Risk management presentation May 27 2013


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Risk management presentation May 27 2013

  1. 1. P a g e | 1International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.risk-compliance-association.comTop 10 risk and compliance management related news storiesand world events that (for better or for worse) shaped theweeks agenda, and what is nextDear Member,I wastravellingfrom London to Dubai to chairtheMarcusEvansconference(Strategic Risk &Compliance2013). I had a headachewhen Iread:―If a medicinedoesnot workasexpected, its not necessarily becausethedosagewastoolow.‖Wow. Ishetalkingtome?He wasnot. He wasnot even a doctor.He wasJaime Caruana, General Manager of the Bank for InternationalSettlements, speakingabout…… ―Hittingthe limitsof "outsidethebox" thinking? Monetarypolicy inthecrisisand beyond.‖Speecheslikethat arenot usuallygoodwhenyou haveaheadache, but asI am a Basel iii addict, it workedhandsomelyfor me.Mr. Caruana continued:―Prolonged monetaryaccommodation givesborrowers,financialinstitutionsandpolicymakersanincentivetokeep"kickingthecandowntheroad", delaying necessary repair and reform.‖International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  2. 2. P a g e | 2If I seesomeonekickingacandowntheroad, I havetoremember whyhedoesit …… it is due to prolonged monetary accommodation.I did not haveaheadacheanymore. I hadeven startedunderstandingthenon-financial worldaround me!Mr. Caruana continued:―Theglobal bond market crash of 1994is a cautionarytale of the risksinvolved in exitingfrom a prolongedperiod of lowinterestrates.‖Unbelievable!ThisisthestresstestI waslookingfor. Agreat scenario fora major investment bank I consult. Whois goingto challengethat?Willsupervisoryauthoritiesdisagree?It isMr. Caruana’sownidea!Read moreat Number 1below.Timeforapuzzle now…… whichisyour opinionabout theURL that follows?http:/ / www.cbrc.gov.cn/ showWhist.doWhat is it about?No, you did not findit! Don’t lie tome!Ok, you saw it is*.cn – ChinaOk, you saw it is*gov.cn– Government of ChinaBut what is the showWhist.do?Whist is a classicEnglish trick-takingcard game which wasplayedwidelyin the 18th and 19th centuries.What?Websitesbelongingtothe Chinesegovernment explore EnglishInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  3. 3. P a g e | 3trick-takingcard games?According to Merriam-Webster, Whist is a card game for four players intwopartnershipsthat isplayed withapack of 52cardsandthat scoresonepoint for each trick in excessof six.No, it is not about Whist.It is about Whistleblowers!AChinese Sarbanes-Oxley(like) approach from the…International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  4. 4. P a g e | 4Themain functionsof the CBRC include:Toformulate supervisory rulesand regulationsgoverningthe banking institutions, to authorize theestablishment, changes,termination and businessscope of the bankinginstitutions, to conduct on-siteexamination and off-sitesurveillanceofthebanking institutions,and take enforcement actionsagainstrule-breakingbehaviors, to conduct fit-and-proper testson the seniormanagerial personnel of the banking institutions.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 Suite 804, Wilmington DE19801,USATel: (302) 342-8828International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  5. 5. P a g e | 5Hitting the limitsof "outside the box"thinking? Monetary policy in the crisisandbeyondSpeechby JaimeCaruana, General Managerof theBank for International Settlements,toOMFIF(GoldenSeries Lecture), London, 16 May2013Central bankshavehadto"think outsidethebox" toaddressunprecedented financial instabilityand toprovidemonetarystimulusin trying times.NIST Posts Initial Analysisof RFIComments on CybersecurityFramework for Critical InfrastructureTheNational Instituteof Standardsand Technology(NIST) haspostedan initial analysisof hundredsof commentssubmittedby industryandthepublic relatedtothe Presidents"Improving Critical InfrastructureCybersecurity" ExecutiveOrder, issuedFeb. 12,2013.Opening Remarksat SEC Roundtable onCredit RatingsBy Chairman MaryJo WhiteU.S. Securitiesand ExchangeCommission, Washington, D.C.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  6. 6. P a g e | 6Raising the bar for the next phase of growthand development – sustaining transformativemomentumWelcomingaddressby Dr Zeti AkhtarAziz, Governorof the Central Bank ofMalaysia, at the10th IFSB(Islamic FinancialServicesBoard)Summit 2013―The future of the Islamic financial servicesindustry–resilience,stabilityand inclusivegrowth‖, Sasana Kijang, Kuala Lumpur.Changesin the Large ExposureRegimeThis paper containsfull details of theproposalsto substantiallyalter theLarge Exposure principlesandguidancethat applytolicensed deposit takersthat are incorporated inGuernsey.GovernorSarah Bloom RaskinAt the Society of Government Economistsand theNational EconomistsClub, Washington, D.C.Prospects for a Stronger RecoveryInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  7. 7. P a g e | 7Opening SpeechbyYolanda BanksMcCoy,Head – Investmentsand SecuritiesDivision,Cayman IslandsMonetaryAuthorityat the 100WHF Cayman Event 2013APerspective on the U.S. Economic Outlookand Monetary PolicyPresented by CharlesI. Plosser, President and ChiefExecutiveOfficer, Federal Reserve Bank ofPhiladelphiaGlobal InterdependenceCenters Central BankingSeries:Recovery 2013— Strength orStagnation, Milan, ItalyMichaelS. Gibson, Director, Division of BankingSupervisionand RegulationCross-Border ResolutionBefore the Subcommitteeon National SecurityandInternational Tradeand Finance, Committeeon Banking, Housing, andUrbanAffair, U.S.Senate, Washington, D.C.―In my remarks, I wouldlike tofirst reflect on the improvementsthathavebeen madein the last few years in theunderlying strength andresiliencyof the largest U.S.bankingfirms, and thenturn to a discussionInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  8. 8. P a g e | 8of what hasbeen accomplishedand what remainstobe accomplishedinfacilitating a cross-border resolution.‖Adjustment and growth in the euro areaSpeechbyMr PeterPraet, Memberof theExecutiveBoard of theEuropean Central Bank, at theEuropean BusinessSummit, Brussels, 16May 2013.―Many of you will have come acrosscommentatorswhoclaim that adjustment is in fact inimicaltogrowth;and that consolidatinggovernment budgetswhile introducingstructuralreformsisthemain causeof our currentdifficulties.‖International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  9. 9. P a g e | 9Hitting the limitsof "outside the box"thinking? Monetary policy in the crisisandbeyondSpeechby JaimeCaruana, General ManageroftheBank for International Settlements,toOMFIF (Golden Series Lecture), London, 16May 2013Central bankshavehad to"think outsidethebox" toaddressunprecedented financial instabilityand toprovidemonetarystimulusin trying times.Monetaryaccommodationhasbeen criticaltostabilisethe financialsystem and the economy.But questionsremain about theefficacyof such policies aslongasbalancesheetsand structural headwindsare not more fullyaddressed.Monetaryaccommodation can only be ashelpful asthe balancesheet, fiscal and structural policiesthat accompanyit.Looking ahead, central banks will continueto facedaunting challengesastheynavigateinunchartedwaters,includinghow best tointegratenewperspectiveson the financial cycle and global spilloversintotheirmonetarypolicy frameworks.Full speechLadies and gentlemen,It is a great pleasureto behere at OMFIF.Thecrisisand itsaftermath haveposed formidablechallengesfor centralbanks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  10. 10. P a g e | 10They have had to "think outside the box" to address unprecedentedfinancial instability and provide monetary stimulusin the face of theconstraint imposedby the zerolowerbound of policyrates.Looking ahead, thechallengesremain daunting. Central bankshave tonavigateunchartedwaters.In thenear term,thequestionishowmonetarypolicycanbestcontributetowhat hassofar beenanuneven recovery.Cant central banksdomuch more?Perhapsthe relevant question iswhethercentral bankscan make up forinsufficient action elsewhere.What monetary policycan substitutefor balancesheet repair by banksandborrowers?What monetary policycan removeimpedimentstoa workermoving froman overbuilt sector toa more promisingone?Thesekindsof question require a medium-term perspective, and in amedium-term perspectivemonetary accommodationwill prove onlyasgoodasthebalancesheet, fiscalandstructuralpoliciesthataccompanyit.From a longer-term perspective, a challengeis tobetter integratefinancial stabilityconsiderationsintomonetary policyframeworks.Therecent crisisbrought theglobal financial system totheverge ofcollapseand hashad dire social and economic consequences.This hasraised fundamental questionsabout how to integratea modernunderstandingofthefinancialsystem intoourtraditionalmonetarypolicymodels.Theseareall exceedinglydifficult questions,the situation isdifferentfrom country to country and noone can claim to have a crystal ball thatprovidesdefiniteanswers.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  11. 11. P a g e | 11Yet, experiencedoesoffer at least some pointersfor thefuture.In the following, I will thereforestart by reviewingthemain insightssuggestedby monetaryhistory, beforeturningtothe current challenges.Insightsfrom monetary historyThepast century saw considerablechangesin the conduct of monetarypolicy.Thesechangeswereoften the result of both historicaleventsand newwaysof thinkingabout the roleof central banks.Bytheend ofthe20thcentury, therewasaclearconsensusthat aremit ofmonetarypolicy focused on price stabilityhad manybenefits.This view reflectedlessonsfrom the painful experienceof double-digitinflationratesand erratic growth that prevailed in manycountriesworldwidein the1970s,and in some emerging market economieswellintothe 1990s.Themain reasonforthisdismalinflationandeconomicperformancewasthat monetary policy neglectedprice stability.Instead, central banks pursuedother goals,whichturned out to beinconsistent withpricestability.In many advanced economies, for example, monetary policy wastooaccommodativeduring the 1970s,and central banks endedup pushingoutput beyond sustainablelevels.In emergingmarket economies, politicalpressuresto generateseigniorageincome and financepublic spendingprogrammesvia theprintingpresswerefrequent sourcesof high inflation.In all theseexperiences,theneglect of price stability did not improveeconomicperformance.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  12. 12. P a g e | 12Overtime, welearned, quitepainfully, that thereisnobeneficial long-runtrade-offbetweeninflationand growth.Indeed, we learned that high and volatile inflation ratesgo hand in handwith erratic growth, large exchange rate swings, and even economic andpoliticalcrises.Chastenedbytheseexperiencesofthe1970sand1980s,central bankshadtorethink their roles.At that time, the result wastoconsider a narrow mandate for pricestability.Tobe sure, thisrequired a very painful adjustment process.Central bankshad tosqueezeinflation out of their economiesat the costof recessions. But that cost waswell worththe price.Thosewhohadthecouragetotrywerevilifiedthen, onlytoberecognisedashavingdone the right thingyears later.Another lesson learnt during this period wasthat central bank autonomyis criticalto achieveprice stability.Onemainunderlying causeofinflationinstabilitywasthefailuretoshieldmonetarypolicymakers sufficientlyfrom short-term political cycles.Somecentral banks, such asthe Bundesbank and theSwissNationalBank, had led theway.Theyenjoyed a high degreeof effectiveindependenceand, on thisbasis,consistentlydeliveredlowerinflationthan their peersduring thepost-BrettonWoodsera.Thesearehard-earned lessonsthat should not be forgotten.Today, central banksare once again "thinkingoutsidethe box" asnewchallengeshave arisen.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  13. 13. P a g e | 13Evenbeforethecrisis,concernsamongcentralbankersweregrowingthatthepolicy environment waschangingin ways that calledfor a furtherevolution of central banking.In particular, thenarrow focuson near-term domestic price stabilitydidnotseem tobeenoughin anenvironment in whichthefinancial cycleandglobal spilloverswerebecoming more prominent.With respect to thefinancial cycle, wenow seethat monetary policyplayed an important part in the build-upof financial imbalancesduringthe2000s.After thebust of thedotcom boom, monetary policy in the advancedeconomiesremained accommodativefor manyyears. Interestrateswerelow,and credit and housepricessoared.Of course, the relevanceof the financial cycle for central banksisnot anentirelynew insight.Theforgingof manycentral banks, such asthat of theFederal Reservein1913, wasthedirect result of thebankingcrises of the 19th and early20thcentury.It became lessrelevant in theearlypostwar period againstthebackground of tightlyregulatedfinancial systems put in placeafter theGreat Depressionand theSecond World War.But the far-reachingfinancial deregulationpursued sincethe1970sallowedthe financial cycle tore-emergeasa major macroeconomicforcethat grew ever stronger.Globalisation, too, hasbeen changingthe policy environment insignificant ways.In addition to the growing influence of global factors on domesticinflation dynamics, globalisation appears to have added fuel to themonetaryeasingin therun-up tothe recent crisis.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  14. 14. P a g e | 14Theunusuallylowpolicy ratesprevailingin the major advancedeconomiesaffectedothersvia a resistancetocurrencyappreciationpressures.Many emerging market economieskept interest rateslowerthan wouldhavebeen suggested by domestic macroeconomic conditionsalone.In turn, their accumulation of foreign exchangereservesput additionaldownward pressure on yieldsin theadvanced economies.Thenet result wasunusuallyaccommodativeglobalmonetaryconditions.Real interestratesaverageda mere 1.5% globallybetween2002and 2007while output grew robustlyat roughly4%.Managing the post-crisisrecoveryWhile thepre-crisisperiod alreadygavecentral banksmuch food forthought, the crisishasgiven them still more to chew on.The financial crisishastested the crisis-management readinessof centralbanks, and the subsequent phase their ability to nurse the economy backtogrowth.Central bankshaverespondedin anunprecedentedwayinboth scaleandscope.Theyhaveprovidedampleliquidityin theirlenderof lastresortfunctions,have committed tolow - often effectivelyzero - interestrates,haveengaged in large-scalebalancesheet policies,have augmentedthis withenhancedforward guidancelinked to real-economyoutcomes,have put in placetargetedlendingschemes,havepurchasedriskyassetsandsoon.Theresponseof central bankshashad important benefits.Thereisnoquestionthat inthemostacutephaseofthecrisisit preventedthefinancial system from imploding, whichwouldhave brought the realeconomydown.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  15. 15. P a g e | 15Low policyratesand theunprecedenteddeployment of balancesheetpoliciesboosted confidence and improved financial market conditions.And asdoubtsre-emergedin financial marketsmore recently, centralbank measureseffectivelyreduced perceivedfinancial tail risks.And yet, despitetheseunprecedentedactions,the global recoveryhasbeen lacklustre.Fiveyears intothe recovery, economic performanceis laggingpreviousonesat the same stage.Economicactivityiswell below itspre-crisistrend in the major advancedeconomiesand unemployment isstubbornly high.Thereis, understandably, frustration about thisapparent lack of traction.This frustration hasledsome to call for ever more monetary policyactivism.But is it really justified?If a medicinedoesnot workasexpected, itsnot necessarilybecausethedosagewastoolow.Maybe instead the overall treatment, and the roleof the medicinewithinit, should be reconsidered.Most likelysomethingelseis needed.Balancesheet recessionsare special:it islessclearthan often thoughtthat monetary policy can foster a quick and robust recoveryin a balancesheet recession.When privatesector balancesheetsneed repair, accommodativemonetarypoliciesare lesseffective.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  16. 16. P a g e | 16When the problem is too much debt and agentsare in the mood toretrench, it isunrealistic to expect monetary policy to revive stronggrowthby loweringinterest rates.When financial institutionsare weak, it isequallyunrealistic toexpectthem toeffectivelytransmit monetary impulses.Moreover, it iswellknown by now that growthtendsto beweakerafterfinancial crisesthanafter ordinary economicdownturns.This is not just, or even primarily, a question of deficient demand.It reflectstheneed for the economy toreabsorb the aggregateand sectoralreal imbalancesthat built up during the preceding unsustainableexpansion, hidden under the froth of thefinancial boom.Suchboomstypicallyleavein their wakenot onlytoomuchdebt, but alsotoomuch capital and labour in thewrongsectors.Therefore, thechallengefor countriesin thenext few years will be toreallocatelabour and capital among sectorsboth within and acrossnational borders.Structural reform toremove rigidities,not monetary policy, is the waytofacilitate this.True, monetarypolicycan buy time toimplement thenecessarybalancesheet repair and structural reforms.But it cannot substitutefor them. After five yearsof buying time, onehastoaskwhetherthat timehasbeen - or will be - used wisely.Refocusingthepolicymix to relymore on repair and reform and not tooverburdenmonetary policy iscrucial because thebalanceof risks ofprolonged very lowinterest ratesand unconventional policiesis shifting.Thecostsare growingin relation tothebenefits,for a number of reasons:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  17. 17. P a g e | 17First, prolongedmonetaryaccommodation givesborrowers,financialinstitutionsandpolicymakersanincentivetokeep"kickingthecandowntheroad", delaying necessary repair and reform.Certainly, progresshasbeen made in a very trying environment.But more needstobe done.Indeed, the slow progress in the implementation of structural reforms andin the deleveraging processmay signal that this delaying mechanism is atwork.Persistent high unemployment ratesin many advanced economiesindicatethechallengesof labour rigiditiesand sectoral rebalancingthatstill face us.At the same time, although some private sector deleveraging is occurringin some countries, and the financial system is better capitalised, the totaldebt figuresare not reassuring.Sincethe end of 2007, total debt of the G20 non-financial sector, bothprivateand public, hasrisen by more than 30trillionUS dollars,whichrunscounter todeleveraging, at least asI understand the term.It is noteworthythat over thesameperiod global central bank assetshaveincreasedby roughly10 trillion USdollars.Second, prolonged accommodation canproduce other unintendedsideeffects.In the 1970s,thedesire to lift output and employment back topre-crisislevelsresulted in surginginflation.Onemight arguethat the situation todayis quitedifferent from then.Inflationhasremainedlowinmost jurisdictionsand closetocentral banktargets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  18. 18. P a g e | 18However,monetary stimulusmay find itswayintoasset pricesandleveragebeforeinfluencinggoodsand servicesprice inflation.Moreover,prolonged very low interest ratescan distort marketsignals,mask underlying balancesheet weaknessesand undermine theearningscapacityof banks, thebusinessmodels of life insurancecompaniesand thesolvencyof pension funds.This may further misallocatecredit, weakenfinancial institutionsbalancesheetsand encourage excessiveand unwelcome risk-taking.Another significant sideeffect arisesfrom global monetary policyspillovers.Persistently low interest rates in the major advanced economies generallyencourage capital flows to fast-growing emerging market economies andput upward pressure on emerging market exchangerates.This can complicatetheabilityof emergingmarket central banks topursuetheir stabilisationgoals.On the onehand, if central banksin emergingmarketskeep policy ratesvery low,capital inflowswouldbe discouraged, but domesticcreditgrowthwouldbe encouraged.If, on the other hand, theyraisepolicyrates,the risksof destabilisingcapital flowswouldrise.Sofar, wehave been seeinga combination of theseforcesat work.Despitesome slowingof capital flowsover thepast year, private sectorcredit and propertypriceshave been surgingin a number of theseeconomies,aswell asin someopen advanced economies.Finally, prolonged accommodation raisesriskstocentral banksthemselves.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  19. 19. P a g e | 19If economies remain weak and structural problems unresolved despiterepeated rounds of further monetary stimulus, the credibility of centralbanksmay suffer, and credibilityisimportant for effectiveness.Let me insist here that resultsin the real economy will depend on theextent that needed repair and reformsare carried out.Resultswill dependtoa largeextent on factorsthat are not under centralbanks control.Aviciouscircle can develop, with awideninggapbetweenwhat centralbanksare expectedtodeliver and what theyactuallycan deliver.This may ultimatelyunderminetheir credibility and, withit, theirlegitimacyand effectiveness.All this underscores the importance of being prepared for the eventualexit from the extraordinarily accommodative monetary conditions thathaveprevailed for thepast several years.While central bankssurelyhaveall the toolsavailableto technicallyengineeran exit, it cannot be taken for granted that it will be smooth.Theglobal bond market crash of 1994is a cautionarytaleof the risksinvolved in exitingfrom a prolongedperiod of low interestrates.At the same time, wealsohave to recognise that the situation today israther different from back then in at least one critical dimension:centralbanksare much more transparent about their policy intentionsnow andtheir communication is much better.This should reducethe risk of major policysurprises.That said, thepolicy environment central bankshave to grapplewithtodayis alsomuch more complex in some important dimensions.Recordlevelsof debt have been issued at very lowinterest rates.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  20. 20. P a g e | 20Central banks,at leastfor now,areplaying animportant, if notdominant, rolein keyfinancial market segments.So, asinterestratesrise and central bankspare back and eventuallyreverselarge-scaleasset purchases, financial marketswill have much todigest.Different national conditionswill require unsynchronised exits,whichmay raise additional complexities.Even in the current environment of enhanced central bank transparencyand credibility, a choppyexit isa material risk.It goeswithout saying that I wouldlovetobe proven wrongaboutthis, and that a lot of work is beingdonetoreduce exit risks.Monetary policy and the financial cycleAswepeer furtherintothefuture, onekeychallengecentralbanksfaceishowtobetter integrate financial stabilityconsiderationsintotheirmonetarypolicy frameworks.Theeconomicand social damage of therecent crisishaspainfullyshownwhat is at stake.And central banksmust reflect on how they can forgea new consensusabout the wayforward.This is not just a narrow operational issue, for exampleabout how torespond to credit and asset priceboomsand busts.It raises the much broader conceptual question of how to shift ourtraditional purely macroeconomic perspective towards a new, fullyintegratedmacro-financial perspective.As I seeit, thecrisishasnot discredited thecore elementsof pre-crisismonetarypolicy frameworks.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  21. 21. P a g e | 21The credibility of central banks as guarantors of price stability has beeninstrumental in anchoring inflation expectations, on both the downsideandtheupside, during the crisisand itsaftermath.Astrong, credibleanchor helpsto counteract thedestabilisingforceshittingthe economyand financial markets.At the same time, the pre-crisismonetary policy frameworksdid notprevent the crisis from happening.Theexperiencein therun-up suggeststhat central banksneed to betterappreciatetheir rolein influencingthe financial cycle.For thispurpose, byfinancial cycle I refer tothe combined endogenousbehaviourof credit and asset prices, particularlyhouseprices.Regulatoryreform obviouslyplays a keyrolein mitigatingfinancialcycles,and wehavealready seen significant progressin this area: betterandhigher buffers, the introduction of countercyclical capital buffersunder thenew Basel III frameworkand the development ofmacroprudential frameworksand tools.Tobe sure, prudential and macroprudential measuresareclearlynecessary.But theyalonewill not be enough and can alsobecircumventedbyregulatoryarbitrage.This is whymonetary policy hasa complementaryroletoplay. Thepolicyrate representsthe universal price of leveragein a givencurrencyand cannot be bypassed easily.In thisrespect, central banks will need toreflect onhow best to respondtofinancial stability concernsin the future.Thecrisishasclearlyshownthat financial stabilityis essential for lastingprice stability.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  22. 22. P a g e | 22Onelessonis that monetary policymay need to respond moresymmetricallytothefinancial cycle than in the past - tighteningmorestronglyin boomsand easinglessaggressively, andpersistently, in busts.In practice,thismeanspaying moreattentiontopolicychallengesbeyondtheconventional policy horizonsof twoor soyears.When financial stabilityconcernsgrow, policyhorizonsneed to belengthenedtotake accountof the fact that the financial cycle isconsiderably longer than the businesscycle.Analytical frameworksalsoneed tobetter reflect the characteristicsoffinancial cyclesand their interactionswithfinancial and macroeconomicstability.Central banks pre-crisis workhorsemodels generallyassignednomeaningful roleto macro-financial linkages.Thefinancial crisishasdemonstratedthat suchanalytical perspectivesare woefullyinadequate.Another dimension along whichcentral banksneedtoreflect is a betterappreciationof global monetary policy spillovers.Global feedbackeffectsamplified thepre-crisisfinancial boom, and wemight be seeingthis mechanismat workagain.In a highly globalisedworld, keepingones ownhouse in order surelyisnot enough.What doesthis mean in practice?It doesnot require central banksto coordinate their policies closely.But, at a minimum, it doescall for them toappreciate better the globalsideeffectsandfeedbacksthat arisefromtheir monetarypolicydecisions.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  23. 23. P a g e | 23Thisisineachcentralbanks owninterest, especiallyif thespillovershavethepotential tofosterregionalfinancialinstabilitythat endsincrisis,withsignificant global repercussionsthat swingback tothe originatingcountries,like a boomerang.Aprecondition for this shift in perspectiveis a more global analyticalapproachthat factorsin interactionsand feedbacksappropriately.Finally,I donot want toleaveyou withtheimpressionthat fiscalpolicyisirrelevant in this discussion.Indeed, fiscal policy plays an important role in financial stability, too. Thefinancial crisishasdemonstratedtheimportanceof having the fiscalcapacityto support thefinancial sectorthrough bank rescuepackagesandthe real economy through fiscal buffers.But the financial crisishaspushed fiscal policy in many economiesontoan unsustainablepath.This is a lesson that wehave tokeep in mind for thefuture.Accumulatingbudgetsurplusesin goodtimesprovidesgovernmentswiththeabilityto respond flexiblyto a financial crisiswithout putting fiscalsustainability at risk.In other words,governmentsneed tofactor in the financial cycle and tobuild up additional fiscal buffers during good timesthat can be drawndownto providesupport in bad times.Summing upLet me sum up. There is littledisagreement that thepast five yearshavebeen unusuallychallenging.Central bankshaveplayed a critical rolein managing the crisis and itsaftermath.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  24. 24. P a g e | 24Theyare now under huge pressuretopromote a sustainablerecoveryunder difficult circumstances.And, lookingahead, they will continue to find themselvesconfrontingmajor challenges.I have suggestedthat monetary historyprovidesa valuablecompasstonavigatethesetrickywaters:aclearfocusonlastingpricestability, amoresymmetrical approach tothe financial cycle, and abetter appreciationofglobal spillover effects- thesewouldappear tobe the key elementsofstronger monetary policy frameworks.At the current juncture, there is alsoa premium on central bankcommunication.Central banksneedtoclearlycommunicate the limitsof monetarypolicy, both to the public and toother policymakers.The private sector and policymakers, who have been facing their own setof daunting challenges in extraordinarily difficult times, will have to playa larger rolein thenext legof theglobal recovery.Crucially, thiswouldalsoallowcentral bankstonormalise monetarypolicy in a manner consistent with a return to sustainableand balancedgrowth.Thank you.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  25. 25. P a g e | 25NIST Posts InitialAnalysisof RFIComments on Cybersecurity Framework for CriticalInfrastructureTheNational Instituteof Standardsand Technology(NIST) haspostedan initial analysisof hundredsof commentssubmittedby industryandthepublic relatedtothe Presidents"Improving Critical InfrastructureCybersecurity" ExecutiveOrder, issuedFeb. 12,2013.NIST is makingthisinitial analysisavailable asa statusupdate and tohelpprovidebackground for a workshoplater thismonth to discussthecybersecurity framework.TheExecutiveOrder callsfor NIST towork with industrytodevelop avoluntary frameworkto reducecybersecurity riskstothenations criticalinfrastructure, whichincludespower,water, communication and othercritical systems.Thefirst step towarddraftingthe frameworkwassolicitinginformationon current risk management policies,existingstandardsandguidelines,and specific industrypracticesfrom stakeholdersthrough aRequestfor Information (RFI).ThesecommentsweredueApril 8, 2013.NIST received more than 200responsesand posted them publicly.NISTs approachtoanalyzing the input from the RFI, aswell asidentificationof thecommon cybersecurityframeworkthemesthatemerged asa result of the analysis, is described in the paper,InitialAnalysis of Cybersecurity Framework RFI Responses.In additiontoidentifying and describing thecommon themes,this paperprovidesquestionsfor stakeholdersto consider.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  26. 26. P a g e | 26Thepaper can be found athttp:/ / csrc.nist.gov/ cyberframework/ nist-initial-analysis-of-rfi-responses.pdfand additional information about thecybersecurity critical infrastructureframeworkproject isavailable at www.nist.gov/ itl/ cyberframework.cfmInformation on the 2nd Cybersecurity Framework Workshop, May29-31,2013,at CarnegieMellonUniversityisatwww.nist.gov/ itl/ csd/ cybersecurity-framework-workshop-may-29-31-2013.cfmCybersecurity FrameworkRecognizingthat thenational and economicsecurityof theUnitedStatesdependson the reliablefunctioningof critical infrastructure,thePresidentunder theExecutiveOrder ―Improving CriticalInfrastructureCybersecurity‖ hasdirected NIST towork withstakeholdersto develop avoluntary frameworkfor reducing cyber risks to critical infrastructure.TheFrameworkwill consistof standards, guidelines,and best practicestopromotethe protection of critical infrastructure.Theprioritized, flexible,repeatable,and cost-effectiveapproachof theframeworkwill help ownersand operatorsof critical infrastructuretomanagecybersecurity-related risk while protectingbusinessconfidentiality, individual privacyand civil liberties.Background - NIST ResponsibilitiesNIST will develop the Framework in a manner that is consistent withitsmission to promoteU.S. innovation and industrial competitiveness.TheFrameworkwill be developed by ongoingengagement with, andinput from, stakeholdersin government, industry, andacademia, includingan open public review and commentprocess, workshopsand other meansof engagement.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  27. 27. P a g e | 27Todevelop the Framework,N IST will use a Request for Information(RFI) and ongoing stakeholder engagement to:(i)identify existingcybersecurity standards, guidelines,frameworks,andbest practicesthat areapplicabletoincreasethe security of criticalinfrastructuresectorsand other interestedentities;(ii)specifyhigh-priority gapsfor whichnew or revised standardsareneeded;and(iii)collaborativelydevelop action plansby whichthesegapscan beaddressed.TheFrameworkwill seekto promote thewideadoption of practicestoincreasecybersecurity acrossall sectorsand industry types.It willseek toprovideownersandoperatorsaflexible,repeatableandcosteffectiverisk-basedapproachtoimplementingsecuritypracticeswhileallowingorganizationsto expressrequirementstomultipleauthoritiesandregulators.Thebelow presentation showstheprocessby whichNIST will workwithstakeholdersto develop the Initial Framework.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  28. 28. P a g e | 28Initial Analysisof Cybersecurity Framework RFI ResponsesIntroductionOn February 26, 2013, NIST issued a Request for Information (RFI) onDeveloping a FrameworkToImprove Critical InfrastructureCybersecurity.Thepurposeofthispaper istodescribethemethodologyusedtoperformtheinitial analysis of thesubmitted responses, and toidentify anddescribethe Cybersecurity Frameworkthemesthat emerged asa part oftheinitial analysis.This initial analysiswill serveasthe basisfor additional discussion andstudyat the Cybersecurity Framework Workshop #2 tobe hosted atCarnegie MellonUniversity in Pittsburgh, Pennsylvania on May 29-31,2013.AnalysisMethodologyNIST implemented a consistent and repeatable methodology to conductits initial analysis of the RFI responses to Federal Register Notice 78 FR13024.a. Review and Categorize RFI ResponsesEach submittedRFI response2wasreviewedand analyzed byNIST.3Thereview of each RFI responseincluded:•Analysisof responsecoverageacrosscritical infrastructure sectorsandorganizationtypes;•Identification of sectionsof text relevant to one or more of theRFIquestions;•Categorization of relevant text to category/sub-category, asshown inAppendix A; andInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  29. 29. P a g e | 29•Specificationof termsand phrasesthat identify keypointsin eachcategorizedsection of relevant text.Theresultingcategorizationwasthenusedtoidentify commonalitiesandrecurringthemes.b. Identification of Commonalities and Recurring ThemesCommonlyused termsand phrasesidentified during theRFI responsecategorizationhelped identify commonalitiesand recurringthemesamongresponses.Due to thevariancein terminologyand nomenclature acrosssectors,NIST identifiedand normalizedtermsthat expressed keypoints.For example, thetermssecurityrequirement, security measure, andsecurity control wereoftenused interchangeably.Tocorrelate these terms, NIST selectedthe term security control to labelthisconcept.Theselected term allowsfor consistencyin nomenclature. Examplesof commonly usedtermsand phrasesinclude, but are notlimitedto:International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  30. 30. P a g e | 30NIST used the commonly used terms and phrases to group relevant textfrom RFI responses. These groupings identified recurring and commonthemes, whichwerethen separatedintothree categories:•Framework Principles:Characteristicsand considerationstheFrameworkmust encompass.•Common Points:Practicesidentifiedashaving wideutilityandadoption.•Initial Gaps: For the purposesof RFI input analysis, initial gapsarethoseareaswhereRFI responseswerenot sufficient tomeet the goal oftheExecutiveOrder.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  31. 31. P a g e | 31Theresultsof theinitial analysis of RFI responses,includingthedescription of each Cybersecurity Framework theme, identificationofassociated keytermsand phrases,summary statistics, examplesof RFIresponses,and representativequestionsare included in the followingsections.This information representsan initial, high-level analysisof the inputsNIST hasreceived toassist withthedevelopment of the Framework.Stakeholdersareaskedto evaluate the themesidentified byNIST, determine if thesethemesare reflectiveof the commentsreceivedInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  32. 32. P a g e | 32through theRFI, and assistin thoseareaswhereadditional stakeholderengagement will be needed to develop a sufficientlyrobust Framework.Toassist, NIST hasprovided a seriesof representativequestionstoencouragediscussionon thesekey themes.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  33. 33. P a g e | 33Opening Remarksat SEC Roundtableon Credit RatingsBy Chairman MaryJo WhiteU.S. Securitiesand ExchangeCommission, Washington, D.C.Goodmorningeveryone, and welcometotheSecuritiesand ExchangeCommissionsCredit Ratings Roundtable, whichI havebeen verymuch lookingforwardtoandwhichwill addressa rangeof criticalsubjects.I wouldlike first to extend a special welcometoour distinguishedMembersof Congressheretoday: Senator Franken, Senator Wicker, andChairmanGarrett.Thank you for takingtime from your hectic schedulestospeak toustoday.Thank you alsoin advancetoour distinguishedpanelistsfor contributingyour time and knowledgeto this roundtable.There aremany questionsabout the appropriateroleof credit ratingsinour financial marketplacegenerally.We take all thequestionsseriously.But today, our discussionswill center on whether and how to change theagency assignment system and alternatives to the compensation modelsnow in use.When Congressenacted the Dodd-Frank Act, it notedthecritical"gatekeeper" role played in thedebt market by NationallyRecognizedStatistical RatingOrganizations(NRSROs).International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  34. 34. P a g e | 34It alsonoted thesystemic importanceof credit ratingsand that creditratingagenciesare central tocapital formation, investor confidence,andtheefficient performanceof theU.S.economy.Congressalsocitedthe adverse impact on the economy of inaccurateratingsassignedtostructuredfinanceproductsduringthefinancialcrisis.And it noted that in certain activities — particularly advising arrangers ofstructured financial products on potential ratings — rating agencies faceconflictsof interestthat need to be recognizedand carefullymonitored.As a result, the Commission wascharged withstudying thecredit ratingprocessfor structured productsand the conflictsof interest associatedwith the issuerpay and subscriber payrating agencymodels.We alsowereinstructedtoexaminethefeasibility of establishinganassignedratingssystem and alternatemeanstocompensateNRSROs.When reportingto Congress,wewererequired tosubmitrecommendationsfor regulatory or statutorychangesthat wouldbeneeded to implement our findings.TheCommissionrequestedpubliccomment and, in preparingthereport, the Commissions staff carefullyreviewedeach of the commentlettersreceivedaswellasstudies,articles,and testimonyregardingpotential conflictsof interestand alternatecompensation models.Wealsomet withseveralNRSROs, proponentsof alternativemodels,andother market participants.Relying on theinformation gathered from theseefforts, the staff reportdescribedpotential benefitsandconcernswiththesystemsproposed, andidentifiedpotential regulatory or statutorychangesthat could beundertaken with respect to eachproposal.Thestaff report wasfiledwithCongressin December 2012.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  35. 35. P a g e | 35Given the complex issuesthe studybrought to our attentionand thevarying and sometimesconflictingviewpointsexpressed, theCommissionsstaff recommended conveninga roundtablededicated tothesetopicsduring whichall sidescould discussthe issuesand thepotential actionsthestudy addressed.Todayis the day for that discussion.As I said, I am verymuch looking forwardto hearingtheexchangeofideasbytodays speakersand panelists,andusingwhat welearntodayasweconsider approachesand appropriateresponses.BeforeI turn thefloorback toTom Butler(directorof theSECs Office ofCredit Ratings), I wouldlike tothank him and all of the staff from acrosstheCommission whoprovided help and assistancein organizingthisroundtable.It wastheir tirelesseffort and coordinated activitiesthat made todaysextremelyimpressive assemblageof speakersand panelistspossible.Thank you all.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  36. 36. P a g e | 36Addressing Conflicts of Interest In theCredit Ratings IndustryBy CommissionerLuisA. AguilarU.S. Securitiesand ExchangeCommissionRemarksat the Credit RatingsRoundtableWashington, D.C.Good morning. I am very pleased tobe here attheRoundtable on Credit Ratings.I strongly support theCommission’seffort toevaluatewaystoimprove our credit ratingssystem.Effectiveoversight of NationallyRecognizedStatistical RatingOrganizations(―NRSROs‖) is critical toensuringaccurateratingsandpromotinginvestor confidence.Before I begin, however, let me issuethestandard disclaimer that theviewsI expresstodayaremy own, anddonot necessarilyreflecttheviewsof the U.S. Securitiesand Exchange Commission(―SEC‖ or―Commission‖), my fellowCommissioners,or membersof thestaff.As an SEC Commissioner, I have focused singularlyon how theSEC canbest serve theneedsof investors.It isclearthat theroleplayed bycredit ratingagenciescanhaveanimpacton the integrityof our marketsand investor confidence.Today’s roundtableand the Commission’sDecember 2012Report toCongressonAssigned Credit Ratingsare direct outgrowthsof industrypracticesthat permitted inaccurateratingsto underminethesecuritiesmarket and the integrity of thecredit ratingsindustry.A number of studies have concluded that inflated credit ratings, amongother factors, contributed to the financial crisis by masking the true riskof manymortgage-relatedsecurities.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  37. 37. P a g e | 37For example, prior tothe financial crisis, NRSROs issuedcredit ratingsfor tensof thousandsof U.S residential mortgagebacked securities(―RMBS‖) and collateralizeddebt obligations(―CDO‖).Amajorityof the productsreceivedAAA and other investment-gradecredit ratingsdespitetheir risky features.AlthoughAAA-rated securitieshavehistoricallyhad lessthan 1%probabilityof incurringdefaults,over 90% of theAAA ratingsgiven tosubprime RMBSsecuritiesthat originated in 2006and 2007werelaterdowngradedby theNRSROs tojunk status.Theselargenumbersof downgradesresulted in great harm and requiresthat wemake sure theydon’t reflect a faultysystemic process.Too that end, one of the key concerns raised by commentators regardingthe current structure of the credit ratings process is the issue of conflictsof interest associatedwiththe ―issuer-pays‖ model.Thismodel allowstheparty planningon issuinga financial instrument topayan NRSRO for assigningthe rating.Anumber of commentatorshaveargued that this businessmodelencouragesratingsshopping bytheissuersand investment bankssellingthesecurities,and resultsin undue pressure for NRSROs togivefavorableratingstoattract business.Investorsuse credit ratingstomake investment decisions, generallyoptingfor ―investment-grade‖ products– thoserated asAAA toBBB-Productsthat carrya greater risk are labeled ―below investment grade.‖Obviously, productsthat receivean investment grade ratinghave a muchbroadermarket in whichto sell.Asaresult, therecanbeagreatdealofincentivetohaveaproduct ratedatinvestment grade level.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  38. 38. P a g e | 38Therefore, it is important to establishprocessestoensure that a productreceivethe appropriate ratinglevel.Afaulty system of assigning credit ratingscan devastate the best financialplanning and destroy financial security, particularly for investors that areretired or nearing retirement.Given the importanceof credit ratings,it is criticalthat credit ratingsbeissuedwith integrityand transparency.It is clearthat thepast cannot be repeated. Thefinancial crisis costAmericans$3.4 trillionin retirement savingsand it triggeredthe worstcrisissincetheGreat Depression.TheFinancial CrisisInquiry Committee concludedthat ―thefailures ofthecredit ratingagencieswereessential cogsin thewheelof financialdestruction … [and] werekeyenablersof the financial meltdown.‖I want tothank all of the panelistsfor beingheretoday to share yourviews.All of you have important informationtosharewithusabout the creditratingssystem, and I appreciatethat you’ve taken thetime to be withus.As today’sdiscussionunfolds, weshould remember theneedsofinvestors,whodeservea credit ratingssystem that istransparent, orderly, and that is not derailedby conflictsof interest.Thank you.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  39. 39. P a g e | 39Raising the bar for the next phase ofgrowthanddevelopment – sustainingtransformative momentumWelcomingaddressby Dr Zeti AkhtarAziz, Governor of theCentral Bank ofMalaysia, at the10th IFSB (IslamicFinancial ServicesBoard) Summit 2013―Thefuture of the Islamic financialservicesindustry – resilience,stabilityandinclusivegrowth‖, SasanaKijang, KualaLumpur.It is a great pleasureto welcomeyou to this 10th IFSBSummit, on the―TheFuture of the Islamic Financial ServicesIndustry:Resilience, Stabilityand InclusiveGrowth‖.Bank Negara Malaysia is most honored tohostthisyear’s summit, whichis held in conjunction withthe 10th anniversary of the IslamicFinancialServicesBoard (IFSB).It washere in Kuala Lumpur 10years agothat wewitnessedthemomentousoccasion of the IFSB inauguration, that wastheculminationof international collaborationamong the founding member countrieswiththesupport of several keyinternational and multilateral institutions.Its landmark establishment in 2002astheinternational prudentialstandardsettingbodyfortheIslamicfinancemarkedamajor milestoneintheeffort to strengthen the international infrastructure for theIslamicfinancialsystem, steeringthepathforitssuccessful integrationasaviablecomponent of the global financial system.Adecadeon, the work of the IFSB in ensuring a cohesivecross-borderregulatoryframeworkandtheinternationalbest practicesthat are attunedtothe intrinsiccharacteristicsand peculiaritiesof Islamic financialintermediation, haveserved to underpin the development of a sound andInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  40. 40. P a g e | 40stableIslamic financial system, usheringin a phaseof rapid growthandgreater internationalizationof the industry.Indeed, 10 years since the founding of the IFSB have been a period ofsignificance, during which the Islamic financial services industry hasgrownimpressivelywith itslandscapedramaticallyevolved.This growthaccelerationhasbeen accompanied by the wideningof itsgeographical reachtranscendingitstraditional bordersin Muslimmajoritycountriestothe more establishedfinancial centres.In addition, Islamicfinancehasevolved asa comprehensivesystem ofintermediationservicingall segmentsof society, includinggovernments,businessesand householdsregardlessof scaleofbusinessesand income levels.In this decade, Islamic financehasalsoevolved from beingdomestic-centric tobecome increasinglyinternationalized,intermediating funds across borders and becoming a new vehicle thatbridges economies and fostering closer financial linkages, particularlyamongemerging and developing markets.As a form of financial intermediationthat is well anchoredtoservetherealeconomy, Islamicfinanceoffersdistinctpotentialtoachievethegoalsof inclusivegrowthand financial stability.Its foundationshavebeen strengthenedwiththe settingup of the IFSBandbeforethat, theAccounting andAuditing Organisationfor IslamicFinancial Institutions(AAOIFI), have taken the lead in settingtheprudential and accountingstandardsfor the industry.Combined withcontinuouscapacitybuildinginitiativesand institutionaldevelopment, it hasresultedin the opportunityto achievescaleand hasallowedthe Islamic financial servicesindustry totransition intoadynamic, fast growingand competitive form of financial intermediationfor the global community.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  41. 41. P a g e | 41TheIFSB todayis celebratingitstenth anniversary in a worldwhichischangingprofoundly.Anew growthand development agenda isunfoldingbeforeus.Given the severe damage and devastation caused by theglobal financialcrisisand the ensuingeconomicdownturns, theroadto anenduringrecoveryand lastingprosperitydemandsa global policy responsethatbrings about a new economictrajectorybuilt on a strong, more inclusiveandmore sustainablegrowthpath.Common challengesthat have alsocome to the forefront, such aspoverty, increasinginequalityand the imperativefor greater socialcohesion, have alsocalledfor theconstruction of policy objectivesandstrategiesthat can enhancestability, social well beingand environmentalsustainability.In the wakeof theglobal financial crisis, there is consensuson the needfor a return tofinancial systemsthat serve the real economy, and thedemandsfor more responsiblefinancial practicesfrom the financialsector, that alsoincludesthecommitment toachievesocio-economicgoals.In response,theinternationalcommunityisprioritizingfinancialstabilitybystrengthening financial regulation.This includesfinancial reforms aimed at protectingdepositorsfromexcessiverisk-taking, over-leveragingand unfetteredinnovation.Thereform initiativeshave alsofocused on enhancingcapital andliquiditystandards, reinforcedby movestostrengthen themacro-prudential orientation of regulationto complementmicro-prudential supervisionto managetherisksarisingfrom theinterdependencieswithin the financial system.Whilst thebreadth of regulatory changesbeingconsideredcollectivelyendeavorto strengthen financial system resilience,the key challengeforInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  42. 42. P a g e | 42policymakers and regulatorsgoing forwardis alsotoachieveinclusiveandmore sustainablegrowth, whilst ensuring financial stability.Whilst Islamicfinancehasbenefitedfrom a well-developed, morecompetitiveand well regulatedeco-system, it needsto build on andreinforcethesolid foundationsthat hasbeen achieved in this decade.As the industry transitionsintoa new eraof growthand development inthispost-crisisworld, thecompetitive financial landscapeis beingredrawnby theevolving international regulatory reforms, changingoperatingmodels, risingconsumer expectationsand increasedcompetition.In this more challengingenvironment, the successof sustainingthemomentum of Islamic financeasatransformative agent for theeconomy, will hingeon the abilityto keep raisingthe bar in thepursuit ofaneffectivefunctioningand sound Islamicfinancial system.Post-crisis,theincreasedemphasisfor inclusiveandsustainableproductsaswell asresponsiblecorporate behavior providesclear potential forIslamic financial players to demonstrateleadershipby capitalizingoncore valuepropositionsof Islamicfinancial intermediation.Thereisalsoscopeforgreaterleverageontheadvancesoftechnologyandnew institutional arrangementsthat can enhanceoperationalexcellence,particularlydistribution channels for extendingoutreach totherangeof usersfrom householdsto microenterprisesand small andmedium scaleenterprises.In addition, innovations in Islamic financial solutionswill need to takeinto account the higher regulatory expectations for moretransparency, and the need for the effective management of risks andcapital.This involvesstrengtheningthe resilienceof theIslamicfinancial systemin alignment withtheevolving international regulatory developmentsthusraisingthebar of industry performance.TheIFSB hasmade significant advancementsin leadingtheeffortstoInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  43. 43. P a g e | 43reviewspecific measuresput forwardbytheBaselCommitteeforpossibleadoption in Islamic finance.Further tothis is theimperativeto cultivate a strong risk culture withininstitutions.Reinforced by a robust shariahgovernance framework, it will ensure thatinnovationfor furthering thedevelopment of Islamicfinanceisharnessedwithinthe boundariesof the Shariah, which wouldavert overzealousinnovativeactivitiesthat could underminefinancial stability.Let me concludemy remarks.Muchhasbeenachieved, bothin termsof theroleand contributionof theIFSB, and the advancement made by Islamic financein this recentdecade.This hasbeen an outcome of cumulativeeffortsto strengthen thefoundationsof the Islamic financial system.As the industry gearsitself for the next phaseof growth in themorechallengingenvironment, our commitment and strategiesto keep raisingthebar tobring Islamicfinancetoanewlevel will enhanceitsprospect tocontributeto achievingour shared vision of inclusivegrowthin anenvironment of financial stability.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  44. 44. P a g e | 44Changesin the Large ExposureRegimeCONSULTATION PAPERGUERNSEY FINANCIALSERVICES COMMISSION1:Executive Summary1.1OverviewThis paper containsfull details of theproposalstosubstantiallyalter theLargeExposure principlesand guidancethat apply to licenseddeposittakersthat are incorporatedin Guernsey.It is proposedthat the new regime wouldtake effect from 1January2014.Theseproposalsincludechangestoenhancethequarterly prudentialreporting tothe Commission and thiswouldaffect not only licenseddeposit takersincorporatedin theBailiwick, but alsothoselicenseddeposit takerswhoseprincipal place of businessisoutsidethe Bailiwick.Thecontext for the review is that theexistingPrinciple1/ 1994/ 24―Principlesand Guidancetobe followedby a locallyincorporatedlicenseddeposit taking institution enteringinto a largeexposure‖ paperpublishedbythe Commission in 1994nolonger adequatelyaddressestherisksassociated withlargeexposures,particularlythosearisingfrom thesystemic and market risks that became evident asa result of the2007/ 2008financial crisis.In respect of largeexposures,the Commission hastended tobe a―pragmatic‖ supervisorrather than a rigid standard basedsupervisor, and, it hasfrom timeto time allowedsuitablycollateralisedlargeexposuresin excessof 25% of net capital base.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  45. 45. P a g e | 45Given that anychange to a more restrictive approach may have a businessimpact on licenseesthe Commission feelsthat it isappropriate toseek theviewsof industry.TheCommission is proposingto retain several elementsof itspragmaticapproachand in seekingthe viewsof industry it will be open to bilateraldiscussionswithlicenseesabout particular typesof exposures.2. What is proposed?Thesubstantivechangesbeing proposed in updated guidanceare asfollows:- Exposurestocentral governmentsand market loansof lessthan 12months’maturity, whichare exempt from the current largeexposureregime, will be deemed tobe largeexposuresunder the new regime.- Thecurrent upstreamingregime will changeto expressagreedexposure limitstoparent/ group banks asa proportion(i.e. %) ofcapital baserather than a proportionof assets. The upstreamingregimewill includeon balancesheet and off balancesheet exposures.- Exposurestothirdpartybankswillnormallybelimitedtoamaximumof 100%of net capital base and will comprise cashplacements, holding of debt instrumentsand off balancesheetexposures.Themaximum proportion (%) of exposure will bedetermined accordingtotheratingofthethird partybank, althoughlimitedflexibilitywillbepermitted in the caseof exceptional short-term excesses.- In relationto exposuresto sovereigns, theconcept of ZoneAandZoneB countrieswill be replaced withtwodifferent OECD-basedgroupings- High IncomeOECD countries and other countries.Exposureswill be capped at a maximum of 1000%of net capital baseandwill be determinedaccordingto the rating of the sovereign.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  46. 46. P a g e | 46- Exposurestoclientsorgroupsofconnectedclientswillbecappedat amaximum of 25% of net capital base,unlessthe exposure is securedbycash and/ or High Income OECD government securities,or theexposureissubjecttoaparentalguarantee(whichinitselfwouldneedtobe included in anyupstreaminglimit).Sub-participationagreementsthat transfer credit risk off thebalancesheet of the Guernseybank will alsobe considered.- Better definition of what constitutes―connected clients‖will beprovided.- Theprudential reportingformswillbechangedtobettercapturelargeexposuresthat havenot previouslybeenreported; e.g. holdingsof debtthat equateto more than 10% of a bank’snet capital base.In accordancewithexpectedinternational developments, theCommission alsoproposestocapturethe top twenty, rather thanthecurrent top ten, largest exposures.Brancheswill be askedto report similar details, but in termsof theirparental capital, sothat data on any significant credit concentrationriskin a branch in Guernseythat may impact on a head officeelsewherecanbecollected.- Breachesof largeexposure limitswill be a reportable event. TheCommissionisproposinga staged approach todealingwithexposuresthat cannot be regularised.- The800% aggregate limit on exposureswouldbe retained, butexposurestoGroup, to thirdparty banksand tosovereignswouldbeexcludedfrom thisaggregate.- Largeexposuresexistingprior tothe intendedeffectivedate for thenew regime of 1January 2014wouldbe grandfatheredin.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  47. 47. P a g e | 471.3 Rationale for changeThelargeexposureregimeisall about capturing concentrationriskanditis coveredby s24of The Banking Supervision(Bailiwick of Guernsey)Law, 1994.Conventional wisdom, asdictatedby theCapital RequirementsDirectiveandthe Basel Core Principlesfor EffectiveBanking Supervision, statesthat noexposuretoaclient orconnectedgroupofclientsshouldequatetomore than 25% of net capital.Short term interbank exposureshavehistoricallybeen exempt from thisrequirement.Our current environment reflectstheseexemptionsand alsopermitsexposurestoclientstoexceed the25% limit.Whilst pure concentration risk to singleobligor counterpartieswasnotseen asa major direct contributor tothe2008financial crisis,nonethelesselementsof concentration risk wereseen asindirect contributors.Interconnectednesswithinand betweengroupswereseen asmagnifiersof some exposures and concentrationsthrough sectoral exposurestoparticular economicsectors(e.g. theIrish propertydevelopment sector)affected credit assessmentsof manyorganisations.That said, theguidanceonlargeexposuresremainshistoricin nature;theBaselCommitteeguidanceonmeasuringandcontrollinglargeexposuresdatesback to 1991,and our own localregimehasnot been significantlyupdatedsince1994.However,there havebeen substantial changestothe EU largeexposureregime.These substantial changes have their origin in late 2007 and early2008, when the Committee of European Banking Supervisors(CEBS), which has since become the European BankingAuthority, reportedto theInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  48. 48. P a g e | 48European Commission on the effectivenessof the largeexposureprovisionsof the Capital RequirementsDirective.Thereport concluded that market failuresassociatedwithsystemic riskand moral hazard applied tointerbank exposuresregardlessof maturity.Accordingly, thelargeexposureregimeforEU memberstateswasrevisedwith effect from December 2010totighten largeexposurelimits,particularlyin relationto interbank and intra-grouplending, whichtheEuropean Commission agreed wasa major systemic risk in thewakeof the financial crisis.Under the revised EU regime, short term loanstobanks areno longerexempt and whilst limitednational discretion is availabletomemberstatesin relationto intra-group lending, loanstothird partybanksarenow capped at 25% of net capital, unlessthe lendingbank is very small.In reality, bythe timethechangestotheEU regimecame along, marketpracticehad alreadychangedtoreflectthis more cautiousapproach tointerbank lending.It isworthnotingthat theCEBS conclusionswerealsoreflectedintheUKGovernment’sresponsetothe report on bankingreform by theIndependent Commission on Banking(―the Vickers Report‖).TheHM Treasurywhitepaper ―BankingReform – deliveringstabilityand supporting a stableeconomy‖ publishedin June2012 envisagesthelimitingof a ring-fencedbank’sexposure tofinancialinstitutionsin ordertoprevent systemicshocks.ClearlyGuernseyis not in the EU, but neverthelesswewouldnot wishtobea completeoutlier in respect of largeexposures.The Basel Core Principles for Effective Banking Supervision do give thesupervisor some latitude in permitting ―minor deviations‖ from the 25%limit, but the economic climate that has prevailed for all but the last fewyears combined with the Commission’s wish to be a pragmatic regulatorhasmeant that these―minor deviations‖ have been permittedmoreInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  49. 49. P a g e | 49frequentlyin thepast than is arguablynow prudent in the currenteconomicand regulatoryclimate.Theguidance however, remainsthesame and a changeis needed tomanageexpectationsand formalise a prudent approach.In developing proposals for a new large exposure regime the Commissionhashad regard to a number of other regimes, including thoseoperating intheUK and theother Crown Dependencies.None of theseare a good fit in their entirety for thetype of bankingbusinessdone in and from within the Bailiwick.The Commission has therefore tried to balance the requirements of otherregimes against the type of banking business that exists in theBailiwick, recognising also the intra-group funding that many licenseesprovide.1.4 Who would be affected?Licensed deposit takers that are incorporated in Guernsey would be thoseprincipally affected, given that limits on exposures are being proposed inrelationtocapital.However, the proposed revisions to the large exposure regime includeenhanced quarterly prudential reporting for all licensees and brancheswouldthereforebe affectedby thesechangestothe BSL/ 2 reports.The CommissionTheGuernsey Financial ServicesCommission is the regulatorybody forthefinancesector in the Bailiwick of Guernsey. The Commission’sprimaryobjectiveis toregulateand supervise financial servicesinGuernsey, with integrity and efficiency, and in sodoing help toupholdtheinternational reputation of Guernsey asa financecentre.Tolearnmore:http:/ / www.gfsc.gg/ Banking/ News/ Documents/ Consultation%20paper%20for%20Commission%20website.pdfInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  50. 50. P a g e | 50GovernorSarah Bloom RaskinAt the Society of Government EconomistsandtheNational EconomistsClub,Washington, D.C.Prospects for a Stronger RecoveryThank you.I am very pleased to be here among an audienceofprofessional economists,whichis certainlypreferabletoappearingbefore an audienceof unprofessionaleconomists.I like your kind! Your talents are needed now morethan ever as we try to put the toolsof the economicprofession toworkfor the common good.Its easyto be aneconomist wholooksback on crisesand crashesandtries toexplain whythey happened, but much harder tobe an economistwhoseeffortsmanagetohelpstopthemfrom happeningin thefirstplace.Economicpolicymaking, at itsbest, reflectsa continuousstruggletomakesurethat dataandexplanationsofsuchdataareconsistent withrealexperience.If were to engagein this strugglehonestly, its noeasytask.It involvesunderstandingnot just thereliabilityand signal in variousdata, but alsoquestioningwhetherthedata accordswithour understandingof actualexperience.So, to get thisright requires many different perspectives,not just on thedata but on the underlying realitiesthedata are trying to capture.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  51. 51. P a g e | 51Government economistsunderstand that non-economistsbringsomethingvaluabletothetablein policymaking--a groundedperspectivein what ishappeningin theeconomy.With that said, what is reallyhappening now in theAmerican economy?What dotheeconomic dataweseeat theFederalReservecurrentlyshow,andhow do wethink thesedata lineup withthe economicrealitiesofmost American householdsand businesses?In my remarkstoday I will offer my assessment of recent economicdevelopmentsand the economicoutlook, and I will discussthe actionsthat the Federal Reserve hasbeen taking, in light of itsview ofdevelopmentsand the outlook, to support the economic recovery.Before I begin, I should notethat theviewsthat I will be presentingaremy own and not necessarilythoseof my colleagueson the Federal OpenMarket Committee(FOMC) or the Board of Governors.Recent Economic and Financial DevelopmentsFor thepast three and ahalf years the U.S.economy hasbeen in arecovery--albeit a very weakone--from a severefinancial crisisand thedeepest recessionof thepost-World War II period.Theunemployment rate, whichreacheda high of 10percent in thefall of2009,hassincecomedown2-1/ 2percentagepoints,to7.5percent inApril.Theincreasein economic activityand thedeclinein the unemploymentrate are, of course, welcome, but westill have a longwaytogoto reachwhat feelslike a healthyeconomy.In fact, the paceof recovery hasbeen slowerthan most had expected.Thegap betweenactual output and theeconomys potential remainsquitelarge,accordingtoestimatesfrom theCongressional BudgetOffice, andtheunemployment rate today remainswellabove levelsseen prior toInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  52. 52. P a g e | 52therecession, and well above the level that theCommittee thinkscan besustainedoncea full recovery hasbeen achieved.In addition, thenumberoflong-termunemployed--peoplewhohavebeenunemployed for 27weeksor more--remainshistoricallyhigh.My interpretationof theeconomicdata that wehave receivedover thepast few quartersis that the recovery hascontinued to gain traction.TheBureau of EconomicAnalysis reportedlastmonth that real grossdomesticproduct (GDP) roseatanannualrateof2-1/ 2percent inthefirstquarter of this year after barelyexpandingat all in the fourth quarter of2012.Thestep-up in growthin the first quarter partly reflecteda rebound fromlast yearsdrought and Hurricane Sandy.Smoothingthrough thesefactors, real GDP wasabout 1-3/4percentaboveitsyear-earlier level in the first quarter, a modest gain that isaboutin linewith thepaceof growthduring much of the recovery.Thestrength of therecoveryamong thecomponentsof GDP has beenmixedrecently.In termsof thehousing sector, there is noquestionthat manycommunities and neighborhoodsweredevastatedby the effectsof thefinancial crisis.Recently, weseethat overall demand hasbeen strengthening, withbothhomesalesand pricesrisingmarkedlyin many areas.Both new and existinghomesaleshavemovedup, on net, sincelate2011, and housingstartsaveragedan annual rate of nearly1million unitsin thefirst quarter of thisyear, up considerablyfrom theextremely lowlevelsthat prevailedthrough 2011.Inventoriesof new homesfor salehave becomequitelean in mostmarketsover the past year, a notablechange from earlier in therecovery.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  53. 53. P a g e | 53Theincreasein activityin the housing sector hasbeendriven byhistoricallylow mortgagerates, growingoptimismabout future houseprices,continuedgainsin thejobmarket, andsizablepurchasesofhomesbyinvestors.Elsewherein the household sector, consumer spending--abouttwo-thirds of overall final demand--hascontinued growingat a moderatepace.On thewhole, familieshave benefitedfrom the modest improvement inthelabor market, and risingstock pricesand reboundinghome valueshavehelpedsome householdsrecoup part of thewealththeylostduringtherecession.However, overall wagegrowthhasbeen anemic, and manyhouseholdshavenot seen their circumstancesimprove materially.As I describedin a speech lastmonth, globalizationand technologicalchangehave continuedto shift the occupationsand industrialdistribution of new jobsavailable.Thesecurrentsof globalizationand technological changecontinueontheir path, makingit morelikelythat workerswhowerelaidoff during therecession wouldbe unableto find reemployment that isof comparablequalityto their previousjobs.About two-thirdsof all job lossesin the recessionwerein middle-wageoccupations--suchasmanufacturing, skilledconstruction, and officeadministrationjobs--but theseoccupationshave accounted for lessthanone-fourth of the job growthduring the recovery.By contrast, lower-wageoccupations, such asretail sales, foodservice, and other lower-paying servicejobs, accounted for only one-fifth of job lossesduring the recessionbut more than one-half of totaljobgainsduring the recovery.As a result of thesetrends in job creation, whichcould well havebeenexacerbated by thesevere nature of thecrisis, the earningspotential forInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  54. 54. P a g e | 54manyhouseholdslikelyremainsbelow what theyhad anticipatedin theyears beforethe recession.Moreover,asyou all know, thetemporarypayroll taxcut hasnowexpired, and many householdshaveseen their disposableincomesreducedfor thisreasonaswell.Spendingin the businesssector recentlyhasincreasedonlymodestly, perhapsdue in part totheeffect of theserecent tax changeson consumers.Real spending on equipment and software rose about 4 percent over thepast 12 months, according to the most recent GDP report, a modest gainfor this categoryof spending.Indicatorsfor capital investment in themonthsahead, includingnewordersfor durable capital goodsand survey measuresof businesssentiment, suggest that growth in businessspendingon new equipmentand softwareis likelyto remain modest in thecomingquarters.Turningtothe government sector, thelegislated reduction in spendingbythe federal government is exertinga clear and continuingdrag oneconomicactivity.Even prior tothebulk of thespendingcutsassociatedwithsequestration, real purchasesbythefederal government werereported tohavedroppedat an annual rate of more than 8 percent in the first quarterof thisyear, followingan even larger drop in the fourth quarter of lastyear.Thesecutsin federal spending arelikely tobe an important influence onthenear-term prospectsfor economicgrowth, and I will saymore aboutthisissuein a moment.In contrast tothe federal government, the budget outlook for stateandlocalgovernment continuestoimprove, and thedrag on economicactivityfrom this sectors cutbacksin spendinghasdiminishedconsiderably.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  55. 55. P a g e | 55Reflectingsome of these mixed influences,asI already noted, real GDPhasbeen rising at a very modest rate, and the labor market hasshownsimilarlymodest gainsover the past year, withtheunemployment ratecomingdown about 1/2 percentagepoint.Tomore fullyunderstand theexperienceof the 11.7millionAmericanswhocant find work, welook to broadermeasuresof laborunderutilization, which take intoaccount job seekerswhohave stoppedlookingfor workbecausetheyhavebecome discouraged, and peopleworkingpart timebut whowouldprefer toworkfull time.Recently, thesenumbers seem to be coming down.Thegainsin payroll employment over thisperiodhave been about in linewiththe declinein the unemployment rate, although, asistypical, thepaceof job gainshasbeen somewhat erraticin recent months.Sincethebeginningof theyear, theincreasesinpayroll employment haveaveraged 196,000per month, a littleabove the183,000 averagemonthlygainsobserved during 2012.Other indicatorsfrom the labormarket have alsoshownsomeimprovement recently. Initial claimsfor unemployment insurancehavedeclined sincelastsummer, and the number of job openingsappearstobeincreasing.I hopetheseindicatorsmean weareturning thecorner on some of thepainful costsassociatedwith beingunemployed or underemployed inAmerica.Turningtoinflation, recent datashowthat pricepressureshaveremainedsubdued. Both total and core inflation wereonly about 1percent over the12monthsending in March,below theFOMCs long-run objectiveof 2percent.Inflationisbeingrestrainedby the continued slack in labor and productmarkets,while stableinflationexpectationshave offset disinflationarypressuresto some extent.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  56. 56. P a g e | 56Moreover,the increasein gasolinepricesthat wesaw earlier in theyearappearsto have fullyreversed, and thepath of oil futurespricesisdownward-sloping, suggestingthat energypricesare likely to hold downheadlineinflationratesin the yearsahead.The Economic OutlookLet me now turn to the outlook.As my Federal Reserve colleaguesand I have noted in thepast, the paceof the economic recoveryhasbeen restrainedby lingeringeffects of thefinancial crisis.Assessingthecurrent strengthof theheadwindsrelated totheselingeringeffectsisan important determinant of theeconomic outlook for thecomingyears.Unfortunately, current federal fiscal policy is oneheadwindtotherecovery that hasintensifiedthisyear.In fact, federal fiscal policy hasbeen tighteningsince2011, after havingbeen quiteexpansionaryduring the recessionand earlyin the recovery.Morerecently, actionsby theAdministration and theCongresstoreducethebudget deficit have ledtofurther tighteningof federal fiscal policy.As I already mentioned, both thetax legislationsignedintolaw inJanuary and the sharp spendingcutsassociatedwithsequestrationwilllikely significantlyhinder GDP growththis year.Indeed, the Congressional Budget Office hasestimated that thesechangesin fiscal policy wouldreduceGDP growthby 1-1/2 percentagepointsthis year relativetowhat weotherwisewouldhave achieved.Looking further ahead, fiscal policyseemslikely toremain restrictiveatthefederal level.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  57. 57. P a g e | 57Theheadwindsfrom thehousingsector have eased, and housing marketactivityis likely tocontinuetocontributeto GDP growthover the nextfew years.Theseheadwindshad been substantial, asthe aftermath of the financialcrisisand housing bubble left many homeownersunderwateron theirmortgages,a largeoverhang of vacant homes, and mortgagecredit veryhard toobtain for anyone without an excellent credit record and a sizabledownpayment.Therise in house pricesover the past year or sohasliftedhousehold networthand pushed some homeownersabovewateron their mortgages.Thesedevelopmentsmayhelptoeasecredit formanyhouseholdsaswell, although mortgagecredit remainsverytight.In a speech last month, I described how thenet declinein housingwealthsincetherecession hashad particularlyacuteeffectson thebalancesheetsof lower- and middle-incomehouseholds,which tend tohold a relativelyhigh share of their total wealthin their homes.Householdsat the bottom of the income distributionhave alsohad aharder time than othersfindingjobsduringthe recovery and their wageshavecontinuedtostagnate.In my view, the largeand increasingamount of inequalityin income andwealth, whichhasbeen an ongoing development for decades, may haveexacerbated the crisisand I think more research is required todeterminewhetherit may alsoposea significant headwindto the recovery from thecrisis for yearsto come.So, whileI am hopeful that pressureswill easefurther ashome pricescontinuetorebound, I alsobelievethat some of the restraintson therecoverymay bequite long-lasting.Theheadwindfrom the financial sector alsohasdiminishedsomewhatover thepast year and should present lessof a restraint on economicgrowththanhasbeenthecaseintherecent past. U.S. equitypricesareupInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  58. 58. P a g e | 58more than 10 percent sofar this year followinglast years13 percentincrease.Riskspreadsembeddedin the interest ratespaid by manyAmericanbusinesses,although still abovetheir pre-crisislevels, havealsomoveddownsubstantiallyover the past year tolevelsthat are moderate, giventhestateof the broader economy.Thesituationin Europe, although still uncertain, appearsto haveimproved sincelast summer--aidedimportantlyby thepoliciesof theEuropean Central Bank (ECB)--and thesedevelopmentshave ledto animprovement in financial conditionsglobally.Policy actionsand promises,includingthe ECBsprogram topurchasethesovereign debt of vulnerableeuro-areacountriesand discussionsabout creatinga bankingunion, appear tohave helpedmarketparticipantsnegotiatepast some recent hurdles, includingthechallengesin forming a governingcoalitionin Italyand thesevere bankingdifficultiesin Cyprus.If policymakers in Europe can follow through on their commitmentstofinancialintegrationandstructuralreforms,amongotherthings,financialstressin Europe should continueto lessen, and European economiesshould graduallyrecover from their current slump.If the economy in Europe wereto begin togrow again, it could supportglobal economic growthmore broadly.Thefinancial condition of the U.S.bankingsector hasalsocontinued toimprovefrom the perspectiveof regulatory capital.While much workremains for regulatorsand banksimplementingpendingcapital requirements,most large, medium-sized, andcommunitybanks are in stronger capital positionstodaythan theywereprior tothe financial crisis.Although not all, some consumersat least, areseeingthebenefitsofimprovementsin financial markets.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  59. 59. P a g e | 59In combination withlowinterestrates,the easingof financial stresshasallowedsome homeownersto refinancetheir mortgagesto lowertheirmonthlypayments, andsometypesof loans,suchasthosefor purchasinga new or used car, have become availableto more people.That said, weclearlystill have a long wayto goin assuringthatAmericanshave accessto affordablecredit.As I noted, an especiallylargenumber of people are unabletoobtainmortgagecredit, and credit card borrowingis alsotight.Taken together, theincomingdata and my own analysis of recentdevelopmentsin fiscal policy suggest that the recovery will continueat amoderate pace, and theunemployment rate will fall gradually.According to the Summary of Economic Projectionsthat wasreleased byFederal Reserve Board membersand Reserve Bank presidentsafter theMarchFOMC meeting, mycolleaguesandI expectedrealGDPgrowthtostep up moderately this year, risingroughly 2-1/2 percent after havingrisen 1-3/ 4percent in 2012.In theprojection, participantsalsoexpectedtheunemployment ratetobein therangeof 7.3to7.5percent by the end of theyear.Looking a bit further ahead, FOMC participantslargely expected theunemployment rate tocontinuereceding, but it wasexpected to remainaboveitslong-run sustainablelevel for several years.Meanwhile, inflationwasexpected to remain closetoor a littlebelowtheCommitteesobjectiveof 2 percent, consistent with ongoingslackin thelaborand product marketsand well-anchoredinflation expectations.Monetary Policy DevelopmentsIn light of this outlook and the risksaround theoutlook, it hasbeenappropriatefor the Federal Reserve to continueto pursuea highlyaccommodativemonetary policy.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  60. 60. P a g e | 60As you all know, duringthe financial crisisand at theonset of therecession, the Federal Reserve took strongeasingmeasures,cuttingthetargetforthefederalfundsrate--thetraditionaltoolofmonetarypolicy--tonearlyzero by theend of 2008.During the recovery, wehave provided additional accommodationthrough twonontraditional policytools aimed at putting downwardpressure on longer-term interestrateseven withshort-term ratesstuck atzero:(1) purchasesof Treasurysecuritiesand mortgage backed securities and(2) communication about thefuture path of the federal fundsrate.Our most recent policy actionshave sought tostrengthentherecoveryinthefaceof only slowimprovementsin labor market conditionsandsubdued inflationarypressures.After lastSeptembers policy meeting, the FOMC announcedthat theFederal Reserve wouldcontinueasset purchasesuntil theoutlook for thelabormarket hasimproved substantiallyin the context of pricestability.Then, at themeetingin December, theFOMC voted to continuepurchasinglonger-term Treasurysecurities at a pace of $45billion eachmonth and agencymortgage-backed securitiesat a paceof $40billioneach month, and wehave maintainedthat paceof asset purchasessofarthisyear.In consideringchangestothepace of asset purchasesin thefuture, wetakeintoaccount judgmentsabout boththeefficacyandpotential costsofthesepurchases,includingpotential risksto inflation and financialstability, aswellastheextent ofprogresstowardour economicobjectives.At its December meeting, the FOMC also recast itsforward guidance toclarify how the target for the federal funds rate is expected to depend onfutureeconomicdevelopments.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  61. 61. P a g e | 61Specifically, wesaid that weanticipate that an exceptionallylowfundsrate is likely tobe warrantedat least aslong asthe unemployment rateremainsabove 6-1/ 2percent, inflation over the period betweenone andtwoyears ahead isprojectedto be nomore than 1/ 2percentagepointabove2 percent, and longer-term inflationexpectationsremain wellanchored.Thesethresholdsareintendedtomake monetarypolicy more transparentandpredictabletothepublic by makingmore explicit our intentiontomaintainpolicy accommodation aslongasneeded to promote a strongerrecoveryin thecontext of price stability.Although it is still tooearlyto assessthefull effectsof themost recentpolicy actions,availableresearch suggeststhat our previousassetpurchaseshaveeased financial conditionsand provided meaningfulsupport to theeconomicrecovery.Given itsstatutorymandate, theFOMCs policyactionsandcommunicationshave naturallysought tolowerinterest ratesasa meansof strengthening aggregate demand, promoting thepace of recoveryinthelabormarket, and keepinginflationfrom fallingfurtherbelowtheratepreferredby the Committeeover the longer run.We will continue to calibratemonetary policy--including both theongoing pace of asset purchasesand communicationsabout the likelypath of thefederal fundsrate--inlight of our interpretationsof the latestdata and theimplicationsof thoseinterpretationsfor the outlookforeconomicactivity, labor market conditions,and inflation.ConclusionIn summary, the U.S. economy has continued to recover from the effectsof the financial crisis and deep recession, though at a pace that has beendisappointinglyslow.Therecovery doesappear tohavepicked up steam in some sectors, mostnotablyin housing, likely reflectingthe easingof some of theheadwindsInternational Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  62. 62. P a g e | 62that had been holdingback the paceof therecovery in earlier years.However,federal fiscal policy remainsan important source of restraint.In light of thesefactors,mostmembersof the FOMC project a modestimprovement in thepace of therecoverythisyear andnext, and, accordingly, a modest declinein theunemployment rate.TheFederal Reserve will continueto conduct monetary policy soastopromotea stronger economicrecovery in thecontext of pricestability.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  63. 63. P a g e | 63Opening SpeechbyYolanda BanksMcCoy,Head – Investmentsand SecuritiesDivision,Cayman IslandsMonetaryAuthorityat the 100WHF Cayman Event 2013Committee members, distinguishedguests, GAIM Ops delegates, ladies andgentlemen:GoodAfternoon.It is anhonour tobe a part of this afternoon’sEvent, and I thank themembersof theCayman Committeefor their invitation tospeak withyoutoday.Theinvitationcame with the remit tooffer an updateon thehedgefundindustryin theCayman Islands,soI proposetodoexactlythat in thetimeallottedtome.TheCayman IslandsFundsIndustry hasperformed exceptionallywelldespitecontinuedvolatilityin the global financial markets.Asof31st March2013,theCayman IslandsMonetaryAuthorityhad10,932regulated funds, whichcomprised of 8,282registeredfunds,399administeredfunds, 120licensedfundsand 2,131master funds.This is an 9.4% increaseover the same period last year, wherewehad9,990 fundsunder our direct remit.Thenumber of newfundsprocessedduringthequarter ended31st March2013was572compared to1,722asat 31st March2012.Total master fundscomprised of 66% of thecumulativenumber (or 376)comparedto81% of thecumulativenumber (or 1,125)for the quarterended31st March 2012.Terminationstotalled81, comparedto176for thesameperiod 2012.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  64. 64. P a g e | 64Growthin the fund administration area remainsconservative, withnonew mutual fund administrators’licenceapplicationsapproved duringthe3rd Quarter of the fiscal year.As of 31st March 2013, there were123licensed FundAdministratorscomparedto127for the sameperiod 2012.Of the total licensed,88wereFull, 33Restricted and 2 Exempted.Thenumber is down from the same period 2012due toi)Licenseesrestructuring their businessaffairs and nolonger requiringtheLicenceandii)byLicenseeswhowereno longer carrying on licensableactivitiesand, consequently, nolonger needing the Licence.Thesecurities investment businessalsocontinuestogrow modestly.Although nonew licenceswereapproved in the3rd Quarter of the fiscalyear, twonew licenceapplicationsare currentlybeing processed.As of 31st March 2013, there were34licensed SecuritiesInvestmentBusinessholderscompared to31duringthesameperiod 2012, and 1,834SIBL ExcludedPersons, compared to1,860in thepreviousyear.Thehealth of theglobal hedge fundsindustry can be gleaned from theInvestment Statistical Digest;an annual publication of theAuthority thatoffersaggregate statisticaldata collated from the FundsAnnual Returnsfiledby all regulatedfunds.We anticipatepublicationof the 2011Investment Statistical Digest inMay.Preliminarydata showsa slight increasein net assetsvalue, increasingfrom US$1,727 billionin 2010to US$1,796billion in 2011.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  65. 65. P a g e | 65Analysis of the top 10 Investment Manager locationsindicatesthat therehasbeen a shift in theNet Assetsby thelocation of the InvestmentManager.TheTop 5 locationsremainedconstant with New York (US$520billion)in thetop spot followedby United Kingdom (US$319billion), Connecticut (US$215billion), California (US$163billion) andMassachusetts(US$66billion).Thenext 5 sawsignificant movementswithIllinois(US$48 billion) andJapan (US$32 billion) moving up to6th and 8th, Switzerland(US$37billion) fallingto7thandLichtenstein(US$27billion) droppingout of thetop 10completely.Notableyear-on-year movementsincludeJapan increasingby US$17billion or 113%, Brazil increasingby US$7 billion or 47%, UnitedKingdom decliningby US$23billion or 7%, Liechtenstein decliningbyUS$5billion or 16% and Switzerlanddecliningby US$12billion or 24%.This data depictsthetough economicconditionsthat existed in Europeduring theyear 2011aswell asthe larger influenceand market shareBrazil and theAsian countriesare exertingand gainingin the HedgeFund Industry.As welook ahead, the Cayman IslandsMonetaryAuthority remainscommitted and poisedto remain the leadingdomicilefor hedge fundformations.For Cayman Islandsregulatedfundswhowishtomarket in theEuropeanUnion, theAuthority is progressingtalkswiththe European SecuritiesMarketsAuthority (ESMA) in light of therecent amendmentsto theMonetaryAuthority Law (2012Revision) that facilitiestheAuthorityenteringintocooperation agreementswithour EU counterparts.TheMonetaryAuthority (Amendment) Bill, 2013waspassed by theLegislativeAssembly on 15March 2013,and contained amendmentsto:further protect the interest of investorsand tomake further provision inrespect of the exchangeof information.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  66. 66. P a g e | 66Other areasof focusare tax information exchangeagreements;depositories;delegation and private equity/closed-ended funds.We are confident that CIM Awill be in a position in the near future toenter intoMOUs withour EU counterparts basedon themodel MOUdeveloped by ESMA.Approximately 23% of Cayman-regulated fund assetsare managedby aEuropean Manager.In the areaof Corporate Governance, theAuthority’s consultationonCorporateGovernancestandardsintheCayman Islandsfinancialservicessectorclosed on 18th March2013.Thenumber of responsesreceived to the consultationwassizeable;considerably more that thenorm for public consultation.Responsescame from both thedomestic industry associationsandindustrystakeholdersfrom a number of jurisdictions.In relation to thesurveyconducted by GreenwichAssociates, theresponserate tothesurveywasexceptional withthe responseratiotoinvitessentbeingapproximately5timesmore than thenorm for this type of survey.Respondentswerepredominantlyfrom the Cayman Islands,UnitedStatesand Europe witha few from Asia.Resultshave proved very beneficial and will be incorporatedintoourCorporateGovernanceconsultationwork.We are in the processof collatingall of thedata and wethank everyonewhotook the timeto respond.It is our objectiveto publish the resultsof the Corporate Governancesurveyonce finalized.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  67. 67. P a g e | 67Turning our focustotheUnited States, and more specificallyFATCA, anumber of updatesand implementingnoticeshave been issuedby theIRS sinceFATCA wasannounced.Most recently, on 17January 2013,the IRSand theUS TreasuryDepartment released the regulationsfor implementingthe FATCArequirements(Reference:RIN 1545–BK68).Theseregulationshavethe followingimpact on the fundsindustry:1.TheFund wouldhavetoregisterwiththeIRS via theIRS secureonlinewebportal;2.TheFund wouldhave to enter intoa complianceagreement (the FFIAgreement) withtheIRS to conduct duediligenceon account holdersorcomplywiththetermsof an applicableintergovernmental agreement(―IGA‖);3.TheFund wouldhave to annuallydisclosecertain information aboutU.S. account holdersand account holdersthat are foreign entitiesinwhichU.S.personshold a substantial ownershipinterest;4.TheFund wouldhave to withholdon paymentstocertain accountholders(beginning 1January, 2014);and5.TheFund wouldhave to undertakeadditional complianceobligationsset forth in the final Regulationsor suchIGA.On 15 March2013,the Ministerfor Financial Servicesannounced theGovernment’sintention toopt for a Model 1IGAwiththe United Statesfor the implementationof FATCA in theCayman Islands.ThesuccessfulconclusionofaModel1agreement wouldmeanthat fundswill be obligatedtoreport information requiredunder FATCA totheCayman IslandsGovernment, whichwill then automaticallytransmit theinformation to the IRS.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  68. 68. P a g e | 68Thefundswouldtherefore not be required to enter intoseparate FFIagreementswiththeIRS to be FATCA compliant.TheMinisterfor Financial Servicesalsoannounced on 15 March2013theGovernment’sintention toenter intoa similar arrangement for theautomatic exchangeof information with theUnited Kingdom.TheGovernmentsof Jersey,Guernseyand the Isleof Manhave similaragreementswiththeUK that werecommitted toduring the1st quarter of2013.While today’s presentationhasbeen brief in content, I trust wecan allagree that there have been a number of developmentsaffectingtheCayman Islands’hedge fund sector in recent times.While weall recognize that theregulatoryarchitecturehaschangedandwill continuetochange, CIMA remainsengagedand committed ingrowingthe localfundsindustry, fosteringa vibrant and competitiveindustry and preservingthe jurisdiction’sreputation.Ladies and gentlemen, thank you for your attention and I wishyou apleasant evening.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com
  69. 69. P a g e | 69APerspective on the U.S. EconomicOutlook and Monetary PolicyPresented by Charles I. Plosser, President andChief Executive Officer, Federal Reserve Bankof PhiladelphiaGlobal InterdependenceCenters CentralBankingSeries:Recovery 2013— Strength orStagnation, Milan, ItalyNote: President Plosserpresented similarremarks on May14, 2013before the SNS (Center for Businessand PolicyStudies)and theSIFR (The Institutefor Financial Research) inStockholm, Sweden.IntroductionIt is a pleasure tobe here withmy colleague,Eric Rosengren, presidentof the Federal Reserve Bank of Boston, tocontinuethisdistinguishedseries of conferenceson central banking hosted by the GlobalInterdependenceCenter (GIC).David Kotok, MichaelDrury, and Ben Craig have gathered anotherimpressivegroup of policymakers, academics,and economiststo discussthestateof our recovery.You may know that the GIC hasbeen basedin Philadelphiafor morethan 30 years, and for the past year, it hasbeen a tenant in our building.I am assured that fact hashad no influenceon the order of our speakersthismorning.Around theworld, centralbankersandpolicymakersmoregenerallyhavebeen challengedover the past five years asthey struggled in the faceof theworstglobal recessionsincethe Great Depression.International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com