1 / 116

P a g e | 1 Inter n atio na l A s s oci a t ion of R isk a nd Co mpl i a n c e Pr o f e s s io na l s ( I A RCP)

P a g e | 1 Inter n atio na l A s s oci a t ion of R isk a nd Co mpl i a n c e Pr o f e s s io na l s ( I A RCP) 12 0 0 G St re e t N W Su i t e 8 0 0 W a s h i ng t o n, D C 2 000 5 - 67 0 5 U SA T e l : 2 0 2 - 449 - 9750 www .ri s k - c ompl i ance-a ss o c i a tion . c om.

onslow
Download Presentation

P a g e | 1 Inter n atio na l A s s oci a t ion of R isk a nd Co mpl i a n c e Pr o f e s s io na l s ( I A RCP)

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 InternationalAssociationofRiskandComplianceProfessionals(IARCP) 1200GStreet NWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext DearMember, Who“leadstheworldinitsimplementationofBaselIII”? Accordingto WayneByres,SecretaryGeneral,BaselCommitteeonBankingSupervision,Asia! “IwouldalsoliketoacknowledgethattheAsianregionleadstheworldinitsimplementationofBaselIII.” But…hecontinues: “Goldilocksexploredthebears’house,testingtheporridge,thechairsandthebedsuntilshefoundthingsthatshethoughtwere“justright” What?Goldilocksexploredthebears’house?Oh,no,Goldilocksisnot coveredinourBaseliiicourse.Itcould beimportant. Bearshouse?HemeansRussia?No, no,ithasnothingtodowiththecoldwar. Let’slearnmore …Google…Search…Goldilocks: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  2. P age |2 In 1837 RobertSoutheypublished"TheStoryoftheThreeBears". In Southey'stale,threeanthropomorphicbears– "aLittle,Small,WeeBear,aMiddle-sizedBear,andaGreat,HugeBear"– livetogetherinahouseinthewoods. Southeydescribes themasverygood-natured,trusting,harmless,tidy, andhospitable. Eachbearhashisownporridgebowl,chair,andbed. Onedaytheytakeawalk in thewoodswhiletheirporridgecools. Anoldwoman(whoisdescribedatvariouspointsinthestoryasimpudent,bad,foul-mouthed,ugly,dirtyandavagrantdeservingofastintintheHouseofCorrection) discoversthebears'dwelling. Shelooksthroughawindow,peepsthroughthekeyhole,andliftsthelatch. Assuredthatnooneishome,shewalks in. The oldwomaneatstheWeeBear'sporridge,thensettlesintohischairandbreaksit. Prowlingabout,shefinds thebears'bedsandfallsasleepinWeeBear'sbed. Theclimaxofthetaleisreachedwhenthebearsreturn. WeeBearfindstheoldwomaninhisbedandcries,"Somebodyhasbeenlying inmybed,– andheresheis!" Theoldwomanstartsup,jumpsfromthewindow,andrunsawaynevertobeseenagain.” InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  3. P age |3 TwelveyearsafterthepublicationofSouthey'stale,JosephCundalltransformedtheantagonistfromanuglyoldwomantoaprettylittlegirlinhisTreasuryofPleasureBooksforYoungChildren. Thelittlegirlsawasuccessionofnames,includingGoldilocks.HereiswhereBaseliiicomesin,whenthe olduglylady(Basel2) becomesaprettygirl(Basel3)– Disclaimer:ThisishowIunderstood it… But…yes,WayneByres,SecretaryGeneraloftheBaselCommitteeonBankingSupervisionsaid: “Goldilocksexploredthebears’house,testingtheporridge,thechairsandthebedsuntilshefoundthingsthatshethoughtwerejustright.” Itisencoded!!!Pillar2,confidential.Let’sbreakit. “Goldilocks(Basel3)exploredthebears’house(BearStearnsandotherbanks),testingtheporridge(internalmodels,thebutterandporridge onthebreadofconsultants),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. In totalthePRAwillregulatearound1,700financialfirms. ThePRA’sroleisdefinedintermsoftwostatutoryobjectivestopromotethesafetyandsoundnessofthesefirmsand,specificallyforinsurers,tocontribute to thesecuringofanappropriatedegreeofprotectionforpolicyholders. SemiannualMonetaryPolicyReporttotheCongress SpeechbyMrBenSBernanke,ChairmanoftheBoard ofGovernorsoftheFederalReserveSystem,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.” CounciloftheEuropeanUnion BaselIIIinEurope– CRD4 IrishPresidencyreachesbreakthroughonnewrulesforstrongerEUbanks TheIrishPresidencyhasreachedabreakthroughin talks withtheEuropean ParliamentonanoverhaulofbankingrulesincreasingEUfinancialstability. UpdateonMeasurestoAddressUnrecordedFinancialFlows BankNegaraMalaysia wouldlike toprovideanupdateonmeasuresthathavebeenundertakenbymembersofaHighLevelMulti-AgencySpecialTaskForce(TaskForce)to reduceillicitfinancialflows. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  6. P age |6 PCAOBIssuesReporton2007-2010InspectionsofDomestic FirmsthatAudit100orFewerPublicCompaniesWashington,D.C. The PublicCompanyAccountingOversightBoardtodayreleasedareportsummarizinginspectionobservationsidentifiedinthe2007 through2010inspectionsofU.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. NegotiationsbetweentheEuropean Parliament,European CommissionandCouncilofMinisterstofinalisethelegislationarestillunderway. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  8. P age |8 TheUKPrudentialRegulationAuthority(PRA) On1April2013thePrudentialRegulationAuthority(PRA)willbecomeresponsiblefortheprudentialregulationandsupervisionofbanks,buildingsocieties,creditunions,insurersandmajorinvestmentfirms. In totalthePRAwillregulatearound1,700financialfirms. ThePRA’sroleisdefinedintermsoftwostatutoryobjectivestopromotethesafetyandsoundnessofthesefirmsand,specificallyforinsurers,tocontribute to thesecuringofanappropriatedegreeofprotectionforpolicyholders. In promotingsafetyandsoundness,thePRAwillfocusprimarilyontheharmthatfirms cancause to thestabilityoftheUKfinancialsystem. Astablefinancialsystemisoneinwhichfirmscontinuetoprovidecriticalfinancialservices– apreconditionforahealthyandsuccessfuleconomy. ThePRAwillmakeforward-lookingjudgementsontherisksposedbyfirmsto itsstatutoryobjectives. Thoseinstitutionsandissueswhichposethegreatestrisktothestabilityofthefinancialsystemwillbethefocusofitswork. ThePRAwascreatedbytheFinancialServicesAct(2012)andwillbepartoftheBankofEngland. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  9. P age |9 Itwillhaveclose workingrelationshipswith otherpartsoftheBank,includingtheFinancialPolicyCommitteeandtheSpecialResolutionUnit. ThePRAwillworkalongsidetheFinancialConductAuthority(FCA)creatinga“twinpeaks”regulatorystructureintheUK. TheFCAwillbeaseparateinstitutionandnotpartoftheBankofEngland. TheFCAwillberesponsibleforpromotingeffectivecompetition,ensuringthatrelevantmarketsfunctionwell,andfortheconductregulationofallfinancialservicesfirms. Thisincludesactingto preventmarketabuseandensuringthatconsumersgetafairdealfromfinancialfirms. TheFCAwilloperatetheprudentialregulationofthosefinancialservicesfirmsnotsupervisedbythePRA,suchasassetmanagersandindependentfinancialadvisers. Priorto1April2013,theFinancialServicesAuthority(FSA)willcontinuetoberesponsibleforprudentialandconductregulationintheUK. TheBankofEnglandwillhavearesponsibilityforfinancialstability,basedonanamendedstatutoryobjectiveto protectandenhancethestabilityofthefinancialsystemoftheUnitedKingdom. And,insupportofthisobjective,theFinancialPolicyCommittee(FPC)willbeestablishedwithin theBank,chargedwithidentifying,monitoringandtakingactiontoremoveorreducesystemicrisks. TheFPC,whichalreadyexistsininterimform,willbeable tomake recommendationsandgivedirectionstothePRAandtheFCAonspecificactionsthatshouldbetakeninordertoachievetheFPC’sobjectives. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  10. P age |10 Sourse:AndrewBailey,ExecutiveDirectoroftheBankofEnglandand ManagingDirectoroftheFinancialServicesAuthority’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 • LatestupdateaswetransitiontothePrudentialRegulationAuthority(PRA) • Thislettergivesyoumoreinformationonwhatyouneedtodotobereadyfor‘legalcutover’(LCO)on1April2013. • ThePRA’sapproachto supervisionwasoutlinedinthetwoapproachdocuments– oneforinsurersandonefordeposit-takersandinvestmentfirms. • WewillpublishrevisedversionsofthesedocumentsatLCO,andthereafterthedocumentswillactasstandingreferencesforfirmsonthePRA’ssupervisoryapproach,keyPRApolicies,andhow we intendtomeetourstatutoryobjectives. • Below isanoverviewofthekeymessagesfromtheapproachdocuments: • ThePRAwillhavetwo statutoryobjectivestopromotethesafetyandsoundnessoffirmsandspecifictoinsurers,to contribute tosecuringanappropriatedegreeofprotectionforpolicyholders. • Astablefinancialsystem,thatisresilientinprovidingthecriticalfinancialservices theeconomyneeds,isanecessaryconditionforahealthyandsuccessfuleconomy. • ThePRAwillnotoperateazero-failureregime. • ThePRAwill, however,seekasfaraspossiblewithresolutionarrangementsinplace,toensurethatanyfirmsthatfaildosoinaway thatavoidssignificantdisruption to thesupplyofcriticalfinancialservices, includinganacceptabledegreeofcontinuityofcoverforpolicyholders;and InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  13. P age |13 - ThePRA’sapproachto supervisionwillbeclearlybasedonjudgementratherthannarrowlyrules-based,Supervisoryjudgementswillbeforward-looking,takingintoaccountawiderangeofpossiblerisks tothePRA’sobjectives. Theapproachdocuments canbeaccessedviatheFSAwebsite: 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 In December2012,Igaveashort interviewentitled“Anewapproachtofinancialsupervision:thePrudentialRegulationAuthority”whichcanbeviewedhere: http://www.youtube.com/watch?v=yJDp1XY3DJM Thefollowingisanupdateoncertainaspectsofthetransitionwherewecan now providegreaterclarity. 1.Changesinpolicy IndividualGuidance ThePRAwillhaveadifferentregulatoryandsupervisoryfocusthantheFSA,includinganewsetofobjectivesandadifferentapproachtosupervision,assetoutintheapproachdocuments. ThismeansthatguidancepreviouslyissuedtofirmsbyFSAsupervisorstoindividualfirmswillnothavebeenissuedwithPRAaimsandobjectivesinmind. Therefore,apartfromthefourcategorieslistedbelow,FSAindividualguidancewillnotautomaticallybepermanentlytransitionedorconfirmed bythePRA. Guidance tobetransitioned InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  14. P age |14 Thefollowingfourcategoriesof‘individualguidance’willbeautomaticallytransitionedatLCO: IndividualCapitalRequirementsGuidance,includingcapitalplanningbuffersforbanks and capitalguidanceissued to insurers IndividualLiquidityGuidance IndividualguidancegivenbytheFSAthatenablesafirmtomovefromahigherproportionalitytiertoalowerproportionalitytierasprovidedforintheFSA’s‘GeneralGuidanceonProportionality:TheRemunerationCode (SYSC19a)&Pillar3 disclosuresonremuneration(BIPRU11)’ GuidanceonthecompletionandsubmissionofRegulatoryReturns OtherGuidance Firmsshouldreviewallindividualguidanceandtheirassociated behaviourinaccordancewithsuchguidanceandassesstheappropriatenessofthatbehaviourinlinewiththePRA’sstatutoryobjectives. FirmsshouldinmanycasesbeabletodothisbyexercisingjudgementandwithoutconsultingthePRA. Firmsshoulddocumentthisreview. Incertaincases,firmsmaywishtorequestthatthe PRA(FSAuntilLCO)reviewitemsofFSAindividualguidancewhichare: Notincludedinthe categoriesidentifiedabove;and Wherethefirmwishes thePRAtoexplicitlyconsiderandconfirmwhetherbehaviouroractionsinlinewiththatguidancewillremainappropriateinthePRA. Thisisnotanopportunity to requestthatallpreviouslyissuedindividualguidanceshouldberetained. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  15. P age |15 Betweennow and30September2013,firmsmaysubmitalistofthoseitemsofindividualguidancewhichtheywishthePRAtoreview,togetherwiththeir ownassessmentofwhetherthebehaviouroractionssetoutintheguidancewouldcontribute towardstheadvancementofthePRA’sobjectives. Relationshipmanagedfirmsshouldsubmitrequestsforreviewtotheirsupervisor,andnon-relationshipmanagedfirmsshouldsubmitthemtotheCustomerContactCentreatemailaddressfcc@fsa.gov.ukuntil2April2013andthePRAfirmenquiriesatemailaddressPRA.Firmenquiries@bankofengland.co.ukfrom2April2013onwards. FirmswillbeabletocontinuetorelyonguidancereferredforreviewuntilthePRAreachesadecisiononwhethertheguidanceremainsappropriateorotherwise. Supervisorswillconfirmthetimetableforthereviewfollowingthesubmissionofthefirm’slist;reviewswillbecompletednomorethan18monthsafterLCO. OurjudgementandanyresultingresponsethatwegivetoafirmwillfocusontheadvancementofthePRA’sobjectives. Anyguidancethatisnotreferred tothe PRAforreviewwillceasetohaveanystatusasformalPRAindividualguidancefrom30September2013. Thisdoesnotmeanthatfirmsshouldautomaticallychangetheirbehaviour. Iffirmsdeemthattheirbehaviourisappropriate,theyshouldcontinuetoactinthatway. Iffirmsdecidetoaltertheirbehaviour,now or inthefuture,theyshould discussthiswiththeirsupervisor,in linewithPrinciple11. Thisapproachtoindividualguidancedoesnotchangerecentassessmentsoftherisksthatweseeasbeingposedbyafirm’sbusiness. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  16. P age |16 In particular,westillexpectRisk MitigationPlanpoints(reflectingtheFSA’sobjectives)outlinedinpreviousARROWletterstobeconcluded,wherewejudgethattheywillcontributetoadvancingthePRA’sobjective. ExistingwaiverswillalsobeautomaticallytransitionedtothePRA. ThresholdConditions TheexistingFSAThresholdConditionswillbereplacedintheirentiretybytheThresholdConditionsbeing introducedbyHMTviasecondarylegislationpursuant to theFinancialServicesAct2012. TheThresholdConditionsintheorderthathasbeenlaidbeforeparliamentareessentiallyintheformHMTconsultedoninOctober2012. Thenewconditionswilltakeeffect atthesametimeastherestoftheamendmentstoFSMAareintroduced,on1April2013,forbothexistingauthorisedfirmsandall in-flightcases. The FinancialServicesandMarketsAct(ThresholdConditions)Order 2013,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 Corporate information“AboutthePRA”willbeaddedandpagesonpolicy andPRAnewsandeventswillbepublished. ThecoreoperationalinformationonauthorisationsandsupervisionwillbepublishedatLCO. Firmsarewelcometosendfeedback includingcommentsandideasaboutthePRAwebpresence to pra.webcontent@bankofengland.co.uk. FirmEnquiries TheOctober2012approachdocumentsexplainedthatfirmswhodonothaveadedicatedsupervision teamshouldusetheFirmEnquiresFunctionastheirfirstpointofcontactwiththePRA. ThePRAFirmEnquirieswillbeoperationalfrom2April2013anditscontactdetailsare: Telephonenumber02034617000(operatinghours9:00– 17:00)EmailPRA.Firmenquiries@bankofengland.co.uk TheFSAcontactcentremust beusedforallenquiriesupto2April2013. However,duringMarchsomecalls tothecontactcentrewillbetransferredtothePRA’sFirmEnquiries,in preparationfortakingfirm’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. Theintentionis to publishthePRAHandbookinMarch2013. AfterLCO,thePRAwillamendits ownsuiteof policymaterialasanindependentbodyinaccordancewiththeprocesseslaiddown in theFinancialServicesAct2012,includingcooperationwiththeFCAandexternalconsultation. EnforcementConsultation WepublishedtheconsultationonthePRA'sapproachto enforcement,includingproposedstatutorystatementsofpolicy andprocedure,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? The FinancialServicesBillreceivedRoyalAssenton19December2012andbecametheFinancialServicesAct2012(TheAct). SomesectionsofTheAct–cameintoforceon23January2013,inordertoenabletheTreasurytomakesecondarylegislation,andtoensurethatthenewregulatorscanpreparefortheirrespectiverolespostlegalcutover. Therestoftheprovisionsrelatingtothenewregulatoryregimewillcomeintoforceon1April,thedatedesignatedforlegalcutovertothenew structure. TheActwillbesupportedbysecondarylegislationandTreasuryhasconsultedonanumberofdraftorderswhichwillneedtobemadepriortolegalcutover. TheordersdetailingthenewThresholdConditions,allocatingresponsibilityformakingrulesinrelationto FSCSbetweentheFCAandthePRA,amendingcertainmutualslegislation,determiningwhichtypesofholdingcompanytheregulatorsnewpowersoverqualifyingparentundertakingsapplytoandspecifyingwhichregulatedactivitieswillbesubjecttothePRA’sregulationhavealreadybeenlaidbeforeParliamentandareexpected tobeapprovedbybothhousesbymid-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 ThepolicystatementandthefirmstobedesignatedbythePRAwillbefinalisedahead oflegalcutover. ShouldIcontinuetosubmitmyreturnthroughGABRIEL? ThePRAwillhaveitsowndatacollectionandqualityassuranceteam– theRegulatoryDataGroup-whichwilltakeoverthePRAregulatorydatarelatedworkpreviouslyundertakenbytheFSA’sDataMonitoringTeam(theFSA’scentraldata collectionteam). ForfirmswhoreportregulatorydataviaGABRIELtherewillbenochange to thisreportingandyouwillcontinuetousetheGABRIELsystemtoreportasyoudonow. GABRIELwillbeoperatedbyFCA.Firmsare tocontinuetousetheircurrentURLandlogindetailstoaccessthesystem. Theexistingdataitemswillremainwithonlyminorchangestothewording. Anytechnicalqueries aboutthesystemshouldberaisedwiththeFCAContactCentreon08456069966oremailaddressfcc@fsa.gov.uk. WhereshouldIsubmitmyfirm’semail/paperreturns? Forfirmswhoreportregulatorydataviaemailor inhardcopy(paper)moredetailofwheretosubmityourreturnswillbeprovidedonthePRA’sinternetsitewww.bankofengland.co.uk/prasoon. Wherefirmsprovidedatadirectlyto FSAsupervisorsorpolicyteams,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. Below isatablelistingthemovedatesforeachdivision: Supervisorswillconfirmoutstandingcontactdetailssuchastelephonenumbers,emailaddressesandemailaddressesaroundtheirmovedates. ForfirmswithPGPencryptedkeys,communicationonnewaccesscodeswillalsobeincluded. WilltheFCAandPRAhaveseparateregisters? TherewillbeoneregistermaintainedbytheFCA.Itwillbeavailabletoallfirms,reflectingthepositionofboththePRAandtheFCA. WillIretainthesameregistrationnumber? Yes.YourFSAnumberswillbecarriedacross tothenewRegister. WilltherebeaPractitionerPanel? Yes.ThePRAwillestablishaPractitionerPanel. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

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

  23. P age |23 Thispapercanbeaccessedhere:http://www.fsa.gov.uk/library/policy/cp/2012/12-26.shtml ConsultationforCP12/26closedon7December2012,wearecurrentlyreviewingtheproposals in lightofresponses to theconsultationandexpectthefinalPRArulesonapprovedpersons tobemadebythePRABoardatoraroundLCO,when othersubstantivechangestotheHandbookwillalsobemade,and accompanyingPolicyStatementsissued. Pleaseseesection4‘Policy Material’below formoredetailonfinalisingthePRAHandbook. Wealsopublishedmoredetailontransitionalarrangementsforapprovedpersonson25thJanuary inCP13/3 http://www.fsa.gov.uk/library/policy/cp/2013/13-03.shtml Willthenewthresholdconditionsbemorespecific? HMTreasuryhaspublishedindicativethresholdconditions.Dualregulatedfirmswillneed tomeettwosetsofconditions,onesetfromthePRAandonesetfromtheFCA. ForthePRAtherewillbethresholdconditionsspecific to insurersandthresholdconditionsforallotherfirmsregulatedbythePRA. http://www.hm-treasury.gov.uk/d/condoc_fin_regulation_draft_secondary_leg.pdf WillauthorisationandthedifferentapprovalprocessestakemoreorlesstimewiththePRA? Thestatutorytimelimitonauthorisationsin FSMAwillremainunchangedafterlegalcutover. 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.Anysubmissionsor informationreceivedpriortoLCOwillnotneedtoberesubmitted. CP13/3outlinesHandbooktransitionalprovisionsrelatedtoinformationsubmissions. HowwillIknowwheretosendinformationornotificationsafterLCO? Whereinformationornotificationsarerequiredunderarule,theappropriatesubmissiondetailswillbeupdatedinthePRA’srulesoronthePRAwebsite. CP13/3setsoutmore informationin relation to thetransitionoftimelimitsandnotificationrequirementsintherulebook. 3.Supervision WhatisthePRA'sapproachtosupervision? InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  25. P age |25 ThePRA’sapproachto supervisionwasoutlinedinthetwoPRA‘approach’documents– onefordeposit-takersandinvestmentfirms,oneforinsurers– initiallypublishedinOctober2012tofacilitatescrutinyofthePRA’sproposedapproachastheFinancialServicesBillpassedthroughParliament. Thedocumentsalsosetoutsomekeypolicy materialforfirms. Wewillpublishupdatedversionsatlegalcutover,andthereafterthedocumentswillactasstandingreferencesforfirmsonthePRA’ssupervisoryapproach,keyPRApolicies,andthePRA’sstatutoryobjectives. WhenwillmylastFSAriskassessmentvisitbe? WearecurrentlyplanningthetransitionfromtheFSA’sriskassessmentframeworktothePRAframework. Firmswillbenotifiedofhowtheirsupervisionwillbetransitioned to‘continuousassessment’fromtheRegulatoryPeriodpreviously indicatedinanARROWorSupervisoryAssessmentletter. ThenewSupervisoryAssessmentFrameworkwillbeacontinuousassessmentmodel,focusingonjudgementsaboutkeyriskstothePRA’sobjectives. FormoredetailrefertotheApproachDocuments. WhenwillIknowwhichcategorymyfirmfallsinto? AcorepartofthePRA’sworkwillbetoassessthesignificanceofafirmtoitsobjectives. Withthisinmindwehavedividedallfirmsintofive‘categories’ofimpact. BeforeLCOwewillwritetofirmsnotifyingthemoftheir categorisation. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  26. P age |26 WillmyfirmstillberequiredtocomplywithFSARiskMitigationProgramme(RMP)items?WhatwillhappentoRMP? WehavestreamlinedthenumberofactionsintheRMP andsplitthemintoconductandprudentialactions. YoursupervisorwillhavecommunicatedwithyourfirmtoconfirmtheoutstandingRMP actions,andyourfirmisaccountable to therelevantregulatorfortheirresolution. WhowillbemyPRAsupervisor? Oneofthemajorchangeswemadein2012wastoestablishprudentialandconductsupervisionteamsfordualregulatedfirms. YoushouldnowbeawareofyourPRAsupervisor. IfyouhavenotbeenallocatedasupervisoryoushouldcontinuetocontactusthroughtheFSAContactCentre. AtLCOthePRAwillhaveits ownFirmEnquires,contactdetailswillbe:Telephonenumber02034617000 EmailPRA.Firmenquiries@bankofengland.co.uk Willindividualcapitalguidanceandindividualliquidityguidancestillapply? BoththeindividualcapitalguidanceandindividualliquidityguidanceissuedbytheFSAtoPRA-regulatedfirmswillcontinuetoapply. HowwillEuropeanandotherpolicyinitiativessuchasSolvencyIIandCRDIVaffectthePRA’ssupervisionmodel? Informationabouthow theinteractionofsuchinitiativeswillaffect thePRA’sapproachwillbemadeavailableaspartoftheimplementationofthesepolicies. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  27. P age |27 Policymaterial HowwillthePRAissuepolicymaterialafterLCO? ThePRAApproachDocumentssetoutthatthePRAwillestablishandmaintainpublishedpolicymaterialwhichisconsistentwithitsobjectives,clearinintent,straightforwardinpresentationandasconciseaspossible. AssetoutinourDecemberletter,onlyalimited amountofFSAnonHandbookguidancewillbetransferredtothePRA. In addition,theletteraccompanyingtheseFAQssetsoutindetailourapproachtoFSA IndividualGuidanceandtheactionrequiredbyfirms. Feesandcosts WillthecurrentfeestructurebeadoptedbythePRA? Firm’scurrentfeeswillseethemthroughthisfeeperiod.ForthefirstfeeyearunderthePRA(expectedtobe2013/14)thePRAfeesstructurewillbebasedonadaptingthecurrentstructure,makingonly thenecessarychangestoaccommodatedual-regulation. Theseproposedchangesareinthefeespolicy ConsultationPaper(CP12/28) http://www.fsa.gov.uk/static/pubs/cp/cp12-28.pdf Howwillfeesbesetnextyear? ForthefirstyearunderthePRA(expectedtobe2013/14)thePRAfeeswillbeset to recovertheannualfundingrequirementitneedsto meetitsstatutoryobjectives. ThisfundingrequirementandthefeeratestorecoverwillbeincludedinthePRAfeesratesConsultationPaper(CP)expectedtobepublishedinApril2013. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  28. P age |28 HowiscreatingthePRAgoingtobepaidfor? ThefeesthatwechargefirmsfundtheFSAandthetransitionworkthatwearedoingforthenewregulator. Wehavesetouttheregulatoryreformcostsinthisyear’sbusinessplan. TheActmakesprovisionforthePRAtorecover,fromtheindustry,theregulatoryreformtransitioncostsoftheFSAandtheBankofEngland. 6.Co-ordinationwiththeFinancialConductAuthority OnwhatbasiswilltheFinancialConductAuthority(FCA)andthePrudentialRegulationAuthority(PRA)worktogether? ThedraftMemorandumofUnderstanding(MoU)betweentheFCAandthePRAsetsoutahighlevelframeworkforhow thetwo regulatorswillworktogetherwithinthenewregulatorysystemprovidedforbytheAct. Itwillbevitalthatthetwo authoritiespursuetheir ownmandates,respectingtheUK’sTwinPeakssupervisorysystem. Butitwillalsobeessentialthattheycoordinate activitiesinsomeareas,andcooperateinothers. TheMoUsetsoutthesearrangementstohelpensuretheyareeffectiveandefficient. TherewillalsobeaseparateMoUcoveringthespecific issuesraisedbythejointregulationofwith-profitsinsurancecontracts. BoththeFCAandPRAarevisitingusnextyear,howdoyouintendtoseparatethetwoareas? TheFCAandPRAaretwo differentregulatorslookingatdifferentaspectsofthebusiness,althoughthereisarequirement to shareinformation.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) • DraftMoUbetweentheFCAandthePRAhttp://www.fsa.gov.uk/static/pubs/mou/fca_pra.pdf • DraftWith-ProfitsMoUbetweentheFCAandthePRA • http://www.fsa.gov.uk/static/pubs/mou/draft-with-profits.pdf • DraftMoUbetweenthePRAandtheFSCShttp://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)onfinancialcrisis management 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,ChairmanoftheBoard ofGovernorsoftheFederalReserveSystem,beforetheCommitteeonBanking,Housing,andUrbanAffairs,USSenate,WashingtonDC *** ChairmanJohnson,RankingMemberCrapo,and othermembersoftheCommittee,IampleasedtopresenttheFederalReserve’ssemiannualMonetaryPolicy Report. Iwillbeginwithashortsummaryofcurrenteconomicconditionsandthendiscuss aspectsofmonetaryandfiscalpolicy. Currenteconomicconditions SinceIlastreportedtothisCommitteeinmid-2012,economicactivityintheUnitedStateshascontinuedtoexpandatamoderateifsomewhatunevenpace. In particular,realgrossdomesticproduct(GDP)isestimatedto haverisenatanannualrateofabout3percentinthethirdquarterbut tohavebeenessentiallyflatinthefourthquarter. ThepauseinrealGDP growthlastquarterdoesnotappeartoreflectastalling-outoftherecovery. Rather,economic activitywastemporarilyrestrainedbyweather-relateddisruptionsandbytransitorydeclinesinafewvolatilecategoriesofspending,evenasdemandbyU.S.householdsandbusinessescontinuedtoexpand. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  32. P age |32 Availableinformationsuggeststhateconomicgrowthhaspickedupagainthisyear. Consistentwiththemoderatepaceofeconomicgrowth,conditionsinthelabormarkethavebeenimprovinggradually. SinceJuly,nonfarmpayrollemploymenthasincreasedby175,000jobspermonth onaverage,andtheunemploymentratedeclined0.3percentagepointto7.9percentoverthesameperiod. Cumulatively,private-sectorpayrollshavenowgrownbyabout6.1millionjobssincetheirlowpointinearly2010,andtheunemploymentratehasfallenabitmorethan2percentagepointssinceits cyclicalpeak inlate2009. Despitethesegains,however,thejobmarketremainsgenerallyweak,withtheunemploymentratewellaboveitslonger-runnormallevel. About4.7millionoftheunemployedhavebeenwithoutajobforsixmonthsormore,andmillionsmorewouldlike full-timeemploymentbutareable to findonlypart-timework. Highunemploymenthassubstantialcosts,includingnotonlythehardshipfacedby theunemployedandtheirfamilies,butalsotheharmdone tothevitalityandproductivepotentialofoureconomyasawhole. Lengthyperiodsofunemploymentandunderemploymentcanerodeworkers'skillsandattachment tothelaborforceorpreventyoungpeoplefromgainingskillsandexperiencein thefirstplace– 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-terminflationexpectationshaveremainedinthenarrow rangesseenoverthepastseveralyears. Againstthisbackdrop,theFederalOpenMarketCommittee (FOMC)anticipatesthatinflationoverthemediumtermlikelywillrunatorbelowits2percentobjective. Monetarypolicy Withunemploymentwellabovenormallevelsandinflationsubdued,progresstowardtheFederalReserve’smandatedobjectivesofmaximumemploymentandpricestabilityhasrequiredahighlyaccommodativemonetarypolicy. Undernormalcircumstances,policyaccommodationwouldbeprovidedthroughreductionsintheFOMC’stargetforthefederalfundsrate– theinterestrateonovernightloansbetweenbanks. However,asthisratehasbeenclosetozerosinceDecember2008,theFederalReservehashadtousealternativepolicytools. Thesealternative toolshavefallenintotwo categories. Thefirstis“forwardguidance”regardingtheFOMC’santicipatedpathforthefederalfundsrate. Sincelonger-terminterestratesreflectmarketexpectationsfor shorter-termratesovertime,ourguidanceinfluenceslonger-termratesandthussupportsastrongerrecovery. Theformulationofthisguidancehasevolvedovertime. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  34. P age |34 BetweenAugust2011andDecember2012,theCommitteeusedcalendardates to indicatehowlongitexpectedeconomicconditionstowarrantexceptionallylow levelsforthefederalfundsrate. AtitsDecember2012meeting,theFOMCagreed toshift toprovidingmoreexplicitguidanceonhow itexpectsthepolicy rate to respondtoeconomicdevelopments. Specifically,theDecemberpostmeetingstatementindicatedthatthecurrentexceptionallylow rangeforthefederalfundsrate“willbeappropriateatleastaslongastheunemploymentrateremainsabove 6-1/2percent,inflationbetweenoneandtwoyearsahead isprojected tobenomorethanahalfpercentagepointabovetheCommittee’s2percentlonger-rungoal,andlonger-terminflationexpectationscontinuetobewellanchored.” Anadvantageofthenewformulation,relative to thepreviousdate-basedguidance,isthatitallowsmarketparticipantsandthepublicto updatetheirmonetarypolicyexpectationsmoreaccuratelyinresponsetonewinformationabouttheeconomicoutlook. ThenewguidancealsoservestounderscoretheCommittee’sintentiontomaintainaccommodationaslongasneededtopromoteastrongereconomicrecoverywithstableprices. Thesecondtypeofnontraditionalpolicy toolemployedbytheFOMCislarge-scalepurchasesoflonger-termsecurities,which,like ourforwardguidance,areintendedtosupporteconomicgrowthbyputtingdownwardpressureonlonger-terminterestrates. TheFederalReservehas engagedinseveralroundsofsuchpurchasessincelate2008. 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,itwilltakeappropriate accountoftheirlikelyefficacyandcosts. In otherwords,aswithallofitspolicydecisions,theCommitteecontinues to assessitsprogramofassetpurchaseswithinacost-benefitframework. In thecurrenteconomicenvironment,thebenefitsofassetpurchases,andofpolicy accommodationmoregenerally,areclear: Monetarypolicyisprovidingimportantsupporttotherecoverywhilekeepinginflationclose to theFOMC’s2percentobjective. Notably,keepinglonger-terminterestrateslowhashelpedsparkrecoveryinthehousingmarketandledtoincreasedsalesandproduction ofautomobilesandotherdurablegoods. 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,theCommitteeremainsconfidentthatithasthetoolsnecessary totightenmonetarypolicy whenthetimecomes todoso. AsInoted,inflationiscurrentlysubdued,andinflationexpectationsappearwellanchored;neithertheFOMCnorprivateforecastersareprojectingthedevelopmentofsignificantinflationpressures. AnotherpotentialcostthattheCommitteetakesveryseriouslyisthepossibilitythatverylowinterestrates,ifmaintainedforaconsiderabletime,couldimpairfinancialstability. Forexample,portfoliomanagersdissatisfiedwithlowreturnsmay“reachforyield”bytakingonmorecreditrisk,durationrisk,orleverage. Ontheotherhand,somerisk-taking– suchaswhenanentrepreneurtakes outaloan to startanewbusinessoranexistingfirmexpandscapacity– isanecessaryelementofahealthyeconomicrecovery. Moreover,althoughaccommodativemonetarypoliciesmayincreasecertaintypesofrisk-taking,inthepresentcircumstancestheyalsoserveinsomewaystoreduceriskinthesystem,mostimportantlybystrengtheningtheoveralleconomy,butalsobyencouragingfirmstorely moreonlongertermfunding,andbyreducingdebtservicecostsforhouseholdsandbusinesses. In any case,theFederalReserveisrespondingactivelytofinancialstabilityconcernsthroughsubstantiallyexpandedmonitoringofemergingrisksinthefinancialsystem,anapproach tothesupervisionoffinancialfirmsthattakes amoresystemicperspective,andtheongoingimplementationofreformstomakethefinancialsystemmoretransparentandresilient. Althoughalongperiodoflow ratescouldencourageexcessiverisk-taking,andcontinuedcloseattention to suchdevelopmentsis certainlywarranted,to thispointwedonotseethepotentialcostsofthe InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  37. P age |37 increasedrisk-taking in somefinancialmarketsasoutweighingthebenefitsofpromotingastrongereconomicrecoveryandmore-rapidjobcreation. AnotheraspectoftheFederalReserve’spoliciesthathasbeendiscussedistheirimplicationsforthefederalbudget. TheFederalReserveearnssubstantialinterestontheassetsitholdsinitsportfolio,and,otherthantheamountneededtofundourcostofoperations,all netincomeisremittedtotheTreasury. WiththeexpansionoftheFederalReserve’sbalancesheet,yearlyremittanceshaveroughlytripledinrecentyears,withpaymentstotheTreasurytotalingapproximately$290billionbetween2009and2012. However,iftheeconomycontinuestostrengthen,asweanticipate,and policy accommodationis accordinglyreduced,theseremittanceswouldlikelydeclineincomingyears. FederalReserveanalysisshowsthatremittancestotheTreasurycouldbequitelowforatimeinsomescenarios,particularlyifinterestratesweretorisequickly. However,eveninsuchscenarios,itishighlylikelythataverageannualremittancesovertheperiodaffectedbytheFederalReserve’spurchaseswillremainhigherthanthepre-crisisnorm,perhapssubstantiallyso. Moreover,totheextentthatmonetarypolicy promotesgrowthandjobcreation,theresultingreductioninthefederaldeficitwoulddwarfanyvariationintheFederalReserve’sremittances to theTreasury. Thoughtsonfiscalpolicy Althoughmonetarypolicy isworkingtopromoteamorerobustrecovery,itcannotcarrytheentireburdenofensuringaspeedierreturn toeconomichealth. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  38. P age |38 Theeconomy’sperformancebothovertheneartermandinthelongerrunwilldependimportantlyonthecourseoffiscalpolicy. ThechallengefortheCongressandtheAdministrationistoputthefederalbudgetonasustainablelong-runpaththatpromoteseconomicgrowthandstabilitywithoutunnecessarilyimpedingthecurrentrecovery. Significantprogresshasbeenmaderecentlytowardreducingthefederalbudgetdeficitoverthenextfewyears. TheprojectionsreleasedearlierthismonthbytheCongressionalBudget Office(CBO)indicatethat,undercurrentlaw,thefederaldeficitwillnarrowfrom7percentofGDPlastyearto2-1/2percentinfiscalyear2015. Asaresult,thefederal debt heldbythepublic(includingthatheld bytheFederalReserve)isprojectedtoremainroughly75percentofGDPthroughmuchofthecurrentdecade. However,asubstantialportionoftherecentprogressinloweringthedeficithasbeenconcentratedinnear-termbudget changes,which,takentogether,couldcreateasignificantheadwindfortheeconomicrecovery. TheCBOestimatesthatdeficit-reductionpoliciesincurrentlawwillslowthepaceofrealGDP growthbyabout1-1/2percentagepointsthisyear,relativetowhatitwouldhavebeenotherwise. AsignificantportionofthiseffectisrelatedtotheautomaticspendingsequestrationthatisscheduledtobeginonMarch1,which,accordingtotheCBO’sestimates,willcontributeabout0.6percentagepointtothefiscaldragoneconomicgrowththisyear. Giventhestill-moderateunderlyingpaceofeconomicgrowth,thisadditionalnear-termburdenontherecoveryissignificant. Moreover,besideshavingadverseeffectsonjobsandincomes,aslower recoverywouldleadtolessactualdeficitreductionintheshortrunforanygivensetoffiscalactions. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  39. P age |39 Atthesametime,anddespiteprogressinreducingnear-termbudgetdeficits,thedifficultprocessofaddressinglonger-termfiscalimbalanceshasonlybegun. Indeed,theCBOprojectsthatthefederaldeficitanddebtasapercentageofGDP willbeginrisingagaininthelatterpartofthisdecade,reflectinginlargeparttheagingofthepopulationandfast-risinghealth-carecosts. Topromoteeconomicgrowthinthelongerterm,and topreserveeconomicandfinancialstability,fiscalpolicymakerswillhave to putthefederalbudgetonasustainablelong-runpaththatfirststabilizestheratiooffederaldebttoGDP and,giventhecurrentelevatedlevelofdebt,eventuallyplacesthatratioonadownwardtrajectory. Between1960andtheonsetofthefinancialcrisis,federaldebt averagedlessthan40percentofGDP. Thisrelativelylow levelofdebtprovidedthenationmuch-neededflexibilitytomeettheeconomicchallengesofthepastfewyears. ReplenishingthisfiscalcapacitywillgivefutureCongressesandAdministrationsgreaterscopetodealwithunforeseenevents. Toaddressboththenear-andlonger-termissues,theCongressandtheAdministrationshouldconsiderreplacingthesharp,frontloaded spendingcutsrequiredby thesequestrationwithpoliciesthatreducethefederaldeficitmoregraduallyintheneartermbutmoresubstantiallyinthelongerrun. Suchanapproachcouldlessenthenear-termfiscalheadwindsfacingtherecoverywhilemoreeffectivelyaddressingthelonger-termimbalancesinthefederalbudget. Thesizesofdeficitsanddebtmatter,ofcourse,butnotalltaxandspendingprogramsarecreatedequalwithrespect to theireffectsontheeconomy. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  40. P age |40 Tothegreatestextentpossible,intheireffortsto achievesoundpublicfinances,fiscalpolicymakersshouldnotlosesightoftheneedforfederaltaxandspendingpoliciesthatincreaseincentives to workandsave,encourageinvestmentsinworkforceskills,advanceprivatecapitalformation,promoteresearchanddevelopment,andprovidenecessaryandproductivepublicinfrastructure. Althougheconomicgrowthalone cannoteliminatefederalbudgetimbalances,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,Iwouldlike to thanktheFSIandEMEAP foronceagainorganisingyetanotherexcellenteventintheseriesofHigh-LevelMeetingsinAsia. PriortotakingupmycurrentroleinBasel,IattendedtheseeventsasanAustralianbanksupervisor,andalwaysfoundthemtobevaluableopportunitiesfortheexchangeofideasandviewsbetweentheregion’sseniorregulatorsandindustryrepresentatives. AlthoughIamnowbasedinanotherpartoftheworld,Iamveryhappytobeabletocontinuetoparticipateandcontributetothesediscussions. IwouldalsoliketoacknowledgethattheAsianregionleadstheworldinitsimplementationofBaselIII. Theregionhasbenefitedfromthedevelopmentofstrongbankingsystemssupportedbystrongregulatoryregimes. Furthermore,manyofyouhaverecognisedBaselIIIasaminimum,and have adoptedlocalpracticesthatimposeadditionalrequirements todealwithlocalrisks. Theresultishealthybankingsystemsthatarewellequippedtosupporteconomicgrowth,notleastbysteppingintothegapcreatedbytheconstraintsfacedbymanybanks in otherpartsoftheworld. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  42. P age |42 • Findingtherightbalance • Iamsurethatmanyofyouknow thestoryofGoldilocksandthethreebears. • In it,Goldilocksexploredthebears’house,testingtheporridge,thechairsandthebedsuntilshefoundthingsthatshethoughtwere“justright”. • WhenItookupmyrole inBasel,afriendsuggestedIhada“Goldilocks”job. • Bythishemeantthatmytaskwas to takearangeofcompetingobjectives,andfindsomemiddlegroundthatwas“justright”. • In aninternationalpolicymakingcontext,thatimpliespoliciesthatare: • comprehensive,yetsimple; • strong,butnotburdensome; • risk-based,yeteasy to understandandcompare; • flexibleandadaptable,yetconsistentlyapplied; • suitablefornormaltimes,butfoundedonthelessonsfromcrises; • builtonconsensus,butalsoonthebroadestpossibleengagement;and • utilisingappropriatelytherelativestrengthsofbothregulation(rules)andsupervision(oversight). • Withsuchamultidimensionalsetoftrade-offs,findingtheoptimalpointforanygivensetofregulatoryproposalsisinevitablyverydifficult. • In thecaseofBaselIII,theCommitteesoughtasuitableminimumamountofcapitalthatwas“justright”–notsolittlethatthefinancialsystemremainedsusceptible totheweaknessesrevealedin2007–08,but InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  43. P age |43 • notsomuchthatbanks couldnotperformtheirimportanteconomicfunctions. • TheCommitteealsoneededtoimprovethewaythattheadequacyofcapitalwasmeasuredsothatitappropriatelyrecognisesthemateriallydifferentmagnitudesofriskwithinindividualbankbalancesheets,butat thesametimeprovidesanoverallmeasureofsoundnessthatinvestorscan compareacrossbanks. • And,recognisingthattheBaselframeworkistheglobalstandardforbankcapital,theCommitteeneededsomethingthatwassuitableforinternationallyactivebanks– ourcoreconstituency– butcouldalsobeappliedmorebroadly. • Capitalrequirements–adequateandcomparable • Regulatory capitalrequirementsdomanythings,butattheirhearttheymust achievetwo fundamentalobjectives: • ensurebanks haveanadequatelevelofcapital(ierelative totheirriskprofile);and • provideameasureofcapitalthatiscomparableovertimeandbetween banks. • Thefirstoftheseobjectives–adequacy–isanobviousgoal,butfailuretoachievethesecond–comparability–underminesconfidencethatthefirstisbeingachieved. • Sincewearedealingwithinstitutionsthathaveabusinessmodelfoundedonconfidence,theimportanceofcomparabilityshouldnotbeunderestimated. • Duringtherecentcrisis,questionsbegantobeaskedaboutthereliabilityofrisk-basedcapitalratiosasanindicatorofbankhealth. • In myview,therewerethreefactorswhichservedtoundermine confidenceintherisk-basedmeasureofcapital: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  44. P age |44 • theregulatory capitalbaseincludedcapitalinstrumentsthatwerenottrulyloss-absorbing– financialmarketsincreasinglydiscountedthese; • theregulatory capitalbaseinsomecountriesfilteredout(ieignored)someunrealisedlossesthatbankshadincurred– financialmarketswantedtoaccountforthese;and • risk-weightedassetcalculationshadbecomecomplexandopaque,makingthemdifficultforexternal investors to understand– financialmarketsbecameconfusedbythese. • In otherwords,questionswerelegitimatelybeingasked aboutwhethercapitalwasbothadequateandcomparable. • Thequestionsrelated toboththenumeratorandthedenominatoroftheregulatorymeasure. • ThereformscontainedinBaselIIIlargelydealwiththesefirsttwo items. • BaselIIIraisestheminimumquantityoftrulyloss-absorbingcapitalbymany multiples. • Italsoimprovesthequalityofthat capitalbyeliminatingquasi-capitalinstruments,andcertainotherassets,thatprovedoflimitedvalueintimesofstress(indeed,investorsin someoftheseinstruments,ratherthan providingasourceofsupport,hadtobebailedoutthemselves!). • Inaddition,byremovingprudentialfiltersandforcingbankstorecogniseunrealisedlossesonfairvalueassets,capitalratioswillbemorecrediblebybetterreflectingthetrue capacityofabanktoabsorbfurtherlossesatanygivenpointintime. • Havingsubstantiallysimplifiedandimprovedthenumeratorofthecapitalratio,theCommittee’sattentionisnowturningto concernsabouttherisk-weightingframework: • itissaidbysometobetoocomplexanddifficulttounderstand,andthatsomethingsimpler(indeed,somesaysimple)wouldbebetter;and InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  45. P age |45 • itissaidbysometoprovidetoomuchflexibilityonhow riskshouldbemeasured,makingitdifficulttocomparereported capitalratios. • Theseconcernsarecloselyrelated– althoughthatdoesnotmeanlesscomplexityandlessflexibilityalwayslead to morecomparability. • Complexityandflexibility • Internationalbanksarecomplexorganisations. • Today,noteven“traditional”linesofbusiness,suchasretailandcommercialbanking,aresimplebusinessesto run,iftheyeverwere. • Capturingtherisk profileofthesebusinessesin asinglemeasureoffinancialsoundnessisextremelydifficult. • Thecomplexityinthe capitalframeworklargelycomesfromthedecisiontoallowbankstousetheirowninternalmodelstomeasurerisk,themajorinnovationcontainedin BaselII. • Althoughinternalmodelshadalreadybeenpartoftheregulatoryframeworkforadecade,thiswasonlyforarelativelysmallareaofactivity. • BaselIIprovidedthe capacitytodothisforthebiggestrisk mostbanksface– thecreditriskwithintheirloan books. • While,ofcourse,banks wererequired tojumpalargenumberofhurdlesinrelationtomodelspecificationandvalidationbeforetheycouldusetheirownmodelsthenewframeworkdidmovebanksawayfromthe“onemodelfitsall”approachthatwasatthecoreofBaselI. • Theprimaryobjectivebehindthisimportantstepwas to betteraligncapitalwithunderlyingrisks. • Regulatoryrequirementscreateincentives;BaselIIattempted to alignthoseincentivesmuchmorecloselywitheconomicrealitythanwasthecaseinBaselI. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  46. P age |46 In thisrespect,BaselII’sgoalcan be thoughtofaspromoting bothcapitaladequacyand capitalefficiency. Properlyapplied,banks’capitalrequirementscouldbemuchmoreresponsivetotheunderlyingriskstheyweretaking;low-riskbankswould benefitbynotbeingburdenedwithunnecessary capitalrequirements,andthosewithhigherriskprofileswouldneedtoholdadditionalcapitalcommensuratewiththeriskstheyareexposedto. Toputitanotherway,BaselIIsoughttobetterdistinguishbetweenhigh-andlow-riskbanks,anditrequiredhigher-riskbankstooperatewithlowerlevelsofleveragethantheirlow-riskpeers. Butasanyoneknowswhohasbuilt,supervisedorjusttriedtounderstandinternalriskmodelswithinabank,theyarenotsimple. Theyare,ofcourse,asimplificationoftherealworld,butthatisnotmuch ofaconsolationsincetherealworldisextremelycomplex. Thedifficultyisthat,ifmodelsareoversimplified,theydonotproduceriskmeasuresthatreflectreality. Butifmadetoocomplex,hardlyanyonecan saywhethertheyproducerealisticrisk measuresornot! Andbyallowingadegreeofflexibilityforbankstomodelrisksastheyseethem,wemakeitmoredifficult to achievecomparability.Gettingit“justright”thereforerequirescarefuljudgement. Comparability BaselIIwasundoubtedlyamajorimprovementintheconceptualsoundnessofthe capitalmeasurementprocess. Italsocreatedimportantincentivesforbanks torefineandimprovetheir riskmodels,and toavoidhighcorrelationsbetweenrisk managementmethodswhichcouldhavedetrimentalimplicationsforfinancialstability. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  47. P age |47 • Thesebenefitsshouldnotbelightlydismissed,buttherearenowconcernsthatthewayin whichmodelsarecurrentlyusedhinderscomparability,sinceusersofinformationcannotunderstandtheimpact thatmodellingchoiceshaveontheresultingcapitalrequirements. • TheCommitteethereforeneedstoensurethatthisadditionalrisksensitivityisnot,asaresultofitscomplexity,underminingtheoverallregimebymakingcomparisontoodifficultforallbutsupervisoryexperts(andmaybeevenfortheexperts too!). • Butbeforewerevertto asimplermeasurementmethodology,weneedtobesurethatitwouldreallybemorecomparable. • Comparabilityhastwo basicdimensions: • betweenbanks atagivenpointintime;and • foragivenbank,overaperiodoftime. • Anystandardisedapproachwillnecessarilybeblunt. • Itwillbesimplertounderstandthananinternalmodel,butthatisbecauseitwillnecessarilymakemanyassumptions. • Theseassumptionswillmean risk canbeincorrectlymeasured. • Theywillalsomeanthat changesinabank’sriskprofilecangoundetected. • Taketheexampleoftheleverageratio. • Itwillnotdistinguishbetweentwosimilarlysizedbanksevenifoneholdsalargeportfolioofhigh-qualitysovereignexposures,andtheotheralargeportfolioofhighlyleveragedloansforpropertydevelopment. • Norwillitshow anyresponseifabankswitchesitsbalancesheetfromoneofthoseportfolios to theotherovertime. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  48. P age |48 Aleverageratiomeasuresexactlywhatitsays–thedegreeofleverageonabank’sbalancesheet. Forthispurpose,itisperfectlysuited. Thatdoesnotnecessarilymakethemostusefulmeasureforjudgingtheadequacyofabank’s capitalbase. Risk-basedregimesseektorespond tothisproblembyintroducinggreaterrisk sensitivity. ButevenwiththestandardisedapproachesintheBaselframework,therearelimits to whatcanbeachieved. Therisk-basedframework wouldrespond,viachangesinthereportedcapitalratio,tothesituationsIhavementionedabove. Itwouldnot, however,necessarilyrespondatamoredetailedlevel– for example,itdoesnotmeaningfullydistinguishbetweenportfoliosoflowloan-to-valueratio(LVR),fulldocumentation,amortisingmortgageloans,andhighLVR,interest-only,self-certifiedmortgageloans. Onlywithadditionalcomplexity canwetakegreateraccountofthemultifacetedriskswithinabank’sloanbook. However,astheframeworkbecomesmoreandmorerisk-sensitiveinjudgingcapitaladequacy,itmaynolongerbethebestmeansofmonitoring,comparingandcontrollingoverallleverage. Forthesereasons,BaselIIIutilisesbotharisk-based capitalratioandanon-risk-basedleverageratiotoprovidecomplementarymeasuresofcapitaladequacyandleverage. Bothratiosserve their individualpurposes:oneameasureofcapitalrelativetorisk;theotherameasureofoverallleverage. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  49. P age |49 Thetwomeasurescanalsobecomparedwitheach other,providingadditionalinformationthatwouldnotbereadilyavailablefrom eithermeasureonits own. Improvingcomparability Theinclusionoftheleverageratioin BaselIIIdoesnotremovetheneedtofurtherreviewthecomparabilityoftherisk-basedregime. ToborrowfromWinstonChurchill,“howeverbeautifulthestrategy,youshouldoccasionallylookattheresults.” TheCommitteehasbeenconsciousofthisissueforsometime,andoverthepastyearithasbeenexploringtheissuefrombothabottom-upandtop-downperspective. Withregardtotheconcernsaboutthecomparabilityofmodel-basedrisk-weightedassetcalculations,theCommitteehasestablishedtwoworkstreams;onetolookattheconsistencyofcalculationsinrelation tothetradingbookand anotherparallelstreamforthebankingbook. Thisworkhasexaminedpubliclyavailabledataforaselectionoflargebanksacrossmultiplejurisdictions,aswellasaskinganumberofbankstoprovideriskmeasuresforaseriesofhypotheticalportfolios. Theoutcomeofthiswork hasbeensupplementedwithaseriesofmeetingswithindividualbanksbyaninternationalteamofsupervisoryexperts,withtheaimofprovidinggreaterunderstandingofthereasonsbehinddifferentresults. ThetradingbookreviewwaspublishedattheendofJanuary,andIwillfocusmycommentsonittoday. Theresultsofthebankingbookworkwillbereleasedinthecomingmonths. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

  50. P age |50 • Thetradingbookreviewfoundthatitisreasonablefor investors tocomplainthattheyfindcurrentriskdisclosuresopaque–theCommittee’sanalysisfoundthesamething! • Currentdisclosureswerenotadequateforexternalparties tobeabletojudgewhethermovementsinmodelledrisk-weightedassetsovertime,orbetweenbanks,weredue tounderlyingdifferencesinrisk,orforotherreasons. • Thatthereisvariabilityinresultsbetweenbanks shouldnotsurprise. • Itisinevitable,andindeeddesirable, in anymodel-basedframeworkthat therebesome. • Whatwaspossiblysurprising,however,wasthatregulatoryandsupervisorydecisionswereproducinganon-trivialproportionofthevariability:contrarytotheinitialhypothesisofmany,itdidnotarisesolelyfromgivingbanks too muchfreedomtomodelrisk. • Aroundaquarterofthevariabilitywasduetoonesinglefactor:theuseofsupervisorymultipliers,whichareappliedasanincentiveforbanks toimprovetheirmodelsandrisk managementsystems. • Therearetwo otherpointsworthnotingfromthetradingbookanalysis: • Thevariabilitydrivenbysupervisors(duetotheuseofmultipliers,orbyrestrictingmodellingchoices)willalmostinvariablyincrease capitalrequirementsrelative to whattheymightotherwisebe. • Inotherwords,someofthevariabilityisduetosomebanksbeingheldtoahigherstandardthantheBaselminimumrequires. • Thisimprovestheadequacyofcapitalresultingfrominternalmodelsbut,duetothefactthatsomesupervisorydiscretionisnotdisclosed,reducescomparability. • Theoutcomesproducedbybankswerebenchmarked to ariskmodelproducedbytheteamofsupervisoryexpertsconductingtheanalysis. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

More Related