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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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