Monday November 26 2012 - Top 10 Risk Management News


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Monday November 26 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 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,“Finance is an industry that sells nothingphysical, nothing that you can kick: it sellspromises: promises to pay, promises you areasking your customers to trust.But the perception in the minds of many members of the public –including many of your potential and current clients – is that the financialindustry lacks integrity, and this view is not aided by some of the moretorrid stories from this summer – headlines about rate-rigging, Mexicandrug lords, and Iranian weapons proliferators will not have helped rebuildtrust in the financial sector collectively.”Who said that?Tracey McDermott, director of the Enforcement and Financial CrimeDivision (FSA UK)Read more at Number 7 of our list.Also:“On August 21, 2012, a whistleblower who had helped the Commissionstop an ongoing multi-million dollar fraud received an award of 30percent -- the maximum percentage payout allowed by law -- of theamount collected in the Commission’s enforcement action against theperpetrators of the scheme. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  2. 2. Page |2The award recipient in this matter submitted a tip concerning the fraudand then provided documents and other significant information thatallowed the Commission’s investigation to move at an accelerated paceand ultimately led to the filing of an emergency action in federal court toprevent the defendants from ensnaring additional victims and furtherdissipating investor funds.The whistleblower’s assistance led to the court ordering more than $1million in sanctions, of which approximately $150,000 had been collectedby the end of the fiscal year.In accordance with the 30 percent award determination, on August 21,2012, the whistleblower was paid nearly $50,000.”Who said that?We can read it at the Annual Report on the Dodd-Frank WhistleblowerProgram, from the staff of the U.S. Securities and Exchange CommissionRead more at Number 1.Also, at Number 8 you can read a really interesting speech from JaseemAhmed, Secretary General, Islamic Financial Services Board (IFSB).Although I confess I did not fully understand his first sentence“Assalamu’alaikum warahmatullahi wabarakatuh and a very goodmorning to all of you”, I found the content very interesting.For example: “Islamic finance offers a major opportunity for diversifyingthe investor base, and raising investor interest in Africa.”Also, “following the pioneering efforts of countries such as Sudan,Bahrain and Malaysia, governments are integrating Islamic financeinstruments into their public finance and expenditure frameworksthrough sovereign Sukūk issuance programmes”Welcome to the Top 10 list. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  3. 3. Page |3U.S. Securities and Exchange CommissionAnnual Report on the Dodd-FrankWhistleblower Program, Fiscal Year 2012This is a Report of the Staff of the U.S. Securitiesand Exchange Commission. The Commission has expressed no viewregarding the analysis, findings, or conclusions contained herein.Current focus of the Basel Committee:Raising the barRemarks by Mr Stefan Ingves, Governor ofSveriges Riksbank and Chairman of the BaselCommittee on Banking Supervision(At the 7th High-Level Meeting jointly organised by the Association ofSupervisors of Banks of the Americas, the Basel Committee on BankingSupervision and the Financial Stability Institute, Panama City, Panama)Challenges in housing and mortgage marketsSpeech by Mr Ben S Bernanke, Chairman of the Boardof Governors of the Federal Reserve System, at theOperation HOPE Global Financial Dignity Summit,Atlanta, Georgia. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  4. 4. Page |4Gerri WalshStatement for the Record for Senate Special Committee onAging HearingGuidelines on Complaints-Handlingby Insurance UndertakingsEIOPA Guidelines on Complaints -Handling by Insurance Undertakingstranslated into all the official EUlanguagesInternational monetary policy interactions:challenges and prospectsSpeech by Jaime CaruanaGeneral Manager, Bank for International SettlementsTo the CEMLA-SEACEN conference on “The role ofcentral banks in macroeconomic and financialstability: the challenges in an uncertain and volatile world” Punta delEste, UruguayCombating Financial Crime: Key themes and Priorities for 2013Speech by Tracey McDermott, director of theEnforcement and Financial Crime Division at theAPCIMS Conference _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  5. 5. Page |5Islamic Finance Prospectsin Africa: SpeechIslamic Banking Summit Africa | Republic of DjiboutiSpeaker : Jaseem Ahmed, Secretary General, IFSBKiyohiko G Nishimura: Ageing, finance andregulationsKeynote address by Mr Kiyohiko G Nishimura, DeputyGovernor of the Bank of Japan, at theJoint Forum Meeting, TokyoWilliam C Dudley: Solving the too big to failproblemRemarks by Mr William C Dudley, President and ChiefExecutive Officer of the Federal Reserve Bank of NewYork and President of the Committee on the GlobalFinancial System (CGFS), at the Clearing House’sSecond Annual Business Meeting and Conference, NewYork City _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  6. 6. Page |6U.S. Securities and ExchangeCommissionAnnual Report on the Dodd-FrankWhistleblower ProgramFiscal Year 2012This is a Report of the Staff of the U.S. Securities and ExchangeCommission. The Commission has expressed no view regardingthe analysis, findings, or conclusions contained herein.IntroductionSection 922 of the Dodd-Frank Wall Street Reform and ConsumerProtection Act (the “Dodd-Frank Act”), amended the SecuritiesExchange Act of 1934 (the “Exchange Act”) by, among other things,adding Section 21F, entitled “Securities Whistleblower Incentives andProtection.”Section 21F directs the Commission to make monetary awards to eligibleindividuals who voluntarily provide original information that leads tosuccessful Commission enforcement actions resulting in the impositionof monetary sanctions over $1,000,000, and certain successful relatedactions.Awards are required to be made in the amount of 10% to 30% of themonetary sanctions collected.Awards will be paid from the Commission’s Investor Protection Fund (the“Fund”).In addition, § 924(d) of the Dodd-Frank Act directs the Commission toestablish a separate office within the Commission to administer and toeffectuate the whistleblower program. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  7. 7. Page |7Section 924(d) of the Dodd-Frank Act requires the Commission’s Officeof the Whistleblower (the “Office” or “OWB”) to report annually toCongress on OWB’s activities, whistleblower complaints, and theresponse of the Commission to such complaints.In addition, Exchange Act § 21F(g)(5) requires the Commission tosubmit an annual report to Congress that addresses the followingsubjects:• The whistleblower award program, including a description of thenumber of awards granted and the types of cases in which awards weregranted during the preceding fiscal year;• The balance of the Fund at the beginning of the preceding fiscal year;• The amounts deposited into or credited to the Fund during thepreceding fiscal year;• The amount of earnings on investments made under Section 21F(g)(4)during the preceding fiscal year;• The amount paid from the Fund during the preceding fiscal year towhistleblowers pursuant to Section 21F(b);• The balance of the Fund at the end of the preceding fiscal year; and• A complete set of audited financial statements, including a balancesheet, income statement and cash flow analysis.This report has been prepared by OWB to satisfy the reportingobligations of Dodd-Frank Act § 924(d) and Exchange Act § 21F(g)(5).Activities of The Office of The WhistleblowerSection 924(d) of the Dodd-Frank Act directs the Commission to establisha separate office within the Commission to administer and to enforce theprovisions of Exchange Act § 21F. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  8. 8. Page |8On February 18, 2011, the Commission announced the appointment ofSean X. McKessy to head OWB in the Division of Enforcement(“Enforcement”).On January 17, 2012, the Commission named Jane A. Norberg as theOffice’s Deputy Chief.In addition to Mr. McKessy and Ms. Norberg, the Office is currentlystaffed by eight attorneys, three paralegals, and one program supportspecialist.Since its establishment, OWB has focused primarily on establishing theoffice and implementing the whistleblower program.During Fiscal Year 2012, the Office’s activities included the following:• Communicating with whistleblowers who have sent tips, additionalinformation, claims for awards, and other correspondence to OWB.OWB also meets with whistleblowers, potential whistleblowers and theircounsel, and consults with the staff in Enforcement to provide guidanceto whistleblowers and their counsel concerning expectations and followup;• Reviewing and processing applications for awards;• Working with staff in Enforcement to identify and track all enforcementcases potentially involving a whistleblower to assist in the documentationof the whistleblower’s information and cooperation in anticipation of aneventual claim for award;• Maintaining and updating the OWB website to better inform the publicabout the whistleblower program ( website includes two videos by Mr. McKessy providing an overviewof the program and information about how tips, complaints and referralsare handled. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  9. 9. Page |9The website also contains detailed information about the program, copiesof the forms required to submit a tip or claim an award, notices of coveredactions, links to helpful resources, and answers to frequently askedquestions;• Supporting the initiative of the Residential Mortgage Backed Securities(RMBS) Fraud Working Group, a working group of the Financial FraudEnforcement Task Force established by President Obama in November2009, by establishing an online link to the OWB website from the memberagencies of the RMBS Fraud Working Group for the public to submit tipsand complaints about possible illegal activity in the offering and sale ofresidential mortgage-backed securities.The OWB website was also updated in connection with this initiative toinclude a page providing an overview of the RMBS Fraud Working Groupand a direct link to report RMBS fraud.OWB further supported the initiative by helping to implementprocedures, consistent with the confidentiality requirements of ExchangeAct § 21F(h)(2), to permit the Enforcement staff to share whistleblowertips with the member agencies of the RMBS Fraud Working Group;• Providing extensive training on the Dodd-Frank Act and theCommission’s implementing rules (the “Final Rules”) to theCommission’s staff.This included in-person training and educational sessions in seven of theeleven Regional Offices, video-linked training to the entire Enforcementstaff, as well as training in the Home Office;• Establishing and implementing internal policies, procedures, andprotocols;• Manning a publicly-available whistleblower hotline for members of thepublic to call with questions about the program.OWB attorneys return all calls within 24 business hours. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  10. 10. P a g e | 10During the 2012 fiscal year, the Office returned over 3,050 phone callsfrom members of the public;• Reviewing and entering whistleblower tips received by mail and fax intothe Commission’s Tips, Complaints, and Referrals System (the “TCRSystem”);• Conferring with regulators from other agencies’ whistleblower offices,including the Internal Revenue Service, Commodity Futures TradingCommission, Department of Justice, and Department of Labor (OSHA),to discuss best practices and experiences;• Publicizing the program actively through participation in webinars,media interviews, presentations, press releases, and other publiccommunications; and• Providing ongoing guidance to Commission staff regarding variousaspects of the program, including the development of internal policies forthe handling of confidential whistleblower identifying information.Whistleblower Tips Received During Fiscal Year 2012The Final Rules specify that individuals who would like to be consideredfor a whistleblower award must submit their tip to OWB on Form-TCReither via facsimile or mail or via the Commission’s online TCRquestionnaire portal.All whistleblower tips received by the Commission are entered into theTCR System, the Commission’s centralized database for theprioritization, assignment, and tracking of TCRs received from thepublic.In Fiscal Year 2012, 3,001 whistleblower TCRs were received.The most common complaint categories reported by whistleblowers wereCorporate Disclosures and Financials (18.2%), Offering Fraud (15.5%),and Manipulation (15.2%). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  11. 11. P a g e | 11The Commission received whistleblower submissions from individuals inall 50 states, the District of Columbia and the U.S. territory of Puerto Rico,as well as 49 countries outside the United States.Processing of Whistleblower Tips During Fiscal Year 2012OWB currently leverages the resources and expertise of the Commission’sOffice of Market Intelligence (“OMI”) to evaluate incomingwhistleblower TCRs and to assign specific, timely, and credible TCRs tomembers of the Enforcement staff for further investigation.During the evaluation process, both staff and supervisors in OMIexamine each tip to identify those that are sufficiently specific, timely,and credible to warrant the further allocation of Commission resources.Tips that relate to an existing investigation are generally forwarded to thestaff working the existing matter.Tips that could benefit from the specific expertise of anotherDivision or Office within the Commission are generally forwarded to staffin that Division or Office for further analysis.When appropriate, tips that fall within the jurisdiction of another federalor state agency are forwarded to the Commission contact at that agency,provided this can be done consistent with the confidentialityrequirements of Exchange Act § 21F(h)(2).Tips that relate to the financial affairs of an individual investor or adiscrete investor group, and that are determined not to be strongcandidates for further expenditure of the Commission’s investigativeresources, are usually forwarded to the Office of Investor Education andAdvocacy (“OIEA”).Comments or questions about agency practice or the federal securitieslaws are also forwarded to OIEA.OWB supports the tip allocation and investigative processes in severalways. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  12. 12. P a g e | 12When whistleblowers submit tips on Form TCR in hard copy via mail orfax, OWB enters this information into the TCR System so it can beevaluated.During the evaluation process, OWB may assist by contacting thewhistleblower to obtain additional information, or may participate in thequalitative assessment of the best course of action to take in response to awhistleblower tip.During an investigation, OWB is available as needed to serve as a liaisonbetween the whistleblower (and his or her counsel) and investigative staff.On occasion, OWB arranges meetings between whistleblowers andsubject matter experts on the Enforcement staff to assist in betterunderstanding the whistleblowers’ submissions and developing the factsof specific cases.OWB staff also communicates frequently with Enforcement staff withrespect to the timely documentation of information regarding the staff’sinteractions with whistleblowers, the value of the information provided bywhistleblowers, and the assistance provided by whistleblowers as thepotential securities law violation is being investigated.Whistleblower Incentive Awards Made During Fiscal Year 2012OWB posts a Notice of Covered Action for each Commissionenforcement action where a final judgment or order, by itself or togetherwith other prior judgments or orders in the same action issued after July21, 2010, results in monetary sanctions exceeding $1 million.Once a Notice of Covered Action is posted, individuals have 90 calendardays to apply for an award by submitting a completed Form WB-APP toOWB by the claim due date listed for that action.Timely submitted applications are reviewed by the staff designated by theDirector of Enforcement (“Claims Review Staff”) in accordance with thecriteria set forth in the Dodd-Frank Act and Final Rules. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  13. 13. P a g e | 13The Claims Review Staff is currently comprised of four senior officers inEnforcement and a senior attorney in the Office of the General Counsel.To assist the Claims Review Staff in its review, OWB prepares a binder ofrelevant documents and a recommendation concerning the appropriatedisposition of the award claim.The Claims Review Staff then makes a Preliminary Determination settingforth its assessment as to whether the claim should be allowed or deniedand, if allowed, setting forth the proposed award percentage amount.If a claim is denied and the applicant does not object, then thePreliminary Determination of the Claims Review Staff becomes the FinalOrder of the Commission.However, an applicant can ask for reconsideration of the PreliminaryDetermination, in which event the Claims Review Staff considers theissues and grounds advanced in the applicant’s response, along with anysupporting documentation provided.After this additional review, the Claims Review Staff issues a ProposedFinal Determination, and the matter is forwarded to the Commission forits decision.In addition, all Preliminary Determinations of the Claims Review Staffthat involve an award of money are forwarded to the Commission asProposed Final Determinations irrespective of whether the applicantobjected to the Preliminary Determination.These procedures ensure that all claims for which a monetary award isrecommended and all preliminary denials of claims to which theapplicant objects are put before the Commission for final decision.Within 30 days of receiving notice of the Proposed Final Determination,any Commissioner may request that the Proposed Final Determinationbe reviewed by the full Commission. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  14. 14. P a g e | 14If no Commissioner requests such a review within the 30-day period, thenthe Proposed Final Determination will become the Final Order of theCommission.In the event a Commissioner requests a review, the Commission reviewsthe record that the Claims Review Staff relied upon in making itsdeterminations and issues its Final Order.During Fiscal Year 2012, the Commission made its first award under thewhistleblower program.On August 21, 2012, a whistleblower who had helped the Commissionstop an ongoing multi-million dollar fraud received an award of 30percent -- the maximum percentage payout allowed by law -- of theamount collected in the Commission’s enforcement action against theperpetrators of the scheme.The award recipient in this matter submitted a tip concerning the fraudand then provided documents and other significant information thatallowed the Commission’s investigation to move at an accelerated paceand ultimately led to the filing of an emergency action in federal court toprevent the defendants from ensnaring additional victims and furtherdissipating investor funds.The whistleblower’s assistance led to the court ordering more than $1million in sanctions, of which approximately $150,000 had been collectedby the end of the fiscal year.In accordance with the 30 percent award determination, on August 21,2012, the whistleblower was paid nearly $50,000.Motions for additional judgments are currently pending before the courtand any additional collections or increase in the sanctions ordered andcollected will increase the amount paid to the whistleblower.As noted below, whistleblowers receive their awards from the Securitiesand Exchange Commission Investor Protection Fund (“Fund”)established pursuant to Section 922 of the Dodd-Frank Act. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  15. 15. P a g e | 15During the 2012 fiscal year, OWB posted 143 Notices of Covered Actionfor enforcement judgments and orders issued during the applicableperiod that included the imposition of sanctions exceeding the statutorythreshold of $1 million.OWB is continuing to review and process applications for awardsreceived during the 2012 fiscal year.Securities and Exchange Commission Investor Protection FundSection 922 of the Dodd-Frank Act established the Fund to providefunding for the Commissions whistleblower award program, includingthe payment of awards in related actions.In addition, the Fund is used to finance the operations of the SEC Officeof the Inspector General’s suggestion program.The suggestion program is intended for the receipt of suggestions fromCommission employees for improvements in the work efficiency,effectiveness, and productivity, and use of resources at the Commission,as well as allegations by Commission employees of waste, abuse,misconduct, or mismanagement within the Commission.The following table provides certain of the information required byExchange Act § 21F(g)(5) for the 2012 fiscal year (October 1, 2011 throughSeptember 30, 2012).As of September 30, 2012, the Fund was fully funded, with an endingbalance of $453,429,825.58. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  16. 16. P a g e | 16The audited financial statements for the Fund, including a balance sheet,income statement, and cash flow analysis are included in theCommission’s Agency Financial Report, separately submitted toCongress and accessible at _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
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  20. 20. P a g e | 20Current focus of the Basel Committee:Raising the barRemarks by Mr Stefan Ingves, Governor ofSveriges Riksbank and Chairman of the BaselCommittee on Banking Supervision(At the 7th High-Level Meeting jointly organisedby the Association of Supervisors of Banks of theAmericas, the Basel Committee on Banking Supervision and theFinancial Stability Institute, Panama City, Panama)I am very pleased to be here for this years High-Level Meeting,organised by ASBA, the Basel Committee and the FSI.At its meeting in March of this year, the Basel Committee discussed anumber of strategies for enhancing its relationship and communicationswith non-Basel Committee member countries.One proposal that was readily endorsed by Committee members was toestablish even closer collaboration with the FSI with regard to itsHigh-Level Meetings.Many of our members are familiar with these well-established annualconferences, which draw together senior central bankers and supervisoryofficials from various regions of the world.In addition to last years ASBA-FSI event, I have participated in severalother high level meetings this year.The feedback that I and my Basel Committee colleagues have gainedfrom these events has been both illuminating and insightful.When we met last year in San Francisco, I called for action on two items:first, guarding against supervisory complacency, and second, putting intopractice the regulatory reforms that were developed to raise the resilienceof banks and banking systems to future shocks. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  21. 21. P a g e | 21These two themes - putting policies into practice, and recognisingsupervision as an essential complement to regulation - continue topervade the Basel Committees work.I am going to repeat these themes today, although in doing so I am notsuggesting we have failed in our efforts in the past.On the contrary, we have made good progress in both areas.But more needs to be done.I will share with you today some of the Committees efforts to furtherthese objectives.I will also say a few words about our ongoing policy work since there isalso more to be done to fully reflect lessons learnt from the crisis.Supervision mattersI will start with supervision.I have been quite vocal in warning that the Basel III Framework is notsufficient - by itself - to set banks and banking systems on a clear path tobecoming stronger and more resilient.It must be matched in practice by good supervision.Good regulation empowers firm supervision, and firm supervisionenforces good regulation.They are mutually reinforcing, and it is unrealistic to think that one canbe successful without the other.Basel III provides a better rulebook by which to judge the safety andsoundness of banks, but the crisis taught us that we also need bettersupervision.And better supervision begins with the basic building blocks, which is theCore Principles for Effective Banking Supervision. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  22. 22. P a g e | 22Core Principles for Effective Banking SupervisionEvery financial crisis is an opportunity to reflect on what went wrong,what worked well and what improvements can be made.This is true for bankers and risk managers, for policy makers, and, ofcourse, for bank supervisors.For the Basel Committee, the supervisory lessons learnt from the financialcrisis prompted our review of the Core Principles.While Basel III has attracted most of the attention, its effectiveness willonly be realised if it rests on a solid bedrock of supervision andimplementation.The Core Principles provide such a foundation.The revised Core Principles were published in September, with theendorsement of supervisors and central bankers representing more than100 countries that were gathered in Istanbul for the 17th InternationalConference of Banking Supervisors.The latest revision was conducted jointly with the Basel ConsultativeGroup, which comprises banking supervisors from both member andnon-member countries of the Basel Committee, as well as regional groupsof banking supervisors, the IMF, the World Bank and the IslamicFinancial Services Board.The review took account of post-crisis lessons and other significantsupervisory developments.At the same time, we have remained mindful of the fact that the CorePrinciples are applied on a global basis and that we need to maintaincontinuity and comparability.We have not sought to reinvent the wheel: many of the revisions aredesigned to reinforce the fundamentals of banking supervision byemphasising effective risk-based analysis, a more forward-lookingperspective and early intervention. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  23. 23. P a g e | 23Given the importance of these basic principles as the foundation for anysupervisory regime, it is imperative that they be implemented withdetermination and rigour around the globe.As many of you would already know, the revised Principles have beenreorganised to highlight the difference between what supervisors do andwhat they expect banks to do.The principles covering supervisory expectations of banks emphasise theimportance of good corporate governance and risk management, as wellas compliance with supervisory standards.In addition, the review took account of several key trends anddevelopments that emerged during the last few years of market turmoil, inparticular the need for greater intensity and resources to deal effectivelywith systemically important banks.Our agenda for this High-Level Meeting includes an in-depth review anddiscussion of the revised Core Principles, so I will not go into any moredetail now.Let me simply make one very important point.In discussing the revisions to the Core Principles, the Committee wasclear in its objective: we wanted to raise the bar.Just as we needed to lift regulatory requirements that were too low, thestatus quo for supervision was not going to be acceptable either.An enhancement of supervisory capabilities is necessary if we want tokeep pace with the increasingly complex, diverse and interconnectedfinancial system.We cannot stand still.More importantly, and as I have stressed previously, we cannot allowourselves to think that just because the problems in the banking systemdid not occur in our backyard this time will mean that they will not occurthere in the future. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  24. 24. P a g e | 24Systemically important banksThe financial crisis that began in 2007 not only reminded us of the criticalrole of intensive supervision, it also reminded us of the importance ofsystemically important banks.During the crisis, the failure or impairment of a number of large, globalfinancial institutions sent shocks through the financial system which, inturn, harmed the real economy.The shocks were exacerbated when it became apparent that supervisorsand other relevant authorities had limited options to deal with thesebanks, and therefore to prevent the problems from spreading through thefinancial system.As a consequence, public sector intervention to restore financial stabilityduring the crisis was not only necessary, but had to be conducted on amassive scale.In response, the Committee adopted a series of reforms that, onceimplemented, will raise the resilience of banks and banking systems.These reforms will have a particular impact on global systemicallyimportant banks (G-SIBs) since their business models have generallyplaced greater emphasis on trading and capital markets related activities,which are most affected by the enhanced risk coverage of the capitalframework.But Basel III is a minimum standard, and is not enough to address theunique risks posed by G-SIBs, the moral hazard associated with theperception that these firms are too big to fail, nor the cross-borderrepercussions that problems in a G-SIB would create.To alleviate these problems, the Committee sought to raise the bar furtherfor these largest banks.We developed an assessment methodology for determining globalsystemic importance, and prescribed additional loss absorbencyrequirements for banks deemed systemically important. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  25. 25. P a g e | 25The G20 Leaders endorsed these rules at their summit last year.At that time, they asked the Basel Committee and the Financial StabilityBoard to work on extending the framework to domestic systemicallyimportant banks (D-SIBs).There are many banks that are not significant from an internationalperspective, but nevertheless could have an important impact on theirdomestic financial system and economy compared to non-systemicinstitutions.The Committee has recently published its framework for dealing withD-SIBs, which is a topic of discussion for this High-Level Meeting.Our goal was to develop a D-SIB regime which was complementary to theG-SIB regime, while at the same time recognising that differentjurisdictions will wish to deal with domestic priorities in different ways.The D-SIB framework therefore identifies a set of common actions thatall jurisdictions are expected to undertake, but leaves the detailed natureof those actions and the specific policy responses to national discretion.My main message for today is that critical to the success of this approachand the interaction with the G-SIB framework is the need for strong andcooperative dialogue between home and host supervisors where a bankfrom one country is designated a D-SIB in foreign jurisdiction.ImplementationSupervision is a top priority for the Basel Committee, and implementationof Basel III is another.We have seen signs of progress on implementation in some countries, butmuch more is needed.Rules and regulations have to be consistently formulated and effectivelyapplied. The implementation process is, therefore, a continuing one.At its September 2011 meeting, the Basel Committee agreed to initiate aprogramme to review members implementation of the Basel regulatoryframework (which includes Basel II, Basel 2.5 and Basel III). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  26. 26. P a g e | 26This is a comprehensive programme which seeks to spur fullimplementation of the Basel standards within the agreed timelines - thisis something that the Committee has not previously done.The Committee has no doubt that with proper implementation, theregulatory reforms - both those already announced and those still in thepipeline - will help make banking systems more resilient.That is why the G20 Leaders have also asked us to keep focus onimplementation issues and finish the job.In Mexico recently, the G20 Finance Ministers and Central BankGovernors said:"We remain committed to the full, timely and consistent implementationof the financial regulation agenda - We agree to take the measures neededto ensure full, timely and effective implementation of Basel II, 2.5 and IIIand its consistency with the internationally agreed standards."Three baseline assessments (the European Union, Japan and the UnitedStates) covering 11 Committee member jurisdictions have beencompleted and the reports have been published.Preparatory work relating to the next round of country assessments isunder way and includes Australia, Brazil, Canada, China, Singapore andSwitzerland.A system of follow-up for those assessments already completed is beingdesigned and will be part of the regular implementation process goingforward.The Basel Committees systematic review of implementation is helping toidentify the regulatory fault lines early on by providing Committeemembers a detailed and a point-of-time review of the progress made andthe materiality of the shortcomings.As intended, the assessments are developing as a means to an end ratherthan an end in themselves.The expectation is that our assessments will help create a dependableglobal regulatory environment that will also help strengthen supervisoryefficacy. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  27. 27. P a g e | 27The assessments we have thus far conducted demonstrate the strongcooperative nature of the programme.It involves senior-level experts from different jurisdictions, technicalcounterparts and select industry participants from the assessedjurisdiction, and the Committees Secretariat.The expert nature of the country assessments is central to its legitimacy.Apart from assessing the regulatory consistency and materiality of thegaps, the Basel III implementation process has drilled down to the levelof individual bank portfolios, and I expect the work will help us to identifythe key drivers of variations in risk-weighted assets across banks, acrossjurisdictions and across time.As other Basel standards and policies are completed - such as thoserelating to liquidity, G-SIBs and large exposures - the focus onimplementation is expected to rise.The implementation work is also helping inform the Committeesongoing policy initiatives.This is an important feedback loop for the Basel Committee as ourpremise is that tougher capital and liquidity rules under the Basel IIIFramework are entirely appropriate for reducing the likelihood of failurefor systemically important banks.Assessing implementation and the application of the Basel frameworkamong Committee members also becomes important for manynon-member countries where banks from BCBS jurisdictions operate andbecome systemically relevant.Their failure may not even be seen as a viable option since these banksplay a critical economic role in credit intermediation and maturity andrisk transformation.Proper implementation of Basel III will enable internationally activebanks in emerging and developing markets to perform their role in asafer, prudent and economically constructive fashion.When globally active banks manage their capital and liquidity prudently,they act as a source of financial stability in the relevant jurisdiction. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  28. 28. P a g e | 28But an important pre-condition is that such banks must play by theinternational norms.Collectively, the regulatory requirements and the supervisory standardsshould push these banks along the path of the intended post-crisis reformagenda so that even during times of stress the banking system operateswithout material disruption to the financing of economic activities.Further regulatory reforms are neededThe reforms to the capital adequacy rules have been substantial, and theBasel Committees efforts to ensure they are put into practice properlyand in a timely way have been considerable.But we cannot say that our work to further improve the regulatoryframework is complete.LiquidityBasel IIIs liquidity rules are the most obvious element of the regulatoryframework that we are working to finalise.Forging agreement on minimum liquidity rules for international bankshas been a longstanding but elusive goal for supervisors and centralbankers.Indeed, Sir George Blunden, the Basel Committees first chairman,opened the Committees very first meeting in 1975 by noting that itsmandate was "to help ensure bank solvency and liquidity".While the Committees reputation has been founded on the first part ofthe task, it has taken 35 years - until Basel III was agreed in 2010 - to findsuccess on the second.Liquidity is an extraordinarily difficult and multifaceted topic.There are a wide range of views on how to define liquidity, as well as onhow best to supervise, regulate and manage its risk.For example, in 1984 some of the questions relating to liquidity discussedby the Committee included: _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  29. 29. P a g e | 29What constitutes liquidity for an international bank, and how can it bemeasured?- What should be the role of particular asset classes within an overall approach to liquidity in an international context?- How does the degree of maturity transformation undertaken affect a banks liquidity?- To what extent can lending in the interbank market constitute liquidity? Does the ability of banks to draw funds from the interbank market affect the extent to which they need liquid assets?- What are the basic supervisory approaches to liquidity used by the different countries represented on the Committee?- What relationship do these approaches bear to the monetary policies applied by the central banks?These questions remain highly relevant, and they are just as difficult asthey were then, but I am pleased to say that the Committee has now cometo grips with them.What has changed?While the persistently increasing globalisation and interconnectedness ofour financial systems were known to be creating potential vulnerabilities,there was no consensus on how (or how urgently) to deal with it.Unfortunately, it took a global financial crisis to provide the necessaryimpetus for agreeing on the Basel III liquidity rules.So the storm clouds of the crisis at least had a silver lining in that respect.As you know, the liquidity rules are comprised of a short-term LiquidityCoverage Ratio (LCR) and a longer-term, structural Net Stable FundingRatio (NSFR).Since these represent the first time we have had global standards, theCommittee agreed that we would review and, if necessary, refine thembefore they came into force. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  30. 30. P a g e | 30And the question everyone therefore wants to know is where do wecurrently stand with respect to finalising them, particularly the LCRwhich is due to come into force in 2015?The Committee is aiming to reach agreement by its December meetingon a few outstanding issues.As any bank supervisor, central banker or risk manager can attest, this isvery difficult work given the wide range of issues we must consider.It has far-reaching implications, for example, for banking, financialmarkets and monetary policy, and for this reason our work has beenundertaken with considerable care and caution.It is important to note that several countries have already adopted theliquidity framework in their jurisdictions, including Sweden, and I ampleased to say the Swedish experience with liquidity regulation has beenvery positive.For more than a year now Swedish banks have been reporting theirliquidity coverage ratios to Sveriges Riksbank and the Swedish FSA, andthe large banking groups also disclose their LCR publicly.Furthermore, from January 2013 minimum standards for the LCR will beintroduced for the largest banking groups, both on an aggregated basisand separately in euro and US dollars.The results so far are reassuring and there are no signs that monetarypolicy operations or the functioning of the interbank market have beenaffected by the implementation of the LCR.Given the implications and potential costs - not the least of which are thesocial costs - of not raising the bar for liquidity requirements and liquidityrisk management in banks, we would be failing in our responsibilities ifwe did not push on to finalise these proposals in the near future.Trading book and securitisationLet me now turn to the work we are doing with respect to some of thecapital rules. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  31. 31. P a g e | 31Following on from the changes introduced in Basel 2.5, the Committee isnow undertaking a more fundamental review of the trading book and thesecuritisation rules.With respect to the former, we want to achieve a regulatory frameworkthat promotes more comparable levels of capital across banks with similartrading book portfolios.We also aim to provide more transparency, and limit arbitrage betweenthe banking and trading books.Regarding securitisation, the complexity of the products, lack oftransparency and poor underlying incentives led to massive losses.The Committees objective is to address these weaknesses by makingcapital requirements for securitisation products simpler, better reflectiveof risk, less reliant on credit ratings and without significant cliff effects.Standardised approachesAlso on the agenda in 2013 is to improve the standardised approaches forcredit and operational risk.Our aim is to ensure these approaches continue to be suitable forassessing the capital adequacy of internationally-active banks - as well asother banks - that are not using the advanced approaches for riskmeasurement.While it would be premature to say what the result of our deliberationswill be, one issue to be considered will be the extent to which the revisedstandardised approaches could also serve as a backstop or benchmark tothe models-based approaches (eg banks, when publishing theirrisk-weighted assets, could be required to reference the calculationsbased on the standardised approaches).Linking the standardised approach with the models-based approach isalready being considered in the fundamental review of the trading book.Using the standardised approaches as a backstop or benchmark couldhelp increase the comparability of risk-weighted asset calculationsamong banks and jurisdictions. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  32. 32. P a g e | 32Large exposuresAnother important regulatory policy that is under review by theCommittee is the large exposures regime.The Committees original guidance - Measuring and controlling largecredit exposures - was published in January 1991.It was successful in promoting broad convergence in the supervision oflarge exposures, while recognising the scope for variation according tolocal conditions.However, it is fair to say that the regulation of large exposures hasbecome increasingly inconsistent.While there is considerable apparent homogeneity in the generalapproaches being adopted, there are significant differences in thespecifics.Another lesson from the crisis has been that we did not pay sufficientattention to risk concentrations.This makes a strong case for a more consistent and effective frameworkfor large exposures.Such an internationally consistent framework would ensure a levelplaying field, reinforce consistency in underlying capital requirements(since the capital framework does not directly capture concentrations)and avoid loopholes or exemptions where risks can build up undetected.The Committee is therefore examining the merits of a more consistentapproach to large exposures, and will publish its proposals for commentduring the course of 2013.Other areas for reviewLet me quickly touch upon two other areas on the Committees agenda:one a broad theme, and the other a specific initiative that is supervisory innature. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  33. 33. P a g e | 33Simplicity and comparabilityI am the first to acknowledge that a number of areas of the regulatoryframework have become increasingly complex over the years.As a result, the Committee has this year been evaluating ways in which itcan be simplified, without materially altering its underlying objective orstrength.There is a fine balance that must be achieved.The use of a regulatory measure that is too simple and blunt can providestrong, perverse incentives for banks.On the other hand, there is a limit to how much faith we should put intothe complexity and sophistication of models. A specific example of the Committees current thinking is our recentannouncement on the regulatory treatment of debit valuationadjustments (DVAs).This is a complex issue relating to the impact of a banks own credit riskon the valuation of derivative transactions.To precisely measure this impact, which we wished to remove from thecapital base, would have been extremely complex and difficult.The maths and analysis necessary would be beyond the capabilities of theaverage bank supervisor - let alone a central bank Governor!The Committee therefore decided on a more simplistic, but conservative,treatment.This was criticised for not being precise enough and therefore potentiallyoverstating the risk.But the Committee decided that there was a trade-off to be made, andthat the additional precision involved in refining the approach was notworth the cost involved.The message here is not that the Committee is dismissive of the benefitsor desirability of risk sensitivity, but rather that it needs to be traded offagainst other objectives. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  34. 34. P a g e | 34At some point it is inevitable that the never-ending pursuit of greaterprecision in risk measurement is not worth the effort - indeed, it can leadto a dangerous false sense of precision, which is best avoided.Capital planningGiven that we have raised minimum capital requirements, capitalplanning will necessarily become more important - both for banks andtheir supervisors.Recognising this, we have established a task force to examine currentindustry practices and develop guidance on good capital planningprocesses.This work is looking at issues such as:- processes for establishing targets for the level and composition of capital;- monitoring and decision making with respect to capital;- linkages to strategic plans and other business planning considerations; and- coordination with the assessment of firms risk profile and appetite.The objective of this work is not a new policy that will impose specificrequirements on banks such that every bank does its capital planning inthe same way.Rather, it will be sound guidance that banks and supervisors can use tohelp judge whether an individual bank has a robust capital planningprocess, given its size, shape and complexity.This will be particularly important in a Basel III world, with a number ofcapital constraints (CET1, Tier 1 and total risk-based ratios, and theleverage ratio) and buffers (capital conservation, countercyclical and SIBsurcharges) to which banks will need to manage. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  35. 35. P a g e | 35Conclusion I would like to bring my remarks to a close by emphasising as I did at theoutset that regulatory reform has two essential complements: supervisionand implementation.Even strong international regulations will be ineffective if they are notimplemented fully or if the associated supervisory regime is weak.Hence, the Committee is raising the bar in all three areas.First, it is obvious that we have been working to strengthen the regulatoryframework.This is not just in the form of Basel III, but also the work we havecompleted on SIBs, and the work still in train on the trading book,securitisation and large exposures.Second, we have been much more proactive in making sure that theinternational agreements are implemented in full, on time and in aconsistent manner.And, finally, we have used the revisions to the Core Principlesto also raisethe bar for supervision. Doing one is not enough; neither is doing two.We need to raise the bar in all three areas if we are to achieve a robust andresilient financial system for the future. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  36. 36. P a g e | 36Ben S Bernanke: Challenges in housing andmortgage marketsSpeech by Mr Ben S Bernanke, Chairman of the Boardof Governors of the Federal ReserveSystem, at the Operation HOPE Global FinancialDignity Summit, Atlanta, Georgia,Good afternoon. I’d like to thank John Bryant andOperation HOPE for inviting me to speak today.I’d also like to congratulate Operation HOPE and the Ebenezer BaptistChurch on the grand opening of the HOPE Financial Dignity Center,which holds the promise of becoming a tremendous resource for thepeople of Atlanta and sits next to Martin Luther King’s home church.Dr King’s legacy to our society is strong and enduring, and the newcenter is very much in the spirit of his work.The past few years have been difficult for many Americans and theircommunities.At the Federal Reserve, we understand the depth of the problem and theneed for action, and we will continue to use the policy tools that we haveto help support economic recovery.We also know that the burdens of a weak economy and the benefits ofeconomic growth often are not equally shared, and that, to be trulyeffective, policymakers must take into account how their decisions affectthe least advantaged, not just the economy as a whole.My remarks today will focus on an important part of our economy, thehousing sector.Housing and housing finance played a central role in touching off thefinancial crisis and the associated recession, and the ensuing wave offoreclosures wreaked great damage on communities across the country. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  37. 37. P a g e | 37As I will discuss, for the first time in a number of years, the housing sectoris improving, adding to growth and jobs. But the housing revival stillfaces significant obstacles, and the benefits of that revival remain quiteuneven.Strengthening and broadening the housing recovery remain a criticalchallenge for policymakers, lenders, and community leaders.The degree to which that challenge is met will help determine thestrength and sustainability of the economic recovery and the extent towhich its benefits are broadly felt.Developments in housing and housing financeThe multiyear boom and bust in housing prices of the past decade,together with the sharp increase in mortgage delinquencies and defaultsthat followed, were among the principal causes of the financial crisis andthe ensuing deep recession – a recession that cost some 8 million jobs.And continued weakness in housing – reflected in falling prices, lowrates of new construction, and historic levels of foreclosure – has proved apowerful headwind to recovery.It is encouraging, therefore, that we are seeing signs of improvement inthe housing market in most parts of the country.House prices nationally have increased for nine consecutive months,residential investment has risen about 15 percent from its low point, andsales of both new and existing homes have edged up.Homebuilder sentiment has improved considerably over the past year,and real estate agents report a substantial rise in homebuyer traffic.The growing demand for homes has been underpinned by record levels ofaffordability, the result of historically low mortgage rates and house pricesthat are 30 percent or more below their peaks in many areas.To be sure, the housing sector is far from being out of the woods. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  38. 38. P a g e | 38Construction activity, sales, and prices remain much lower than they werebefore the crisis.About 20 percent of mortgage borrowers remain underwater – that is, theyowe more than their homes are worth.Despite marked improvements in overall credit quality, 7 percent ofmortgages are either more than 90 days overdue or in the process offoreclosure.And, although the number of homes in foreclosure has edged down sincecresting in 2010, that number remains in excess of 2 million, three timesthe historical norm.Meanwhile, the national homeownership rate has slipped nearly 4percentage points from its 2004 high of 69 percent, and it now stands at a15-year low.So, although there are good reasons to be encouraged by the recentdirection of the housing market, we should not be satisfied with theprogress we have seen so far.Lower-income and minority communities are often disproportionatelyaffected by problems in the national economy, and the effects of thehousing bust have followed that unfortunate pattern.Indeed, as a result of the crisis, most or all of the hard-won gains inhomeownership made by low-income and minority communities in thepast 15 years or so have been reversed.For example, among all income groups, between 2007 and 2010,homeownership rates fell the most for households with income of $20,000or less, according to the Federal Reserve’s Survey of Consumer Finances.Data from the Census Bureau show that, over the period from 2004 to2012, the homeownership rate fell about 5 percentage points for AfricanAmericans, compared with about 2 percentage points for other groups. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  39. 39. P a g e | 39Homeownership rates fall when existing homeowners lose or leave theirproperties, when barriers to homeownership increase, or both.In recent years, both factors have been important.As I mentioned, home loss through foreclosure, though down from itspeaks, remains an important problem, with lower-income and minorityhomeowners often being the hardest hit.Importantly, foreclosures can inflict economic damage beyond thepersonal suffering and dislocation that accompany them.Foreclosed properties that sit vacant for months (or years) oftendeteriorate from neglect, adversely affecting not only the value of theindividual property but the values of nearby homes as well.Concentrations of foreclosures have been shown to do serious damage toneighborhoods and communities, reducing tax bases and leading toincreased vandalism and crime.Thus, the overall effect of the foreclosure wave, especially whenconcentrated in lower-income and minority areas, is broader than itseffects on individual homeowners.A strengthening housing market will help to gradually undo that damage,but the process has only begun.Homeownership rates have also declined because fewer households havechosen, or have been able, to become new homeowners in recent years.Buying a home usually means obtaining a mortgage, and the data showthat the pace of mortgage lending has fallen considerably on a nationalbasis; the extension of first-lien mortgages to purchase homes fell bymore than half from 2006 to 2011 and now stands at the lowest level since1995.Again the contraction in mortgage originations has been particularlysevere for minority groups and those with lower incomes: Since the peak _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  40. 40. P a g e | 40in mortgage lending in 2006, the number of home-purchase loansextended to African Americans and Hispanics has fallen more than 65percent, whereas lending to non-Hispanic whites has fallen less than 50percent.Home purchase originations in lower-income neighborhoods have fallenabout 75 percent, compared with around 50 percent for middle- andupper-income neighborhoods.To be clear, the reduction in mortgage originations and home purchasesfor all groups relative to the pre-crisis period partly reflects weakness inthe effective demand for housing rather than the unavailability ofmortgage credit.Unemployment, income loss, and income insecurity prevent manyhouseholds from purchasing homes, and concerns about the futuredirection of the labor market, housing prices, and the economy moregenerally keep other potential buyers on the sidelines.In addition, the fall in home prices means that many current homeownerscannot rely as much as they could in the past on tapping their existinghome equity to trade up to larger or better homes, while underwaterhomeowners may be financially unable to move from their current homes.Although the decline in the number of willing and qualified potentialhomebuyers explains some of the contraction in mortgage lending of thepast few years, I believe that tight credit nevertheless remains animportant factor as well.The Federal Reserve’s Senior Loan Officer Opinion Survey on BankLending Practices indicates that lenders began tightening mortgagecredit standards in 2007 and have not significantly eased standardssince.Terms and standards have tightened most for borrowers with lower creditscores and with less money available for a down payment. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  41. 41. P a g e | 41For example, in April nearly 60 percent of lenders reported that theywould be much less likely, relative to 2006, to originate a conforminghome-purchase mortgage to a borrower with a 10 percent down paymentand a credit score of 620 – a traditional marker for those with weakercredit histories.As a result, the share of home-purchase borrowers with credit scoresbelow 620 has fallen from about 17 percent of borrowers at the end of 2006to about 5 percent more recently.Lenders also appear to have pulled back on offering these borrowers loansinsured by the Federal Housing Administration (FHA).When lenders were asked why they have originated fewer mortgages, theycited a variety of concerns, starting with worries about the economy, theoutlook for house prices, and their existing real estate loan exposures.They also mention increases in servicing costs and the risk of beingrequired by government-sponsored enterprises (GSEs) to repurchasedelinquent loans (so-called putback risk).Other concerns include the reduced availability of private mortgageinsurance for conventional loans and some program-specific issues forFHA loans as reasons for tighter standards.Also, some evidence suggests that mortgage originations for newpurchases may be constrained because of processing capacity, as highlevels of refinancing have drawn on the same personnel who wouldotherwise be available for handling loans for purchase.Importantly, however, restrictive mortgage lending conditions do notseem to be linked to any insufficiency of bank capital or to a generalunwillingness to lend.Certainly, some tightening of credit standards was an appropriateresponse to the lax lending conditions that prevailed in the years leadingup to the peak in house prices. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  42. 42. P a g e | 42Mortgage loans that were poorly underwritten or inappropriate for theborrower’s circumstances ultimately had devastating consequences formany families and communities, as well as for the financial institutionsthemselves and the broader economy.However, it seems likely at this point that the pendulum has swung toofar the other way, and that overly tight lending standards may now bepreventing creditworthy borrowers from buying homes, thereby slowingthe revival in housing and impeding the economic recovery.Policy responsesThe factors contributing to reduced mortgage lending and lower rates ofhomeownership are varied and complex; no simple solutions exist thatcan, on their own, restore the housing market to health.Since the extent of the crisis became apparent, a range of initiatives hasbeen undertaken.For example, a number of public and private efforts have been made tohelp avoid unnecessary foreclosures and to enable underwater and otherborrowers to refinance at lower interest rates.Alternatives to foreclosure, including short sales and deed-in-lieuarrangements, have become more common.The recent settlement with a group of large servicers includes provisionsto improve the process for working with delinquent borrowers and tocompensate foreclosed-upon homeowners who were unfairly treated inthe past.As I have noted, vacant foreclosed homes lose value and create problemsfor neighborhoods.The overhang of empty homes also slows the recovery of the housingmarket by keeping prices low and limiting the need for new construction. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  43. 43. P a g e | 43To explore ways to address the number of foreclosed homes standingempty, the Federal Housing Finance Agency, which supervises the GSEs,undertook a pilot initiative that made it easier for qualified investors topurchase pools of foreclosed properties from Fannie Mae; the acquiredproperties would then be rented for a specified number of years.For our part, the Federal Reserve is encouraging the institutions wesupervise to manage their inventories of foreclosed homes in ways that donot exacerbate problems in local neighborhoods, including renting themout, where appropriate, rather than leaving the properties vacant.Policymakers have also taken steps to remove barriers to the flow ofmortgage credit.The Federal Housing Finance Agency recently announced new rules thatwill provide mortgage lenders greater clarity about the conditions underwhich they will be required to buy back defaulted mortgages from FannieMae and Freddie Mac or otherwise address origination problems.This greater clarity may result in reduced concern about putback risk,which in turn should increase the willingness of lenders to make newloans.In its rulemakings and supervision, the Federal Reserve, along with otherbank supervisors, has worked with lenders to try to achieve an appropriatebalance between reasonable prudence and ensuring that qualifiedborrowers are not denied access to credit.Although regulatory policy will be important for restoring a fullyfunctioning housing and mortgage market, the strength of the overalleconomic recovery is crucial as well.Obviously, loss of employment or income makes it more difficult forfamilies to pay their mortgages, maintain good credit histories, refinancetheir mortgages at lower rates, and avoid foreclosure.People who are worried about their jobs are understandably morereluctant to purchase homes, and households who have suffered hits to _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  44. 44. P a g e | 44their incomes face difficulty qualifying for a mortgage and saving for adown payment.Concerns about the financial strength of households and about theeconomic recovery also make lenders more cautious.At the Federal Reserve, we have sought to support the economic recoveryand maintain price stability – the two goals given to us by the Congress –by keeping both short term and longer-term interest rates historically low.Low interest rates reduce the cost to households of buying homes, cars,and other consumer durables while increasing the attractiveness of newcapital investments by firms.Increased demand in turn leads to faster economic growth and more jobs.My colleagues and I have been and remain quite concerned about thestubbornly high level of unemployment – particularly long-termunemployment.We have taken strong actions throughout the financial crisis and recoveryto help stabilize the economy.In September, we took the added step of stating that we will continueactions to put downward pressure on longer-term interest rates until theoutlook for the job market improves substantially in a context of pricestability.Our hope is that our statement provides individuals, families, businesses,and financial markets greater confidence about the Federal Reserve’scommitment to promoting a sustainable recovery with price stability andthat, as a result, they will become more willing to invest, hire and spend.In addition, of course, the historically low mortgage rates that haveresulted from the Federal Reserve’s policies are directly supporting thehousing market by putting homeownership within the reach of morepeople. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  45. 45. P a g e | 45While the economic recovery and regulatory policy affect access to creditfor all households, some potential borrowers may face the added burdenof discrimination.In our role as a banking regulator, the Federal Reserve strives to ensurethat the banks we supervise obey laws that prohibit illegal discriminationin lending.I am reminded here that fair treatment in housing was a significant focusof Dr King’s, and the Fair Housing Act of 1968 – still one of the nation’scornerstone laws to prohibit discrimination – was passed only a weekafter his assassination and stands among his legacies.Two types of discrimination continue to have particular significance tomortgage markets: One is redlining, in which mortgage lendersdiscriminate against minority neighborhoods, and the other is pricingdiscrimination, in which lenders charge minorities higher loan pricesthan they would to comparable nonminority borrowers.The Federal Reserve has been vigilant in identifying and stopping suchabuses, and we remain committed to vigorous enforcement of thenation’s fair lending laws.We currently co-chair, with the Department of Justice, an interagencytask force to promote robust fair lending supervision and enforcement.Government policies, both microeconomic and macroeconomic, have animportant role to play in restoring the health of the housing sector.However, government can only be part of the solution; in the remainderof my remarks I will discuss what others can do, including potentialhomeowners themselves.Financial preparedness and homeownershipOne lesson of the past few years is that the desire to own a home is notenough. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  46. 46. P a g e | 46Although many foreclosures resulted from job loss or other economichardships, others occurred because people bought more of a house thanthey could afford, took out a loan that was not appropriate to theircircumstances, or did not manage their resources well.Future homeownership must be built on a more solid foundation.And while much of the responsibility for building that foundation must liewith lenders and with regulators, consumers must do their part as well byacquiring the information and financial knowledge they need to makesound decisions.Operation HOPE has made this point frequently and forcefully.Effective financial education – aimed at both youths and adults – canprovide people with the knowledge they need.Some of the skills that prospective homeowners need are relatively basic –for example, knowing how to shop for the lowest interest rate and fees,understanding the difference between a fixed-rate and an adjustable-ratemortgage, and, very importantly, knowing how to find trustworthyinformation and advice.More generally, the decision to buy a home must be consistent with afamily’s longer-term objectives, needs, and resources.Good financial planning – including effective budgeting, adequatesaving, and sensible investing – can help families maintainhomeownership while also pursuing other important objectives, such aspreparing for retirement or financial emergencies.And financially informed households will have a better chance to buildwealth, reducing – in the case of minority households – the large wealthgap that exists between minorities and other groups.At the Federal Reserve, we appreciate the benefits to families of acquiringbasic information and skills about managing their money. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  47. 47. P a g e | 47But we see another important advantage of financial education, which isthat an economy with financially knowledgeable households is likely tobe stronger, more equal, and more stable.As such, we all gain from efforts to increase financial literacy.Although basic knowledge about money management and decisionmaking is extremely useful, it is not practical, of course, for everyone to bea financial expert.Sometimes a professional can help, and people should not be afraid toseek advice at appropriate times.For example, an individual may be involved in buying a home – acomplex and intimidating experience for many people – only once ortwice in a lifetime.That’s why advice from a housing counselor at the right point in theprocess can make all the difference.Nonprofit organizations can help prospective homeowners assess theirreadiness to purchase.And, by providing useful information about how to search for a home,apply for financing, handle home maintenance, and prevent delinquency,these nonprofits can help aspiring homebuyers find the right home andmaintain their mortgage payments.We have also seen that counseling can help consumers who are facingdelinquency or default.Borrowers in trouble who receive foreclosure counseling are relativelymore likely to subsequently become current on their mortgage, receive aloan modification, and, ultimately, keep their home.Financial preparedness is important not only for prospective homebuyers. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  48. 48. P a g e | 48It ought to be a lifelong undertaking, starting with children andteenagers.Organizations around the country – including Operation HOPE – helppeople across a range of ages develop their skills.Despite, or perhaps because of, the broader economic challenges we face,it now seems to be a time of creativity and innovation in this field.We are seeing experimentation, knowledge sharing, public-privatecollaborations, “bottom up” community-driven approaches, and stateandlocal-government efforts to promote family financial security andopportunity.More generally, community organizations like Operation HOPE haveplayed an important role in helping low-income and minoritycommunities weather the storm of the past few years.Besides promoting financial literacy and providing counseling (andsometimes credit) for homebuyers, community organizations havehelped build small businesses through investment and technicalassistance.Organizations such as NeighborWorks America (and as an aside, FederalReserve Governor Sarah Bloom Raskin currently chairs its board) havebeen leaders in fighting the blight in neighborhoods with high rates offoreclosure.Unfortunately, just as families have been hurt by the financial crisis andrecession, so have many community-based organizations.These groups face the daunting task of finding new sources of capital andinvestment in a constrained financial environment.Some organizations have begun to retool their operations and developnew markets, products, and strategies to better serve the financial needsof consumers and communities. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  49. 49. P a g e | 49Among other goals, they are developing strategies to foster responsiblehomeownership, which they see as an important building block forstronger communities.To return to where I began, after a long and difficult period, we are seeingwelcome signs of improvement in the housing market.An improving housing market will in turn aid the economic recoverywhile strengthening neighborhoods and increasing the financialwell-being of families.Our recovery must be broadly felt to be complete, and families andcommunities that were already struggling before the crisis must beincluded in that recovery.As Dr King is widely quoted to have said, “We may have all come ondifferent ships, but we’re in the same boat now.”The Federal Reserve will continue to do what we can to support thehousing recovery, both through our monetary policy and our regulatoryand supervisory actions.But, as I have discussed, not all of the responsibility lies with thegovernment; households, the financial services industry, and those in thenonprofit sector must play their part as well.In that spirit, I would like to close by expressing my appreciation andadmiration for the work that so many of you are doing to restore ourneighborhoods and to help individuals and families regain a solidfinancial footing.Thank you. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  50. 50. P a g e | 50Gerri WalshStatement for the Record for Senate SpecialCommittee on Aging HearingChairman Kohl, Ranking Member Corker and Members of theCommittee:The Financial Industry Regulatory Authority (FINRA) appreciates theopportunity to submit this statement for the record of the Committeeshearing to examine fraud among senior investors.Our comments focus on the outreach and educational initiatives FINRAhas underway to protect all investors—including seniors—from fallingvictim to financial fraud.FINRA and the FINRA Investor Education FoundationFINRA is the largest non-governmental regulator for all securities firmsdoing business with the public in the United States.FINRA oversees nearly 4,345 brokerage firms and about 162,410 branchoffices, and more than 635,140 registered securities representatives.We touch virtually every aspect of the securities business—fromregistering and educating industry participants to examining securitiesfirms; writing rules; enforcing those rules and the federal securities laws;informing and educating the investing public; providing trade reportingand other industry utilities; and administering the largest disputeresolution forum for investors and registered firms.FINRA believes that investor education is a critical component ofinvestor protection—and that we are uniquely positioned to providevaluable educational information and tools to retail investors.Over the last decade, we have worked hard to develop a strong investoreducation outreach program. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  51. 51. P a g e | 51We produce alerts, interactive tools and educational content to helpinvestors make wise financial decisions.Our BrokerCheck tool, for example, provides investors with a quick wayto check a brokers disciplinary and professional background.Encouraging people to take this simple step before doing business—orcontinuing to do business—with a broker is part of our greatercommitment to protecting investors.In 2003, FINRA created the FINRA Investor Education Foundation,currently the largest foundation in the United States dedicated to investoreducation.The FINRA Foundation seeks to provide underserved Americans withthe knowledge, skills and tools necessary for financial success throughoutlife.To date, the FINRA Foundation has approved approximately $73 millionin financial education and investor protection initiatives through acombination of educational and research grants, as well as targetedprojects managed directly by the FINRA Foundation.How FINRA Protects Older InvestorsAt FINRA, we serve every U.S. investor, from newlyweds planning to buya home to parents saving for a childs college education to seniorsdepending on a secure retirement.Over the past five years, we have been keenly focused on issues impactingolder investors, especially those at or approaching retirement.For example, in September 2007, FINRA issuedRegulatory Notice 07-43,which highlighted certain issues common to many older investors—including suitability, senior- or retirement-specific credentials orprofessional designations, high-pressure sales seminars and diminishedcapacity. _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  52. 52. P a g e | 52The Notice reminded broker-dealers of their obligations in this area andprovided examples of industry best practices.That same year, FINRAs Member Education and Training Departmentlaunched the first in a series of webcasts to help registered representativesand other frontline brokerage firm employees learn about theircompliance obligations when working with senior customers.Topics in this free educational series include Senior Investor Issues:Diminished Decisional Capacity, Senior Investor SuitabilityConsiderations and Supervisory Considerations for Working withSeniors—and are available 2008 and 2010, FINRA joined with other regulators to issue findingsand guidance on firms practices relative to senior investors.More recently, at the beginning of 2011, FINRA issued its AnnualRegulatory and Examination Priorities Letter, which reiterated that theprotection of vulnerable customers, including senior investors, continuesto be a high regulatory priority—and that one area of particular focus isthe use of certifications and designations that imply expertise,certification, training or specialty in advising senior investors.And in November 2011, FINRA published Regulatory Notice 11-52:FINRA Reminds Firms of Their Obligations Regarding the Supervisionof Registered Persons Using Senior Designations to remind firms of theirsupervisory obligations regarding the use of certifications anddesignations that imply expertise, certification, training or specialty inadvising senior investors.In addition to educational outreach to regulated firms and registeredpersonnel, FINRA has also increased our efforts to fight fraud and, to thatend, established several programs to help root out bad actors and helpconsumers protect themselves.In early 2009, we created the Office of the Whistleblower, and later thatyear, also established the Office of Fraud Detection and MarketIntelligence (OFDMI). _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  53. 53. P a g e | 53Through this office, staff with expertise in fraud detection andinvestigation can provide a heightened review of potentially seriousfrauds.OFDMIs mission is to ensure that allegations of serious fraud receivedby FINRA in the form of complaints, regulatory filings and other sourcesare subjected to a heightened review.OFDMI serves as a centralized point of contact on fraud issues, withinFINRA and externally with other regulators and the public.The creation of OFDMI has expedited fraud detection and investigation,by pursuing matters as far as possible and by referring cases that falloutside of FINRAs scope to the appropriate authorities.Investor Protection CampaignOne of the major initiatives of the FINRA Foundation aims to reduceinvestor susceptibility to fraud.Launched in 2008, the Investor Protection Campaign (IPC) is aninnovative, research-based, multi-faceted effort intended to help investorsunderstand how they might be susceptible to investment fraud and toreplace risky investment behaviors with fraud detection and preventionbehaviors.Armed with research around investment fraud victims and fraudstertactics, as well as the field-tested Outsmarting InvestmentFraud curriculum and related resources, the program has achieved thefollowing results to date:- public television distribution of the award-winning documentary, Trick$ of the Trade: Outsmarting Investment Fraud, with 760 airings on 172 public television stations in 76 television markets across 31 states since September 2010, reaching an estimated 51 million households of consumers age 50 and older; _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  54. 54. P a g e | 54- in-person and direct-mail distribution of more than 100,000 DVD copies of the documentary and over 300,000 Fighting Fraud 101 brochures;- delivery of more than 640 presentations in conjunction with national, state and local partners that have reached more than 33,000 investors nationwide;- training of 40 percent of Better Business Bureau affiliates to deliver the curriculum in local communities;- "live" fraud prevention counseling to almost 28,000 investors through outbound calls from a network of Fraud Fighter Call Centers; and- creation of a Financial Fraud Research Center and release of a white paper that comprehensively examines what is currently known about retail financial fraud.The campaign builds upon FINRA Foundation-funded research unveiledin July 2006 that shattered the stereotypes of senior investment fraudvictims, revealing a fraud victim profile that was counterintuitive in manyrespects.Instead of being isolated, frail and gullible, fraud victims tended to bemarried, college-educated males with above-average incomes andabove-average levels of financial literacy.The research further identified the sophisticated and highly effectiveinfluence tactics that fraudsters use to carry out investment scams.These findings forced regulators and senior citizen advocates alike torethink how best to approach the challenge of equipping older investorswith the tools and information they need to thwart fraudsters toutinginvestment scams.In 2007, the Foundation conducted extensive due diligence to develop aprogram to meet these challenges, coordinating closely with one of the _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)
  55. 55. P a g e | 55lead social scientists on the 2006 study, Doug Shadel, director of AARPsWashington State office.Adopting best practices recommended by the Organization for EconomicCo-operation and Development (see OECD,Examining ConsumerPolicy: A Report on Consumer Information Campaigns ConcerningScams (December 20, 2005)), we structured the Investor ProtectionCampaign to focus less on shortterm, information-led "warning"strategies and more on a longer term, skills-based "educating" strategybacked by significant research and resources.In 2008, the FINRA Foundation launched the Investor ProtectionCampaign, seeking to protect all investors, especially those over the ageof 55, from investment fraud by helping them to recognize theirvulnerability to financial fraud, to identify persuasion tactics and to takesimple steps to reduce risky behaviors.The centerpiece of the campaign is a field-tested persuasion resistancecurriculum, Outsmarting Investment Fraud, which we developed inconsultation with an array of experts in psychology, marketing and fraud.Designed to be flexible (with half-hour and hour-long versions available),the curriculum typically features a moderated presentation with videoclips and hands-on learning activities that covers some of the mostcommon tactics employed by fraudsters:- Phantom Riches—dangling the prospect of wealth or enticing investors with something they want but cant have. "These oil wells are guaranteed to produce $6,800 a month in income."- Source Credibility or Authority—building credibility and trust by claiming to be an expert. "Ive been in the business for 20 years, hold the XYZ credential and wouldnt offer an investment that doesnt make money for my clients."- Social Consensus—leading the target to believe that other savvy investors have already invested. "This is how Famous Person got his _____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)