Risk Management Presentation January 28 2013

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International Association of Risk and Compliance Professionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com
Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's agenda, and what is next
Dear Member, Which is the difference between good deleveraging and bad deleveraging? According to Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, good deleveraging means scaling back the exposure to other financial intermediaries, whereas bad deleveraging means that lending to the real economy is being reduced. Dr Andreas Dombret is one of my favourite speakers. In Number 2 of our list he asks the question: Will 2012 go down in history as an annus horribilis or rather as an annus mirabilis, or neither? He starts from the originator of the annus horribilis, Queen Elizabeth, that used the phrase to describe her feelings about the year 1992, and he goes on with the fire at Windsor Castle. Many people use the metaphor of a large-scale fire to explain the economic term of a systemic event. The fire spread so rapidly due to a citys narrow streets and the interconnectedness of houses. The fire in the financial markets was stopped by the ECB, by the two firewalls EFSF and ESM as well as by the governments announcing that they would improve the financial system.
Thus 2012 is an annus mirabilis.

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com
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H e also remembered Peter Bernstein, the financial historian from the US, that illustrated his point by citing the anecdote of a Moscovite professor of statistics, who refused to go to the air-raid shelter during World War II bomb attacks.
The professor argued: See, Moscow has seven million inhabitants. Why should I expect to be one who will be hit? His neighbours were astonished, when he came back to the shelter the next night.
Now the professors argumentation was:

Moscow has seven million inhabitants and one elephant. Last night the elephant was hit. More at N umber 2 of our list. In N umber 1 this week we have the speech of Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas. H e speaks about the the injustice of being held hostage to large financial institutions considered too big to fail.
I enjoyed what he remembered:

One is reminded of the comment French Prime Minister Clemenceau made about President Wilsons 14 points: Why 14? he asked. God did it in 10. Were that we only had 14 points of financial regulation to contend with today. Read more at N umber 1 below. Welcome to the Top 10 list.
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Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas.
Ending 'Too Big to Fail': A Proposal for Reform Before It's Too Late (With Reference to Patrick Henry, Complexity and Reality)
Remarks before the Committee for the Republic Washington, D.C. January 16, 2013
Dr Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank
Challenges for financial stability policy and academic aspects

Dinner Speech at the Joint Conference of the Deutsche Bundesbank, the Technical University Dresden and the Journal of Financial Stability
Preserving the safety and security of Malaysias banking system

Speech by Mr Encik Abu H assan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia, at the launch of the e-Banking Fraud Awareness Campaign, Kuala Lumpur
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Comments received on the consultative report "Recovery and resolution of financial market infrastructures
South Africa, Financial Services Board (FSB) has requested the SAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limited to provide feedback.
Opening Remarks at Investor Advisory Committee Meeting

By Chairman Elisse Walter U.S. Securities and Exchange Commission Washington, D.C. January 18, 2013
Tougher credit rating rules confirmed by European Parliament's vote

New rules on when and how credit rating agencies may rate state debts and private firms' financial health were approved by Parliament on Wednesday.
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FSA UK
Risk to Customers from Financial Incentives

Consumer trust and confidence in financial services is essential.
Ensuring the smooth functioning of money markets

Speech by Mr Benot Coeur, Member of the Executive Board of the European Central Bank, at the 17th Global Securities Financing Summit, Luxembourg, 16 January 2013.
Michel BARNI ER
The European banking union, a precondition to financial stability and a historical step forward for European integration
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Understanding the European Banking Union

In June 2012, EU leaders agreed to deepen economic and monetary union as one of the remedies of the current crisis. At that meeting (European Council of 28/ 29 June), the leaders discussed the report entitled 'Towards a Genuine Economic and Monetary Union', prepared by the President of the European Council in close collaboration with the President of the European Commission, the Chair of the Eurogroup and the President of the European Central Bank.
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Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas.
Ending 'Too Big to Fail': A Proposal for Reform Before It's Too Late (With Reference to Patrick Henry, Complexity and Reality)
Remarks before the Committee for the Republic Washington, D.C. January 16, 2013 It is an honor to be introduced by my college classmate, John Henry. John is a descendant of the iconic patriot, Patrick Henry. Most of Johns ancestors were prominent colonial Virginians and many were anti-crown. Patrick, however, was the most outspoken. Ask John why this was so, and he will answer: Patrick was poor. However poor he may have been, Patrick Henry was a rich orator. In one of his greatest speeches, he said:
Different men often see the same subject in different lights; and therefore, I hope that it will not be thought disrespectful to those gentlemen if, entertaining as I do, opinions of a character very opposite to theirs, I shall speak forth my sentiments freely, and without reserve.
This is no time for ceremony [it] is one of awful moment to this country. Patrick Henry was addressing the repression of the American colonies by the British crown.
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Tonight, I wish to speak to a different kind of repressionthe injustice of being held hostage to large financial institutions considered too big to fail, or TBTF for short.
I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people. Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nations economic prosperity. I have spoken of this for several years, beginning with a speech on the Pathology of Too-Big-to-Fail in July 2009. My colleague, Harvey Rosenbluma highly respected economist and the Dallas Feds director of researchand I and our staff have written about it extensively. Tomorrow, we will issue a special report that further elucidates our proposal for dealing with the pathology of TBTF. It also addresses the superior relative performance of community banks during the recent crisis and how they are being victimized by excessive regulation that stems from responses to the sins of their behemoth counterparts. I urge all of you to read that report. Now, Federal Reserve convention requires that I issue a disclaimer here: I speak only for the Federal Reserve Bank of Dallas, not for others associated with our central bank. That is usually abundantly clear. In many matters, my staff and I entertain opinions that are very different from those of many of our esteemed colleagues elsewhere in the Federal Reserve System.
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Today, I speak forth my sentiments freely and without reserve on the issue of TBTF, while meaning no disrespect to others who may hold different views.
The Problem of TBTF

Everyone and their sister knows that financial institutions deemed too big to fail were at the epicenter of the 200709 financial crisis. Previously thought of as islands of safety in a sea of risk, they became the enablers of a financial tsunami. Now that the storm has subsided, we submit that they are a key reason accommodative monetary policy and government policies have failed to adequately affect the economic recovery. Harvey Rosenblum and I first wrote about this in an article published in the Wall Street Journal in September 2009, The Blob That Ate Monetary Policy. Put simply, sick banks dont lend. Sickseriously undercapitalized megabanks stopped their lending and capital market activities during the crisis and economic recovery. They brought economic growth to a standstill and spread their sickness to the rest of the banking system. Congress thought it would address the issue of TBTF through the DoddFrank Wall Street Reform and Consumer Protection Act. Preventing TBTF from ever occurring again is in the very preamble of the act. We contend that DoddFrank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better.
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We submit that, in the short run, parts of DoddFrank have exacerbated weak economic growth by increasing regulatory uncertainty in key sectors of the U.S. economy.
It has clearly benefited many lawyers and created new layers of bureaucracy. Despite its good intention, it has been counterproductive, working against solving the core problem it seeks to address.
Defining TBTF
Let me define what we mean when we speak of TBTF. The Dallas Feds definition is financial firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction. Such firms capture the financial upside of their actions but largely avoid paymentbankruptcy and closurefor actions gone wrong, in violation of one of the basic tenets of market capitalism (at least as it is supposed to be practiced in the United States). Such firms enjoy subsidies relative to their non-TBTF competitors. They are thus more likely to take greater risks in search of profits, protected by the presumption that bankruptcy is a highly unlikely outcome. The phenomenon of TBTF is the result of an implicit but widely taken-for-granted government-sanctioned policy of coming to the aid of the owners, managers and creditors of a financial institution deemed to be so large, interconnected and/ or complex that its failure could substantially damage the financial system. By reducing a TBTF firms exposure to losses from excessive risk taking, such policies undermine the discipline that market forces normally assert on management decision making.
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The reduction of market discipline has been further eroded by implicit extensions of the federal safety net beyond commercial banks to their nonbank affiliates.
Moreover, industry consolidation, fostered by subsidized growth (and during the crisis, encouraged by the federal government in the acquisitions of Merrill Lynch, Bear Stearns, Washington Mutual and Wachovia), has perpetuated and enlarged the weight of financial firms deemed TBTF. This reduces competition in lending. DoddFrank does not do enough to constrain the behemoth banks advantages. I ndeed, given its complexity, it unwittingly exacerbates them.
Complexity Bites
Andrew Haldane, the highly respected member of the Financial Policy Committee of the Bank of England, addressed this at last summers Jackson H ole, Wyo., policymakers meeting in witty remarks titled, The Dog and the Frisbee. Here are some choice passages from that noteworthy speech. Haldane notes that regulators efforts to catch the crisis Frisbee have continued to escalate. Casual empiricism reveals an ever-growing number of regulators Ever-larger litters have not, however, obviously improved the watchdogs Frisbee-catching abilities. [After all,] no regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight. So what is the secret of the watchdogs failure?
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The answer is simple.

Or rather, it is complexity complex regulation might not just be costly and cumbersome but sub-optimal. In financial regulation, less may be more. One is reminded of the comment French Prime Minister Clemenceau made about President Wilsons 14 points: Why 14? he asked. God did it in 10.
Were that we only had 14 points of financial regulation to contend with today.
Haldane notes that DoddFrank comes against a background of ever-greater escalation of financial regulation. He points out that nationally chartered banks began to file the antecedents of call reports after the formation of the Office of the Comptroller of the Currency in 1863. The Federal Reserve Act of 1913 required state-chartered member banks to do the same, having them submitted to the Federal Reserve starting in 1917. They were short forms; in 1930, Haldane noted, these reports numbered 80 entries. In 1986, [the call reports submitted by bank holding companies] covered 547 columns in Excel, by 1999, 1,208 columns. By 2011 2,271 columns. Fortunately, he adds wryly, Excel had expanded sufficiently to capture the increase. Though this growingly complex reporting failed to prevent detection of the seeds of the debacle of 200709, DoddFrank has layered on copious
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amounts of new complexity. The legislation has 16 titles and runs 848 pages.
It spawns litter upon litter of regulations: More than 8,800 pages of regulations have already been proposed, and the process is not yet done. In his speech, H aldane notedconservatively, in my viewthat a survey of the Federal Register showed that complying with these new rules would require 2,260,631 labor hours each year. He added: Of course, the costs of this regulatory edifice would be considered small if they delivered even modest improvements to regulators ability to avert future crises. He then goes on to argue the wick is not worth the candle. And he concludes: Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble. As you do not fight fire with fire, you do not fight complexity with complexity. [The situation] requires a regulatory response grounded in simplicity, not complexity. Delivering that would require an about-turn.
The Dallas Feds Proposal: A Reasonable About-Turn

The Dallas Feds proposal offers an about-turn and a way to mend the flaws in DoddFrank. I t fights unnecessary complexity with simplicity where appropriate. It eliminates much of the mumbo-jumbo, ineffective, costly complexity of DoddFrank. Of note, it would be especially helpful to non-TBTF banks that do not pose systemic or broad risk to the economy or the financial system.
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Our proposal would relieve small banks of some unnecessary burdens arising from DoddFrank that unfairly penalize them.
Our proposal would effectively level the playing field for all banking organizations in the country and provide the best protection for taxpaying citizens. In a nutshell, we recommend that TBTF financial institutions be restructured into multiple business entities. Only the resulting downsized commercial banking operationsand not shadow banking affiliates or the parent companywould benefit from the safety net of federal deposit insurance and access to the Federal Reserves discount window.
Defining the Landscape

It is important to have an accurate view of the landscape of banking today in order to understand the impact of this proposal. As of third quarter 2012, there were approximately 5,600 commercial banking organizations in the U.S. The bulk of theseroughly 5,500were community banks with assets of less than $10 billion. These community-focused organizations accounted for 98.6 percent of all banks but only 12 percent of total industry assets. Another group numbering nearly 70 banking organizationswith assets of between $10 billion and $250 billionaccounted for 1.2 percent of banks, while controlling 19 percent of industry assets. The remaining group, the megabankswith assets of between $250 billion and $2.3 trillionwas made up of a mere 12 institutions. These dozen behemoths accounted for roughly 0.2 percent of all banks, but they held 69 percent of industry assets.
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The 12 institutions that presently account for 69 percent of total industry assets are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble. By contrast, should any of the other 99.8 percent of banking institutions get into trouble, the matter most likely would be settled with private-sector ownership changes and minimal governmental intervention. How and why does this work for 99.8 percent but not the other 0.2 percent?
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To answer this question, it helps to consider the sources of regulatory and market discipline imposed on each of the three groups of banks.
Lets look at two dimensions of regulatory discipline: Potential closure of the institution and the effectiveness of supervisory pressure on bank management practices. Do the owners and managers of a banking institution operate with the belief that their institution is subject to a bankruptcy process that works reasonably quickly to transfer ownership and control to another banking entity or entities? Is there a group of interested and involved shareholders that can exert a restraining force on franchise-threatening risk taking by the banks top management team? Can management be replaced and ownership value wiped out?Is the firm controlled de facto by its owners, or instead effectively management-controlled? In addition, we ask: To what extent do uninsured creditors of the banking entity impose risk-management discipline on management? This analytical framework is summarized in the following slide:
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Looking across line 1, it is clear that community banks are subject to considerable regulatory and shareholder discipline. They can and do fail. In the last few years, the Federal Deposit I nsurance Corp. (FDIC) has built a reputation for regulators carrying out Joseph Schumpeters concept of creative destruction by taking over small banks on a Friday evening and reopening them on Monday morning under new ownership. In on Friday, out by Monday is the mantra of this process. Knowing the power of banking supervisors to close the institution, owners and managers of community banks heed supervisory suggestions to limit risk.
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Community banks often have a few significant shareholders who have a considerable portion of their wealth tied to the fate of the bank.
Consequently, they exert substantial control over the behavior of management because risk and potential closure matter to them. Since community banks derive the bulk of their funding from federally insured deposits, they are simple rather than complex in their capital structure and rarely have uninsured and unsecured creditors. Market discipline over management practices is primarily exerted through shareholders. Of the three groups, the 70 regional and moderate-sized banking organizations depicted in line 2 are subject to a broader range of market discipline. Like community banks, these institutions are not exempt from the bankruptcy process; they can and do fail. But given their size, complexity and generally larger geographic footprint, the failure resolution and ownership transfer processes cannot always be accomplished over a weekend. In practice, owners and managers of mid-sized institutions are nonetheless aware of the downside consequences of the risks taken by the institution. Uninsured depositors and unsecured creditors are also aware of their unprotected status in the event the institution experiences financial difficulties.
Mid-sized banking institutions receive a good dose of external discipline from both supervisors and market-based signals.
TBTF megabanks, depicted in line 3, receive far too little regulatory and market discipline.
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This is unfortunate because their failure, if it were allowed, could disrupt financial markets and the economy. For all intents and purposes, we believe that TBTF banks have not been allowed to fail outright.
Knowing this, the management of TBTF banks can, to a large extent, choose to resist the advice and guidance of their bank supervisors efforts to impose regulatory discipline. And for TBTF banks, the forces of market discipline from shareholders and unsecured creditors are limited. Lets first consider discipline from shareholders.
Having millions of stockholders has diluted shareholders ability to prevent the management of TBTF banks from pursuing corporate strategies that are profitable for management, though not necessarily for shareholders.
As we learned during the crisis, adverse information on poor financial performance often is available too late for shareholder reaction or credit default swap (CDS) spreads to have any impact on management behavior. For example, during the financial crisis, shares in two of the largest bank holding companies (BHCs) declined more than 95 percent from their prior peak prices and their CDS spreads went haywire. The ratings agencies eventually reacted, in keeping with their tendency to be reactive rather than proactive. But the damage from excessive risk taking had already been done. And after the crisis?
Judging from the behavior of many of the largest BHCs, with limited exception, efforts by shareholders of these institutions to meaningfully influence management compensation practices have been slow in coming.
So much for shareholder discipline as a check on TBTF banks.
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Unfortunately, TBTF banks also do not face much external discipline from unsecured creditors.
An important facet of TBTF is that the funding sources for megabanks extend far beyond insured deposits, as referenced by my mention of CDS spreads. The largest banks, not just the TBTF banks, fund themselves with a wide range of liabilities. These include large, negotiable CDs, which often exceed the FDIC insurance limit; federal funds purchased from other banks, all of which are uninsured, and subordinated notes and bonds, generally unsecured. It is not unusual for such uninsured/ unsecured liabilities to account for well over half the liabilities of TBTF institutions. If market discipline were to be imposed on TBTF institutions, one would expect it to come from uninsured/ unsecured depositors, creditors and debt holders. But TBTF status exerts perverse market discipline on the risk-taking activities of these banks. Unsecured creditors recognize the implicit government guarantee of TBTF banks liabilities. As a result, unsecured depositors and creditors offer their funds at a lower cost to TBTF banks than to mid-sized and regional banks that face the risk of failure. This TBTF subsidy is quite large and has risen following the financial crisis. Recent estimates by the Bank for I nternational Settlements, for example, suggest that the implicit government guarantee provides the largest U.S. BHCs with an average credit rating uplift of more than two notches,
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thereby lowering average funding costs a full percentage point relative to their smaller competitors.
Our aforementioned friend from the Bank of England, Andrew Haldane, estimates the current implicit TBTF global subsidy to be roughly $300 billion per year for the 29 global institutions identified by the Financial Stability Board (2011) as systemically important. To put that $300 billion estimated annual subsidy in perspective, all the U.S. BHCs summed together reported 2011 earnings of $108 billion. Add to that the burdens stemming from the complexity of TBTF banks. Here is the basic organization diagram for a typical complex financial holding company:
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To simplify a complex issue, one might consider all the operations other than the commercial banking operation as shadow banking affiliates, including any special investment vehiclesor SIVsof the commercial bank.
Now, consider this table. It gives you a sense of the size and scope of some of the five largest BHCs, noting their nondeposit liabilities in billions of dollars and their number of total subsidiaries and countries of operation (according to the Financial Stability Oversight Council):
For perspective, consider the sad case of Lehman Brothers. More than four years later, the Lehman bankruptcy is still not completely resolved.
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As of its 10-K regulatory filing in 2007, Lehman operated a mere 209 subsidiaries across only 21 countries and had total liabilities of $619 billion.
By these metrics, Lehman was a small player compared with any of the Big Five. If Lehman Brothers was too big for a private-sector solution while still a going concern, what can we infer about the Big Five in the table?
Correcting for the Drawbacks of DoddFrank

DoddFrank addresses this concern. Under the Orderly Liquidation Authority provisions of DoddFrank, a systemically important financial institution would receive debtor-in-possession financing from the U.S. Treasury over the period its operations needed to be stabilized. This is quasi-nationalization, just in a new, and untested, format. In Dallas, we consider government ownership of our financial institutions, even on a temporary basis, to be a clear distortion of our capitalist principles. Of course, an alternative would be to have another systemically important financial institution acquire the failing institution. We have been down that road already. All it does is compound the problem, expanding the risk posed by the even larger surviving behemoth organizations. In addition, perpetuating the practice of arranging shotgun marriages between giants at taxpayer expense worsens the funding disadvantage faced by the 99.8 percent remainingsmall and regional banks. Merging large institutions is a form of discrimination that favors the unwieldy and dangerous TBTF banks over more focused, fit and disciplined banks.
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The approach of the Dallas Fed neither expands the reach of government nor further handicaps the 99.8 percent of community and regional banks.
Nor does it fight complexity with complexity. It calls for reshaping TBTF banking institutions into smaller, less complex institutions that are: economically viable; profitable; competitively able to attract financial capital and talent; and of a size, complexity and scope that allows both regulatory and market discipline to restrain excessive risk taking.
Our proposal is simple and easy to understand. I t can be accomplished with minimal statutory modification and implemented with as little government intervention as possible.
It calls first for rolling back the federal safety net to apply only to basic, traditional commercial banking. Second, it calls for clarifying, through simple, understandable disclosures, that the federal safety net applies only to the commercial bank and its customers and never ever to the customers of any other affiliated subsidiary or the holding company. The shadow banking activities of financial institutions must not receive taxpayer support. We recognize that undoing customer inertia and management habits at TBTF banking institutions may take many years. During such a period, TBTF banks could possibly sow the seeds for another financial crisis. For these reasons, additional action may be necessary. The TBTF BHCs may need to be downsized and restructured so that the safety-net-supported commercial banking part of the holding company can be effectively disciplined by regulators and market forces.
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And there will likely have to be additional restrictions (or possibly prohibitions) on the ability to move assets or liabilities from a shadow banking affiliate to a banking affiliate within the holding company.
To illustrate how the first two points in our plan would work, I come back to the hypothetical structure of a complex financial holding company. Recall that this type of holding company has a commercial bank subsidiary and several subsidiaries that are not traditional commercial banks: insurance, securities underwriting and brokerage, finance company and others, many with a vast geographic reach.
Where the Government Safety Net Would Begin and End

Under our proposal, only the commercial bank would have access to deposit insurance provided by the FDIC and discount window loans provided by the Federal Reserve. These two features of the safety net would explicitly, by statute, become unavailable to any shadow banking affiliate, special investment vehicle of the commercial bank or any obligations of the parent holding company. This is largely the current casebut in theory, not in practice. And consistent enforcement is viewed as unlikely.
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Reinforced by a New Covenant

To reinforce the statute and its credibility, every customer, creditor and counterparty of every shadow banking affiliate and of the senior holding company would be required to agree to and sign a new covenant, a simple disclosure statement that acknowledges their unprotected status. A sample disclosure need be no more complex than this:
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This two-part step should begin to remove the implicit TBTF subsidy provided to BHCs and their shadow banking operations. Entities other than commercial banks have inappropriately benefited from an implicit safety net. Our proposal promotes competition in light of market and regulatory discipline, replacing the status quo of subsidized and perverse incentives to take excessive risk. As indicated earlier, some government intervention may be necessary to accelerate the imposition of effective market discipline. We believe that market forces should be relied upon as much as practicable.
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However, entrenched oligopoly forces, in combination with customer inertia, will likely only be overcome through government-sanctioned reorganization and restructuring of the TBTF BHCs.
A subsidy once given is nearly impossible to take away. Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, reestablish a competitive landscape and level the playing field.
Why Protect the 0.2 Percent?

My team at the Dallas Fed and I are confident this simple treatment to the complex problem and risks posed by TBTF institutions would be the most effective treatment. Think about it this way: At present, 99.8 percent of the banking organizations in America are subject to sufficient regulatory or shareholder/market discipline to contain the risk of misbehavior that could threaten the stability of the financial system. Zero-point-two percent are not. Their very existence threatens both economic and financial stability. Furthermore, to contain that risk, regulators and many small banks are tied up in regulatory and legal knots at an enormous direct cost to them and a large indirect cost to our economy . Zero-point-two percent. If the administration and the Congress could agree as recently as two weeks ago on legislation that affects 1 percent of taxpayers, surely it can process a solution that affects 0.2 percent of the nations banks and is less complex and far more effective than DoddFrank.
Making a Time of Awful Moment a Time of Promise

The time has come to change the decision making paradigm.
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There should be more than the present two solutions: bailout or the end-of-the-economic-world-as-we-have-known-it.
Both choices are unacceptable. The next financial crisis could cost more than two years of economic output, borne by millions of U.S. taxpayers. That horrendous cost must be weighed against the supposed benefits of maintaining the TBTF status quo.
To us, the remedy is obvious: end TBTF now. End TBTF by reintroducing market forces instead of complex rules, and in so doing, level the playing field for all banking institutions.
I return to Patrick H enry. He noted that it is natural to man to indulge in the illusions of hope. We are apt to shut our eyes against a painful truth, and listen to the song of that siren till she transforms us.
We labor under the siren song of DoddFrank and the recent run-up in the pricing of TBTF bank stocks and credit, indulging in the illusion of hope that this complex legislation will end too big to fail and right the banking system.
We shut our eyes to the painful truth that TBTF represents an ongoing danger not just to financial stability, but also to fair competition. The Dallas Fed offers a modest but, we believe, far more effective fix to DoddFrank. This plan is not without its costs.
But it is less costly than all the alternatives put forward and it seriously reduces the likelihood of another horrendous and costly financial crisis.
This need not be a time of awful moment. It should instead be a time of promise.
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Treating the pathology of TBTF now would be a big step toward a more stable and prosperous economic system, one that relies on fundamental principles of capitalism rather than regulatory complexity and increasing government intervention.
Thank you.
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Dr Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank
Challenges for financial stability policy and academic aspects

Dinner Speech at the Joint Conference of the Deutsche Bundesbank, the Technical University Dresden and the Journal of Financial Stability
2012: An annus horribilis or an annus mirabilis or neither?

Your Magnificence Professor Mller-Steinhagen, Mister State Minister Doctor Beermann, Ladies and Gentlemen: The turn of the year gives me the chance to relate my discussion of some of the future challenges for financial stability to a rsum of the previous year. Please allow me to do this from a European perspective and let me start with a seemingly innocent question:
Will 2012 go down in history as an annus horribilis or rather as an annus mirabilis, or neither?
The answer to this question is less trivial than it appears at first. Lets look to the origins of the words annus horribilis and annus mirabilis. To see this please note that the originator of the annus horribilis, Queen Elizabeth, used it to describe her feelings about the year 1992. At the time, her Majesty was talking about, among others, the fire at Windsor Castle, but one might also read it as a comment about what
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happened in the financial sector in 1992 when the markets forced the UK to leave the European Exchange Rate Mechanism.
More recently, the Queens remarks sound as a comment about the financial and economic development of 2012. Please also note that many people use the metaphor of a large-scale fire to explain the economic term of a systemic event. Thus her Majesty is worth quoting in more length: 1992 is not a year on which I shall look with undiluted pleasure.
In the words of one of my more sympathetic commentators it has turned to be an annus horribilis.
I suspect that I am not alone in thinking it so. Indeed I suspect that there are very few people or institutions unaffected by the last months of worldwide turmoil and uncertainty. According to various measures 2012 was a year of considerable systemic tensions. Indeed, the indicators were approaching - but did not quite reach - the sad levels seen in the second half of 2008 and in the first half of 2009 which was without doubts a very difficult period in the financial and economic history. Therefore, one might be tempted to classify 2012 as an annus horribilis. I wish to challenge this view. Will 2012, with hindsight, possibly go down in history as an annus mirabilis? Absurd, you may think. But on second thought this notion seems less absurd than it first appears. Let us not forget that the famous poem of John Dryden entitled annus mirabilis was inspired from major events in the year 1666. A very difficult year, to put it mildly, a year in which the Great Fire destroyed 80% of the city of London.
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The fire spread so rapidly due to the citys narrow streets and the interconnectedness of houses.
The battle to stop the fire was considered to have been won by two factors: the strong east winds died down, and the Tower of London garrison used gunpowder to create effective firebreaks to stop the fire from spreading further eastwards. Drydens view was that God had performed miracles for England. The King promised to improve the streets.
Well, some may say, so it is in 2012.

The fire in the financial markets was stopped by the ECB, by the two firewalls EFSF and ESM as well as by the governments announcing that they would improve the financial system. Thus 2012 is an annus mirabilis. But as you know, miracles need to be acknowledged either by the pope or by the scientific community. So let us check whether a miracle was at work in 1666.
And what I am going to say now about 1666 can be understood as a metaphorical warning about what could happen if we do not draw the right policy conclusion from the events of 2012.
Despite numerous radical proposals, London was rebuilt using essentially the same street plan which was in use before the fire. So the miracle is that nothing similar to the Great Fire has happened in the following years. The lesson of this story is quite clear.
The financial system needs better rules than in the years preceding the crisis.
We need a resilient financial system. We need a strong supervision. We need effective macroprudential instruments.
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We need to know how these instruments will work, which is a challenge for the scientific community as well as for macroprudential policy makers.
Otherwise, we would be putting our trust in a miracle. And we need to understand the complicated interactions between the financial and the real economy, which is the topic of your conference.
Links between the Financial System and the Real Economy

Take, for example, the LTROs which provided banks with liquidity for a period of three years.
These LTROs have made the links between the public and the banking sector in some countries closer, not wider meaning that the system is even more vulnerable to systemic contagion than before.
Another example is the issue of deleveraging and forbearance. In Europe, many banks balance sheets are too large. Most of you probably agree that it is necessary for these banks to shrink their balance sheets. At the same time, some fear that deleveraging cuts off corporations from their financing sources. From a theoretical viewpoint, however, a distinction needs to be made between good and bad deleveraging. Good deleveraging, for instance, means scaling back the exposure to other financial intermediaries whereas bad deleveraging means that lending to the real economy is being reduced. The problem with this view is that, in practice, the distinction is not at all so clear-cut.
The issue becomes even more complicated, when we additionally introduce the concept of forbearance, i.e. postponing the act of declaring a doubtful loan to be a doubtful loan.
What is the best response to this issue?
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The first answer is transparency. At this point, transparency is more easily said than done.
But we need it, particularly in the context of a banking union and possible bank recapitalisations. And transparency is especially important with a view to legacy assets and forbearance of the problem banks. How do we proceed further? Repairing the banks balances sheets and injecting capital is one answer.
However, some fear that repairing balance sheets has procyclical effects and could damage the availability of credit for the real economy.
In my view, however, repairing balance sheets will have a long-term positive impact on potential output growth more than offsetting the possible short-term cyclical effects.
The Limits of State Interventions

I often hear that the banks were responsible for the crisis. But can governments do better?
As you know, one reason for the financial crisis was the use of risk models based on assumptions, which concentrated on expected values rather than tails.
Peter Bernstein, the financial historian from the US, illustrated this point by citing the anecdote of a Moscovite professor of statistics, who refused to go to the air-raid shelter during World War I I bomb attacks. The professor argued: See, Moscow has seven million inhabitants. Why should I expect to be one who will be hit?
His neighbours were astonished, when he came back to the shelter the next night.
Now the professors argumentation was: Moscow has seven million inhabitants and one elephant. Last night the elephant was hit.
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If regulators and banks essentially use the same models for their risk management, why should we expect a better financial stability outcome?
Of course, one solution is to improve our models. But I do not think that this is the end of the story. I rather believe that regulators can do better if they acknowledge their own limitations. Regulators should employ the market mechanism to find the best risk management tools. In an ideal world the market is a discovery process. First, each individual agent knows better what is good for him. But at the end of the discovery process in theory we will get the best risk management tools, if and this if is the decisive word here if banks with weak risk management processes are allowed to fail, having to leave the market. This is one reason why resolving the too-big-to-fail-problem needs to be a top priority on the regulatory agenda. As far as I can judge, we are only beginning to understand how well-established instruments like the capital ratio work and what effect they have on the banks behaviour. And there are other new macroprudential instruments where our knowledge is even more limited. Take the counter-cyclical buffer. The idea is simple and compelling. When the regulators identify a bubble developing, this buffer is activated, thereby leading banks to reduce their lending. If all works well, this buffer prevents the exuberances altogether, or at least mitigates it. However, it is not clear how the buffers should be calibrated in order to achieve better financial stability.
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Moreover, not much is known about possible time lags.

In the worst situation, these buffer effects are not counter- but pro-cyclical. Things become even more complicated if different instruments are applied at the same time. As you can easily see, there are many questions waiting to be answered, many problems waiting to be resolved. When I think about what we know how macroprudential instruments work, traffic lights come to my mind. To prevent pedestrians from crossing the street when the traffic light is red the authorities actually installed buttons that pedestrians could press to shorten the red phase. And it turned out to be a success: fewer pedestrians crossed the street when the lights were red. However, what the pedestrians did not know was that pushing the buttons had no effect on the duration of the red phase.
Please do not misunderstand me: I do not believe that macroprudential instruments are useless. Quite the contrary is true.
What I want to highlight is that we cannot expect to prevent all future crises from happening. It is an illusion to believe that we can finetune our instruments such that they have exactly the effect we want them to have. Recently, Otmar Issing wrote in the Frankfurter Allgemeine Zeitung: The attempt to prevent each kind of crisis is just as hopeless as harmful. The guiding principle of the market paradigm of action and liability for the consequences (of these actions) should be valid without exemption.
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Taking this into consideration, the effects and the interdependence of macroprudential instruments may turn out to be a very fruitful research area.
To sum up, every intervention in the market needs to be justified by market failures, something that, unfortunately, is not hard to find in many areas of the financial system. There is no guarantee, however, that governments can do a better job. But at least the state has an incentive taking into account the negative externalities of banks decisions and thus to minimise tax payers losses. When the state is aware of its own limitations there is a good chance that the outcome will be better than one in which the financial system is left to its own devices.
Newtons annus mirabilis

There was one famous scientist for whom 1666 was indeed an annus mirabilis. Isaac Newton made revolutionary inventions and discoveries in calculus, motion, optics and gravitation. As such, 1666 was later referred to I saac Newton's annus mirabilis. It is the year when I saac Newton was said to have observed an apple falling from a tree and hit upon gravitation. He afforded the time to work on his theories due to the closure of Cambridge University. In his own words: All this was in the two years 1665 and 1666, for in those days I was in the prime of my age of invention, and minded mathematics and philosophy more than at any time since.
Nowadays, Newtons experience might inspire you to invent and discover macroprudential mechanisms which policy makers could put to appropriate use in practice.
Then the year 2012 might, in hindsight, turn out to have been a genuine annus mirabilis.
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I wish you all a very successful conference. Thank you for your attention.
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Preserving the safety and security of Malaysias banking system

Speech by Mr Encik Abu H assan Alshari Yahaya, Assistant Governor of the Central Bank of Malaysia, at the launch of the e-Banking Fraud Awareness Campaign, Kuala Lumpur It is my pleasure and honour to be invited to launch this joint e-Banking fraud awareness campaign.
I would like to thank the Association of Banks in Malaysia for this invitation and the coordinated efforts in undertaking this important awareness campaign.
A significant initiative
This campaign is indeed a very important initiative for the banking industry in Malaysia. This is the first time that all banks have come together in a concerted effort to help create greater awareness of online fraud with the cooperation of CyberSecurity and the Police Force. This is to be lauded as all stakeholders have a role to play in preserving the safety and security of the banking system.
Maintaining confidence in online banking services

Online transactions have been growing at a rapid pace over the years. Over the last decade, the use of electronic payments has increased at an average annual growth of 23.4%. In 2012, Malaysian households and businesses performed more than 300 million financial transactions with a value close to RM15 trillion via
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electronic channels comprising mainly funds transfers, bill payments, top-up for prepaid cards, purchases of phone cards and payments for investments in the capital market.
Among the electronic channels, internet banking is the most popular. Fundamental to the growth of internet banking over the years is the confidence which the public has in its convenience and security. This is something that we cannot take for granted and must be continuously preserved. Advancement in technology and innovation has resulted in greater consumer convenience and enhanced efficiency. However, the same technology and innovation have also created new methods of perpetrating fraud that could be executed faster and with greater reach. Cyber criminals have been active ever since the advent of the internet, and are constantly finding new ways to defraud innocent victims. Safety and security of transactions in the banking system is fundamental in ensuring consumer confidence. Hence, an important function and responsibility of the Central Bank is to ensure online transactions can be made in a safe and efficient manner in the economy, in the pursuit of monetary and financial stability objectives.
The need for constant vigilance & cooperation

This fight that the banks are launching today is something that requires the support of all parties. We are aware of the creative ways in which criminals have attempted to deceive customers over the years and measures were required to be taken by the banks to protect the customers.
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While it is good to know that banks have played their roles in investing in robust security systems, they must also ensure that customers play their part in protecting their own assets and savings.
The reminder and greater awareness from the Banks through this campaign is timely. It will not only reinforce the need for constant vigilance from all parties, but also help create an environment where everyone is risk conscious and responsible in protecting the interests of each other.
These initiatives would not achieve the desired outcomes without effective communication, and the media has a critical role to play in conveying the message from the banks.
We have always acknowledged the importance of the media and I would like to record Bank Negara Malaysias appreciation for the assistance rendered by the media in creating awareness of this issue in the past. We hope that with the support of the media on this occasion too, this campaign will be a success, and the public will have heightened levels of understanding and vigilance over this issue. On behalf of Bank Negara Malaysia, I would like to thank all the banks for taking this initiative to undertake this joint e-banking awareness campaign. Our thanks also to Cyber Security and the Police Force for your ongoing efforts to collaborate with the banking industry. I wish all of you the best and assure you that Bank Negara Malaysia will continuously support you in this noble effort.
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Comments received on the consultative report "Recovery and resolution of financial market infrastructures
South Africa, Financial Services Board (FSB) has requested the SAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limited to provide feedback.
Introduction
On the 31st of July 2012, a consultative report on the Recovery and Resolution of Financial Market Infrastructures was issued by the Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO). Subsequently the Financial Services Board (FSB) has requested the SAFEX Clearing Company (Pty) Limited (SAFCOM) and Strate Limited to provide feedback and commentary on the report.
This report serves as a consolidation of Strate Limiteds and SAFCOM s views on the contents of the document.
Background
Strate Limited is a licensed Central Securities Depository (CSD) for the electronic settlement of financial instruments in South Africa. Strate handles the settlement of a number of securities including equities and bonds for the Johannesburg Stock Exchange (JSE) as well as a range of derivative products such as warrants, Exchange Traded Funds (ETFs), retail notes and tracker funds. It is also responsible for the settlement of money market securities to its portfolio of services. It provides services to issuers for their investors in terms of the Companies Act and Securities Services Act (SSA), 2004.
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SAFEX Clearing Company (Pty) Limited operates as a clearing house for the Johannesburg Stock Exchange derivatives markets. It was incorporated in 1987 and is based in South Africa.
As of October 2008, SAFEX Clearing Company (Pty) Limited operates as a subsidiary of the JSE.
General Comment
In compiling a response to the request for comment by CPSS-IOSCO, Strate has reviewed the Consultative Report, the Key Attributes of Effective Resolution Regimes for Financial Institutions (issued by the Financial Stability Board) as well as the Principles for Financial Market Infrastructure and the associated recommendations for Regulators. Strate believes that the Consultative Report has been generally well thought out and represents a comprehensive assessment of the likely impacts in the event of FMI default or failure as well as an effective guideline to assist individual FMI s in the development of an appropriate and effective Recovery and Resolution plan. The broad differentiation between those FMIs that assume credit risk and those that do not is also considered most appropriate to take into account the different roles and responsibilities of individual FM I s. It is, however, very clear from this exercise that a comprehensive review of the Resolution Regimes contained in current and proposed future legislation will need to be undertaken to ensure that the ideals contained in the referenced documents are suitably entrenched and understood.
Specific responses to questions raised:

The following responses and comments have been put forward for each of the specific questions raised in the Recovery and Resolution of Financial Market I nfrastructures report. 1. I n what circumstances, and for what types of FMI, can a statutory management, administration or conservatorship offer an appropriate process within which to ensure a continuity of critical services?
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The consideration as to whether statutory management, administration or conservatorship would offer the most appropriate process within which to ensure the continuity of critical services is, in our opinion, directly linked to the speed with which such an arrangement could be effectively implemented within the framework provided in local legislation rather than the type of FMI.
This does, however, also link to question 2 below. 2.Are there powers beyond those of a standard insolvency practitioner that a statutory manager, administrator or conservator would require in these circumstances? Potentially, yes. This assessment can, however, only be completed with a full legislative review in the particular jurisdiction to ensure that the appointed authority has the necessary authorities already outlined in the Consultative Paper. Key to this assessment will be the ability to ensure the speedy assumption of control by the appointed authority. 3.Is tear-up an appropriate loss allocation arrangement prior to resolution of a CCP? If so, in what circumstances? Unable to comment not applicable to Strate 4.To what extent should the possibility of a tear-up in recovery be articulated in ex ante rules? Unable to comment not applicable to Strate. 5.Should there be a limit to the number of contracts that are eligible for tear-up? Unable to comment not applicable to Strate. 6.How should the appropriate haircuts be determined? Unable to comment not applicable to Strate.
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7.What qualitative or quantitative indicators of non-viability should be used in determining the trigger for resolution for different types of FMI?
Key to this decision is the role of the particular FMI. I n the case of non-credit risk bearing FMI s the indicators would tend to be qualitative rather than quantitative once the primary measurement of adequate reserves has been addressed. In the case of Strate, this would include many elements assessed by its lead regulator in terms of the annual licence renewal process (including such things as competencies, quality of service delivery, operational capacities, robustness of existing technology etc.). 8.What loss allocation methods must be available to a resolution authority, and for which types of FM I? Could or should these resolution powers include tear-up, cash calls or a mandatory replenishment of default fund contributions by an FMIs direct participants? Does it make a difference if the losses are from a defaulting member or are made up of other losses (e.g. losses in investments made by the FMI)? In what circumstances, and by what methods, should losses be passed on beyond the direct participants e.g. to the clients or FMI shareholders in resolution? To the extend applicable to Strate, losses in investments made by the FMI would be allocated directly to its shareholders rather than to its participants in any way. 9.What, if any, special considerations or methods should be applied when allocating losses whose maximum value cannot be capped (e.g. when allocating potential losses that might arise from open and uncapped positions at a CCP)? Unable to comment not applicable to Strate. 1 0 . H ow should equity in FMI s be treated in resolution scenarios: should it be written down in all circumstances?
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From a Strate perspective, and given the nature of the risks borne by the CSD, no need for differentiation in the treatment of equity write-downs could be identified.
11.Are there circumstances in which loss allocation in resolution should result in a different distribution of losses to losses borne in insolvency? Does it make a difference if the losses stem from a defaulting member or are made up of other losses (e.g. losses in investments made by the FMI or resulting from operational risks)? Given the profile of Strate it is not envisaged that there should be any difference in the loss allocation regardless of whether by resolution or insolvency. 12.Should an FMI s rules for addressing uncovered losses be taken into account when calculating whether creditors are no worse off in resolution than in liquidation? Unable to comment not applicable to Strate. 13.Are there any circumstances in which the ability to exercise termination rights as a result of the use of resolution powers should outweigh the objective of ensuring continuity? Given the profile of Strate this would only apply to contracts for services from third parties and to the extent that the ability to exercise termination rights relates to non-core services, this may assist in minimizing the immediate negative financial impacts on the FMI. It is unlikely that one would wish to invoke the early termination of core services as part of a resolution process. 14.Are there any circumstances in which a temporary stay on exercising termination rights should apply for any event of default and not just where triggered by the resolution measures? As with 13. above, the profile of Strate reduces the need to exercise, or indeed temporarily stay, termination rights whether as a result of default or resolution.
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15.Are there any circumstances in which a moratorium with a suspension of payments to unsecured creditors may be appropriate when resolving an FMI? Should this be limited to certain types of FMI and/ or certain types of payment?
The benefit of introducing a suspension of payments to unsecured creditors to assist in the resolution of an FMI such as Strate would be minimal and, given the specific nature of the role that Strate plays in the market, is unlikely to affect (either positively or negatively) its ability to continue settling or processing transactions which are processed directly between counterparties through the Central Bank payment system or, as is the case with Corporate Events processing, through Trust accounts which could effectively be ring-fenced from the FMI itself. 1 6 . I f so, should resolution authorities retain the discretion to apply a moratorium and, if so, what restrictions (if any) on its use would be appropriate (e.g. scope, duration or purpose)? Given the response to 15 above, this is not considered relevant to Strate other than to the extent that the Resolution Authority may wish to defer payment on non-core services in terms of existing powers. No special powers are considered necessary. 17.Should the bail-in tool be available to collateral, margin (including initial margin) and other sources of funds if they would bear losses in insolvency? Unable to comment not applicable to Strate. 1 8 . I n what circumstances and for what types of FMI should wider loss recovery arrangements exist beyond the FMIs own rules and the resolution powers of the resolution authority? Not applicable to Strate as it does not assume principal risk in any of the transactions it processes. The CSD Rules already cover the CSD adequately in this respect. 1 9 . I n conducting a resolvability assessment of an FMI, what factors should authorities pay particular attention to?
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The assessments outlined in Annexure I I of the Key Attributes of Effective Resolution Regimes for Financial Institutions issued by the Financial Stability Board are considered sufficiently comprehensive to conduct a resolvability assessment.
20. In addition, is the summary of the application of the Key Attributes to FMIs provided in the annex sufficiently detailed to support the development of recovery and resolution regimes for FM Is? Are there specific areas where more detail could be provided? If so, which areas and what additional detail should be provided?
Are any of the key attributes not applicable to a particular type of FMI?
If so, which key attribute(s) and why not? Other than those areas already identified in the Annex as being not applicable to an FMI like Strate, no additional areas could be identified and no additional detail is considered necessary to assist Strate, in consultation with its Lead Regulator, in the development of an appropriate Resolution Plan.
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Opening Remarks at Investor Advisory Committee Meeting

By Chairman Elisse Walter U.S. Securities and Exchange Commission Washington, D.C. January 18, 2013 Good morning. I t is a pleasure to be with you today, and to make my first public appearance as SEC Chairman with you, a group who has chosen to dedicate yourselves to looking at the issues we face through the eyes of the investors we are dedicated to protect. As you know, although I am new to the role of Chairman, I am proud to have worked at the SEC both as a staff member and a Commissioner for a total of more than two decades. I have made the SEC the cornerstone, and the heart, of my career because I strongly believe that the SECs mission of investor protection and market stability is critical to the function of and confidence in the financial system as a wholeand especially because I believe that investors need and deserve an effective advocate within the Federal government. Today, thanks to our exceptional staff and strong leadership team, I believe that we are executing our role as the investors advocate boldly and effectively, at a time when our role has become more important than ever. This is a challenging and exciting time for the Commission. Commissioners and the staff are considering a number of complex and important issues and working hard on rules that will have a profound and positive impact on investors and our markets for years to come.
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I am currently working with the other Commissioners to prioritize the many agenda items before us and to set a realistic timetable for executing on those priorities.
With these discussions still under way, I cant yet give you too many details. I will say, though, that I am confident that completing the remaining rulemakings and other projects mandated by the Dodd-Frank Act and the JOBS Act will be at the top of the list.
And despite the often-mentioned 2-2 divide, I find that my fellow commissioners as well as Commission staff are eager to find common ground and move forward in a practical and effective manner.
I m also on something of a listening tour -- clarifying my own thoughts and keeping an appropriate perspective by listening to ideas, questions and complaints from people in and out of the agency. And, that is why I am here today to listen to you.
The Investor Advisory Committee is the right idea, and particularly at this critical juncture in the history of our markets.
Over the last decade, the retail investing landscape has become increasingly complex, populated by products, strategies, technologies, opportunities, and risks that simply didnt exist just a short time ago. And, on top of the changes that arise more or less organically from in the marketplace, important new legislation is reshaping the terrain, as well. Just 21 months after Dodd Frank, the most significant financial reform bill in decades, was enacted and created this committee the JOBS Act brought another seismic shift in the way companies, particularly small and emerging ones, raise capital and how individual investors participate in that process. Against this backdrop, the decisions confronted by individual investors decisions that are absolutely critical to the course of their lives and the
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lives of their families and the information and advice they receive when they make these decisions, are becoming more complex even as the stakes grow higher.
As some of you may know, when I think about the SECs role at a time like this, I like to think of my very dear if completely imaginary Aunt Millie, a retail investor with a modest portfolio, looking towards a secure retirement hopefully in the near term and some fun with her family during her golden years. Now, as dear to me as she is, Aunt Millie is no hedge fund manager. So when she sits down with her financial professional, and the talk turns to ETFs and target date funds, crowdfunding or her professionals fees, I want the SECs presence to be felt there in that office whether or not she even knows anything about the SEC (although MY Aunt Millie is, of course, qvelling at her nieces recent promotion), I want the SEC to be there looking out for her, helping her make sense of the environment in which she is investing her future security. Aunt Millie and her fellow retail investors are unique among the major stakeholders in the financial system: they arent members of a trade association, and they dont exactly spend a lot of time (or any time for that matter) following the Federal Register, monitoring the SEC, or although I am trying to improve this submitting substantive comments on proposed rules and concept releases. Like most retail investors, Aunt Millie is under-informed and underrepresented in the regulatory process. That is why, in the midst of continuing and significant changes in the markets, your work is so important. You help represent these retail investors with a visibility and sophistication that ensures that their needs and interests are carefully considered.
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You help us keep the playing field level for all investors, including and especially investors like Aunt Millie and her compatriots.
Your first set of recommendations to the Commission, on proposed rules that would lift the restriction on general solicitation in certain private placements, reflects your commitment to that task. I deeply appreciate the effort and thoughtfulness that went into crafting the recommendations. In addition, your ability to work together and provide recommendations that were unanimously supported by the Committee is heartening to me and serves as an example to us all. In a short time, you have established yourselves as an effective organization and a critical component of the ongoing regulatory dialogue that affects every American investor. I look forward to our continuing collaboration as you address other matters of critical importance in a relentlessly evolving financial world.
Thank you for what you have accomplished already and for what I know you will continue to do. I said earlier that we were still sorting out all of our priorities for the days ahead, but one of them is certainly this: continuing the close relationship that I believe we already have.
And, since I m here as part of my listening tour and not my talking tour, its probably time for me to stop talking and start listening to any questions and comments you may have.
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Fulfilling the Commissions Statutory Responsibility to Respond to IACs Recommendations

By Commissioner Luis A. Aguilar, U.S. Securities and Exchange Commission, Investor Advisory Committee Meeting Washington, D.C., January 18, 2013 I want to welcome the members of the I nvestor Advisory Committee to the Committees third in-person meeting. I also want to thank you for your continuing focus on the many issues confronting investors. Your input to the Commission is vital to highlight the initiatives that serve to benefit and protect investors, as well as to deter the Commission from undertaking initiatives that undercut or dismantle existing investor protections. It is critical that initiatives undertaken by the Commission fulfill its mission of protecting investors. As the I nvestor Advisory Committee, you are the Committee focused on the needs of investors and your recommendations are critical to facilitating that the Commission is operating to fulfill its mission. Congress clearly had this in mind when it codified this Committee in Section 911 of the Dodd-Frank Act and mandated how the Committee would operate. This Committee has already demonstrated that it takes its responsibilities seriously. For example, on October 12, 2012, the Committee sent the Commission seven unanimous recommendations regarding the SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings. I commend you for the hard work that you have undertaken, as reflected in the recommendations we received and which are available on the SEC website.
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It is now incumbent on the Commission to act. As required by Section 911 of the Dodd-Frank Act, the Commission is required to review the findings and recommendations of the Committee.
In particular, the statute specifies that, each time the Committee submits a finding or recommendation to the Commission, the Commission is required to promptly issue a public statement (A)assessing the finding or recommendation of the Committee; and (B)disclosing the action, if any, the Commission intends to take with respect to the finding or recommendation. The importance of this obligation is underscored by the fact that the law requires that the Commission itself assess the Committees recommendations and determine how best to respond to them. This is a responsibility of the Commission not one that has been delegated to the staff. To that end, I look forward to the Commission issuing the required response assessing your October 2012 recommendations. It is imperative that this Committees recommendations be treated with the serious consideration that the law mandates. I look forward to the Committees on-going efforts and to what the Committee has to say. Thank you.
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Tougher credit rating rules confirmed by European Parliament's vote

New rules on when and how credit rating agencies may rate state debts and private firms' financial health were approved by Parliament on Wednesday. They will allow agencies to issue unsolicited sovereign debt ratings only on set dates, and enable private investors to sue them for negligence. Agencies' shareholdings in rated firms will be capped, to reduce conflicts of interest. MEPs also ensured that the ratings are clearer by requiring agencies to explain the key factors underlying them. Ratings must not seek to influence state policies, and agencies themselves must not advocate any policy changes, adds the text. The rules have already been provisionally agreed with the Council. "We are taking some steps forward with this new regulation, fully in line with its basic spirit, which is to enable firms to do their own internal ratings. These should provide viable, comparable and reliable alternatives to those of the rating oligopoly", said lead MEP Leonardo Domenici (S&D, IT ).
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Set dates for sovereign debt ratings

Unsolicited sovereign ratings could be published at least two but no more than three times a year, on dates published by the rating agency at the end of the previous year. Furthermore, these ratings could be published only after markets in the EU have closed and at least one hour before they reopen.
Agencies to be liable for ratings

Investors who rely on a credit rating could sue the agency that issued it for damages if it breaches the rules set out in this legislation either intentionally or by gross negligence, regardless whether there is any contractual relationship between the parties. Such breaches would include, for example, issuing a rating compromised by a conflict of interests or outside the published calendar.
Reducing over-reliance on ratings

To reduce over-reliance on ratings, MEPs urge credit institutions and investment firms to develop their own rating capacities, to enable them to prepare their own risk assessments. The European Commission should also consider developing a European creditworthiness assessment, adds the text. By 2020 no EU legislation should directly refer to external ratings, and financial institutions must not be any more obliged to automatically sell assets in the event of a downgrade.
Capping shareholdings
A credit rating agency will have to refrain from issuing ratings, or disclose that its ratings may be affected, if a shareholder or member holding 10 % of the voting rights in that agency has invested in the rated entity.
The new rules will also bar anyone from simultaneously holding stakes of more than 5% in more than one credit rating agency, unless the agencies concerned belong to the same group.
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The Domenici report on the regulation was adopted by 579 votes to 58, with 60 abstentions and that on the directive by 599 votes to 27, with 68 abstentions.
Article 1 Subject matter

This Regulation introduces a common regulatory approach in order to enhance the integrity, transparency, responsibility, good governance and independence of credit rating activities, contributing to the quality of credit ratings issued in the Union, thereby contributing to the smooth functioning of the internal market while achieving a high level of consumer and investor protection. It lays down conditions for the issuing of credit ratings and rules on the organisation and conduct of credit rating agencies, including their shareholders and members, to promote credit rating agencies' independence, the avoidance of conflicts of interest and the enhancement of consumer and investor protection. This Regulation also lays down obligations for issuers, originators and sponsors established in the Union regarding structured finance instruments.
Article 5ba Over-reliance on credit ratings in Union law

Without prejudice to its right of initiative, the Commission shall continue to review references to credit ratings in Union law which trigger or have the potential to trigger sole or mechanistic reliance on credit ratings by competent authorities or financial market participants, with a view to eliminating all references to ratings in Union law by 1 January 2020, provided that appropriate alternatives to credit risk assessment have been identified and implemented.
Article 6a Conflicts of interest concerning investments in credit rating agencies

1. A shareholder or a member of a credit rating agency holding at least 5 % of the capital or the voting rights in a credit rating agency or in a company
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which has the power to exercise dominant influence or control over the registered credit rating agency, shall be prohibited from:
(a) holding 5 % or more of the capital of any other credit rating agency; (b) having the right or the power to exercise 5 % or more of the voting rights in any other credit rating agency; (c) having the right or the power to appoint or remove members of the administrative, management or supervisory body of any other credit rating agency; (d) being member of the administrative, management or supervisory body of any other credit rating agency; (e) exercising or having the power to exercise dominant influence or control over any other credit rating agency. The prohibition referred to in point (a) of the first subparagraph does not apply to holdings in diversified collective investment schemes, including managed funds such as pension funds or life insurance, provided that the holdings in diversified collective investment schemes do not put him or her in a position to exercise significant influence on the business activities of those schemes.
Article -8a Sovereign debt ratings

1.Sovereign debt ratings shall be issued in a manner, which ensures that the individual specificity of a particular Member State has been analysed. A statement announcing revision of a given group of countries shall be prohibited, if not accompanied by individual country reports. Those reports shall be made publicly available. 2.Public communications other than credit ratings, rating outlooks or accompanying press releases, as referred to in point 5 of Part I of Section D of Annex I , which relate to potential changes of sovereign ratings shall not be based on information stemming from the sphere of the rated entity, where such information has been released without the consent of the
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rated entity, unless it is available from generally accessible sources or unless there are no legitimate reasons for the rated entity not to give its consent to the release of the information.
3.A credit rating agency shall, taking into consideration the provisions in second subparagraph of Article 8(5), publish on its website and send to ESMA on an annual basis, in accordance with point 3 of Part I I I of Section D of Annex I, a calendar at the end of the month of December for the next 12 months, setting a maximum of three dates for the publication of unsolicited sovereign ratings and related outlooks and setting the dates for the publication of solicited sovereign ratings and related outlooks. Such dates shall be set on a Friday. 4.Deviation of the publication of sovereign rating or related rating outlooks from the calendar shall only be possible in as much as this is necessary for the credit rating agency to comply with its obligations under Article 8(2), Article 10(1) and Article 1 1(1) and shall be accompanied by a detailed explanation of the reasons for the deviation from the announced calendar.
Article 8c Use of multiple credit rating agencies

1.Where an issuer or a related third party intends to mandate at least two credit rating agencies for the credit rating of the same issuance or entity, the issuer shall consider the possibility to mandate at least one credit rating agency which does not have more than 10 % of the total market share and which can be evaluated by the issuer as capable for rating the relevant issuance or entity, provided that, based on the list of ESMA mentioned in paragraph 2, there is a credit rating agency available for rating the specific issuance or entity. Where the issuer does not mandate at least one credit rating agency which does not have more than 10 % of the total market share, this shall be recorded. 2.With a view to facilitating the evaluation by the issuer under paragraph 1, ESMA shall annually publish on its website a list of registered credit rating agencies, indicating their total market share and the types of ratings issued, which can be used by the issuer as a starting point for its evaluation.
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3. For the purposes of this Article, the total market share shall be measured by annual turnover generated from credit rating activities and ancillary services, at group level.
Article 35a Civil liability

1. Where a credit rating agency has committed intentionally or with gross negligence any of the infringements listed in Annex I I I having an impact on a credit rating, an investor or issuer may claim damages from that credit rating agency for damage caused to them due to that infringement.
An investor may claim damages under this Article where it establishes that it has reasonably relied, in accordance with Article 5a or otherwise with due care, on a credit rating for a decision to invest into, hold onto or divest from a financial instrument covered by that credit rating.
An issuer may claim damages under this Article where it establishes that it or its financial instruments are covered by that credit rating and the infringement was not caused by misleading and inaccurate information provided by the issuer to the credit rating agency, directly or through information publicly available. 5. Civil liability as referred to in paragraph 1 may be limited in advance only where all of the following conditions are complied with: (a) the limitation is reasonable and proportionate; and (b) the limitation is allowed by the relevant national law as determined in accordance with paragraph 5a. Where a limitation of civil liability does not comply with the conditions referred to in the first subparagraph it shall have no legal effect. 5a. The terms damage, intention, gross negligence, reasonably relied, due care, impact, reasonable and proportionate which are referred to in this Article but are not defined in this Regulation, shall be interpreted and applied in accordance with the applicable national law as determined by the relevant rules of private international law.
Matters concerning the civil liability of a credit rating agency and which are not at all covered by this Regulation shall be governed by the
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applicable national law as determined by the relevant rules of private international law.
The competent court to decide on a claim for civil liability brought by an investor shall be determined by the relevant rules of private international law. 5b. This Article does not exclude further civil liability claims in accordance with national law.
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FSA UK
Risk to Customers from Financial Incentives Context

Consumer trust and confidence in financial services is essential. In autumn 2011 we published a review of sales incentives and asked for feedback on our proposed guidance. We know that the way sales staff are paid influences how and what they sell to consumers. Equally, we recognise that firms may want to incentivise their staff to sell. We do not have a problem with incentive schemes, but they must never be at the customers expense and the risks need to be managed properly. Consumers must be confident they are being sold a product for the right reasons.
Our review found that most incentive schemes were likely to drive people to mis-sell and these risks were not being properly managed.
We welcome the significant recent changes that a number of firms have made to reduce the risks in their incentive schemes.
Our review and its findings a reminder

We have carried out a review conducted across a variety of authorised firms including banks, building societies, insurance companies and investment firms.
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We were concerned to find that incentive schemes with high-risk features and the potential for sales staff to earn significant bonuses were common across the firms we assessed.
Most firms did not have effective systems and controls in place to adequately manage the increased risks of mis-selling arising from their incentive schemes. The review uncovered a range of serious failings, such as: Firms failing to identify how incentive schemes might encourage staff to mis-sell, suggesting they had not sufficiently thought about the risks or had turned a blind eye to them. Firms failing to understand their own incentive schemes because they were so complex, therefore making it harder to control them. Firms not having enough information about their incentive schemes to understand and manage the risks. Firms relying too much on routine monitoring, rather than taking account of the specific features of their incentive schemes. Sales managers with clear conflicts of interest that were not properly managed. Firms having links to sales quality built into their incentive schemes that were ineffective. Firms not doing enough to control the risk of mis-selling in face-to-face situations.
How do we expect firms to manage incentive schemes?

We do not currently prescribe how firms should, or should not, incentivise their staff. However, our standards for firms are clear.
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Principle 3 of the FSAs Principles for Businesses states that a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
The Senior Management Arrangements, Systems and Controls sourcebook (SYSC) of the Handbook sets out organisational and systems and controls requirements for firms. We expect firms to apply Principle 3 and SYSC when developing incentive schemes for their staff and to have a mitigation strategy in place to manage any risk of mis-selling to consumers that might occur. The attached Annex gives examples of previous enforcement cases where financial incentives were a feature.
What do we consider mis-selling?

We use the term mis-selling in this document to refer to a failure to deliver fair outcomes for consumers. These outcomes include: Customers are treated fairly; Customers understand the key features of the product or service and whether they are being given advice or information; Customers are given information that is clear, fair and not misleading information that enables them to make an informed decision before purchasing a product or service or before trading; and Customers buying on an advised basis are recommended suitable products.
How firms have responded to these findings?

Since discussing our findings with the firms in the review, we have seen them take action in response to our concerns.
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This includes:
changing incentive schemes so that they are not based on sales volumes; removing high-risk incentive features and conflicts of interest for sales managers; reducing the value of incentive schemes linked to sales, or capping maximum payments; introducing more effective links between incentive schemes and the results of business quality monitoring; improving controls, including additional monitoring for higher performing sales staff, and additional MI and monitoring around the features of incentive schemes that increase the risk to customers; improving controls to actively identify inappropriate behaviour by sales staff during face-to-face sales conversations; strengthening governance arrangements around the design and sign-off of incentive schemes; and undertaking past business sampling to identify if any systemic mis-selling has occurred because of higher risk features in incentive schemes.
Examples of incentive scheme features that significantly increase the risk of mis-selling Disproportionate rewards for marginal sales
Reaching a certain target or a goal that triggers an increase in earnings much higher than the normal rate at which incentives accrue. An example is a retrospective accelerator where passing a target increases the level of incentive earned for all sales over a period, rather than just those above the target.
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Example of a retrospective accelerator bonuses multiplied up to eight times

One firms sales staff could see their bonuses multiplied by up to eight times for cross-selling protection products. This resulted in a strong incentive for staff to sell protection products to consumers, regardless of their needs, to reach a certain number of sales and dramatically increase their bonus, backdated for the whole month. This incentive scheme was likely to drive sales staff to mis-sell, for example misleading consumers by exaggerating the benefits of a product while playing down the limitations. Other examples include schemes where high performance can trigger significant additional incentives, both monetary and non-monetary (such as foreign travel).
Example of disproportionate rewards first past the post competition bonus

One firm operated a Super Bonus scheme competition which was run on a first past the post basis for reaching a sales target or threshold.
The first 21 people to reach this target earned up to 10,000. This created a strong motivation to reach the Super Bonus target as soon as possible, increasing the risk of mis-selling.
Example of disproportionate rewards enhancing annual bonus

One firm had an incentive scheme where advisers were paid commission on products sold over the course of the year. If they reached a series of targets, they could lock in an enhanced commission of up to 35% for the whole of the next year.
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This created a heightened risk from a series of cliff edge points at the end of the year, to exceed the target and secure enhanced commission for the following year.
Accelerators (or stepped payments)

A higher rate of incentive is earned with higher volumes of sales where the higher rate only applies to sales over a target. This form of incentive creates increased risk as staff try to maximise their sales before the end of the incentive period.
Example of an accelerator
A monthly bonus is based on a set payment for each product sold up to 100% of a target and the payment per product is increased for the rest of the month if the target is reached before month-end.
Inappropriate incentive bias between products

There is an inappropriately larger incentive for one product compared with another, whether the products are substitutable or not. Where the incentive is different for substitutable products, there is an even higher risk that sales staff will sell the higher earning product.
Example of incentive bias between products

A firm excessively incentivised one product type over another, where that product was more profitable. The high difference in value meant that staff could only earn a significant bonus by selling the more highly incentivised products. The firm claimed to offer holistic advice, but there was a clear risk that advisers would sell one product over another because there was no prospect of earning large bonuses from selling the other product range.
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The firm did not seem to have considered the risk to customers.
Variable salaries
Incentive schemes may vary basic pay (up or down) based on performance against sales targets in a set period. This could include a substantial reduction if sales staff do not continue to meet their sales targets. A reduction in basic pay may have a significant impact on an individuals ability to meet financial commitments and may reduce other employee benefits linked to pay.
Example of variable salaries

A firm reviewed staff salaries every quarter, and moved staff between salary bands depending on how much they sold. The highest salary band earned more than three times the lower salary band so there was a strong incentive to achieve the sales targets required to get the higher basic salary. Staff may also have put themselves under pressure to sell enough to stay in the higher salary bands once they got there, increasing the risk of misselling further. Staff could move through salary levels quickly. One top performer described coming in at grade 1 and rapidly moving to grade 5, which meant his annual salary increased by more than 25,000.
He then exceeded sales targets in the next 18 months, adding another 20,000 to his salary .
We were concerned that the variable salaries significantly increased the risk of mis-selling at this firm.
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In a review of advisers who were close to dropping a salary band, several made a lot of sales at the end of the quarter, including to family members, and these sales did not always follow proper procedures.
In particular, one adviser cut corners to rush through six sales in the last few days of a quarter to avoid his pay being reduced.
Inappropriate requirements to determine if incentives are paid

For example, incentive payments are accrued but will not be paid unless a minimum target is met for each of several different product types, which potentially leads to sales to meet quotas rather than meeting customer needs.
Example of inappropriate requirements

From our thematic work on payment protection insurance (PPI), we saw one firm where sales staff could earn an incentive of up to 100% of their basic salary for sales of loans and PPI. However, no bonus would be paid unless staff sold PPI to at least 50% of all customers. This incentive increased the risk of sales staff mis-selling PPI.
100% variable pay/ commission only

Where firms remunerate staff or advisers purely by variable pay (such as sales commission with no basic salary or a proportion of the revenue earned for the firm). This significantly increases the risk of mis-selling because staff need to make a minimum level of sales each month to be able to meet their financial commitments.
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Inappropriate levels of incentives for sales of additional products

Where sales staff receive an inappropriate level of incentives for cross-selling additional products or selling product add-ons, compared to the incentive for only selling the primary product. There may be a greater opportunity to increase the sales of additional products and add-ons through inappropriate sales conversations than is the case for primary product sales. For example, sales staff may not make it clear to customers that the additional product is optional and a separate product. This type of mis-selling occurred many times in relation to PPI.
Other incentive scheme features that increase the risk of mis-selling Thresholds
Once staff achieve a certain threshold (a minimum level of sales), they get bonuses on each sale above the threshold. The threshold might be 50 sales a month or 100 sales a quarter, for example. There is a risk that staff will want to sell as much as possible after they have met such a threshold and before the end of the month/ quarter, as sales may be worth more than those in the next period. This may be exacerbated where deficits from previous periods need to be met in addition to the current threshold.
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Incentives linked to the level or type of premium, investment amount or length of term
There is the risk that sales staff seeking to maximise income will persuade customers to invest more than is appropriate or take out more insurance cover than they need, or select a product term that is longer than required. This can also include differences in incentive levels where there is a product with a choice between regular or single premiums.
Competitions/ promotions
Campaigns or competitions designed to increase sales volumes, or based on similar measures, where staff can earn additional payments or win prizes. These can be product-specific or simply based on general sales volume. With product-specific promotions, there is a risk of product bias leading to mis-selling.
Incentive scheme features that might reduce the risk of mis-selling

We have identified below examples of scheme features that might help to reduce the risks of mis-selling created by incentive schemes. These features may reduce risk but do not eliminate it, and the remaining risk will still need to be managed.
We also include examples that show these features are not always implemented effectively.
This is not an exhaustive list.
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Emphasising quality
Bonus and incentive schemes need to reward quality or good compliance (selling the right way) with a sufficient deterrent to penalise poor behaviour or mis-selling. Quality measures should reflect the fair treatment of customers and not just customer satisfaction. Deterrents will not work if the rewards for how much is sold are set at a much higher level.
Claw back
Many firms have claw back arrangements where incentive payments already received by sales staff have to be repaid or offset against future incentives if, for example, products are subsequently cancelled. To be really effective, firms need to carefully monitor the levels of claw back and why customers are cancelling sales.
Unexplained high level of claw back

At one firm, a number of sales staff had high levels of claw back in relation to the bonuses earned, for example, one person earned a bonus of 40,000 after claw back totalling 19,000. The firm was unable to satisfy the FSA that it had an effective approach to monitoring the levels of claw back for individual sales staff, in particular the root causes of the underlying reasons for the cancellation of policies.
Capped or decreasing incentives

For example, setting a cap or reducing bonuses when sales volumes approach a certain level, so that sales staff are not tempted to rush lots of sales through before the end of a target period.
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Firms might also choose to limit variable incentive earnings to a lower proportion of basic salary.
Deferral of incentive payments

Firms might award bonuses on a monthly or quarterly basis, but defer part of the payment until the end of the year or longer. Qualification for payment of the deferred element could then be linked to ongoing sales quality results or other measures, like cancelation rates or the number of complaints received.
Rolling target thresholds

Where a firm has a threshold based on a minimum number of sales before incentive payments begin to accrue, this might be based on a rolling average of the sales made. For example, a threshold in a quarterly bonus scheme based on a minimum volume of sales averaged over a 12-month rolling period.
Balanced scorecards
For example, a firm might have an incentive scheme where a bonus is not just based on sales volumes but will include other measures that determine how much bonus is awarded. An example of the measures in a balanced scorecard approach might include; sales results or financial contribution; sales quality results; customer satisfaction; and other key performance indicators (such as cancelation rates, upheld complaints and the mix of products sold). However, a balanced scorecard approach would be less effective if the element relating to sales results or financial contribution was the most dominant factor in how the incentive is calculated.
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The effectiveness will also depend on the importance given to other measures and whether they drive appropriate behaviours, which reflect the fair treatment of customers.
Guidance on managing the risks and governance of incentive schemes

Customers can lose out if firms do not have effective governance arrangements and controls to identify and manage the increased risk of mis-selling from features of their incentive schemes. Effective controls and governance may include: robust risk-based business quality monitoring and adequate controls to mitigate the risk of inappropriate behaviour during sales conversations; MI to identify, and act upon, trends or patterns in individual sales staff activity that could indicate an increased risk of mis-selling as a result of features in the incentive scheme. Using this M I to inform the approach to monitoring sale staff incentive risks;
proper management of sales managers conflicts of interest;

effective oversight of incentive schemes by appropriate senior management, including approval of the incentive schemes; and an effective risk identification and mitigation process, including regular reviews of incentive schemes and the effectiveness of controls, taking into account customers interests. The following section sets out what controls and governance arrangements we expect firms to have in place to identify and mitigate the increased risk to consumers from features within incentive schemes.
Management information (MI)

We expect firms to collect sufficient information to be able to properly
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manage risks with their incentive schemes.

Firms should make sure that they have the right information to help monitor what is being sold and identify individual sales staff who are higher risk. This information may include: which sales staff are achieving high sales volumes and what products they are selling;
patterns of an individuals sales activity around incentive scheme features that indicate increased risk; and
the effect of product promotions or sales campaigns. Firms should then act on the results accordingly, including taking areas of increased risk into account in business quality monitoring.
Business quality monitoring

Where incentive schemes increase the risk of mis-selling, we expect firms to take account of these increased risks in their approach to monitoring and when identifying sales cases for checking.
Well-designed business quality monitoring (including call monitoring for telephone sales), carried out by competent staff, can be an effective control. However, this is unlikely to be sufficient on its own because firms are likely to need a range of controls depending on the incentive scheme in place and the type of product or distribution method. Staff undertaking business quality monitoring should be sufficiently independent of the sales function to avoid inappropriate influence by sales staff or managers.
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Firms should take appropriate action where issues are identified, for example, reviewing individual sales, re-training and undertaking follow-up monitoring to ensure issues are not recurring.
Firms should also check if the issues identified indicate trends of mis-selling.
Governance arrangements
Senior management should ensure that firms identify and assess the specific features of their incentive schemes that might increase the risk of mis-selling and ensure controls are in place to adequately mitigate the increased risks. Senior management should approve incentive schemes with input from risk management and compliance functions into the design and review of incentive policies. Senior management should ensure they consider how incentive scheme features can lead to poor customer outcomes.
There should be frequent and effective reviews of incentive schemes, with sufficient attention given to risks to the fair treatment of customers.
Management information should be collected and used by senior management to assess if risks are crystallising and if controls are effective in mitigating the risks.
Conclusions and next steps

This paper marks the start of a programme of work to reduce the risks to consumers from poorly managed incentive schemes, which will be taken forward by the Financial Conduct Authority (FCA). During the review we found that most firms have incentive schemes that can drive mis-selling, but do not have effective systems and controls to adequately manage the risks.
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Depending on the industry response, we are still open-minded about the need to change or strengthen our rules in this area.
In the meantime, we will continue to take action against firms that do not meet our requirements and we plan to strengthen the way we supervise firms incentive schemes. We will follow up with firms to assess what they have done in response to this work.
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Ensuring the smooth functioning of money markets

Speech by Mr Benot Coeur, Member of the Executive Board of the European Central Bank, at the 17th Global Securities Financing Summit, Luxembourg, 16 January 2013. *** Ladies and Gentlemen, It is a pleasure to speak to you today at this annual Global Securities Financing Summit organised by Clearstream / Deutsche Brse Group. In my remarks today, I will talk about the smooth functioning of money markets and the role of market infrastructures in this respect. The speech is composed of two parts. I will start with some comments on developments in the euro area (interbank) money markets. As you are well aware, the financial crisis and the subsequent sovereign debt crisis have led to a gradual shift from the unsecured to the secured segment of the money markets. Moreover, the crises have exposed the weaknesses of certain financial institutions, causing the European interbank money market to fragment. Fragmentation has occurred between cash-rich and cash-strapped banks and also between different jurisdictions, leading to a renationalisation of money markets.
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Since money markets can be a source and a propagation channel of financial instability, it is important to ensure their proper functioning and mitigate the potential risks they pose.
In the second part of my speech I will consider the role of market infrastructures in ensuring well-functioning money markets. For this part, I will refer back to work conducted by the Basel Committee on Payment and Settlement Systems (CPSS) in 2010 when it examined the extent to which the market infrastructure for repos added to the uncertainty or instability evident in some repo markets. I will take up two issues identified in the related report published by the CPSS and which can be considered relevant for the smooth functioning of euro money markets, i.e. the role of market infrastructures in providing adequate protection against counterparty risk as well as the efficient use of collateral. In so doing, I will also discuss some tensions which have emerged recently relating to a particular development at market infrastructure level, where it is important to quickly address the underlying issues in order to move forward.
1. Secured and unsecured money markets: developments in the euro area

Well-functioning money markets are an essential component of the financial system. When money markets do not function, financial stability and the transmission of monetary policy are at risk, with potentially severe adverse consequences for the real economy. Deep and liquid money markets insure banks against liquidity risk, a risk that arises naturally in banking, where maturity mismatch is the nature of the business. Unsecured money markets exert a useful disciplinary effect on banks.
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Money markets also are the starting point for the redistribution of the liquidity provided by central banks and hence the starting point for the transmission of monetary policy.
For example, the EONIA rate the rate of unsecured overnight lending between some of the largest euro area banks is an important first link in the chain of monetary policy transmission. Ever since the financial turmoil started in August 2007 more than five years ago and then became a severe crisis with the bankruptcy of Lehman Brothers one year later in September 2008, money markets have not been operating smoothly. The outbreak of the financial crisis has been well documented, but it is worthwhile recalling the extent of the shocks, which are still being felt today. Within a few days after the demise of Lehman Brothers on 15 September 2008, the EURIBOR-OIS spread, which had been zero a little over 12 months before, rose to a staggering 186 basis points (in the United States the spread rose to 365 basis points). In addition, cash-rich banks were apparently no longer lending to cash-poor banks. The flow of liquidity in the financial system came to a sudden stop. Prior to the bankruptcy of Lehman Brothers, banks hardly ever deposited funds at the ECB (where they earn the deposit facility rate, which at the time was 1% less than the policy rate). After the Lehman bankruptcy, banks suddenly deposited an aggregate amount of around 200 billion. Deposits increased since the ECB responded to the tensions in the market by accommodating the increase in banks demand for liquidity.
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The extent of banks use of the ECBs deposit facility is a useful indicator of the impairment of the flow of liquidity throughout the banking system, especially when the group of depositing banks is different from the group of borrowing banks.
A further troubling indication of the malfunctioning of money markets right after the Lehman bankruptcy came from cross-border transactions. Before the bankruptcy, cross-border transactions accounted for 60% of all unsecured overnight interbank lending.
Right after the bankruptcy, this proportion dropped to 50%.

A fall in the cross-border flow of liquidity indicates a fragmentation of the euro area money market along national borders and threatens the implementation of a common monetary policy throughout the euro area. The ECB reacted and succeeded in calming markets, including money markets, first by conducting two monetary policy operations with a three-year maturity, and then, most recently, by committing to remove redenomination risk in countries having signed to an ESM assistance programme (the so-called Outright Monetary Transactions, OMTs for short). For example, the share of the cross-border overnight transactions increased gradually from 30% to 50% following the OMT announcement. The rise and fall of the EURIBOR-OIS spread, of the use of the ECBs deposit facility and the proportion of cross-border transactions all indicate that banks are more risk-averse than they were before the financial crisis.
Money markets, especially unsecured ones, suffer from counterparty risk, that is, the fear of not being repaid.
Accordingly, driven by the desire to protect and ensure repayment, transactions in money markets have become both more short-term and secured.
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There is no official data on the overall size of the repo market in the euro area, although surveys are regularly conducted by ICMA and the ECB.
According to the latest I CMA survey, the total value of repo contracts outstanding on the books of the 62 participating institutions was 5.6 trillion in June 2012, down from 6.2 trillion in December 2011. The ECBs Money Market Study of December 2012 with 172 banks participating shows a similar development. The Money Market Study also compares the development of the secured with the unsecured market. And indeed, while the unsecured money market has steadily contracted since 2007, the secured money market has held its ground over the same period. Another, more recent and troubling development in the functioning of the money markets is the on-going investigations into manipulations of key money market reference rates.
The ECB is closely following this development and is supporting the attempts to reform reference rates, given the role they play in the transmission of monetary policy.
In our response to the European Commissions public consultation, while stressing that reference rates should remain private market initiatives, we have called for short-term governance reforms to restore and uphold the credibility of these reference rates, associated with longer-term measures involving changes in the calculation methodology. In the short term, governance reforms and increased supervisory and regulatory scrutiny can help to restore the markets confidence in the integrity of the benchmarks and to ensure their continuous viability. An appropriate balance must be found between a sound production process with adequate controls and safeguards on the one hand, and cost-efficiency for contributing banks on the other hand.
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Also it is important that regulation is uniformly applied and enforced within the EU to avoid risks of further fragmentation in the money markets, and that international coordination is sought.
In the longer term, a broader overhaul can be conceived, involving changes in the calculation methodology and possibly other changes to reflect the structural changes that have taken place in terms of the functioning of the money market since the onset of the crisis, such as the shift towards secured transactions. However, this process should be primarily driven by the market, based on the needs of end-users, while being supported by the public sector. In light of the fundamental importance of money market reference rates, we are closely following the developments taking place as regards the shrinking number of panel members for establishing EURIBOR and EONIA rates. Given the authorities commitment to addressing the shortcomings revealed in the rate-setting process, it is in the interest of markets that banks remain in the panel while the regulatory framework is being amended and behave as responsible market participants, thus preventing potential disruption in the functioning of an important financial market segment. Related to the shift of money market transactions to the secured segment is the use of central counterparties (CCPs). In 2012, CCP repo transactions accounted for 55% of all repo transactions (up from 50% in 2010). In addition to the use of CCPs, triparty repo has become more important. Triparty repo accounted for 1 1% of all repo transactions in 2012 (up from 9% in 2010). I will come back to CCPs and triparty repo later on, but would first like to say some words on collateral and haircuts.
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Collateral of course is intended to hedge default risk, while haircuts are usually seen as being intended to hedge the risk on that collateral.
In times of market stress however, large and sudden margin increases can create self-reinforcing, pro-cyclical spirals of increasing weakness, exacerbate market swings and oblige market dealers to provide collateral to support secured transactions just when it is most costly to do so. Two examples come to mind. First, when the sovereign debt crisis intensified, haircuts on government bonds under stress also went up because the rise in yields reduced their collateral value. For example, when the spread on I talian ten-year government bonds relative to core issuers rose to over 450 basis points in November 2011, the haircut for Italian government bonds was increased by 500 basis points, leading to a posting of intraday margins about 12 times greater than in any other preceding month in 2011. On the day of the increased haircut alone, the spread between Italian and German government bonds rose by 60 basis points. In addition, margin increases generally reduce the amount that a repo seller can borrow, which might increase the sellers probability of default. This can trigger a negative feedback loop: increases in the probability of default might cause repo buyers to increase the haircuts imposed on the seller, which reduces the amount the seller can borrow (when it needs to borrow subsequently), and so on. The ECB/ Eurosystem has been successful in easing market tensions using standard and non-standard tools. However, the underlying structural problems which relate to uncertainty about risk, whether in the form of counterparty, credit, liquidity or redenomination risk, need to be solved.
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When implemented, the Single Supervisory Mechanism will play a key role in comforting confidence in euro area banks and re-establishing cross-border liquidity flows within the region.
Market re-integration has now started. It will succeed only if it is supported by continued efforts by governments to bridge fiscal and competitiveness imbalances. We can consider how the further development of market infrastructures can be an important part of this process.
2. The role of market infrastructures

In the second part of my remarks today, I would like to consider the role of market infrastructures. Market infrastructures have proven very resilient to the crisis. Resilient market infrastructures also play an important role in helping to address some of the issues that have been identified in the money markets. In this regard we can usefully build on the CPSS analysis of areas for further development and for enhancing market infrastructures in repo markets. The CPSS has identified seven issues directly or indirectly related to repo market infrastructure that may affect the resilience of repo markets. I would like to pick up on two of these seven issues now in the context of euro area money markets. The first issue concerns effective protection against counterparty credit risk, which I believe can be addressed to some extent by the use of CCPs, while the second issue relates to the inefficient use of (high-quality) collateral due to constraints within repo clearing and
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settlement arrangements, which is being addressed via collateral optimisation initiatives.
a) Role of central counterparties (CCPs)

CCPs play a major role in reducing counterparty risk, thereby mitigating the potential risks associated with the drying-up of funding sources. First, as independent clearing agents, CCPs are well positioned to offer effective protection against counterparty risk through the application of consistent margin requirements to a wide range of counterparties and through multilateral netting and risk sharing. Second, CCPs also provide enhanced transparency for the markets they serve, which in turn facilitates appropriate risk management and may also help to reduce excessive leverage. Third, as a result of multilateral netting, CCPs may also free up collateral. Overall, provided that it is well-managed and in line with applicable regulatory and oversight requirements, a CCP can be expected to guarantee trade execution under a wide range of market conditions, including extreme or exceptional scenarios. This supports trading also at times of distress when uncertainty and risk aversion may disrupt activity and exacerbate volatility in markets. Given the benefits of central clearing for market resilience and financial stability more broadly, the ECB welcomes the overall increase in the share of transactions that are cleared through CCPs. It also supports the execution of repo transactions via CCPs. In Europe, market incentives seem sufficiently strong to favour use of CCPs, and we would not see a need at the current juncture to advocate regulatory action to impose central clearing of repos, as has been the case for OTC derivative transactions.
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At the same time, an expanded use of CCPs should be accompanied by effective supervision and oversight, which always needs to be kept up to date and in line with new market developments.
The global Principles for Financial Market I nfrastructures (PFMIs), developed jointly by CPSS and the I nternational Organisation of Securities Commissions (IOSCO) and published last April, are a key pillar in this regard. Major jurisdictions around the world are now updating their supervisory and oversight requirements for CCPs in response to the new PFMIs, thereby leading to an even more robust set-up for CCPs. Another major strand of work currently underway at both international and EU level concerns the development of recovery and resolution regimes for CCPs. In the EU, the European Commission has recently consulted the public on a possible framework for the recovery and resolution of financial institutions other than banks, covering CCPs and other market infrastructures. We trust that the European framework will be closely aligned with the respective global work of the CPSS and I OSCO. Besides CCPs, another key infrastructure to be considered in relation to the repo market is the trade repository. Trade repositories provide a comprehensive overview of the transactions in the markets they serve, which contributes to better risk management, public supervision and oversight as well as market discipline.
The ECB actively supports the current work to develop such a central database for the EU repo market.
It could be established in a joint effort by public authorities and the financial industry.
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b) Collateral optimization
Let me now turn to the second point on collateral optimisation. As recognised in the CPSS report, the efficient and flexible use of collateral facilitates market participants collateral management and can contribute to the development of liquidity and smoothly functioning repo markets. This was considered to hold true for repo markets in normal times as well as allowing an enhancement of the resilience of repo markets in times of stress. The need for efficient and flexible use of collateral facilities has even become greater in the past couple of years, taking into account the generally increasing demands for collateral assets coming from various quarters. Efforts are therefore being made to seek out creative and innovative ways to make better use of existing collateral in terms of making these assets available, when and where they are needed. Both the Eurosystem and the industry have taken a number of initiatives in this respect. At todays conference, you will probably hear more about the many innovative solutions that are coming from the industry in this respect, so I will limit myself to some key initiatives in which the ECB/ Eurosystem is directly involved, although naturally cooperating closely with the industry. The first initiative in this respect of course is TARGET2 Securities T2S.
The main objective of establishing this single European infrastructure for securities settlement is to reduce risk and increase efficiencies in the posttrade environment, especially as far as cross-border settlement is concerned.
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This greatly enhanced process for transferring collateral across national borders in Europe will in itself be a huge benefit to market participants both to cover collateralised money market transactions as well as collateralised credit operations with central banks.
Moreover, T2S incorporates several features that aim to help banks optimise their collateral management. Once T2S goes live for example, banks will no longer need to hold multiple buffers of collateral when settling in several European countries and can instead use the state-of-the-art T2S auto-collateralisation and self-collateralisation features, also on a cross-border basis. The second initiative that I want to mention is the implementation of cross-border triparty collateral management services within the Eurosystem collateral framework. Triparty services, as you know, involve a triparty agent acting as a facilitator between the two parties to the repo. Triparty services are already used within the current operational framework of the Eurosystem, although only on a domestic basis and limited to a small number of euro area countries (Germany, Luxembourg, France and I taly). In 2014 however, the possibility to collateralise Eurosystem credit operations by using triparty services on a cross-border basis will be introduced, thereby allowing for greater efficiencies in collateral mobilisation and re-use of collateral received in triparty repo with the respective central banks of the Eurosystem. Another initiative with which the ECB is associated relates to triparty settlement interoperability. When we refer to this, we should keep in mind that an important feature of the European repo market set-up is the (increasing) integration between the repo clearing, settlement and collateral management layers.
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While there is an increasing integration across these layers however, there remains in some cases a certain fragmentation that limits traders opportunities based on the location of the collateral.
Working in close cooperation with the European Repo Council (ERC), the international central securities depositories (ICSDs) have started to develop a triparty settlement interoperability model to support settlement of general collateral trading cleared by CCPs. With the interoperability between the two I CSDs collateral management systems, market participants would avoid the fragmentation of their liquidity pools. The ECB is fully behind this market-led triparty interoperability initiative because of its collateral pooling benefits and efficiencies. Moreover, it reduces the costs for triparty repos related to collateral management, settlement and legal charges, and allows trading to be executed regardless of the location of the collateral. Non-discriminatory, risk-based access to and by market infrastructures is an important element of the new international regulatory framework. With market participants increasingly moving to central clearing, the business case for triparty interoperability is growing. Furthermore, the new CPSS-IOSCO principles for financial market infrastructures were specifically strengthened to facilitate access and interaction between such infrastructures. Some of the key parties involved in this triparty settlement interoperability initiative have started to show signs of retreating in past months. While the ECB understands the complexity of establishing a triparty interoperability model and the substantial efforts and in particular the investment costs required to make it work, it would like to strongly urge all parties to continue to work together.
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Interoperability will bring important benefits by allowing a more efficient use of collateral by bringing together separate pools of liquidity.
The ECB remains ready to continue to support the triparty settlement interoperability initiative and to help bring the project forward.
Concluding remarks
Let me conclude. The resilience and proper functioning of market infrastructures is of paramount importance to ensure well-functioning money markets. Public authorities and central banks have both an interest and an obligation to ensure that market infrastructures have a high level of security and operational performance. The market infrastructures in the euro area are performing well in this respect and, as we have heard, there are a number of initiatives under way to further enhance this (in particular as regards the collateralisation processes). I would, however, urge industry representatives to further pursue the triparty interoperability project, and seek to find ways to address the issues which have recently appeared. In particular, where these issues are not going to be addressed by T2S, I would encourage the industry to find a solution now. It is of great importance that collateral can flow freely, regardless of its location.
I am confident that further improvements will be made. Thank you.
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Michel BARNI ER
The European banking union, a precondition to financial stability and a historical step forward for European integration
Ladies and Gentlemen, First of all, I would like to thank the European Corporate Governance Institute, and Chairman Jrgen H OLMQUIST, for inviting me. Let me also thank: the National Bank of Belgium, the host of this conference; as well as the US Securities and Exchange Commission and Columbia Law School. Ladies and Gentlemen, As you know, the Council of European Finance Ministers reached a historic agreement last week. Member States have agreed to hand over the key supervisory tasks over their banks to the European Central Bank. This is the first step towards the Banking Union. The ECB will be in a position to detect risks to the viability of banks. And require banks to take the necessary actions. It will be competent to grant and revoke licences for credit institutions. It will ensure compliance with capital requirements.
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This Single Supervisory Mechanism (SSM) will be a great asset for financial stability in Europe.
Before I will say a few words on the modalities of the SSM and the next steps of the Banking Union, I would like to explain the key rationale for the SSM.
I The Single Supervisory Mechanism should bring three major benefits to Europe 1.First, it is a precondition to put an end to the negative feedback loop between banks and sovereigns.
Between 2008 and 2011, EU taxpayers granted banks 4,5 trillion in loans and guarantees. This has had very concrete consequences. In some countries it has resulted in soaring rates at which countries can finance themselves on the markets and a severe drop in market confidence. Therefore, we need to move from national backstops to a European backstop. This is the purpose of the European Stability Mechanism. But this new fund will only be able to recapitalise banks directly once all European banks are properly supervised. This is why an agreement on the SSM was so deeply needed.
2.Second, we need the SSM to reduce the fragmentation of the banking system.
The current crisis has led to a re-nationalisation of bank activities. With less cross-border funding and many lost opportunities for citizens and businesses.
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The differentiated perception of risks led to disparity of spreads on sovereign bonds as well as in the interbank market.
We all know the consequences: similar companies in different parts of Europe operating on the same markets may be subject to significantly different costs of borrowing. The SSM will restore confidence in the European banking sector. I t is likely to have a positive impact on the spreads and consolidate the Single Market.
3. Third, we need the SSM to complete the monetary union.

Monetary policy is an important tool to deal with economic shocks. But it depends to a large extent on private banks which transmit monetary impulses to the real economy. If we want an efficiently functioning monetary policy, we need a single European banking system. And it starts with a single European supervisory system. Therefore the SSM is not just a way to restore confidence and deal with the crisis in the short-term. It is also a way to consolidate our economy in the longer-term. For all these reasons, the last week's agreement is a major milestone in the history of European integration. Let me now move to the content of the SSM agreement.
I I How will the new Single Supervisory Mechanism work?

There are five important points which deserve attention.
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1. First, the scope of the new supervision

Some Member States wanted the new supervision to be restricted to "systemically important" banks. But we know that small or medium-size banks can endanger the entire financial system. The failures of banks like Northern Rock, Dexia or Bankia are clear reminders of that. Moreover, we cannot have two supervisory mechanisms for banks operating in the same market. It would be inherently unstable. Therefore I am glad that the SSM will cover all 6,000 banks in the Euro area. The ECB will set the rules and be able to assume directly all relevant supervisory tasks whenever it considers it appropriate. For each one of these 6,000 banks. However, it seems logical that the ECB focuses its direct supervision on the banks which can generate significant prudential risks through their size or risk profile. Member States decided last week to clarify the division of labour between the ECB and national authorities. Within a unified supervisory system, the ECB will have direct responsibility for around 150 banks with assets of more than 30 billion Euros, or representing more than 20 % of a Member States national output. Other banks will still be looked after primarily by national supervisors within the same unified supervisory system. The ECB will have the power to step in directly at any moment, if need be. Besides, national supervisors will also remain in charge of tasks like consumer protection, money laundering and branches of third country banks.
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2.Second, the governance of the new mechanism

Bank supervision is a new task for the ECB. We had to make sure that this task is clearly separated from the monetary policy functions of the ECB. That is why we proposed to create within the ECB a Supervisory Board alongside the Governing Council. In addition, to ensure the democratic accountability of the new system the ECB will report to the European Parliament on its role as a Single Supervisor.
3.Third, the participation of non-Euro area Member States in the SSM

The SSM is open to all Member States, also those outside the Euro area. The final decision-making body of the ECB is the Governing Council, which includes only representatives from Euro area Member States. Therefore, it was important to allow non-Euro area Member States to participate in the SSM on an equal footing. The creation within the ECB of the Supervisory Board alongside the Governing Council solves this issue, with a mediation panel to resolve differences.
4.Fourth, the case of non-Euro area Member States which do not wish to participate in the new mechanism
Some countries have expressed their wish not to join the SSM for now. I n this context, the UK, Sweden and the Czech Republic have expressed concerns about the ECB's new powers.
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In particular, they questioned the ECB's voting rights within the European Banking Authority (EBA).
I understand these concerns. And last week's agreement does preserve the influence of non-Eurozone Member States within EBA. According to the new voting modalities, any EBA decisions will have to be approved by a majority of countries outside the Banking Union. EBA will have the task of fostering a single rulebook for all 27 countries of the single market. I t will also work on enhancing convergence of supervisory practices via a single supervisory handbook.
5. Finally, the timing

Let me reiterate one point: an effective SSM is a prerequisite if we want to open the way for the European Stability Mechanism to directly recapitalise banks. And to break the vicious circle between banks and sovereigns. Therefore we had no time to lose. That said, the Member States found last week that a phasing-in approach was necessary. That is why they decided that the new mechanism will become fully operational in March 2014. And before that happens, the ECB will be able to take over supervision of ailing banks, at the request of the European Stability Mechanism.
I I I Finally, let me conclude by adding a few words on next steps.

The SSM is a great first step towards a proper Banking Union. But the Banking Union does not stop with the SSM.
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1.First, the Banking Union will build on a single rulebook.

The single rulebook will be applicable to all 27 Member States. It will include rules on key issues such as: Capital requirements: Our "CRD 4" proposal is crucial for financial stability. I t is currently being discussed in the so called "trilogues" and we hope to reach an agreement very soon. And our banks are ready for it as demonstrated by stress tests conducted by the European Banking Authority. But our major partners should also follow. Starting with the US. As the two largest financial markets in the world, we both have a duty to set the example and show leadership. We need to ensure a coordinated approach for the implementation of these important rules. Deposit guarantee schemes are another important aspect of the single rulebook. We need to ensure that each Member State has a fully funded scheme in place.
We also need rules on Bank resolution: Our proposal for a common European resolution framework provides that shareholders and creditors should bear the cost of resolution before any external funding is granted. And that private sector solutions should be found instead of using taxpayers' money.
Finally, the single rulebook could include rules on the structure of the banking sector. The Liikanen report has proposed solutions to separate deposit taking from more risky activities. Our reflection in this field is still on-going.
2.Secondly - the Banking Union will also need a single resolution authority.
The SSM will help us prevent crises. But we also need to anticipate the cases where a crisis would nonetheless occur.
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We of course need to ensure that each Member State sets up national funds for resolution and deposit guarantees.
But a fully-fledged Banking Union would require going even further and creating a single resolution authority. In case of cross-border failures, it would be more efficient than a network of national resolution authorities. This is in particular needed so that we can ensure speedy and credible reactions to addressing banking crises. Ladies and Gentlemen,
With last week's agreement, EU countries have fulfilled the commitment they made in June.
The SSM now has to be discussed in the European Parliament. The rapporteurs Sven GIEGOLD and Marianne TH YSSEN have already done a great job. I am confident that the final agreement will be reached soon. This would be good news for financial stability, for public finances in the Eurozone and for the world economy, which would get a boost from a return of full confidence in the Eurozone. I am also confident that, in five years' time, the SSM will be considered as the key step to putting our financial house in order. And a milestone in a new phase of European integration, which should lead us to a genuine financial, budgetary, economic and political union. Thank you for your attention.
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Jos Manuel Duro Barroso, President of the European Commission

Statement by President Barroso on the Cyprus Presidency of the Council European Parliament plenary session/ Strasbourg Mr. President, President Christofias, Honourable members, I want to start by thanking and also congratulating President Christofias, and through him all the people and authorities involved in the running of the Cyprus Presidency. I want to pay tribute today to Cyprus that, as one of our smallest member states, with its particular geographical location and itself facing important political and economic challenges these days, has proved its pro European commitment, professionalism and efficiency during its Council Presidency. Together we have reached important results during this period, and I am convinced that Cyprus will continue to make an important contribution to our Union beyond its term of Presidency . President Christofias, thank you very much for your kind words regarding the role the Commission and myself have played in contributing to your very successful Presidency. Honourable members, Our debate today gives us the opportunity to take stock of what has been achieved so far, and what is still on the table. During six months not all problems can be solved. N ot all files can be closed. N evertheless, a lot of important groundwork has been done in 2012 which, in that sense, was a crucial year: Crisis-hit Eurozone countries have made important progress in bringing their budgets in order and in tackling deep-rooted structural problems.
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They have done so with determination and resolve. At every phase, they have been driven forward, advised and assisted by the European institutions. This process needs to continue;
The ever-sceptical financial markets have taken note of these efforts and acknowledged them; Private investors are finding their way back to Eurozone countries in need; Competitiveness, notably of the least competitive member states, is improving, leading to the gradual rebalancing the Eurozone so far has lacked; Overall public finances are improving, slowly but surely. We have safeguarded the integrity of the Eurozone. We have stopped the existential threat hanging over us earlier. Of course, we must avoid any kind of complacency. As long as unemployment remains very high, the crisis is certainly not over yet. And I've been extremely clear saying that we still have a crisis in front of us, namely a social crisis, very deep in some of our Members States. But we have turned a page in the crisis. No more, no less. And we are now ready to write the next chapter of the recovery. Mr President, Honourable members, This next chapter will be about building confidence by further strengthening our economic governance, by completing the banking union and by exploiting every means possible to create growth sustainable growth - and jobs and to address the most pressing social problems in our countries.
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The Commission will continue to take the lead in this. The line the Commission has been defending, and will continue to defend, is of course about putting our public finances in order.
Because without that there is no confidence, without confidence there is no investment, without investment there is no growth. But this is just part of the answer. We have at the same time highlighted how important it is to have reforms for competitiveness and also investment, because investment is indispensable for growth. I wish all governments of Europe could share the same priority the Commission is giving to the need for investment at European level. We will continue to firmly defend the European interest. And we will continue to work hand in hand with this Parliament. The European Union and its member states have to continue on the path of reform. We have yet to prove the sustainability of this process. Looking at the past year I feel encouraged that we will be successful. In fact, this is the main lesson I draw from what happened and from what didn't happen over the last few months: those speculating against the Euro have underestimated the political capital that is invested in it. Let us continue to prove them wrong, and beware not to disinvest at such a crucial moment, just when our investment is starting - and I underline: starting to pay off. A lot still has to be done. This is also why it is crucial to complete our work at European level. Despite the important efforts deployed by the Cyprus Presidency and by many of you in the European Parliament, we have not been able to finalise the Two Pack. And the Two Pack is essential to make progress in the economy governance within the community method.
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After over a year of negotiations, with thirteen trilogue meetings, I believe it's time to conclude and send, once again, the signal that Europe is capable of decisive action. This is the first opportunity we have to keep the reform momentum going.
Likewise, we have not had the chance to break the deadlock in the negotiations on the multiannual financial framework, something both Parliament and the Commission would have welcomed. The Cyprus Presidency made the first attempt to reach a consensus. However, the conditions were not yet met to reach agreement. Clearly, these have been the most difficult and complex budget negotiations ever. Now, negotiations have reached a point where, I must say, further cuts risk weakening the European Union as such, while our common goal should be to strengthen our Union. The MFF is a fundamental European tool for growth, for investment, for solidarity - concrete solidarity. The Commission will continue to work towards an agreement between member states and also between our institutions. We have highlighted constantly that the approval of this Parliament is indispensable. And we need that agreement. We have seen, in the extremely difficult negotiations on the European Union's budget for 2013 and the amending budget for 2012, where, by the way, the Cyprus presidency made a tremendous and at the end successful effort - negative for us would be, if we could not have the predictability that a multiannual budget can give for investment in Europe. And I will also keep fighting for the truly European parts of the package, notably those aimed at growth and jobs. But as I said, we are not yet there. Further efforts will be needed to bring positions together.
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This will be difficult but certainly not impossible.

That was also clear from the debate on the road towards a European banking union. The centrepiece of the Cypriot Presidency was to make progress on the Commission's proposals for a Single Supervisory Mechanism. And in this, we have achieved a significant breakthrough, both on the Council and on the Parliament side. Parliament has worked on this very efficiently and the Thyssen and Giegold reports are constructive and supportive, and in very many points rather similar to the approach taken by the Council. I hope making the final step for formal adoption is a matter of weeks, not months. Next should be a swift conclusion on the pending proposals on bank capital rules, bank resolution and deposit guarantees. Following the adoption of the SSM the Commission will make a formal legislative proposal for a single resolution mechanism in the banking sector before the summer. I consider this a matter of utmost political priority. This proposal will be by no means less important than the SSM, and neither will it be less complex to frame in legal, technical and political terms. At the same time, we have not neglected to prepare the ground for the major debate needed before the European elections: in presenting our Blueprint on a Deep and Genuine EMU, the Commission stuck its neck out. That is our role. It's the only way for Europe to keep its focus on the long road still ahead, to provide coherence and also to structure to our day-to-day efforts. The focus that we had to give to the financial sector, the fiscal situation and to questions of economic governance does not mean Europe is losing
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sight of the real economy. On the contrary, real economy is and should be our first priority.
And in this sense the contribution, in the last six months, made by the Cyprus presidency, needs to be highlighted here: After some 30 years of debate, and based on Commission proposals, an agreement was finally reached between member states - even if not all on the Single European Patent; We have concluded negotiations on a Free Trade Agreement with Singapore, and you have given the final consent to trade deals with Central America, and with Colombia and Peru; and we have agreed to launch negotiations for a Free Trade Agreement with Japan. We took stock of the implementation of the Digital Agenda for Europe, halfway through its 5-year strategy, and found that it had achieved many of its targets and is on track to meet most of the others; The Commission presented its proposal for a Council Recommendation on Youth Guarantees. First discussions have taken place in the Council. It is key that we prioritise for job and training opportunities for those hit hardest by the crisis. This is a matter where Member States can give a concrete demonstration that they are committed to growth and to tackle the very serious problem of unemployment, namely youth unemployment; A very good contribution of the Cyprus Presidency was the Limassol declaration, giving a new impetus to our integrated maritime policy. This is a matter very close to my heart. I was happy to be in Cyprus for that occasion and I believe this can be a real contribution to boost growth; Finally, and I could of course quote other matters, but among the most important, progress was also made on the Asylum Package and it has brought us very close to concluding the discussions on the Common European Asylum System and with your groundwork, important steps have been achieved in negotiating with this House on the Schengen
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Governance package, preparing the ground for an agreement in early 2013.

Mr President, Honourable members, I truly believe that over the last few months, while many important and difficult challenges remain, notably the social ones, we have regained trust, we have reaffirmed composure and recovered momentum.
The Cyprus Presidency can therefore look back with satisfaction at a number of important achievements in economically and socially difficult times.
During these last six months, Cyprus has shown its European commitment in holding its first Council rotating Presidency. It will be our job over the months to come, through serious efforts, to show that Europe works and delivers - each of us with his or her own role to play, but never forgetting our collective responsibility as a Union. I thank you for your attention.
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The European Banking Union

Towards a banking union In June 2012, EU leaders agreed to deepen economic and monetary union as one of the remedies of the current crisis.
At that meeting (European Council of 28/ 29 June), the leaders discussed the report entitled 'Towards a Genuine Economic and Monetary Union', prepared by the President of the European Council in close collaboration with the President of the European Commission, the Chair of the Eurogroup and the President of the European Central Bank.
This report set out the main building blocks towards deeper economic and monetary integration, including banking union.
1. What do we want to achieve with banking union? 1.1 What is the banking union that we wish to implement?
When the financial crisis spread to Europe in 2008, we had 27 different banking regulatory systems in place, all based on national rules and national rescue measures. Some form of European coordination existed but it was related to exchanges of information and rather informal cooperation procedures. This was not sufficient to respond to the financial sector crisis and its contagion to sovereigns. A fully-fledged banking union will be key to supporting economic and monetary integration.
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Pooled monetary responsibilities have indeed spurred closer economic and financial integration, and increased the possibility of cross-border effects in the event of bank crises.
Common and more integrated banking supervision for the Euro area is one important pillar to make sure that supervision abides by the highest standards. This will build the necessary trust between Member States which is a condition for using common backstops, notably the direct recapitalization by the ESM of banks. Once common supervision for the Euro area is in place, the Commission's intention is to build on existing proposals for deposit guarantee schemes and bank recovery and resolution, moving towards a more integrated approach also in these areas.
2. Why do we want to achieve this banking union?

a.To break the link between Member States and their banks: Between October 2008 and October 2011, European countries have mobilised 4.5 trillion in public support and guarantees to their banks. This is not acceptable. With its proposal on capital requirements for banks ("CRD I V"), the Commission wants to ensure that the capital of banking institutions is sufficient both in quantity and in quality to face future shocks. The future European Stability Mechanism (ESM) could have the possibility to recapitalise banks directly once a single supervisory mechanism is established for banks in the euro area. This will contribute to breaking the vicious circle between banks and sovereigns as the ESM loans would not add to the debt burden of countries facing intense market pressure.
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b.To restore the credibility of the financial sector: The proposals already tabled by the European Commission to improve regulation of the financial system represent a solid basis to go further in the harmonisation of the rules, which will be made easier in the framework of a banking union.
The European single supervisory system for banks will enable a fully rigorous and independent supervision of our banking sector. Giving to the ECB the ultimate responsibility for supervision of banks in the euro area will contribute to increasing confidence between the banks and in this way increase financial stability in the euro area. c.To preserve tax payers' money: I n early June, there were proposed EU rules for bank recovery and resolution. To make sure that supervisory authorities have all the tools they need to deal with bank failures without taxpayers' money. This also aims to protect taxpayers' money and deposits. d.To make sure that banks serve society and the real economy: With our financial regulation agenda, we are improving financial markets' effectiveness, integrity and transparency in order to make sure that the funds available finance the economy.
2. EU banking union: what have we done so far?

For each of the four pillars of the banking union (i.e. single rulebook; supervision; deposit guarantees; and bank resolution), the Commission has already taken action providing a solid basis for developing them further.
2.1 Measures to allow for more integrated banking supervision

Three European supervisory authorities (ESAs) started work on 1 January 2011 to provide a supervisory framework:
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1.The European Banking Authority (EBA) which deals with banking supervision, including the supervision of the recapitalisation of banks, as well as the coordination and dispute settlement of national supervisors.
2.The European Securities and Markets Authority (ESMA) which deals with the supervision of capital markets. 3..c. The European Insurance and Occupational Pensions Authority (EIOPA), which deals with insurance supervision. The 27 national supervisors are represented in all three supervisory authorities. Their role is to contribute to the development of a single rulebook for financial regulation in Europe, solve cross-border problems, prevent the build-up of risks, and help restore confidence. In addition, the European Systemic Risk Board (ESRB) has been tasked with the macro-prudential oversight of the financial system within the Union. This new financial supervision framework has been in place since November 2010.
2.2 Towards a single rule book for the banking sector

The European Council of June 2009 unanimously recommended establishing a single rulebook applicable to all the financial institutions in the single market. With its proposal on capital requirements for banks ("CRD I V"), the Commission launched the process of implementing for the European Union the new global standards on bank capital agreed at G20 level (most commonly known as the Basel I I I agreement). It is recalled that banking institutions entered the crisis with capital that was insufficient both in quantity and in quality, leading to unprecedented support from national authorities.
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Europe is playing a leading role on this matter, applying these rules to more than 8,000 banks, representing 53% of global assets.
The Commission proposals are currently being discussed by the Council and the European Parliament and the Commission is determined that an agreement be reached shortly. With this legislation the Commission also wants to set up a governance framework giving bank supervisors new powers to monitor banks more closely and take action through possible sanctions when they spot risks, for example to reduce credit when it looks like it is growing into a bubble. European supervisors would intervene in some cases, for example when national supervisors disagree in cross-border situations. Further, the completion of the financial regulation agenda forms integral part of the banking union.
2.3 Action taken to offer more protection to bank depositors

Thanks to EU legislation, bank deposits in any Member State are already guaranteed up to 100,000 per depositor if a bank fails. From a financial stability perspective, this guarantee prevents depositors from making panic withdrawals from their banks, thereby preventing severe economic consequences. In July 2010, the Commission proposed to go further, with a harmonisation and simplification of protected deposits, faster pay-outs and improved financing of schemes, notably through ex-ante funding of deposit guarantee schemes and a mandatory mutual borrowing facility between the national schemes. The idea behind this is that if a national deposit guarantee scheme finds itself depleted, it can borrow from another national fund. This would be the first step towards a pan-EU deposit guarantee scheme.
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In managing a number of bank crises over recent years, national authorities have often created a new structure out of the failing bank and transferred some critical functions of the bank to this structure, such as safeguarding deposits.
These resolution mechanisms make sure that depositors never lose access to their savings (for example in the case of N orthern Rock, the bank was split into a good bank, which contained the deposits and good mortgage loans, and a so-called "bad bank" winding down the impaired loans).
3. Banking union and bank recapitalisation

The EU has already taken action as regards the recapitalisation of banks in several ways. For instance, extensive financial sector conditionality has been included in the policy requirements addressed to Member States that have received international financial assistance. With respect to the banking sector, the required policy measures consist, on the one hand, of the orderly winding-down of non-viable institutions and, on the other hand, of the restructuring of viable banks.
Higher capital requirements, recapitalisations of banks, stress tests, deleveraging targets as well as enhancing the regulatory and supervisory frameworks have also been part of the policy initiatives.
While not specific to programme countries, these stabilisation measures are most easily implemented in the context of international financial assistance.
The European Financial Stability Facility (EFSF) can provide loans to non-programme euro area Member States for the specific purpose of recapitalising financial institutions, with the appropriate conditionality, institution-specific as well as horizontal, including structural reform of the domestic financial sector.
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A single supervisory mechanism

On 12 September 2012 the European Commission proposed a single supervisory mechanism (SSM) for banks led by the European Central Bank (ECB) in order to strengthen the Economic and Monetary Union. The set of proposals is a first step towards an integrated banking union which includes further components such as a single rulebook, common deposit protection and a single bank resolution mechanisms. The proposals concern: 1.A regulation giving strong powers for the supervision of all banks in the euro area to the ECB and national supervisory authorities i.e. the creation of a single supervisory mechanism; 2.A regulation with limited and specific changes to the regulation setting up the European Banking Authority (EBA) to ensure a balance in its decision making structures between the euro area and non-euro area Member States;
3.A communication outlining the Commission's overall vision for rolling out the banking union, covering the single rulebook, common deposit protection and a single bank resolution mechanism.
The European Commission proposes new ECB powers for banking supervision as part of a banking union
Proposals for a single supervisory mechanism (SSM) for banks in the euro area are an important step in strengthening the Economic and Monetary Union (EMU). In the new single mechanism, ultimate responsibility for specific supervisory tasks related to the financial stability of all Euro area banks will lie with the European Central Bank (ECB).
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National supervisors will continue to play an important role in day-to-day supervision and in preparing and implementing ECB decisions.
The Commission is also proposing today that the European Banking Authority (EBA) develop a Single Supervisory Handbook to preserve the integrity of the single market and ensure coherence in banking supervision for all 27 EU countries.
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Certified Risk and Compliance Management Professional (CRCMP) distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:
A. The official presentations we use in our instructor-led classes (3285 slides)

The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_ Training.htm
B. Up to 3 Online Exams
You have to pass one exam.
If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certif ication_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_ 1.pdf
C. Personalized Certificate printed in full color

Processing, printing, packing and posting to your office or home.
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D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides)
The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements. You will find more information at: www.risk-compliance-association.com/Distance_Learning_and_Cert ification.htm

Risk Management Presentation January 28 2013

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Page |1

International Association of Risk and Compliance Professionals (IARCP)

Thus 2012 is an annus mirabilis.

Now the professors argumentation was:

I enjoyed what he remembered:

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Dr Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank

Challenges for financial stability policy and academic aspects

Preserving the safety and security of Malaysias banking system

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Opening Remarks at Investor Advisory Committee Meeting

Tougher credit rating rules confirmed by European Parliament's vote

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Risk to Customers from Financial Incentives

Ensuring the smooth functioning of money markets

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Understanding the European Banking Union

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

The Problem of TBTF

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

The answer is simple.

The Dallas Feds Proposal: A Reasonable About-Turn

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Defining the Landscape

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Correcting for the Drawbacks of DoddFrank

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Where the Government Safety Net Would Begin and End

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Reinforced by a New Covenant

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Why Protect the 0.2 Percent?

Making a Time of Awful Moment a Time of Promise

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Dr Andreas Dombret Member of the Executive Board of the Deutsche Bundesbank

Challenges for financial stability policy and academic aspects

2012: An annus horribilis or an annus mirabilis or neither?

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Well, some may say, so it is in 2012.

Links between the Financial System and the Real Economy

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

The Limits of State Interventions

Moreover, not much is known about possible time lags.

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Newtons annus mirabilis

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Preserving the safety and security of Malaysias banking system

Maintaining confidence in online banking services

The need for constant vigilance & cooperation

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Specific responses to questions raised:

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com