1Basel iii Compliance Professionals Association (BiiiCPA)             www.basel-iii-association.com
2   Basel iii Compliance Professionals Association (BiiiCPA)      1200 G Street NW Suite 800 Washington, DC 20005-6705 USA...
32. The set up of a macroprudential overlay so as to address systemic riskin its two dimensions, namely its time dimension...
4As a point of reference, the sum of profits after tax prior to distributionsacross the same sample of Group 1 banks in th...
5Are these banks right or wrong? It is hard to say. All regulatoryframeworks have unintended consequences…Fitch Ratings, t...
6                      TABLE OF CONTENTSBasel iii news, January 2012, Page 7Basel iii news, February 2012, Page 48Basel ii...
1Basel iii Compliance Professionals Association (BiiiCPA)      1200 G Street NW Suite 800 Washington, DC 20005-6705 USA   ...
2Certain rows are in italics. These rows would be deleted after all theineligible capital instruments have been fully phas...
3Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
4Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
5Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
6Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
7Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
8Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
9Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
10Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
11Notes        Basel iii Compliance Professionals Association (BiiiCPA)                     www.basel-iii-association.com
12         Disclosure template during the transition phaseThe proposed template for use during the transition phase is the...
13Example - Row 8: In 2014 banks will be required to make 20% of theregulatory adjustments in accordance with Basel III.Co...
14Therefore, new rows have been added in each of the three sections onregulatory adjustments to allow each jurisdiction to...
15Example - Between rows 41 and 42:Assume that the bank described in the bullet point above is in ajurisdiction that curre...
16Example – Row 60:To take account of the fact that the existing national treatment of a BaselIII regulatory adjustment ma...
17Example: Consider a jurisdiction that currently risk weights definedbenefit pension fund net assets at 200% and in 2014 ...
18Basel iii Compliance Professionals Association (BiiiCPA)             www.basel-iii-association.com
19               Financial stability and risk disclosure Keynote address by Mr Jaime Caruana, General Manager of the BIS, ...
20Accounting standards need to converge, standards for the discussion andanalysis that accompany financial statements need...
21How do we promote market discipline?First, we need to make sure that the market has the information it needs.And a key e...
22Sound standards and practices enhance the quality of informationavailable to investors, depositors and other market part...
23And it is good for the stability of the system as a whole, because it reducesthe chance that unexpected events will caus...
24This suggests the public sector has a key role in promoting markettransparency. Whenever one suggests the public sector ...
25As a result, everyone in the market may just watch each other, instead ofmaking the investment in producing and obtainin...
26Greater transparency is one way to help break this cycle, by making itpossible for investors to see more precisely where...
27data collected nationally on a harmonised basis in a central hub, proposedto be hosted by the BIS.The FSB and national s...
28Disclosures often seek to provide information "through the eyes ofmanagement" that reflects how organisations measure an...
29        Core principles for effective banking supervision              BIS Consultative document, December 2011The Basel...
30Various additional criteria have been upgraded to essential criteria as aresult, while new assessment criteria were warr...
31greater public disclosure and transparency, and enhanced financialreporting and external audit. As a result of this revi...
32                      The 29 Core Principles are:Supervisory powers, responsibilities and functionsPrinciple 1 – Respons...
33At a minimum, the licensing process consists of an assessment of theownership structure and governance (including the fi...
34approach and deploys supervisory resources on a proportionate basis,taking into account the risk profile and systemic im...
35Prudential regulations and requirementsPrinciple 14 – Corporate governance: The supervisor determines thatbanks and bank...
36This includes prudent policies and processes to identify, measure,evaluate, monitor, report and control or mitigate cred...
37Principle 22 – Market risks: The supervisor determines that banks have anadequate market risk management process that ta...
38account their risk appetite, risk profile and market and macroeconomicconditions.This includes prudent policies and proc...
39risk management strategies and corporate governance policies andprocesses.Principle 29 – Abuse of financial services: Th...
40                      Basel III Speakers BureauThe Basel iii Compliance Professionals Association (BiiiCPA) hasestablish...
41To learn more you may visit:www.basel-iii-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.basel...
1   Basel iii Compliance Professionals Association (BiiiCPA)      1200 G Street NW Suite 800 Washington, DC 20005-6705 USA...
2Banks in Europe also try to avoid some of the most challenging Basel iiiimplementation rules. France and Germany are also...
3The Committee will monitor, on an ongoing basis, the status of membersadoption of the globally-agreed Basel rules.It will...
4Raising the resilience of the global banking system, restoring andmaintaining market confidence in regulatory ratios, and...
5specific concerns regarding the pool of high-quality liquid assets as wellas some adjustments to the calibration of net c...
6SIFIs: is there a need for a specific regulation on systematicallyimportant financial institutions?Remarks of Stefan Ingv...
7externalities" that these firms create and which current regulatorypolicies do not fully address.These adverse side effec...
8These include better quality and higher levels of capital; improving riskcoverage; introducing a leverage ratio to serve ...
9calibration from 1% to 2.5% is in the lower half of this estimated range. Asa means to discourage banks from becoming eve...
10These could include financial market infrastructures, insurancecompanies, other non-bank financial institutions and dome...
11Unlike the CoCos under the buffer, the Cocos under the progressivecomponent will convert when capital levels falls below...
12These adverse side effects, which include an increased risk of contagionand moral hazard, have serious implications for ...
13FSB - G20 MONITORING PROGRESSThe United States of AmericaInteresting partsThe Basel III framework agreement and other Ba...
14The CCAR involved a forward-looking, detailed evaluation of capitalplanning and stress scenario analysis at the 19 large...
15On June 15, 2011, U.S. banking supervisors published proposed guidanceon stress testing applicable to all banking organi...
16The Dodd-Frank Act created new authority to resolve nonbank financialinstitutions, similar to that which the FDIC has wi...
17Extending the regulatory perimeter to entities/activities thatpose risks to the financial systemThe FSOC has authority t...
18valuation policies and practices of the advised fund(s); types of assetsheld; side arrangements or side letters; trading...
19The SEC will engage in rulemaking to implement certain provisions.The Dodd-Frank Act generally requires all advisers to ...
20The table will provide comparable disclosures so that investors mayidentify originators with clear underwriting deficien...
21The SEC adopted new rules related to ABS in January and August 2011.Implementation is ongoing.Section 941(b) of the Dodd...
22State insurance regulators are closely monitoring, and collaborating onsupervision of financial guaranty insurers.Given ...
23On May 18, 2011, the SEC voted to propose new rules and amendmentsthat would implement certain provisions of the Dodd-Fr...
24Risk managementThe Dodd-Frank Act requires the Federal Reserve to conduct annualstress tests for all systemically import...
25The Basel iii Compliance Professionals Association (BiiiCPA) is thelargest association of Basel iii Professionals in the...
26B. Up to 3 Online ExamsThere is only one exam you need to pass, in order to become a CertifiedBasel iii Professional (CB...
27Basel iii Compliance Professionals Association (BiiiCPA)             www.basel-iii-association.com
1   Basel iii Compliance Professionals Association (BiiiCPA)      1200 G Street NW Suite 800 Washington, DC 20005-6705 USA...
Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
Understanding Basel III, January 2012 to June 2012
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Understanding Basel III, January 2012 to June 2012

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Understanding Basel III, January 2012 to June 2012

  1. 1. 1Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  2. 2. 2 Basel iii Compliance Professionals Association (BiiiCPA) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.comDear Member,We have some important developments from the BIS.Preserving financial stability involves a wide range of policy areas.According to Jaime Caruana, General Manager, Bank for InternationalSettlements, what Basel III brings is twofold:1. An enhancement of the regulatory framework introduced by Basel II atthe level of individual institutions; and Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  3. 3. 32. The set up of a macroprudential overlay so as to address systemic riskin its two dimensions, namely its time dimension (by mitigatingprocyclicality) and its cross-sectional dimension (by mitigatinginterconnection and contagion risk).Another interesting development: Crying is not a sign of weakness. Youmay let out your tears!Assuming full implementation of the Basel III requirements as of 30 June2011, including changes to the definition of capital and risk-weightedassets, and ignoring phase-in arrangements, Group 1 banks would havean overall shortfall of €38.8 billion for the CET1 minimum capitalrequirement of 4.5%, which rises to €485.6 billion for a CET1 target levelof 7.0% (ie including the capital conservation buffer); the latter shortfallalready includes the G-SIB surcharge where applicable.Group 1 banks are those that have Tier 1 capital in excess of €3 billion andare internationally active. All other banks are considered Group 2 banks. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  4. 4. 4As a point of reference, the sum of profits after tax prior to distributionsacross the same sample of Group 1 banks in the second half of 2010 andthe first half of 2011 was €356.6 billion.Under the same assumptions, the capital shortfall for Group 2 banksincluded in the Basel III monitoring sample is estimated at €8.6 billion forthe CET1 minimum of 4.5% and €32.4 billion for a CET1 target level of7.0%.The sum of Group 2 bank profits after tax prior to distributions in thesecond half of 2010 and the first half of 2011 was €35.6 billion.You will read the details below.Also, a very important template is available!The common template that the Basel Committee has developed isdesigned to capture the capital positions of banks after the transitionperiod for the phasing-in of deductions ends on 1 January 2018.The Basel Committee proposes that banks should publish the completeddisclosure template with the same frequency as the publication of theirfinancial statements (typically quarterly or half yearly).Furthermore, it is proposed that the completed disclosure templateshould either be included in the bank’s published financial reports or, at aminimum, these reports should provide a direct link to the completedtemplate on the bank’s website.Banks should also make available on their websites an archive of alltemplates relating to prior reporting periods.Another development: Major banks try hard to understand andimplement the new Basel iii framework.The same time, banks and financial conglomerates try hard to influencepoliticians and change some of the strict rules. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  5. 5. 5Are these banks right or wrong? It is hard to say. All regulatoryframeworks have unintended consequences…Fitch Ratings, the credit ratings agency, has released a statement whichexplains that the US Federal Reserves adoption of the Basel III capitalrequirements can harm the credit markets by restricting the activities ofbanks that make loans.Mr Dimon, the chief executive and chairman of JPMorgan Chase (anddefinitely not a fan of the new Basel iii framework) has said that banks allaround the world were concentrating on increasing their exposures toassets that have advantageous risk weighting, while limiting exposure toassets that have disadvantageous risk weighting.Where is the problem? A huge one… regulators are causing the bankingsystem to amass enormous concentrations of assets that haveadvantageous risk weighting.An important concentration risk that has a simple cause: Basel ii/iii.The current crisis in Europe is an example of wrong Basel ii principlesand capital regulations. According to Basel ii, sovereign risk is not that animportant risk… so many times, banks did not have to set aside anycapital at all for the government bonds they held.Basel iii is a good framework. It is way better that Basel ii. It is good, butis not great. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  6. 6. 6 TABLE OF CONTENTSBasel iii news, January 2012, Page 7Basel iii news, February 2012, Page 48Basel iii news, March 2012, Page 118Basel iii news, April 2012, Page 192Basel iii news, May 2012, Page 259Basel iii news, June 2012, Page 526 Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  7. 7. 1Basel iii Compliance Professionals Association (BiiiCPA) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.com Basel III News, January 2012Dear Member,Interesting! We have the first important Basel iii templates.We will start with the Post 1 January 2018 disclosure templateFrom the BIS Consultative document, Definition of capital disclosurerequirements, Issued for comment by 17 February 2012, December 2011 Post 1 January 2018 disclosure templateThe common template that the Basel Committee has developed isdesigned to capture the capital positions of banks after the transitionperiod for the phasing-in of deductions ends on 1 January 2018The Basel Committee proposes that banks should publish the completeddisclosure template with the same frequency as the publication of theirfinancial statements (typically quarterly or half yearly).Furthermore, it is proposed that the completed disclosure templateshould either be included in the bank’s published financial reports or, at aminimum, these reports should provide a direct link to the completedtemplate on the bank’s website.Banks should also make available on their websites an archive of alltemplates relating to prior reporting periods. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  8. 8. 2Certain rows are in italics. These rows would be deleted after all theineligible capital instruments have been fully phased out (from 1 January2022 onwards).Regarding the shading (below):- Each dark grey row introduces a new section detailing a certaincomponent of regulatory capital.- The light grey rows with no thick border represent the sum cells in therelevant section.- The light grey rows with a thick border show the main components ofregulatory capital and the capital ratios.Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  9. 9. 3Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  10. 10. 4Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  11. 11. 5Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  12. 12. 6Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  13. 13. 7Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  14. 14. 8Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  15. 15. 9Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  16. 16. 10Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  17. 17. 11Notes Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  18. 18. 12 Disclosure template during the transition phaseThe proposed template for use during the transition phase is the same asthe steady state disclosure template set out in Section 1 except for thefollowing additions (all of which are highlighted in the template belowusing cells with dotted borders and capitalised text):A new column has been added for banks to report the amount of eachregulatory adjustment that is subject to the existing national treatmentduring the transition phase (labelled as the “pre-Basel III treatment”). Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  19. 19. 13Example - Row 8: In 2014 banks will be required to make 20% of theregulatory adjustments in accordance with Basel III.Consider a bank with “Goodwill, net of related tax liability” of $100 mnand assume that the bank is in a jurisdiction that does not currentlyrequire this to be deducted from common equity.The bank would report $20 mn in the first of the two empty cells in row 8and report $80 mn in the second of the two cells.The sum of the two cells will therefore equal the total Basel III regulatoryadjustment.While the new column shows the amount of each regulatory adjustmentthat is subject to the existing national treatment, it is necessary to showhow this amount is included under existing national treatment in thecalculation of regulatory capital. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  20. 20. 14Therefore, new rows have been added in each of the three sections onregulatory adjustments to allow each jurisdiction to set out their existingnational treatment.Example - Between rows 26 and 27:Consider a jurisdiction that currently filters out unrealised gains andlosses on holdings of AFS debt securities and consider a bank in thatjurisdiction that has an unrealised loss of $50 mn.The transitional arrangements require this bank to recognise 20% of thisloss (ie $10 mn) in 2014.This means that 80% of this loss (ie $40 mn) is not recognised.The jurisdiction would therefore include a row between rows 26 and 27that allows banks to add back this unrealised loss.The bank would then report $40 mn in this row as an addition to CommonEquity Tier 1. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  21. 21. 15Example - Between rows 41 and 42:Assume that the bank described in the bullet point above is in ajurisdiction that currently requires goodwill to be deducted from Tier 1.This jurisdiction would insert a new row in between rows 41 and 42, toindicate that during the transition phase some goodwill will continue tobe deducted from Tier 1 (in effect Additional Tier 1).The $80 mn that the bank had reported in the last cell of row 8, would thenneed to be reported in this new row inserted between rows 41 and 42. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  22. 22. 16Example – Row 60:To take account of the fact that the existing national treatment of a BaselIII regulatory adjustment may be to apply a risk weighting, jurisdictionswould also be able to add new rows immediately prior to the row on riskweighted assets (row 60).These rows would need to be defined by each jurisdiction to list the BaselIII regulatory adjustments that are currently risk weighted. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  23. 23. 17Example: Consider a jurisdiction that currently risk weights definedbenefit pension fund net assets at 200% and in 2014 a bank has $50 mn ofthese assets.The transitional arrangements require this bank to deduct 20% of theassets in 2014.This means that the bank will report $10 mn in the first empty cell in row15 and $40 mn in the second empty cell (the total of the two cells thereforeequals the total Basel III regulatory adjustment).The jurisdiction would disclose in one of the inserted rows between row59 and 60 that such assets are risk weighted at 200% during thetransitional phase.The bank would then report a figure of $80 mn ($40 mn * 200%) in thatrow. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  24. 24. 18Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  25. 25. 19 Financial stability and risk disclosure Keynote address by Mr Jaime Caruana, General Manager of the BIS, to the FSB Roundtable on risk disclosure, Basel, 9 December 2011.AbstractHigh-quality risk disclosure is good for markets, because it helpsinvestors make more informed decisions.It is good for prudential supervisors, because it makes banks moreaccountable to both supervisors and investors.And it is good for financial stability, because it reduces the chance thatunexpected events will disrupt the system.To be effective in promoting market discipline, disclosure must becomplemented by strong incentives for counterparties to engage inmonitoring.The public sectors role in promoting transparency arises from a numberof market failures, including the externalities to be gained from commonstandards, the "free rider" problems that may lead to too little investmentin producing and gathering financial information, and the tendency ofmarkets to overreact to bad news when the information environment isclouded.Guided by these considerations, the Financial Stability Board and theBasel Committee on Banking Supervision have long supportedimprovements in transparency, through their work on accounting,disclosure templates and aggregate market data.At the same time, industry and investor representatives need to play a keyrole in developing disclosure standards. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  26. 26. 20Accounting standards need to converge, standards for the discussion andanalysis that accompany financial statements need to be established, andexternal auditors need to insist on higher-quality risk disclosures.Full speech Good morning, and welcome to Basel. We are meeting at a time of greatturbulence and uncertainty in the global economy and financial system.But although all of us are focused on immediate challenges and risks, it isimportant not to lose sight of the need to carry forward our longer-termagenda towards building a better, stronger financial system.Your discussions today are an essential part of making progress on thisagenda.If we can achieve a significant improvement in the quality, comparabilityand timeliness of risk disclosures by financial firms, this will without adoubt help break the vicious cycles of contagion, asset sales and pullbackfrom risk-taking that have paralysed markets repeatedly over the last fewyears.The three pillars of Basel II continue to guide our efforts to strengthenfinancial regulation in the Basel III era and beyond.Weve now accomplished a great deal on Pillar 1 - minimum capitalrequirements.The task now is to follow through on Pillar 2 by strengthening supervisoryreview, with a focus on firm-wide risk management and risk governance,and on Pillar 3 disclosures, by improving market discipline.And while Pillar 3 is a good step in the right direction, achieving ouroverall objective of stronger market discipline will require efforts that gobeyond strictly regulatory approaches. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  27. 27. 21How do we promote market discipline?First, we need to make sure that the market has the information it needs.And a key element of market information is sound, consistentlyhigh-quality risk disclosures.That will be the subject of my remarks, and of course the theme of yourdiscussions today.But I should also point out that market discipline only works wheninvestors have the right incentives to use the information, and banks havethe right incentives to take account of the signals sent by the market.For these incentives to be right, the perception of a public safety net forbanks that are "too big to fail" needs to be eliminated.This points to the relevance of the work by the FSB and Basel Committeeto reduce moral hazard by increasing loss absorbency, strengtheningresolution procedures and enhancing supervisory intensity forsystemically important banks.If we successfully follow through on this work, then investors will havestronger incentives to develop a comprehensive picture of the risks andexposures facing financial institutions, and the banks should face morepressure to be as accurate and transparent as possible about theseexposures.The FSB and the Basel Committee have long supported soundaccounting and robust disclosure standards and practices.Examples include the risk disclosure template for structured creditproducts set out in the Financial Stability Forums report to the G7 inApril 2008, the Basel Committees work on Pillar 3 disclosures, and themore recent work to encourage sound expected-loss provisioning rulesand related disclosures. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  28. 28. 22Sound standards and practices enhance the quality of informationavailable to investors, depositors and other market participants, as well asto prudential authorities and regulators - including about risk exposures,risk management practices and policies, governance, and capitalmeasures and ratios.This can lead to greater transparency that can support market confidence,improve market discipline and facilitate sound risk managementpractices by financial firms and other companies, and has the potential tolead to more consistent practices over time.Together with effective supervision, these can help to foster safe andsound banking systems and more stable financial markets.We should recognise the limitations to what improved information aboutrisks can achieve.The economy and the financial system are always changing and evolving,and our understanding of key relationships struggles to keep up.Risks often appear precisely in the areas to which market participants andpublic authorities have paid the least attention, and about which theyhave demanded the least accurate information.Given these limits to our understanding, we need to be prudent.This means protecting the system against the unknown and unexpected,for example by strengthening capital and liquidity buffers at institutionsand initial margin in traded markets.Nevertheless, strengthened, transparent disclosure is good for markets,because it helps investors make more informed decisions.It is good for prudential supervision, because it helps to make banks moreaccountable, both to supervisors and investors. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  29. 29. 23And it is good for the stability of the system as a whole, because it reducesthe chance that unexpected events will cause major system-widedisruptions.We should not forget that the official sector has a direct interest inpromoting financial stability through increased transparency; theexperience of the past four years has reminded us of the many costs that apoorly functioning financial system can impose on taxpayers and the realeconomy.One might think that market participants would naturally providecomprehensive, relevant disclosure in a timely manner, since its in theinterest of investors, counterparties and institutions. But as we have seen,this is often not the case.For example, during the ongoing turbulence related to Europeansovereign debt, investors and market analysts have struggled to develop acomprehensive and reliable assessment of the exposures of financialinstitutions to troubled sovereigns through bond holdings and derivativespositions.Some of the disruptions to bank funding markets have reflectedscepticism as to whether enough is known about these exposures, as wellas the chain of exposures related to them - banks exposures to otherbanks, and so on.We at the BIS regularly publish information on the aggregate exposuresof national financial systems, but of course this says nothing about thenetwork of exposures of individual institutions.Lacking adequate information to inform their risk assessments, providersof funds have naturally pulled back from European financial firms of allsorts - in the process undermining the stability of the system and puttingstill greater pressure on banks and sovereigns. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  30. 30. 24This suggests the public sector has a key role in promoting markettransparency. Whenever one suggests the public sector should dosomething, its good practice to identify the specific market failures thatimpel public action.With respect to risk disclosure, I would emphasise the following ones.First, common standards have externalities.Just as everyone benefits from common weights and measures in thephysical world, or from common standards for electronic media like DVDencoding, theres a social benefit from financial statements following asingle standard, including key concepts, common definitions andprinciples, and, to the extent possible, common formats.In some cases, collaborative efforts by the industry can generate theneeded standards; in others, especially where the subject matter iscomplex and there is a wide range of interested parties, some of whommay not support full, timely transparency, the public sector must play arole.Second, producing and gathering financial information are subject to"free rider" problems.Its costly to produce, interpret and analyse information from disclosures.But if one investor or counterparty does so, prices adjust and othersbenefit from it. So while investors can and do make money from carefullystudying publicly available information, theres still an incentive to "freeride" - to wait for someone else to gather relevant information, then toshare in the benefit by trading on it.And preparers may face similar incentives to wait for others beforeproviding useful information about their risk exposures and riskmanagement practices. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  31. 31. 25As a result, everyone in the market may just watch each other, instead ofmaking the investment in producing and obtaining accurate information.Theres no way to completely eliminate such free-riding from markets,but establishing common standards goes part way, by reducing the costs -in time, effort and resources - needed to produce and acquiremarket-relevant information.We want to see a richer array of information made available that is lesscostly to collect, more widely available to market participants, moreusable and more comparable.This should help take us towards markets where prices are movedprimarily by new information, rather than by herd behaviour, leverage orsudden shifts in risk appetites.Third, if the information environment is murky, then markets overreact tobad news.We saw this in the 2007-09 crisis - whenever problems were discovered inone asset class, or one institution, investors started to scrutinise similarlyplaced assets or institutions, and downgraded their valuations of them.This sometimes led to a self-fulfilling process that made things stillworse.The same has happened in sovereign debt crises, including the currentchallenges in Europe - when one country gets into trouble, investorsimmediately look around to see whos next.This creates a kind of collective action problem - it makes sense for eachplayer individually to pull back, but when many players do this the impactis devastating for the market as a whole. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  32. 32. 26Greater transparency is one way to help break this cycle, by making itpossible for investors to see more precisely where, and whether, theirconcerns are justified. Saying there is a public sector role in promoting transparency, for thereasons Ive just laid out, is not the same as saying that strengtheningtransparency is the public sectors job alone.Indeed, industry and investor efforts need to be at the centre ofdeveloping standards, since this will ensure that new requirements havethe proper technical grounding and a strong buy-in by marketparticipants.The public sector can contribute by catalysing private sector efforts andby directing those efforts in fruitful directions.At the same time, however, if the private sector does not step in to addressthese issues adequately, supervisory and regulatory authorities may needto undertake further reforms to improve disclosure standards andpractices.Alongside this work at the firm level, the international community hasalso been working to improve transparency by strengthening thecollection, aggregation and dissemination of financial sector data.The BIS, together with the Committee on the Global Financial System,has long performed this role with respect to cross-border banking andOTC derivatives market activity.Looking forward, the FSB has made substantial progress in developing adata framework that facilitates monitoring of key interlinkages among themajor global banks in a consistent manner.While this project is still very much work in progress, it is notable thatnational authorities and the FSB are considering storing and pooling the Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  33. 33. 27data collected nationally on a harmonised basis in a central hub, proposedto be hosted by the BIS.The FSB and national supervisors are also working to make sure that theshift of derivatives market activity to central trading and clearingplatforms leads to a greater availability of useful market-level data onactivity in these instruments.Also, following the FSB recommendation earlier this year, the FSBsStanding Committee on the Assessment of Vulnerabilities, which I chair,is also assessing whether newly identified risks could benefit fromimproved risk disclosure practices.But even as we work to improve the assessment of risks and theavailability and quality of aggregated industry and market data throughefforts by the official sector, strengthened disclosures by individualinstitutions still offer the most promising benefits in terms ofstrengthening financial stability.Going forward, I would emphasise a number of key challenges:Following through on convergence of IASB and FASB accountingstandards, including their risk disclosure requirements.Progress in converging the two main international accounting standardsframeworks will help ensure that users can make meaningfulcomparisons across institutions and entities operating in multiplejurisdictions.Developing standards for the discussion and analysis that firms provide tocomplement the figures in the financial statements.Common standards can be useful not only for financial data, but also forthe interpretations given to them. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  34. 34. 28Disclosures often seek to provide information "through the eyes ofmanagement" that reflects how organisations measure and manage theirrisks.While this approach can be helpful in understanding business models andrisk management practices, it can lead to disclosure of information that isnot comparable across firms, and therefore difficult for investors andregulatory bodies to assess.Strengthening the contribution of external audits to the quality of riskdisclosures.What is the degree of assurance that auditors provide about publicdisclosures, including those in financial statements, managementsdiscussion and analysis sections of financial reports, and risk informationon their clients websites?To what extent, and in what ways, do they review or audit the accuracyand reliability of the financial reports that they examine, and how do theyreport on their assessments and findings to the public?These are deep questions about how to best evolve the audit function asfinancial systems and investor needs evolve, and they wont be resolvedovernight.They need to be addressed, however, if we are to clarify and to strengthenthe role of auditors in promoting transparency at firms.The discussions at the FSB Roundtable today will mark important stepstowards progress in many of these areas.I am confident the FSB and its standard-setting bodies are up to the task,and I encourage key stakeholders in the private sector to join together toencourage and to support better, more transparent risk disclosurepractices. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  35. 35. 29 Core principles for effective banking supervision BIS Consultative document, December 2011The Basel Committee on Banking Supervision has issued for consultationits revised Core principles for effective banking supervision.The consultative paper updates the Committees 2006 Core principles foreffective banking supervision and the associated Core principlesmethodology (assessment methodology). Both the existing Core Principles and the associated assessmentmethodology have served their purpose well in terms of helping countriesto assess their supervisory systems and identify areas for improvement.While conscious efforts were made to maintain continuity andcomparability as far as possible, the Committee has merged the CorePrinciples and the assessment methodology into a single comprehensivedocument.The revised set of twenty-nine Core Principles have also been reorganisedto foster their implementation through a more logical structure,highlighting the difference between what supervisors do themselves andwhat they expect banks to do:Principles 1 to 13 address supervisory powers, responsibilities andfunctions, focusing on effective risk-based supervision, and the need forearly intervention and timely supervisory actions.Principles 14 to 29 cover supervisory expectations of banks, emphasisingthe importance of good corporate governance and risk management, aswell as compliance with supervisory standards.Important enhancements have been introduced into the individual CorePrinciples, particularly in those areas that are necessary to strengthensupervisory practices and risk management. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  36. 36. 30Various additional criteria have been upgraded to essential criteria as aresult, while new assessment criteria were warranted in other instances.Close attention was given to addressing many of the significant riskmanagement weaknesses and other vulnerabilities highlighted in the lastcrisis.In addition, the review has taken account of several key trends anddevelopments that emerged during the last few years of market turmoil:the need for greater intensity and resources to deal effectively withsystemically important banks; the importance of applying a system-wide,macro perspective to the microprudential supervision of banks to assist inidentifying, analysing and taking pre-emptive action to address systemicrisk; and the increasing focus on effective crisis management, recoveryand resolution measures in reducing both the probability and impact of abank failure.The Committee has sought to give appropriate emphasis to theseemerging issues by embedding them into the Core Principles, asappropriate, and including specific references under each relevantPrinciple. In addition, sound corporate governance underpins effective riskmanagement and public confidence in individual banks and the bankingsystem.Given fundamental deficiencies in banks corporate governance that wereexposed in the last crisis, a new Core Principle on corporate governancehas been added in this review by bringing together existing corporategovernance criteria in the assessment methodology and giving greateremphasis to sound corporate governance practices.Similarly, the Committee reiterated the key role of robust marketdiscipline in fostering a safe and sound banking system by expanding anexisting Core Principle into two new ones dedicated respectively to Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  37. 37. 31greater public disclosure and transparency, and enhanced financialreporting and external audit. As a result of this review, the number of Core Principles has increasedfrom 25 to 29.There are a total of 36 new assessment criteria, comprising 31 newessential criteria and 5 new additional criteria.In addition, 33 additional criteria from the existing assessmentmethodology have been upgraded to essential criteria that representminimum baseline requirements for all countries.The Basel Committee welcomes comments on the revised CorePrinciples. Comments should be submitted by Tuesday 20 March 2012 byemail to: baselcommittee@bis.org.Alternatively, comments may be sent by post to the Secretariat of theBasel Committee on Banking Supervision, Bank for InternationalSettlements, CH-4002 Basel, Switzerland.All comments may be published on the Bank for InternationalSettlementss website unless a commenter specifically requestsconfidential treatment. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  38. 38. 32 The 29 Core Principles are:Supervisory powers, responsibilities and functionsPrinciple 1 – Responsibilities, objectives and powers: An effective systemof banking supervision has clear responsibilities and objectives for eachauthority involved in the supervision of banks and banking groups.A suitable legal framework for banking supervision is in place to provideeach responsible authority with the necessary legal powers to authorisebanks, conduct ongoing supervision, address compliance with laws andundertake timely corrective actions to address safety and soundnessconcerns.Principle 2 – Independence, accountability, resourcing and legalprotection for supervisors: The supervisor possesses operationalindependence, transparent processes, sound governance and adequateresources, and is accountable for the discharge of its duties.The legal framework for banking supervision includes legal protection forthe supervisor.Principle 3 – Cooperation and collaboration: Laws, regulations or otherarrangements provide a framework for cooperation and collaborationwith relevant domestic authorities and foreign supervisors.These arrangements reflect the need to protect confidential information.Principle 4 – Permissible activities: The permissible activities ofinstitutions that are licensed and subject to supervision as banks areclearly defined and the use of the word “bank” in names is controlled.Principle 5 – Licensing criteria: The licensing authority has the power toset criteria and reject applications for establishments that do not meet thecriteria. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  39. 39. 33At a minimum, the licensing process consists of an assessment of theownership structure and governance (including the fitness and proprietyof Board members and senior management) of the bank and its widergroup, and its strategic and operating plan, internal controls, riskmanagement and projected financial condition (including capital base).Where the proposed owner or parent organsation is a foreign bank, theprior consent of its home supervisor is obtained.Principle 6 – Transfer of significant ownership: The supervisor has thepower to review, reject and impose prudential conditions on anyproposals to transfer significant ownership or controlling interests helddirectly or indirectly in existing banks to other parties.Principle 7 – Major acquisitions: The supervisor has the power to approveor reject (or recommend to the responsible authority the approval orrejection of), and impose prudential conditions on, major acquisitions orinvestments by a bank, against prescribed criteria, including theestablishment of cross-border operations, and to determine that corporateaffiliations or structures do not expose the bank to undue risks or hindereffective supervision.Principle 8 – Supervisory approach: An effective system of bankingsupervision requires the supervisor to develop and maintain aforward-looking assessment of Core Principles for Effective BankingSupervision the risk profile of individual banks and banking groups,proportionate to their systemic importance; identify, assess and addressrisks emanating from banks and the banking system as a whole; have aframework in place for early intervention; and have plans in place, inpartnership with other relevant authorities, to take action to resolve banksin an orderly manner if they become non-viable.Principle 9 – Supervisory techniques and tools: The supervisor uses anappropriate range of techniques and tools to implement the supervisory Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  40. 40. 34approach and deploys supervisory resources on a proportionate basis,taking into account the risk profile and systemic importance of banks.Principle 10 – Supervisory reporting: The supervisor collects, reviews andanalyses prudential reports and statistical returns from banks on both asolo and a consolidated basis, and independently verifies these reports,through either on-site examinations or use of external experts.Principle 11 – Corrective and sanctioning powers of supervisors: Thesupervisor acts at an early stage to address unsafe and unsound practicesor activities that could pose risks to banks or to the banking system.The supervisor has at its disposal an adequate range of supervisory toolsto bring about timely corrective actions.This includes the ability to revoke the banking licence or to recommendits revocation.Principle 12 – Consolidated supervision: An essential element of bankingsupervision is that the supervisor supervises the banking group on aconsolidated basis, adequately monitoring and, as appropriate, applyingprudential standards to all aspects of the business conducted by thebanking group worldwide.Principle 13 – Home-host relationships: Home and host supervisors ofcrossborder banking groups share information and cooperate for effectivesupervision of the group and group entities, and effective handling ofcrisis situations.Supervisors require the local operations of foreign banks to be conductedto the same standards as those required of domestic banks. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  41. 41. 35Prudential regulations and requirementsPrinciple 14 – Corporate governance: The supervisor determines thatbanks and banking groups have robust corporate governance policies andprocesses covering, for example, strategic direction, group andorganisational structure, control environment, responsibilities of thebanks’ Boards and senior management, and compensation.These policies and processes are commensurate with the risk profileand systemic importance of the bank.Principle 15 – Risk management process: The supervisor determines thatbanks have a comprehensive risk management process (includingeffective Board and senior management oversight) to identify, measure,evaluate, monitor, report and control or mitigate all material risks on atimely basis and to assess the adequacy of their capital and liquidity inrelation to their risk profile and market and macroeconomic conditions.This extends to development and review of robust and credible recoveryplans, which take into account the specific circumstances of the bank.The risk management process is commensurate with the risk profile andsystemic importance of the bank.Principle 16 – Capital adequacy: The supervisor sets prudent andappropriate capital adequacy requirements for banks that reflect the risksundertaken by, and presented by, a bank in the context of the marketsand macroeconomic conditions in which it operates.The supervisor defines the components of capital, bearing in mindtheir ability to absorb losses.Principle 17 – Credit risk: The supervisor determines that banks have anadequate credit risk management process that takes into account theirrisk appetite, risk profile and market and macroeconomic conditions. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  42. 42. 36This includes prudent policies and processes to identify, measure,evaluate, monitor, report and control or mitigate credit risk (includingcounterparty credit risk) on a timely basis.The full credit lifecycle should be covered including credit underwriting,credit evaluation, and the ongoing management of the bank’s loan andinvestment portfolios.Principle 18 – Problem assets, provisions and reserves: The supervisordetermines that banks have adequate policies and processes for the earlyidentification and management of problem assets, and the maintenanceof adequate provisions and reserves.Principle 19 – Concentration risk and large exposure limits: Thesupervisors determines that banks have adequate policies and processesto identify, measure, evaluate, monitor, report and control or mitigateconcentrations of risk on a timely basis.Supervisors set prudential limits to restrict bank exposures to singlecounterparties or groups of connected counterparties.Principle 20 – Transactions with related parties: In order to preventabuses arising in transactions with related parties and to address the riskof conflict of interest, the supervisor requires banks to enter into anytransactions with related parties on an arm’s length basis; to monitorthese transactions; to take appropriate steps to control or mitigate therisks; and to write off exposures to related parties in accordance withstandard policies and processes.Principle 21 – Country and transfer risks: The supervisor determines thatbanks have adequate policies and processes to identify, measure,evaluate, monitor, report and control or mitigate country risk and transferrisk in their international lending and investment activities on a timelybasis. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  43. 43. 37Principle 22 – Market risks: The supervisor determines that banks have anadequate market risk management process that takes into account theirrisk appetite, risk profile, and market and macroeconomic conditions andthe risk of a significant deterioration in market liquidity.This includes prudent policies and processes to identify, measure,evaluate, monitor, report and control or mitigate market risks on a timelybasis.Principle 23 – Interest rate risk in the banking book: The supervisordetermines that banks have adequate systems to identify, measure,evaluate, monitor, report and control or mitigate interest rate risk in thebanking book on a timely basis.These systems take into account the bank’s risk appetite, risk profile andmarket and macroeconomic conditions.Principle 24 – Liquidity risk: The supervisor sets prudent and appropriateliquidity requirements (which can include either quantitative orqualitative requirements or both) for banks that reflect the liquidity needsof the bank.The supervisor determines that banks have a strategy that enablesprudent management of liquidity risk and compliance with liquidityrequirements.The strategy takes into account the bank’s risk profile as well as marketand macroeconomic conditions and includes prudent policies andprocesses, consistent with the bank’s risk appetite, to identify, measure,evaluate, monitor, report and control or mitigate liquidity risk over anappropriate set of time horizons.Principle 25 – Operational risk: The supervisor determines that bankshave an adequate operational risk management framework that takes into Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  44. 44. 38account their risk appetite, risk profile and market and macroeconomicconditions.This includes prudent policies and processes to identify, assess, evaluate,monitor, report and control or mitigate operational risk on a timely basis.Principle 26 – Internal control and audit: The supervisor determines thatbanks have adequate internal controls to establish and maintain aproperly controlled operating environment for the conduct of theirbusiness taking into account their risk profile.These include clear arrangements for delegating authority andresponsibility; separation of the functions that involve committing thebank, paying away its funds, and accounting for its assets and liabilities;reconciliation of these processes; safeguarding the bank’s assets; andappropriate independent internal audit and compliance functions to testadherence to these controls as well as applicable laws and regulations.Principle 27: Financial reporting and external audit: The supervisordetermines that banks and banking groups maintain adequate andreliable records, prepare financial statements in accordance withaccounting policies and practices that are widely accepted internationallyand annually publish information that fairly reflects their financialcondition and performance and bears an independent external auditor’sopinion.The supervisor also determines that banks and parent companies ofbanking groups have adequate governance and oversight of the externalaudit function.Principle 28 – Disclosure and transparency: The supervisor determinesthat banks and banking groups regularly publish information on aconsolidated and, where appropriate, solo basis that is easily accessibleand fairly reflects their financial condition, performance, risk exposures, Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  45. 45. 39risk management strategies and corporate governance policies andprocesses.Principle 29 – Abuse of financial services: The supervisor determines thatbanks have adequate policies and processes, including strict customerdue diligence rules to promote high ethical and professional standards inthe financial sector and prevent the bank from being used, intentionally orunintentionally, for criminal activities.The Basel iii Compliance Professionals Association (BiiiCPA) is thelargest association of Basel iii Professionals in the world. It is a businessunit of the Basel ii Compliance Professionals Association (BCPA), whichis also the largest association of Basel ii Professionals in the world. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  46. 46. 40 Basel III Speakers BureauThe Basel iii Compliance Professionals Association (BiiiCPA) hasestablished the Basel III Speakers Bureau for firms and organizationsthat want to access the Basel iii expertise of Certified Basel iiiProfessionals (CBiiiPros).The BiiiCPA will be the liaison between our certified professionals andthese organizations, at no cost. We strongly believe that this can be agreat opportunity for both, our certified professionals and the organizers.To learn more:www.basel-iii-association.com/Basel_iii_Speakers_Bureau.html Certified Basel iii Professional (CBiiiPro) Distance Learning and Online Certification Program.The Cost: US$ 297What is included in this price:A. The official presentations we use in our instructor-led classes (1426slides)You can find the course synopsis at:www.basel-iii-association.com/Course_Synopsis_Certified_Basel_III_Professional.htmlB. Up to 3 Online ExamsThere is only one exam you need to pass, in order to become a CertifiedBasel iii Professional (CBiiiPro). If you fail, you must study again theofficial presentations, but you do not need to spend money to try again.Up to 3 exams are included in the price. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  47. 47. 41To learn more you may visit:www.basel-iii-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.basel-iii-association.com/Certification_Steps_CBiiiPro.pdfC. Personalized Certificate printed in full color.Processing, printing and posting to your office or home.To become a Certified Basel iii Professional (CBiiiPro) you must followthe steps described at:www.basel-iii-association.com/Basel_III_Distance_Learning_Online_Certification.html Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  48. 48. 1 Basel iii Compliance Professionals Association (BiiiCPA) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.com Basel III News, February 2012Dear Member,Most of the major banks try hard to understand and implement the newBasel iii framework. The same time, banks and financial conglomeratestry hard to influence politicians and change some of the strict rules.Are these banks right or wrong? It is hard to say. All regulatoryframeworks have unintended consequences…Fitch Ratings, the credit ratings agency, has released a statement whichexplains that the US Federal Reserves adoption of the Basel III capitalrequirements can harm the credit markets by restricting the activities ofbanks that make loans.Mr Dimon, the chief executive and chairman of JPMorgan Chase (anddefinitely not a fan of the new Basel iii framework) has said that banks allaround the world were concentrating on increasing their exposures toassets that have advantageous risk weighting, while limiting exposure toassets that have disadvantageous risk weighting. Where is the problem? Ahuge one… regulators are causing the banking system to amassenormous concentrations of assets that have advantageous risk weightingAn important concentration risk that has a simple cause: Basel ii/iii.The current crisis in Europe is an example of wrong Basel 2 principlesand capital regulations. According to Basel 2, sovereign risk is not that animportant risk… so many times, banks did not have to set aside anycapital at all for the government bonds they held. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  49. 49. 2Banks in Europe also try to avoid some of the most challenging Basel iiiimplementation rules. France and Germany are also pushing for a delay.But the last week of January, Michel Barnier, the EuropeanCommissioner in charge of financial regulation, said that he would stickstrictly to a timetable already agreed for implementing stricter Basel IIIbank capital requirements.Basel iii is a good framework. Good but not great.Basel III liquidity standard and strategy for assessingimplementation of standardsEndorsed by Group of Governors and Heads of Supervision8 January 2012The Group of Governors and Heads of Supervision (GHOS), theoversight body of the Basel Committee on Banking Supervision, met on 8January 2012.The main items of discussion were the Basel Committees proposals onthe Liquidity Coverage Ratio (LCR) and its strategy for assessingimplementation of the Basel regulatory framework more broadly.The GHOS endorsed the Committees comprehensive approach tomonitoring and reviewing implementation of the Basel regulatoryframework.GHOS Chairman and Governor of the Bank of England Mervyn Kingnoted that "the focus on implementation represents a significant newdirection for the Basel Committee.The level of scrutiny and transparency applied to the manner in whichcountries implement the rules the Committee has developed and agreedwill help ensure full, timely and consistent implementation of theinternational minimum requirements". Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  50. 50. 3The Committee will monitor, on an ongoing basis, the status of membersadoption of the globally-agreed Basel rules.It will review the compliance of members domestic rules or regulationswith the international minimum standards in order to identify differencesthat could raise prudential or level playing field concerns.The Committee will also review the measurement of risk-weighted assetsto ensure consistency in practice across banks and jurisdictions.Against this background, each Basel Committee member country hascommitted to undergo a detailed peer review of its implementation of allcomponents of the Basel regulatory framework.In addition to Basel III, the Committee will assess implementation ofBasel II and Basel II.5 (ie the July 2009 enhancements on market risk andresecuritisations).The GHOS also endorsed the Committees agreement to publish theresults of the assessments.The Basel Committee will discuss and define the protocol governing thepublication of the results.The GHOS also agreed that the initial peer reviews should assessimplementation in the European Union, Japan and the United States.These reviews will commence in the first quarter of 2012.Mr Stefan Ingves, Chairman of the Basel Committee and Governor of theSwedish Riksbank, noted that "the Committees rigorous peer reviewprocess is a clear signal that effective implementation of the Baselstandards is a top priority. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  51. 51. 4Raising the resilience of the global banking system, restoring andmaintaining market confidence in regulatory ratios, and providing a levelplaying field will only be achieved through full, timely and consistentimplementation".With respect to the Liquidity Coverage Ratio, GHOS members reiteratedthe central principle that a bank is expected to have a stable fundingstructure and a stock of high-quality liquid assets that should be availableto meet its liquidity needs in times of stress.Once the LCR has been implemented, its 100% threshold will be aminimum requirement in normal times.But during a period of stress, banks would be expected to use their pool ofliquid assets, thereby temporarily falling below the minimumrequirement.The Basel Committee has been asked to provide further elaboration onthis principle by clarifying the LCR rules text to state explicitly that liquidassets accumulated in normal times are intended to be used in times ofstress.It will also provide additional guidance on the circumstances that wouldjustify the use of the pool.The Basel Committee will also examine how central banks interact withbanks during periods of stress, with a view to ensuring that the workingsof the LCR do not hinder or conflict with central bank policies.The GHOS also reaffirmed its commitment to introduce the LCR as aminimum standard in 2015.Members fully supported the Committees proposed focus, course ofaction and timeline to finalise key aspects of the LCR by addressing Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  52. 52. 5specific concerns regarding the pool of high-quality liquid assets as wellas some adjustments to the calibration of net cash outflows.The modifications currently under investigation apply only to a few keyaspects and will not materially change the frameworks underlyingapproach. The GHOS directed the Committee to finalise and subsequently publishits recommendations in these three areas by the end of 2012.Governor King said, "The aim of the Liquidity Coverage Ratio is toensure that banks, in normal times, have a sound funding structure andhold sufficient liquid assets such that central banks are asked to performonly as lenders of last resort and not as lenders of first resort.While the Liquidity Coverage Ratio may represent a significant challengefor some banks, the benefits of a strong liquidity regime outweigh theassociated implementation costs." Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  53. 53. 6SIFIs: is there a need for a specific regulation on systematicallyimportant financial institutions?Remarks of Stefan Ingves, Chairman of the Basel Committee on BankingSupervision and Governor of Sveriges Riksbank, prepared for roundtablediscussion at the European Ideas Network Seminar on Long-termgrowth: organizing the stability and attractiveness of European FinancialMarkets, Berlin (Deutsche Bank), 19-20 January 2012.Good morning and thank you for inviting me to share some thoughts withyou on the question of whether a specific treatment is warranted forsystemically important financial institutions, or "SIFIs".In the few minutes I have to introduce this topic, I will set out the basisfor the Basel Committees response to this question, which is anunqualified "yes".I will say a few words about the Committees view and the actions wehave taken on SIFIs that have been strongly influenced by recentexperience.I will then review how our response will help to address the too-big-to-failissue.Our work on this issue is ongoing and I will then say a few words aboutthe Committees current efforts.I will conclude by sharing with you my thoughts on the direction of futurework related to global systemically important banks - or G-SIBs.Experiences from the banking system - focus on G-SIBsThe Basel Committees motivation for policy measures for G-SIBs thatsupplement the Basel III framework is based on the "negative Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  54. 54. 7externalities" that these firms create and which current regulatorypolicies do not fully address.These adverse side effects can become amplified by the global reach ofthese firms - a problem in any one G-SIB could trigger problems for otherfinancial institutions around the world and even disrupt the globaleconomy (eg Lehman Brothers).The impact caused by the failure of large, complex, interconnected,global financial institutions can send shocks through the financial systemwhich, in turn, can harm the real economy.This scenario played out in the recent crisis during which authorities hadlimited options other than the provision of public support as a means foravoiding the transmission of such shocks. Such rescues have had obvious implications for fiscal budgets andtaxpayers. In addition, the moral hazard arising from public sectorinterventions and implicit government guarantees can also have longerterm adverse consequences.These include inappropriate risk-taking, reduced market discipline,competitive distortions, and increased probability of distress in the future.The Basel Committees responseWhat has the Committee done in response to the G-SIB issue?As a starting point, we recognised that there is no single solution fordealing with the negative externalities posed by G-SIBs.Basel III will help improve the resilience of banks and banking systems ina number of ways. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  55. 55. 8These include better quality and higher levels of capital; improving riskcoverage; introducing a leverage ratio to serve as a backstop to therisk-based framework; introducing capital buffers as well as a globalstandard for liquidity risk.These measures are significant but are not sufficient to address thenegative externalities posed by G-SIBs nor are they adequate to protectthe system from the wider spillover risks of G-SIBs.To specifically address the G-SIBs issue, the Committees approach is toreduce the probability of a G-SIBs failure and the impact of a potentialfailure by increasing its loss absorbency in the form of a common equitycapital surcharge.Based on a methodology for assessing systemic importance of G-SIBs,this additional loss absorbency will complement the measures adopted bythe Financial Stability Board (FSB) to establish robust national resolutionand recovery regimes and to improve cross-border harmonisation andcoordination.But even with improved resolution capacity, the failure of the largest andmost complex international banks will continue to pose disproportionaterisks to the global economy.Our empirical analysis indicates that the costs of requiring additional lossabsorbency for G-SIBs are outweighed by the associated benefits ofreducing the probability of a systemic financial crisis.We have also introduced transitional arrangements to implement thecapital surcharge that help ensure that the banking sector can meet thehigher capital standards through reasonable earnings retention andcapital raising, while still supporting lending to the economy.The Committees analysis points to additional loss absorbency generallyin the range of around 1% to 8% of risk-weighted assets. Our agreed Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  56. 56. 9calibration from 1% to 2.5% is in the lower half of this estimated range. Asa means to discourage banks from becoming even more systemicallyimportant, there is a potential surcharge of 3.5%.Looking aheadThe Committees approach to dealing with G-SIBs was endorsed by theG20 Leaders at their November 2011 summit.At that time, an initial list of 29 banks that were deemed globallysystemically important was published.This is not a fixed list and it will be updated annually and published eachNovember.Transparency is a very high priority and we expect market discipline toplay an important role.As such, the methodology and the data used to assess systemicimportance will be publicly available so that markets and institutions canreplicate the Committees determination.The requirements will be phased in starting January 2016 with fullimplementation by January 2019.The basis for adopting specific requirements to address externalitiesposed by G-SIBs is not exclusive for the global banking system.Measures should be developed for all institutions whose disorderlydistress or failure, because of their size, complexity and systemicinterconnectedness would cause significant disruption to the widerfinancial system and economic activity. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  57. 57. 10These could include financial market infrastructures, insurancecompanies, other non-bank financial institutions and domesticsystemically important banks.The Committee is now in the process of determining whether there areelements of the G-SIBs assessment methodology that could be applied todomestic SIBs.A number of countries, notably Switzerland, the United Kingdom andSweden have already taken action to implement higher capitalrequirements for banks that are deemed systemically important at thenational level.The Swiss too-big-to-fail package, which was approved by the SwissParliament in September 2011, is due to come into force on 1 March 2012.The package, which is particularly demanding with respect to capitalrequirements, consists of the following:A capital buffer of 8.5% of risk-weighted assets.This is in addition to the Basel III minimum requirement of 10.5%.Of this 8.5%, at least 5.5% must be in the form of common equity whileup to 3% may be held in the form of convertible capital (CoCos).The CoCos would convert when a banks common equity falls below 7%.The two big Swiss banks, Credit Swiss and UBS will have to hold a total of10% common equity tier 1 capital.This exceeds both Basel III and the internationally agreed capitalsurcharge for G-SIBs.The package also includes a so-called "progressive component" equal to6% of RWA consisting entirely of CoCos. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  58. 58. 11Unlike the CoCos under the buffer, the Cocos under the progressivecomponent will convert when capital levels falls below 5% commonequity. In the United Kingdom, Sir John Vickers, chair of the IndependentCommission on Banking, recommended in September 2011 thatsystemically important retail banks defined as retail banks with RWAexceeding 3% of GDP should have primary loss-absorbing capacity of atleast 17-20% of RWA.At least 10% must be covered by equity capital while the remaining 7-10%may consist of long-term unsecured debt that regulators could require tobear losses in resolution. These are the so called bail-in bonds.The proposed changes related to loss absorbency are intended to be fullycompleted by the beginning of 2019.In Sweden, authorities (the Swedish Financial Supervisory Authority, theMinistry of Finance and the Riksbank) announced in November 2011 thatcapital ratios for the four major banks will be advocated to at least 10%common equity to RWA from 1 January 2013, and 12% from 1 January2015.The requirements follow the Basel III definitions and include, like BaselIII, a capital conservation buffer of 2.5%, but no countercyclical buffer.The Swedish proposal goes further than Basel III, both with regard to thelevels and in terms of timingConclusionBasel III will improve the resilience of banks and banking systems but byitself is not sufficient to fully address the negative externalities arisingfrom global systemically important banks. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  59. 59. 12These adverse side effects, which include an increased risk of contagionand moral hazard, have serious implications for fiscal budgets andtaxpayers.In response, the Basel Committee has developed assessmentmethodology to identify G-SIBs and has adopted an additional lossabsorbency requirement for such banks that must be met through highercommon equity.This is meant to reduce the probability of a G-SIBs failure by increasingits loss absorbency in the form of a common equity capital Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  60. 60. 13FSB - G20 MONITORING PROGRESSThe United States of AmericaInteresting partsThe Basel III framework agreement and other Basel III proposals, mustbe fully implemented through US regulations by the end of 2012.The United States is committed to meeting these deadlines.U.S. agencies expect to release a final rule in 2012, in order to meet theimplementation timeline of January 1, 2013.Stress testing forms one part of enhanced supervision under theDodd-Frank Act (DFA).The DFA requires one supervisory stress test per year to be conductedby the Federal Reserve on banks with more than $50 billion inconsolidated assets and/or banks designated for heightened supervisionand two stress tests per year by large firms.The DFA requires both banks and supervisors to disclose results,although the exact nature of that disclosure is still subject to rule making.On March 22, 2010, U.S. supervisors issued the final interagency guidanceon funding and liquidity risk management.The policy statement emphasizes the importance of cash flowprojections, diversified funding sources, stress testing, a cushion of liquidassets, and a formal, well developed contingency funding plan as primarytools for measuring and managing liquidity risk.In the spring of 2011, Federal Reserve completed a ComprehensiveCapital Analysis and Review (CCAR), a cross-institution study of thecapital plans of the 19 largest U.S. bank holding companies. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  61. 61. 14The CCAR involved a forward-looking, detailed evaluation of capitalplanning and stress scenario analysis at the 19 large bank holdingcompanies.As part of the CCAR, the Federal Reserve assessed the firms ability, aftertaking into account the proposed capital actions, to maintain sufficientcapital levels to continue lending in stressed economic environments,including under an adverse scenario specified by the Federal Reserve.The Dodd-Frank Act requires the Federal Reserve to conduct annualstress tests for all systemically important companies and publish asummary of the results.Additionally, the Act requires that these systemically importantcompanies and all other financial companies with $10 billion or more inassets that are regulated by a primary Federal financial regulatory agencyconduct semi-annual or annual (respectively) internal stress tests andpublish a summary of the resultsSupervisory reviews are ongoing, with a focus on requiring bankorganizations to have sound capital planning policies and processes fordeterminations regarding dividend, as well as the redemption andrepurchase of common stock and other tier 1 capital instruments.Regulators are writing rules governing stress tests under the DFA.The deadline for implementation of rules governing stress tests is January17, 2012.U.S. agencies are incorporating the guidance into the supervisoryprocess. U.S. supervisors continue to monitor the liquidity risk profiles ofall banks via the field examination staff.They also collect liquidity data at large and regional banks on a daily ormonthly basis. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  62. 62. 15On June 15, 2011, U.S. banking supervisors published proposed guidanceon stress testing applicable to all banking organizations with more $10billion in consolidated assetsAddressing systemically important financial institutions (SIFIs)The Dodd-Frank Act modifies U.S. regulatory framework by creating theFinancial Stability Oversight Council (FSOC), chaired by the Secretary ofthe Treasury, with the authority to determine that a nonbank financialcompany shall be supervised by the Board of Governors and subject toprudential standards if the Council determines that material financialdistress at the nonbank financial company, or the nature, scope, size,scale, concentration, interconnectedness, or mix of the activities of thenonbank financial company, could pose a threat to the financial stabilityof the United States.The FSOC issued a second notice of proposed rulemaking and proposedguidance on October 11, 2011.The banking agencies have actively participated in drafting andcommenting on the documents included in the Key Attributes ofEffective Resolution Regimes for Financial Institutions that wasapproved by the FSB Plenary in Oct. 2011.CMG meetings have been held with major U.S. banking firms and theirsignificant host regulators.The U.S. firms submitted initial recovery plans to U.S. regulators onAugust 16, 2010. U.S. regulators reviewed the plans and are working withthe firms to further refine them.Information from the recovery plans will help to inform the U.S.regulators in developing and maintaining firm-specific resolution plans. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  63. 63. 16The Dodd-Frank Act created new authority to resolve nonbank financialinstitutions, similar to that which the FDIC has with regard to insuredbanks, whose failure could have serious systemic effects.Additionally, legislation requires resolution plans for all large bankholding companies and non-bank financial companies subject toheightened supervision by the Federal Reserve.Title II of the Dodd-Frank Act allows the FDIC to be appointed asreceiver for nonbank financial firms, the failure of which could causesystemic risk to the U.S. economy.Under the Dodd-Frank Act framework, the FDIC can create a bridge firmin order to maximize value in an orderly liquidation process for a financialgroup.While Title II became effective upon signing, the FDIC draftedregulations for the implementation of its authority under Title II toprovide clarity on how the FDIC would implement a resolution under theDodd-Frank Act.A first set of interim final rules was adopted in January 2011. A second setof rules was proposed in March 2011, and a final rule was approved in July2011.The FRB and FDIC are finalizing issuance of a rule implementingthe resolution plan provision in the legislation which is due 18 monthsfrom enactment.On September 21, 2011, the FDIC adopted an interim rule requiring aninsured depository institution with $50 billion or more in total assets tosubmit to the FDIC a contingency plan for the resolution of suchinstitution in the event of its failure. Comments are due by November 21,2011. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  64. 64. 17Extending the regulatory perimeter to entities/activities thatpose risks to the financial systemThe FSOC has authority to expand the U.S. regulatory perimeter bydesignating the largest, most interconnected nonbank firms forheightened prudential standards and supervision by the Federal Reserve.The FSOC has proposed a rule regarding the criteria and process fordesignating nonbank financial firms.FSOC issued a second more detailed proposal on this framework, withinterpretive guidance on October 11, 2011 for public comment.Hedge fundsOperators and managers of commodity pools are required to register withthe CFTC as Commodity Pool Operators, and those who make tradingdecisions on a pool’s behalf must register with the CFTC as CommodityTrading Advisors.Certain exemptions from registration apply, however, including foroperators of pools that accept no more than 15 participants or are“otherwise regulated” as an SECregistered investment company, as wellas operators of pools that have limited futures activity or that restrictparticipation to sophisticated persons.Pursuant to legislation passed by Congress, CFTC and SEC staff havejointly proposed regulations for public comment that establish the formand content of the reports that dual-registered investment advisers toprivate funds are required to file.The regulations will require investment advisers to maintain records andmay require them to file information related to: use of leverage;counterparty credit risk exposure; trading and investment positions; Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  65. 65. 18valuation policies and practices of the advised fund(s); types of assetsheld; side arrangements or side letters; trading practices; and anyother information deemed necessary.Reports of dual registrants are expected to be filed SEC and madeavailable to the CFTC.On January 26, 2011, the CFTC and SEC jointly proposed rules that wouldrequire certain private fund advisers to maintain records and certainprivate fund advisers to file non-public information designed to assist theFinancial Stability Oversight Council in its assessment of systemic risk inthe U.S. financial system.Under the proposal, each private fund adviser would file certain basicinformation annually, and certain large private advisers (i.e. thoseadvisers managing hedge funds that collectively have at least $1 billion inassets as of the close of business on any day during the reporting periodfor the required report) would file basic information each quarter alongwith additional systemic risk related information concerning certain oftheir private funds.The comment period closed on April 12, 2011, and the CFTC and SECplan to finalize the rules this fall.Recordkeeping and reporting requirements will include disclosure of: (i) assets under management; (ii) use of leverage; (iii) counterparty credit risk exposure; (iv) trading and investment positions; and (v) trading practices, as well as other specified information.The Dodd-Frank Act provides for a one-year transition period from thedate of enactment before the private fund adviser registration andrecordkeeping/disclosure obligations go into effect. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  66. 66. 19The SEC will engage in rulemaking to implement certain provisions.The Dodd-Frank Act generally requires all advisers to hedge funds (andother private pools of capital, including private equity funds) whoseassets under management exceed $100 million to register with the SEC.The Act authorizes the SEC to impose recordkeeping and reportingrequirements on not only those advisers required to register, but alsocertain other private fund advisers (i.e. advisers to venture capital funds).The recordkeeping and reporting requirements are designed to requireprivate fund advisers to report information on the funds they manage thatis sufficient to assess whether any fund poses a threat to financialstability.SecuritisationIn April 2010, the SEC proposed revisions to its rules relating to ABS shelfeligibility.In July 2010, US Congress passed the Dodd-Frank Act, which requiresrulemaking to implement further changes related to the offering ofsecuritized products in the United States.Section 943 of the Dodd-Frank Act requires issuers of ABS to disclose thehistory of the requests they received and repurchases they made related totheir outstanding ABS.The SEC approved final rules to implement Section 943 on January 20,2011.The final rules require ABS issuers to file with the SEC, in tabular format;the history of the requests they received and repurchases they maderelating to their outstanding ABS. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  67. 67. 20The table will provide comparable disclosures so that investors mayidentify originators with clear underwriting deficiencies.The SEC also adopted final rules to implement Section 945 of theDodd-Frank Act, which requires ABS issuers to review assets underlyingthe ABS and to disclose the nature of the review.In July 2011, the SEC issued a follow up re-proposal to the April 2010proposal on ABS shelf eligibility.As part of this re-proposal, the SEC solicited comments on provisionsrequiring issuers of private ABS to represent that they will make the sameinformation available to investors that would be provided if the securitieswere publicly registered.The July 2011 re-proposal also solicited comments on whether the April2010 proposal appropriately implemented Section 942(b) of the Dodd-Franck Act with regard to the disclosure of asset-level or loan-level datafor ABS, if such data are necessary for investors to independently performdue diligence.In August 2011 the SEC adopted final rules to implement Section 942 ofthe Dodd Frank Act to eliminate the automatic suspension of ExchangeAct reporting obligations for ABS issuers as long as securities are held bynon-affiliates of the issuer.Also pursuant to Section 942, the SEC adopted rules to allow for thesuspension of reporting obligations for ABS issuers for a semi annualperiod if there are no longer any ABS of the class sold in a registeredtransaction held by non-affiliates of the issuer.In April 2010, IOSCO issued its Disclosure Principles for Public Offeringsand Listings of Asset-backed Securities. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  68. 68. 21The SEC adopted new rules related to ABS in January and August 2011.Implementation is ongoing.Section 941(b) of the Dodd-Frank Act requires federal banking agenciesand the SEC to jointly prescribe regulations that require securitizers ofABS, by default, to maintain 5% of the credit risk in assets transferred,sold or conveyed through the issuance of ABS.To implement this, the SEC and other Federal agencies proposed rules inMarch 2011 relating to credit risk retention requirements.The proposed rules would permit a sponsor to retain an economic interestequal to at least 5% of the credit risk of the assets collateralizing an ABSissuance.The proposed rules would also permit a sponsor to choose from a menu ofretention options, with disclosure requirements specifically tailored toeach form of risk retention.The New York Department of Insurance considered legislation to reviseoversight of financial guaranty insurers, which would have served as thebasis for additional state activity in this area.This legislative response was in addition to increased monitoring andsupervision of financial guaranty insurers that is ongoing.The New York Department of Insurance has taken proactive steps toensure that other relevant state insurance department regulators remaincurrent and up-to-date on the solvency of financial guaranty insurersthrough quarterly updates and interstate regulatory communication.However, the market has contracted such that there is only one activewriter of financial guaranty insurance focusing primarily on municipalbond insurance coverage (and not structured products) and consequentlythere has not been a need for legislative revisions at this time. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  69. 69. 22State insurance regulators are closely monitoring, and collaborating onsupervision of financial guaranty insurers.Given the current scrutiny and the significant market contraction intomore traditional bond insurance coverage, there is no additionallegislative or regulatory changes anticipated at this time.Credit rating agenciesThe Credit Rating Agency Reform Act of 2006 (Rating Agency Act)provided the SEC with exclusive authority to implement a registrationand oversight program for Nationally Recognized Statistical RatingOrganizations (NRSROs).In June 2007, the SEC approved rules implementing a registration andoversight program for NRSROs, which became effective that samemonth.The rules established registration, recordkeeping, financial reporting andoversight rules for credit rating agencies that apply to be registered withthe SEC.These rules are consistent with the principles set forth in the IOSCOStatement of Principles Regarding the Activities of Credit RatingAgencies and the IOSCO Code of Conduct Fundamentals for CreditRating Agencies.Since adopting the implementing rules in 2007, the SEC has adoptedadditional amendments to its NRSRO rules.The Dodd-Frank Act contains a number of provisions designed tostrengthen the SEC’s regulatory oversight of NRSROs. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  70. 70. 23On May 18, 2011, the SEC voted to propose new rules and amendmentsthat would implement certain provisions of the Dodd-Frank Act andenhance the SEC’s existing rules governing credit ratings and NRSROs.The Rating Agency Act was enacted in order “to improve ratings qualityfor the protection of investors and in the public interest by fosteringaccountability, transparency, and competition in the credit ratingindustry.”To that end, the Rating Agency Act and the SEC’s implementingregulations prohibit certain conflicts of interest for NRSROs and requireNRSROs to disclose and manage certain others.NRSROs are also required to disclose their methodologies andunderlying assumptions related to credit ratings they issue in addition tocertain performance statistics.Under the new rules and rule amendments proposed by the SEC on May18, 2011 to implement certain provisions of the Dodd-Frank Act, NRSROswould be required to, among other things:- Report on internal controls.- Protect against certain additional conflicts of interest.- Establish professional standards for credit analysts.- Publicly provide – along with the publication of the credit rating – disclosure about the credit rating and the methodology used to determine it.- Enhance their public disclosures about the performance of their credit ratings. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  71. 71. 24Risk managementThe Dodd-Frank Act requires the Federal Reserve to conduct annualstress tests for all systemically important companies and publish asummary of the results.Additionally, the Act requires that these systemically importantcompanies and all other financial companies with $10 billion or more inassets that are regulated by a primary Federal financial regulatory agencyconduct semi-annual or annual (respectively) internal stress tests andpublish a summary of the results.The Federal Reserve has created an enhanced quantitative surveillanceprogram that will use supervisory information, firm specific data analysis,and market based indicators to identify developing strains andimbalances that may affect the largest and most complex firms.Periodic scenario analysis across large firms will enhance understandingof the potential impact of adverse changes in the operating environmenton individual firms and on the system as a whole.This work will be performed by a multi-disciplinary group comprised ofeconomic and market researchers, supervisors, market operationsspecialists, and accounting and legal experts.The Federal Reserve is currently developing rules to implement theprovision in coordination and consultation with the other relevantagencies. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  72. 72. 25The Basel iii Compliance Professionals Association (BiiiCPA) is thelargest association of Basel iii Professionals in the world. It is a businessunit of the Basel ii Compliance Professionals Association (BCPA), whichis also the largest association of Basel ii Professionals in the world. Basel III Speakers BureauThe Basel iii Compliance Professionals Association (BiiiCPA) hasestablished the Basel III Speakers Bureau for firms and organizationsthat want to access the Basel iii expertise of Certified Basel iiiProfessionals (CBiiiPros).The BiiiCPA will be the liaison between our certified professionals andthese organizations, at no cost. We strongly believe that this can be agreat opportunity for both, our certified professionals and the organizers.To learn more:www.basel-iii-association.com/Basel_iii_Speakers_Bureau.html Certified Basel iii Professional (CBiiiPro) Distance Learning and Online Certification Program.The Cost: US$ 297What is included in this price:A. The official presentations we use in our instructor-led classes (1426slides)You can find the course synopsis at:www.basel-iii-association.com/Course_Synopsis_Certified_Basel_III_Professional.html Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  73. 73. 26B. Up to 3 Online ExamsThere is only one exam you need to pass, in order to become a CertifiedBasel iii Professional (CBiiiPro).If you fail, you must study again the official presentations, but you do notneed to spend money to try again. Up to 3 exams are included in the price.To learn more you may visit:www.basel-iii-association.com/Questions_About_The_Certification_And_The_Exams_1.pdfwww.basel-iii-association.com/Certification_Steps_CBiiiPro.pdfC. Personalized Certificate printed in full color.Processing, printing and posting to your office or home.To become a Certified Basel iii Professional (CBiiiPro) you must followthe steps described at:www.basel-iii-association.com/Basel_III_Distance_Learning_Online_Certification.html Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  74. 74. 27Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com
  75. 75. 1 Basel iii Compliance Professionals Association (BiiiCPA) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.com Basel III News, March 2012Dear Member,Today we will start from a very interesting speech and 4 really interestingslides Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com