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1. P age |1 InternationalAssociationofRiskandComplianceProfessionals(IARCP) 1200GStreet NWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext DearMember, Whichis thedifferencebetweengood deleveragingandbaddeleveraging? Accordingto DrAndreasDombret,MemberoftheExecutiveBoardoftheDeutsche Bundesbank,gooddeleveragingmeansscalingbacktheexposuretootherfinancialintermediaries,whereasbaddeleveragingmeansthatlendingtotherealeconomyisbeingreduced. DrAndreasDombretisoneofmyfavouritespeakers.InNumber2ofourlistheasksthequestion: Will2012godowninhistoryasan“annushorribilis”orratherasan “annusmirabilis”,orneither? Hestartsfromtheoriginatorofthe“annushorribilis”,QueenElizabeth,thatusedthephrasetodescribeher feelings abouttheyear1992,andhegoesonwiththefireatWindsorCastle.Manypeopleusethemetaphorofalarge-scalefiretoexplaintheeconomictermofa“systemic”event. Thefirespreadsorapidlydue toacity’snarrowstreetsandthe“interconnectedness”ofhouses. ThefireinthefinancialmarketswasstoppedbytheECB,bythetwofirewallsEFSF andESMaswellasbythegovernmentsannouncingthat theywouldimprovethefinancialsystem. Thus2012isan“annusmirabilis”. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

2. P age |2 HealsorememberedPeterBernstein,thefinancialhistorianfromtheUS,thatillustratedhispointbycitingtheanecdoteofaMoscoviteprofessorofstatistics,whorefusedtogototheair-raidshelterduringWorldWarIIbombattacks. Theprofessorargued:“See,Moscowhassevenmillioninhabitants.WhyshouldIexpecttobeonewhowillbehit?” Hisneighbourswereastonished,whenhe cameback to theshelterthenextnight. Nowtheprofessor’sargumentationwas: “Moscowhassevenmillioninhabitantsandoneelephant.Lastnighttheelephantwashit.” MoreatNumber2ofourlist. InNumber1thisweek wehavethespeechofRichardW.Fisher,presidentandCEOoftheFederalReserveBankofDallas. Hespeaksaboutthe“theinjusticeofbeingheldhostagetolargefinancialinstitutionsconsideredtoobigtofail”. Ienjoyedwhatheremembered: OneisremindedofthecommentFrenchPrimeMinisterClemenceau made aboutPresidentWilson’s14points: “Why14?”heasked.“Goddiditin10.” Werethatweonlyhad14pointsoffinancialregulation tocontendwithtoday. ReadmoreatNumber1below.Welcome totheTop10list. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

3. P age |3 RichardW.Fisher,presidentandCEOoftheFederalReserveBankofDallas. Ending 'TooBigtoFail':AProposalforReformBeforeIt'sTooLate(WithReferencetoPatrickHenry,ComplexityandReality) Remarksbefore theCommitteefortheRepublicWashington,D.C.· January16,2013 DrAndreasDombret MemberoftheExecutiveBoardoftheDeutscheBundesbank Challengesforfinancialstability–policyand academicaspects DinnerSpeechattheJointConferenceoftheDeutscheBundesbank,theTechnicalUniversityDresdenandtheJournalofFinancialStability PreservingthesafetyandsecurityofMalaysia’sbankingsystem SpeechbyMrEncikAbuHassanAlshariYahaya,AssistantGovernoroftheCentralBankofMalaysia,atthelaunchofthee-BankingFraudAwarenessCampaign,KualaLumpur InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

4. P age |4 Commentsreceivedontheconsultativereport"Recoveryandresolutionoffinancialmarketinfrastructures SouthAfrica,FinancialServicesBoard(FSB)hasrequestedtheSAFEXClearingCompany(Pty)Limited(SAFCOM)andStrateLimited toprovidefeedback. OpeningRemarksatInvestorAdvisoryCommitteeMeeting ByChairmanElisseWalter U.S. SecuritiesandExchangeCommissionWashington,D.C.January18,2013 Toughercreditratingrules confirmedbyEuropeanParliament'svote Newrulesonwhenandhow creditratingagenciesmayratestatedebtsandprivatefirms'financialhealthwereapprovedbyParliamentonWednesday. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

5. P age |5 FSAUK RisktoCustomersfromFinancialIncentives Consumertrustandconfidenceinfinancialservicesisessential. Ensuringthesmoothfunctioningofmoney markets SpeechbyMrBenoîtCoeuré,MemberoftheExecutiveBoardoftheEuropean CentralBank,atthe17thGlobalSecuritiesFinancingSummit,Luxembourg,16January2013. MichelBARNIER TheEuropeanbankingunion,aprecondition tofinancialstabilityandahistoricalstepforwardforEuropeanintegration InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

6. P age |6 UnderstandingtheEuropeanBankingUnion InJune2012,EUleadersagreed todeepen economicandmonetaryunionasoneoftheremediesofthecurrentcrisis. Atthatmeeting(EuropeanCouncilof28/29June),theleadersdiscussedthereportentitled'TowardsaGenuineEconomicandMonetaryUnion',preparedbythePresidentoftheEuropeanCouncilinclosecollaborationwiththePresidentoftheEuropean Commission,theChairoftheEurogroupandthePresidentoftheEuropeanCentralBank. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

7. P age |7 RichardW.Fisher,presidentandCEOoftheFederalReserveBankofDallas. Ending 'TooBigtoFail':AProposalforReformBeforeIt'sTooLate(WithReferencetoPatrickHenry,ComplexityandReality) Remarksbefore theCommitteefortheRepublicWashington,D.C.· January16,2013 Itisanhonortobeintroducedbymycollegeclassmate,JohnHenry.Johnisadescendantoftheiconicpatriot,PatrickHenry. MostofJohn’sancestorswereprominentcolonialVirginiansandmanywereanti-crown.Patrick,however,was themostoutspoken. AskJohnwhythiswasso,andhewillanswer:“Patrickwaspoor.” Howeverpoorhemayhavebeen,PatrickHenrywasarichorator.In oneofhisgreatestspeeches,hesaid: “Differentmenoftenseethesamesubjectindifferentlights;andtherefore,Ihopethatitwillnotbethoughtdisrespectfulto thosegentlemenif,entertainingasIdo,opinionsofacharacterveryoppositetotheirs,Ishallspeakforthmysentimentsfreely,andwithoutreserve. Thisisnotimeforceremony …[it]isoneofawfulmomenttothiscountry.” PatrickHenrywasaddressingtherepressionoftheAmericancoloniesby theBritishcrown. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

8. P age |8 Tonight,Iwishtospeaktoadifferentkindofrepression—theinjusticeofbeingheldhostagetolargefinancialinstitutionsconsidered“toobigtofail,”orTBTFforshort. Isubmitthattheseinstitutions,asaresultoftheirprivilegedstatus,exactanunfairtaxupontheAmericanpeople. Moreover,theyinterferewiththetransmissionofmonetarypolicy andinhibittheadvancementofournation’seconomicprosperity. Ihavespokenofthisforseveralyears,beginningwithaspeechonthe“PathologyofToo-Big-to-Fail”inJuly2009. Mycolleague,HarveyRosenblum—ahighlyrespectedeconomistandtheDallasFed’sdirectorofresearch—andIandourstaffhavewrittenaboutitextensively. Tomorrow,wewillissueaspecialreportthatfurtherelucidatesourproposalfordealingwiththepathologyofTBTF. Italsoaddressesthesuperiorrelativeperformanceofcommunitybanksduringtherecentcrisisandhow theyarebeingvictimizedbyexcessiveregulationthatstemsfromresponsestothesinsoftheirbehemothcounterparts. Iurgeallofyoutoread thatreport. Now,FederalReserveconventionrequiresthatIissueadisclaimerhere:I speakonlyfortheFederalReserveBankofDallas,notforothersassociatedwithourcentralbank. Thatisusuallyabundantlyclear. Inmanymatters,mystaffandIentertainopinionsthatareverydifferentfromthoseofmanyofouresteemedcolleagueselsewhereintheFederalReserveSystem. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

9. P age |9 Today,I“speakforthmysentimentsfreelyandwithoutreserve”ontheissueofTBTF,whilemeaningnodisrespect to otherswhomayhold differentviews. TheProblemofTBTF Everyoneandtheirsisterknowsthatfinancialinstitutionsdeemedtoobigtofailwereattheepicenterofthe2007–09financialcrisis. Previouslythoughtofasislandsofsafetyinaseaofrisk,theybecametheenablersofafinancialtsunami. Nowthatthestormhassubsided,wesubmitthattheyareakeyreasonaccommodativemonetarypolicyandgovernmentpolicieshavefailedtoadequatelyaffecttheeconomicrecovery. HarveyRosenblumandIfirstwrote aboutthisin anarticlepublishedintheWallStreetJournal in September2009,“TheBlobThatAteMonetaryPolicy.” Putsimply,sickbanksdon’tlend.Sick—seriouslyundercapitalized— megabanksstoppedtheirlendingandcapitalmarketactivitiesduringthecrisisandeconomicrecovery. Theybroughteconomicgrowthtoastandstillandspreadtheirsicknesstotherestofthebankingsystem. CongressthoughtitwouldaddresstheissueofTBTF throughtheDodd–FrankWallStreetReformandConsumerProtectionAct. PreventingTBTFfromeveroccurringagainisintheverypreambleoftheact. WecontendthatDodd–FrankhasnotdoneenoughtocorralTBTFbanksandthat,onbalance,the acthasmadethingsworse,notbetter. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

10. P age |10 Wesubmitthat, in theshortrun,partsofDodd–Frankhaveexacerbatedweakeconomicgrowthbyincreasingregulatoryuncertaintyin keysectorsoftheU.S.economy. Ithas clearlybenefitedmanylawyersandcreatednewlayersof bureaucracy. Despiteitsgoodintention,ithasbeencounterproductive,workingagainstsolvingthecoreproblemitseeksto address. DefiningTBTF LetmedefinewhatwemeanwhenwespeakofTBTF. TheDallasFed’sdefinitionisfinancialfirmswhoseowners,managersandcustomersbelievethemselvestobeexemptfromtheprocessesof bankruptcyandcreativedestruction. Suchfirms capturethefinancialupsideoftheir actionsbutlargelyavoidpayment—bankruptcyandclosure—foractionsgonewrong, in violation ofoneofthebasictenetsofmarketcapitalism(atleastasitissupposedtobepracticedintheUnitedStates). Suchfirmsenjoysubsidiesrelative totheirnon-TBTF competitors. Theyarethusmorelikelytotakegreaterrisks insearchofprofits,protectedbythepresumptionthatbankruptcyisahighlyunlikelyoutcome. ThephenomenonofTBTF istheresultofanimplicitbutwidely taken-for-grantedgovernment-sanctionedpolicyofcomingtotheaidoftheowners,managersandcreditorsofafinancialinstitutiondeemed tobesolarge,interconnectedand/orcomplexthatitsfailurecouldsubstantiallydamagethefinancialsystem. ByreducingaTBTFfirm’sexposuretolossesfromexcessiverisktaking,suchpoliciesunderminethedisciplinethatmarketforcesnormallyassertonmanagementdecisionmaking. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

11. P age |11 Thereductionofmarketdisciplinehasbeenfurthererodedbyimplicitextensionsofthefederalsafetynetbeyondcommercialbanksto theirnonbankaffiliates. Moreover,industryconsolidation,fosteredbysubsidizedgrowth(and duringthecrisis,encouragedbythefederalgovernmentintheacquisitionsofMerrillLynch,BearStearns,WashingtonMutualandWachovia), has perpetuatedandenlargedtheweightoffinancialfirmsdeemedTBTF. Thisreducescompetitioninlending. Dodd–Frankdoesnotdoenoughtoconstrainthebehemothbanks’advantages.Indeed,givenitscomplexity,itunwittinglyexacerbatesthem. ComplexityBites AndrewHaldane,thehighlyrespectedmemberoftheFinancialPolicyCommitteeoftheBankofEngland,addressedthisatlastsummer’sJacksonHole,Wyo.,policymakers’meetinginwittyremarkstitled,“TheDogandtheFrisbee.” Herearesomechoicepassagesfromthatnoteworthyspeech. Haldanenotesthatregulators’“…effortsto catchthecrisisFrisbeehavecontinued to escalate. Casualempiricismrevealsanever-growingnumberofregulators … Ever-largerlittershavenot,however,obviouslyimprovedthewatchdogs’Frisbee-catchingabilities. [Afterall,]noregulatorhadtheforesightto predictthefinancialcrisis,althoughsomehavesinceexhibitedsupernaturalpowersof hindsight. “Sowhatisthesecretofthewatchdogs’failure? InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

12. P age |12 The answerissimple. Orrather,itiscomplexity… complexregulation…mightnotjustbecostlyandcumbersomebutsub-optimal.…Infinancialregulation,lessmaybemore.” OneisremindedofthecommentFrenchPrimeMinisterClemenceau made aboutPresidentWilson’s14points: “Why14?”heasked.“Goddiditin10.” Werethatweonlyhad14pointsoffinancialregulation tocontendwithtoday. HaldanenotesthatDodd–Frankcomesagainstabackgroundofever-greaterescalationoffinancialregulation. Hepointsoutthatnationallycharteredbanksbegantofiletheantecedentsof“callreports”aftertheformationoftheOfficeoftheComptrolleroftheCurrencyin 1863. TheFederalReserveActof1913requiredstate-charteredmemberbankstodothesame,havingthemsubmittedtotheFederalReservestartingin1917. Theywereshortforms; in 1930,Haldanenoted,thesereportsnumbered80entries. “In1986,[the‘callreports’submittedbybankholdingcompanies]covered547columns inExcel,by1999,1,208columns. By2011… 2,271columns.” “Fortunately,”headdswryly,“Excelhadexpandedsufficientlytocapture theincrease.” Thoughthisgrowinglycomplexreportingfailed to preventdetectionoftheseedsofthedebacleof2007–09,Dodd–Frankhaslayeredoncopious InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

13. P age |13 amountsofnewcomplexity.Thelegislationhas16titlesandruns848pages. Itspawnslitteruponlitterofregulations:Morethan8,800pagesofregulationshavealreadybeenproposed,andtheprocessisnotyetdone. In hisspeech,Haldanenoted—conservatively,inmyview—thatasurvey oftheFederalRegistershowedthatcomplyingwiththesenewruleswouldrequire2,260,631laborhours eachyear. He added:“Ofcourse,thecostsofthisregulatoryedificewouldbeconsideredsmalliftheydeliveredevenmodestimprovements toregulators’abilitytoavertfuturecrises.” Hethengoesontoarguethewick isnotworththe candle. Andheconcludes:“Modernfinanceiscomplex,perhapstoocomplex.Regulationofmodernfinanceiscomplex,almostcertainly toocomplex. Thatconfigurationspellstrouble.Asyoudonotfightfirewithfire,youdonotfightcomplexitywithcomplexity. [Thesituation]requiresaregulatoryresponsegroundedinsimplicity,notcomplexity.Deliveringthatwouldrequireanabout-turn.” TheDallasFed’sProposal:AReasonable‘About-Turn’ TheDallasFed’sproposaloffersan“about-turn”andawaytomendtheflawsinDodd–Frank.Itfightsunnecessarycomplexitywithsimplicitywhereappropriate. Iteliminatesmuchofthemumbo-jumbo,ineffective,costlycomplexityofDodd–Frank. Ofnote,itwouldbeespeciallyhelpfultonon-TBTF banksthatdonotposesystemicorbroadrisk totheeconomyorthefinancialsystem. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

14. P age |14 OurproposalwouldrelievesmallbanksofsomeunnecessaryburdensarisingfromDodd–Frankthatunfairlypenalizethem. Ourproposalwouldeffectivelyleveltheplayingfieldforallbankingorganizationsinthecountryandprovidethebestprotectionfortaxpayingcitizens. In anutshell,werecommendthatTBTFfinancialinstitutionsberestructuredintomultiplebusinessentities. Onlytheresultingdownsizedcommercialbankingoperations—andnotshadowbankingaffiliatesortheparentcompany—wouldbenefitfromthesafetynetoffederaldepositinsuranceandaccesstotheFederalReserve’sdiscountwindow. DefiningtheLandscape Itisimportanttohaveanaccurateviewofthelandscapeofbankingtodayinordertounderstandtheimpactofthisproposal. Asofthirdquarter2012,therewereapproximately5,600commercialbankingorganizationsintheU.S. Thebulkofthese—roughly5,500—werecommunitybanks withassetsoflessthan$10billion. Thesecommunity-focusedorganizationsaccountedfor98.6percentofallbanksbutonly12percentoftotalindustryassets. Anothergroupnumberingnearly70bankingorganizations—withassetsofbetween$10billionand$250billion—accountedfor1.2percentof banks,whilecontrolling19percentofindustryassets. Theremaininggroup,themegabanks—withassetsofbetween$250billionand$2.3trillion—wasmadeupofamere12 institutions. Thesedozenbehemothsaccountedforroughly0.2percentofallbanks,buttheyheld69percentofindustryassets. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

15. P age |15 The12institutionsthatpresentlyaccountfor69percentoftotal industryassetsarecandidates to beconsideredTBTF becauseofthethreattheycouldposetothefinancialsystemandtheeconomyshouldoneormoreofthemgetintotrouble. Bycontrast,shouldanyoftheother99.8percentofbankinginstitutionsgetintotrouble,themattermostlikelywouldbesettledwith private-sectorownershipchangesandminimalgovernmental intervention. Howandwhydoesthisworkfor99.8percentbutnottheother0.2percent? InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

16. P age |16 Toanswerthisquestion,ithelpstoconsiderthesourcesofregulatoryandmarketdisciplineimposedoneachofthethreegroupsofbanks. Let’slookattwodimensionsofregulatorydiscipline:Potentialclosureoftheinstitutionandtheeffectivenessofsupervisorypressureonbankmanagementpractices. Dotheownersandmanagersofabankinginstitutionoperatewiththebeliefthattheir institutionissubjecttoabankruptcyprocessthatworksreasonablyquicklytotransferownershipandcontrolto anotherbankingentityorentities? Isthereagroupofinterestedandinvolvedshareholdersthatcanexerta restrainingforceonfranchise-threateningrisktakingbythebank’stopmanagementteam? Canmanagementbereplacedandownershipvaluewipedout?Isthefirmcontrolleddefactobyitsowners,or insteadeffectively management-controlled? Inaddition,weask:Towhatextentdouninsuredcreditorsofthebankingentityimposerisk-managementdisciplineonmanagement? Thisanalyticalframeworkissummarizedinthefollowingslide: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

17. P age |17 Lookingacrossline1,itisclearthatcommunitybanks aresubjecttoconsiderableregulatoryandshareholderdiscipline. They cananddofail. In thelastfewyears,theFederalDepositInsuranceCorp.(FDIC)hasbuiltareputationforregulatorscarryingoutJosephSchumpeter’sconceptof“creativedestruction”bytakingoversmallbanksonaFridayeveningandreopeningthemonMondaymorningundernewownership. “InonFriday,outbyMonday”isthemantraofthisprocess.Knowingthepowerofbankingsupervisors to close theinstitution, ownersandmanagersofcommunitybanks heedsupervisorysuggestions tolimitrisk. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

18. P age |18 Communitybanks oftenhaveafewsignificantshareholderswhohaveaconsiderableportionoftheirwealthtiedtothefateofthebank. Consequently,theyexertsubstantialcontroloverthebehaviorof managementbecauserisk andpotentialclosuremattertothem. Sincecommunitybanks derivethebulkoftheirfundingfromfederallyinsureddeposits,theyaresimpleratherthancomplexintheircapitalstructureandrarelyhaveuninsuredandunsecuredcreditors. “Marketdiscipline”overmanagementpracticesisprimarilyexertedthroughshareholders. Ofthethreegroups,the70regionalandmoderate-sizedbankingorganizationsdepictedinline2aresubjectto abroaderrangeofmarketdiscipline. Likecommunitybanks,theseinstitutionsarenotexemptfromthebankruptcyprocess;they can anddofail. Butgiventheirsize,complexityandgenerallylargergeographicfootprint,thefailureresolutionandownershiptransferprocesses cannotalwaysbeaccomplishedoveraweekend. In practice,ownersandmanagersofmid-sizedinstitutionsarenonethelessawareofthedownsideconsequencesoftheriskstakenbytheinstitution. Uninsureddepositorsandunsecuredcreditorsarealsoawareoftheirunprotectedstatusintheeventtheinstitutionexperiencesfinancial difficulties. Mid-sizedbankinginstitutionsreceiveagooddoseofexternaldisciplinefrombothsupervisorsandmarket-basedsignals. TBTF megabanks,depictedinline3,receivefartoolittleregulatoryandmarketdiscipline. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

19. P age |19 Thisisunfortunatebecausetheirfailure,ifitwereallowed,coulddisruptfinancialmarketsandtheeconomy.Forallintentsandpurposes,webelievethatTBTF bankshavenotbeenallowedto failoutright. Knowingthis,themanagementofTBTF banks can,toalargeextent,choosetoresisttheadviceandguidanceoftheirbanksupervisors’effortstoimposeregulatorydiscipline.AndforTBTF banks,theforcesofmarketdisciplinefromshareholdersandunsecuredcreditorsarelimited. Let’sfirstconsiderdisciplinefromshareholders. Havingmillionsofstockholdershasdilutedshareholders’abilitytopreventthemanagementofTBTF banksfrompursuingcorporatestrategiesthatareprofitableformanagement,thoughnotnecessarilyforshareholders. Aswelearnedduringthecrisis,adverseinformationonpoorfinancial performanceoftenisavailabletoolateforshareholderreactionorcreditdefaultswap(CDS)spreadstohaveanyimpactonmanagementbehavior. Forexample,duringthefinancialcrisis,sharesintwo ofthelargestbankholdingcompanies(BHCs)declinedmorethan95percentfromtheirpriorpeakpricesandtheirCDSspreadswenthaywire. Theratingsagencieseventuallyreacted,inkeepingwiththeirtendencytobereactiveratherthanproactive. Butthedamagefromexcessiverisktakinghadalreadybeendone.Andafterthecrisis? JudgingfromthebehaviorofmanyofthelargestBHCs,withlimited exception,effortsbyshareholdersoftheseinstitutions tomeaningfullyinfluencemanagementcompensationpracticeshavebeenslow incoming. SomuchforshareholderdisciplineasacheckonTBTF banks. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

20. P age |20 Unfortunately,TBTF banksalsodonotfacemuchexternaldisciplinefromunsecuredcreditors. AnimportantfacetofTBTF isthatthefundingsourcesformegabanksextendfarbeyondinsureddeposits,asreferencedbymymentionofCDSspreads. Thelargestbanks,notjusttheTBTFbanks,fundthemselveswithawiderangeofliabilities. Theseincludelarge,negotiableCDs,whichoftenexceedtheFDICinsurancelimit;federalfundspurchasedfrom otherbanks,allofwhichareuninsured,andsubordinatednotesandbonds,generallyunsecured. Itisnotunusualforsuchuninsured/unsecuredliabilities toaccountforwelloverhalftheliabilitiesofTBTF institutions. IfmarketdisciplineweretobeimposedonTBTFinstitutions,onewouldexpectittocomefromuninsured/unsecureddepositors,creditorsand debtholders. ButTBTF statusexertsperversemarketdisciplineontherisk-takingactivitiesofthesebanks. UnsecuredcreditorsrecognizetheimplicitgovernmentguaranteeofTBTFbanks’liabilities. Asaresult,unsecureddepositorsandcreditorsoffertheirfundsatalowercosttoTBTF banksthan tomid-sizedandregionalbanksthatfacetheriskoffailure. ThisTBTF subsidyisquitelargeandhasrisenfollowingthefinancialcrisis. RecentestimatesbytheBankforInternationalSettlements,forexample,suggestthattheimplicitgovernmentguaranteeprovidesthelargestU.S.BHCswithanaveragecreditratingupliftofmorethantwonotches, InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

21. P age |21 therebyloweringaveragefundingcostsafullpercentagepointrelative totheirsmallercompetitors. OuraforementionedfriendfromtheBankofEngland,AndrewHaldane,estimatesthecurrentimplicitTBTF globalsubsidytoberoughly$300billionperyearforthe29globalinstitutionsidentifiedbytheFinancialStabilityBoard(2011)as“systemicallyimportant.” Toputthat$300billionestimatedannualsubsidyinperspective,allthe U.S.BHCssummedtogetherreported2011earningsof$108billion. Add to thattheburdensstemmingfromthecomplexityofTBTF banks. Hereisthebasicorganizationdiagramforatypicalcomplexfinancial holdingcompany: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

22. P age |22 Tosimplifyacomplexissue,onemightconsideralltheoperations otherthanthecommercialbankingoperationasshadowbankingaffiliates,includinganyspecialinvestmentvehicles—orSIVs—ofthecommercialbank. Now,considerthistable. ItgivesyouasenseofthesizeandscopeofsomeofthefivelargestBHCs,notingtheirnondepositliabilitiesin billionsofdollarsandtheirnumberoftotalsubsidiariesandcountriesofoperation(accordingtotheFinancialStabilityOversightCouncil): Forperspective,considerthesadcaseofLehmanBrothers. Morethanfouryearslater,theLehmanbankruptcyisstillnotcompletely resolved. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

23. P age |23 Asofits10-Kregulatoryfiling in2007,Lehmanoperatedamere209subsidiariesacrossonly21countriesandhadtotalliabilitiesof$619billion. Bythesemetrics,LehmanwasasmallplayercomparedwithanyoftheBigFive. IfLehmanBrotherswastoobigforaprivate-sectorsolutionwhilestillagoingconcern,whatcanweinferabouttheBigFiveinthetable? CorrectingfortheDrawbacksofDodd–Frank Dodd–Frankaddressesthisconcern.UndertheOrderlyLiquidationAuthorityprovisionsofDodd–Frank,asystemicallyimportantfinancialinstitutionwouldreceivedebtor-in-possessionfinancingfromtheU.S. Treasuryovertheperioditsoperationsneededtobestabilized.Thisisquasi-nationalization,justinanew,anduntested,format. In Dallas,weconsidergovernmentownershipofourfinancialinstitutions,evenona“temporary”basis,tobeacleardistortionofourcapitalistprinciples. Ofcourse,analternativewouldbetohaveanothersystemicallyimportantfinancialinstitutionacquirethefailing institution. Wehavebeendownthatroad already. Allitdoesiscompoundtheproblem,expandingtherisk posedby theevenlargersurvivingbehemothorganizations. In addition,perpetuatingthepracticeofarrangingshotgunmarriagesbetweengiantsattaxpayerexpenseworsensthefundingdisadvantagefacedbythe99.8percentremaining—smallandregionalbanks. Merginglargeinstitutionsisaformof discriminationthatfavorstheunwieldyanddangerousTBTF banks overmorefocused,fitand disciplinedbanks. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

24. P age |24 TheapproachoftheDallasFedneitherexpandsthereachofgovernmentnorfurtherhandicaps the99.8percentofcommunityandregionalbanks. Nordoesitfightcomplexitywithcomplexity. ItcallsforreshapingTBTF bankinginstitutionsintosmaller,less-complexinstitutionsthatare:economicallyviable;profitable;competitivelyabletoattractfinancialcapitalandtalent;andofasize,complexityandscopethatallowsbothregulatoryandmarketdisciplinetorestrainexcessiverisktaking. Ourproposalissimpleandeasy to understand.It canbeaccomplishedwithminimalstatutorymodificationandimplementedwithaslittlegovernmentinterventionaspossible. Itcallsfirstforrollingbackthefederalsafetynettoapply only to basic,traditionalcommercialbanking. Second,itcallsforclarifying,throughsimple,understandabledisclosures,thatthefederalsafetynetappliesonly tothecommercialbankanditscustomersandneverevertothecustomersofanyotheraffiliatedsubsidiaryortheholdingcompany. Theshadowbankingactivitiesoffinancialinstitutionsmustnotreceivetaxpayersupport. We recognizethatundoingcustomer inertiaandmanagementhabitsatTBTF bankinginstitutionsmaytakemanyyears. Duringsuchaperiod,TBTF banks couldpossiblysowtheseedsforanotherfinancialcrisis.Forthesereasons,additionalactionmaybenecessary. TheTBTF BHCsmayneedtobedownsizedandrestructuredsothatthesafety-net-supportedcommercialbankingpartoftheholdingcompanycan beeffectivelydisciplinedbyregulatorsandmarketforces. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

25. P age |25 Andtherewilllikelyhave tobeadditionalrestrictions(orpossiblyprohibitions)ontheability to moveassetsorliabilitiesfromashadowbankingaffiliatetoabankingaffiliatewithintheholdingcompany. Toillustratehowthefirsttwopointsinourplanwouldwork,Icomebacktothehypotheticalstructureofacomplexfinancialholdingcompany. Recallthatthistypeofholdingcompanyhasacommercialbanksubsidiaryandseveralsubsidiariesthatarenottraditionalcommercialbanks:insurance,securitiesunderwritingandbrokerage,financecompanyand others,manywithavastgeographicreach. WheretheGovernmentSafetyNetWouldBeginandEnd Underourproposal,onlythecommercialbankwouldhave accesstodepositinsuranceprovidedbytheFDICanddiscountwindowloansprovidedbytheFederalReserve. Thesetwo featuresofthe safetynetwouldexplicitly,bystatute,becomeunavailabletoanyshadowbankingaffiliate,specialinvestmentvehicleofthecommercialbankoranyobligationsoftheparentholdingcompany. Thisislargelythecurrentcase—butin theory,notinpractice.Andconsistentenforcementisviewedasunlikely. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

26. P age |26 ReinforcedbyaNewCovenant Toreinforcethestatuteanditscredibility,everycustomer,creditorandcounterpartyofeveryshadowbankingaffiliateandoftheseniorholdingcompanywouldberequiredtoagreetoandsignanewcovenant,asimpledisclosurestatementthatacknowledgestheirunprotectedstatus. Asampledisclosureneedbenomorecomplexthanthis: InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

27. P age |27 Thistwo-partstepshouldbegin to removetheimplicitTBTF subsidyprovided to BHCsandtheirshadowbankingoperations. Entitiesotherthancommercialbankshaveinappropriatelybenefitedfromanimplicitsafetynet. Ourproposalpromotescompetitioninlightofmarketandregulatorydiscipline,replacingthestatusquoofsubsidizedandperverseincentivestotakeexcessiverisk. Asindicatedearlier,somegovernmentinterventionmaybenecessarytoacceleratetheimpositionofeffectivemarketdiscipline. Webelievethatmarketforcesshouldberelieduponasmuchaspracticable. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

28. P age |28 However,entrenched oligopolyforces,incombinationwithcustomerinertia,willlikelyonlybeovercomethroughgovernment-sanctionedreorganizationandrestructuringoftheTBTF BHCs. Asubsidyoncegivenisnearlyimpossible to takeaway. Thus,itappearswemayneedapush,usingaslittlegovernmentinterventionaspossible to realignincentives,reestablishacompetitivelandscapeandleveltheplayingfield. WhyProtectthe0.2Percent? MyteamattheDallasFedandIareconfidentthissimpletreatmenttothecomplexproblemandrisksposedbyTBTF institutionswouldbethemosteffectivetreatment. Thinkaboutitthisway:Atpresent,99.8percentofthebankingorganizationsinAmericaaresubject tosufficientregulatoryorshareholder/marketdisciplinetocontaintheriskofmisbehaviorthatcouldthreatenthestabilityofthefinancialsystem. Zero-point-two percentarenot. Theirveryexistencethreatensbotheconomicandfinancialstability. Furthermore,to containthatrisk,regulatorsandmanysmallbanksaretiedupin regulatoryandlegalknotsatanenormousdirectcosttothemandalargeindirectcosttooureconomy.Zero-point-twopercent. IftheadministrationandtheCongresscouldagreeasrecentlyastwoweeks agoonlegislationthataffects1percentoftaxpayers,surelyit canprocessasolutionthataffects0.2percentofthenation’sbanksandislesscomplexandfarmoreeffectivethanDodd–Frank. MakingaTimeof‘AwfulMoment’aTimeofPromise Thetimehascometo changethedecisionmakingparadigm. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

29. P age |29 Thereshouldbemorethanthepresenttwo solutions:bailoutortheend-of-the-economic-world-as-we-have-known-it. Bothchoicesareunacceptable. Thenextfinancialcrisiscouldcostmorethantwoyearsofeconomicoutput,borneby millionsofU.S.taxpayers. Thathorrendouscost mustbeweighedagainstthesupposedbenefitsofmaintainingtheTBTF statusquo. Tous,theremedyisobvious:endTBTF now.EndTBTF byreintroducingmarketforces insteadofcomplexrules,andinsodoing,leveltheplayingfield forallbankinginstitutions. IreturntoPatrickHenry.Henotedthat“itisnaturaltomantoindulgeintheillusionsofhope. Weareapt toshutoureyesagainstapainfultruth,andlistento thesongofthatsirentillshetransformsus.” WelaborunderthesirensongofDodd–Frankandtherecentrun-upinthepricingofTBTF bankstocksandcredit,indulging intheillusionof hopethatthiscomplexlegislationwillendtoobigtofailandrightthebankingsystem. WeshutoureyestothepainfultruththatTBTF representsanongoingdangernotjusttofinancialstability,butalsotofaircompetition. TheDallasFedoffersamodestbut,webelieve,farmoreeffectivefixtoDodd–Frank.Thisplanisnotwithoutitscosts. Butitislesscostlythanallthealternativesputforwardanditseriouslyreducesthelikelihoodofanotherhorrendousandcostlyfinancialcrisis. Thisneednotbeatimeof“awfulmoment.”Itshouldinsteadbeatimeofpromise. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

30. P age |30 TreatingthepathologyofTBTF now wouldbeabigsteptowardamorestableandprosperouseconomicsystem,onethatreliesonfundamentalprinciplesofcapitalismratherthanregulatorycomplexityandincreasinggovernmentintervention. Thankyou. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

31. P age |31 DrAndreasDombret MemberoftheExecutiveBoardoftheDeutscheBundesbank Challengesforfinancialstability– policyandacademicaspects DinnerSpeechattheJointConferenceoftheDeutscheBundesbank,theTechnicalUniversityDresdenandtheJournalofFinancialStability 2012:An“annushorribilis”oran“annusmirabilis”orneither? YourMagnificenceProfessorMüller-Steinhagen, MisterStateMinisterDoctorBeermann,LadiesandGentlemen: Theturnoftheyeargivesmethechancetorelate mydiscussionofsomeofthefuturechallengesforfinancialstabilityto arésuméofthepreviousyear. Pleaseallow metodothisfromaEuropeanperspectiveandletmestartwithaseeminglyinnocentquestion: Will2012godowninhistoryasan“annushorribilis”orratherasan“annusmirabilis”,orneither? Theanswertothisquestionislesstrivialthanitappearsatfirst.Let’slooktotheoriginsofthewords“annushorribilis”and“annusmirabilis”. Toseethispleasenotethattheoriginatorofthe“annushorribilis”,QueenElizabeth,usedittodescribeherfeelingsabouttheyear1992. Atthetime,herMajestywastalkingabout,amongothers,thefireatWindsorCastle,butonemightalsoreaditasacomment aboutwhat InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

32. P age |32 happenedinthefinancialsectorin1992whenthemarketsforcedtheUKtoleavetheEuropeanExchangeRateMechanism. Morerecently,theQueen’sremarkssoundasacommentaboutthefinancialandeconomicdevelopmentof2012. Pleasealsonotethatmanypeopleusethemetaphorofalarge-scalefiretoexplaintheeconomictermofa“systemic”event. ThusherMajestyisworthquoting inmorelength:“1992isnotayearonwhichIshalllookwithundilutedpleasure. In thewordsofoneofmymoresympatheticcommentatorsithas turnedtobean“annushorribilis”. IsuspectthatIamnotaloneinthinkingitso.IndeedIsuspectthatthereareveryfewpeopleor institutionsunaffectedbythelastmonthsofworldwideturmoilanduncertainty.” Accordingto variousmeasures2012wasayearofconsiderablesystemictensions. Indeed,theindicatorswereapproaching-butdidnotquitereach-thesadlevelsseeninthesecondhalfof2008andinthefirsthalfof2009-whichwaswithoutdoubtsaverydifficultperiodinthefinancialandeconomichistory. Therefore,onemightbetemptedtoclassify2012asan“annushorribilis”.Iwishtochallengethisview. Will2012,withhindsight,possiblygodowninhistoryasan“annusmirabilis”?Absurd,youmaythink. Butonsecondthoughtthisnotionseemslessabsurdthanitfirstappears. LetusnotforgetthatthefamouspoemofJohnDrydenentitled“annusmirabilis”wasinspiredfrommajoreventsintheyear1666. Averydifficultyear,toputit mildly,ayearinwhichtheGreatFiredestroyed80%ofthe cityofLondon. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

33. P age |33 Thefirespreadsorapidlyduetothecity’snarrowstreetsandthe“interconnectedness”ofhouses. Thebattletostopthefirewasconsidered tohavebeenwonbytwofactors:thestrongeastwindsdieddown,andtheTowerofLondongarrisonusedgunpowdertocreateeffectivefirebreakstostopthefirefromspreadingfurthereastwards. Dryden’sviewwasthatGodhadperformedmiraclesforEngland.TheKingpromisedtoimprovethestreets. Well,somemaysay,soitisin2012. ThefireinthefinancialmarketswasstoppedbytheECB,bythetwofirewallsEFSF andESMaswellasbythegovernmentsannouncingthat theywouldimprovethefinancialsystem. Thus2012isan“annusmirabilis”. Butasyouknow,miraclesneedtobeacknowledgedeitherbythepopeorbythescientificcommunity. Soletuscheckwhetheramiraclewasatwork in 1666. AndwhatIamgoingto saynowabout1666 canbeunderstoodasametaphoricalwarningaboutwhatcouldhappenifwedonotdrawtherightpolicy conclusionfromtheeventsof2012. Despitenumerousradicalproposals,Londonwasrebuiltusingessentially thesamestreetplanwhichwasinusebeforethefire. SothemiracleisthatnothingsimilartotheGreatFirehashappenedinthefollowingyears. Thelessonofthisstoryisquiteclear. Thefinancialsystemneedsbetterrulesthanintheyearsprecedingthecrisis. Weneedaresilientfinancialsystem. Weneedastrongsupervision.Weneedeffectivemacroprudentialinstruments. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

34. P age |34 Weneedtoknow howtheseinstrumentswillwork,whichisachallengeforthescientificcommunityaswellasformacroprudentialpolicymakers. Otherwise,wewouldbeputtingourtrustin amiracle. Andweneed tounderstandthecomplicatedinteractionsbetweenthefinancialandtherealeconomy,whichisthetopicofyourconference. LinksbetweentheFinancialSystemandtheRealEconomy Take,forexample,theLTROswhichprovidedbanks withliquidityforaperiodofthreeyears. TheseLTROshavemade thelinksbetweenthepublicandthebankingsectorinsomecountriescloser,notwidermeaningthatthesystemisevenmorevulnerable tosystemiccontagionthanbefore. Anotherexampleistheissueofdeleveragingandforbearance.InEurope,manybanks’balancesheetsaretoolarge. Mostofyouprobablyagreethatitisnecessaryforthesebanks to shrinktheirbalancesheets. Atthesametime,somefearthatdeleveragingcutsoffcorporationsfromtheirfinancingsources. Fromatheoreticalviewpoint, however,adistinctionneedstobemadebetweengoodandbaddeleveraging. Gooddeleveraging,for instance,meansscalingbacktheexposuretootherfinancialintermediarieswhereasbaddeleveragingmeansthatlendingtotherealeconomyisbeingreduced. Theproblemwiththisviewisthat,inpractice,thedistinctionisnotatallsoclear-cut. Theissuebecomesevenmorecomplicated,whenweadditionallyintroducetheconceptofforbearance,i.e.postponingtheactofdeclaringadoubtfulloan tobeadoubtfulloan. Whatisthebestresponsetothisissue? InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

35. P age |35 Thefirstansweristransparency.Atthispoint,transparencyismoreeasilysaidthandone. Butweneedit,particularlyinthecontextofabankingunionandpossiblebankrecapitalisations. Andtransparencyisespeciallyimportantwithaview to legacyassetsandforbearanceoftheproblembanks. Howdoweproceedfurther? Repairingthebanks’balancessheetsandinjectingcapitalisoneanswer. However,somefearthatrepairingbalancesheetshasprocyclicaleffectsandcoulddamagetheavailabilityofcreditfortherealeconomy. In myview,however,repairingbalancesheetswillhavealong-termpositiveimpactonpotentialoutputgrowthmorethanoffsettingthepossibleshort-termcyclicaleffects. TheLimitsofStateInterventions Ioftenhearthatthebankswereresponsibleforthecrisis.But cangovernmentsdobetter? Asyouknow,onereasonforthefinancialcrisiswastheuseofriskmodelsbasedonassumptions,whichconcentratedonexpectedvaluesratherthantails. PeterBernstein,thefinancialhistorianfromtheUS,illustratedthispointbycitingtheanecdoteofaMoscoviteprofessorofstatistics,who refusedtogo to theair-raidshelterduringWorldWarIIbombattacks. Theprofessorargued:“See,Moscowhassevenmillioninhabitants.WhyshouldIexpecttobeonewhowillbehit?” Hisneighbourswereastonished,whenhe cameback to theshelterthenextnight. Nowtheprofessor’sargumentationwas: “Moscowhassevenmillioninhabitantsandoneelephant.Lastnighttheelephantwashit.” InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

36. P age |36 Ifregulatorsandbanks essentiallyusethesamemodelsfortheirriskmanagement,whyshouldweexpectabetterfinancialstabilityoutcome? Ofcourse,onesolutionistoimproveourmodels.ButIdonotthinkthatthisistheendofthestory. Iratherbelievethatregulators candobetteriftheyacknowledgetheirownlimitations. Regulatorsshouldemploythemarketmechanismtofindthebestriskmanagementtools. In anidealworldthemarketisadiscoveryprocess. First,eachindividualagentknowsbetterwhatisgoodforhim. Butattheendofthediscoveryprocess–intheory– wewillgetthebestriskmanagement tools,if– andthis“if”isthedecisivewordhere – if bankswithweakriskmanagementprocessesareallowedtofail,havingtoleavethemarket. Thisisonereasonwhyresolvingthe“too-big-to-fail”-problemneedstobeatoppriorityontheregulatoryagenda. AsfarasIcanjudge,weareonlybeginningto understandhow well-establishedinstrumentslike the capitalratioworkandwhateffecttheyhaveonthebanks’behaviour. Andthereareothernewmacroprudentialinstrumentswhereourknowledgeisevenmorelimited. Takethecounter-cyclicalbuffer. Theideaissimpleandcompelling.Whentheregulatorsidentifyabubbledeveloping,thisbufferisactivated,therebyleadingbankstoreducetheirlending. Ifallworkswell,thisbufferprevents theexuberancesaltogether,oratleastmitigatesit. However,itisnotclearhowthebuffersshouldbecalibratedinordertoachievebetterfinancialstability. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

37. P age |37 Moreover,notmuchisknownaboutpossibletimelags. In theworstsituation,thesebuffereffectsarenotcounter-butpro-cyclical. Thingsbecomeevenmorecomplicatedifdifferentinstrumentsareappliedatthesametime. Asyou caneasilysee,therearemanyquestionswaitingtobeanswered,manyproblemswaitingtoberesolved. WhenIthinkaboutwhatweknowhowmacroprudentialinstrumentswork,traffic lightscometomymind. Topreventpedestriansfromcrossingthestreetwhenthetraffic lightisredtheauthoritiesactuallyinstalledbuttonsthatpedestrianscouldpresstoshortentheredphase. Anditturnedout tobeasuccess:fewerpedestrianscrossedthestreetwhenthelightswerered. However,whatthepedestriansdidnotknowwasthatpushingthebuttonshadnoeffectonthedurationoftheredphase. Pleasedonotmisunderstandme:Idonotbelievethatmacroprudentialinstrumentsareuseless.Quitethecontraryistrue. WhatIwant tohighlightisthatwecannotexpecttopreventallfuturecrisesfromhappening. Itisanillusion tobelievethatwe canfinetuneour instrumentssuchthattheyhaveexactlytheeffectwewantthemtohave. Recently,OtmarIssingwroteintheFrankfurterAllgemeineZeitung:“Theattempttopreventeachkindofcrisisisjustashopelessasharmful. … Theguidingprincipleofthemarketparadigmofactionandliabilityfortheconsequences(oftheseactions)shouldbevalidwithoutexemption.” InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

38. P age |38 Takingthisintoconsideration,theeffectsandtheinterdependenceofmacroprudentialinstrumentsmayturnouttobeaveryfruitfulresearcharea. Tosumup,everyinterventioninthemarketneedstobejustifiedbymarketfailures,somethingthat,unfortunately,isnothardtofindinmanyareasofthefinancialsystem. Thereisnoguarantee,however,thatgovernments candoabetterjob. Butatleastthestatehas anincentivetaking intoaccountthenegativeexternalitiesofbanks’decisionsandthustominimisetaxpayers’losses. Whenthestateisawareofits ownlimitationsthereisagood chancethattheoutcomewillbebetterthanoneinwhichthefinancialsystemislefttoits owndevices. Newton’s“annusmirabilis” Therewasonefamous scientistforwhom1666wasindeedan“annusmirabilis”. IsaacNewtonmaderevolutionaryinventionsanddiscoveriesincalculus,motion,opticsandgravitation. Assuch,1666waslaterreferredtoIsaacNewton's“annusmirabilis”. ItistheyearwhenIsaacNewtonwassaidtohaveobservedanapplefallingfromatreeandhitupongravitation. Heaffordedthetime to workonhistheoriesduetotheclosureofCambridgeUniversity. Inhisownwords:“Allthiswasinthetwoyears1665and1666,forinthosedaysIwasintheprimeofmyageofinvention,andmindedmathematicsandphilosophymorethanatanytimesince.” Nowadays,Newton’sexperiencemightinspireyoutoinventanddiscovermacroprudentialmechanismswhichpolicy makerscouldputtoappropriateuseinpractice. Thentheyear2012might, in hindsight,turnout tohavebeenagenuine“annusmirabilis”. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

39. P age |39 Iwishyouallaverysuccessfulconference.Thankyouforyourattention. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

40. P age |40 PreservingthesafetyandsecurityofMalaysia’sbankingsystem SpeechbyMrEncikAbuHassanAlshariYahaya,AssistantGovernoroftheCentralBankofMalaysia,atthelaunchofthee-BankingFraudAwarenessCampaign,KualaLumpur Itismypleasureandhonourtobeinvitedto launchthisjointe-Bankingfraudawarenesscampaign. Iwouldlike tothanktheAssociationofBanks inMalaysiaforthisinvitationandthecoordinatedeffortsinundertakingthisimportantawarenesscampaign. Asignificantinitiative This campaignisindeedaveryimportantinitiativeforthebankingindustryinMalaysia. Thisisthefirsttimethatallbankshavecometogetherinaconcertedeffort to helpcreategreaterawarenessofonlinefraudwiththecooperationofCyberSecurityandthePoliceForce. Thisistobelaudedasallstakeholdershavearole toplayinpreservingthesafetyandsecurityofthebankingsystem. Maintainingconfidenceinonlinebankingservices Onlinetransactionshavebeengrowingatarapidpaceovertheyears. Overthelastdecade,theuseofelectronicpaymentshasincreasedatanaverageannualgrowthof23.4%. In 2012,Malaysianhouseholdsandbusinessesperformedmorethan300millionfinancialtransactionswithavalueclosetoRM15trillionvia InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

41. P age |41 electronicchannelscomprisingmainlyfundstransfers,billpayments,top-upforprepaidcards,purchasesofphonecardsandpaymentsforinvestmentsinthecapitalmarket. Amongtheelectronicchannels,internetbankingisthemostpopular. Fundamentaltothegrowthofinternetbankingovertheyearsistheconfidencewhichthepublichasinitsconvenienceandsecurity. Thisissomethingthatwe cannottakeforgrantedand mustbecontinuouslypreserved. Advancementintechnologyandinnovationhasresultedin greaterconsumerconvenienceandenhancedefficiency. However,thesametechnologyandinnovationhavealsocreatednewmethodsofperpetratingfraudthatcouldbeexecutedfasterandwithgreaterreach. Cybercriminalshavebeenactiveeversincetheadventoftheinternet,andareconstantlyfinding newways todefraudinnocentvictims. Safetyandsecurityoftransactionsinthebankingsystemisfundamentalinensuringconsumerconfidence. Hence,animportantfunctionandresponsibilityoftheCentralBankistoensureonlinetransactions canbemadein asafeandefficientmannerintheeconomy,inthepursuitofmonetaryandfinancialstabilityobjectives. Theneedforconstant vigilance&cooperation Thisfightthatthebanks arelaunchingtodayissomethingthatrequiresthesupportofallparties. Weareawareofthecreativewaysinwhichcriminalshaveattempted todeceivecustomersovertheyearsandmeasureswererequiredtobetaken bythebanks toprotectthecustomers. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

42. P age |42 Whileitisgoodtoknowthatbanks haveplayedtheirrolesininvestinginrobustsecuritysystems,theymustalsoensurethatcustomersplaytheirpartinprotectingtheir own assetsandsavings. ThereminderandgreaterawarenessfromtheBanksthroughthiscampaignistimely. Itwillnotonlyreinforcetheneedforconstantvigilancefromallparties,butalsohelpcreateanenvironmentwhereeveryoneisriskconsciousandresponsibleinprotectingtheinterestsofeachother. Theseinitiativeswouldnot achievethedesiredoutcomeswithouteffectivecommunication,andthemediahas acriticalrole toplayinconveyingthemessagefromthebanks. WehavealwaysacknowledgedtheimportanceofthemediaandIwouldlike to recordBankNegaraMalaysia’sappreciationfortheassistancerenderedbythemediaincreatingawarenessofthisissueinthepast. Wehopethatwiththesupportofthemediaonthisoccasiontoo,thiscampaignwillbeasuccess,andthepublicwillhaveheightenedlevelsof understandingandvigilanceoverthisissue. OnbehalfofBankNegaraMalaysia,Iwouldlike to thankallthebanksfortakingthisinitiativetoundertakethisjointe-bankingawarenesscampaign. Ourthanks alsotoCyberSecurityandthe PoliceForceforyourongoingeffortsto collaboratewiththebanking industry. IwishallofyouthebestandassureyouthatBankNegaraMalaysiawillcontinuouslysupportyouinthisnobleeffort. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

43. P age |43 Commentsreceivedontheconsultativereport"Recoveryandresolutionoffinancialmarketinfrastructures SouthAfrica,FinancialServicesBoard(FSB)hasrequestedthe SAFEXClearingCompany(Pty)Limited(SAFCOM)andStrateLimited toprovidefeedback. Introduction Onthe31stofJuly2012,aconsultativereportontheRecoveryandResolutionofFinancialMarketInfrastructureswasissuedbytheCommitteeonPaymentandSettlementSystems(CPSS)andtheInternationalOrganizationofSecuritiesCommissions(IOSCO). SubsequentlytheFinancialServicesBoard(FSB)hasrequestedtheSAFEXClearingCompany(Pty)Limited(SAFCOM)andStrateLimitedtoprovidefeedback andcommentaryonthereport. ThisreportservesasaconsolidationofStrateLimited’sandSAFCOM’sviewsonthecontentsofthedocument. Background StrateLimitedisalicensedCentralSecuritiesDepository(CSD)fortheelectronicsettlementoffinancialinstrumentsinSouthAfrica. StratehandlesthesettlementofanumberofsecuritiesincludingequitiesandbondsfortheJohannesburgStock Exchange(JSE)aswellasarangeofderivativeproductssuchaswarrants,ExchangeTradedFunds(ETFs),retailnotesandtrackerfunds. Itisalsoresponsibleforthesettlementofmoneymarketsecuritiestoitsportfolioofservices.ItprovidesservicestoissuersfortheirinvestorsintermsoftheCompaniesActandSecuritiesServicesAct(SSA),2004. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

44. P age |44 SAFEXClearingCompany(Pty)LimitedoperatesasaclearinghousefortheJohannesburgStockExchangederivativesmarkets.Itwasincorporatedin1987andisbasedinSouthAfrica. AsofOctober2008,SAFEXClearingCompany(Pty)LimitedoperatesasasubsidiaryoftheJSE. GeneralComment In compilingaresponsetotherequestforcommentbyCPSS-IOSCO,StratehasreviewedtheConsultativeReport,theKeyAttributesofEffectiveResolutionRegimesforFinancialInstitutions(issuedby the FinancialStabilityBoard)aswellasthePrinciplesforFinancialMarketInfrastructureandtheassociatedrecommendationsforRegulators. StratebelievesthattheConsultativeReporthasbeengenerallywellthoughtoutandrepresentsacomprehensiveassessmentofthelikelyimpactsintheeventofFMIdefaultorfailureaswellasaneffectiveguidelinetoassistindividualFMI’sinthedevelopmentofanappropriateandeffectiveRecoveryandResolutionplan. ThebroaddifferentiationbetweenthoseFMI’sthatassumecreditriskandthosethatdonotisalsoconsideredmostappropriatetotakeintoaccountthedifferentrolesandresponsibilitiesofindividualFMI’s. Itis,however,veryclearfromthisexercisethatacomprehensivereviewoftheResolutionRegimescontainedincurrentandproposedfuturelegislationwillneedtobeundertaken toensurethattheidealscontainedinthereferenceddocumentsaresuitablyentrenchedandunderstood. Specificresponsestoquestionsraised: ThefollowingresponsesandcommentshavebeenputforwardforeachofthespecificquestionsraisedintheRecoveryand ResolutionofFinancialMarketInfrastructuresreport. 1.Inwhatcircumstances,andforwhattypesofFMI,canastatutorymanagement,administrationorconservatorshipofferanappropriateprocesswithinwhich to ensureacontinuityofcriticalservices? InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

45. P age |45 Theconsiderationas to whetherstatutorymanagement,administrationorconservatorshipwouldofferthemostappropriateprocesswithinwhichtoensurethecontinuityofcriticalservicesis,in ouropinion,directlylinkedtothespeedwithwhichsuchanarrangementcouldbeeffectivelyimplementedwithintheframeworkprovidedin locallegislationratherthanthetypeofFMI. Thisdoes,however,alsolinktoquestion2below. Aretherepowersbeyondthoseofastandardinsolvencypractitionerthatastatutorymanager,administratororconservator wouldrequireinthesecircumstances? Potentially,yes. Thisassessmentcan, however,onlybecompletedwithafulllegislativereviewintheparticularjurisdictiontoensurethattheappointedauthorityhasthenecessaryauthoritiesalreadyoutlinedintheConsultativePaper. Keytothisassessmentwillbetheabilitytoensurethespeedyassumption ofcontrolbytheappointedauthority. Istear-upanappropriatelossallocationarrangementpriortoresolution ofaCCP? Ifso,in whatcircumstances? Unable to comment– notapplicable toStrate Towhatextentshouldthepossibilityofatear-upin recoverybearticulatedin exanterules? Unable to comment– notapplicable toStrate. Shouldtherebealimittothenumberofcontractsthatareeligiblefortear-up? Unable to comment– notapplicable toStrate. Howshouldtheappropriatehaircutsbedetermined?Unable to comment– notapplicable toStrate. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

46. P age |46 Whatqualitativeorquantitativeindicatorsofnon-viabilityshouldbeusedindeterminingthetriggerforresolutionfordifferenttypesofFMI? Key to thisdecisionistheroleoftheparticularFMI.Inthecaseof non-creditriskbearingFMI’stheindicatorswouldtendtobequalitativeratherthanquantitativeoncetheprimarymeasurementofadequatereserveshasbeenaddressed. In thecaseofStrate,thiswouldincludemanyelementsassessedbyitslead regulatorintermsoftheannuallicencerenewalprocess(includingsuchthingsascompetencies,qualityofservicedelivery,operationalcapacities,robustnessofexistingtechnology etc.). Whatlossallocationmethodsmustbeavailabletoaresolutionauthority,andforwhichtypesofFMI? Couldorshouldtheseresolutionpowersincludetear-up,cashcallsoramandatoryreplenishmentofdefaultfundcontributionsbyanFMI’sdirectparticipants? Doesitmakeadifferenceifthelossesarefromadefaultingmemberoraremadeupofotherlosses(e.g.lossesininvestmentsmadebytheFMI)? Inwhatcircumstances,andbywhatmethods,shouldlossesbepassedonbeyondthedirectparticipants– e.g.to theclientsorFMIshareholders– inresolution? TotheextendapplicabletoStrate,lossesininvestmentsmadebytheFMIwouldbeallocateddirectlytoitsshareholdersratherthantoitsparticipantsinanyway. What,ifany,specialconsiderationsormethodsshouldbeappliedwhenallocatinglosseswhosemaximumvaluecannotbe capped(e.g. whenallocatingpotentiallossesthatmightarisefromopenanduncappedpositionsataCCP)? Unable to comment– notapplicable toStrate. How shouldequityin FMIsbetreatedin resolutionscenarios:shoulditbewrittendowninallcircumstances? InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

47. P age |47 FromaStrateperspective,andgiventhenatureoftherisksbornebytheCSD,noneedfordifferentiationinthetreatmentofequitywrite-downscouldbeidentified. Aretherecircumstancesinwhichlossallocationin resolutionshouldresultinadifferentdistributionoflosses to lossesborneininsolvency? Doesitmakeadifferenceifthelossesstemfromadefaultingmemberoraremadeupofotherlosses(e.g.lossesininvestmentsmadebytheFMIorresultingfromoperationalrisks)? GiventheprofileofStrateitisnotenvisagedthatthereshouldbeanydifferenceinthelossallocationregardlessofwhetherbyresolutionorinsolvency. ShouldanFMI’srulesforaddressinguncoveredlossesbetakenintoaccountwhencalculatingwhethercreditorsarenoworseoffinresolutionthanin liquidation? Unable to comment– notapplicable toStrate. Arethereanycircumstancesinwhichtheabilitytoexerciseterminationrightsasaresultoftheuseofresolutionpowersshouldoutweightheobjectiveofensuringcontinuity? GiventheprofileofStratethiswouldonlyapplytocontractsforservicesfromthirdpartiesandtotheextentthattheabilitytoexerciseterminationrightsrelatestonon-coreservices,thismayassistinminimizingtheimmediatenegativefinancialimpactsontheFMI. Itisunlikelythatonewouldwish toinvoke theearly terminationofcoreservicesaspartofaresolutionprocess. Arethereanycircumstancesinwhichatemporarystayonexercisingterminationrightsshouldapplyforanyeventofdefaultandnotjustwheretriggeredbytheresolutionmeasures? Aswith13.above,theprofileofStratereducestheneed toexercise,orindeed temporarilystay,terminationrightswhetherasaresultofdefaultorresolution. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

48. P age |48 Arethereanycircumstancesinwhichamoratoriumwithasuspension ofpaymentstounsecuredcreditorsmaybeappropriatewhenresolvingan FMI?Shouldthisbelimited to certaintypesofFMIand/orcertaintypesofpayment? Thebenefitofintroducingasuspensionofpayments tounsecuredcreditorstoassistintheresolutionofanFMIsuchasStratewouldbeminimaland,giventhespecificnatureoftherolethatStrateplaysinthemarket,isunlikelytoaffect (eitherpositivelyornegatively)itsability tocontinuesettlingorprocessingtransactionswhichareprocesseddirectlybetweencounterpartiesthroughtheCentralBankpaymentsystemor,asisthecasewithCorporateEventsprocessing,throughTrustaccountswhichcouldeffectivelybering-fencedfromtheFMIitself. Ifso,shouldresolutionauthoritiesretainthediscretiontoapplya moratoriumand,ifso,whatrestrictions(ifany)onitsusewouldbeappropriate(e.g.scope,durationorpurpose)? Giventheresponseto15above,thisisnotconsideredrelevant to StrateotherthantotheextentthattheResolutionAuthoritymaywishtodeferpaymentonnon-coreservicesintermsofexistingpowers. Nospecialpowersareconsiderednecessary. Shouldthebail-in toolbeavailabletocollateral,margin(includinginitialmargin)andothersourcesoffundsiftheywouldbearlossesin insolvency? Unable to comment– notapplicable toStrate. InwhatcircumstancesandforwhattypesofFMIshouldwiderlossrecoveryarrangementsexistbeyondtheFMI’sownrulesandtheresolutionpowersoftheresolutionauthority? NotapplicabletoStrateasitdoesnotassumeprincipalrisk inanyofthetransactionsitprocesses.TheCSDRulesalreadycovertheCSDadequatelyinthisrespect. InconductingaresolvabilityassessmentofanFMI,whatfactorsshouldauthoritiespayparticularattentionto? InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

49. P age |49 TheassessmentsoutlinedinAnnexureIIoftheKeyAttributesofEffectiveResolutionRegimesforFinancialInstitutionsissuedbytheFinancialStabilityBoardareconsideredsufficientlycomprehensivetoconductaresolvabilityassessment. 20.In addition,isthesummaryoftheapplicationoftheKeyAttributestoFMIsprovidedinthe annexsufficientlydetailedtosupportthedevelopmentofrecoveryandresolutionregimesforFMIs? Aretherespecificareaswheremoredetailcouldbeprovided? Ifso,whichareasandwhatadditionaldetailshouldbeprovided? Areanyofthekeyattributesnotapplicable to aparticulartypeofFMI?Ifso,whichkeyattribute(s)andwhynot? OtherthanthoseareasalreadyidentifiedintheAnnexasbeing notapplicabletoanFMIlike Strate,noadditionalareascouldbeidentifiedandnoadditionaldetailisconsiderednecessary to assistStrate,inconsultationwithitsLead Regulator,inthedevelopmentofanappropriateResolutionPlan. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com

50. P age |50 OpeningRemarksatInvestorAdvisoryCommitteeMeeting ByChairmanElisseWalter U.S. SecuritiesandExchangeCommissionWashington,D.C.January18,2013 Goodmorning.Itisapleasuretobewithyoutoday,andtomakemyfirstpublicappearanceasSECChairmanwithyou,agroupwhohaschosentodedicateyourselvestolookingatthe issueswefacethroughtheeyesoftheinvestorswearededicatedtoprotect. Asyouknow,althoughIamnew to theroleofChairman,IamproudtohaveworkedattheSECbothasastaffmemberandaCommissionerforatotalofmorethantwodecades. IhavemadetheSECthecornerstone,andtheheart,ofmycareerbecauseIstronglybelievethattheSEC’s missionofinvestorprotectionandmarketstabilityiscriticaltothefunctionofandconfidenceinthefinancialsystemasawhole…andespeciallybecauseIbelievethatinvestorsneedanddeserveaneffectiveadvocatewithintheFederalgovernment. Today,thanks to ourexceptionalstaffandstrongleadershipteam,Ibelievethatweareexecutingourroleastheinvestor’sadvocateboldlyandeffectively,atatimewhenourrolehasbecomemoreimportantthanever. ThisisachallengingandexcitingtimefortheCommission. Commissionersandthestaffareconsideringanumberofcomplexandimportantissuesandworkinghardonrulesthatwillhaveaprofoundand positiveimpactoninvestorsandourmarketsforyearstocome. InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com