Monday November 12 2012 - Top 10 Risk Management News

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Monday November 12 2012 - Top 10 Risk Management News

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Monday November 12 2012 - Top 10 Risk Management News

  1. 1. Page |1 International Association of Risk and Compliance Professionals (IARCP) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the weeks agenda, and what is nextDear Member,If you had to put Global SystemicallyImportant Banks (G-SIBa) in “buckets”…what would you do?This year, the G-SIBs are shown allocated to buckets corresponding totheir required level of additional loss absorbency.This is what the Financial Stability Board and the Basel Committee did: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  2. 2. Page |2The additional loss absorbency requirements for G-SIBs will be phased instarting from 2016, initially for those banks identified as G-SIBs inNovember 2014, and are to be fully met by 2019.Learn more at Number 10 of our list!At Number 5 of our list you will find the “metaphorical overreach” of theweek:“If you will forgive me for a possible metaphorical overreach, one canthink of ethical concepts as the white blood cells that make anorganization’s “immune system” – its compliance and risk managementsystems and culture – effective.Extending that same metaphor, conflicts of interest can be thought of asthe viruses that threaten the organization’s wellbeing.As in the microbial world, these viruses come in a vast array of constantlymutating formats, and if not eliminated or neutralized, even the simplestvirus is a mortal threat to the body.Especially when combined with the wrong culture and incentives,conflicts of interest can do great harm. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  3. 3. Page |3Who said that?Carlo V. di Florio, Director, Office of Compliance Inspections andExaminations, National Society of Compliance Professionals, SECRead more at Number 5 of our list.Welcome to the Top 10. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  4. 4. Page |4The FSB welcomes the report ofthe Enhanced Disclosure TaskForceThe Financial Stability Board (FSB)welcomes the publication of the Reportof the Enhanced Disclosure Task Force(EDTF) and views it as a valuable stepto improve the quality of riskdisclosures.The EDTF’s principles andrecommendations for improved bankrisk disclosures and leading disclosure practices are designed to providetimely information useful to investors and other users, which togetherwith current regulatory developments and standard setterrecommendations can contribute, over time, to improved marketconfidence in financial institutions.Report to G20 FinanceMinisters and CentralBank Governors on BaselIII implementationThe G20 Leaders met in LosCabos in June 2012. At this Summit, they endorsed the work of the BaselCommittee on Banking Supervision in monitoring the globalimplementation of its standards, and urged jurisdictions to meet theircommitments.“We welcome progress in implementing Basel II, 2.5 and III and urgejurisdictions to fully implement the standards according to the agreedtimelines.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  5. 5. Page |5Agencies Issue Statement onSupervisory Practices RegardingFinancial Institutions andBorrowers Affected by HurricaneSandyThe Office of the Comptroller of theCurrency, the Board of Governors of theFederal Reserve System, and the Federal Deposit Insurance Corporation(the agencies) recognize the serious impact of Hurricane Sandy on thecustomers and operations of many financial institutions and will provideregulatory assistance to affected institutions subject to their supervision.The Recovery andMonetary PolicyWilliam C. Dudley, President and Chief Executive OfficerConflicts of Interest and Risk GovernanceCarlo V. di FlorioDirector, Office of Compliance Inspections andExaminationsNational Society of Compliance Professionals _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  6. 6. Page |6Commission WorkProgramme 2013“Todays absolute imperative is totackle the economic crisis and put the EU back on the road to sustainablegrowth”.Feedback on commentsreceived from stakeholders to the EBA, EIOPA and ESMA’sJoint Consultation PaperOn its proposed response to the European Commission’s Call for Adviceon the Fundamental Review of the Financial Conglomerates DirectiveFinancial crime: a guide for firmsPart 1: A firm’s guide to preventing financialcrimeThis Guide consolidates FSA guidance onfinancial crime.It does not contain rules and its contents are not binding. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  7. 7. Page |7The Irish banking sector – five challengesAddress by Mr Matthew Elderfield, DeputyGovernor of the Central Bank of Ireland, to theAssociation of Compliance Officers in Ireland,University College Cork, CorkFSB releases reports onprogress in implementing theSIFI frameworkThe FSB is releasing three documentson latest steps in implementing the FSB’s policy framework foraddressing the systemic and moral hazard risks associated withsystemically important financial institutions (SIFIs). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  8. 8. Page |8The FSB welcomes the reportof the Enhanced DisclosureTask ForceThe Financial Stability Board (FSB)welcomes the publication of the Reportof the Enhanced Disclosure Task Force(EDTF) and views it as a valuable stepto improve the quality of riskdisclosures.The EDTF’s principles andrecommendations for improved bankrisk disclosures and leading disclosure practices are designed to providetimely information useful to investors and other users, which togetherwith current regulatory developments and standard setterrecommendations can contribute, over time, to improved marketconfidence in financial institutions.The FSB encourages banks to continue to strive to improve riskdisclosures.The EDTF was formed in May at the initiative of the FSB.The task force represents a unique private sector initiative – one thatbrings together on a global basis, senior officials and experts fromfinancial institutions, investors, and audit firms – to developrecommendations for enhancing risk disclosure practices by major banksstarting with end-year 2012 annual risk disclosures and continuing into2013 and beyond.1. BackgroundIt has been five years since the beginning of the financial crisis and thepublic’s trust in financial institutions has yet to be fully restored. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  9. 9. Page |9Investors today are more sensitive to the complexity and opacity of banks’business models and credit spreads for financials remain persistentlyhigher than for similarly-rated corporates.Moreover, in some markets, banks still need significant liquidity supportfrom the public sector.Many banks are now trading at market values below their book values,which is in marked contrast to the past.Investors and other public stakeholders are demanding better access torisk information from banks; information that is more transparent, timelyand comparable across institutions.In response, international regulators and standard setters have taken arange of steps to improve the quality and content of the financialdisclosures of banks, including initiatives by the Financial Stability Board(FSB)1 in 2011 and the Senior Supervisors Group2 in 2008.Banks have also made efforts to improve disclosures, both individuallyand collectively.This report differs in one crucial respect: it has been developed amongprivate sector stakeholders as a joint initiative representing both usersand preparers of financial reports.By bringing together the perspectives of leading global banks, investors,analysts and external auditors, this report seeks to establish a benchmarkfor high-quality risk disclosures, with specific emphasis onenhancements that can be implemented in the short term, particularly in2012 and 2013 annual reports.High-quality risk disclosures should be viewed as a collective public goodgiven the systemic importance of banks and the contingent liability theyrepresent for taxpayers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  10. 10. P a g e | 10Poor quality disclosures can result in higher uncertainty premiums, andthis can undermine the extension of credit needed to supportemployment and productive investments in struggling economies,and affect its price.Disclosures that describe risks and risk management practicestransparently help to build confidence in the firm’s management, which isparticularly important in attracting debt and equity investors and may inturn support higher equity valuations.By enhancing investors’ understanding of banks’ risk exposures and riskmanagement practices, high-quality risk disclosures may reduceuncertainty premiums and contribute to broader financial stability.For well-managed firms, the benefits of proactively enhancing riskdisclosures are clear.2. Objectives and processThe Enhanced Disclosure Task Force (EDTF) was established by theFSB in May 2012 following an FSB roundtable in December 2011 ofeighty-two senior officials and experts from around the world.The roundtable outlined broad goals for improving the quality,comparability and transparency of risk disclosures, while reducingredundant information and streamlining the process for bringing relevantdisclosures to the market quickly.With the goal of improving the risk disclosures of banks and otherfinancial institutions, the primary objectives of the EDTF were to:i. Develop fundamental principles for enhanced risk disclosures;ii. Recommend improvements to current risk disclosures, including waysto enhance their comparability; andiii. Identify examples of best or leading practice risk disclosurespresented by global financial institutions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  11. 11. P a g e | 11Membership of the EDTF had wide geographical representation andincluded senior executives from leading asset management firms,investors and analysts, global banks, credit rating agencies and externalauditors.To organise its work and the resulting recommendations, the EDTFestablished six workstreams reflecting banks’ primary risk areas,and each task force member was allocated to a workstream so that theycomprised both users and preparers of financial reports.The workstreams were as follows:i. risk governance and risk management strategies/business model;ii. capital adequacy and risk-weighted assets;iii. liquidity and funding;iv. market risk;v. credit risk; andvi. other risks.Each workstream analysed current disclosures in its risk area byreviewing a sample of banks’ recent annual and interim reports, Pillar 3reports and other publicly available information, such as media releasesand presentations to investors.On the basis of that analysis, and following extensive discussion amongits members, each workstream developed recommendations forenhancing disclosures in its respective risk area, and presented them tothe EDTF plenary for further consideration.The task force had plenary meetings in London, New York, Singaporeand Frankfurt, and held two additional meetings by telephone. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  12. 12. P a g e | 12During those meetings, the EDTF thoroughly debated and challengedeach recommendation proposed by the workstreams.As a result, the recommendations in this report represent the collectiveviews and expertise of the EDTF membership.Also, at key stages in its work, the Co-chairs of the EDTF engaged indialogue with securities and banking regulators and supervisors,accounting standard-setters, banking associations and other stakeholderorganisations located in Europe, North America, Latin America, theMiddle East and Asia.Minutes of these meetings were circulated to EDTF members and,during the plenary meetings, the Co-chairs gave oral accounts of thesestakeholder organisations’ views on risk disclosure issues, including anyinitiatives underway to address risk disclosure issues.Prior to its finalisation, a draft of the report was circulated by the EDTF tokey stakeholder organisations, including the International BankingFederation and the Institute of International Finance, and feedback wassolicited on its content.Working within the EDTF’s compressed timetable for providingcomments, these international organisations expeditiously distributedthe document to their respective memberships and provided the EDTFwith invaluable feedback.The task force considered the input received from its extensive outreachprogramme as well as the views of the EDTF membership in thedevelopment and finalization of this report.3. Scope and other considerationsScope of the recommendations in this reportThe fundamental principles are applicable to all banks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  13. 13. P a g e | 13However, the EDTF has developed the recommendations for enhancedrisk disclosures with large international banks in mind, although theyshould be equally applicable to banks that actively access the majorpublic equity or debt markets.Some of the recommendations, therefore, are likely to be lessapplicable to smaller banks and subsidiaries of listed banks and theEDTF would expect such entities to adopt only those aspects of therecommendations that are relevant to them.This report was not specifically developed for other types of financialservices organisations, such as insurance companies, though thefundamental principles and recommendations contained herein mayprovide some appropriate guidance.Banks will need to continue to comply with the relevant securities lawsand reporting requirements applicable to their activities, and will alsoneed to assess any relevant confidentiality and other jurisdictional legalissues.In addition, all banks, including the large international ones, will need toassess factors specific to their circumstances such as the materiality, costsand benefits of each recommendation in this report.In making these assessments, banks should consider their users’ needsand expectations and may wish to speak directly to their key stakeholdersas they begin to implement changes.The EDTF acknowledges that existing jurisdictional differences inaccounting and regulatory requirements may affect how banksimplement the recommendations, and may make it difficult to achievefull comparability between banks across jurisdictions.Timing of implementationThe EDTF believes that many of the recommendations can be adopted in2012 or 2013, for example, those that involve only the re-ordering oraggregation of existing disclosures in banks’ reports to enable users to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  14. 14. P a g e | 14find and assimilate information more quickly, or those that are based oninformation that is already reported to management.However, other recommendations may take longer to develop andimplement, particularly where banks need to create new systems andprocesses to ensure that the information required to support theenhanced disclosure is of high quality, and thus the EDTF envisagesenhancements of the risk disclosures of banks continuing after 2013.The EDTF also recognises that banks have other commitments withsimilar timelines, such as implementing Basel II or Basel III and theGlobally Systemically Important Banks (G-SIB) data template.Some of the recommendations are dependent on the finalisation orimplementation of particular regulatory rules and, thus, cannot beadopted until then.Frequency of disclosuresThis report has been produced in the context of the existing legal andregulatory requirements for banks’ public reporting.Banks produce annual reports, which contain audited financialstatements and management commentary (including risk commentary),and interim reports.Some banks also produce preliminary announcements before their annualor interim reports are available.Interim reports and preliminary announcements are intended to provideusers with timely updates on the bank’s last annual report.The recommendations do not suggest changing the requirements forinterim reporting, which vary from market to market.However, the EDTF thinks that several areas in the report should bedisclosed more frequently than in annual reports, and thus that more risk _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  15. 15. P a g e | 15disclosures would be included in interim reports than is currently thecase.Banks should consider whether their interim reports contain relevant riskinformation to support the financial information presented and whethersuch reports provide a sufficient update on top and emerging risks.Location of disclosuresIn making its recommendations, the EDTF generally does not specifywhere any new disclosure should be made, nor does it suggest that bankschange the current location of their reported information when adoptingthe enhancements.Banks should retain flexibility in what they choose to disclose in theirannual reports and other filings, such as their Pillar 3 reports.However, the EDTF expects many of the detailed regulatory capitaldisclosures will remain in or will be added to the Pillar 3 report.Consistent with the FSB’s recommendation in 2011, the task forceadvocates, as part of the fundamental principles, that annual reports andPillar 3 reports should be published at the same time, and believes thatthis would provide users with complete and timely reporting across thekey areas of interest.It is not the intention of this report to create a checklist of all possible riskdisclosures or to reproduce existing disclosure requirements set forth inaccounting and regulatory standards.Banks will need to assess the recommendations in this report in the lightof how they apply the existing disclosure requirements in theirjurisdictions.Indeed, those extensive existing requirements may contribute to bothpreparers’ views that financial reporting is a compliance exercise andusers’ difficulties in navigating long annual reports. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  16. 16. P a g e | 16This can be a particular concern for international banks that must meetvarying and sometimes overlapping disclosure requirements in differentjurisdictions.As a result, some banks may question whether the benefits of increasedtransparency justify the additional investment in resources, managementattention and the potential risks involved in making forward-lookingstatements.This report addresses these concerns by recommending ways for banks tocommunicate important disclosures to users more effectively andefficiently.4. Fundamental principles for risk disclosureThe EDTF has collectively identified seven principles for enhancing riskdisclosures, which both underpin the recommendations set out in thisreport and provide an enduring framework for future work on riskdisclosures.These principles provide a firm foundation from which to achievetransparent, high-quality risk disclosures that enable users to understandin an integrated manner a bank’s7 business and its risks, and the resultanteffects on its performance and financial position.The seven fundamental principles for enhanced risk disclosures are:1. Disclosures should be clear, balanced and understandable.2. Disclosures should be comprehensive and include all of the bank’s keyactivities and risks.3. Disclosures should present relevant information.4. Disclosures should reflect how the bank manages its risks.5. Disclosures should be consistent over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  17. 17. P a g e | 176. Disclosures should be comparable among banks.7. Disclosures should be provided on a timely basis.Principle 1: Disclosures should be clear, balanced andunderstandable.- Disclosures should be written with the objective of communicating information to a range of users (i.e. investors, analysts and other stakeholders) rather than simply complying with minimum requirements. The disclosures should be sufficiently granular to benefit sophisticated users but should also provide summarised information for those who are less specialised, along with clear signposting to enable navigation through the information. Disclosures should be organised so that key information and messages are prioritised and easy to find.- There should be an appropriate balance between qualitative and quantitative disclosures, using text, numbers and graphical presentations. Fair and balanced narrative explanations should provide insight into the implications of the quantitative disclosures and any changes or developments that they portray.- Disclosures should provide straightforward explanations for more complex issues. Descriptions and terms should fairly represent the substance of the bank’s activities. Terms used in the disclosures should be explained or defined. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  18. 18. P a g e | 18Principle 2: Disclosures should be comprehensive and includeall of the bank’s key activities and risks.- Disclosures should provide an overview of the bank’s activities and its key risks. They should include a description of how the bank identifies, measures, manages and reports each risk, highlighting any significant internal or external changes during the reporting period and the key actions taken by management in response.- Disclosures should include informative explanations of important processes and procedures – as well as underlying cultures and behaviours – that affect the bank’s business and its risk generation or risk management. Disclosures of such items should enable users to obtain an understanding of the bank’s risk management operations and the related governance by the bank’s board and senior management.- When appropriate and meaningful, disclosures should be complemented with information about key underlying assumptions and sensitivity or scenario analysis. Such analysis should demonstrate the effect on selected risk metrics or exposures of changes in the key underlying assumptions, both in qualitative and quantitative terms.Principle 3: Disclosures should present relevant information.- The bank should provide disclosures only if they are material and reflect its activities and risks – and can be prepared without unreasonable cost. Accordingly, disclosures should be eliminated if they are immaterial or redundant. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  19. 19. P a g e | 19 Disclosing immaterial information or information on situations that do not apply to the bank reduces the relevance of its disclosures and undermines the ability of users to understand them. However, when exposures receiving significant current market attention are either immaterial or nonexistent, the bank should acknowledge this fact to reduce uncertainty among users. Moreover, banks should avoid generic or boilerplate disclosures that do not add value or do not communicate useful information.- Disclosures should be presented in sufficient detail to enable users to understand the nature and extent of the bank’s risks. Where period-end information may not be representative of the risks, consideration should be given to providing averages and high and low balances during the period. The type of information, the way in which it is presented and the accompanying explanatory notes will differ between banks and will change over time, but information should be reported at the level of detail that users need in order to understand the bank, its risk appetite, its exposures and the manner in which it manages its business and risks, including in stress conditions.- The bank should explain its business model to provide context for its business and risk disclosures. In many cases, disclosures will focus on the consolidated group. However, understanding the risks relative to returns embedded in key operating subsidiaries and business divisions – and the way that risks are shared or assets, liabilities, income and costs are allocated across the group – can be key to users’ understanding of the risks to which the group is exposed. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  20. 20. P a g e | 20Principle 4: Disclosures should reflect how the bank manages itsrisks.- Disclosures should be based on the information that is used for internal strategic decision making and risk management by key management, the board and the board’s risk committee. Approaches to disclosure should be sufficiently flexible to allow banks to reflect their particular circumstances in both narrative and quantitative terms.- The bank should explain the risk and reward profile of its activities. Disclosures should be representative of risk exposures during the period, as well as at the end of the period.- If disclosure of particularly commercially sensitive or otherwise confidential information would unduly expose the bank to litigation or other risks, the level of information provided will need to balance confidentiality and materiality. If material, a bank should assess what information should be provided to ensure users are aware of important issues without disclosing potentially damaging confidential details.Principle 5: Disclosures should be consistent over time.- Disclosures should be consistent over time to enable users to understand the evolution of the bank’s business, risk profile and management practices. Core disclosures should not change dramatically but should evolve over time, allowing for inter-period comparisons.- Changes in disclosures and related approaches or formats (e.g. due to changes in risk practices, emerging risks, measurement methodologies or accounting or regulatory requirements) should be clearly highlighted and explained. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  21. 21. P a g e | 21 Presenting comparative information is helpful; however, in some situations it may be preferable to include a new disclosure even if comparative information cannot be prepared or restated.Principle 6: Disclosures should be comparable among banks.- Disclosures should be sufficiently detailed to enable users to perform meaningful comparisons of businesses and risks between different banks, including across various national regulatory regimes. Disclosures that facilitate users’ understanding of the bank’s exposures compared with its competitors are of particular importance in building users’ understanding and confidence as well as reducing the risk of inappropriate comparisons.Principle 7: Disclosures should be provided on a timely basis.- Information should be delivered to users in a timely manner using appropriate media (e.g. annual and interim reports, websites, news releases, or regulatory reports). The bank should seek to release to the market all relevant and important risk-based information at the same time (e.g. the annual report and Pillar 3 disclosures). Equally important are regular updates of financial information; users need more frequent updates than just the annual report. This can be accomplished through various means and media; thus banks should endeavour to provide frequent updates to their users to ensure financial information remains up to date.The EDTF acknowledges that in some cases there will be tensionbetween two or more fundamental principles.For example, under Principles 4 and 5, disclosures are most useful if theyprovide information that reflects how the bank manages its risks and areconsistent over time while, under Principle 6, disclosures should enable _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  22. 22. P a g e | 22users to perform meaningful comparisons between banks. Similarly, therecan be tension within a single principle.For example, Principle 1 states that disclosures should be clear, balancedand understandable, but users have differing views on the level of detailthat is needed to achieve that objective.Even sophisticated users find that some granular disclosures, which maybe provided to comply with particular regulatory or accountingrequirements, are difficult to use or understand unless they areaccompanied by summarised information.Tension may also arise if investors seek information that is toocommercially sensitive for banks to disclose.The EDTF believes that these tensions do not reflect a fault or weaknessin the fundamental principles but are inevitable given the varying, andsometimes competing, needs of users, preparers and regulators.Banks should endeavour, both individually and collectively, to find anappropriate balance among the principles, and indeed within particularprinciples, without creating excessive disclosures that will overwhelmusers.Users should provide ongoing feedback to banks about whether they areachieving an appropriate balance.It is acknowledged that the applications of the principles will differbetween risk areas and may change over time.The aim of the fundamental principles, and the recommendations thatfollow from them, is to address investors’ concerns about the quality andtransparency of banks’ disclosures.However, users already have considerable knowledge of topics such asgeneral business risks, finance and current economic conditions, and abank’s disclosures are not the sole source of information available tothem. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  23. 23. P a g e | 23This report builds on that existing knowledge and information, and seeksto avoid developing disclosures that would duplicate information thatshould already be known, apparent or readily accessible from othersources.5. Recommendations for enhancing risk disclosuresThe EDTF has identified the following recommendations for enhancingrisk disclosures.Additionally, there are eight examples in the appendix to this section thatillustrate how particular recommendations could be adopted to produceclear and understandable disclosures.Section 6 provides additional commentary that expands on theserecommendations.General1: Present all related risk information together in any particular report.Where this is not practicable, provide an index or an aid to navigation tohelp users locate risk disclosures within the bank’s reports.2: Define the bank’s risk terminology and risk measures and present keyparameter values used.3: Describe and discuss top and emerging risks, incorporating relevantinformation in the bank’s external reports on a timely basis.This should include quantitative disclosures, if possible, and a discussionof any changes in those risk exposures during the reportingperiod.4: Once the applicable rules are finalised, outline plans to meet each newkey regulatory ratio, e.g. the net stable funding ratio, liquidity coverage _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  24. 24. P a g e | 24ratio and leverage ratio and, once the applicable rules are in force, providesuch key ratios.Risk governance and risk management strategies/businessmodel5: Summarise prominently the bank’s risk management organisation,processes and key functions.6: Provide a description of the bank’s risk culture, and how proceduresand strategies are applied to support the culture.7: Describe the key risks that arise from the bank’s business models andactivities, the bank’s risk appetite in the context of its business modelsand how the bank manages such risks.This is to enable users to understand how business activities are reflectedin the bank’s risk measures and how those risk measures relate to lineitems in the balance sheet and income statement.8: Describe the use of stress testing within the bank’s risk governance andcapital frameworks.Stress testing disclosures should provide a narrative overview of thebank’s internal stress testing process and governance.Capital adequacy and risk-weighted assets9: Provide minimum Pillar 1 capital requirements, including capitalsurcharges for G-SIBs and the application of counter-cyclical and capitalconservation buffers or the minimum internal ratio established bymanagement.10: Summarise information contained in the composition of capitaltemplates adopted by the Basel Committee to provide an overview of themain components of capital, including capital instruments and regulatoryadjustments. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  25. 25. P a g e | 25A reconciliation of the accounting balance sheet to the regulatory balancesheet should be disclosed.11: Present a flow statement of movements since the prior reporting datein regulatory capital, including changes in common equity tier 1, tier 1and tier 2 capital.12: Qualitatively and quantitatively discuss capital planning within a moregeneral discussion of management’s strategic planning, including adescription of management’s view of the required or targeted level ofcapital and how this will be established.13: Provide granular information to explain how risk-weighted assets(RWAs) relate to business activities and related risks.14: Present a table showing the capital requirements for each methodused for calculating RWAs for credit risk, including counterparty creditrisk, for each Basel asset class as well as for major portfolios within thoseclasses.For market risk and operational risk, present a table showing the capitalrequirements for each method used for calculating them.Disclosures should be accompanied by additional information aboutsignificant models used, e.g. data periods, downturn parameterthresholds and methodology for calculating loss given default (LGD).15: Tabulate credit risk in the banking book showing average probabilityof default (PD) and LGD as well as exposure at default (EAD), totalRWAs and RWA density for Basel asset classes and major portfolioswithin the Basel asset classes at a suitable level of granularity based oninternal ratings grades.For non-retail banking book credit portfolios, internal ratings grades andPD bands should be mapped against external credit ratings and thenumber of PD bands presented should match the number ofnotch -specific ratings used by credit rating agencies. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  26. 26. P a g e | 2616: Present a flow statement that reconciles movements in RWAs for theperiod for each RWA risk type.17: Provide a narrative putting Basel Pillar 3 back-testing requirementsinto context, including how the bank has assessed model performanceand validated its models against default and loss.Liquidity18: Describe how the bank manages its potential liquidity needs andprovide a quantitative analysis of the components of the liquidity reserveheld to meet these needs, ideally by providing averages as well asperiod-end balances.The description should be complemented by an explanation of possiblelimitations on the use of the liquidity reserve maintained in any materialsubsidiary or currency.Funding19: Summarise encumbered and unencumbered assets in a tabular formatby balance sheet categories, including collateral received that can berehypothecated or otherwise redeployed.This is to facilitate an understanding of available and unrestricted assetsto support potential funding and collateral needs.20: Tabulate consolidated total assets, liabilities and off-balance sheetcommitments by remaining contractual maturity at the balance sheetdate.Present separately(i) Senior unsecured borrowing(ii) Senior secured borrowing (separately for covered bonds and repos)and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  27. 27. P a g e | 27(iii) Subordinated borrowing.Banks should provide a narrative discussion of management’s approachto determining the behavioural characteristics of financial assets andliabilities.21: Discuss the bank’s funding strategy, including key sources and anyfunding concentrations, to enable effective insight into available fundingsources, reliance on wholesale funding, any geographical or currencyrisks and changes in those sources over time.Market risk22: Provide information that facilitates users’ understanding of thelinkages between line items in the balance sheet and the incomestatement with positions included in the traded market risk disclosures(using the bank’s primary risk management measures such as Value atRisk (VaR)) and non-traded market risk disclosures such as risk factorsensitivities, economic value and earnings scenarios and/or sensitivities.23: Provide further qualitative and quantitative breakdowns of significanttrading and nontrading market risk factors that may be relevant to thebank’s portfolios beyond interest rates, foreign exchange, commodity andequity measures.24: Provide qualitative and quantitative disclosures that describesignificant market risk measurement model limitations, assumptions,validation procedures, use of proxies, changes in risk measures andmodels through time and descriptions of the reasons for back-testingexceptions, and how these results are used to enhance the parameters ofthe model.25: Provide a description of the primary risk management techniquesemployed by the bank to measure and assess the risk of loss beyondreported risk measures and parameters, such as VaR, earnings oreconomic value scenario results, through methods such as stress tests,expected shortfall, economic capital, scenario analysis, stressed VaR orother alternative approaches. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  28. 28. P a g e | 28The disclosure should discuss how market liquidity horizons areconsidered and applied within such measures.Credit risk26: Provide information that facilitates users’ understanding of the bank’scredit risk profile, including any significant credit risk concentrations.This should include a quantitative summary of aggregate credit riskexposures that reconciles to the balance sheet, including detailed tablesfor both retail and corporate portfolios that segments them by relevantfactors.The disclosure should also incorporate credit risk likely to arise fromoffbalance sheet commitments by type.27: Describe the policies for identifying impaired or non-performingloans, including how the bank defines impaired or non-performing,restructured and returned-to-performing (cured) loans as well asexplanations of loan forbearance policies.28: Provide a reconciliation of the opening and closing balances ofnon-performing or impaired loans in the period and the allowance forloan losses.Disclosures should include an explanation of the effects of loanacquisitions on ratio trends, and qualitative and quantitative informationabout restructured loans.29: Provide a quantitative and qualitative analysis of the bank’scounterparty credit risk that arises from its derivatives transactions.This should quantify notional derivatives exposure, including whetherderivatives are over-the-counter (OTC) or traded on recognisedexchanges. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  29. 29. P a g e | 29Where the derivatives are OTC, the disclosure should quantify how muchis settled by central counterparties and how much is not, as well asprovide a description of collateral agreements.30: Provide qualitative information on credit risk mitigation, includingcollateral held for all sources of credit risk and quantitative informationwhere meaningful.Collateral disclosures should be sufficiently detailed to allow anassessment of the quality of collateral.Disclosures should also discuss the use of mitigants to manage credit riskarising from market risk exposures (i.e. the management of the impact ofmarket risk on derivatives counterparty risk) and single nameconcentrations.Other risks31: Describe ‘other risk’ types based on management’s classifications anddiscuss how each one is identified, governed, measured and managed. Inaddition to risks such as operational risk, reputational risk, fraud risk andlegal risk, it may be relevant to include topical risks such as businesscontinuity, regulatory compliance, technology, and outsourcing.32: Discuss publicly known risk events related to other risks, includingoperational, regulatory compliance and legal risks, where material orpotentially material loss events have occurred.Such disclosures should concentrate on the effect on the business, thelessons learned and the resulting changes to risk processes alreadyimplemented or in progress.Appendix to Section 5The following appendix includes eight examples of possible disclosureformats to assist banks in adopting the recommendations in this report. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  30. 30. P a g e | 30These examples reflect instances where investors have suggested thatconsistent tabular presentation is particularly important to improvingtheir understanding of the disclosed information and facilitatingcomparability among banks.All numbers included in the Figures are for illustrative purposes.It is understood that differing business models, reporting regimes andmateriality will affect how banks provide such information. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  31. 31. P a g e | 31 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  32. 32. P a g e | 32Core Tier 1 (CET1) CapitalIn addition to those items illustrated on the previous page, the line item‘other, including regulatory adjustments and transitional arrangements’may include (as per applicable regime):- common share capital issued by subsidiaries and held by third parties;- other movements in shareholders’ equity;- reserves arising from property revaluation;- defined benefit pension fund adjustment;- cash flow hedging reserve;- shortfall of provisions to expected losses;- securitisation positions;- investments in own CET1;- reciprocal cross-holdings in CET1;- investments in the capital of unconsolidated entities (less than 10%);- significant investments in the capital of unconsolidated entities (amount above 10% threshold);- mortgage servicing rights (amount above 10% threshold);- deferred tax assets arising from temporary differences (amount above 10% threshold);- amounts exceeding 15% threshold; and- regulatory adjustments applied due to insufficient additional tier 1. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  33. 33. P a g e | 33Other ‘non-core’ tier 1 (additional tier 1) capitalThe line item ‘other, including regulatory adjustments and transitionalarrangements’ may include (as per applicable regime):- other ‘non-core’ tier 1 capital (additional tier 1) instruments issued by subsidiaries and held by third parties;- unconsolidated investments deductions;- investments in own additional tier 1 instruments;- reciprocal cross-holdings;- significant investments in the capital of unconsolidated entities;- other investments in the capital of unconsolidated entities;- grandfathering adjustments;- regulatory adjustments applied due to insufficient tier 2 capital; and- currency translation differences.Tier 2 CapitalThe line item ‘other, including regulatory adjustments and transitionalarrangements’ may include (as per applicable regime):- tier 2 capital instruments issued by subsidiaries and held by third parties;- unconsolidated investments deductions;- investments in own tier 2 instruments;- reciprocal cross-holdings; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  34. 34. P a g e | 34- significant investments in the capital of unconsolidated entities;- other investments in the capital of unconsolidated entities;- collective impairment allowances;- grandfathering adjustments; and- currency translation differences. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  35. 35. P a g e | 35 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  36. 36. P a g e | 366. Additional commentary on areas identified for enhanced riskDisclosuresThis section describes the EDTF’s views on current risk disclosurepractices, recognizing areas of leading practice and those which could beenhanced.The section also reproduces the recommendations and providesadditional explanatory guidance designed to place them in context andhighlight their importance to users.Banks will need to continue to comply with securities laws and reportingrequirements relevant to their operations to ensure that they are not _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  37. 37. P a g e | 37breached, and assess appropriate confidentiality and other jurisdictionallegal issues, particularly where the disclosure of commercially sensitiveinformation would threaten a bank’s stability or possess the potential togive rise to systemic risk.They will also wish to consider factors specific to their circumstancessuch as the materiality, costs and benefits of disclosures.The additional commentary accords with the fundamental principles andexpands on the recommendations set out in Section 5 of this report.The enhanced disclosures emphasise relevance, consistency orcomparability, depending on the importance of the principle to aparticular area.Users need to understand how the bank manages risk and be able tomake comparisons over time and between reporting organisations.The EDTF recognises that differences in regulatory and accountingrequirements in different jurisdictions may make it difficult to achievecomparability and it will take time to improve this, but it remains an aimof enhanced disclosures.The EDTF’s recommendations are organised within the following sevenbroad risk areas, which are the major categories of risk for banks:6.1 risk governance and risk management strategies/business model;6.2 capital adequacy and risk-weighted assets;6.3 liquidity;6.4 funding;6.5 market risk;6.6 credit risk; and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  38. 38. P a g e | 386.7 other risks.Many of these risk areas are inter-related. For example, reputational riskmay be addressed as part of ‘other risks’ but may also be a key driver ofrisk governance. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  39. 39. P a g e | 39Report to G20Finance Ministersand Central BankGovernors onBasel IIIimplementationIntroduction and summaryThe G20 Leaders met in Los Cabos in June 2012. At this Summit, theyendorsed the work of the Basel Committee on Banking Supervision inmonitoring the global implementation of its standards, and urgedjurisdictions to meet their commitments.“We welcome progress in implementing Basel II, 2.5 and III and urgejurisdictions to fully implement the standards according to the agreedtimelines.”This report updates the G20 Finance Ministers and Central BankGovernors on the progress made by Basel Committee memberjurisdictions in implementing the Basel III standards (including Basel IIand Basel 2.5, which now form integral parts of Basel III).It also highlights specific areas that require attention if the goal ofachieving timely and consistent implementation is to be achieved.The Basel Committee believes that full, timely and consistentimplementation of Basel III by its members is essential for restoringconfidence in the regulatory framework for banks and to help ensure asafe and stable global banking system.The transitional phase for implementing the Basel III packagecommences on 1 January 2013, by when all jurisdictions should have inplace the necessary regulations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  40. 40. P a g e | 40At the time of this report, eight of the 27 member jurisdictions of the BaselCommittee have issued their final set of Basel III related regulations, 17members have published draft regulations, and two members arecurrently in the process of drafting regulations but have not yet publishedthem.Given their commitment, and the fact that the transitional date is apublically announced one, it is especially important that memberjurisdictions that are home to global systemically important banks(G-SIBs) make every effort to issue final regulations as soon as possible inorder to meet the transition period deadline.To facilitate proper implementation and follow up, the Basel Committeehas begun to assess the consistency of these regulations and progresswith implementation against 14 core elements of the Basel framework.As a first step, the Committee conducted detailed assessments of thecontent and substance of the final regulations implementing the Basel IIIpackage in Japan, and the draft regulations in the European Union andthe United States.While noting implementation progress in all three jurisdictions, theassessments have identified areas of divergence from the globally agreedBasel standards.In the case of Japan, no material deviations were observed and thejurisdiction is assessed overall as “compliant.”In the European Union and the United States, 4 there were a fewdeviations in the draft regulations that were assessed to be of a materialnature (for securitisation related regulations in the United States, and forregulations covering the definition of capital and the internalratings-based (IRB) approach in the European Union).All other elements in both jurisdictions were either “compliant” or“largely compliant.” _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  41. 41. P a g e | 41Given the importance of making the banking system more resilient, it isessential that the Basel framework is implemented consistently andaccording to the globally-agreed timelines.The Basel Committee therefore urges the G20 Finance Ministers andCentral Bank Governors to call on(i) All Basel Committee jurisdictions to meet the globally agreeddeadline;(ii) The European and United States authorities, and others who undergoa Basel Committee regulatory consistency assessment, to close anyidentified gaps between their regulations and Basel III and;(iii) All jurisdictions to ensure their implementation of Basel III remainstimely and consistent with the internationally agreed package of reforms.The Basel Committee also continues to perform detailed analysis of thevariations in risk-weighted assets across banks, across jurisdictions andover time, both for assets in the banking book and in the trading book.This report includes preliminary conclusions of this analysis.More detailed assessment reports, potentially including policyrecommendations, where appropriate, will be considered by theCommittee later in 2012 and in early 2013.Basel standardsIn June 2004, a package of reforms known as Basel II introduced morerisk-sensitive minimum capital requirements for banks, including anenhanced measurement of credit risk, and capture of operational risk.Basel II also reinforced the requirements by setting out principles forbanks to assess the adequacy of their capital and for supervisors to reviewsuch assessments to ensure banks have the necessary capital to supporttheir risks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  42. 42. P a g e | 42It also strengthened market discipline by enhancing disclosurerequirements.The deadline for implementation of the Basel II framework by memberjurisdictions was the end of 2006.In July 2009, the Committee introduced enhancements to the Basel IIframework in response to lessons from the financial crisis.These reforms, referred to as Basel 2.5, relate to the measurement of risksfor calculating regulatory capital for securitisation and trading bookexposures (Pillar 1), risk management and supervisory review (Pillar 2)and disclosure (Pillar 3).A deadline for implementing these reforms was set for end 2011.In December 2010, the Basel Committee published Basel III, acomprehensive set of reforms to raise the resilience of banks,supplementing Basel II and 2.5 in a number of dimensions.Basel III addresses both firm-specific and broader, systemic risks by:• Raising the quality of capital, with a focus on common equity, and thequantity of capital to ensure banks are better able to absorb losses;• Enhancing the coverage of risk, in particular for capital marketactivities;• Introducing capital buffers which should be built up in good times sothat they can be drawn down during periods of stress;• Introducing an internationally harmonised leverage ratio to serve as abackstop to the risk-based capital measure and to contain the build-up ofexcessive leverage in the system;• Introducing minimum global liquidity standards to improve banks’resilience to acute short term stress and to improve longer term funding;and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  43. 43. P a g e | 43• Introducing additional capital buffers for the most systemicallyimportant institutions to address the issue of “too big to fail.”The implementation period for Basel III capital requirements starts from1 January 2013 and includes transitional arrangements until 1 January2019.The transitional arrangements are available to give banks time to meetthe higher standards, while still supporting lending to the economy.The liquidity requirements, leverage ratio and systemic surcharges comeinto force in a phased approach starting from 2015.The implementation of these rules will, therefore, be assessed later6 andare not covered in this report.Design of the Committee’s Basel III Implementation ReviewProgrammeIn January 2012, the Group of Central Bank Governors and Heads ofSupervision (GHOS), the Basel Committee’s oversight body, endorsedthe comprehensive process proposed by the Committee to monitormembers’ implementation of Basel III.The process consists of the following three levels of review:• Level 1: ensuring the timely adoption of Basel III;• Level 2: ensuring regulatory consistency with Basel III; and• Level 3: ensuring consistency of outcomes (initially focusing onrisk-weighted assets).The Basel Committee has published three “Level 1” progress reports.It has completed a “Level 2” review of Japan, and has releasedpreliminary reports on the European Union and the United States. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  44. 44. P a g e | 44In addition, it has commenced an assessment of Singapore.The Committee’s “Level 3” reviews are conducting detailed assessmentsof banks’ models to compute capital charges for the banking and tradingbook, based on test portfolios, information obtained from questionnairesand visits to individual banks.The Basel Committee has worked in close collaboration with theFinancial Stability Board, (FSB) given the FSB’s role in coordinating themonitoring of implementation of regulatory reforms.The Committee designed its programme to be consistent with the FSB’sCoordination Framework for Monitoring the Implementation ofFinancial Reforms (CFIM) agreed by the G20.The objectives and the process of each of the three levels of review are asfollows.Level 1: Timely adoption of Basel IIIThe objective of the “Level 1” assessment is to ensure that Basel III istransformed into domestic regulations according to the agreedinternational timelines.It does not include the review of the content or substance of the domesticrules.Each Basel Committee member jurisdiction’s status is reported in asimple table.Separately, the Financial Stability Institute (FSI) of the Bank forInternational Settlements is surveying non-Basel Committee membercountries and has published the results. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  45. 45. P a g e | 45Level 2: Regulatory consistencyThe objective of the “Level 2” assessments is to ensure compliance ofdomestic regulations with the international minimum requirements.The Level 2 assessments are conducted by teams of 6-7 specialists with adiverse range of technical skills from independent jurisdictions.The reviews take place over a period of six months and include a detailedself-assessment, on-site visits and an assessment of the materiality ofdivergences.Multiple layers of cross-checking and peer review exist to ensure a fairand rigorous process and consistent treatment across reviews.All Basel Committee members will be assessed over time.The Committee decided to prioritise its reviews, focusing first on thehome jurisdictions of global systemically important banks (G-SIBs).The first three reviews of the draft regulations in the European Union andthe United States, and final rules in Japan have been concluded inSeptember and the reports are available on the BIS website.Level 3: Risk-weighted assets consistencyThe objective of the “Level 3” assessments is to ensure that the outcomesof the rules are in line with the intended policy objectives in practiceacross banks and jurisdictions.It extends the scope of Levels 1 and 2, both of which focus on nationalrules and regulations, to supervisory implementation at the bank level.The Committee has established two expert groups, one for the bankingbook and one for the trading book. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  46. 46. P a g e | 46These groups are identifying and analysing areas of material variabilityand inconsistencies in the calculation of risk-weighted assets (RWAs, orthe denominator of the Basel capital ratio).Depending on the outcome, the work may result in policyrecommendations to address identified inconsistencies.Progress and findings to dateLevel 1Basel II, which was due to come into force from end 2006, has beenimplemented in full by three-quarters of member jurisdictions.Of the five countries that have not yet fully implemented Basel II, two arehome countries of G-SIBs – China and the United States.Both countries are in the process of assessing their banks’ progresstoward meeting all the qualifying criteria for the advanced approaches.The other countries that are still in the process of implementing Basel IIare Argentina, Indonesia and Russia.Basel 2.5, which was due to be implemented by Basel Committeemembers by end 2011, has been implemented by 20 of the 27 memberjurisdictions.China, Saudi Arabia and the United States have issued final regulationsfor Basel 2.5 that come into effect from 1 January 2013.Basel III regulations are due to come into effect from 1 January 2013.While progress can be observed, only eight of the 27 Basel Committeemember jurisdictions have thus far issued final regulations – Australia,China, Hong Kong SAR, India, Japan, Saudi Arabia, Singapore andSwitzerland. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  47. 47. P a g e | 47This means there is now a high probability that just six of the 29 globalsystemically important banks identified by the FSB in November 2011will be subject to Basel III regulations from the globally agreed start date.Level 2The assessment of the European Union analysed the 5th Danishcompromise versions of the Capital Requirements Regulation (CRR) andCapital Requirements Directive (CRD4).The assessment judged 12 of the 14 key components as either“compliant” or “largely compliant”.A “materially non-compliant” rating was assigned in two areas:Definition of capital and internal ratings-based (IRB) approach to creditrisk.The review identified a number of areas of material (or potentiallymaterial) deviation in the draft regulations relating to the definition ofcapital, which are described in more detail in the report.For IRB credit risk, the material finding relates to the “permanent partialuse” which allows IRB banks to risk-weight sovereign exposuresaccording to the standardised approach (eg subject those claimsdenominated and funded in local currency to a 0% risk weight).A subsequent review will take place on the final regulations onceavailable.It should be noted that the European Commission disagrees with theseconclusions and believes that the findings overstate the degree ofdivergence from the Basel standards and that the section gradings havenot been assigned consistently across jurisdictions.The assessment of Japan was based on final regulations that will comeinto force from end March 2013 in line with the end of the fiscal year inJapan. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  48. 48. P a g e | 48Each of the 13 key components was assessed as either “compliant” or“largely compliant.”For capital buffers (capital conservation and countercyclical), thedomestic rules are not yet in place and hence the finding is “not yetassessed.”The Japanese authorities plan to issue the rules by 2015, ie one year beforethe 2016 deadline.The overall grade of “compliant” is based on three facts/observations(i) The number of gaps is relatively low,(ii) Gaps were found to be non-material, both in isolation and inaggregate, and(iii) The review recognised secondary legislation as generally binding.The assessment of the United States was based on final rulesimplementing advanced approaches, the final rule on market risk andthree notices of proposed rulemaking (NPRs) issued in June 2012.The assessment has highlighted the overarching issue of prolongedparallel run for banks on the advanced IRB and the advancedmeasurement approach (AMA), the only available options for credit andoperational risk in the United States.At the time of the report, none of the core US banks had receivedpermission to exit the transitional parallel run.As a result, US banks continue to determine their capital requirementsbased primarily on the Basel I framework, and the review noted there islittle incentive for some core banks to move onto the more advancedapproaches.The US assessment team judged 12 of the 13 key components as“compliant” or “largely compliant”. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  49. 49. P a g e | 49A “materially non-compliant” rating was assigned to securitisationexposures.It was noted that the US regulatory agencies’ proposed implementationmust conform with the prohibition on the use of external credit ratings, asrequired by the Dodd-Frank Act.The US authorities were unable to demonstrate that their alternativeformulation of the rules would not result in weaker capital requirementsthan the Basel requirements.This will be subject to further follow-up analysis once final rules are inplace.The US authorities believe that the US implementation of securitisation islikely to be at least as robust as the Basel standards.Level 3Analysis of risk-weighted assets in the banking bookThe Committee is also evaluating sources of material differences inrisk-weighted assets (RWAs) across banks in the banking book.The Committee is assessing the extent to which differences in credit riskparameters based on the IRB approach for credit risk are driven bydifferences in risk levels or differences in practices – in the latter case theCommittee will discuss whether the variations are consistent withrelevant Basel standards.Review of existing studiesThe Committee has reviewed a wide range of existing analyses of RWAsacross banks and countries to assess methodologies and identify possibledrivers of RWA differences.The various studies highlighted many potential drivers, most of whichsuggested that RWA differences are driven by both risk-based and _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  50. 50. P a g e | 50practice-based factors, although the relative focus on different driversvary and no study could pinpoint the definitive causes of RWAdifferences.The review highlighted important lessons for the Committee’s ownanalytical work:• There is a need to carry out both top-down and bottom-up analyseswhile recognising the limitations of each method;• Better analysis would be facilitated by using more complete (includingnon-public) data sources, and by collecting new and better data directlyfrom selected banks; and• An assessment of differences in specific practices by banks, nationalsupervisors, and other sources such as accounting standards authoritiescan help better identify and understand ultimate drivers of RWAdifferences.Top-down analysisDrawing on these lessons, the Committee is undertaking furthertop-down analysis using supervisory data collected by the Committee aspart of ongoing capital monitoring.The analysis covers 56 large, internationally active banking organisationsand 44 non-internationally active banking organisations in 15jurisdictions.Preliminary findings indicate that corporate and retail exposures are thelargest contributors to credit RWA and show the greatest variability inportfolio risk-weights across banks and countries.Risk-weights for bank and sovereign exposures may vary significantlyacross banks as well, but these asset classes are less significantcontributors to credit RWA variations because of their low absoluterisk-weights. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  51. 51. P a g e | 51Probability of default (PD) appears to be a significant source of RWAvariability for the corporate, bank and sovereign asset classes.Loss given default (LGD) appears to be the more important riskparameter for the retail asset class, although LGD also is an importantcontributor to RWA variability for corporates.Bottom-up portfolio benchmarkingThe Committee is also conducting a bottom-up portfolio benchmarkingexercise using a test portfolio of common exposures to supplement itstop-down analysis.Thirty-three banks from 13 jurisdictions participated in the exercise byreporting PD and LGD estimates for a set of sovereign, bank, andcorporate exposures.The data submitted by the banks is being reviewed to assess thevariability of PD and LGD estimates across banks for common obligorsand exposures.Range of practices and on-site visitsRecognising the importance of overlaying the analytical work with anassessment of differences in bank and regulatory practices, theCommittee has developed a list of potentially important practice-baseddrivers of RWA differences.This work draws on existing supervisory knowledge and judgement of thesignificance and prevalence of different practices.Based on this initial list of drivers and taking into account the preliminaryfindings from the top-down analysis, the Committee has identifiedcertain risk measures (like probability of default) as areas where thematicreviews would be fruitful. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  52. 52. P a g e | 52Depending on the results of these thematic reviews as well as thetop-down and bottom-up analytical work, there may be a need to conductmore focused reviews of practices through on-site visits to banks in 2013.Future directionIn early 2013, the Committee expects a final report summarising allfindings regarding the relative importance of various sources and driversof RWA variation, as well as the extent to which RWA differences do or donot reflect underlying differences in risk.Based on the conclusions of the work, the Committee may considerchanges related to reporting and disclosure, as well as possible narrowingof the range of practices in some areas.Finally, the Committee will consider recommendations or options forongoing monitoring and supervisory activities to foster RWA consistencyin the future.Analysis of risk-weighted assets in the trading bookThe Committee is working on completing the analysis of variability ofmarket risk measures across banks.The analysis is primarily based on publicly available information, but alsoconsiders the variability of supervisory data.Furthermore a test portfolio exercise has been undertaken, in which 15large, internationally active banks participated.The Committee expects to publish some results of this analysis by the endof this year.Publicly available information and supervisory dataThe analysis based on publicly available information so far revealsmaterial differences in the ratio of the regulatory measure of market risk _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  53. 53. P a g e | 53(market-risk RWA or mRWA) to total trading assets across the selectedsample.To the extent that such differences are driven by differences in risk taking– for example as a result of differences in business models or tradingstrategies – the variation should not be a cause for concern.An analysis of the composition of trading assets provides some support tothis view, as it shows that banks with a higher ratio of mRWA to totaltrading assets typically have a greater proportion of risky trading assetson the balance sheet, including distressed debt and illiquid equity.However, even after addressing these factors, there remains materialunexplained variation in mRWA across banks.Other possible factors that might explain such a variation are:• Differences in supervisory approaches (such as the timing of Basel 2.5adoption);• Differences in the use of capital add-ons or multipliers;• Methodological choices; or• The degree of reliance of banks on internal model approaches versusstandardised approaches.A key finding is that data available in public information generally doesnot appear sufficient to fully explain the variation in mRWA across banks,nor to explain the variation in mRWA for a single bank over time.Limits to the detail of public disclosure can be explained by banks’ desireto keep their trading strategies and positions private for competitivereasons.However these shortcomings in disclosure make cross-bank comparisondifficult. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  54. 54. P a g e | 54Some banks provide more detailed and useful disclosures than others andminimal guidance across jurisdictions adds to inconsistencies in content.In some jurisdictions, Basel II Pillar 3 reports were not available for theanalysis.The Committee is therefore considering broadening its analysis toinvestigate the utility of consistent supervisory data in explainingdifferences in mRWA.An initial finding is that supervisory data collection, while consistentwithin jurisdictions, is not consistent across jurisdictions.Some jurisdictions collect only limited additional data for supervisorypurposes.It must be noted, however, that in some jurisdictions efforts are underwayto improve the regulatory data collection related to banks’ trading books.These supervisory efforts may suggest options for more consistentpatterns of disclosure across banks.Test portfolio exerciseTo further examine the modelling choices that potentially drivedifferences in mRWA, the Committee conducted a test portfolio exercise.The test portfolios and accompanying questionnaires were designed tocover a range of trading portfolios and trading strategies, which closelyrepresented but were generally less complex than banks’ actual portfoliosand trading strategies.A total of 15 large, internationally active banks from nine jurisdictionsparticipated in the exercise.The participating banks calculated for each hypothetical test portfolio theoutcome of their internally modelled risk measures and provided detailed _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  55. 55. P a g e | 55information regarding their modelling assumptions throughsupplemental questionnaires.This allowed the Committee to identify modelling choices that drivepotential variation in mRWA.To investigate the results in more detail, a programme of on-site visitswas initiated in which 9 participating banks were visited by internationalteams of supervisors.The objective of the visits was to gain further understanding of the marketrisk models that the banks use and to investigate in more detail the causesof variability identified across banks.The initial results from the test portfolio exercise suggest there isgenerally less variability observed for internal models that have been inuse for a long time.In addition, the variability is generally less for models where there aremore regulatory constraints.Next stepsThe Committee will further elaborate on the initial findings and possiblepolicy options.Regarding the analysis of public data, one expectation of the outcome ofthis exercise could be suggestions related to improvements in publicdisclosures for mRWA calculations.With regard to the analysis of the test portfolio exercise, a finalquantification of the level of variability of each internal model for eachportfolio in the exercise is expected.The findings will also serve as input for the Committee’s currentfundamental review of the trading book. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  56. 56. P a g e | 56The analysis suggests that there is a direct relationship betweencomplexity of risk metric/product and the associated variability of themetric across banks.The current test portfolio exercise was based on a set of plain vanillaportfolios and excluded the most complex market risk models that areused by banks.The Committee believes it is important to consider more complexproducts and models in a future exercise. A follow-up test portfolioexercise including more complex portfolios is therefore being consideredfor 2013.Further workLevel 1The Committee will continue to publish progress reports every sixmonths.The next report will be published in April 2013 showing the position as atend March 2013.Level 2A Level 2 assessment of Singapore is underway and the report will bepublished in April 2013.A review of Switzerland will commence in early 2013 followed by China inthe second quarter.Reviews of Australia, Brazil and Canada will commence in the secondhalf of 2013.Follow-up reviews of the European Union and the United States willcommence after final regulations are published and will cover the finalrules in their entirety. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  57. 57. P a g e | 57The reviews will assess whether identified gaps have been rectified butwill also check for issues that were not present in the draft regulations.At present, the Committee is conducting a “lessons learnt” review toreflect on the experience of the first three Level 2 reviews.Level 3Findings of the Level 3 assessments for the banking book and tradingbook will be reported to the Committee around the end of 2012 or early2013. Further analysis will be conducted in 2013, and, subject to decisionsat a later stage, will continue on an ongoing basis.Further policy development work may be necessary to address thefindings. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  58. 58. P a g e | 58 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  59. 59. P a g e | 59 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  60. 60. P a g e | 60 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  61. 61. P a g e | 61 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  62. 62. P a g e | 62 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  63. 63. P a g e | 63 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  64. 64. P a g e | 64Agencies Issue Statement onSupervisory Practices RegardingFinancial Institutions andBorrowers Affected by HurricaneSandyWASHINGTON--The Office of theComptroller of the Currency, theBoard of Governors of the FederalReserve System, and the Federal Deposit Insurance Corporation (theagencies) recognize the serious impact of Hurricane Sandy on thecustomers and operations of many financial institutions and will provideregulatory assistance to affected institutions subject to their supervision.The agencies encourage institutions in the affected areas to meet thefinancial services needs of their communities.A complete list of the affected disaster areas can be found atwww.fema.gov.Lending: Bankers should work constructively with borrowers incommunities affected by Hurricane Sandy.The agencies realize that the effects of natural disasters on localbusinesses and individuals are often transitory, and prudent efforts toadjust or alter terms on existing loans in affected areas should not besubject to examiner criticism.In supervising institutions affected by the hurricane, the agencies willconsider the unusual circumstances they face.The agencies recognize that efforts to work with borrowers incommunities under stress can be consistent with safe-and-sound bankingpractices as well as in the public interest. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  65. 65. P a g e | 65Community Reinvestment Act (CRA): Financial institutions may receiveCRA consideration for community development loans, investments, orservices that revitalize or stabilize federally designated disaster areas intheir assessment areas or in the states or regions that include theirassessment areas.For additional information, institutions should review the InteragencyQuestions and Answers Regarding Community Reinvestment (PDF).Investments: Bankers should monitor municipal securities and loansaffected by the hurricane. The agencies realize local government projectsmay be negatively affected. Appropriate monitoring and prudent efforts tostabilize such investments are encouraged.Reporting Requirements: Institutions affected by Hurricane Sandy thatexpect to encounter difficulty submitting accurate and timely regulatoryreport data for the September 30, 2012, report date should contact theirprimary federal regulatory agency to discuss their situation.These regulatory reports include the Consolidated Reports of Conditionand Income (Call Report) and holding company Y reports.The agencies do not expect to assess penalties or take other supervisoryaction against institutions that take reasonable and prudent steps tocomply with regulatory reporting requirements if those institutions areunable to fully satisfy those requirements by the specified filing deadlinesbecause of the effects of Hurricane Sandy.The agencies staffs stand ready to work with affected institutions thatmay be experiencing problems fulfilling their reporting responsibilities,taking into account each institutions particular circumstances, includingthe status of its reporting and recordkeeping systems and the condition ofits underlying financial records.Publishing Requirements: The agencies understand that the damagecaused by the hurricane may affect compliance with publishing and otherrequirements for branch closings, relocations, and temporary facilitiesunder various laws and regulations. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  66. 66. P a g e | 66Institutions experiencing disaster-related difficulties in complying withany publishing or other requirements should contact their primary federalregulatory agency.Temporary Banking Facilities: The agencies understand that many banksface power, telecommunications, staffing and other challenges inre-opening facilities after the hurricane.In cases where operational challenges persist, the appropriate primaryfederal regulator will expedite any request to operate temporary bankingfacilities to provide more convenient availability of services to thoseaffected by the hurricane.In most cases, a telephone notice to the primary federal regulator willsuffice initially. Necessary written notification can be submitted later. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  67. 67. P a g e | 67The Recovery andMonetary PolicyWilliam C. Dudley, President and Chief Executive OfficerRemarks at the National Association for Business Economics AnnualMeeting, New York CityGood morning. It is a pleasure to have the opportunity to speak at thisNABE (National Association for Business Economics) conference today.Having spent more than 20 years as a business economist working in theprivate sector before joining the Federal Reserve Bank of New York in2007, I feel right at home here today.My remarks will focus on the economic outlook. I do this with sometrepidation, of course.In the private sector there are two adages about forecasting thatunderscore the need to be humble in this endeavor:First, forecast often.Second, specify a level or a time horizon, but never specify both, together.But more seriously, despite the difficulties in making accurate forecasts,we still need to understand as best we can why the economy is performingthe way it is, what that implies about the economic outlook, and, howpolicymakers can respond to generate better outcomes.We live in a highly complex and uncertain world, but we need to make asmuch sense out of it as possible. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com
  68. 68. P a g e | 68As always, what I have to say reflects my own views and not necessarilythose of the FOMC (Federal Open Market Committee) or the FederalReserve System.My attention today will be on three important questions:Why has the U.S. recovery been so sluggish and consistently weaker thanexpected?What should we, as monetary policymakers, do it about it?What other policy actions are needed to help ensure a timely transition tostrong and sustainable growth?The disappointing recoveryTurning to the first question, U.S. economic growth has been quitesluggish in recent years.For example, annualized real GDP (gross domestic product) growth hasaveraged only about 2.2 percent since the end of the recession in 2009.As a consequence, we have seen only modest improvement in the U.S.labor market.Not only has growth been slow, it has also been disappointing relative tothe forecasters expectations. For example, the Blue Chip Consensus havebeen persistently too optimistic in recent years.This is illustrated in Exhibit 1 which shows how private sector forecastsfor 2008 through 2013 have evolved over time. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

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