwithabundant natural resourcesand energypotentials.In the 12thFive-Year-Plan, it is stipulatedthat Macao will have strongsupport in the development of a service platform for the economiccooperation betweenChina and Portuguese speakingcountries, wherebyappropriateeconomic diversificationof Macao can be promoted.Recently, thereisanincreasingrisein economicactivitiesbetweenChinaand Lusophonecountries.Tradevolume withthe 8 Lusophonecountriesamounted toUSD128.8billion in 2012,whichwasa 10.1%increaseyear-on-year.There is a great demand in the market for related financial services.Macaocanfullyembodyitsplatform functionbyprovidingsolidfinancialsupport servicesfor trade.9)Some Portuguesespeakingcountrieswouldliketo share Macao‘sexperiencein managingRMB businessaswell asthe experienceindealingwithinvestment in the currency.Tothis end, recently, the Central Bank of Mozambique, under the termsof the ―Memorandum of Understanding‖ withthe MonetaryAuthority ofMacao, arrangedtosendofficers toMacaoin mid-April witha view tomakingpreparationfor future development.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 13410)On theother hand, bankswithcapital from China and Portugalaccount for the lion‘sshare in Macao‘sbankingindustry.Some banks of Chinese capital have executed business cooperationagreements with financial institutions of some Portuguese speakingcountries.Under such indigenouscompetitiveness, the MSAR Government isleadinglocalfinancial institutionstomake full use of the developmentopportunityofferedby Portuguesespeakingcountries to further expandtheir business.Assuch, wecangraspthechanceanddirectsuitablefinancialinstitutionsand enterprisestoinvest in thosecountriesthrough Macaoastheplatform.We followthe strategic direction of ―internationalization‖ aspostulatedbyour country.Suchamovewillhavespill-overeffect onothereconomic/ tradeactivities,andsuchsupportservicescanbeprovidedbytheMacaofinancialsystem.11)In November 2010,the then Premier of the State Council, Mr. WenJiabao,visited Macaofor the 3rd Ministerial Meetingof the ―Forum forEconomicCooperation betweenChina and Portuguese SpeakingCountries‖.He announced a seriesof policymeasuresto promote Macaotobe theplatform for economic cooperation betweenthe countries.He hoped that Macaowouldperform ―core function‖ in promoting RMBtradesettlement in theprocess,whichwouldfurther embody Macao‘spositionasplatform for economic cooperation betweenChina andLusophone countries.12)Macao‘suniquenessand competitiveedgessupport itsdevelopmentintoa RMB settlement platform for commercial and tradeactivitiesbetweenthe Mainlandand Portuguesespeaking countries.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 135At the moment, thedivisionof labour betweenthetwofinancialcentres,Shanghai and HongKong, is clearcut; Shanghai is the―onshore‖ RMBcentre wh ile Hong Kong is th e lead in g ―offshore‖ cen t re .It is envisagedthat Macao can strengthenitscooperation withShanghaiand Hong Kong, exploring the opportunityarisingfrom theorderlyfinancial reform in the Mainland.Tocopewiththeneed of thecountry, Macaocan serve asa platform forregional economicand trade cooperation, by whichit can help createanaccommodativeenvironment conducivetoexternal trade, overalleconomicdevelopment, financial reform and modernizationof ourcountry.Undersuchpositiveinteraction, wecanpromotejointlytheprocessoftheinternationalizationof theRMB.Thank you!International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 136The Digitisation of our EconomiesNeelie Kroes, Vice-President of the EuropeanCommission responsiblefor the DigitalAgenda, 11th European BusinessSummit, BrusselsOur worldis going online.Ever more services, from banking togovernment; from energy toeducation.And no doubt, that brings hugebenefitsforproductivity, competitiveness,and jobs.Onlinesmall businessesgrow and export twiceasmuch.TheInternet createstwo and a half jobsfor every one lost.Increasingbroadbandbrings an economicboost worthbillions.In this sector, asin others,lets not forget our crownjewel:the SingleMarket.It meansyou can travel, trade, transact, whereveryou are.Without borders,without barriers.Theonlineworldshould be the natural new home for that SingleMarket.Online,it shouldnt matterif abusinessisbased inBrusselsor Bratislava.But weare at risk of creatingnew bordersonline, even whenwespentdecadesbringingthem down in thereal world.Take cloud computing.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 137Its a wholenew wayof deliveringIT for businesses.It could give an economic boost worthhundredsof billions.But incompatiblestandardsand"national fortresses" riskwreckingthosebenefits.Or take eGovernment.Registeringyour business, paying your taxes,bidding for contracts–theyre all easier online.That convenienceshould be available acrossborders too.But weneed tolink up national systems.Or take telecomsservices.ICT allowsfor great new services, includingbusiness-to-business.Like instant, cheap videoconferencing.But currentlythe European telecomsmarket is actuallyjust 27distinctnational markets.Currently, consumersand businesseshave their choicelimitedto whatson offer locally.Operatorscant serve an EU-widemarket.Sotheycan‘t reachthe size and scaletoinvest, innovateand compete globally.Todaymany businessesfind roaming chargesacostlyirritant.That willbeyet worsein aworldofmachinetomachinecommunications,whereeverything isconnected, from your car toyourwallet.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 138But imagineaEurope whereoperatorscanprovidedigital servicesacrossthewholeEU, wherevertheyare based.Wheretelecomsuserscanenjoythosesameservices,wherevertheyliveorwork.Offeringa boost for thewholeInternet ecosystem – from operatorstoequipment makers toapp designers.And for thewholeeconomy besides.Becauseweneed companiesto smash barriers, think European, andcompeteglobally: even againsttheAmerican giants.We will soon be coming forwardwithproposalson a SingleMarket fortelecoms.This is a major priorityfor therest of my mandate.Barriers to the digital Single Market are barriers to growth.Im determined to knock them down wherever I find them.In fact, Im the sameage asAlex Ferguson.But I haveno intentionof retiring until Ive completed this task.Until Ive helped all our citizensand businessescapture thedigitalopportunity.Then wecan reallyget more European players in the global ChampionsLeague.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 139Digital "to-do" list: new digital prioritiesfor 2013-2014TheEuropean Commission hastoday adoptedseven new prioritiesfor thedigital economy and society.Thedigital economyis growingat seventimesthe rateof the rest of theeconomy, but this potential is currentlyheld back by a patchypan-Europeanpolicyframework.Todays prioritiesfollowa comprehensivepolicy review and placenewemphasisonthemosttransformativeelementsof theoriginal2010DigitalAgenda for Europe.European Commission VicePresident Neelie Kroes said: "2013will bethebusiest year yet for the DigitalAgenda. Mytop prioritiesare toincreasebroadband investment and to maximisethedigital sectorscontribution toEuropes recovery."Full implementationof thisupdated DigitalAgenda wouldincreaseEuropean GDP by 5%, or 1500€per person, over the next eight years, byincreasinginvestment in ICT, improvingeSkillslevelsin thelabourforce, enablingpublicsector innovation, and reformingthe frameworkconditionsfor the internet economy.In termsof jobs,up toone million digital jobsrisk going unfilledby 2015without pan-Europeanaction while 1.2million jobscould be createdthrough infrastructureconstruction.This would riseto 3.8million new jobsthroughout the economy in thelongterm.New priorities are:1.Create a new and stablebroadband regulatory environment.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 140Moreprivate investment is needed in high speed fixed and mobilebroadband networks.TheCommissions top digital priorityfor 2013is thereforefinalisinganew and stablebroadband regulatoryenvironment.Apackageof ten actionsin 2013will includeRecommendationsonstronger non-discriminatorynetworkaccessand new costingmethodologyfor wholesaleaccesstobroadband networks,netneutrality, universal serviceandmechanismsforreducingthecivilengineeringcostsof broadband roll-out.This will build on new Broadband StateAid Guidelinesand theproposedConnectingEurope Facilityloans.2.New public digital service infrastructuresthrough ConnectingEuropeFacilityWith Council support, the Commissionwill fast-track theroll out ofdigital services(especiallytheir crossborder interoperability) in eIDsandeSignatures,businessmobility, eJustice, electronic health recordsandcultural platformssuchasEuropeana.eProcurement alonecould save€100billion per year and eGovernmentcan reduce thecostsof administration by15-20%.3. Launch Grand Coalitionon Digital Skillsand JobsAcoalitionisneeded totakepracticalstepstoavoid onemillion ICT jobsgoingpersonnel.Such an outcome is avoidable, and wouldbe unacceptableat a time ofhigh general unemployment.TheCommission will coordinate public and privatesectoractionsto:increaseIT trainingplacements,createmore direct education-businesslinks,agree standard job profilesand promote skill certification tohelpjobmobility.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 141TheCommission will alsodeliver an action plan to support webentrepreneursand make Europe more "start-up friendly".4. Propose EU cyber-security strategy and DirectiveSecurity and freedom onlinegohand-in-hand. TheEU should offer theworlds safestonlineenvironments, valuing user freedom and privacy.TheCommission will deliver a strategyand proposed Directivetoestablisha common minimum level of preparednessat nationallevel, includingan onlineplatform toprevent and counter cross-bordercyber incidents,and incident reportingrequirements.This will stimulate a larger European market for securityandprivacy-by-design products.5. Update EUs Copyright FrameworkModernisingcopyright is key to achievingthisDigital SingleMarket.ThereforetheCommissionwill seek asolutionof copyright-relatedissueswhererapid progressis neededvia a structured stakeholder dialoguein2013.In paralleltheCommissionwillcompleteitson-goingefforttoreview andthemodernisetheEU copyright legislativeframework,witha view toadecisionin 2014onwhethertotableresultinglegislativereform proposals(seeMEMO/ 12/ 950.6. Accelerate cloud computing through public sector buying powerTheCommission will launchpilot actionsin the European CloudPartnership (IP/12/ 1225), which harnessespublic buying powerto helpcreatetheworlds largest cloud-enabledICT market,dismantlingcurrentnational fortressesand negative consumer perceptions7. Launch new electronicsindustrial strategyInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 142TheCommission will proposean industrial strategy for micro- andnano-electronics, to increaseEuropes attractivenessfor investment indesignand productionaswell asgrowingits global market share.BackgroundTheDigital Agenda for Europewasadoptedin2010,asanintegralpart oftheEurope 2020strategy, to stimulatethe digital economy and addresssocietal challengesthrough ICT.TheEuropeanCouncilandtheEuropeanParliament havesincecalledforfurther strengtheningof the European digital leadership and completionof the Digital SingleMarket by 2015 (European Council conclusionsof28/29June 2012conclusionsof 1/2March 2012.)TheDigital Agenda hasmet many of its targetsand is on track to meetmanyothers.Regularinternet usageis risingsteadily, especiallyamong disadvantagedgroups.Thenumber of citizenswhohave never used theinternet is decreasing.Similarly, onlinebuying continuestoincrease, although the paceofgrowth in cross-border eCommerceis tooslow.High-speed broadband showsthe first signsof taking off, includingultra-fast connectionsabove100Mbps.However significant differences remain among different Member States,differences which require active European policy action to minimise andeliminate.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 143Understanding Supervisory CollegesCollegesasan effective tool for cross-border supervisionEnhanced cooperationbetweensupervisoryauthoritiesboth at EU andglobal level is thekey to strengtheningthe supervision of cross-borderbankinggroups.Thevehicles for thecoordinationof supervisoryactivitiesare thecollegesof supervisors.Under EU law,such collegeshave to beestablishedfor EEA bankswithsubsidiariesor significant branchesin other EEAcountries.Theymay includesupervisorsin non-EEA countries,whererelevant.When theyfunctionat their best, the collegesallowsupervisoryauthoritiesto join forces, share knowledgeand useskillsand resourcesmore effectivelyand efficiently, regardlessof their individual jurisdiction.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 144Thisrequiresdeterminationandsignificant effortstoprompt coordinatedapproachesamong competent authorities.Toassist in developing a consistent and effectivecollege framework,theEBA‘s predecessor,the CEBS, published guidelines(i)On theoperational functioningof collegesand(ii)On thejoint assessment of banks‘risks, and joint decisionson theadequacyof cross-border banks‘capital withina college setting.Thestructure of collegesreflectstheactivitiesof thesupervised entity.Someof the smalleronesconsist of twoauthoritiesonly, whereasotherscomprise 20 or more authorities from all parts of the world.Thefrequencyand intensityof collegeactivitiescan alsodiffersignificantlydependingon thesize and complexityof the institutions.2011wasan important milestone in thedevelopment of theEuropeancollegesof supervisorsasit wasthefirst year that collegeslegallyhad toreach joint decisionson the level of risk-based capital adequacyfor cross-border banking groups, both on consolidatedand individual entity levels.Such decisions,based on the joint riskassessmentsconducted by thecollegemembers (commonlyreferred to asjoint riskassessment anddecisions– JRAD), now form an integral part of the supervisorycycle forcross-border banks.Role of the EBATheEBA focusesitsmonitoringactivitieson around 40‗priority‘collegesestablished for thesupervision of the largest cross-border groups.Thetasksperformed by EBA staff include(i) Participationin all aspectsof college work,International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 145(ii)Provisionof guidanceand toolstoassist in fosteringa commonsupervisoryculture;and(iii)Assessing and ensuring the colleges‘adherence toboth annual EBAaction plansand the college-relatedguidelinesmentioned above.Theoverall aim of EBAstaff participation and monitoring isto overseetheeffectivefunctioningof the collegesand their compliancewithUnionlaw.The role of collegesin crisis managementTheimportanceof robust crisismanagement procedureshasbecomeevident in the turmoil of financial marketsin recent years.Proper crisismanagement iscomplicated at a domesticlevel and evenmore complex wherecross-border banking groupsare involved.Toaddressthis aspect of risk management, the EBAhasbeen mandatedtocontributeto, and to actively participatein, thedevelopment ofeffectiveand consistent recovery and resolution plansin theEU.In 2011, the EBAbeganattendingcrisismanagement groups(CMGs)/ cross-borderstability groups(CBSGs) for some of themajorbankinggroupswiththeobjectiveof facilitatingthe development of bestpracticesin thisimportant area.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 146Vice Chair Janet L. YellenAt the InternationalMonetaryConference,Shanghai, ChinaRegulatory Landscapes: AU.S. PerspectiveThank you. I dont want to delay what I expect tobe a lively discussion, so my opening remarks willbebrief.Ill summarize the considerableprogresssince2008tomake the globalfinancial system more resilient, and then offer my viewson what moreshould be done.ABrief Retrospective on Financial Regulatory ProgressIts useful todividethe regulatoryreform workof the past fewyears intothreecategories:strengtheningthebasicbank regulatory framework,reducingthe threat tofinancial stabilityposed by systemically importantfinancial institutions(SIFIs), and strengtheningcorefinancial marketsand infrastructure.Bank Regulatory BasicsThefinancial crisisrevealed that bankingfirms around theworlddid nothaveenough high-qualitycapital to absorb lossesduring periodsofseverestress.TheBasel III reformspromulgated in 2010by the Basel CommitteeonBankingSupervision will increasetheamount of regulatorycapitalrequiredto be held by global banking firms and improve theloss-absorbingqualityof that capital.U.S. banking agenciesissued proposalslast summer to implementBaselIIIs capital reforms, have reviewedcomments, and arepreparingthefinal regulation.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 147Wealsowerereminded duringthecrisisthat abankingfirm--particularlyonewithsignificant amountsof short-term wholesalefunding--canbecomeilliquidbeforeit becomesinsolvent, ascreditorsrunin thefaceofuncertaintyabout thefirms viability.TheBasel Committeegeneratedtwoliquiditystandardstomitigatetheserisks:a LiquidityCoverageRatio with a 30-daytime horizon and a NetStableFunding Ratio(NSFR) witha one-year time horizon.TheU.S.banking agenciesexpect toissuea proposal to implement theLiquidityCoverageRatiolater this year, and weare workingwith theBasel Committeenow to review the structure and parametersof theNSFR.SpecialMeasuresfor SIFIsThefinancial crisisalsomade clear that international bank rules shouldfocus more on the potential threat to financial stability posed by SIFIs.In this arena, the effortsof the Federal Reserve and the global regulatorycommunityhave focused principallyon(1)producingstronger regulationstoreducetheprobabilityof default ofsuchfirmstolevelsthat aremeaningfullybelowthoseforlesssystemicallyimportant financial firms, and(2)creatinga resolution regime to reducethe lossestothe broaderfinancial system and economy upon the failure of a SIFI.Thegoal hasbeen tocompel SIFIs tointernalizethe coststheir failurewouldimposeonsocietyandtooffsetanyimplicitsubsidythat suchfirmsmay enjoydue tomarket perceptionsthat theyare too-big-to-fail.Theeffort to reducethelikelihood of SIFI failure hasworked throughseveral channels.TheBasel Committeein 2011agreed on a framework of graduatedcommon equityrisk-basedcapital surchargesfor systemic firms, and weInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 148are workingtowardproposingrulestoimplement this surchargeframeworkin theUnited States.Consistent withtheDodd-Frank Wall Street Reform and ConsumerProtectionAct, theFederal Reserve proposed a broad set of enhancedprudential standardsfor largeU.S. bank holdingcompaniesin December2011.TheFederal Reserve alsonow performs rigorousannual supervisorystresstestsand capital planreviewsof thelargestbankingfirmstoensurethatthesefirms can continuetooperate and lend through timesof severeeconomicand financial stress.In addition, in December theFederal Reserveproposed enhancedprudential standardsfor foreign banksunder theDodd-Frank Act.Theproposal generallywouldrequire foreign bankswith a largeU.S.presenceto organize their U.S.subsidiariesunder a singleintermediateholdingcompany that wouldbe subject tothesamecapital and liquidityrequirementsasU.S. bank holding companies.TheproposalisdesignedtoincreasetheresiliencyandresolvabilityoftheU.S. operationsof foreignbanks, help protect U.S.and global financialstability, and promote competitiveequityfor all largebanking firmsoperatingin theUnitedStates.In addition to reducing the probability of SIFI failure, global regulatorsalso have striven to reduce the potential damage to the financial systemandtheeconomyif a failure of a major financial firm weretooccur.TheFinancial StabilityBoard (FSB) hasproposed new standards forstatutoryresolutionframeworks,firm-specific resolution planning, andcross-bordercooperation.In the United States,Dodd-Frank created an OrderlyLiquidationAuthority and requiredall largebank holding companies todevelopresolutionplans.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 149Other countriesthat arehome to largeglobal banking firms are workingalongsimilarlines.Strengthening Resilience of Financial MarketsReducingthe likelihoodof a severe financial crisisalsorequiresstrengtheningthe capacityof our financial marketsand infrastructuretoabsorb shocks.Towardthat end, U.S.and global regulatorshave worked toimprove thetransparencyandstability oftheover-the-counterderivativesmarketsandtostrengthen the oversight of financialmarket utilitiesand other criticalfinancial infrastructure.In particular, U.S.agenciesare workingtogether toaddressstructuralweaknessesin thetripartyrepomarket and in money market mutualfunds.The Unfinished Business of Financial Regulatory ReformLet me now look forward.Although wehavemadethe financial system safer, important workremainsin each of the three areasI have highlighted:thebasic bankregulatoryapparatus, addressingthe problemsposedby SIFIs,andlimitingrisks in shadowbankingand financial markets.Let meoutlinewhat I considertheprincipalpiecesofunfinishedbusinessin global financial regulatory reform.Strengthening the Basic Bank Regulatory FrameworkFirst, wemust activelysupport the continuingeffortsof the BaselCommitteetostrengthen the foundationsof global bank regulation.Key Basel Committee workin theyears ahead will include finalizingtheBaselIII leverageratio and NSFR, completingthecomprehensivereviewof tradingbook capital requirements,adoptinga global large-exposureInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 150regime, and increasingthe comparabilityof risk-basedcapitalrequirementsacrossbanksand acrosscountries.I want tohighlight theimportanceof thecommitteesworktoexplorewaystoincreasethestandardization and comparability of therisk-basedcapital rulesfor global banks.Thestabilityof theglobal financial system dependscriticallyon thecapital adequacyof global banks, the capital adequacyof global banksdependscriticallyon the Basel III reforms,and much of the goodprogressin theBaselIII reforms restson the integrityand strengthof therisk weights.Reducing the Probability of SIFI FailureAs this brief historyhas highlighted, tougher prudential regulationandsupervision have substantiallyreduced the probabilityof a SIFI failure.Ending too-big-to-fail will require steadfastimplementation by globalregulatorsover thenext few years of thework already in train.Somehave proposedideasfor more sweepingrestructuring of thebankingsystem tosolve too-big-to-fail.Theseideasincluderesurrection of Glass-Steagall-style separation ofcommercial bankingfrom investment banking and impositionof banksizelimits.I am not persuadedthat suchblunt approacheswouldbe themostefficient waysto addressthetoo-big-to-fail problem.But at the same timeIm not convincedthat theexistingSIFI regulatoryworkplan, whichmovesin the right direction, goesfar enough.As my colleaguesGovernorsTarulloand Stein have noted in recentspeeches,it may be appropriate to gobeyond the capital surchargesputforwardbythe Basel Committee.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 151As theysuggest, fullyoffsettingany remainingtoo-big-to-fail subsidiesand forcing full internalizationof thesocial costsof a SIFI failure mayrequireeither a steeper capital surchargecurveorsome other mechanismfor requiring that additional capital be held by firmsthat potentiallyposethegreatest riskstofinancial stability.Improving SIFI ResolvabilityThereareat leastthreekeyobstaclesthat policymakersmustovercometomaximizethe prospectsfor an orderly resolution of a global financial firm.First, eachmajor jurisdictionmust adopt astatutoryresolutionregimeforfinancial firmsconsistent withtheFSBs KeyAttributes.TheUnited Stateshasbeen a leader in this regard, and I hope that othercountriesthat havenot yet adopted a compliant resolution regime will dosopromptly.Second, policymakers need to ensure that all SIFIsmaintaina sufficientamount of total pre-failure and post-failurelossabsorptioncapacity.In consultationwiththe Federal Deposit InsuranceCorporation, theFederalReserveisconsideringthemeritsof aregulatoryrequirement thatthelargest, most complex U.S.banking firms maintain a minimumamount of long-term unsecureddebt outstanding.Such a requirement could enhancetheprospectsfor an orderlySIFIresolution.Switzerland, the United Kingdom, and theEuropean Union are movingforwardon similar requirements,and it may be useful to work towardaninternational agreement on minimum total lossabsorbencyrequirementsfor global SIFIs.Third, it istime for policymakers tofind concreteand crediblesolutionstothe thornycross-borderobstaclesthat impedethe orderly resolution ofa globallysystemic financial firm.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 152Reducing Systemic Risk in the Shadow Banking SystemImportant asbankingreformsmaybe, it isworthrecallingthat thetriggerfortheacutephaseof thefinancialcrisiswastherapidunwindingof largeamountsof short-term wholesalefundingthat hadbeenmadeavailabletohighly leveragedand/ or maturity-transforming financial firmsthat werenot subject toconsolidatedprudential supervision.Many of the key problemsrelated to shadowbankingand their potentialsolutionsare still beingdebateddomesticallyand internationally.But I believethe path forwardisreasonablyclear.We needto increasethetransparencyof shadow banking marketssothatauthoritiescan monitor for signsof excessiveleverageand unstablematuritytransformation outsideregulatedbanks.We alsoneed totakefurther stepstoreduce theriskof runson moneymarket mutual funds.In addition, weneed to further amelioraterisksin the settlement processfor tripartyrepoagreements,includingthroughcontinued reductionsintheamount of intraday credit provided by theclearingbanks.But evenwhenweaccomplishthese reforms, more work will remain toreducesystemic riskin the short-term wholesalefunding marketsthatshadowbankingrelieson.Amajor source of unaddressed risk emanatesfrom thelargevolume ofshort-term securitiesfinancingtransactions(SFTs)--repos,reverserepos,securitiesborrowingand lending transactions,and marginloans--engagedin by broker-dealers,moneymarket funds, hedgefunds,and other shadow banks.Regulatoryreform mostly passed over thesetransactions,I suspect,becauseSFTsappear safefrom a microprudential perspective.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 153But SFTs, particularlylargematchedbooksof SFTs, createsizablemacroprudential risks, includinglargenegativeexternalitiesfrom dealerdefaultsand from asset fire sales.Theexisting bank and broker-dealer regulatoryregimeshavenot beendesignedto materiallymitigatethese systemic risks.Theglobal regulatory community should focussignificant amountsofenergy, now, toattack thisproblem.The perfect solution may not yet be clear but possible optionsare evident:raising bank and broker-dealer capital or liquidity requirements onSFTs,or imposing minimum margin requirementson some or all SFTs.Ill stop there, and I look forwardto thediscussion.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
    • P a g e | 154DisclaimerThe 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 correctthem.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;- issometimeslinked 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, wereto lead it torevisesomeof the views expressedhere;- 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
    • P a g e | 155Certified 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
    • P a g e | 156D. 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
    • P a g e | 157International Association of Risk and Compliance Professionals(IARCP)http://www.risk-compliance-association.comEvery MondayDo you want to receive (at not cost) every Monday the Top 10 risk andcompliance management related news stories and world events that(for better or for worse) shaped the weeks agenda, and what is next?You can register at:http://www.risk-compliance-association.com/Top_10_Risk_Compliance_Management_Stories_Events.htmlReceive the New Member Orientation NewslettersYou will have the opportunity to learn what members registeredbefore you have already learned. Understand better risk andcompliance management, projects, careers, challenges andopportunities.You can register at:http://www.risk-compliance-association.com/New_Member_Orientation_Newsletters.htmlThank you!International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com