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International Association of Risk and Compliance Professionals (IARCP)
1200 G Street N W 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
George Lekatis President of the IARCP

Dear Member, There are some interesting job openings and descriptions:

Vice President - Bank Regulatory Policy / Basel Manhattan, N Y, Salary $120,000-$180,000 / yr., Full -Time ―This individual will assist in interpreting and developing firm policy for U.S. and international banking regulations related to capital and and other regulatory reporting matters. They are seeking individuals with prior Basel I I and I I I and bank capital regulations experience.‖ Finance and Risk Solution Architect London, Salary £80,000 - £115,000 + Bonus ―We are currently looking for profiles with a consulting or business stream background in the following areas for a new business practice in the finance sector: we are looking for individuals with the following background or experience: Risk Management in Capital or Liquidity requirements, Financial Industry Regulatory Reporting such as FSA, Dodd Frank, Basel I I / I I I & I ndustry Best Practice, reporting strategies & Global Transactions. Individuals will have a Business/ Technical Architectural Background ideally with some Business Analysis & Consulting background.‖

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Business Analyst with Basel I II Job ―We are actively seeking a contractor to lead a team in documentation, design, and traceability of requirements in support of Basel I I I implementation. This includes defining solutions to business/ systems problems and ensuring the integrity of delivery through customer acceptance and final disposition of solution for the Basel I I I project. This is a minimum 6-8 month project with strong possibility of extension or conversion to full time‖ employment.‖
Very interesting job descriptions… … and very interesting salary. The same time, banks try hard to understand what to do with the new Basel I I I requirements (N umber 1 of our list) and to find more investors (Tier 1 capital).

Welcome to the Top 10 list.

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BIS, Results of the Basel I I I monitoring exercise as of 31 December 2011 This report presents the results of the Basel Committee's Basel I I I monitoring exercise. The study is based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel I I I standards for financial markets; the first results of the exercise based on June 2011 data had been published in April 2012.

Financial Services Agency, The Japanese Government Recent Trend of Financial and Capital Markets, Regulatory and Supervisory Challenges Ryutaro Hatanaka

Investor Protection through Audit Oversight Lewis H. Ferguson, Board Member California State University 1 1th Annual SEC Financial Reporting Conference, Irvine, CA

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Annual public hearing of the chairpersons of the three European Supervisory Authorities (EBA, ESMA and E IOPA). Initial statement by Andrea Enria Chairperson of the EBA, in front of the Economic and Monetary affairs committee of the European Parliament

Challenges to the single monetary policy and the European Central Bank‘s response Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank, at the I nstitut d‘études politiques, Paris, 20 September 2012.

EIOPA and FINM A Sign a Memorandum of Understanding The European I nsurance and Occupational Pensions Authority (EIOPA) and the Swiss Financial Market Supervisory Authority (FINMA) have signed a Memorandum of Understanding (MoU) in Bern. The main objective of the MoU is to ensure optimal cooperation in supervision, in particular for insurance groups with international activities in the European economic area (EEA) and Switzerland.

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European Systemic Risk Board ESRB Risk Dashboard

Simon Kwan, vice president at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook.

Maximum Employment and Monetary Policy" Jeffrey M. Lacker, President Federal Reserve Bank of Richmond Money Marketeers of New York University, Down Town Association, New York City, N.Y.

Basel iii in Singapore Response to the feedback received

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NUMBER 1

BIS, Results of the Basel I I I monitoring exercise as of 31 December 2011 Important parts
This report presents the results of the Basel Committee's Basel I I I monitoring exercise.

The study is based on rigorous reporting processes set up by the Committee to periodically review the implications of the Basel I I I standards for financial markets; the first results of the exercise based on June 2011 data had been published in April 2012.
A total of 209 banks participated in the study, including 102 Group 1 banks (ie those that have Tier 1 capital in excess of €3 billion and are internationally active) and 107 Group 2 banks (ie all other banks).

While the Basel I I I framework sets out transitional arrangements to implement the new standards, the monitoring exercise results assume full implementation of the final Basel I I I package based on data as of 31 December 2011 (ie they do not take account of the transitional arrangements such as the phase in of deductions).
No assumptions were made about bank profitability or behavioural responses, such as changes in bank capital or balance sheet composition. For that reason the results of the study are not comparable to industry estimates. The study finds that based on data as of 31 December 2011 and applying the changes to the definition of capital and risk-weighted assets, the average common equity Tier 1 capital ratio (CET1) of Group 1 banks was 7.7%, as compared with the Basel I I I minimum requirement of 4.5%.

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In order for all Group 1 banks to reach the 4.5% minimum, an increase of €11.9 billion CET1 would be required.
The overall shortfall increases to €374.1 billion to achieve a CET1 target level of 7.0% (ie including the capital conservation buffer); this amount includes the surcharge for global systemically important banks where applicable. As a point of reference, the sum of profits after tax and prior to distributions across the same sample of Group 1 banks in 201 1 was €356 billion. Compared to the June 2011 exercise, the aggregate CET1 shortfall with respect to the 4.5% minimum for Group 1 banks has reduced by €26.9 billion. At the CET1 target level of 7.0%, the aggregate CET1 shortfall for Group 1 banks has reduced by €111.5 billion. For Group 2 banks, the average CET1 ratio stood at 8.8%. In order for all Group 2 banks in the sample to meet the new 4.5% CET1 ratio, the additional capital needed is estimated to be €7.6 billion. They would have required an additional €21.7 billion to reach a CET1 target 7.0%; the sum of these banks' profits after tax and prior to distributions in 2011 was €24 billion.

Executive summary
In 2010, the Basel Committee on Banking Supervision1 conducted a comprehensive quantitative impact study (C-QIS) using data as of 31 December 2009 to ascertain the impact on banks of the Basel I I I framework that was published in December 2010 and revised in June 2011. The Committee intends to continue monitoring the impact of the Basel I I I framework in order to gather full evidence on its dynamics.
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For this purpose, a semi-annual monitoring framework has been set up on the risk-based capital ratio, the leverage ratio, and the liquidity metrics using data collected by national supervisors on a representative sample of institutions in each jurisdiction.
This report is the second publication of results of the Basel I I I monitoring exercise and summarises the aggregate results using data as of 31 December 2011. The Committee believes that the information contained in the report will provide the relevant stakeholders with a useful benchmark for analysis. Information considered for this report was obtained by data submissions of individual banks to their national supervisors on a voluntary and confidential basis. A total of 209 banks participated in the study, including 102 Group 1 banks and 107 Group 2 banks. Members‘ coverage of their banking sector is very high for Group 1 banks, reaching 100% coverage for some jurisdictions, while coverage is comparatively lower for Group 2 banks and varied across jurisdictions. The Committee appreciates the significant efforts contributed by both banks and national supervisors to this ongoing data collection exercise. The report focuses on the following items: - Changes to bank capital ratios under the new requirements, and estimates of any capital deficiencies relative to fully phased-in minimum and target capital requirements (to include capital charges for global systemically important banks – G-SIBs); - Changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including a reallocation of deductions to CET1, and changes to the eligibility criteria for Additional Tier 1 and Tier 2 capital;

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- Increases in risk-weighted assets resulting from changes to the definition of capital, securitisation, trading book, and counterparty credit risk requirements;
- The Basel I I I leverage ratio; and - Two Basel I I I liquidity standards – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR). With the exception of the transitional arrangements for non-correlation trading securitization positions in the trading book, this report does not take into account any transitional arrangements such as phase-in of deductions and grandfathering arrangements. Rather, the estimates presented assume full implementation of the final Basel I I I requirements based on data as of 31 December 2011. No assumptions have been made about banks‘ profitability or behavioural responses, such as changes in bank capital or balance sheet composition, since this date or in the future. For this reason, the results are not comparable to current industry estimates, which tend to be based on forecasts and consider management actions to mitigate the impact, and incorporate estimates where information is not publicly available. The results presented in this report are also not comparable to the C-QIS that was prepared using end-December 2009 data because that report evaluated the impact of policy questions that differ in certain key respects from the finalised Basel I I I framework. As one significant example, the C-QIS did not consider the impact of capital surcharges for global systemically important banks.

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Key results Capital shortfalls
Assuming full implementation of the Basel I I I requirements as of 31 December 2011, including changes to the definition of capital and risk-weighted assets, and ignoring phase-in arrangements, Group 1 banks would have an overall shortfall of €11.9 billion for the CET1 minimum capital requirement of 4.5%, which rises to €374.1 billion for a CET1 target level of 7.0% (ie including the capital conservation buffer); the latter shortfall also includes the G-SIB surcharge where applicable. As a point of reference, the sum of profits after tax prior to distributions across the same sample of Group 1 banks in 2011 was €356 billion. Compared to the June 2011 exercise, the aggregate CET1 shortfall with respect to the 4.5% minimum for Group 1 banks has improved by €26.9 billion or 69.3%. At the CET1 target level of 7.0%, the aggregate CET1 shortfall for Group 1 banks has improved by €111.5 billion or 23.0%.

Under the same assumptions, the capital shortfall for Group 2 banks included in the Basel I I I monitoring sample is estimated at €7.6 billion for the CET1 minimum of 4.5% and €21.7 billion for a CET1 target level of 7.0%.
The sum of Group 2 bank profits after tax prior to distributions in 2011 was €24 billion. Further details on additional capital needs to meet the Basel I I I requirements are included in Section 2.

Capital ratios
The average CET1 ratio under the Basel I I I framework would decline from 10.4% to 7.7% for Group 1 banks and from 10.4% to 8.8% for Group 2 banks.
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The Tier 1 capital ratios of Group 1 banks would decline, on average from 1 1.7% to 8.0% and total capital ratios would decline from 14.2% to 9.2%.
As with the CET1 ratios, the decline in other capital ratios is comparatively less pronounced for Group 2 banks; Tier 1 capital ratios would decline on average from 1 1.0% to 9.2% and total capital ratios would decline on average from 14.3% to 1 1.0%.

Changes in risk-weighted assets
As compared to current risk-weighted assets, total risk-weighted assets increase on average by 18.1% for Group 1 banks under the Basel I I I framework. This increase is driven largely by charges against counterparty credit risk, trading book exposures, and securitization exposures (principally those risk-weighted at 1250% under the Basel I I I framework that were previously 50/ 50 deductions under Basel I I). Banks that have significant exposures in these areas influence the average increase in risk-weighted assets heavily. As Group 2 banks are less affected by the revised counterparty credit risk and trading book rules, these banks experience a comparatively smaller increase in risk-weighted assets of only 7.5%. Even within this sample, higher risk-weighted assets are attributed largely to Group 2 banks with counterparty and securitisation exposures (ie those subject to a 1250% risk weighting). As discussed in Section 4.1, the increase in risk-weighted assets contains certain estimates pertaining to trading book exposures for banks that have already adopted the Basel 2.5 enhancements.

Leverage ratio
The average Basel I II Tier 1 leverage ratio for all banks is 3.6%. The Basel I I I average for Group 1 banks is 3.5%, and the average for Group 2 banks is 4.2%.
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Liquidity standards
Both liquidity standards are currently subject to an observation period which includes a review clause to address any unintended consequences prior to their respective implementation dates of 1 January 2015 for the LCR and 1 January 2018 for the NSFR. Basel I I I monitoring results for the end-December 2011 reporting period give an indication of the impact of the calibration of the standards based on the December 2010 rules text and highlight several key observations: - A total of 102 Group 1 and 107 Group 2 banks participated in the liquidity monitoring exercise for the end-December 2011 reference period. - The weighted average LCR for Group 1 banks is 91%, compared to 90% for 30 June 2011, while the weighted average LCR for Group 2 banks is 98%. The aggregate LCR shortfall is €1.8 trillion which represents approximately 3% of the €61.4 trillion total assets of the aggregate sample. - The weighted average NSFR is 98% for Group 1 banks and 95% for Group 2 banks, compared to 94% for each of the Group 1 and Group 2 samples as at 30 June 2011. The aggregate shortfall of required stable funding is €2.5 trillion.

Sample of participating banks
A total of 209 banks participated in the study, including 102 Group 1 banks and 107 Group 2 banks.
Group 1 banks are those that have Tier 1 capital in excess of €3 billion and are internationally active.

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All other banks are considered Group 2 banks.
Banks were asked to provide data as of 31 December 2011 at the consolidated level. Subsidiaries are not included in the analyses to avoid double counting. Table 1 shows the distribution of participation by jurisdiction. For Group 1 banks members‘ coverage of their banking sector was very high reaching 100% coverage for some jurisdictions. Coverage for Group 2 banks was comparatively lower and varied across jurisdictions. Not all banks provided data relating to all parts of the Basel I I I framework. Accordingly, a small number of banks are excluded from individual sections of the Basel I I I monitoring analysis due to incomplete data. In certain sections, data are based on a consistent sample of banks. This consistent sample represents only those banks that reported necessary data at both the June 2011 and December 2011 reporting dates, in order to make more meaningful period-to-period comparisons.

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Capital shortfalls
Chart 5 and Table 2 provide estimates of the amount of capital that Group 1 and Group 2 banks would need based on data as of 31 December 2011 in addition to capital already held at the reporting date, in order to meet the target CET1, Tier 1, and total capital ratios under Basel I I I assuming fully phased-in target requirements and deductions. Under these assumptions, the CET1 capital shortfall for Group 1 banks with respect to the 4.5% CET1 minimum requirement is €11.9 billion. The CET1 shortfall with respect to the 4.5% requirement for Group 2 banks, where coverage of the sector is considerably smaller, is estimated at €7.6 billion. For a CET1 target of 7.0% (ie the 4.5% CET1 minimum plus the 2.5% capital conservation buffer, plus any capital surcharge for Group 1 G-SIBs as applicable), Group 1 banks‘ shortfall is €374.1 billion and Group 2 banks‘ shortfall is €21.7 billion. The surcharges for G-SIBs are a binding constraint on 21 of the 27 G-SIBs included in this Basel I I I monitoring exercise. As a point of reference, the aggregate sum of after-tax profits prior to distributions for Group 1 and Group 2 banks in the same sample was €356 billion and €24 billion, respectively in 2011. Compared to the J une 2011 exercise, the aggregate CET1 shortfall with respect to the 4.5% minimum for Group 1 banks has improved by €26.9 billion or 69.3% (see Chart 5). At the CET1 target level of 7.0%, the aggregate CET1 shortfall for Group 1 banks has improved by €111.5 billion or 23.0%. Assuming the 4.5% CET1 minimum capital requirements were fully met (ie, there were no CET1 shortfalls), Group 1 banks would need an additional €32.5 billion of additional Tier 1 or CET1 capital to meet the minimum Tier 1 capital ratio requirement of 6.0%.
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Assuming banks already hold 7.0% CET1 capital, Group 1 banks would need an additional €219.3 billion of additional Tier 1 or CET1 capital to meet the Tier 1 capital target ratio of 8.5% (ie the 6.0% Tier 1 minimum plus the 2.5% CET1 capital conservation buffer), respectively.
Group 2 banks would need an additional €2.1 billion and an additional €11.9 billion to meet these respective Tier 1 capital minimum and target ratio requirements. Assuming CET1 and Tier 1 capital requirements were fully met (ie, there were no shortfalls in either CET1 or Tier 1 capital), Group 1 banks would need an additional €100.2 billion of Tier 2 or higher quality capital to meet the minimum total capital ratio requirement of 8.0% and an additional €224.3 billion of Tier 2 or higher quality capital to meet the total capital target ratio of 10.5% (ie the 8.0% Tier 1 minimum plus the 2.5% CET1 capital conservation buffer). Group 2 banks would need an additional €4.1 billion and an additional €8.6 billion to meet these respective total capital minimum and target ratio requirements. As indicated above, no assumptions have been made about bank profits or behavioural responses, such as changes balance sheet composition, that will serve to ameliorate the impact of capital shortfalls over time.

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Impact of the definition of capital on Common Equity Tier 1 capital
As noted above, reductions in capital ratios under the Basel I I I framework are attributed in part to capital deductions not previously applied at the common equity level of Tier 1 capital in most jurisdictions.
Table 3 shows the impact of various regulatory adjustment categories on the gross CET1 capital (ie, CET1 before adjustments) of Group 1 and Group 2 banks. In the aggregate, regulatory adjustments reduce the gross CET1 of Group 1 banks under the Basel I I I framework by 29.0%. The largest driver of Group 1 bank deductions is goodwill, followed by combined deferred tax assets (DTAs) deductions, and intangibles other than mortgage servicing rights. These deductions reduce Group 1 bank gross CET1 by 14.0%, 4.3%, and 3.5%, respectively.
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The category described as other adjustments reduces Group 1 bank gross CET1 by 3.8% and pertain mainly to deductions for provision shortfalls relative to expected credit losses and deductions related to defined benefit pension fund schemes.
Holdings of capital of other financial companies reduce the CET1 of Group 1 banks by 1.9%. The category ―Excess above 15%‖ refers to the deduction of the amount by which the aggregate of the three items subject to the 10% limit for inclusion in CET1 capital exceeds 15% of a bank‘s CET1, calculated after all deductions from CET1. These 15% threshold bucket deductions reduce Group 1 bank gross CET1 by 1.6%. Deductions for MSRs exceeding the 10% limit have no impact on Group 1 CET1 in the aggregate. Table 3 also compares regulatory adjustments for Group 1 banks with the results of the previous period for those banks which participated in both exercises. Overall, deductions have been reduced by 2.6 percentage points, mainly driven by lower deductions for goodwill and financials. Regulatory adjustments reduce the CET1 of Group 2 banks by 20.4%. Goodwill is the largest driver of deductions for Group 2 banks, followed by holdings of the capital of other financial companies, deductions for intangibles other than mortgage servicing rights, and combined DTAs deductions.

These deductions reduce Group 2 bank CET1 by 7.5%, 2.3%, 2.3% and 1.9%, respectively.

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Other adjustments, which are driven significantly by deductions for provision shortfalls relative to expected credit losses, result in a 3.1% reduction in Group 2 bank gross CET1.
Deductions for items in excess of the aggregate 15% threshold basket reduce Group 2 bank gross CET1 by 1.2%. Deductions for mortgage servicing rights above the 10% limit have no impact on Group 2 banks.

Changes in risk-weighted assets 4.1 Overall results
Reductions in capital ratios under the Basel I I I framework are also attributed to increases in risk-weighted assets.

Table 4 provides additional detail on the contributors to these increases, to include the following categories:

Definition of capital:
These columns measure the change in risk-weighted assets as a result of proposed changes to the definition of capital.

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The column heading ―other‖ includes the effects of lower risk-weighted assets for exposures that are currently included in risk-weighted assets but receive a deduction treatment under Basel I I I.
The column heading ―50/50‖ measures the increase in risk-weighted assets applied to securitisation exposures currently deducted under the Basel I I framework that are risk-weighted at 1250% under Basel I I I . The column heading ―threshold‖ measures the increase in risk-weighted assets for exposures that fall below the 10% and 15% limits for CET1 deduction;

Counterparty credit risk (CCR):
This column measures the new capital charge for credit valuation adjustments (CVA risk) and the higher capital charge that results from applying a higher asset value correlation parameter against exposures to financial institutions under the I RB approaches to credit risk. Banks have not been asked to provide data on the risk-weighted asset effects of capital charges for exposures to central counterparties (CCPs) or on any impact of incorporating stressed parameters for effective expected positive exposure (EEPE);

Trading book:
As data from most countries already include the RWA impact of the Basel 2.5 market risk rules, the incremental impact for changes in market RWA shown in these tables has been estimated using the sum of the following elements relative to elements in place under Basel I I : the proportion of internally modeled general and specific risk that is attributable to stress value-at-risk, the incremental risk capital charge (IRC), capital charges for the correlation trading portfolio, and capital charges under the standardised measurement method (SMM) for other securitisation exposures and nth-to-default credit derivatives. The effect of higher capital charges for re-securitisation exposures in the banking book and increased conversion factors for short-term liquidity
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facilities to off-balance sheet conduits are not considered in these tables given the data are no longer available for all countries.
However, prior reports have shown the impact of these charges to be generally small for both Group 1 and Group 2 banks. Risk-weighted assets for Group 1 banks increase overall by 18.1% for Group 1 banks. This increase is to a large extent attributed to higher risk-weighted assets for counterparty credit risk exposures, which result in an overall increase in total Group 1 bank risk-weighted assets of 7.9%. The predominant drivers behind this figure are capital charges for CVA risk and the higher asset value correlation parameter, which is included in the column labelled ―CCR‖. Trading book exposures and securitisation exposures currently subject to deduction under Basel I I, also contribute significantly to higher risk-weighted assets at Group 1 banks at 4.9% and 4.2%, respectively.

Risk-weighted assets of Group 2 banks increase overall by 7.5%. Banks in this group tend to have smaller counterparty credit risk and trading book exposures, which explains the lower increase risk-weighted assets for Group 2 banks as compared to Group 1 banks.

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Securitisation exposures currently subject to deduction, CCR exposures, and exposures that fall below the 10% and 15% CET1 eligibility limits are significant contributors to changes in risk-weighted assets for Group 2 banks.
Changes in risk-weighted assets show significant variation across banks as shown in Chart 6. Again, these differences are explained in large part by the extent of banks‘ counterparty credit risk and trading book exposures, which attract significantly higher capital charges under Basel I I I as compared to current rules.

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Liquidity 6.1 Liquidity coverage ratio
One of the two standards introduced by the Committee is a 30-day liquidity coverage ratio (LCR) which is intended to promote short-term resilience to potential liquidity disruptions. The LCR has been designed to require global banks to have sufficient high-quality liquid assets to withstand a stressed 30-day funding scenario specified by supervisors. The LCR numerator consists of a stock of unencumbered, high-quality liquid assets that must be available to cover any net outflow, while the denominator is comprised of cash outflows less cash inflows (subject to a cap at 75% of outflows) that are expected to occur in a severe stress scenario. 102 Group 1 and 107 Group 2 banks provided sufficient data in the 31 December 2011 Basel I I I monitoring exercise to calculate the LCR according to the Basel I I I liquidity framework.

The weighted average LCR was 91% for Group 1 banks, compared to 90% for 30 June 2011, and 98% for Group 2 banks.
These aggregate numbers do not speak to the range of results across the banks. Chart 8 below gives an indication of the distribution of bank results; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group. 47% of the banks in the Basel I I I monitoring sample already meet or exceed the minimum LCR requirement, an increase from 45% at the end of June 2011, and 62% have LCRs that are at or above 75%.

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For the banks in the sample, Basel I I I monitoring results show a shortfall (ie the difference between high-quality liquid assets and net cash outflows) of €1.8 trillion (which represents approximately 3% of the €61.4 trillion total assets of the aggregate sample) as of 31 December 2011, if banks were to make no changes whatsoever to their liquidity risk profile. This number is only reflective of the aggregate shortfall for banks that are below the 100% requirement and does not reflect surplus liquid assets at banks above the 100% requirement.

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Banks that are below the 100% required minimum have until 2015 to meet the standard by scaling back business activities which are most vulnerable to a significant short term liquidity shock or by lengthening the term of their funding beyond 30 days.
Banks may also increase their holdings of liquid assets. The key components of outflows and inflows are shown in Table 7. Group 1 banks show a notably larger percentage of total outflows, when compared to balance sheet liabilities, than Group 2 banks. This can be explained by the relatively greater contribution of wholesale funding activities and commitments within the Group 1 sample, whereas Group 2 banks, as a whole, are less reliant on these types of activities.

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75% cap on total inflows
As at 31 December 2011, no Group 1 and 16 Group 2 banks reported inflows that exceeded the cap, compared to 19 Group 2 banks as at 30 June 2011. Of the 16 Group 2 banks, three fail to meet the LCR, so the cap is binding on them. Of the banks impacted by the cap on inflows, 12 have inflows from other financial institutions that are in excess of the excluded portion of inflows.

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Composition of high-quality liquid assets
The composition of high-quality liquid assets currently held at banks is depicted in Chart 9. The majority of Group 1 and Group 2 banks‘ holdings, in aggregate, are comprised of Level 1 assets; however the sample, on whole, shows diversity in their holdings of eligible liquid assets. Within Level 1 assets, 0% risk-weighted securities issued or guaranteed by sovereigns, central banks and PSEs, and cash and central bank reserves comprise the most significant portions of the qualifying pool, with the latter increasing its contribution to the overall composition to 31.4% as at the end of December 2011 from 27.6% as at the end of June 2011. Comparatively, within the Level 2 asset class, the majority of holdings are comprised of 20% risk-weighted securities issued or guaranteed by sovereigns, central banks or PSEs, and qualifying covered bonds.

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Cap on Level 2 assets
€1 17 billion of Level 2 liquid assets were excluded because reported Level 2 assets were in excess of the 40% cap as currently operationalised. 23 banks currently reported assets excluded, of which 16 (8% of the total sample) had LCRs below 100%. These results compare to €121 billion of Level 2 liquid assets excluded by 34 banks as at 30 June 2011, of which 24% (1 1% of the sample) had LCRs below 100%. Chart 10 combines the above LCR components by comparing liquidity resources (buffer assets and inflows) to outflows. Note that the €710 billion difference between the amount of liquid assets and inflows and the amount of outflows and impact of the cap displayed in the chart is smaller than the €1.8 trillion gross shortfall noted above as it is assumed here that surpluses at one bank can offset shortfalls at other banks.

In practice the aggregate shortfall in the industry is likely to lie somewhere between these two numbers depending on how efficiently banks redistribute liquidity around the system.

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Net stable funding ratio
The second standard is the net stable funding ratio (NSFR), a longer-term structural ratio to address liquidity mismatches and provide incentives for banks to use stable sources to fund their activities. 102 Group 1 and 107 Group 2 banks provided sufficient data in the 31 December 2011 Basel I I I monitoring exercise to calculate the NSFR according to the Basel I I I liquidity framework. 51% of these banks already meet or exceed the minimum N SFR requirement, compared to 46% at the end of June 2011, with 92% at an NSFR of 75% or higher as at 31 December 2011.

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The weighted average NSFR for the Group 1 bank sample is 98% while it is 95% for the Group 2 sample, compared to 94% for each of the Group 1 and Group 2 samples as at 30 June 2011.
Chart 1 1 shows the distribution of results for Group 1 and Group 2 banks; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group.

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The results show that banks in the sample had a shortfall of stable funding of €2.5 trillion at the end of December 2011, a decrease from €2.8 trillion at the end of June 2011, if banks were to make no changes whatsoever to their funding structure.
This number is only reflective of the aggregate shortfall for banks that are below the 100% N SFR requirement and does not reflect any surplus stable funding at banks above the 100% requirement. Banks that are below the 100% required minimum have until 2018 to meet the standard and can take a number of measures to do so, including by lengthening the term of their funding or reducing maturity mismatch. It should be noted that the shortfalls in the LCR and the NSFR are not necessarily additive, as decreasing the shortfall in one standard may result in a similar decrease in the shortfall of the other standard, depending on the steps taken to decrease the shortfall.

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NUMBER 2
Financial Services Agency, The Japanese Government

Recent Trend of Financial and Capital Markets, Regulatory and Supervisory Challenges
Ryutaro Hatanaka

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NUMBER 3

Investor Protection through Audit Oversight
Lewis H. Ferguson, Board Member California State University 1 1th Annual SEC Financial Reporting Conference, Irvine, CA Thank you for inviting me to speak today. I am delighted to be here in sunny Southern California to share some thoughts with you about developments in auditor oversight, the part of the financial reporting universe in which I now spend my time. Before I begin, I must tell you that the views I express today are my own and do not necessarily reflect the views of the Public Company Accounting Oversight Board, any other Board member, or the staff of the PCAOB. Anyone involved in the financial reporting process deals daily with the hard realities of complexity and rapid change -- whether you are a preparer of financial statements, a board or audit committee member, an investor, an independent or internal auditor, a counselor, or a regulator. Commercial activity is increasingly global. Some financial instruments and transactions are bafflingly complex with values that can only be estimated. Standard setters in the United States and abroad are moving away from historical cost accounting toward fair value accounting, requiring difficult estimates.

There is a plethora of new rules and requirements growing out of the Dodd-Frank and JOBS acts in the United States, and all of this is happening in what since 2008 has been the most difficult global economic environment since the Great Depression of the 1930s.

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Much as we struggle with these rapid changes and their complexity, regulators also struggle to see around the curve, to be prepared for what is coming tomorrow, and to have tools in their toolbox that will be appropriate for those challenges.
In the next session of today‘s conference, I will discuss a number of specific initiatives the PCAOB is undertaking to deal with some of these challenges, but in this address I want to focus on one specific area, the challenge of globalization and cross-border financial reporting, auditing and audit oversight. A bit of background may be useful here. The PCAOB was created by the U.S. Congress in 2002, in response to a crisis stemming from the failures of enterprises like Enron, WorldCom, Adelphia and others. These cases all involved systemic and undetected financial and accounting fraud. Congress concluded that these cases demonstrated that the long established system of auditor quality oversight by the auditing profession itself, known as peer review, was irretrievably broken. Accordingly, Congress created the PCAOB as an independent, not-for-profit body, whose five members are appointed by the United States Securities and Exchange Commission, to ―oversee the audit of public companies that are subject to the securities laws.‖ The Board‘s mission is ―protect the interest of investors and further the public interest in the preparation of informative, accurate, and independent audit reports‖ for U.S. public companies. From its establishment in 2002, the PCAOB has grown to be an organization with a projected 800 employees by the end of this year located in 16 offices throughout the United States, including in Irvine and Los Angeles. To prevent capture by the accounting profession, Congress provided that while two of the five PCAOB board members had to be CPAs, no more than two could be.
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That leaves two of my fellow board members and me, including the PCAOB‘s chairman, who are lawyers by training and profession.
The PCAOB was assigned four principal functions by the statute: 1.The first is to oversee and maintain the registration of all auditing firms whether they are located here or abroad that file audit reports with the SEC or participate substantially in the audit of companies that file such reports. In 2010, the Dodd-Frank Act also gave the PCAOB jurisdiction over auditors of registered brokers and dealers and required all such firms to be registered. Today, 2,380 auditing firms are registered with the PCAOB including 570 firms that audit brokers and dealers. Of the total, 1,465 firms are located in the United States and 915 firms outside the United States in 85 jurisdictions. The largest number of foreign registered firms are in China with 100 firms, including 52 in H ong Kong and 48 in the People‘s Republic of China, 66 in India, 64 in the U.K., 48 in Canada and 41 in Australia.

2.The second principal function of the PCAOB is periodically to inspect registered firms that file or participate in the preparation of audit reports of public companies and securities brokers and dealers.
Any audit firm with more than 100 issuer audit clients must be inspected annually and at least triennially if they regularly provide audit reports for 100 or fewer issuers. In 2012, there are currently 9 annually inspected auditing firms. Our inspections are not randomly selected but are selected on the basis of audit risk, focusing on issues, industries, or firms where we believe the greatest risk of audit failure may lie. Since its inception, the PCAOB has conducted more than 1,950 inspections and examined portions of over 8,200 individual audits.

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In 2011, for example, for the 10 firms subject to annual inspection in that year, the PCAOB inspectors looked at portions of approximately 340 audits.
For the 203 firms inspected on a three-year cycle in 2011, portions of approximately 485 audits were examined, including 42 non-U.S. audit firms located in 15 jurisdictions. We are scheduled to inspect approximately 80 non-U.S. firms in 2012. As part of an interim program for the inspection of brokers and dealers, in 2011 and early 2012, we inspected 10 audit firms, examining portions of 23 separate audits and issued a public interim report on those inspections in August of this year. 3.Our third function is to set auditing and other professional standards. We have an ambitious standard-setting agenda that tackles old and new issues in auditing, particularly issues that surfaced after the recent financial crisis – from improving communications with audit committees to reforming the auditor‘s reporting model. In the next session of this conference, I will discuss in more detail the PCAOB‘s standard-setting projects. 4.Our fourth and last principal function is to conduct investigations and enforcement proceedings. The Board has the authority to impose disciplinary sanctions, including barring auditors from public company auditing and imposing substantial monetary penalties. Since 2003, the PCAOB has taken 55 disciplinary actions against 42 registered accounting firms and 56 persons associated with registered firms. As part of these enforcement actions, the Board has revoked the registration of 27 firms, barred 43 individuals, and suspended the registration of five individuals and one firm. These are our four core functions: registration, inspections, standard setting, and investigation and enforcement.
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Everything the Board does is in support of these functions.
Other offices, particularly the Office of Research and Analysis, provides valuable input. ORA‘s staff of more than 30 economists and analysts study economic trends and the large bodies of confidential data we collect as part of our inspection process. The broad reach of our activities gives us a unique perspective on the state of audit practice in the United States and abroad, and on the operations of major auditing firms. When the PCAOB was created in 2002, the United States was essentially alone in the world in having comprehensive regulation of the auditors of public companies that was independent of the profession itself. Initially, Sarbanes-Oxley was seen by many, particularly outside the United States, as an effort to address something that was strictly an American problem. But shortly after the failures of Enron and WorldCom, a series of major accounting failures were uncovered at non-U.S. companies, such as Parmalat, Vivendi, Hollinger, Ahold, Royal Dutch Shell, China Aviation and others. As a result, many other countries began to adopt independent audit supervisory regimes. Today, just 10 years after the creation of the PCAOB, almost all advanced or emerging market countries have an independent audit regulator. These regimes differ. Some like the PCAOB are independent agencies; others are housed in the local securities regulator. But they share certain common attributes: they are either government agencies or bodies that are independent of the audit profession; they conduct regular inspections of audit firms; and they possess disciplinary and sometimes licensing and standard-setting powers.

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We are grateful that the example of the PCAOB has encouraged the creation of similar, independent audit oversight in other countries— oversight that can only benefit the investors in our national and global markets.

International Cooperation IFIAR
It is not surprising that these new regulators soon decided that they should form an organization for sharing views and helping each other improve their work. In September 2006, a group of 18 independent audit regulators formed the International Forum of Independent Audit Regulators, to provide a forum for regulators to share knowledge of the audit market environment and the practical experience gained from their independent audit regulatory activity. Only regulators that are truly independent of the auditing profession are eligible for membership which has grown steadily to 43 members today with another 13 candidate members in various stages of the application process. In addition to the United States, Canada and one South American regulator, most European regulators are members as well as several regulators in the Middle East, and a number of Asian regulators, including those in Japan, Korea, Taiwan, Thailand, Malaysia, Singapore, Sri Lanka, and Australia. The United States has come to play a leadership role in I FIAR and I was honored recently to be elected Vice-Chair of the organization. IFIAR holds annual plenary meetings at which regulators from around the world meet to exchange information on a variety of topics including general inspection and enforcement findings, standard-setting initiatives and cross-border cooperation. The next such meeting will be in London at the beginning of October.

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In addition, there are five working groups that meet more frequently and focus on specific issues like standard setting, international cooperation, investor concerns, inspection training and public policy.
One of the most important is the last, the Global Public Policy Committee Working Group, that meets three times each year with the leadership of the six global network audit firms to discuss issues of concern to the regulators and the firms. IFIAR also conducts an annual inspection training workshop for audit inspectors from around the world.

For the first time this year, I FIAR has surveyed its members about their audit inspection findings.
Thirty-seven of the 43 IFIAR members responded to the survey and while the results are presently confidential, I can tell you that a striking result of the survey is that other regulators around the world seem to be finding the same types of defects in their inspections that the PCAOB is finding, particularly deficiencies in auditing fair value measurements, testing internal controls, revenue recognition and engagement quality control reviews.

The Global Environment
You might ask why an organization like IFIAR is important. The short answer is that it enables individual regulators to get a better window on the global landscape of audit practice and financial reporting. This is important because the world‘s largest enterprises -- those that represent the largest share of global economic activity and shareholder wealth -- operate globally. Not only do they sell products globally, but increasingly they purchase raw and component materials, manufacture, distribute, and do research and development globally. One only needs to look at some of the latest signature industrial products, like new automobiles, computer and smartphone products, or the Boeing 787 airliner to realize that these products are produced from designs and components sourced and manufactured in many different countries.
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A global company, perhaps operating in more than 100 countries, also has financial reporting activities in many, if not all, of those countries.
Any regulator, confined to a view within its own borders, can only see a portion, and often a small portion, of the activities and risks of such an enterprise. Cross-border regulatory cooperation, working together and sharing information, is vital to our common mission to improve the protection of investors who rely on auditors to assure that the financial reports of publicly traded companies are transparent, complete and fairly stated.

Just as the largest corporations in the world have become increasingly global in their operations, their auditors must be able to conduct audits on a global basis.
The largest audit firms have grown globally along with their clients. But unlike their corporate clients, which usually operate globally through a centrally controlled structure of parent and subsidiary entities, the global audit firms operate as an affiliation of individual audit firms. They are organized and operating under the laws of different political and regulatory jurisdictions joined together in networks where they share clients, training, audit methodologies, and quality assurance practices. T hey operate under a common name such as Deloitte Touche Tohmatsu, Ernst & Young, PricewaterhouseCoopers, KPMG, Grant Thornton and others. There are a number of reasons for such structures: local licensing and ownership requirements; different traditions of training and practice; and not least, concern about cross border liability exposure. The global organization of these networks provides common audit methodologies, conducts quality assurance examinations and provides other services. But in the final analysis, the only real power the global leadership has over its individual members is the power to remove a member from the network.
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This is a very different power from that of the chief executive officer of a global corporation over his or her far flung subsidiaries.
In the audit of a major global corporation, a number of different auditing firms, operating under a single trade name, will cooperate to perform the audit of the corporation‘s global operations. Today, the auditor‘s report on such a corporation is signed by only one firm in the network and does not reveal whether other affiliated firms participated in the audit or the extent of their participation. The reality of today‘s global business environment means that regulators around the world must do the same thing. We must cooperate effectively with each other if we are to ensure that audit quality remains high and that investors are protected.

Details of the PCAOB‘s Cooperative Arrangements with Other Regulators
The PCAOB cooperates closely with audit regulators outside the United States, and the scope of that cooperation is extensive. Since 2005, we have conducted 338 inspections of PCAOB registered firms in 38 different countries. We have cooperative agreements with 14 foreign regulators in Australia, Canada, Dubai, the U.K., Germany, Israel, Japan, the N etherlands, Norway, Korea, Singapore, Spain, Switzerland, and Taiwan as a result of which we either conduct joint inspections or share inspection findings with regulators in those jurisdictions. We are also actively negotiating such agreements with regulators in a number of other European countries. We have conducted international inspections, both alone and jointly, with the local regulator. We have found that joint inspections are particularly useful and have conducted them with regulators in Canada, Switzerland, the United Kingdom, Germany, Norway and the Netherlands.

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We will shortly conduct joint inspections with the Spanish and Korean audit regulators.
In these inspections, we have faced and resolved difficult data protection issues that are of great concern to regulators in the European Union. We have also resolved confidentiality concerns that Swiss regulators have raised. The joint inspections have demonstrated that with a cooperative approach many obstacles can be overcome.

In joint inspections each regulator learns from the other and we are convinced that these inspections have improved regulatory oversight both by the PCAOB and by our foreign counterparts.

Limits on PCAOB Inspections and their Effects on Investors
I want to talk now about some of the limits to the PCAOB‘s ability to inspect non-U.S. audit firms registered with us and the potential risks this poses to U.S. investors. The PCAOB currently is prevented from inspecting the U.S.-company related audit work and practices of PCAOB-registered firms in certain European countries, China, and – to the extent their audit clients have operations in China – Hong Kong. In Europe, the obstacles to inspection center around the requirement to satisfy the individual country‘s data protection requirements under European Union law. After some delay, we are now making progress and have cooperative agreements with several European Union regulators. We continue to negotiate with others.

Where the PCAOB is not able to conduct inspections, investors in U.S.-traded companies who rely on the audit reports of firms' in those countries are deprived of the potential benefits of PCAOB inspections of those firms.

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To better inform investors about our inspections, the PCAOB publishes on its website a list of more than 400 companies whose auditors are located in jurisdictions where obstacles to PCAOB inspections exist.
The list is derived from annual reports filed with the PCAOB by registered public accounting firms.

China
Now, let me turn to China. As you are probably aware, in the past year or so, alleged serious financial frauds and attendant accounting problems have been disclosed involving a number of China-based companies whose securities are registered outside of China, particularly in the United States, Singapore and, to a lesser extent, Europe. Not more than a decade ago, Chinese firms began to access foreign capital markets. Two types of Chinese companies sought access to U.S. capital markets, smaller enterprises that had difficulty accessing the very restricted Chinese domestic capital markets and some of the largest state-owned enterprises in industries such as petroleum and telecommunications. At the same time some of the largest global companies, including U.S companies, began to engage in extensive operations in China. The smaller companies most commonly sought access to U.S. markets by merging with existing, registered U.S. shell companies in reverse mergers. The larger companies filed initial public offerings. A PCAOB Research Note showed that, in the United States alone, between January 1, 2007 and March 31, 2010, 159 Chinese companies entered the U.S. securities markets using reverse mergers and generated market capitalization of $12.8 billion. These transactions represented the largest share of the reverse merger market during that period.

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In the same period, 56 Chinese companies, including a number of very large state-owned enterprises completed U.S. IPOs and had an aggregate market capitalization of $27.2 billion.
Seventy-four percent of these reverse merger companies were audited by U.S.-based audit firms and China-based audit firms audited the balance, but all of these firms were registered with the PCAOB. As major U.S. companies like General Motors, I BM, Microsoft, Apple Computer, Proctor & Gamble, General Electric and Walmart began to build extensive operations in China, the China and H ong Kong based affiliates of the global network audit firms began to play an increasing role in the consolidated audits of those companies. Beginning in the latter part of 2010, alleged financial frauds and serious accounting issues were revealed at a number of the smaller Chinese reverse merger companies. To date, 67 of these China-based issuers have had their auditor resign, and 126 issuers have either been delisted from U.S. securities exchanges or ―gone dark‖ – meaning that they are no longer filing current reports with the SEC.

Billions of dollars of market capitalization of such companies have been lost in U.S. securities markets and it is fair to say that all of these smaller China-based companies listed on U.S. securities exchanges have suffered serious losses of both market value and investor confidence as a result of the problems of other companies.
The number of China-based companies that have successfully filed an initial public offering in the United States in the past year has slowed to a trickle. We understand that smaller Chinese companies have also suffered similar adverse consequences in other non-U.S. and non-Chinese markets. At present, the PCAOB does not have cooperative agreements with either the China Securities Regulatory Commission or China‘s Ministry of Finance which share jurisdiction over Chinese accountants.

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The CSRC has jurisdiction over the 53 accounting firms, including the affiliates of the global network firms that are authorized to file audit reports with respect to companies listing securities on the Chinese domestic securities markets in Shanghai and Shenzhen.
The MOF licenses all accountants in China and has jurisdiction over more than 7,000 accounting firms in China, including some of the firms registered with the PCAOB. Under Chinese law, it is illegal to remove audit work papers from China. At the present time, Chinese authorities will also not permit any non-Chinese regulator to conduct inspections on Chinese soil. As a result, it is impossible for the PCAOB or other regulators to inspect China-based audit firms or to assess the quality of such firms registered with it. This limitation also applies to the affiliates of the global network firms that perform audit work on the audits of the Chinese operations of the large global companies operating in China. In an attempt to address these problems, the PCAOB has intensified its dialogue with both the China Securities Regulatory Commission and the MOF over the past year. Both we and the Chinese regulators recognize the importance of improving audit quality and investor protection. For the PCAOB, an agreement with China is important not only because of the risks investors face, but because of the size and rapid growth of the Chinese economy. Almost 5 percent of PCAOB registered firms are based either in China or Hong Kong, the largest group of non-U.S. firms.

Chinese authorities say that we should rely on their oversight of auditors. They have two principal concerns.
The first is that any action by a foreign regulator on Chinese soil, even a mere inspection, could violate Chinese sovereignty.

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This concern has deep historical roots, specifically relating to the humiliations that China suffered at the hands of Western powers in the nineteenth and early twentieth centuries.
The second concern grows out of China‘s very expansive state secrecy laws. There has been a concern expressed that inspection of audit work papers, particularly work papers from the audits of state-owned enterprises, could lead to disclosures of state secrets. The question for both countries is how to conduct inspections in ways that respect national sovereignty and the legitimate regulatory goals of both countries. As mentioned earlier, we have been able successfully to navigate or balance these seemingly competing interests in a number of countries around the globe. As a first step toward further cooperation, we are working toward and have tentatively agreed on observational visits where PCAOB inspectors would observe the Chinese authorities conducting their own audit oversight activities and the Chinese could observe the PCAOB at work. This would not be a substitute for a PCAOB inspection but would be a trust building exercise between regulators. Initially, such observations would focus on quality control examinations of the audit firm being examined rather than a substantive review of a specific audit. We hope such exercises will build trust and lead to further cooperation. The ultimate goal for the PCAOB is to achieve a level of cooperation with the Chinese authorities that will enable us to have enough information and confidence that we could issue inspection reports on those China-based audit firms that prepare or participate substantially in the preparation of audit reports filed in the United States. There is, however, a second and complicating issue with China and Hong Kong.
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Both the PCAOB and the SEC are in discussion with Chinese authorities about cooperation in connection with investigative activities.
Both agencies are seeking the cooperation of the Chinese authorities in obtaining documents in appropriate investigations. Although we remain hopeful that breakthroughs will be achieved, to date difficulties remain. Despite our hopes, the question arises as to what happens if we are not able to achieve an agreement on regulatory cooperation with the Chinese.

Any firm that registers with the PCAOB is legally obligated to cooperate with us and provide documents and potentially testimony if requested in connection with an inspection or investigation.
A refusal to cooperate, either in an inspection or an investigation, could subject the firm to PCAOB sanctions even if motivated by compliance with local laws that restrict such cooperation. One possible sanction could be revocation of a firm‘s PCAOB registration. Any company audited by such a firm would either have to get a new audit opinion signed by a firm registered with the PCAOB or risk being in violation of SEC and stock exchange rules. The stakes in this matter are very high. But U.S. financial authorities have a primary responsibility to protect the integrity of our capital markets and the interests of U.S. investors. We believe the Chinese authorities are aware of the seriousness of this matter and we are hopeful that we will be able to work out satisfactory arrangements.

We continue to engage in dialogue with the Chinese authorities, but at this time it remains uncertain where this dialogue will ultimately lead.

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Other Steps to Improve Transparency in Audit Reports Affecting Global Enterprises
The PCAOB has also proposed another step to increase the transparency of the audits of global enterprises. Today, the typical audit report for a U.S-listed company is a one-page document. It provides general information about how every audit must be conducted and states that the audit complied with applicable standards.

It gives the firm‘s opinion on the company‘s financial statements, including internal controls over financial reporting where appropriate, and concludes with the signature of the firm that issued it.
In this era of global networks firms, that signature does not tell the full story. An audit report on a multi-national company may carry the signature of one audit firm, but gives the reader no hint about the key participants in the audit, including whether portions of the audit were conducted by an affiliated firm in the global network or by another auditor. The audit report also gives no information about how the audit work was allocated among firms. In October 2011, the Board proposed amendments to PCAOB auditing standards that would require audit reports to disclose the name of the audit engagement partner as well as the identity of other independent audit firms or persons that provided 3 percent or more of the total hours in the most recent audit. These amendments, if approved by the Board and the SEC, would serve two purposes. First, they would give investors more information about which firms are actually performing work in the audit which many investors have told us they want; and second, they would make publicly available the names of firms that have provided more than 3 percent of the total audit hours but

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are located in jurisdictions where the PCAOB cannot yet conduct inspections.
Investors can then make a more informed decision about the quality of the firms participating in a company‘s audit.

Some Issues in I nternational Registrations and I nspections
Finally, I want to address an issue we have faced in connection with the registration of certain non-U.S. audit firms as well as certain findings in international inspections.

As mentioned above, U.S. securities laws require that any company with securities traded in U.S. markets be audited by an accounting firm registered with the PCAOB.
Registration subjects each firm to the oversight activities assigned to the PCAOB for the protection of investors including inspections and enforcement. In 2010, the PCAOB began to request additional information from certain firms applying for registration. Essentially, we asked the firm to provide assurance -- including written confirmation from its national regulatory authority -- that the PCAOB would be able to inspect the firm. We have requested such information from applicants from China, H ong Kong and certain European countries. To date, one firm‘s registration has been rejected by the Board because it could not offer that assurance, and several other firms‘ applications were, at the firms‘ request, essentially put on hold until they are able to provide this assurance. Some of those applications have since been approved as the Board reached agreements with the regulators. Since 2005, the PCAOB has inspected portions of more than 825 audits performed by 213 registered firms based outside the United States.

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Seven years of international inspections have revealed that too often auditors are missing some basic things and making troubling errors, including errors in the timing and documentation of a company‘s revenue recognition; overreliance on managements‘ estimates of such things as contingency and warranty reserves, allowances for doubtful accounts in financial institutions, hard to value financial instruments, and obsolete or overvalued inventory .
These problems are not confined to inspections of non-U.S. firms and we have seen similar deficiencies in the audits of U.S.-based auditors. Many of these problems could be solved if auditors approached their jobs with a higher degree of independence, objectivity and, perhaps most important, professional skepticism. Auditors are supposed to challenge management, and the PCAOB would like to see more auditors do so. In the same vein, PCAOB inspections continue to find that firms are deficient in aspects of their internal governance. More specifically, in an international context, our inspectors have found deficiencies in the quality control mechanisms within the global network firms, in the supervision by the principal auditor of work performed by affiliated firms and in their referral of work to non-affiliated firms or specialists. We continue to pursue these issues actively directly with individual firms, with the leadership of the global auditing network firms, and through our role as a member of the Global Public Policy Committee Working Group of IFIAR which meets with the leadership of the global practice firms three times each year. That Working Group has concentrated on questions around professional skepticism, engagement quality control review, group audits, revenue recognition, sovereign debt issues, the role of the audit committee and the auditor‘s reporting model.

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Conclusion
In the economic crisis that reached its nadir in 2008 we saw well-known companies—notably Lehman Brothers—whose bankruptcies eclipsed the failures of Enron and WorldCom in 2002. What is more sobering is that the economic climate remains uncertain, with weak job growth in the United States, uncertainty inside the European Community and a slowing of business growth in China. Despite these uncertainties globalization of the world economy continues apace. This is just the time that investors most need protection. We may claim a large company as our own because its headquarters is within our national borders, but, more likely than not, the company is doing business globally and seeking capital in markets in other countries. As a consequence, it is the duty of all of us involved in the financial reporting process, whether as preparer, manager, audit committee member, auditor, counselor or regulator to work to ensure that financial reports are complete, transparent, and fairly stated, wherever the operations they reflect are located. We owe that to investors who are, after all, our fellow citizens. Thank you for your attention.

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NUMBER 4
Annual public hearing of the chairpersons of the three European Supervisory Authorities (EBA, ESMA and E IOPA).

Initial statement by Andrea Enria Chairperson of the EBA, in front of the Economic and Monetary affairs committee of the European Parliament
Dear Madame Chair, H onourable Members of this Committee,
The sovereign debt crisis has had serious adverse consequences on the banking sector in the euro area and the Single Market. The interconnection between banks and their sovereigns deepened, leading to a segmentation of the Single Market along national lines and to a dangerous volatility of deposits in some Member States. The concerns of investors translated into a freeze in bank funding, especially on the longer maturities, which could have triggered a massive and disordered deleveraging process, with potentially large effects on growth and employment. Since the second half of 2011, the EBA argued for a three-pronged approach to address this situation: (i)Strengthening banks‘ capital, to put them on a stronger footing to finance the real economy and limit deleveraging; (ii)European interventions to support bank funding and break the link with the sovereigns; and (iii)Actions directly remedying the sovereign debt crisis, thus taking redenomination risk off the table.

As supervisors, we tackled head on the first line of intervention, which falls directly in our remit.
If we consider the capital injected in the system, for achieving the threshold set in the 2011 stress test, and the adjustment in capital positions triggered by our Recommendation, which asked banks to set up
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a Core Tier 1 buffer equal to 9% of risk weighted assets, with a prudent valuation of sovereign exposures, the overall strengthening already realised is above € 190 bn – an amount very close to the recommendation issued by the I MF in the Autumn of 2011.
The support measures already approved for Greek and Spanish banks will bring the final figure further up, to a significant amount. We managed this complex process ensuring that banks did not achieve the capital target by cutting back on lending to households and corporates, especially small and medium enterprises (SMEs).

We also fostered close cooperation between home and host authorities within supervisory colleges, to avoid that the possible capital adjustment was affected by a home bias.
The EBA is committed to pursuing its efforts to ensure that the action of balance sheet repair continues. In this respect, supervisory coordination should take place to ensure that banks apply conservative and consistent valuation of assets and take actions to gradually restore the smooth funding of their activities in private markets. The unlimited supply of term liquidity by the ECB and by other European central banks, and the decision to move towards a Banking Union, which we strongly support, are other key components of the policy package to restore stability in the European banking sector. The Banking Union will have an impact on the responsibilities of the EBA as it will call on the whole Union for an even stronger commitment to the Single Rulebook and for a leap towards truly unified supervisory methodologies - a Single Supervisory Handbook - to assess the risks at banks and to trigger corrective actions.

Without such an effort, we risk a polarisation of the Single Market between the euro area, with single rules and supervisory practices, and the rest of the Union, which would operate with a still wide degree of national discretion in implementing and applying the Single Rulebook.

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The EBA has put a lot of effort in contributing to the action of regulatory repair and the establishment of the Single Rulebook, by preparing draft standards in a number of areas defined by the proposed CRD4-CRR.
At the request of the Commission, we also finalised a report on the capital requirements for SME lending, a topic that is receiving great attention also in your discussions. I believe we established a good working method, with open channels of communication with this Committee and due process of open consultation and impact assessment.

This should allow us to promptly finalise our draft standards once the legislative texts are approved.
In the final stage of the negotiations, it is essential that all policy makers maintain a strong commitment to rigorous and consistent rules, in line with international standards. In the EU, these rules will be applied to all banks and should therefore acknowledge the variety of business models and cultures. Proportionality will be a key concept in this respect.

But in a large number of areas, it is essential that the yardsticks to assess the solvency and liquidity of banks are effectively the same for all banks in the Single Market.
The strong pressure we faced to address the difficult situation in banking markets and in contributing to the reform of banking rules determined a slower start in the accomplishment of our tasks in the area of consumer protection. I am aware that the Parliament attaches great importance to these tasks. The urgency of making progress in this area is confirmed by the recent episodes of mis-selling, poor compliance with anti-money laundering rules and manipulation of market benchmarks. We are now working at a much higher speed in these areas and envisage issuing important guidelines in the area of mortgage lending - on responsible lending and on arrears management.
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Reviews of the risks for consumers and banks from financial innovations such as Exchange Traded Funds, Contacts for Differences and structured products are also being finalised.
Further work is taking place under the aegis of the Joint Committee. In conclusion, let me touch on the delicate issue of resources. We really appreciate the efforts made by the Parliament to strengthen our resources. Notwithstanding the generous support provided by national supervisory authorities, which have seconded a significant number of staff at our premises during the periods of our most intense workload, it remains difficult for us to fulfil our tasks under such stringent resource constraints. While the amount of staff envisaged in the steady state situation, to be reached around 2015, is still commensurate to our tasks, there is an urgent need to accelerate the process, as the difficult challenges we are facing require that the resources are available as soon as possible. Thank you for your attention.

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NUMBER 5

Benoît Coeuré: Challenges to the single monetary policy and the European Central Bank‘s response
Speech by Mr Benoît Coeuré, Member of the Executive Board of the European Central Bank, at the I nstitut d‘études politiques, Paris, 20 September 2012. Ladies and gentlemen, It is a great pleasure for me to speak here today at Sciences Po Paris. 9 August this year was the fifth anniversary of the start of the financial crisis. The past few years have been times of hardship, financial turbulence and risks. At the same time, the crisis has exposed weaknesses in the framework of the economic and monetary union and provided an impetus to strengthen its foundations and to begin the process of bringing all euro area countries back to a more sustainable fiscal and macroeconomic path. The crisis has also brought challenges and opportunities for monetary policy, which is going to be the focus of my remarks today. Let me elaborate on two of them. The first challenge I will describe is that after Lehman‘s collapse central banks had to combat exceptional threats to price stability arising from financial instability and recessionary forces. At that time their standard tool of monetary policy – changes to the short-term interest rate – was losing traction due to the dislocation in the financial system.
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Central banks had to quickly learn that this situation required switching from normal operating mode, based simply on setting short-term interest rates, to crisis mode, aimed at sidestepping the obstacles to the standard channels of monetary policy transmission.
This experience has given us an opportunity to deepen our understanding of monetary policy and, in particular, to reject the textbook dichotomy that either the central bank is able to rely on the ―interest rate channel‖ for the transmission of its intentions, or else the economy is condemned to lasting instability.

It is now clear that additional channels and conduits are available.
The second challenge I want to discuss is the sovereign debt crisis and the associated fragmentation of credit markets across national borders. Starting in 2010, the financial crisis began to unfold in the euro area by turning into a debt crisis for some sovereign issuers. This quickly spilled across markets and countries. And more recently, it was exacerbated by investors‘ fears of the reversibility of the euro. The challenge faced by monetary policy in this environment is enormous and is testing the ability of the ECB to act as the central bank of a single monetary area with 17 fiscal jurisdictions. It has been increasingly challenging to preserve the singleness of the monetary policy and to ensure the proper transmission of the policy stance to the real economy throughout the currency area.

To address this situation, the ECB has taken a number of non-standard measures, and two weeks ago it announced the modalities for undertaking Outright Monetary Transactions in secondary markets for sovereign bonds in the euro area.

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I will describe the rationale for this decision and argue that it is a key element to ensure a lasting ―monetary dominance‖ in the euro area, compliant with the Treaties.

Channels of monetary policy in normal times and crisis times
In normal times, monetary policy works primarily through inter-temporal financial arbitrage. In the Eurosystem, this arbitrage covers two different time dimensions. There is the weekly arbitrage cycle, through which the volume of central bank liquidity is reallocated across banks trading in the money market in the period between two consecutive weekly Eurosystem main refinancing operations (MROs). The reason for this reallocation is that – as a matter of routine, at least – the Eurosystem provides reserves at weekly intervals. While the banking sector‘s need for reserves in the aggregate may not change significantly within a week, the cash needs of individual banks do fluctuate at higher frequencies, probably daily. So banks with liquidity deficits in the infra-weekly period need to borrow from banks with liquidity surpluses. The price at which these trades of liquid reserves between banks occur, i.e. the overnight interest rate (of which a euro area average, the EONIA, is computed and published every day by the ECB), is influenced by expectations of the cost of Eurosystem credit – the so-called MRO rate – at the next weekly monetary policy operation.

A short-term inter-temporal arbitrage calculus anchors the overnight interest rate applied on the credit transaction between banks that need liquidity and banks that have a liquidity surplus.
The second dimension of the inter-temporal calculus has a longer horizon and a wider scope of application across asset classes.
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Banks can borrow short in the money market or from the Eurosystem and decide to engage in term lending to other banks or to their customers.
Bank customers, in turn, can use bank liquidity to finance consumption or the acquisition of capital. It is important to note that all of these money transactions in the broader economy involve traders weighing the costs of their borrowing against the return opportunities on their asset acquisition at different points in time, where the horizon is typically longer than a week. But, again, as banks borrowing from the Eurosystem are the source of this liquidity propagation pattern, and banks‘ financial calculus is based on their anticipations of the interest rate settings by the Eurosystem in the future, such anticipations anchor the pricing of credit in the broader economy. We call this ―the interest rate channel‖ of monetary policy decisions. In normal times, when risk factors are contained and can be diversified away, the interest rate channel, working through inter-temporal arbitrage, is the prime conduit of monetary policy (see slide 2). It sets the floor for term borrowing costs. Parsing longer-term yields into two components – the average level of the short-term policy interest rate expected over the term to maturity of the asset, and the risk premia – expectations of monetary policy pin down the first component. The mechanism through which this occurs is the inter-temporal financial arbitrage I just described. Term and liquidity premia are the additional returns that investors demand as a compensation for their reluctance to bear interest rate risk over long-duration assets, and for their decision to forgo liquidity services – I am abstracting here from credit risk, to which I will return later.

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When markets are properly functioning, non-depository institutions – dealers, hedge funds, investment banks – provide immediacy by offering lenders and borrowers their capacity to take positions on both sides of the market.
Their ready availability to take positions as lenders and borrowers supports market liquidity, namely the ease with which a lender can liquidate a position before maturity. When market liquidity is secure, lenders are willing to engage in finance, trades in long-duration assets are active and the liquidity premia are contained. And, most importantly, they are steady. With a steady premium, the expectations of the short-term rates become the driving factor in the pricing of long-dated securities, and monetary policy acquires a potent handle on the economy. In August 2007, a sudden re-pricing in the US sub-prime mortgage market changed this world. The close and predictable relationship between the expected path of policy rates and market rates broke down because the liquidity premia widened and became volatile. The elevation of market premia was especially pronounced in the spread between the three-month EURIBOR and the expected three-month path of the overnight rate (see slide 3). Banks recognised a substantial counterparty risk in lending to each other, given that interbank lending was generally unsecured. But, even if collateral was taken, the ability to liquidate it at a reasonable price was severely impaired in an environment of widespread fear and uncertainty. Bank positions in the interbank market can be highly persistent.

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Large diversified banks tend to be borrowers and smaller, regional banks lenders.
When the financial turmoil erupted, persistent borrowers endured a sharp and sustained jump in their funding costs and many of them had no access to markets at all. When Lehman Brothers finally filed for bankruptcy in mid-September 2008, widespread financial panic broke out. The paralysis of transactions spread beyond the money markets, where it had been more or less confined for a year. Outside the money market, dealers play a critical role guaranteeing market liquidity. But in order to be able to take positions on both sides of the market, they need to finance their securities positions via collateralised funding. For that, they need their own capital, which they can use to pay for the margins required by those who lend them securities. When confidence evaporates, margins increase and dealers‘ capital is eroded, so that their ability to trade as buyers is restricted. Markets lose a critical actor, assets become less liquid, and the value of assets declines further. Having tasted the forbidden fruit of excess risk-taking, financial institutions were cast out of the paradise of seamless financial markets. In a financial crisis of these proportions, ―outside money‖ – an asset that is not a liability for anybody else than a central bank – becomes the sole trustworthy store of value. Only a central bank, the monopoly provider of outside money, can respond to the scrambles for liquidity.
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The ECB injected its funding capacity into a market vacuum left wide open by bank retrenchment, dealer defaults and investor panic.
In these conditions, inter-temporal financial arbitrage – of the type I described above – becomes impaired. The power of banks and dealers to engage in or finance inter-temporal trades of liquidity balances is degraded. So the main conduit of monetary policy – which depends on those trades – is lost. The ECB had to open a new channel, the ―liquidity channel‖, to get round the roadblocks facing the interest rate channel (see slide 4). More precisely, the ECB acted in two dimensions. It sought to alleviate the difficulties experienced by banks in getting liquidity from the interbank market, which was putting pressure on the assets side of banks‘ balance sheets and increasing the risks of hindering credit supply. At the same time, it sought to restore the normal pass-through from short-term money market (lending) rates to other market and bank interest rates. As far as impairments to banks‘ funding are concerned, the ECB addressed banks‘ funding uncertainty by fully accommodating liquidity needs at a fixed interest rate (the ECB main refinancing rate), while simultaneously lengthening the maturity of refinancing operations: from three to six months and twelve months, and more recently two operations with a three-year maturity. This has allowed an alleviation of the funding constraints of the banking system. In this way, a substantial change in the term structure of liquidity has taken place.
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While before the crisis about three-quarters of outstanding liquidity had a maturity of one week and the rest three months (i.e. an average maturity of 15–20 days), the current average maturity is 28 months (see slide 5). The expansion of the ECB collateralised monetary policy operations, together with the more widespread collateralisation of financial transactions, has raised the fear of encumbrance of bank assets.
This risk has not materialised as the list of eligible collateral has been expanded to enable banks to take full advantage of the ECB full-allotment policy, while rigorously applying risk control measures to mitigate liquidity, market and credit risk. But as higher haircuts erode the refinancing power of encumbered assets, there must be an asymptotic limit to the ability of the central bank to provide outside money without endangering its creditworthiness, on which confidence in the currency rests. The notion that central banks have an unlimited capacity to create money is an illusion and thus cannot be used as an excuse not to reform the economy.

Overall, the policy measures taken on several fronts were able to stem the risk of a credit flow fallout with related adverse implications for price stability.
In particular, the role of bank credit in financing the private sector has been preserved, supported by an increased recourse to debt markets especially by large firms (see slide 6).

The sovereign debt crisis and fragmentation of credit markets across national borders
My discussion so far has focused on term and liquidity premia, which have taken centre stage since the very beginning of the financial crisis. Starting in May 2010, the crisis was marked by a new phenomenon, until then little known in euro area: the emergence of large and variable credit risk premia in the pricing of supposedly risk-free securities issued by euro
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area governments.
This has led to questions about the creditworthiness of some sovereign issuers and to a fully-fledged sovereign debt crisis. This new phase of the crisis has taken on several dimensions. The first and most noticeable one has been the large sell-off of government debt issued by sovereigns in precarious fiscal positions (see slide 7).

Markets have increased their scrutiny of the fiscal and structural conditions of Member States (the ―fundamentals‖) and assessed them with an increasing degree of risk aversion.
At times, markets have also overreacted to national news and to the political debate at euro area level, with yields subsequently displaying little mean reversion.

Fragmentation of credit market across national borders
The second dimension of the debt crisis has been a fragmentation of credit markets across national borders, affecting both banks and the private non-financial sector – in addition to the fragmentation experienced in government debt markets.
The tight link between sovereign and bank creditworthiness is clearly visible in the high degree of correlation between sovereign CDS premia and bank CDS premia within the same jurisdiction (see slide 8). Causality runs both ways: banks‘ rising funding costs reflect the risk associated with banks‘ holdings of bonds issued by their own sovereign; and sovereign risk is exacerbated by the contingent liabilities coming from the perception that the government will have to intervene to rescue the domestic financial system. This creates a self-reinforcing loop between bank and sovereign risks, with doubts about the solvency of the sovereigns feeding doubts about the solvency of the banks, and vice versa.
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Such dynamics are much weaker in euro area countries considered by markets as financially solid. In the US – an example of a well-integrated fiscal and financial union, with a shock-absorbing capacity at the federal level, credible discipline at state level and a centralised mechanism to supervise and resolve banks – there is no correlation between bank and sovereign CDS premia.

With hindsight, the ―original sins‖ of Economic and Monetary Union, an otherwise carefully thought-through and consistent project, were weak fiscal institutions, tolerance of economic imbalances and the lack of an integrated mechanism to supervise and resolve banks.
As a matter of fact, financial fragmentation has led to a ―two-gear‖ monetary union, in which the marginal cost of borrowing for banks varies according to the jurisdiction. 1.Banks belonging to jurisdictions considered by markets as financially sound can generally access the interbank money market and get overnight financing at the EONIA rate, which is currently as low as 0.10%. 2.Banks in jurisdictions where risks and uncertainty are elevated generally have limited access to the interbank money market and rely to a large extent on central bank liquidity, charged at the MRO rate, currently 0.75%. The distressed funding conditions faced by banks in some parts of the euro area, compounded by expectations of a worsening macroeconomic outlook, have in turn resulted in fragmented credit conditions for households and firms, again along national borders. For one thing, credit supply standards applied by banks in their lending to the real economy have diverged across euro area countries. A similar message comes from the cross-country comparison of bank lending rates.

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The 75 basis point cut in the ECB main policy rate implemented in late 2011 has been accompanied by little reaction or even an increase of lending rates in countries under stress, whereas there has been a complete pass-through in euro area countries considered by the markets as financially solid (see slide 9).

Self-fulfilling equilibria driven by break-up fears
The third, and most recent, dimension of the debt crisis has taken the form of investor fears of a break-up of the currency union. Whereas exchange rate risk across euro area countries should have disappeared permanently with the creation of the single currency in 1999, there have been signs, especially over the summer, that investors have started pricing in redenomination risk. Investors require a compensation for the risk that the euro might not remain the irreversible currency of the euro area – at least in its current composition. Although it is difficult to disentangle redenomination premia from other sources of risks – and it requires econometric analysis – the inversion of the slope of the term structure of sovereign bond spreads observed in early summer 2012, for instance, for Spain and I taly was consistent with expectations of imminent break-up risks. Market fears of a high probability of not paying back in full, or of equivalently to repaying in a different, lower-valued currency , command high spreads. If the probability of this event concentrates over the short horizon, then the cumulative default probability for longer horizons (bounded overall by 100%) cannot rise much further, and inversion of the spread curve necessarily follows. Redenomination premia share some similarities with exchange rate premia that were driven out of control in the early 1990s by speculative attacks against the legacy currencies.
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The early symptoms – inverted sovereign yield curves, at least for some contries – were the same.
And the potential of such attacks is known to generate self-fulfilling prophecies. In early summer 2012 this situation had two main implications. One was for fiscal policy: it needs to deliver sound fundamentals as the only way to lastingly overcome the crisis; but, at the same time, there can be no viable fiscal adjustment that can ensure sustainability if the interest rate faced by the fiscal authority keeps rising and there are severe distortions in government bond markets. The second implication was for monetary policy: the central bank cannot fulfil its mandate to maintain price stability if its policy intentions are not transmitted correctly to the real economy through the chain which forms the basis for monetary policy transmission; but, at the same time, the central bank cannot fulfil its mandate to maintain price stability if the fiscal authority does not fully honour its obligation to pay back its liabilities under all circumstances. How to make these apparently conflicting instances compatible? And how to overcome the deadlock?

The ECB policy response: Outright Monetary Transactions
Guidance to answer these questions can be derived from the Maastricht Treaty and the conceptual apparatus developed in the context of the economic literature on monetary vs. fiscal dominance. These insights have made clear that, from an institutional design perspective, central bank independence and a clear focus on price stability are necessary but not sufficient to ensure that the central bank can provide a regime of low and stable inflation under all circumstances – in the economic jargon, ensuring ―monetary dominance‖. Maintaining price stability also requires appropriate fiscal policy.
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To borrow from Leeper‘s terminology, this means that an ―active‖ monetary policy – namely a monetary policy that actively engages in the setting of its policy interest rate instrument independently and in the exclusive pursuit of its objective of price stability – must be accompanied by ―passive‖ fiscal policy.
A passive fiscal policy means that the fiscal authority must be ready and willing to adjust its policy stance (revenues and primary spending) in such a way as to stabilise its debt at any level of the interest rate that the central bank may choose.

Or, to put it another way, borrowing from Woodford‘s terminology, fiscal policy needs to be ―Ricardian‖.
Although the Treaty shows an awareness of the need for consistency between monetary and fiscal policy, in the sense described above, to ensure lasting stability, it did not foresee that fiscal policy could go off track to an extent that requires dedicated institutions and policies able to provide financial assistance, against conditionality, in order to restore sustainability and preserve financial stability in the euro area. The creation of the EFSF/ ESM in charge of providing support to euro area Member States in difficulties and enforcing appropriate conditionality has filled this gap. It provides the euro area with a means to restore ―Ricardianess‖, thereby minimising the risk of ―fiscal dominance‖. Against this background, it is easy to understand the ECB‘s decision on 6 September to undertake Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area, and to understand the specific framework within which they will be implemented. The aim of OMTs is to preserve the singleness of monetary policy and to ensure the proper transmission of the monetary policy stance to the real economy throughout the euro area. OMTs are intended to provide the ECB with a tool to address severe distortions in government bond
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markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.
Effectively, OMTs represent a means to rule out destructive self-fulfilling prophecies that would force the economy into a sub-optimal equilibrium (with elevated interest rates, adjustments made impossible, ultimately leading to default and currency redenomination). Meanwhile, OMTs preserve the incentives for governments to enforce the economic and fiscal adjustments which will prove necessary to steer the economy towards the ―good‖ equilibrium. As a consequence, OMTs can succeed only if action is taken by governments, at national and at euro area level, to restore long-term growth and bridge fiscal and economic imbalances. The framework for OMTs is based on six main elements (see slide 10). First, strict and effective conditionality. A necessary condition for initiating OMTs is that a Member State activates an appropriate EFSF/ ESM programme, which envisages strict and effective conditionality spanning the fiscal, macroeconomic, structural and financial spheres. And the design of conditionality and the monitoring of such a programme can largely benefit from the involvement of the I MF. This is however not sufficient. The country also needs to maintain (at least some) market access.

And this is signalled by the reference the ECB has made to the need for the EFSF /ESM programme to include the possibility of primary market purchases.

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In addition, and most importantly, the Governing Council maintains full discretion to initiate OMTs, focusing its assessment exclusively on monetary policy considerations.
The second main element on which the framework for OMTs is based is a built-in exit strategy. OMTs will be terminated when one of the following conditions materialises. OMTs are no longer warranted due to threats to price stability; the aim of OMTs has been achieved; there is non-compliance with the conditionality established in the EFSF/ ESM programme. This announced rules-based approach represents a way to address time inconsistency. Third, OMTs will focus on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years. This underscores the monetary policy nature of such outright transactions, the principle of which was foreseen in the ECB Statute. And it buttresses the OMTs‘ aim to address reversibility premia which, as I argued above, have tended to manifest themselves at the short end of the term structure, while addressing the fact that credit risk embedded in longer-term yields should reflect the credibility of countries‘ economic and financial adjustment programmes. Fourth, there are no ex ante quantitative limits on the size of OMTs.

This makes clear that the ECB is committed to do whatever it takes, within its mandate, to preserve the solidity and irreversibility of the currency.
Fifth, the ECB accepts the same (pari passu) treatment as private or other creditors with respect to bonds purchased in the context of OMTs.
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Finally, the liquidity created through OMTs will be fully sterilised. This reflects the role of OMTs in counteracting destructive self-fulfilling equilibria rather than altering the aggregate liquidity stance. The main features of the framework for OMTs outlined here address by design also three concerns or questions sometimes voiced in relation to outright purchases of government bonds by a central bank. The first concern can be summed up in two questions: Are OMTs a form of monetary financing of governments and will inflation be unleashed? The answer to both questions is: No. In fact, quite the opposite. OMTs will be conducive to the monetary authority restoring its power to control credit conditions in the euro area and, through that channel, inflation in the medium term. It thus creates the conditions for a transition from a regime of undisciplined fiscal policies – from a ―non-Ricardian‖ or ―active‖ fiscal policy, using the terminology of the economic literature referred to above – to a regime where fiscal policy respects its inter-temporal obligations – it becomes ―Ricardian‖, or ―passive‖. This means that monetary policy has regained its pre-eminence in determining credit conditions and inflation. This renewed assignment of tasks pushes back fiscal dominance and affirms monetary dominance. The second concern can be formulated in terms of the question: will OMTs bring large risks to the central bank‘s balance sheet? The answer again is: no. OMTs establish a second type of interaction: between the central bank, real money investors and households and firms,
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which save and borrow to finance real economic activity.
To the extent that break-up and reversibility premia are squeezed out of bond pricing, real money investors will return to the euro area securities market, and the prices of securities will again better reflect the fundamentals. Households and firms will benefit from restored credit conditions. And the associated widespread reassessment of risks will make market portfolios and the central bank portfolios grow in value. Ultimately, strict and effective conditionality could be seen as acting as a credit enhancement of all euro area portfolios. The third question is whether OMTs are a form of quantitative easing (QE). The answer is: no. First of all, QE is meant to ease the general credit conditions which are considered by the central bank to have become tight in a situation in which the short-term interest rate cannot be reduced further. OMTs are meant instead to restore homogeneous credit conditions throughout the euro area, but not necessarily to ease credit conditions in the aggregate. In the euro area as a region, there are currently no clear signs of deflation fears (see slide 1 1) that would justify QE. In addition, the channels of transmission are different. QE is expected to act on risk premia (primarily term premia) by subtracting long-duration securities from the market and replacing them with base money, which has a very short duration. This would reduce term premia and bid up the price of long-dated securities.
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The aim of OMTs however is not to create an excess demand for duration in the market, but to counteract redenomination risk and squeeze redenomination premia out of bond prices. In fact, OMTs focus on relatively short maturities, where premia associated with break-up risk are most evident. Finally, QE would need to be tailored to the specificities of the euro area, where two-thirds of the external financing of non-financial corporations is extended by banks and which does not have access to actively traded credit markets.

Conclusions
Let me conclude. The effectiveness of monetary policy relies on the control of monetary and credit conditions. This ability has been severely tested by the crisis. Some of the challenges faced by the ECB have been common to other central banks. The threat to the viability of the interest rate channel, and the consequent need to devise alternative (―non-standard‖) measures exploiting other channels of transmission, is a prominent example. The crisis has taught us that the liquidity channel exploited by monetary policy in the euro area can be very powerful.

It has allowed the ECB to maintain the flow of credit to the real economy and ensure price stability even in face of the soaring liquidity and funding risks experienced by banks during the crisis.
Other challenges faced by the ECB have taken a specific form in the euro area and thus been somewhat different from those experienced by central banks elsewhere.

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The most obvious one is the sovereign debt crisis, with the associated fragmentation of credit markets across national borders and more recently the break-up fears.
The destructive potential of these developments is enormous. This has led the ECB to recently announce its Outright Monetary Transactions in secondary markets for sovereign bonds as a means to safeguard the monetary policy transmission mechanism in all countries of the euro area and to counteract self-fulfilling prophecies.

The design of OMTs has been inspired by the desire to affirm in a lasting manner ―monetary dominance‖, in compliance with the principles enshrined in the Maastricht Treaty.
Going forward, the ECB remains committed to do whatever it takes to comply with its mandate of maintaining price stability in the euro area.

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NUMBER 6

EIOPA and FIN MA Sign a Memorandum of Understanding
The European I nsurance and Occupational Pensions Authority (EIOPA) and the Swiss Financial Market Supervisory Authority (FINMA) have signed a Memorandum of Understanding (MoU) in Bern today. The main objective of the MoU is to ensure optimal cooperation in supervision, in particular for insurance groups with international activities in the European economic area (EEA) and Switzerland. The Memorandum creates a formal basis for cooperation in the following areas: group supervision, assistance in the work of EEA and FINMA colleges of supervisors, action required in emergency situations, safeguarding financial stability by monitoring and assessing risks, interconnectedness and conducting stress tests. The Authorities would like to emphasise that the Memorandum will not modify or supersede any laws or regulatory requirements in force and will not affect any arrangements under the MoUs that have previously been signed between FIN MA and other national supervisory authorities of the EEA. Anne H éritier Lachat, Chair of FINM A Board of Directors, said: ― In light of the increased internationalisation of financial groups and financial products, international cooperation between supervisory authorities is gaining in importance. We are very interested in conducting an active and fruitful dialogue with key financial regulators. The MoU with E IOPA provides us with a very good basis to do so‖. Gabriel Bernardino, Chairman of E IOPA, said: ―This is the first Memorandum of Understanding ever signed by E IOPA. We are
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committed to pursue a constructive dialogue, effective cooperation and information exchange with FINMA.
This MoU is an important step to reinforce the efficiency of supervision and to enhance consumer protection in an increasingly global insurance market‖.

Note:
European Economic Area (EAA) consists of 27 EU Member States including I celand, Liechtenstein and Norway. The Swiss Financial Market Supervisory Authority (FINMA) is an independent state supervisory authority of banks, insurance companies, exchanges, securities dealers, collective investment schemes, distributors and insurance intermediaries. The European I nsurance and Occupational Pensions Authority (EIOPA) was established as a result of the reforms to the structure of supervision of the financial sector in the European Union. The reform was initiated by the European Commission, following the recommendations of a Committee of Wise Men, chaired by Mr de Larosière, and supported by the European Council and Parliament. EIOPA is part of the European System of Financial Supervision consisting of three European Supervisory Authorities, the N ational Supervisory Authorities and the European Systemic Risk Board. It is an independent advisory body to the European Commission, the European Parliament and the Council of the European Union. EIOPA‘s core responsibilities are to support the stability of the financial system, enhance the transparency of markets and financial products, and protect insurance policy holders, pension scheme members and beneficiaries.

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Memorandum of Understanding (MoU) between the European Insurance and Occupational Pensions Authority (EIOPA) and the Swiss Financial Market Supervisory Authority (FINMA)
(hereinafter referred to as ―Authorities‖) whereas, EIOPA is, under Regulation (EU) No. 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing the European I nsurance and Occupational Pensions Authority (―The Regulation‖), expected to ensure the orderly functioning and integrity of financial markets and the stability of the financial system in the European Union. With regard to EIO PA‘s role under this MoU, Articles 8 (f) and (i), 17, 18, 21, 23, 33, 35 and 70 of The Regulation are particularly relevant. EIOPA has under The Regulation the task to pursue a constructive dialogue and effective cooperation with supervisory authorities outside the European Union. EIOPA has also the task to contribute as a competent authority to colleges of supervisors (―EEA Colleges‖). EEA Colleges may also include third country subsidiaries and branches or financial groups having their headquarters in third countries and their subsidiaries or branches in the European Union. EIOPA facilitates and updates the so called Helsinki plus list which provides information on EEA insurance groups and their supervision. EIOPA will in its contacts with FINM A fully respect the existing roles and respective competences of the EU Member States, Liechtenstein, Iceland, N orway and the European Union institutions. This arrangement will not create legal obligations in respect of the European Union, its Member States, Liechtenstein, I celand and Norway nor shall it prevent Member States and Liechtenstein, I celand and Norway and their competent authorities from concluding bilateral or multilateral arrangements with FINM A.
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Since the tasks of E IOPA as a European Supervisory Authority are of a specific nature, a separate MoU between E IOPA and FIN MA is needed.
FINMA has under the Federal Act on the Swiss Financial Market Supervisory Authority (FINMASA) of 22 June 2007, notably Article 6 (2), the remit to fulfil the international tasks that are related to its supervisory activity. FINMA may, in particular, according to Article 42 FINM ASA, cooperate with foreign authorities responsible for financial market supervision including the sharing of confidential information and documents.

FINMA sets up and chairs supervisory colleges (―F INMA Colleges‖) pursuant to its Policy on I nsurance Supervisory Colleges where FINMA is the responsible group supervisor of an insurance group with international activities. I n this context, FINMA is to liaise with the foreign authorities responsible for the supervision of relevant group entities.
FINMA also participates where appropriate in insurance supervisory colleges organised by foreign supervisory authorities.

A. Principles and Scope
1. The purpose of this Memorandum of Understanding (MoU) is to establish a formal basis for cooperation with a view to further strengthening the dialogue and cooperation between E IOPA and FINMA within their respective statutory remits pertaining to insurance regulation and supervision, and more in particular regarding: •The exchange of information and assistance relating to insurance groups under group supervision of FIN MA or of a supervisory authority considered a Voting Member or Observer in E IOPA‘s Board of Supervisors and have business activities in the respective jurisdiction of the other authority, in particular exchange of information and assistance relating to the work of EEA and FINM A Colleges, and action required in emergency situations. •The exchange of information for macroprudential (financial stability) purposes, such as monitoring and assessment of risks, interconnectedness, and stress testing.
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2.This MoU does not modify or supersede any laws or regulatory requirements in force with regard to, or applying to, FINM A or in force with regard to, or applying to, E IOPA.
This MoU sets forth a statement of intent and accordingly does not create any enforceable rights. This MoU does not affect any arrangements under other MoUs. 3.The Authorities acknowledge that they may only provide information under this MoU if permitted or not prevented under applicable laws, regulations and requirements. 4.For EIOPA, all confidential information exchanged under this MoU will be subject to E IOPA‘s obligation of professional secrecy (Article 70 of The Regulation and EIOPA‘s confidentiality policy). 5.For FINMA, all confidential information exchanged under this MoU will be subject to FINMA‘s obligation of professional secrecy (Article 14 FINMASA).

B. Cooperation for Supervision of I nsurance Groups and Conglomerates
6.The Authorities agree that the aim of cooperation is to ensure optimal supervision in particular for insurance groups with international activities in the EEA and Switzerland.
The cooperation should be carried out efficiently and effectively, and should not impose unnecessary burden for the insurance undertakings subject to supervision, or for the Authorities involved. 7.The Authorities will make all reasonable efforts to exercise the cooperation and coordination in a spirit of mutual trust. 8.FINMA may participate in the activities of the EEA Colleges formed by the EEA Authorities when a Swiss insurance undertaking is concerned. In this case EIOPA Guidelines on EEA Colleges shall apply. 9.When Swiss based insurance groups with activities in the EEA are subject to group supervision by FINM A, E IOPA may participate in the activities of the FIN MA colleges.
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In this case, the FINMA Policy on I nsurance Supervisory Colleges shall apply.
1 0 . E IOPA will facilitate information exchange between FIN MA and the Supervisory Authority considered a Voting Member or Observer in EIOPA‘s Board of Supervisors, in particular by making the Helsinki plus list3 accessible to FINMA. 11.FINMA will provide information to complete the Helsinki plus list4 to enable EIOPA to keep the list up to date. 1 2 . E IOPA will in its oversight function also use information received from FINMA to prepare for the EEA College work. Only in the cases of Articles 17 and 18 of The Regulation, E IOPA may use such information for supervisory purposes.

C. Macroprudential tasks
13. FINMA and E IOPA will share relevant information to fulfil their macro8prudential tasks.

D. Procedure for Requests for Information and Assistance
14.If a request for information and assistance is made, each Authority will make reasonable efforts to provide assistance to the other, subject to its laws and overall policy. 15.Requests for the provision of information or assistance should be made in writing. In urgent cases, requests may be made orally to the usual contact persons, in summary form to be followed as soon as possible by a full request. 16. Requests for information and assistance should specify: a.the individual or aggregated information or assistance requested; b. a description of the matter which gives rise to the request; c.the purpose for which the information is sought (including details of the laws

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and regulatory requirements pertaining to the matter which is the subject of the request);
d.the persons believed by the requesting Authority to possess the information sought, or the place where such information may be obtained, if known; e.to whom, if anyone, onward disclosure of information is likely to be necessary and the reason for such disclosure; f. the desired time period for the reply.

Assessment of requests
17.Each request for information and assistance should be assessed on a case-by-case basis by the recipient Authority to determine whether assistance can be provided under the terms of this MoU. 1 8 . I n any case where the request cannot be fulfilled in part or whole, the recipient Authority may consider whether there may be other assistance which can be given by itself or by any other organisation in its jurisdiction. 19.In deciding whether and to what extent to fulfil a request, the recipient Authority may take into account: a.whether the request conforms with this MoU; b.whether the request involves the administration of a law, regulation or requirement which has no close parallel in the jurisdiction of the requested Authority; c.whether the provision of assistance would be so burdensome as to disrupt the proper performance of the recipient Authority‘s functions; d.whether it would be otherwise contrary to the public interest or the essential national interest of the recipient Authority‘s jurisdiction to give the assistance sought; e.any other matters specified by the laws, regulations and requirements of the recipient Authority‘s jurisdiction (in particular those relating to

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confidentiality and professional secrecy, data protection and privacy, and procedural fairness); and
f.whether complying with the request may otherwise be prejudicial to the performance by the recipient Authority of its functions. g.whether the request would lead to the prosecution or taking of disciplinary action or other enforcement action against a person who in the opinion of the requested Authority has already been appropriately dealt with in relation to the alleged breach in the subject matter of the request.

20.The Authorities recognise that assistance may be denied in whole or in part for any of the above reasons in the discretion of the recipient Authority.

Contact Points
21.The Authorities will provide a list of contact points (departments or teams in the organisation) to which information or requests for information and/ or assistance under this MoU should be directed.

Costs
22.If the cost of fulfilling a request is likely to be substantial, the recipient Authority may, as a condition of agreeing to give assistance under this MoU, require the requesting Authority to make a contribution to any costs incurred.

E. Permissible Use and Confidentiality
23.If the Authorities receive confidential information under this MoU, they agree to treat such information as confidential in accordance with the provisions of this MoU. 24.An Authority that receives confidential information under this MoU may use that information for the purposes set forth in the request for information and/ or assistance. 25.If the recipient Authority intends to use information provided under this MoU for any purposes other than those contemplated in paragraph 24, it will seek prior consent of the Authority providing the information.
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26.The requesting Authority confirms that it will seek consent from the requested Authority before disclosing any confidential information it receives under this MoU.
27.Before disclosing the information obtained pursuant to this MoU to third parties, the requesting Authority will seek a commitment from them to keep the information confidential. 28.The recipient Authority will undertake every effort to comply with any restrictions on the use or disclosure of information that are agreed when the information is provided.

29.If the requesting Authority is subject to a mandatory disclosure requirement or receives a legally enforceable demand for information under applicable laws, regulations and requirements, the requesting Authority will notify the requested Authority of its obligation to disclose and will endeavour to seek consent from the requested Authority before making a disclosure. If the requested Authority withholds its consent, the requesting Authority will make its best efforts to protect the confidentiality of confidential information obtained according to its confidentiality obligations stated under paragraphs 4 and 5 and, if necessary, to resist disclosure, including asserting such appropriate legal exemptions or privileges with respect to that information as may be available, for example by advising the concerned court or requesting party of the possible negative consequences of a disclosure on future co8operation between the Authorities.
30.The Authorities agree to treat the confidential information received under this MoU as confidential to the extent permitted by law even after withdrawal from this MoU under paragraph 32 below.

F. Consultation
31. The Authorities will keep the operation of this MoU under review and will consult when necessary: a.in the event of a dispute over the meaning of any term used in the MoU; b.in the event of a substantial change in the laws, regulations or practices affecting the operation of the MoU;
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c.in the event of any Authority proposing to withdraw from the MoU; and
d.whenever necessary, with a view to improving its operation and resolving any matters.

G. Commencement, Withdrawal and Amendment
32. This MoU will take effect when signed. Any Authority may withdraw from the MoU by giving 30 days advance written notice to the other Authority. The MoU may be amended by agreement in writing.

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NUMBER 7

European Systemic Risk Board ESRB Risk Dashboard
DISCLAIMER: The dashboard is a set of quantitative indicators and not an early warning system. Users may not rely on the indicators as a basis for any mechanical form of inference.

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A. Interlinkages and composite measures of systemic risk

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B. Macro risk

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C. Credit risk

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D. Funding and liquidity
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E. Market risk

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F. Profitability and solvency

Sample of large EU banking groups

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Sample of large EU insurance groups

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Sample of 36 large EU banking groups for EBA key risk indicators 1 Erste Group Bank AG 2 KBC Group Dexia 3 DZ BANK AG 4 WestLB AG2 5 Landesbank Baden-Wuerttemberg 6 Deutsche Bank AG 7 Commerzbank AG 8 Norddeutsche Landesbank GZ 9 Bayerische Landesbank 10 Hypo Real Estate 1 1
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12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36

Danske Bank A/ S Banco Santander SA Banco Bilbao Vizcaya Argentaria SA La Caixa Banco Financiero y de Ahorro BNP Paribas Crédit Agricole Group-Crédit Agricole Société Générale Credit Mutuel Group BPCE Barclays Plc Lloyds Banking Group Plc Standard Chartered Plc HSBC Holdings Plc Royal Bank of Scotland Group Plc (The) Nationwide Building Society Gruppo UniCredit Gruppo Monte dei Paschi di Siena Gruppo Bancario I ntesa Sanpaolo ABN Amro ING Groep N V Rabobank Group-Rabobank Nederland Skandinaviska Enskilda Banken AB Nordea Bank AB (publ) Svenska H andelsbanken

WestLB is included in indicators 27 and from 39.a to 40.b up to Q1 2011. On 30 June 2012 WestLB was formally dissolved.

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NUMBER 8

Simon Kwan, vice president at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook.
Incoming data indicate that economic activity has continued to expand at a moderate pace in recent months. Nonfarm payrolls rose by only 96,000 in August, while gains in July and June were revised down by 41,000 jobs. That put June-through-August job growth at a meager 94,000 per month, a notable downshift from average job creation of over 200,000 per month over the first three months of the year. Amid slow job growth, the unemployment rate remains elevated at 8.1%, nearly unchanged since the beginning of the year and well above its longer-run normal level. Other indicators, including the rate of participation in the labor force, confirm pervasive labor market weakness. The recent stagnation of the labor market, if not reversed, could pose a serious threat to the economy‘s long-term health. While household spending has continued to advance, capital outlays have slowed. New orders for core capital goods have also dipped below shipments lately, pointing to potentially further slowing in business capital investment. During the current recovery, aggregate capital expenditures by nonfinancial corporations have consistently been below the funds these businesses have generated internally, which consists mainly of after-tax
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profits and noncash business expenses such as depreciation.
The sluggish business investment seems even more striking given the strength of corporate balance sheets. Profit margins of nonfinancial corporations have been holding up well, and equity analysts are forecasting robust earnings growth in future quarters. Meanwhile, data suggest that nonfinancial firms are sitting on a lot of cash and other liquid assets, and have ample borrowing capacity. One crucial factor driving sluggish hiring and lackluster capital investment appears to be heightened uncertainty about the future. This uncertainty is fueled by several factors, including the halting recovery in sales and demand, the protracted European debt crisis, and a lack of clarity on what will happen with near-term and longer-term federal fiscal policy, including the ―fiscal cliff.‖ With excess capacity in the economy and below-trend growth, inflation has been subdued. The medium-term outlook is that inflation is likely to run at or below the 2% target that Federal Reserve policymakers consider most consistent with their maximum employment and price stability goals. Looking ahead, the odds appear to have risen that the Fed will continue to miss both its maximum employment and price stability mandates. Thus, the stage was set for the Fed‘s policy body, the Federal Open Market Committee (FOMC), to act boldly. At its September meeting, the FOMC moved to provide additional monetary stimulus, using both its balance sheet and its communication tools. The FOMC announced that the Fed will purchase additional agency
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mortgage-backed securities at a pace of $40 billion per month.
The Fed will also continue the Maturity Extension Program announced in June to increase holdings of longer-term Treasury securities and decrease holdings of short-term Treasuries. And the Fed will maintain its existing reinvestment policy to replace maturing securities. If the labor market outlook does not improve substantially, the Fed will continue purchases of agency mortgage-backed securities, carry out additional asset purchases, and employ other policy tools as appropriate until improvement is achieved in a context of price stability. The policy of open-ended purchases of securities is unprecedented for the Fed. The shift to a flow-based balance sheet policy instead of a fixed quantity of purchases provides greater flexibility for the Fed to respond to new information. As always, the Fed will monitor economic and financial developments to assess the efficacy and costs of asset purchases. The new policy initiatives have a critical communications component. In explicitly laying out the conditions for stopping the asset purchase program—a broad-based improvement in the labor market—the Fed is underscoring its resolve to support economic growth. Doing so should reduce the uncertainty about whether asset purchases will be enough to improve labor market conditions. And, by stressing that it will conduct asset purchases in a context of price stability, the Fed is reconfirming its commitment to its dual mandate. The FOMC also emphasized that it expects a highly accommodative
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stance of monetary policy to remain appropriate for a considerable time after the economic recovery strengthens.
This reassures the public that the Fed will not tighten policy prematurely as the economy picks up. In particular, the FOMC extended its guidance on future policy by stating it anticipates exceptionally low levels for the Fed‘s benchmark federal funds rate are likely to be warranted at least through mid-2015. The additional monetary stimulus is expected to support a stronger recovery, boosting GDP growth to about 2.5% in 2013 and about 3.3% in 2014. At the same time, the unemployment rate is expected to come down a bit faster, to about 7.9% by the end of 2013 and about 7.3% by the end of 2014. Inflation as measured by the personal consumption expenditures price index is projected to be only slightly higher than without the stimulus— 1.7% in 2013 and 1.8% in 2014.

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NUMBER 9

Maximum Employment and Monetary Policy"
Jeffrey M. Lacker, President Federal Reserve Bank of Richmond Money Marketeers of New York University, Down Town Association New York City, N.Y.
Topics: Labor Markets, Business Cycles, Economic Conditions, Monetary Policy, Unemployment The Federal Open Market Committee (FOMC) conducts the nation‘s monetary policy subject to its congressional mandate to pursue ―maximum employment, stable prices and moderate long-term interest rates.‖ Most people talk about only the first two objectives and refer to the Fed‘s ―dual mandate.‖ The dual mandate poses a clear challenge for the FOMC in times like these. Three years after the end of the Great Recession, employment seems far from what anyone would consider its maximum level by historical standards, with unemployment above 8 percent, labor force participation having fallen dramatically and the ratio of employment to population at its lowest level in nearly 30 years.

Although we have seen spurts of more robust employment growth, they seem to peter out after several months.
Since employment bottomed out in February 2010, we‘ve only managed to add 135,000 net new jobs per month, a rate that is generally not expected to be able to bring down unemployment very rapidly.

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With this backdrop, the FOMC voted recently to initiate a new program of asset purchases by buying additional agency mortgage-backed securities at a rate of $40 billion per month.
The Committee stated that it ―expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,‖ and that it currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015. As you may know, I dissented, and I will discuss the reasons for my dissent later in my remarks. The Committee‘s actions and communications are consistent with a widespread view of the dual mandate — namely, that as long as unemployment remains high, the Fed has room to stimulate employment growth without putting its price stability goal too much at risk. In this view, high unemployment represents slack in the economy that prevents inflationary pressures from taking hold — and could even lead to unwelcome disinflation or deflation. A somewhat stronger reading of the mandate even suggests that, in circumstances like the present, the Fed can and should accept an increased rate of inflation for some time in order to accelerate improvement in labor market conditions. While I do not believe this view of the mandate is driving the Committee‘s recent decisions, it‘s a view that has been associated with a number of prominent economists. In my remarks today, I would like to take a closer look at the concept of economic slack and what it means for the Fed‘s maximum employment mandate. A review of the role of maximum employment in the conduct of monetary policy leads naturally, I believe, to a degree of skepticism
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regarding the net benefits of adding further monetary stimulus in the present environment.
So you won‘t be surprised to hear me tell you that the views I express are my own and are not necessarily shared by my FOMC colleagues. As you might expect, the Committee has spent a great deal of time in recent years studying labor market conditions and their implications for our monetary policy mission. In January of this year, the FOMC released a Longer-Run Goals and Policy Strategy statement. That statement outlined a broad set of principles pertaining to the implementation of its congressional mandate. The FOMC spent a good deal of time on the question of how to measure performance relative to our price stability mandate. Because the inflation rate over the longer run is determined by monetary policy, the Committee has the ability to specify a numerical target for inflation. The Committee decided that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve‘s statutory mandate. The maximum employment objective of the mandate also requires a yardstick against which to compare actual labor market performance. One possible approach is to gauge what the employment rate or the unemployment rate would be in ―normal times,‖ after the economy has been able to recover from adversity. ―To be precise, to what number would the unemployment rate converge, in the future, in the absence of further shocks and under appropriate monetary policy.‖

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Call this ―the long-run normal rate of unemployment,‖ or just ―the longrun unemployment rate.‖
This measure also can be thought of in terms of the path to which employment would converge in the absence of unanticipated shocks and under appropriate policy. Given how the size of the labor force behaves over time, the unemployment rate and the level of employment are, at least conceptually, interchangeable ways of thinking about labor market conditions. For simplicity and convenience, in the rest of my remarks, I will refer to the unemployment rate, but all that I will say can be translated directly into statements about employment or, for that matter, output. In evaluating the current stance of monetary policy, the long-run unemployment rate would appear to be an attractive yardstick, since it provides a sense of where one ultimately would like to be. But for assessing monetary policy on a month-to-month or quarter-toquarter basis, the long-run unemployment rate can be very misleading. For example, when unemployment is relatively high, it‘s unlikely that unemployment can be made to return to the long-run unemployment rate at a very rapid clip — within a quarter or two, say. At such times, the best possible monetary policy will only bring unemployment down gradually over time. We can debate whether a given pace is faster or slower than optimal. But there is undoubtedly some optimal pace, and it‘s unlikely to be virtually instantaneous. While that convergence process is going on, to what unemployment rate should we refer when assessing monetary policy? In other words, while an economy is adjusting to significant economic shocks, what constitutes ―maximum employment‖?
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Surely not the long-run rate, because how far we are away from that rate does not, in general, tell us how fast we should be returning.
A few examples illustrate this principle. Consider a large and permanent oil price increase. Such ―supply shocks‖ reduce the productive capacity of the economy. On impact, inflation and unemployment may rise. Costly and timeconsuming adjustments take place in response to the new relative price of oil; businesses shift input mixes and adjust their capital, while consumers alter spending patterns. Over time, productive capacity is restored and real incomes recover. I n the meantime, before those adjustments are complete, an attempt to reduce unemployment too rapidly is likely to spark more inflation; conversely, allowing disinflation to emerge may cause unemployment to decline too slowly. In other words, there‘s a reference unemployment rate that is relevant for monetary policy, and until the real economic adjustments to the oil price shock have taken place, it will be above the long-run rate.

Another example, with similar implications, is an acceleration of productivity growth similar to the one we saw in the late 1990s. This might allow lower unemployment without accelerating inflation.
A focus on the long-run unemployment rate might lead one to tighten monetary policy prematurely. Acknowledging that the right yardstick for monetary policy might have fallen below the long-run unemployment rate leads to better outcomes. As a third and final example, consider a shock that causes economic activity to shift rapidly away from some sectors and toward others. Such a shock could lead to persistently high unemployment because costly and time-consuming retraining is required for workers to move between sectors, or because capital investments in other sectors are required to absorb the newly available pool of labor.
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In the absence of further shocks, society‘s optimal response is likely to have the unemployment rate decline gradually over time.
This, arguably, is the type of shock that contributed significantly to the Great Recession — an unexpected decline in residential construction that resulted in an oversupply of labor and capital that has been difficult to successfully redeploy to other sectors. These three examples all illustrate a general result from the models that most contemporary economists use to analyze business cycles and monetary policy. In such models, there is a reference unemployment rate to which it‘s most appropriate to compare the current unemployment rate for the purposes of assessing current policy. In general, that reference rate is a function of most of the shocks in the model. The most common term for this reference rate is ―the natural rate‖ of unemployment, although there is some variation among authors.

There is a clear intuition for having the unemployment yardstick for monetary policy vary with economic conditions. Modern economies are buffeted by unanticipated disturbances.
Even at their best, economies take time to adjust to those shocks. The pace of that adjustment is in turn affected by a variety of frictions in an economy — frictions in the way firms determine the prices of their goods, frictions in the process of searching for the most promising opportunities to deploy available capital and labor resources, and frictions in the way workers and employers search for each other and determine wages, among others. Monetary policy is simply unable to offset all of the ways in which various frictions impede the economy‘s adjustment to various shocks.

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The term ‗maximum employment‘ should therefore be thought of as the level of employment that currently can be achieved by a central bank, taking into account its long-run objectives and the very real impediments to a more rapid adjustment to recent economic shocks.
From this perspective, some popular empirical practices are of dubious value for evaluating current monetary policy. For example, estimates of an older concept known as the ―nonaccelerating inflation rate of unemployment,‖ or ―NAI RU,‖ are aimed at measuring the long-run normal unemployment rate. Estimates of NAIRU invariably impose the assumption that it varies only slowly and does not respond to many transitory shocks. Many other estimates of benchmark unemployment rates also impose conditions that prevent them from fluctuating with unanticipated economic shocks. These are reasonable strategies for estimating the long-run unemployment rate, but by design, they will fail to capture important variations in the natural rate, especially variations over the business cycle. Thus they will be incomplete and potentially misleading guides to policy and inflation dynamics in the short run. Estimating the natural rate of unemployment is difficult because it requires us to be as precise as possible about both the shocks that drive the behavior of the economy over time and the frictions that govern how the economy responds. The modern macroeconomic models most widely used for policy analysis specify and estimate those shocks and frictions, which allows one to make inferences about the current natural rate implied by the model. This approach leaves considerable uncertainty, since broadly similar models can still lead to different implications about the natural rate.
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Nonetheless, specifying an explicit model has the advantage of transparency regarding the range of judgments underlying any given estimate — you have to ―put your cards on the table,‖ as it were.
I see no good substitute for spelling out clear models if we‘re to seriously assess the Fed‘s performance on its maximum employment mandate. The FOMC‘s statement on Longer-Run Goals and Monetary Policy Strategy recognizes this distinction between the natural rate as an appropriate yardstick and the long-run unemployment concept.

I will read from that statement.
―The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee‘s policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants‘ estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC‘s Summary of Economic Projections.‖ The identification of maximum employment as driven by a range of real economic shocks lines up precisely with what I have been calling the natural unemployment rate. The longer-run normal rate of unemployment is a distinct concept, but one which informs Committee participants‘ assessments of the maximum level of employment that‘s relevant to current monetary policy.

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In principle, the natural rate could be close to the long-run unemployment rate, depending on the nature of shocks and frictions affecting the economy.
Such alignment might be expected when an economic expansion is mature. But generally these rates will differ, particularly following significant economic disturbances or disruptions, when the natural rate could be well above the long-run rate, perhaps for a considerable period of time.

This distinction between the unemployment rate relevant to current policy and the unemployment rate we can expect in the longer run, absent further shocks, was critical to my decision to dissent from the most recent FOMC decision.
The journey back to the long-run rate of unemployment is taking longer than we may have anticipated, and certainly longer than we would like. And the delay has meant significant hardships for many American families, make no mistake about it. But my assessment is that there are several impediments to more rapid growth that are likely to have significantly increased the natural rate. First, the housing market is still coping with the large inventory overhang that remains from the prerecession boom. This sector has begun to show some encouraging signs, with home prices and construction showing improvement this year. But housing investment is still quite low relative to historical norms, and it will continue to underperform until the demand for housing makes more progress catching up to the existing housing stock.

Second, and related, was the significant shift in economic activity away from residential construction and related supply industries.
The rapid loss of jobs in these industries, layered on top of ongoing longer-run sectoral shifts, resulted in large inflows into the ranks of the unemployed.
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The resulting shift in the profile of available workers has meant that the reallocation and skill mismatch frictions affecting labor markets are at a relatively high level.
Finally, the political gridlock that has delayed remedies to our unsustainable federal fiscal path has meant paralyzing uncertainty across the vast range of fiscal policy touch points in the economy. This appears to have seriously dampened investments and hiring for the new business ventures that typically would take up the economic slack caused by one sector‘s decline. These forces are hard to quantify, but my sense, given an array of statistical analyses and a wide range of qualitative reports, is that labor market conditions have been held back by real impediments that are beyond the capacity of monetary policy to offset. The collapse in housing construction was a huge blow to our economy, and it will take a substantial amount of time for us to recover by shifting labor, capital and spending toward other growth opportunities. Thus, my assessment is that a reasonably strong case can be made that the natural rate of unemployment that corresponds to the Fed‘s maximum employment mandate is now relatively elevated. Given this assessment, I dissented on the question of a new asset purchase program because, in such circumstances, further monetary stimulus runs the risk of raising inflation in a way that threatens the stability of inflation expectations. Recently, inflation has been running close to the Committee‘s goal of 2 percent per year. In fact, over the last 20 years, inflation has averaged very close to 2 percent, despite significant quarter-to-quarter and year-to-year fluctuations. That track record appears to have given market participants some confidence in the Fed‘s commitment to keep inflation around 2 percent going forward. Indeed, measures of inflation expectations have been remarkably stable over the last two decades.
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But that confidence should not be taken for granted. Perceptions that the Committee was focused on reducing unemployment at the expense of maintaining price stability would undercut that confidence and destabilize inflation.
The consequences could be devastating, as we saw in the 1970s, when policymakers attempted to push unemployment below an estimate of the natural rate that was, in hindsight, mistakenly low. It‘s worth noting that when previous asset purchase programs were adopted in 2009 and 2010, the inflation outlook was significantly different than today. Back then, deflation appeared to be a very real possibility, so further accommodation, whatever it did for unemployment, also helped keep inflation closer to the Committee‘s goal of 2 percent. The Committee‘s statement also altered the ―forward guidance‖ regarding future monetary policy, stating for the first time that it expected a highly accommodative stance of monetary policy for ―a considerable period after the economic recovery strengthens.‖

I disagreed with this statement because I believe a commitment to provide stimulus beyond the point at which the recovery strengthens and growth increases implies too great a willingness to tolerate higher inflation and would be inconsistent with a balanced approach to the FOMC‘s price stability and maximum employment mandates.
Finally, I strongly opposed purchasing additional agency mortgagebacked securities. These purchases are intended to reduce borrowing rates for conforming home mortgages. Such purchases, as compared to purchases of an equivalent amount of U.S. Treasury securities, distort investment allocations and raise interest rates for other borrowers. Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve. Central banks abuse their independence when they promote some borrowers at the expense of
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others. This principle was recognized in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009:
―Government decisions to influence the allocation of credit are the province of the fiscal authorities,‖ that is, Congress and the administration. In conclusion, let me emphasize that monetary policy requires making tough calls and that, despite our differences, I have the utmost respect for my FOMC colleagues.

Given their decision, I very much hope they are correct that substantial monetary stimulus aimed at hastening the reduction in unemployment will not raise the risk of destabilizing inflation.
But given the uncertainty about the economic outlook, I am sure we will all be watching the incoming data with vigilance.

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NUMBER 10

Basel iii in Singapore Response to the feedback received 1 I ntroduction
1.On 28 December 2011, MAS issued a consultation paper inviting Singapore-incorporated banks (―Reporting Banks‖) and interested parties to comment on proposed amendments to MAS Notice 637, which incorporated the Basel I I I capital reforms by the Basel Committee on Banking Supervision (―BCBS‖) issued in December 2010 and revised in June 20111, as well as other policy enhancements arising from MAS‘ ongoing review of the capital rules and guidance. 2.The revisions to MAS N otice 637 to raise the quality of the regulatory capital base, enhance risk coverage of the capital framework, and introduce the new leverage ratio and capital buffer requirements, as well as other amendments arising from MAS‘ policy review, will be implemented on 1 January 2013. Comments received from the consultation relating to these areas that are of wider interest and MAS‘ responses are set out below. 3. We thank all respondents for their comments.

2 Definition of affiliate
1.A respondent asked if the definition of ―affiliate‖ could be aligned with ―affiliated entity‖ under Regulation 12 of the Banking Regulations.

MAS‘ Response
2.The definition of ―affiliate‖ is in line with the intended scope set out in footnote 30 of the Basel I I I framework.

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As the definition of ―affiliated entity‖ in the Banking Regulations is wider than this intended scope, it will not be appropriate for use within MAS N otice 637.

3 Definition of a financial institution
3.1 Financial institutions are defined in MAS N otice 637 for the purpose of regulatory adjustments to capital and for application of the asset value correlation multiplier for exposures to financial institutions under the internal-ratings based approach.

A respondent sought clarification on the rationale for the scope of entities specified in the definition of financial institutions.
Respondents also asked whether the following entities are classified as financial institutions – (a)pawnshops and gold bullion traders; (b)group holding companies involved in varied principal activities through their subsidiaries; and (c)companies that exist solely to issue securities not used as regulatory capital and whose activities are to provide financial services within the group. 3.2 In relation to the definition of regulated financial institutions, some banks asked for an elaboration on what is meant by ―subject to minimum prudential standard and supervision by a regulatory agency‖. Respondents also asked whether money changers, remittance agents and exempt fund managers would be considered as regulated financial institutions.

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MAS‘ Response
3.The definition of financial institutions in M AS Notice 637 is based on the Basel I I I text, as well as further interpretative guidance issued by the BCBS. The Basel I I I text and further interpretive guidance include, as financial institutions, insurance companies, broker/dealers, banks, funds and entities whose main business activities include management of financial assets, lending, factoring, leasing, provision of credit enhancements, securitisation, investments, financial custody, central counterparty services and proprietary trading. As the principal activity of a pawnshop is to carry on the business of lending and the principal activity of a gold bullion trader is to carry on the business of dealing or trading in gold-related exchange-traded derivatives or over-the-counter derivatives, these will be considered financial institutions for the purposes of MAS N otice 637. 4.A financial holding company, which holds as a subsidiary , a banking institution or an insurance entity, will be considered a financial institution for the purposes of MAS Notice 637. We will revise the definition of a financial institution to include a financial holding company. 5.Entities that exist solely to issue securities which are not used as regulatory capital and whose activities are to provide financial services within the group will be considered financial institutions for the purposes of MAS N otice 637. For the avoidance of doubt, financial institutions will exclude a special purpose entity through which a Reporting Bank issues its regulatory capital as referred to in paragraphs 6.2.5 and 6.3.5 of Part VI. 6.As for the definition of a regulated financial institution, examples of minimum prudential standards and supervision that regulated financial

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institutions are subject to include minimum capital requirements or restrictions or limits on exposures, and inspections or off-site supervision by the regulatory agency to assess compliance with prudential standards.
3.7 For the purpose of the application of the asset value correlation multiplier for exposures to financial institutions under the internalratings based approach, companies that conduct money-changing and remittance business activities in Singapore are regulated by MAS and are required to comply with prudential requirements under the Moneychanging and Remittance Businesses Act.

They will be considered regulated financial institutions. Entities that carry on the principal activity of fund management in Singapore will also be considered regulated financial institutions.

4 Exposure measure for the leverage ratio
1.A respondent asked if the exposure measure for on-balance sheet, non derivative exposures should be net of general allowances, for the purpose of computing the leverage ratio.

MAS‘ Response
2.The exposure measure for the leverage ratio should generally follow the accounting measure of exposure. Where general allowances are netted from total assets in accordance with the relevant accounting standards, the exposure measure may be net of general allowances.

5 Minimum requirements for capital instruments – Recognition of proceeds
5.1 A respondent sought clarification on the interpretation of ―issued and fully paid-up in cash‖ relating to the recognition of capital instruments.

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MAS‘ Response
5.2 The amount recognised as regulatory capital shall be net of issuance costs. This has been clarified in the rules text.

6Minimum requirements for AT1 capital instruments and Tier 2 capital instruments – Seniority of claims
1.A respondent highlighted that the requirements which prohibit the paid-up amounts of any AT1 capital instrument or Tier 2 capital instrument from being secured or covered by a guarantee of the Reporting Bank or any of its related corporations or other affiliates, were stricter than the requirements under the Basel I I I capital standards.

MAS‘ Response
2.We have aligned the requirements to those under the Basel I I I capital standards. These are set out in paragraphs 6.2.2(c) and 6.3.2(c) of MAS Notice 637.

7Minimum requirements for AT1 capital instruments and Tier 2 capital instruments - Inclusion of call options within the first five years from the issuance date
1.A respondent asked for greater clarity on the situations that call options can be permitted within the first five years from the issuance date.

MAS‘ Response
2.Call options are permitted within the first five years from the issuance date under the following situations, provided that the requirements set out in paragraphs 6.2.2(g) and 6.3.2(g) of MAS Notice 637 are met for AT1 capital instruments and Tier 2 capital instruments, respectively:
(a) Where there is a change in the tax status of the capital instrument
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due to changes in the applicable tax laws of the country or territory in which the capital instrument was issued; or
(b) Where there is a change relating to the recognition of the capital instrument as regulatory capital for calculating Tier 1 CAR and Total CAR. MAS shall, in determining whether to grant approval, consider whether the Reporting Bank is in a position to anticipate the event at issuance. This has been clarified in footnote 58 and footnote 73 in Part VI of MAS Notice 637.

8Minimum requirements for AT1 capital instruments and Tier 2 capital instruments - Purchase or funding of the purchase of capital instruments
1.Some respondents highlighted that a Reporting Bank may not have sufficient influence over major stake companies to prohibit the purchase by such entities of the AT1 capital instruments and Tier 2 capital instruments issued by the Reporting Bank. Some respondents also stated that the inclusion of ―major stake companies‖ within the scope of this requirement seems more stringent than the requirements under the Basel I I I capital framework.

MAS‘ Response
2.We agree and have amended the relevant paragraphs in MAS N otice 637 to limit the scope of this requirement to ―banking group entities‖ and ―associates‖.

9 Recognition of minority interest
9.1 A respondent asked if there could be flexibility in allowing Reporting Banks to apply minimum regulatory capital requirements that are higher than those specified in paragraph 4.1.4 of MAS Notice 637, in computing
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surplus CET1 Capital (e.g. to take into account the Countercyclical Capital Buffer should this be imposed).

MAS‘ Response
9.2 In computing surplus CET1 Capital for the purposes of calculating the amount of minority interest and other capital issued out of consolidated subsidiaries that are held by third parties, only the minimum regulatory capital requirements and the Capital Conservation Buffer shall be applied.

The Countercyclical Capital Buffer shall not be included. This is aligned with the requirements under the Basel I I I capital framework.

10Regulatory adjustments - Deduction of Goodwill from CET1 Capital
1.Some respondents sought clarification on whether the regulatory adjustment applied in the calculation of CET1 Capital set out in paragraph 6.1.3(a) of MAS Notice 637 should also include goodwill included in the valuation of associates that are accounted for using the equity method. The respondents noted that accounting standards presently do not require such goodwill to be separately recognised.

MAS‘ Response
2.The policy intent is to require goodwill included within the carrying amounts of associates accounted for using the equity method, to be deducted from CET1 Capital at the Group level.

A Reporting Bank shall calculate the goodwill amount by separating any excess of the acquisition cost over its share of the net fair value of the identifiable assets and liabilities of the entity.

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11Regulatory adjustments - Investments in own capital instruments and capital instruments of other financial institutions
1.Some respondents highlighted the operational difficulties with the look through approach to indirect holdings of the Reporting Bank‘s own capital instruments or capital instruments of other financial institutions. A respondent suggested that the 2% eligible total capital limit on any index fund set out in MAS Notice 639 sufficed in addressing the risks of double counting of capital. Another respondent asked if the remaining exposures within index securities that are not deducted should continue to be subject to the applicable risk weighting requirements.

MAS‘ Response
2.A Reporting Bank could acquire exposures to several index funds, each of which is within the 2% eligible total capital limit, thereby accumulating very large exposures to such capital investments. As such, this existing limit within MAS Notice 639 will not be effective in minimising double counting of regulatory capital. The look through requirement continues to be necessary. 3.The deduction of indirect holdings held through index securities can be based on the weightage of the securities within the index. The amounts deducted need not be risk weighted; the remaining exposures that are not deducted shall continue to be risk weighted in accordance with the relevant provisions under Parts VII or VII I in MAS Notice 637.

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12Regulatory adjustments - Capital deficits in subsidiaries and associates that are regulated financial institutions
1.A respondent sought clarification on whether the capital deficits in regulated subsidiaries and associates should be computed based on the regulatory capital requirements set by the host regulator.

MAS‘ Response
2.The regulatory capital requirements imposed by the host regulator are to be applied to the measurement of capital deficits of subsidiaries and associates.

13 Regulatory adjustments - Investments in unconsolidated financial institutions
13.1 In identifying capital investments in unconsolidated financial institutions in which the Reporting Bank does not hold a major stake, a respondent asked if (a)a capital instrument recognised by a bank regulatory agency that has implemented the Basel I I I capital standards can be deemed to have met the criteria for recognition as regulatory capital of the Reporting Bank; and (b)how capital investments in a financial institution that is not a bank should be mapped into the relevant tiers of bank regulatory capital for the purpose of this regulatory adjustment.

MAS‘ Response
13.2 For the purpose of this regulatory adjustment:
(a) Where a capital instrument satisfies the applicable regulatory capital criteria imposed by a bank regulatory agency that has implemented the Basel I I I capital standards, such capital instruments would be deemed to have met the criteria for CET1 Capital, AT1 Capital and
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Tier 2 Capital, as the case may be. This has been clarified in footnote 47(a) of Part VI in MAS Notice 637; and
(b) Where the capital investment of the Reporting Bank (i) is in a financial institution that is not a bank; (ii) where the entity is subject to minimum prudential standards and supervision by a regulatory agency; and (iii) the investment is not in the form of ordinary shares but is nonetheless recognised as Tier 1 Capital (or its equivalent) or Tier 2 Capital (or its equivalent), the capital instrument can be deemed to have met the criteria for CET1 Capital, AT1 Capital and Tier 2 Capital, as the case may be.

14Regulatory adjustments - Investments in the ordinary shares of unconsolidated major stake companies
1.A respondent sought clarification on whether the risk-weighted assets (―RWA‖) arising from investments that are within the thresholds set out in paragraph 6.1.3(p)(i) of MAS Notice 637 and risk-weighted at 250% pursuant to paragraph 6.1.3(p)(iii), should be included within SA(EQ) RWA or IRBA(EQ) RWA.

MAS‘ Response
2.As the risk weight of 250% for such exposures is not a risk weight currently prescribed under the SA(EQ) or the I RBA(EQ), such RWA shall not be classified as SA(EQ) RWA or IRBA(EQ) RWA. Notwithstanding this, such exposures shall be regarded as equity exposures and be taken into account in computing the threshold set out in paragraph 4.8 of Annex 7AC of Part VI I in MAS N otice 637.

15 Regulatory adjustments - Investments in own capital instruments
15.1 Some respondents sought clarification on how the minimum requirements for AT1 capital instruments and Tier 2 capital instruments set out in paragraphs 6.2.2(n) and 6.3.2(j) respectively, interact with the
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regulatory adjustments relating to the deduction of own AT1 capital instruments and Tier 2 capital instruments set out in paragraphs 6.2.3(a) and 6.3.3(a) respectively.

MAS‘ Response
15.2 The requirements set out in paragraphs 6.2.2(n) and 6.3.2(j) are minimum requirements that capital instruments need to meet before they can be recognised as AT1 Capital and Tier 2 Capital respectively. Any portion of capital instrument that has been directly or indirectly funded by the Reporting Bank, its banking group entities or associates shall not count towards regulatory capital. On the other hand, the regulatory adjustments set out in paragraphs 6.2.3(a) and 6.3.3(a) shall be applied where such capital instruments are subsequently held by the Reporting Bank or any of its banking group entities.

16Requirements to ensure loss absorbency at the point of nonviability - Compensation to holders as a result of a write-off
1.A respondent highlighted that it might be operationally challenging for ordinary shares to be issued immediately, following the trigger event.

MAS‘ Response
2.When a trigger event occurs, any compensation made to the instrument holders in the form of ordinary shares shall be paid without delay, and as soon as possible.

To this end, a Reporting Bank shall ensure that at all times, all prior authorisation necessary to ensure that the relevant number of shares can be issued immediately, has been obtained.
The requirements, as drafted, reflect these expectations.

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17Requirements to ensure loss absorbency at the point of nonviability - Conversion formula of capital instrument
1.Some respondents asked if the requirement to fix the conversion formula at the point of issuance of the capital instrument allows subsequent adjustments to be made to the conversion formula, to take into account the occurrence of capitalisation issues.

MAS‘ Response
2.The requirement to fix the conversion formula at the point of issuance of the capital instrument does not preclude the possibility of subsequent adjustments to be made to the formula, to take into account the occurrence of capitalisation issues such as bonus issues or share splits.

18Requirements to ensure loss absorbency at the point of nonviability – Scope of legal opinion
1.A respondent sought clarification on the scope of the required external legal opinion set out in paragraph 1.8(a) of Annex 6B in MAS Notice 637.

MAS‘ Response
2.To ensure that the requirements set out in Annex 6B of MAS N otice 637 are complied with, an external legal opinion is required to confirm that the write off or conversion feature at the point of non-viability is enforceable, and that there are no impediments to the write-off or conversion of the instrument into ordinary shares of the Reporting Bank. In this regard, this shall include, amongst others, an assessment that all prior approvals have been obtained, and that the terms and conditions of the capital instruments do not impede conversion.

19 Asset value correlation multiplier

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1.A respondent asked if the computation of total assets for the determination of meeting the USD 100 billion threshold would include the ultimate parent company or stop at the parent that is a financial institution.

MAS‘ Response
2.For the purposes of computing total assets, the Reporting Bank shall use the reported total assets of the consolidated group of companies which include the regulated financial institution. The consolidation is not limited to a parent company that is a financial institution. Monetary Authority of Singapore

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Certified Risk and Compliance Management Professional (CRCMP) Distance learning and online certification program.
Companies like I BM, 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-complianceassociation.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-complianceassociation.com/ Questions_About_The_Certification_And_The_Exams _1.pdf www.risk-complianceassociation.com/ CRCMP_Certification_Steps_1.pdf

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C.Personalized Certificate printed in full color.
Processing, printing, packing and posting to your office or home.

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-complianceassociation.com/ Distance_Learning_and_Certification.htm

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