1 / 116

P a g e | 1

P a g e | 1 Inter n a tio n a l A s s oci a t ion of R isk a nd Compl i a n c e Pro f e s s io n a ls ( I A RCP) 1200 G St re e t NW Su i te 800 W a s h i ng t o n, D C 200 0 5 - 67 0 5 U SA T e l : 202 - 449 - 9750 w w w .ri s k - co m pl i a nce - a s s o c i a tion . co m.

aure
Download Presentation

P a g e | 1

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. P age |1 InternationalAssociationofRiskandCompliance Professionals(IARCP) 1200GStreetNWSuite800Washington, DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext DearMember, Who“leadstheworldinitsimplementationofBaselIII”? AccordingtoWayneByres,SecretaryGeneral,BaselCommitteeonBankingSupervision,Asia! “IwouldalsoliketoacknowledgethattheAsianregionleadstheworldinitsimplementationofBaselIII.” But…hecontinues: “Goldilocksexploredthebears’house,testingtheporridge,thechairsandthebedsuntilshefoundthingsthatshethoughtwere“justright” What?Goldilocksexploredthebears’house?Oh,no,GoldilocksisnotcoveredinourBaseliiicourse.Itcould beimportant. Bearshouse?HemeansRussia?No, no,ithasnothingtodowiththecoldwar. Let’slearnmore…Google…Search…Goldilocks: InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  2. P age |2 In1837RobertSoutheypublished"TheStoryoftheThreeBears". InSouthey'stale,threeanthropomorphicbears–"aLittle,Small,WeeBear,aMiddle-sizedBear,andaGreat,HugeBear"–livetogetherinahouseinthewoods. Southeydescribesthemasverygood-natured,trusting,harmless,tidy,andhospitable. Eachbearhashisownporridgebowl,chair,andbed. Onedaytheytakeawalkinthewoodswhiletheirporridgecools. Anoldwoman(whoisdescribedatvariouspointsinthestoryasimpudent,bad,foul-mouthed,ugly,dirtyandavagrantdeservingofastintintheHouseofCorrection)discoversthebears'dwelling. Shelooksthroughawindow,peepsthroughthekeyhole,andliftsthelatch. Assuredthatnooneishome,shewalksin. TheoldwomaneatstheWeeBear'sporridge,thensettlesintohischairandbreaksit. Prowlingabout,shefindsthebears'bedsandfallsasleepinWeeBear'sbed. Theclimaxofthetaleisreachedwhenthebearsreturn. WeeBearfindstheoldwomaninhisbedandcries,"Somebodyhasbeenlyinginmybed,–andheresheis!" Theoldwomanstartsup,jumpsfromthewindow,andrunsawaynevertobeseenagain.” InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  3. P age |3 TwelveyearsafterthepublicationofSouthey'stale,JosephCundalltransformedtheantagonistfromanuglyoldwomantoaprettylittlegirlinhisTreasuryofPleasureBooksforYoungChildren. Thelittlegirlsawasuccessionofnames,includingGoldilocks. HereiswhereBaseliiicomesin,whentheolduglylady(Basel2)becomesaprettygirl(Basel3)–Disclaimer:ThisishowIunderstoodit… But…yes,WayneByres,SecretaryGeneraloftheBaselCommitteeonBankingSupervisionsaid: “Goldilocksexploredthebears’house,testingtheporridge,thechairsandthebedsuntilshefoundthingsthatshethoughtwerejustright.” Itisencoded!!!Pillar2,confidential.Let’sbreakit. “Goldilocks(Basel3)exploredthebears’house(BearStearnsandotherbanks),testingtheporridge(internalmodels,thebutterandporridgeonthebreadofconsultants),thechairs(fitandproperfortheboardandseniormanagement)andthebeds(bonuses)until(itwilltakeuntil2019totesteverything)shefoundthingsthatshethought(inBaselwehave“realisticassumptions”,notfacts)werejustright(finalBaseliiiimplementation,readyforBaseliv)” Youcanlearnmore(aboutthespeech,notGoldilocks,atNumber3ofourlistbelow WelcometotheTop10list. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  4. P age |4 TheUKPrudentialRegulationAuthority(PRA) On1April2013thePrudentialRegulationAuthority(PRA)willbecomeresponsiblefortheprudentialregulationandsupervisionofbanks,buildingsocieties,creditunions,insurersandmajorinvestmentfirms. IntotalthePRAwillregulatearound1,700financialfirms. ThePRA’sroleisdefinedintermsoftwostatutoryobjectivestopromotethesafetyandsoundnessofthesefirmsand,specificallyforinsurers,tocontributetothesecuringofanappropriatedegreeofprotectionforpolicyholders. SemiannualMonetaryPolicyReporttotheCongress SpeechbyMrBenSBernanke,ChairmanoftheBoardofGovernorsoftheFederalReserveSystem,beforetheCommitteeonBanking,Housing,andUrban Affairs,USSenate,WashingtonDC WayneByres,SecretaryGeneralBaselCommitteeonBankingSupervision SIMPLICITY,RISKSENSITIVITYANDCOMPARABILITY:THEREGULATORYBALANCINGACT BCBS-EMEAP-FSIHigh-LevelMeeting,Seoul,Korea InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  5. P age |5 ProtectingInvestorsthroughReliableAudits JeanetteM.Franzel,BoardMember WayneStateUniversity,GeorgeR.HusbandDistinguishedLectureSeries,Detroit,MI “ThecreationofthePCAOBendedmorethan100yearsofself-regulationbythepublicaccountingprofessionintheU.S.,andestablishedtheBoard'sregulatoryframeworkforfirmsthatconductauditsofcompanieswhosesecuritiestradeontheU.S.markets.” CounciloftheEuropeanUnionBaselIIIinEurope–CRD4 IrishPresidencyreachesbreakthroughonnewrulesforstrongerEUbanks TheIrishPresidencyhasreachedabreakthroughin talkswiththeEuropeanParliamentonanoverhaulofbankingrulesincreasingEUfinancialstability. UpdateonMeasurestoAddressUnrecordedFinancialFlows BankNegaraMalaysiawouldliketoprovideanupdateonmeasuresthathavebeenundertakenbymembersofaHighLevelMulti-AgencySpecialTaskForce(TaskForce)toreduceillicitfinancialflows. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  6. P age |6 PCAOBIssuesReporton2007-2010InspectionsofDomesticFirmsthatAudit100orFewerPublicCompaniesWashington,D.C. ThePublicCompanyAccountingOversightBoardtodayreleasedareportsummarizinginspectionobservationsidentifiedinthe2007through2010inspectionsofU.S.firmsthataudited100orfewerpubliccompanies. RemarksbyThomasJ.Curry ComptrolleroftheCurrency BeforetheNationalAssociationofAttorneysGeneralWashington,DC NISTSolicitsViews,IdeasfromStakeholdersforCybersecurityFrameworkforCriticalInfrastructure TheNationalInstituteofStandardsandTechnology(NIST)issuedaRequestforInformation(RFI)intheFederalRegisterasitsfirststepintheprocesstodevelopaCybersecurityFramework,asetofvoluntarystandardsandbestpracticestoguideindustryinreducingcyberriskstothenetworksandcomputersthatsupportcriticalinfrastructurevitaltothenation'seconomy,securityanddailylife. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  7. P age |7 CRDIV FSArefreshedstatementregardingCRDIVimplementation TheoriginalproposeddeadlineforentryintoforceofthedraftEuropeanUnionlegislationtoupdatetheframeworkforcapitalrequirements,knownasCRDIV,hasnowpassed. NegotiationsbetweentheEuropeanParliament,EuropeanCommission andCouncilofMinisterstofinalisethelegislationarestillunderway. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  8. P age |8 TheUKPrudentialRegulationAuthority(PRA) On1April2013thePrudentialRegulationAuthority(PRA)willbecomeresponsiblefortheprudentialregulationandsupervisionofbanks,buildingsocieties,creditunions,insurersandmajorinvestmentfirms. IntotalthePRAwillregulatearound1,700financialfirms. ThePRA’sroleisdefinedintermsoftwostatutoryobjectivestopromotethesafetyandsoundnessofthesefirmsand,specificallyforinsurers,tocontributetothesecuringofanappropriatedegreeofprotectionforpolicyholders. Inpromotingsafetyandsoundness,thePRAwillfocusprimarilyontheharmthatfirmscancausetothestabilityoftheUKfinancialsystem. Astablefinancialsystemisoneinwhichfirmscontinuetoprovidecriticalfinancialservices–apreconditionforahealthyandsuccessfuleconomy. ThePRAwillmakeforward-lookingjudgementsontherisksposedbyfirmstoitsstatutoryobjectives. Thoseinstitutionsandissueswhichposethegreatestrisktothestabilityofthefinancialsystemwillbethefocusofitswork. ThePRAwascreatedbytheFinancialServicesAct(2012)andwillbepartoftheBankofEngland. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  9. P age |9 ItwillhavecloseworkingrelationshipswithotherpartsoftheBank,includingtheFinancialPolicyCommitteeandtheSpecialResolutionUnit. ThePRAwillworkalongsidetheFinancialConductAuthority(FCA) creatinga“twinpeaks”regulatorystructureintheUK. TheFCAwillbeaseparateinstitutionandnotpartoftheBankofEngland. TheFCAwillberesponsibleforpromotingeffectivecompetition,ensuringthatrelevantmarketsfunctionwell,andfortheconductregulationofallfinancialservicesfirms. Thisincludesactingtopreventmarketabuseandensuringthatconsumersgetafairdealfromfinancialfirms. TheFCAwilloperatetheprudentialregulationofthosefinancialservicesfirmsnotsupervisedbythePRA,suchasassetmanagersandindependentfinancialadvisers. Priorto1April2013,theFinancialServicesAuthority(FSA)willcontinuetoberesponsibleforprudentialandconductregulationintheUK. TheBankofEnglandwillhavearesponsibilityforfinancialstability,basedonanamendedstatutoryobjectivetoprotectandenhancethestabilityofthefinancialsystemoftheUnitedKingdom. And,insupportofthisobjective,theFinancialPolicyCommittee(FPC)willbeestablishedwithintheBank,chargedwithidentifying,monitoringandtakingactiontoremoveorreducesystemicrisks. TheFPC,whichalreadyexistsininterimform,willbeabletomakerecommendationsandgivedirectionstothePRAandtheFCAonspecificactionsthatshouldbetakeninordertoachievetheFPC’sobjectives. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  10. P age |10 Sourse:AndrewBailey,ExecutiveDirectoroftheBankofEnglandandManagingDirectoroftheFinancialServicesAuthority’sPrudentialBusinessUnit,andSarahBreedenandGregoryStevensoftheBank’sPRATransitionUnit InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  11. P age |11 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  12. P age |12 • Theletter • Dear • LatestupdateaswetransitiontothePrudentialRegulation Authority(PRA) • Thislettergivesyoumoreinformationonwhatyouneedtodotobereadyfor‘legalcutover’(LCO)on1April2013. • ThePRA’sapproachtosupervisionwasoutlinedinthetwoapproachdocuments–oneforinsurersandonefordeposit-takersandinvestmentfirms. • WewillpublishrevisedversionsofthesedocumentsatLCO,andthereafterthedocumentswillactasstandingreferencesforfirmsonthePRA’ssupervisoryapproach,keyPRApolicies,andhowweintendtomeetourstatutoryobjectives. • Belowisanoverviewofthekeymessagesfromtheapproachdocuments: • ThePRAwillhavetwostatutoryobjectivestopromotethesafetyandsoundnessoffirmsandspecifictoinsurers,tocontributetosecuring anappropriatedegreeofprotectionforpolicyholders. • Astablefinancialsystem,thatisresilientinprovidingthecriticalfinancialservicestheeconomyneeds,isanecessaryconditionforahealthyandsuccessfuleconomy. • ThePRAwillnotoperateazero-failureregime. • ThePRAwill,however,seekasfaraspossiblewithresolutionarrangementsinplace,toensurethatanyfirmsthatfaildosoinawaythatavoidssignificantdisruptiontothesupplyofcriticalfinancialservices,includinganacceptabledegreeofcontinuityofcoverforpolicyholders;and InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  13. P age |13 -ThePRA’sapproachtosupervisionwillbeclearlybasedonjudgementratherthannarrowlyrules-based,Supervisoryjudgementswillbeforward-looking,takingintoaccountawiderangeofpossibleriskstothePRA’sobjectives. TheapproachdocumentscanbeaccessedviatheFSAwebsite: Banking http://www.fsa.gov.uk/static/pubs/other/pra-approach-banking.pdf Insurance http://www.fsa.gov.uk/static/pubs/other/pra-approach-insurance.pdf InDecember2012,Igaveashortinterviewentitled“Anewapproachtofinancialsupervision:thePrudentialRegulationAuthority”whichcanbeviewedhere: http://www.youtube.com/watch?v=yJDp1XY3DJM Thefollowingisanupdateoncertainaspectsofthetransitionwherewecannowprovidegreaterclarity. 1.ChangesinpolicyIndividualGuidance ThePRAwillhaveadifferentregulatoryandsupervisoryfocusthantheFSA,includinganewsetofobjectivesandadifferentapproachtosupervision,assetoutintheapproachdocuments. ThismeansthatguidancepreviouslyissuedtofirmsbyFSAsupervisorstoindividualfirmswillnothavebeenissuedwithPRAaimsandobjectivesinmind. Therefore,apartfromthefourcategorieslistedbelow,FSAindividualguidancewillnotautomaticallybepermanentlytransitionedorconfirmed bythePRA. Guidancetobetransitioned InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  14. P age |14 Thefollowingfourcategoriesof‘individualguidance’willbe automaticallytransitionedatLCO: IndividualCapitalRequirementsGuidance,includingcapitalplanningbuffersforbanksandcapitalguidanceissuedtoinsurers IndividualLiquidityGuidance IndividualguidancegivenbytheFSAthatenablesafirmtomovefromahigherproportionalitytiertoalowerproportionalitytierasprovidedforintheFSA’s‘GeneralGuidanceonProportionality:TheRemunerationCode(SYSC19a)&Pillar3disclosuresonremuneration(BIPRU11)’ GuidanceonthecompletionandsubmissionofRegulatoryReturns OtherGuidance Firmsshouldreviewallindividualguidanceandtheirassociated behaviourinaccordancewithsuchguidanceandassesstheappropriatenessofthatbehaviourinlinewiththePRA’sstatutoryobjectives. FirmsshouldinmanycasesbeabletodothisbyexercisingjudgementandwithoutconsultingthePRA. Firmsshoulddocumentthisreview. Incertaincases,firmsmaywishtorequestthatthePRA(FSAuntilLCO)reviewitemsofFSAindividualguidancewhichare: Notincludedinthecategoriesidentifiedabove;and WherethefirmwishesthePRAtoexplicitlyconsiderandconfirmwhetherbehaviouroractionsinlinewiththatguidancewillremainappropriateinthePRA. Thisisnotanopportunitytorequestthatallpreviouslyissuedindividualguidanceshouldberetained. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  15. P age |15 Betweennowand30September2013,firmsmaysubmitalistofthoseitemsofindividualguidancewhichtheywishthePRAtoreview,togetherwiththeirownassessmentofwhetherthebehaviouroractionssetoutintheguidancewouldcontributetowardstheadvancementofthePRA’sobjectives. Relationshipmanagedfirmsshouldsubmitrequestsforreviewtotheirsupervisor,andnon-relationshipmanagedfirmsshouldsubmitthemtotheCustomerContactCentreatemailaddressfcc@fsa.gov.ukuntil2April2013andthePRAfirmenquiriesatemailaddressPRA.Firmenquiries@bankofengland.co.ukfrom2April2013onwards. FirmswillbeabletocontinuetorelyonguidancereferredforreviewuntilthePRAreachesadecisiononwhethertheguidanceremainsappropriateorotherwise. Supervisorswillconfirmthetimetableforthereviewfollowingthesubmissionofthefirm’slist;reviewswillbecompletednomorethan18monthsafterLCO. OurjudgementandanyresultingresponsethatwegivetoafirmwillfocusontheadvancementofthePRA’sobjectives. AnyguidancethatisnotreferredtothePRAforreviewwillceasetohaveanystatusasformalPRAindividualguidancefrom30September2013. Thisdoesnotmeanthatfirmsshouldautomaticallychangetheirbehaviour. Iffirmsdeemthattheirbehaviourisappropriate,theyshouldcontinuetoactinthatway. Iffirmsdecidetoaltertheirbehaviour,noworinthefuture,theyshould discussthiswiththeirsupervisor,inlinewithPrinciple11. Thisapproachtoindividualguidancedoesnotchangerecentassessmentsoftherisksthatweseeasbeingposedbyafirm’sbusiness. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  16. P age |16 Inparticular,westillexpectRiskMitigationPlanpoints(reflectingtheFSA’sobjectives)outlinedinpreviousARROWletterstobeconcluded,wherewejudgethattheywillcontributetoadvancingthePRA’sobjective. ExistingwaiverswillalsobeautomaticallytransitionedtothePRA. ThresholdConditions TheexistingFSAThresholdConditionswillbereplacedintheirentiretybytheThresholdConditionsbeingintroducedbyHMTviasecondarylegislationpursuanttotheFinancialServicesAct2012. TheThresholdConditionsintheorderthathasbeenlaidbeforeparliamentareessentiallyintheformHMTconsultedoninOctober2012. ThenewconditionswilltakeeffectatthesametimeastherestoftheamendmentstoFSMAareintroduced,on1April2013,forbothexisting authorisedfirmsandallin-flightcases. TheFinancialServicesandMarketsAct(ThresholdConditions)Order2013,aslaidbeforeparliament,canbeviewedat:http://www.legislation.gov.uk/ukdsi/2013/9780111533802/pdfs/ukdsi_9780111533802_en.pdf 2.InteractionwiththePRAPRAwebpresence AnewwebpageforthePRAisnowavailableontheBankofEnglandwebsiteatwww.bankofengland.co.uk/pra ThiswillbethewebaddressthatfirmsshouldusefromLCO. AtthisstagefirmscanfindabriefintroductiontothePRAonthewebsite. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  17. P age |17 Corporateinformation“AboutthePRA”willbeaddedandpagesonpolicyandPRAnewsandeventswillbepublished. ThecoreoperationalinformationonauthorisationsandsupervisionwillbepublishedatLCO. FirmsarewelcometosendfeedbackincludingcommentsandideasaboutthePRAwebpresencetopra.webcontent@bankofengland.co.uk. FirmEnquiries TheOctober2012approachdocumentsexplainedthatfirmswhodonothaveadedicatedsupervisionteamshouldusetheFirmEnquiresFunctionastheirfirstpointofcontactwiththePRA. ThePRAFirmEnquirieswillbeoperationalfrom2April2013anditscontactdetailsare: Telephonenumber02034617000(operatinghours9:00–17:00)EmailPRA.Firmenquiries@bankofengland.co.uk TheFSAcontactcentremustbeusedforallenquiriesupto2April2013. However,duringMarchsomecallstothecontactcentrewillbetransferredtothePRA’sFirmEnquiries,inpreparationfortakingfirm’senquiriesatLCO. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  18. P age |18 PublicationofthePRAHandbook Aspreviouslystated,atLCO,certainprovisionsfromtheFSAHandbookwillbesplitbetweentheFCAandthePRA. TwonewHandbookswillbecreated:oneforthePRAandonefortheFCA. MostprovisionsintheFSAHandbookwillbeincorporatedintothePRA’sHandbook,theFCA’sHandbook,orboth,inlinewitheachnewregulator’ssetofresponsibilities. TheintentionistopublishthePRAHandbookinMarch2013. AfterLCO,thePRAwillamenditsownsuiteofpolicymaterialasanindependentbodyinaccordancewiththeprocesseslaiddownintheFinancialServicesAct2012,includingcooperationwiththeFCAandexternalconsultation. EnforcementConsultation WepublishedtheconsultationonthePRA'sapproachtoenforcement,includingproposedstatutorystatementsofpolicyandprocedure,on20December2012. TheconsultationisontheFSAwebsite,wewelcomeanycommentsontheproposalsby28February2013. http://www.fsa.gov.uk/library/policy/cp/2012/12-39.shtmlAttachedisasetofupdatedFAQsandadditionalinformation. Yourssincerely InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  19. P age |19 FAQsontransitiontothePRA 1.Generalquestions AtwhatstageistheFinancialServicesBill? TheFinancialServicesBillreceivedRoyalAssenton19December2012andbecametheFinancialServicesAct2012(TheAct). SomesectionsofTheAct–cameintoforceon23January2013,inordertoenabletheTreasurytomakesecondarylegislation,andtoensurethatthenewregulatorscanpreparefortheirrespectiverolespostlegalcutover. Therestoftheprovisionsrelatingtothenewregulatoryregimewillcomeintoforceon1April,thedatedesignatedforlegalcutovertothenewstructure. TheActwillbesupportedbysecondarylegislationandTreasuryhasconsultedonanumberofdraftorderswhichwillneedtobemadepriortolegalcutover. TheordersdetailingthenewThresholdConditions,allocatingresponsibilityformakingrulesinrelationtoFSCSbetweentheFCAandthePRA,amendingcertainmutualslegislation,determiningwhichtypesofholdingcompanytheregulatorsnewpowersoverqualifyingparentundertakingsapplytoandspecifyingwhichregulatedactivitieswillbesubjecttothePRA’sregulationhavealreadybeenlaidbeforeParliamentandareexpectedtobeapprovedbybothhousesbymid-March. http://www.legislation.gov.uk/ukdsi/2013/9780111533802/pdfs/ukdsi_9780111533802_en.pdf HowwillthePRAdeterminewhichinvestmentfirmsshouldbedesignatedforprudentialregulationbythePRA? WepublishedadraftstatementofpolicyonthedesignationofinvestmentfirmsbythePRAinOctober2012:http://www.fsa.gov.uk/static/pubs/cp/boe-pra-cp.pdf InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  20. P age |20 ThepolicystatementandthefirmstobedesignatedbythePRAwillbefinalisedaheadoflegalcutover. ShouldIcontinuetosubmitmyreturnthroughGABRIEL? ThePRAwillhaveitsowndatacollectionandqualityassuranceteam–theRegulatoryDataGroup-whichwilltakeoverthePRAregulatorydatarelatedworkpreviouslyundertakenbytheFSA’sDataMonitoringTeam(theFSA’scentraldatacollectionteam). ForfirmswhoreportregulatorydataviaGABRIELtherewillbenochangetothisreportingandyouwillcontinuetousetheGABRIELsystemtoreportasyoudonow. GABRIELwillbeoperatedbyFCA.FirmsaretocontinuetousetheircurrentURLandlogindetailstoaccessthesystem. Theexistingdataitemswillremainwithonlyminorchangestothewording. AnytechnicalqueriesaboutthesystemshouldberaisedwiththeFCAContactCentreon08456069966oremailaddressfcc@fsa.gov.uk. WhereshouldIsubmitmyfirm’semail/paperreturns? Forfirmswhoreportregulatorydataviaemailorinhardcopy(paper)moredetailofwheretosubmityourreturnswillbeprovidedonthePRA’sinternetsitewww.bankofengland.co.uk/prasoon. WherefirmsprovidedatadirectlytoFSAsupervisorsorpolicyteams,youwillcontinuetodosoafterLCO. If,afterLCO,youareunsurewheretoreportdata,pleasefirstlycheckthePRA’sinternetsiteunderthesectiononregulatorydataorcontactPRA’sFirmEnquiries. Contactdetailswillbe:Telephonenumber02034617000 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  21. P age |21 EmailPRA.Firmenquiries@bankofengland.co.uk WhenwillthePRAreleasefurthercontactdetails/newaddress? Movesto20Moorgatearetakingplaceinstages,havingstartedinearlyJanuary2013. Belowisatablelistingthemovedatesforeachdivision: Supervisorswillconfirmoutstandingcontactdetailssuchastelephonenumbers,emailaddressesandemailaddressesaroundtheirmovedates. ForfirmswithPGPencryptedkeys,communicationonnewaccesscodeswillalsobeincluded. WilltheFCAandPRAhaveseparateregisters? TherewillbeoneregistermaintainedbytheFCA.Itwillbeavailabletoallfirms,reflectingthepositionofboththePRAandtheFCA. WillIretainthesameregistrationnumber? Yes.YourFSAnumberswillbecarriedacrosstothenewRegister. WilltherebeaPractitionerPanel? Yes.ThePRAwillestablishaPractitionerPanel. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  22. P age |22 2.Authorisationsandtransitionalarrangements Whatwillhappentoourexistingpermissionsandwaivers? Transitionalarrangementsfor‘grandfathering’existingprovisionsaredependentonsecondarylegislation. WeareindiscussionwithHMTreasury,withaviewtothelegislation providingthatexistingPartIVpermissions,controlledfunctions,passports,limitationsandrequirementsaregrandfatheredwithouttheneedforafirmtotakeaction. Exactdetailsofgrandfatheringarrangementswillbefinalisedoncesecondarylegislationhasbeenpublished. Wealsopublishedmoredetailontransitionalarrangementsforapprovedpersons,andonHandbooktransitionalsmoregenerally,on25JanuaryinCP13/3 http://www.fsa.gov.uk/library/policy/cp/2013/13-03.shtml WhathappensifweareapplyingforaneworvariedpermissionorwaiversovertheperiodincludingLCO? ThePRAwillensurethatapplicationstotheFSAthataremadebeforelegalcutoverbutnotdetermineduntilafterlegalcutoveraretransitionedtotheappropriateregulatorandmadeagainsttheappropriatestatutorytests. Exactdetailsof‘in-flight’authorisationarrangementswillbefinalisedoncesecondarylegislationhasbeenpublished. WhenwillweknowthefinalchangesbeingmadetotheApprovedPersonsregime? ThereismoredetailonourapprovedpersonregimeinourApproachDocumentsandintheconsultationpaper(CP12/26)coveringchangestotheapprovedpersonsHandbooksections. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  23. P age |23 Thispapercanbeaccessedhere:http://www.fsa.gov.uk/library/policy/cp/2012/12-26.shtmlConsultationforCP12/26closedon7December2012,wearecurrently reviewingtheproposalsinlightofresponsestotheconsultationandexpectthefinalPRArulesonapprovedpersonstobemadebythePRA BoardatoraroundLCO,whenothersubstantivechangestothe Handbookwillalsobemade,andaccompanyingPolicyStatementsissued. Pleaseseesection4‘PolicyMaterial’belowformoredetailonfinalisingthePRAHandbook. Wealsopublishedmoredetailontransitionalarrangementsforapprovedpersonson25thJanuaryinCP13/3 http://www.fsa.gov.uk/library/policy/cp/2013/13-03.shtml Willthenewthresholdconditionsbemorespecific? HMTreasuryhaspublishedindicativethresholdconditions.Dualregulatedfirmswillneedtomeettwosetsofconditions,onesetfromthePRAandonesetfromtheFCA. ForthePRAtherewillbethresholdconditionsspecifictoinsurersandthresholdconditionsforallotherfirmsregulatedbythePRA. http://www.hm-treasury.gov.uk/d/condoc_fin_regulation_draft_secondary_leg.pdf WillauthorisationandthedifferentapprovalprocessestakemoreorlesstimewiththePRA? ThestatutorytimelimitonauthorisationsinFSMAwillremainunchangedafterlegalcutover. ThePRAwillreportagainststatutorytimelimits. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  24. P age |24 ShouldIcontinuetouseONAafterlegalcutover? ImmediatelyafterLCO,theONAsystemwillcontinuetobeusedforthesubmissionofapplicationsandnotifications,withsomeminorchangestoreflectthatitwillbeownedbytheFCA,butaccessibletobothregulators. Willfirmsstillberequiredtodisclosewhotheyareauthorisedandregulatedby? Yes.Wehaveconsultedonrevisedwordingofthisstatusdisclosureandaproposedtransitional,aspartofconsultationonHandbookchanges.Thepapercanbeaccessedhere: http://www.fsa.gov.uk/library/policy/cp/2012/12-24.shtml WillIberequiredtoresubmitanyinformationornotificationsthataresubmittedjustbeforeLCO? No.AnysubmissionsorinformationreceivedpriortoLCOwillnotneedtoberesubmitted. CP13/3outlinesHandbooktransitionalprovisionsrelatedtoinformationsubmissions. HowwillIknowwheretosendinformationornotificationsafterLCO? Whereinformationornotificationsarerequiredunderarule,theappropriatesubmissiondetailswillbeupdatedinthePRA’srulesoronthePRAwebsite. CP13/3setsoutmoreinformationinrelationtothetransitionoftimelimitsandnotificationrequirementsintherulebook. 3.Supervision WhatisthePRA'sapproachtosupervision? InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  25. P age |25 ThePRA’sapproachtosupervisionwasoutlinedinthetwoPRA‘approach’documents–onefordeposit-takersandinvestmentfirms,oneforinsurers–initiallypublishedinOctober2012tofacilitatescrutinyofthePRA’sproposedapproachastheFinancialServicesBillpassedthroughParliament. Thedocumentsalsosetoutsomekeypolicymaterialforfirms. Wewillpublishupdatedversionsatlegalcutover,andthereafterthedocumentswillactasstandingreferencesforfirmsonthePRA’ssupervisoryapproach,keyPRApolicies,andthePRA’sstatutoryobjectives. WhenwillmylastFSAriskassessmentvisitbe? WearecurrentlyplanningthetransitionfromtheFSA’sriskassessmentframeworktothePRAframework. Firmswillbenotifiedofhowtheirsupervisionwillbetransitionedto‘continuousassessment’fromtheRegulatoryPeriodpreviouslyindicatedinanARROWorSupervisoryAssessmentletter. ThenewSupervisoryAssessmentFrameworkwillbeacontinuousassessmentmodel,focusingonjudgementsaboutkeyriskstothePRA’sobjectives. FormoredetailrefertotheApproachDocuments. WhenwillIknowwhichcategorymyfirmfallsinto? AcorepartofthePRA’sworkwillbetoassessthesignificanceofafirmtoitsobjectives. Withthisinmindwehavedividedallfirmsintofive‘categories’ofimpact. BeforeLCOwewillwritetofirmsnotifyingthemoftheircategorisation. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  26. P age |26 WillmyfirmstillberequiredtocomplywithFSARiskMitigationProgramme(RMP)items?WhatwillhappentoRMP? WehavestreamlinedthenumberofactionsintheRMPandsplitthemintoconductandprudentialactions. YoursupervisorwillhavecommunicatedwithyourfirmtoconfirmtheoutstandingRMPactions,andyourfirmisaccountabletotherelevantregulatorfortheirresolution. WhowillbemyPRAsupervisor? Oneofthemajorchangeswemadein2012wastoestablishprudentialandconductsupervisionteamsfordualregulatedfirms. YoushouldnowbeawareofyourPRAsupervisor. IfyouhavenotbeenallocatedasupervisoryoushouldcontinuetocontactusthroughtheFSAContactCentre. AtLCOthePRAwillhaveitsownFirmEnquires,contactdetailswillbe:Telephonenumber02034617000 EmailPRA.Firmenquiries@bankofengland.co.uk Willindividualcapitalguidanceandindividualliquidityguidancestillapply? BoththeindividualcapitalguidanceandindividualliquidityguidanceissuedbytheFSAtoPRA-regulatedfirmswillcontinuetoapply. HowwillEuropeanandotherpolicyinitiativessuchasSolvencyIIandCRDIVaffectthePRA’ssupervisionmodel? InformationabouthowtheinteractionofsuchinitiativeswillaffectthePRA’sapproachwillbemadeavailableaspartoftheimplementationofthesepolicies. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  27. P age |27 Policymaterial HowwillthePRAissuepolicymaterialafterLCO? ThePRAApproachDocumentssetoutthatthePRAwillestablishandmaintainpublishedpolicymaterialwhichisconsistentwithitsobjectives,clearinintent,straightforwardinpresentationandasconciseaspossible. AssetoutinourDecemberletter,onlyalimitedamountofFSAnonHandbookguidancewillbetransferredtothePRA. Inaddition,theletteraccompanyingtheseFAQssetsoutindetailour approachtoFSAIndividualGuidanceandtheactionrequiredbyfirms. Feesandcosts WillthecurrentfeestructurebeadoptedbythePRA? Firm’scurrentfeeswillseethemthroughthisfeeperiod.ForthefirstfeeyearunderthePRA(expectedtobe2013/14)thePRAfeesstructurewillbebasedonadaptingthecurrentstructure,makingonlythenecessarychangestoaccommodatedual-regulation. TheseproposedchangesareinthefeespolicyConsultationPaper(CP12/28) http://www.fsa.gov.uk/static/pubs/cp/cp12-28.pdf Howwillfeesbesetnextyear? ForthefirstyearunderthePRA(expectedtobe2013/14)thePRAfeeswillbesettorecovertheannualfundingrequirementitneedstomeetitsstatutoryobjectives. Thisfundingrequirementandthefeeratestorecoverwillbeincludedin thePRAfeesratesConsultationPaper(CP)expectedtobepublishedin April2013. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  28. P age |28 HowiscreatingthePRAgoingtobepaidfor? ThefeesthatwechargefirmsfundtheFSAandthetransitionworkthatwearedoingforthenewregulator. Wehavesetouttheregulatoryreformcostsinthisyear’sbusinessplan.TheActmakesprovisionforthePRAtorecover,fromtheindustry,the regulatoryreformtransitioncostsoftheFSAandtheBankofEngland. 6.Co-ordinationwiththeFinancialConductAuthority OnwhatbasiswilltheFinancialConductAuthority(FCA)andthePrudentialRegulationAuthority(PRA)worktogether? ThedraftMemorandumofUnderstanding(MoU)betweentheFCAandthePRAsetsoutahighlevelframeworkforhowthetworegulatorswillworktogetherwithinthenewregulatorysystemprovidedforbytheAct. Itwillbevitalthatthetwoauthoritiespursuetheirownmandates,respectingtheUK’sTwinPeakssupervisorysystem. Butitwillalsobeessentialthattheycoordinateactivitiesinsomeareas,andcooperateinothers. TheMoUsetsoutthesearrangementstohelpensuretheyareeffectiveandefficient. TherewillalsobeaseparateMoUcoveringthespecificissuesraisedbythejointregulationofwith-profitsinsurancecontracts. BoththeFCAandPRAarevisitingusnextyear,howdoyouintendtoseparatethetwoareas? TheFCAandPRAaretwodifferentregulatorslookingatdifferentaspectsofthebusiness,althoughthereisarequirementtoshareinformation.DetailoftheFCAandthePRA’sassessmentsandexpectationsoffirmsaresetoutintherespectiveApproachDocuments InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  29. P age |29 • Current&forthcomingpublications • Thereareavarietyofpublicationsthatfirmsshouldbeawareof,including: • Banking-TheBankofEngland,PrudentialRegulationAuthorityapproachdocumenttobankingsupervision • http://www.fsa.gov.uk/static/pubs/other/pra-approach-banking.pdf • Insurance-TheBankofEngland,PrudentialRegulationAuthorityapproachdocumenttoinsurancesupervision • http://www.fsa.gov.uk/static/pubs/other/pra-approach-banking.pdf • DesignationofinvestmentfirmsbythePRA-thisdocumentsetsouthowthePRAwillexercisethepowersthatwillbeconferredunderFSMA2000,Order201(thedraftOrder). • http://www.fsa.gov.uk/static/pubs/other/designation.pdf • DraftMemorandaofUnderstanding(MoU) • DraftMoUbetweentheFCAandthePRA • http://www.fsa.gov.uk/static/pubs/mou/fca_pra.pdf • DraftWith-ProfitsMoUbetweentheFCAandthePRA • http://www.fsa.gov.uk/static/pubs/mou/draft-with-profits.pdf • DraftMoUbetweenthePRAandtheFSCS • http://www.fsa.gov.uk/static/pubs/mou/fca_pra.pdf • DraftMoUbetweentheHMT,Bank,PRAandFCAoninternationalorganisations InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  30. P age |30 http://www.hm-treasury.gov.uk/d/fin_fs_bill_mou_international_organisations_jan2012.pdf -MoUbetweenHMT,Bank(includingthePRA)onfinancialcrisismanagement http://www.hm-treasury.gov.uk/d/fin_fs_bill_mou_financial_crisis_management_jan2012.pdf InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  31. P age |31 SemiannualMonetaryPolicyReporttotheCongress SpeechbyMrBenSBernanke,ChairmanoftheBoardofGovernorsoftheFederalReserveSystem,beforetheCommitteeonBanking,Housing,andUrbanAffairs,USSenate,WashingtonDC *** ChairmanJohnson,RankingMemberCrapo,andothermembersoftheCommittee,IampleasedtopresenttheFederalReserve’ssemiannualMonetaryPolicyReport. Iwillbeginwithashortsummaryofcurrenteconomicconditionsandthendiscussaspectsofmonetaryandfiscalpolicy. Currenteconomicconditions SinceIlastreportedtothisCommitteeinmid-2012,economicactivityin theUnitedStateshascontinuedtoexpandatamoderateifsomewhatunevenpace. Inparticular,realgrossdomesticproduct(GDP)isestimatedtohaverisenatanannualrateofabout3percentinthethirdquarterbuttohavebeenessentiallyflatinthefourthquarter. ThepauseinrealGDPgrowthlastquarterdoesnotappeartoreflectastalling-outoftherecovery. Rather,economicactivitywastemporarilyrestrainedbyweather-relateddisruptionsandbytransitorydeclinesinafewvolatilecategoriesofspending,evenasdemandbyU.S.householdsandbusinessescontinuedtoexpand. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  32. P age |32 Availableinformationsuggeststhateconomicgrowthhaspickedupagainthisyear. Consistentwiththemoderatepaceofeconomicgrowth,conditionsinthelabormarkethavebeenimprovinggradually. SinceJuly,nonfarmpayrollemploymenthasincreasedby175,000jobspermonthonaverage,andtheunemploymentratedeclined0.3percentagepointto7.9percentoverthesameperiod. Cumulatively,private-sectorpayrollshavenowgrownbyabout6.1millionjobssincetheirlowpointinearly2010,andtheunemploymentratehasfallenabitmorethan2percentagepointssinceitscyclicalpeakinlate2009. Despitethesegains,however,thejobmarketremainsgenerallyweak,withtheunemploymentratewellaboveitslonger-runnormallevel. About4.7millionoftheunemployedhavebeenwithoutajobforsixmonthsormore,andmillionsmorewouldlikefull-timeemploymentbutareabletofindonlypart-timework. Highunemploymenthassubstantialcosts,includingnotonlythehardshipfacedbytheunemployedandtheirfamilies,butalsotheharmdonetothevitalityandproductivepotentialofoureconomyasawhole. Lengthyperiodsofunemploymentandunderemploymentcanerodeworkers'skillsandattachmenttothelaborforceorpreventyoungpeoplefromgainingskillsandexperienceinthefirstplace–developmentsthatcouldsignificantlyreducetheirproductivityandearningsinthelongerterm. Thelossofoutputandearningsassociatedwithhighunemploymentalsoreducesgovernmentrevenuesandincreasesspending,therebyleadingtolargerdeficitsandhigherlevelsofdebt. Therecentincreaseingasolineprices,whichreflectsbothhighercrudeoilpricesandwiderrefiningmargins,ishittingfamilybudgets. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  33. P age |33 However,overallinflationremainslow. Overthesecondhalfof2012,thepriceindexforpersonalconsumptionexpendituresroseatanannualrateof1-1/2percent,similartotherateofincreaseinthefirsthalfoftheyear. Measuresoflonger-terminflationexpectationshaveremainedinthenarrowrangesseenoverthepastseveralyears. Againstthisbackdrop,theFederalOpenMarketCommittee (FOMC)anticipatesthatinflationoverthemediumtermlikelywillrunatorbelowits2percentobjective. Monetarypolicy Withunemploymentwellabovenormallevelsandinflationsubdued,progresstowardtheFederalReserve’smandatedobjectivesofmaximumemploymentandpricestabilityhasrequiredahighlyaccommodativemonetarypolicy. Undernormalcircumstances,policyaccommodationwouldbeprovidedthroughreductionsintheFOMC’stargetforthefederalfundsrate–theinterestrateonovernightloansbetweenbanks. However,asthisratehasbeenclosetozerosinceDecember2008,theFederalReservehashadtousealternativepolicytools. Thesealternativetoolshavefallenintotwocategories. Thefirstis“forwardguidance”regardingtheFOMC’santicipatedpathforthefederalfundsrate. Sincelonger-terminterestratesreflectmarketexpectationsfor shorter-termratesovertime,ourguidanceinfluenceslonger-termratesandthussupportsastrongerrecovery. Theformulationofthisguidancehasevolvedovertime. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  34. P age |34 BetweenAugust2011andDecember2012,theCommitteeusedcalendardatestoindicatehowlongitexpectedeconomicconditionstowarrantexceptionallylowlevelsforthefederalfundsrate. AtitsDecember2012meeting,theFOMCagreedtoshifttoprovidingmoreexplicitguidanceonhowitexpectsthepolicyratetorespondtoeconomicdevelopments. Specifically,theDecemberpostmeetingstatementindicatedthatthecurrentexceptionallylowrangeforthefederalfundsrate“willbeappropriateatleastaslongastheunemploymentrateremainsabove 6-1/2percent,inflationbetweenoneandtwoyearsaheadisprojectedtobenomorethanahalfpercentagepointabovetheCommittee’s2percentlonger-rungoal,andlonger-terminflationexpectationscontinuetobewellanchored.” Anadvantageofthenewformulation,relativetothepreviousdate-basedguidance,isthatitallowsmarketparticipantsandthepublictoupdatetheirmonetarypolicyexpectationsmoreaccuratelyinresponsetonewinformationabouttheeconomicoutlook. ThenewguidancealsoservestounderscoretheCommittee’sintentiontomaintainaccommodationaslongasneededtopromoteastrongereconomicrecoverywithstableprices. ThesecondtypeofnontraditionalpolicytoolemployedbytheFOMCislarge-scalepurchasesoflonger-termsecurities,which,likeourforwardguidance,areintendedtosupporteconomicgrowthbyputtingdownwardpressureonlonger-terminterestrates. TheFederalReservehasengagedinseveralroundsofsuchpurchasessincelate2008. LastSeptembertheFOMCannouncedthatitwouldpurchaseagencymortgage-backedsecuritiesatapaceof$40billionpermonth,andinDecembertheCommitteestatedthat,inaddition,beginninginJanuaryitwouldpurchaselonger-termTreasurysecuritiesataninitialpaceof$45billionpermonth. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  35. P age |35 Theseadditionalpurchasesoflonger-termTreasurysecuritiesreplacethepurchaseswewereconductingunderournow-completedmaturityextensionprogram,whichlengthenedthematurityofoursecuritiesportfoliowithoutincreasingitssize. TheFOMChasindicatedthatitwillcontinuepurchasesuntilitobservesasubstantialimprovementintheoutlookforthelabormarketinacontextofpricestability. TheCommitteealsostatedthatindeterminingthesize,pace,andcompositionofitsassetpurchases,itwilltakeappropriateaccountoftheirlikelyefficacyandcosts. Inotherwords,aswithallofitspolicydecisions,theCommitteecontinuestoassessitsprogramofassetpurchaseswithinacost-benefitframework. Inthecurrenteconomicenvironment,thebenefitsofassetpurchases,andofpolicyaccommodationmoregenerally,areclear: MonetarypolicyisprovidingimportantsupporttotherecoverywhilekeepinginflationclosetotheFOMC’s2percentobjective. Notably,keepinglonger-terminterestrateslowhashelpedsparkrecoveryinthehousingmarketandledtoincreasedsalesandproductionofautomobilesandotherdurablegoods. Byraisingemploymentandhouseholdwealth–forexample,through higherhomeprices–thesedevelopmentshaveinturnsupportedconsumersentimentandspending. Highlyaccommodativemonetarypolicyalsohasseveralpotentialcostsandrisks,whichtheCommitteeismonitoringclosely. Forexample,iffurtherexpansionoftheFederalReserve’sbalancesheetweretounderminepublicconfidenceinourabilitytoexitsmoothlyfromouraccommodativepoliciesattheappropriatetime,inflation InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  36. P age |36 expectationscouldrise,puttingtheFOMC’sprice-stabilityobjectiveat risk. However,theCommitteeremainsconfidentthatithasthetoolsnecessarytotightenmonetarypolicywhenthetimecomestodoso. AsInoted,inflationiscurrentlysubdued,andinflationexpectationsappearwellanchored;neithertheFOMCnorprivateforecastersareprojectingthedevelopmentofsignificantinflationpressures. AnotherpotentialcostthattheCommitteetakesveryseriouslyisthepossibilitythatverylowinterestrates,ifmaintainedforaconsiderabletime,couldimpairfinancialstability. Forexample,portfoliomanagersdissatisfiedwithlowreturnsmay“reachforyield”bytakingonmorecreditrisk,durationrisk,orleverage. Ontheotherhand,somerisk-taking–suchaswhenanentrepreneurtakesoutaloantostartanewbusinessoranexistingfirmexpandscapacity–isanecessaryelementofahealthyeconomicrecovery. Moreover,althoughaccommodativemonetarypoliciesmayincreasecertaintypesofrisk-taking,inthepresentcircumstancestheyalsoserveinsomewaystoreduceriskinthesystem,mostimportantlybystrengtheningtheoveralleconomy,butalsobyencouragingfirmstorelymoreonlongertermfunding,andbyreducingdebtservicecostsforhouseholdsandbusinesses. Inanycase,theFederalReserveisrespondingactivelytofinancialstabilityconcernsthroughsubstantiallyexpandedmonitoringofemergingrisksinthefinancialsystem,anapproachtothesupervisionoffinancialfirmsthattakesamoresystemicperspective,andtheongoingimplementationofreformstomakethefinancialsystemmoretransparentandresilient. Althoughalongperiodoflowratescouldencourageexcessiverisk-taking,andcontinuedcloseattentiontosuchdevelopmentsis certainlywarranted,tothispointwedonotseethepotentialcostsofthe InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  37. P age |37 increasedrisk-takinginsomefinancialmarketsasoutweighingthebenefitsofpromotingastrongereconomicrecoveryandmore-rapidjobcreation. AnotheraspectoftheFederalReserve’spoliciesthathasbeendiscussedistheirimplicationsforthefederalbudget. TheFederalReserveearnssubstantialinterestontheassetsitholdsinitsportfolio,and,otherthantheamountneededtofundourcostofoperations,allnetincomeisremittedtotheTreasury. WiththeexpansionoftheFederalReserve’sbalancesheet,yearlyremittanceshaveroughlytripledinrecentyears,withpaymentstotheTreasurytotalingapproximately$290billionbetween2009and2012. However,iftheeconomycontinuestostrengthen,asweanticipate,and policyaccommodationisaccordinglyreduced,theseremittanceswouldlikelydeclineincomingyears. FederalReserveanalysisshowsthatremittancestotheTreasurycouldbequitelowforatimeinsomescenarios,particularlyifinterestrateswereto risequickly. However,eveninsuchscenarios,itishighlylikelythataverageannualremittancesovertheperiodaffectedbytheFederalReserve’spurchaseswillremainhigherthanthepre-crisisnorm,perhapssubstantiallyso. Moreover,totheextentthatmonetarypolicypromotesgrowthandjobcreation,theresultingreductioninthefederaldeficitwoulddwarfanyvariationintheFederalReserve’sremittancestotheTreasury. Thoughtsonfiscalpolicy Althoughmonetarypolicyisworkingtopromoteamorerobustrecovery,itcannotcarrytheentireburdenofensuringaspeedierreturntoeconomichealth. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  38. P age |38 Theeconomy’sperformancebothovertheneartermandinthelongerrunwilldependimportantlyonthecourseoffiscalpolicy. ThechallengefortheCongressandtheAdministrationistoputthefederalbudgetonasustainablelong-runpaththatpromoteseconomicgrowthandstabilitywithoutunnecessarilyimpedingthecurrentrecovery. Significantprogresshasbeenmaderecentlytowardreducingthefederalbudgetdeficitoverthenextfewyears. TheprojectionsreleasedearlierthismonthbytheCongressionalBudgetOffice(CBO)indicatethat,undercurrentlaw,thefederaldeficitwillnarrowfrom7percentofGDPlastyearto2-1/2percentinfiscalyear2015. Asaresult,thefederaldebtheldbythepublic(includingthatheldbytheFederalReserve)isprojectedtoremainroughly75percentofGDPthroughmuchofthecurrentdecade. However,asubstantialportionoftherecentprogressinloweringthedeficithasbeenconcentratedinnear-termbudgetchanges,which,takentogether,couldcreateasignificantheadwindfortheeconomicrecovery. TheCBOestimatesthatdeficit-reductionpoliciesincurrentlawwillslowthepaceofrealGDPgrowthbyabout1-1/2percentagepointsthisyear, relativetowhatitwouldhavebeenotherwise. AsignificantportionofthiseffectisrelatedtotheautomaticspendingsequestrationthatisscheduledtobeginonMarch1,which,accordingtotheCBO’sestimates,willcontributeabout0.6percentagepointtothefiscaldragoneconomicgrowththisyear. Giventhestill-moderateunderlyingpaceofeconomicgrowth,thisadditionalnear-termburdenontherecoveryissignificant. Moreover,besideshavingadverseeffectsonjobsandincomes,aslowerrecoverywouldleadtolessactualdeficitreductionintheshortrunforanygivensetoffiscalactions. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  39. P age |39 Atthesametime,anddespiteprogressinreducingnear-termbudgetdeficits,thedifficultprocessofaddressinglonger-termfiscalimbalanceshasonlybegun. Indeed,theCBOprojectsthatthefederaldeficitanddebtasapercentageofGDPwillbeginrisingagaininthelatterpartofthisdecade,reflectinginlargeparttheagingofthepopulationandfast-risinghealth-carecosts. Topromoteeconomicgrowthinthelongerterm,andtopreserveeconomicandfinancialstability,fiscalpolicymakerswillhavetoputthefederalbudgetonasustainablelong-runpaththatfirststabilizestheratiooffederaldebttoGDPand,giventhecurrentelevatedlevelofdebt,eventuallyplacesthatratioonadownwardtrajectory. Between1960andtheonsetofthefinancialcrisis,federaldebtaveragedlessthan40percentofGDP. Thisrelativelylowlevelofdebtprovidedthenationmuch-neededflexibilitytomeettheeconomicchallengesofthepastfewyears. ReplenishingthisfiscalcapacitywillgivefutureCongressesandAdministrationsgreaterscopetodealwithunforeseenevents. Toaddressboththenear-andlonger-termissues,theCongressandtheAdministrationshouldconsiderreplacingthesharp,frontloadedspendingcutsrequiredbythesequestrationwithpoliciesthatreducethefederaldeficitmoregraduallyintheneartermbutmoresubstantiallyin thelongerrun. Suchanapproachcouldlessenthenear-termfiscalheadwindsfacingthe recoverywhilemoreeffectivelyaddressingthelonger-termimbalancesinthefederalbudget. Thesizesofdeficitsanddebtmatter,ofcourse,butnotalltaxandspendingprogramsarecreatedequalwithrespecttotheireffectsontheeconomy. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  40. P age |40 Tothegreatestextentpossible,intheireffortstoachievesoundpublicfinances,fiscalpolicymakersshouldnotlosesightoftheneedforfederaltaxandspendingpoliciesthatincreaseincentivestoworkandsave, encourageinvestmentsinworkforceskills,advanceprivatecapitalformation,promoteresearchanddevelopment,andprovidenecessaryandproductivepublicinfrastructure. Althougheconomicgrowthalonecannoteliminatefederalbudgetimbalances,ineithertheshortorlongerterm,amorerapidlyexpandingeconomicpiewilleasethedifficultchoicesweface. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  41. P age |41 WayneByres,SecretaryGeneralBaselCommitteeonBankingSupervision SIMPLICITY,RISKSENSITIVITYANDCOMPARABILITY:THEREGULATORYBALANCINGACT BCBS-EMEAP-FSIHigh-LevelMeeting,Seoul,Korea BeforeIbeginmyremarkstoday,IwouldliketothanktheFSIandEMEAPforonceagainorganisingyetanotherexcellenteventintheseriesofHigh-LevelMeetingsinAsia. PriortotakingupmycurrentroleinBasel,IattendedtheseeventsasanAustralianbanksupervisor,andalwaysfoundthemtobevaluableopportunitiesfortheexchangeofideasandviewsbetweentheregion’sseniorregulatorsandindustryrepresentatives. AlthoughIamnowbasedinanotherpartoftheworld,Iamveryhappytobeabletocontinuetoparticipateandcontributetothesediscussions. IwouldalsoliketoacknowledgethattheAsianregionleadstheworldinitsimplementationofBaselIII. Theregionhasbenefitedfromthedevelopmentofstrongbankingsystemssupportedbystrongregulatoryregimes. Furthermore,manyofyouhaverecognisedBaselIIIasaminimum,and haveadoptedlocalpracticesthatimposeadditionalrequirementstodealwithlocalrisks. Theresultishealthybankingsystemsthatarewellequippedtosupporteconomicgrowth,notleastbysteppingintothegapcreatedbytheconstraintsfacedbymanybanksinotherpartsoftheworld. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  42. P age |42 • Findingtherightbalance • IamsurethatmanyofyouknowthestoryofGoldilocksandthethreebears. • Init,Goldilocksexploredthebears’house,testingtheporridge,thechairsandthebedsuntilshefoundthingsthatshethoughtwere“justright”. • WhenItookupmyroleinBasel,afriendsuggestedIhada“Goldilocks”job. • Bythishemeantthatmytaskwastotakearangeofcompetingobjectives,andfindsomemiddlegroundthatwas“justright”. • Inaninternationalpolicymakingcontext,thatimpliespoliciesthatare: • comprehensive,yetsimple; • strong,butnotburdensome; • risk-based,yeteasytounderstandandcompare; • flexibleandadaptable,yetconsistentlyapplied; • suitablefornormaltimes,butfoundedonthelessonsfromcrises; • builtonconsensus,butalsoonthebroadestpossibleengagement;and • utilisingappropriatelytherelativestrengthsofbothregulation(rules) andsupervision(oversight). • Withsuchamultidimensionalsetoftrade-offs,findingtheoptimalpointforanygivensetofregulatoryproposalsisinevitablyverydifficult. • InthecaseofBaselIII,theCommitteesoughtasuitableminimumamountofcapitalthatwas“justright”–notsolittlethatthefinancialsystemremainedsusceptibletotheweaknessesrevealedin2007–08,but InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  43. P age |43 • notsomuchthatbankscouldnotperformtheirimportanteconomicfunctions. • TheCommitteealsoneededtoimprovethewaythattheadequacyof capitalwasmeasuredsothatitappropriatelyrecognisesthemateriallydifferentmagnitudesofriskwithinindividualbankbalancesheets,butat thesametimeprovidesanoverallmeasureofsoundnessthatinvestorscancompareacrossbanks. • And,recognisingthattheBaselframeworkistheglobalstandardforbankcapital,theCommitteeneededsomethingthatwassuitableforinternationallyactivebanks–ourcoreconstituency–butcouldalsobeappliedmorebroadly. • Capitalrequirements–adequateandcomparable • Regulatorycapitalrequirementsdomanythings,butattheirhearttheymustachievetwofundamentalobjectives: • ensurebankshaveanadequatelevelofcapital(ierelativetotheirriskprofile);and • provideameasureofcapitalthatiscomparableovertimeandbetween banks. • Thefirstoftheseobjectives–adequacy–isanobviousgoal,butfailuretoachievethesecond–comparability–underminesconfidencethatthefirstisbeingachieved. • Sincewearedealingwithinstitutionsthathaveabusinessmodelfoundedonconfidence,theimportanceofcomparabilityshouldnotbeunderestimated. • Duringtherecentcrisis,questionsbegantobeaskedaboutthereliabilityofrisk-basedcapitalratiosasanindicatorofbankhealth. • Inmyview,therewerethreefactorswhichservedtoundermine confidenceintherisk-basedmeasureofcapital: InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  44. P age |44 • theregulatorycapitalbaseincludedcapitalinstrumentsthatwerenottrulyloss-absorbing–financialmarketsincreasinglydiscountedthese; • theregulatorycapitalbaseinsomecountriesfilteredout(ieignored)someunrealisedlossesthatbankshadincurred–financialmarketswantedtoaccountforthese;and • risk-weightedassetcalculationshadbecomecomplexandopaque, makingthemdifficultforexternalinvestorstounderstand–financialmarketsbecameconfusedbythese. • Inotherwords,questionswerelegitimatelybeingaskedaboutwhethercapitalwasbothadequateandcomparable. • Thequestionsrelatedtoboththenumeratorandthedenominatoroftheregulatorymeasure. • ThereformscontainedinBaselIIIlargelydealwiththesefirsttwoitems. • BaselIIIraisestheminimumquantityoftrulyloss-absorbingcapitalbymanymultiples. • Italsoimprovesthequalityofthatcapitalbyeliminatingquasi-capitalinstruments,andcertainotherassets,thatprovedoflimitedvalueintimesofstress(indeed,investorsinsomeoftheseinstruments,ratherthan providingasourceofsupport,hadtobebailedoutthemselves!). • Inaddition,byremovingprudentialfiltersandforcingbankstorecogniseunrealisedlossesonfairvalueassets,capitalratioswillbemorecrediblebybetterreflectingthetruecapacityofabanktoabsorbfurtherlossesatanygivenpointintime. • Havingsubstantiallysimplifiedandimprovedthenumeratorofthecapitalratio,theCommittee’sattentionisnowturningtoconcernsabouttherisk-weightingframework: • itissaidbysometobetoocomplexanddifficulttounderstand,andthatsomethingsimpler(indeed,somesaysimple)wouldbebetter;and InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  45. P age |45 • itissaidbysometoprovidetoomuchflexibilityonhowriskshouldbemeasured,makingitdifficulttocomparereportedcapitalratios. • Theseconcernsarecloselyrelated–althoughthatdoesnotmeanlesscomplexityandlessflexibilityalwaysleadtomorecomparability. • Complexityandflexibility • Internationalbanksarecomplexorganisations. • Today,noteven“traditional”linesofbusiness,suchasretailandcommercialbanking,aresimplebusinessestorun,iftheyeverwere. • Capturingtheriskprofileofthesebusinessesinasinglemeasureoffinancialsoundnessisextremelydifficult. • Thecomplexityinthecapitalframeworklargelycomesfromthedecisiontoallowbankstousetheirowninternalmodelstomeasurerisk,themajorinnovationcontainedinBaselII. • Althoughinternalmodelshadalreadybeenpartoftheregulatoryframeworkforadecade,thiswasonlyforarelativelysmallareaofactivity. • BaselIIprovidedthecapacitytodothisforthebiggestriskmostbanksface–thecreditriskwithintheirloanbooks. • While,ofcourse,bankswererequiredtojumpalargenumberofhurdlesinrelationtomodelspecificationandvalidationbeforetheycouldusetheirownmodelsthenewframeworkdidmovebanksawayfromthe“onemodelfitsall”approachthatwasatthecoreofBaselI. • Theprimaryobjectivebehindthisimportantstepwastobetteralign • capitalwithunderlyingrisks. • Regulatoryrequirementscreateincentives;BaselIIattemptedtoalignthoseincentivesmuchmorecloselywitheconomicrealitythanwasthecaseinBaselI. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  46. P age |46 Inthisrespect,BaselII’sgoalcanbethoughtofaspromotingbothcapitaladequacyandcapitalefficiency. Properlyapplied,banks’capitalrequirementscouldbemuchmoreresponsivetotheunderlyingriskstheyweretaking;low-riskbankswould benefitbynotbeingburdenedwithunnecessarycapitalrequirements,andthosewithhigherriskprofileswouldneedtoholdadditionalcapitalcommensuratewiththeriskstheyareexposedto. Toputitanotherway,BaselIIsoughttobetterdistinguishbetweenhigh-andlow-riskbanks,anditrequiredhigher-riskbankstooperatewithlowerlevelsofleveragethantheirlow-riskpeers. Butasanyoneknowswhohasbuilt,supervisedorjusttriedtounderstandinternalriskmodelswithinabank,theyarenotsimple. Theyare,ofcourse,asimplificationoftherealworld,butthatisnotmuchofaconsolationsincetherealworldisextremelycomplex. Thedifficultyisthat,ifmodelsareoversimplified,theydonotproduceriskmeasuresthatreflectreality. Butifmadetoocomplex,hardlyanyonecansaywhethertheyproducerealisticriskmeasuresornot! Andbyallowingadegreeofflexibilityforbankstomodelrisksastheyseethem,wemakeitmoredifficulttoachievecomparability.Gettingit“justright”thereforerequirescarefuljudgement. Comparability BaselIIwasundoubtedlyamajorimprovementintheconceptualsoundnessofthecapitalmeasurementprocess. Italsocreatedimportantincentivesforbankstorefineandimprovetheirriskmodels,andtoavoidhighcorrelationsbetweenriskmanagementmethodswhichcouldhavedetrimentalimplicationsforfinancialstability. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  47. P age |47 • Thesebenefitsshouldnotbelightlydismissed,buttherearenowconcernsthatthewayinwhichmodelsarecurrentlyusedhinderscomparability,sinceusersofinformationcannotunderstandtheimpact thatmodellingchoiceshaveontheresultingcapitalrequirements. • TheCommitteethereforeneedstoensurethatthisadditionalrisksensitivityisnot,asaresultofitscomplexity,underminingtheoverallregimebymakingcomparisontoodifficultforallbutsupervisoryexperts(andmaybeevenfortheexpertstoo!). • Butbeforewereverttoasimplermeasurementmethodology,weneedtobesurethatitwouldreallybemorecomparable. • Comparabilityhastwobasicdimensions: • betweenbanksatagivenpointintime;and • foragivenbank,overaperiodoftime. • Anystandardisedapproachwillnecessarilybeblunt. • Itwillbesimplertounderstandthananinternalmodel,butthatisbecauseitwillnecessarilymakemanyassumptions. • Theseassumptionswillmeanriskcanbeincorrectlymeasured. • Theywillalsomeanthatchangesinabank’sriskprofilecangoundetected. • Taketheexampleoftheleverageratio. • Itwillnotdistinguishbetweentwosimilarlysizedbanksevenifoneholdsalargeportfolioofhigh-qualitysovereignexposures,andtheotheralargeportfolioofhighlyleveragedloansforpropertydevelopment. • Norwillitshowanyresponseifabankswitchesitsbalancesheetfromoneofthoseportfoliostotheotherovertime. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  48. P age |48 Aleverageratiomeasuresexactlywhatitsays–thedegreeofleverageonabank’sbalancesheet. Forthispurpose,itisperfectlysuited. Thatdoesnotnecessarilymakethemostusefulmeasureforjudgingtheadequacyofabank’scapitalbase. Risk-basedregimesseektorespondtothisproblembyintroducinggreaterrisksensitivity. ButevenwiththestandardisedapproachesintheBaselframework,therearelimitstowhatcanbeachieved. Therisk-basedframeworkwouldrespond,viachangesinthereportedcapitalratio,tothesituationsIhavementionedabove. Itwouldnot,however,necessarilyrespondatamoredetailedlevel–for example,itdoesnotmeaningfullydistinguishbetweenportfoliosoflowloan-to-valueratio(LVR),fulldocumentation,amortisingmortgageloans,andhighLVR,interest-only,self-certifiedmortgageloans. Onlywithadditionalcomplexitycanwetakegreateraccountofthemultifacetedriskswithinabank’sloanbook. However,astheframeworkbecomesmoreandmorerisk-sensitiveinjudgingcapitaladequacy,itmaynolongerbethebestmeansofmonitoring,comparingandcontrollingoverallleverage. Forthesereasons,BaselIIIutilisesbotharisk-basedcapitalratioandanon-risk-basedleverageratiotoprovidecomplementarymeasuresof capitaladequacyandleverage. Bothratiosservetheirindividualpurposes:oneameasureofcapitalrelativetorisk;theotherameasureofoverallleverage. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  49. P age |49 Thetwomeasurescanalsobecomparedwitheachother,providing additionalinformationthatwouldnotbereadilyavailablefromeithermeasureonitsown. Improvingcomparability TheinclusionoftheleverageratioinBaselIIIdoesnotremovetheneedtofurtherreviewthecomparabilityoftherisk-basedregime. ToborrowfromWinstonChurchill,“howeverbeautifulthestrategy,youshouldoccasionallylookattheresults.” TheCommitteehasbeenconsciousofthisissueforsometime,andoverthepastyearithasbeenexploringtheissuefrombothabottom-upandtop-downperspective. Withregardtotheconcernsaboutthecomparabilityofmodel-basedrisk-weightedassetcalculations,theCommitteehasestablishedtwo workstreams;onetolookattheconsistencyofcalculationsinrelationtothetradingbookandanotherparallelstreamforthebankingbook. Thisworkhasexaminedpubliclyavailabledataforaselectionoflargebanksacrossmultiplejurisdictions,aswellasaskinganumberofbankstoprovideriskmeasuresforaseriesofhypotheticalportfolios. Theoutcomeofthisworkhasbeensupplementedwithaseriesofmeetingswithindividualbanksbyaninternationalteamofsupervisoryexperts,withtheaimofprovidinggreaterunderstandingofthereasonsbehinddifferentresults. ThetradingbookreviewwaspublishedattheendofJanuary,andIwillfocusmycommentsonittoday. Theresultsofthebankingbookworkwillbereleasedinthecomingmonths. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  50. P age |50 • Thetradingbookreviewfoundthatitisreasonableforinvestorstocomplainthattheyfindcurrentriskdisclosuresopaque–theCommittee’sanalysisfoundthesamething! • Currentdisclosureswerenotadequateforexternalpartiestobeabletojudgewhethermovementsinmodelledrisk-weightedassetsovertime,orbetweenbanks,wereduetounderlyingdifferencesinrisk,orforotherreasons. • Thatthereisvariabilityinresultsbetweenbanksshouldnotsurprise. • Itisinevitable,andindeeddesirable,inanymodel-basedframeworkthat therebesome. • Whatwaspossiblysurprising,however,wasthatregulatoryandsupervisorydecisionswereproducinganon-trivialproportionofthevariability:contrarytotheinitialhypothesisofmany,itdidnotarisesolelyfromgivingbankstoomuchfreedomtomodelrisk. • Aroundaquarterofthevariabilitywasduetoonesinglefactor:theuseofsupervisorymultipliers,whichareappliedasanincentiveforbankstoimprovetheirmodelsandriskmanagementsystems. • Therearetwootherpointsworthnotingfromthetradingbookanalysis: • Thevariabilitydrivenbysupervisors(duetotheuseofmultipliers,orby restrictingmodellingchoices)willalmostinvariablyincreasecapitalrequirementsrelativetowhattheymightotherwisebe. • Inotherwords,someofthevariabilityisduetosomebanksbeingheldtoahigherstandardthantheBaselminimumrequires. • Thisimprovestheadequacyofcapitalresultingfrominternalmodelsbut,duetothefactthatsomesupervisorydiscretionisnotdisclosed,reducescomparability. • Theoutcomesproducedbybankswerebenchmarkedtoariskmodelproducedbytheteamofsupervisoryexpertsconductingtheanalysis. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

More Related