Risk Management Presentation July 2 2012

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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, To err is human; to blame it on somebody else shows management potential. Just kidding. In Basel iii, to err is human, to blame it on something else and to amend the Basel iii accord to close the next gap, shows that our kids will try hard to comply with the next version of Basel Basel x. (No kidding) Number 1: We have the Basel 3 Pillar 3 templates available! A common template is established that banks must use to report the breakdown of their regulatory capital when the transition period for the phasing-in of deductions ends on 1 January 2018. A new 3 step approach for banks to follow is established to ensure that the Basel I I I requirement to provide a full reconciliation of all regulatory capital elements back to the published financial statements is met in a consistent manner. A common template is established that banks must use to meet the Basel I I I requirement to provide a description of the main features of regulatory capital instruments issued.
I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com
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Banks which disclose ratios involving components of regulatory capital (eg Equity Tier 1, Core Tier 1 or Tangible Common Equity ratios) must accompany such disclosures with a comprehensive explanation of how these ratios are calculated.
Banks are required to make available on their websites the full terms and conditions of all instruments included in regulatory capital. Number 7: Singapore is developing a Solvency I I flavor for the insurance sector. It is a very clever and very interesting approach that combines Basel iii and Solvency ii. Singapore seeks to ensure a level playing field across the financial sectors by having a consistent regulatory and supervisory framework for all regulated financial institutions. The Tier 1 and Tier 2 capital components are largely aligned between the existing framework for insurers and the capital adequacy framework for banks. Singapore wants to incorporate the same Basel I I I features (i.e. equity conversion or write-down on breach of regulatory capital requirements) as conditions for a capital instrument to be approved as a Tier 1 resource in I nsurance. We also have a very interesting definition: Operational risk refers to the risk of loss arising from complex operations, inadequate internal controls, processes and information systems, organisation changes, fraud or human errors, (or unforeseen catastrophes including terrorist attacks). I enjoy the terminology. In Solvency I I we have the Solvency Capital Requirement and the Minimum Capital Requirement. I n Singapore we have the Prescribed Capital Requirement and the Minimum Capital Requirement. N ot exactly the same Number 2: In the public sector we have an interesting risk management project - DARPA develops technologies for aiding disaster relief. It is a very interesting and very different area of risk management. Welcome to the Top 10 list.
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Composition of capital disclosure requirements - Rules text, June 2012 The Basel Committee on Banking Supervision has published a set of disclosure requirements on the composition of banks' capital.
DARPA Develops technologies for aiding disaster relief New sea and air delivery systems to enable direct support to disaster zones from offshore container ships
EIOPA Published Guidelines on Complaints Handling

Insurers should put in place a complaints management policy, which is endorsed by their senior management Insurers should have a complaints management function which enables complaints to be investigated fairly and possible conflicts of interest to be identified and mitigated
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Interview with Speech by I FRS Foundation Chairman Michel Prada at IFRS Foundation Conference in Frankfurt 27 June 2012 An update on recent and future developments at the I FRS Foundation, six months after Michael had the honour of being elected Chairman of the Foundation Trustees
FASB Publishes Proposal for Disclosing Liquidity and I nterest Rate Risk The Financial Accounting Standards Board (FASB) issued for public comment a proposed Accounting Standards Update (ASU) intended to improve financial reporting about certain risks inherent in financial instruments and how they contribute to the reporting organizations broader risks.
Speech by Thomas M. Selman Executive Vice President, Regulatory Policy IRI Government, Legal and Regulatory Conference Washington, DC Monday, June 25, 2012
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MAS Consults on Proposed Review of Risk-based Capital Framework for Insurance Business The Monetary Authority of Singapore (MAS) released a consultation paper on the review of the Risk-Based Capital (RBC) framework for insurance business.
EIOPA Enhancing the European Market for Occupational Pension Provision
Joint Statement from the United States and Japan Regarding a Framework for Intergovernmental Cooperation to Facilitate the I mplementation of FATCA and Improve International Tax Compliance
Is globalisation great? Stephen Cecchetti Economic Adviser at the Bank for I nternational Settlements (BIS), and H ead of its Monetary and Economic Department Remarks prepared for the 1 1th BIS Annual Conference, Lucerne, Switzerland, 2122 June 2012
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NUMBER 1
Composition of capital disclosure requirements - Rules text June 2012

The Basel Committee on Banking Supervision has published a set of disclosure requirements on the composition of banks' capital. During the financial crisis, market participants and supervisors were hampered in their efforts to undertake detailed assessments of banks' capital positions and make cross-jurisdictional comparisons. The source of this difficulty was insufficiently detailed disclosure by banks and a lack of consistency in reporting between banks and across jurisdictions.
This lack of clarity may have contributed to uncertainty during the financial crisis.
The disclosure requirements aim to improve market discipline through enhancing both transparency and comparability.
Composition of capital disclosure requirements Introduction

During the financial crisis, many market participants and supervisors attempted to undertake detailed assessments of the capital positions of banks and comparisons of their capital positions on a cross jurisdictional basis. The level of detail of the disclosure and the lack of consistency in the way that it was reported typically made this task difficult and often made it impossible to do with any accuracy.
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It is often suggested that lack of clarity on the quality of capital contributed to uncertainty during the financial crisis.
Furthermore, the interventions carried out by the authorities may have been more effective if capital positions of the banks were more transparent. To ensure that banks back their risk exposures with a high quality capital base, Basel I I I introduced a set of detailed requirements to raise the quality and consistency of capital in the banking sector.
In addition, Basel I I I established certain high level disclosure requirements to improve transparency of regulatory capital and enhance market discipline and noted that more detailed Pillar 3 disclosure requirements would be forthcoming.
This document sets out these detailed requirements. To enable market participants to compare the capital adequacy of banks across jurisdictions it is essential that banks disclose the full list of regulatory capital items and regulatory adjustments. In addition, to improve consistency and ease of use of disclosures relating to the composition of regulatory capital, and to mitigate the risk of inconsistent formats undermining the objective of enhanced disclosure, the Basel Committee has agreed that internationally-active banks across Basel member jurisdictions will be required to publish their capital positions according to common templates. The requirements are set out in the following 5 sections:
Section 1: Post 1 January 2018 disclosure template

A common template is established that banks must use to report the breakdown of their regulatory capital when the transition period for the phasing-in of deductions ends on 1 January 2018.
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It is designed to meet the Basel I I I requirement to disclose all regulatory adjustments, including amounts falling below thresholds for deduction, and thus enhance consistency and comparability in the disclosure of the elements of capital between banks and across jurisdictions.
This template may be used in advance of 1 January 2018 in certain circumstances, which are set out in Section 1.
Section 2: reconciliation requirements

A 3 step approach for banks to follow is established to ensure that the Basel I I I requirement to provide a full reconciliation of all regulatory capital elements back to the published financial statements is met in a consistent manner. This approach is not based on a common template because the starting point for reconciliation, the banks reported balance sheet, will vary between jurisdictions due to the application of different accounting standards.
Section 3: main features template

A common template is established that banks must use to meet the Basel I I I requirement to provide a description of the main features of regulatory capital instruments issued.
Section 4: other disclosure requirements

This section sets out what banks must do to meet the Basel I I I requirement to provide the full terms and conditions of regulatory capital instruments on their websites and the requirement to report the calculation of any ratios involving components of regulatory capital.
Section 5: template during the transitional period

This section requires banks to use a modified version of the post 1 January 2018 template in Section 1 during the transitional phase.
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This template is established to meet the Basel I I I requirement for banks to disclose the components of capital that are benefiting from the transitional arrangements.
I mplementation date and frequency of reporting

National authorities will give effect to the disclosure requirements set out in this document by no later than 30 June 2013. Banks will be required to comply with the disclosure requirements from the date of publication of their first set of financial statements relating to a balance sheet date on or after 30 June 2013 (with the exception of the Post 1 January 2018 template set out in Section 1). Furthermore, except as required in paragraph 7, banks must publish this disclosure with the same frequency as, and concurrent with, the publication of their financial statements, irrespective of whether the financial statements are audited (ie disclosure will typically be quarterly or half yearly). In the case of the main features template (Section 3) and provision of the full terms and conditions of capital instruments (Section 4), banks are required to update these disclosures whenever a new capital instrument is issued and included in capital and whenever there is a redemption, conversion/ write-down or other material change in the nature of an existing capital instrument. Under Pillar 3, large banks are required to make certain minimum disclosures with respect to certain defined key capital ratios and elements on a quarterly basis, regardless of the frequency of financial statement publication.
The disclosure of key capital ratios/elements for these banks will continue to be required under Basel I I I.
Banks disclosures required by this document must either be included in banks published financial statements or, at a minimum, these statements
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must provide a direct link to the completed disclosure on their websites or on publicly available regulatory reports.
Banks must also make available on their websites, or through publicly available regulatory reports, an archive (for a suitable retention period determined by the relevant national authority) of all templates relating to prior reporting periods. Irrespective of the location of the disclosure (published financial reports, bank websites or publicly available regulatory reports), all disclosures must be in the format required by this document.
Section 1: Post 1 January 2018 disclosure template

The common template that the Basel Committee has developed is set out in Annex 1, along with an explanation of its design. The template is designed to capture the capital positions of banks after the transition period for the phasing-in of deductions ends on 1 January 2018 and must be used by banks for reporting periods on or after this date.
If a jurisdiction permits or requires its banks to apply the full Basel I I I deductions in advance of 1 January 2018 (ie does not phase-in the deductions or accelerates the phase-in period of deductions), it can permit or require its banks to use the template in Annex 1 as an alternative to the transitional template described in Section 5 from the date of application of at least the full Basel I I I deductions.
In such cases the relevant banks must clearly disclose that they are using this template because they are fully applying the Basel I I I deductions.
Section 2: Reconciliation requirements

This section sets out a common approach that banks must follow to comply with the requirement of paragraph 91 of the Basel I I I rules text, which states that banks should disclose a full reconciliation of all regulatory capital elements back to the balance sheet in the audited financial statements.
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This requirement aims to address the problem that at present there is a disconnect in many banks disclosure between the numbers used for the calculation of regulatory capital and the numbers used in the published financial statements.
Banks are required to take a 3 step approach to show the link between their balance sheet in their published financial statements and the numbers that are used in the composition of capital disclosure template set out in Section 1.
The 3 steps require banks to:

Step 1: Disclose the reported balance sheet under the regulatory scope of consolidation. Step 2: Expand the lines of the balance sheet under the regulatory scope of consolidation to display all of the components that are used in the composition of capital disclosure template. Step 3: Map each of the components that are disclosed in Step 2 to the composition of capital disclosure template set out in Section 1. The 3 step approach outlined below is designed to offer the following benefits: The level of disclosure is proportionate, varying with the complexity of the balance sheet of the reporting bank (ie banks are not subject to a fixed template that is designed to fit the most complex banks. A bank can skip a step if there is no further information added by that step).
Market participants and supervisors can trace the origin of the elements of the regulatory capital back to their exact location on the balance sheet under the regulatory scope of consolidation.
The approach is flexible enough to be used under any accounting standard: firms are required to map all the components of the regulatory
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capital disclosure templates back to the balance sheet under the regulatory scope of consolidation, regardless of whether the accounting standards require the source to be reported on the balance sheet.
Step 1: Disclose the reported balance sheet under the regulatory scope of consolidation
The scope of consolidation for accounting purposes and for regulatory purposes are often different.
This factor often explains much of the difference between the numbers used in the calculation of regulatory capital and the numbers used in a banks published financial statements.
Therefore, a key element in any reconciliation involves disclosing how the balance sheet in the published financial statements changes when the regulatory scope of consolidation is applied. Step 1 is illustrated in Annex 2. If the scope of regulatory consolidation and accounting consolidation is identical for a particular banking group, it would not need to undertake Step 1. The banking group could simply state that there is no difference between the regulatory consolidation and the accounting consolidation and move to Step 2. In addition to Step 1, banks are required to disclose the list the legal entities that are included within accounting scope of consolidation but excluded from the regulatory scope of consolidation. This will better enable supervisors and market participants to investigate the risks posed by unconsolidated subsidiaries.
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Similarly, banks are required to list the legal entities included in the regulatory consolidation that are not included in the accounting scope of consolidation.
Finally, if some entities are included in both the regulatory scope of consolidation and accounting scope of consolidation, but the method of consolidation differs between these two scopes, banks are required to list these legal entities separately and explain the differences in the consolidation methods. Regarding each legal entity that is required to be disclosed by this paragraph, banks must also disclose its total balance sheet assets and total balance sheet equity (as stated on the accounting balance sheet of the legal entity) and a description of the principle activities of the entity.
Step 2: Expand the lines of the regulatory balance sheet to display all of the components used in the definition of capital disclosure template
Many of the elements used in the calculation of regulatory capital cannot be readily identified from the face of the balance sheet. Therefore, banks should expand the rows of the regulatory-scope balance sheet such that all of the components used in the composition of capital disclosure template (described in Section 1) are displayed separately. For example, paid-in share capital may be reported as one line on the balance sheet. However, some elements of this may meet the requirements for inclusion in Common Equity Tier 1 (CET1) and other elements may only meet the requirements for Additional Tier 1 (AT1) or Tier 2 (T2), or may not meet the requirements for inclusion in regulatory capital at all. Therefore, if the bank has some paid-in capital that feeds into the calculation of CET1 and some that feeds into the calculation of AT1, it should expand the paid-in share capital line of the balance sheet in the following way (also illustrated in Annex 2 (step 2)):
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In addition, as illustrated above, each element of the expanded balance sheet must be given a reference number/letter for use in Step 3. As another example, one of the regulatory adjustments is the deduction of intangible assets. While at first it may seem as if this can be taken straight off the face of the balance sheet, there are a number of reasons why this is unlikely to be the case. Firstly, the amount on the balance sheet may combine goodwill, other intangibles and mortgage services rights. MSRs are not to be deducted in full (they are instead subject to the threshold deduction treatment). Secondly, the amount to be deducted is net of any related deferred tax liability. This deferred tax liability will be reported on the liability side of the balance sheet and is likely to be reported in combination with other deferred tax liabilities that have no relation to goodwill or intangibles. Therefore, the bank should expand the balance sheet in the following way:
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It is important to note that banks will only need to expand elements of the balance sheet to the extent that this is necessary to reach the components that are used in the composition of capital disclosure template.
So, for example, if all of the paid-in capital of the bank met the requirements to be included in CET1, the bank would not need to expand this line.
The level of disclosure is proportionate, varying with the complexity of the banks balance sheet and its capital structure. Step 2 is illustrated in Annex 2.
Step 3: Map each of the components that are disclosed in Step 2 to the composition of capital disclosure templates
When reporting the disclosure template, described in Section 1 and Section 5, the bank is required to use the reference numbers/ letters from Step 2 to show the source of every input. For example, the composition of capital disclosure template includes the line goodwill net of related deferred tax liability. Next to the disclosure of this item in the definition of capital disclosure template the bank should put ad to illustrate how these components of the balance sheet under the regulatory scope of consolidation have been used to calculate this item in the disclosure template.
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Additional comments on the 3 step approach

The Basel Committee considered requiring banks to use a common template to disclose the reconciliation between banks balance sheets and their regulatory capital. However, it does not feel that this would be possible at this stage given that banks balance sheets are not reported in a common way across jurisdictions due to the application of different accounting standards. Within a single jurisdiction, the use of a common template may be possible. Therefore, the relevant authorities may design a common template that is consistent with the 3 step approach set out above and require banks use this in order to achieve greater consistency in the way the 3 step approach is implemented within their jurisdiction.
Section 3: Main features template

Basel I I I requires banks to disclose a description of the main features of regulatory capital instruments issued. While banks will also be required to make available the full terms and conditions of their regulatory capital instruments (see section 4), the length of these documents makes the extraction of the key features a burdensome task. The issuing bank is better placed to undertake this task than market participants and supervisors that want an overview of the capital structure of the bank. Basel I I Pillar 3 guidance already includes a requirement that banks provide qualitative disclosure that sets out Summary information on the terms and conditions of the main features of all capital instruments, especially in the case of innovative, complex or hybrid capital instruments.
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However, the Basel Committee has found that this Basel I I requirement is not met in a consistent way by banks.
The lack of consistency in both the level of detail provided and the format of the disclosure makes the analysis and monitoring of this information difficult. To ensure that banks meet the Basel I I I requirement to disclose the main features of regulatory capital instruments in a consistent and comparable way, banks are required to complete a main features template. This template represents the minimum level of summary disclosure that banks are required to report in respect of each regulatory capital instrument issued. The template is set out in Annex 3 of this report, along with a description of each of the items to be reported. Some key points to note about the template are: - It has been designed to be completed by banks from when the Basel I I I framework comes into effect on 1 January 2013. It therefore also includes disclosure relating to instruments that are subject to the transitional arrangements. - Banks are required to report each regulatory capital instrument, including common shares, in a separate column of the template, such that the completed template would provide a main features report that summarises all of the regulatory capital instruments of the banking group.
- The list of main features represents a minimum level of required summary disclosure.
In implementing this minimum requirement, each Basel Committee member authority is encouraged to add to this list if there are features
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that it is important to disclose in the context of the banks they supervise.

- Banks are required to keep the completed main features report up-to-date, such that the report is updated and made publicly available whenever a bank issues or repays a capital instrument and whenever there is a redemption, conversion/ write-down or other material change in the nature of an existing capital instrument. - Given that the template includes information on the amount recognised in regulatory capital at the latest reporting date, the main features report should either be included in the banks published financial reports or, at a minimum, these financial reports must provide a direct link to where the report can be found on the banks website or publicly available regulatory reporting.
Section 4: Other disclosure requirements

In addition to the disclosure requirements set out in Sections 1 to 3, and aside from the transitional disclosure requirements set out in Section 5, the Basel I I I rules text makes the following requirements in respect of the composition of capital:
Non-regulatory ratios
Banks which disclose ratios involving components of regulatory capital (eg Equity Tier 1, Core Tier 1 or Tangible Common Equity ratios) must accompany such disclosures with a comprehensive explanation of how these ratios are calculated.
Full terms and conditions

Banks are required to make available on their websites the full terms and conditions of all instruments included in regulatory capital. The requirement for banks to make available the full terms and conditions of regulatory capital instruments on their websites will allow
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market participants and supervisors to investigate the specific features of individual capital instruments.
An additional related requirement is that all banks must maintain a Regulatory Disclosures section of their websites, where all of the information relating to disclosure of regulatory capital is made available to market participants. In cases where disclosure requirements set out in this document are met via publication through publicly available regulatory reports, the regulatory disclosures section of the banks website should provide specific links to the relevant regulatory reports that relate to the bank. This requirement stems from the supervisory experience that, in many cases, the benefit of Pillar 3 disclosures is severely diminished by the challenge of finding the disclosure in the first place. Ideally much of the information that would be reported in the Regulatory Disclosures section of the website would also included in the published financial reports of the bank. The Basel Committee has agreed that, at minimum, the published financial reports must direct users to the relevant section of their websites where the full set of required regulatory disclosure is provided.
Section 5: Template during the transitional period

The Basel I I I rules text states that: During the transition phase banks are required to disclose the specific components of capital, including capital instruments and regulatory adjustments that are benefiting from the transitional provisions. The transitional arrangements for Basel I I I phase in the regulatory adjustments between 1 January 2014 and 1 January 2018. They require 20% of the adjustments to be made according to Basel I I I in 2014, with the residual subject to existing national treatment.
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In 2015 this increases to 40%, and so on, until the full amount of the Basel I I I adjustments are applied from 1 January 2018.
These transitional arrangements create an additional layer of complexity in the definition of capital in the period between 1 January 2013 and 1 January 2018, especially due to the fact that existing national treatments of the residual regulatory adjustments vary considerably. This complexity suggests that there would be particular benefits in setting out detailed disclosure requirements during this period to ensure that banks do not adopt different approaches that make comparisons between them difficult. This section of the composition of capital disclosure rules text aims to ensure that disclosure during the transitional period is consistent and comparable across banks in different jurisdictions. Banks will be required to use a modified version of the Post 1 January 2018 Disclosure Template, set out in Section 1, in a way that captures existing national treatments for the regulatory adjustments. The use of a modified version of the Post 1 January 2018 Disclosure Template, rather than the development of a completely separate set of reporting requirements, should help to reduce systems costs for banks. The template is modified in just two ways: (1)An additional column indicates the amounts of the regulatory adjustments that will be subject to the existing national treatment; and (2)Each jurisdiction will insert additional rows in four separate places to indicate where the adjustment amounts reported in the added column actually affect capital during the transition period. The modifications to the template are set out in Annex 4, along with some examples of how the template will work in practice.
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Banks are required to use the template for all reporting periods on or after the implementation date set out in paragraph 5, and banks are required to report the template with the same frequency as the publication of their financial statements (typically quarterly or half yearly).
Annex 1 Post 1 January 2018 Disclosure Template

Key points to note about the template set out in this Annex are: - The template is designed to capture the capital positions of banks after the transition period for the phasing-in of deductions ends on 1 January 2018 (the template for banks to use to report their capital positions during this transitional phase is set out in Section 5). - Certain rows are in italics. These rows will be deleted after all the ineligible capital instruments have been fully phased out (ie from 1 January 2022 onwards). - The reconciliation requirements included in Section 2 result in the decomposition of certain regulatory adjustments. For example, the disclosure template below includes the adjustment Goodwill net of related tax liability. The requirements in Section 2 will lead to the disclosure of both the goodwill component and the related tax liability component of this regulatory adjustment.
- Regarding the shading: Each dark grey row introduces a new section detailing a certain component of regulatory capital.
The light grey rows with no thick border represent the sum cells in the relevant section.
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The light grey rows with a thick border show the main components of regulatory capital and the capital ratios.
- Also provided below is a table that sets out an explanation of each line of the template, with references to the appropriate paragraphs of the Basel I I I text.
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Set out in the following table is an explanation of each row of the template above.
Regarding the regulatory adjustments banks are required to report deductions from capital as positive numbers and additions to capital as negative numbers. For example, goodwill (row 8) should be reported as a positive number, as should gains due to the change in the own credit risk of the bank (row 14). However, losses due to the change in the own credit risk of the bank should be reported as a negative number as these are added back in the calculation of Common Equity Tier 1.
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4 1 . I n general, to ensure that the common templates remain comparable across jurisdictions there should be no adjustments to the version banks use to disclose their regulatory capital position.
However, the following exceptions apply to take account of language differences and to reduce the reporting of unnecessary information: - The common template and explanatory table above can be translated by the relevant national authorities into the relevant national language(s) that implement the Basel standards.
The translated version of the template will retain all of the rows included the template above.
- Regarding the explanatory table, the national version can reference the national rules that implement the relevant sections of Basel I I I. - Banks are not permitted to add, delete or change the definitions of any rows from the common reporting template implemented in their jurisdiction.
This will prevent a divergence of templates that could undermine the objectives of consistency and comparability.
- This national version of the template will retain the same row numbering used in the first column of the template above, such that market participants can easily map the national templates to the common version above. However, the common template includes certain rows that reference national specific regulatory adjustments (row 26, 41, and 56).
The relevant national authority should insert rows after each of these to provide rows for banks to disclose each of the relevant national specific adjustments (with the totals reported in rows 26, 41 and 56).
The insertion of any rows must leave the numbering of the remaining rows unchanged, eg rows detailing national specific regulatory
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adjustments to common equity Tier 1 could be labelled Row 26a, Row 26b etc, to ensure that the subsequent row numbers are not affected.
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In cases where the national implementation of Basel I I I applies a more conservative definition of an element listed in the template above, national authorities may choose between one of two approaches: Approach 1: in the national version of the template maintain the same definitions of all rows as set out in the template above, and require banks to report the impact of the more conservative national definition in the designated rows for national specific adjustments (ie row 26, row 41, row 56). Approach 2: in the national version of the template use the definitions of elements as implemented in that jurisdiction, clearly labelling them as being different from the Basel I I I minimum definition, and require banks to separately disclose the impact of each of these different definitions in the notes to the template. The aim of both approaches is to provide all the information necessary to enable market participants to calculate the capital of banks on a common basis.
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Annex 2
Illustration of the 3 step approach to reconciliation Step 1
Under Step 1 banks are required to take their balance sheet in their published financial statements (numbers reported the middle column below, in a balance sheet that is provided for illustrative purposes) and report the numbers when the regulatory scope of consolidation is applied (numbers reported in the right hand column below of the illustrative balance sheet). If there are rows in the balance sheet under the regulatory scope of consolidation that are not present in the published financial statements, banks are required to add these and give a value of zero in the middle column.
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Step 2
Under Step 2 banks are required to expand the balance sheet under the regulatory scope of consolidation (revealed in Step 1) to identify all the elements that are used in the definition of capital disclosure template set out in Annex 1. Set out below are some examples of elements that may need to be expanded for a particular banking group.
The more complex the balance sheet of the bank, the more items would need to be disclosed.
Each element must be given a reference number / letter that can be used in Step 3.
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Step 3
Under Step 3 banks are required to complete a column added to the post 1 January 2018 disclosure template to show the source of every input. For example, the Post 1 January 2018 Disclosure Template includes the line goodwill net of related deferred tax liability. Next to the disclosure of this item in the template the bank would be required to put ad to show that row 7 of the template has been calculated as the difference between component a of the balance sheet under the regulatory scope of consolidation, illustrated in step 2, and component d.
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Annex 3
Main features template
Set out below is the template that banks must use to ensure that the key features of all regulatory capital instruments are disclosed. Banks will be required to complete all of the shaded cells for each outstanding regulatory capital instrument (banks should insert NA if the question is not applicable).
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This template was developed in a spreadsheet that will be made available to banks on the Basel Committees website. To complete most of the cells banks simply need to select an option from a drop down menu. Using the reference numbers in the left column of the table above, the following table provides a more detailed explanation of what banks are required to report in each of the grey cells, including, where relevant, the list of options contained in the spreadsheets drop down menu.
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Annex 4
Disclosure template during the transition phase
The template that banks must use during the transition phase is the same as the Post 1 January 2018 disclosure template set out in Section 1 except for the following additions (all of which are highlighted in the template below using cells with dotted borders and capitalised text): - A new column has been added for banks to report the amount of each regulatory adjustment that is subject to the existing national treatment during the transition phase (labelled as the pre-Basel I I I treatment). Example 1: I n 2014 banks will be required to make 20% of the regulatory adjustments in accordance with Basel I I I . Consider a bank with Goodwill, net of related tax liability of $100 mn and assume that the bank is in a jurisdiction that does not currently require this to be deducted from common equity. The bank will report $20 mn in the first of the two empty cells in row 8 and report $80 mn in the second of the two cells. The sum of the two cells will therefore equal the total Basel I I I regulatory adjustment. - While the new column shows the amount of each regulatory adjustment that is subject to the existing national treatment, it is necessary to show how this amount is included under existing national treatment in the calculation of regulatory capital. Therefore, new rows have been added in each of the three sections on regulatory adjustments to allow each jurisdiction to set out their existing national treatment. Example 2: Assume that the bank described in the bullet point above is in a jurisdiction that currently requires goodwill to be deducted from Tier 1.
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This jurisdiction will insert a new row in between rows 41 and 42, to indicate that during the transition phase some goodwill will continue to be deducted from Tier 1 (in effect Additional Tier 1).
The $80 mn that the bank had reported in the last cell of row 8, will then need to be reported in this new row inserted between rows 41 and 42. In addition to the phasing-in of some regulatory adjustments described above, the transition period of Basel I I I will in some cases result in the phasing-out of previous prudential adjustments.
In these cases the new rows added in each of the three sections on regulatory adjustments will be used by jurisdictions to set out the impact of the phase-out.
Example 3: Consider a jurisdiction that currently filters out unrealised gains and losses on holdings of AFS debt securities and consider a bank in that jurisdiction that has an unrealised loss of $50 mn. The transitional arrangements require this bank to recognise 20% of this loss (ie $10 mn) in 2014. This means that 80% of this loss (ie $40 mn) is not recognised. The jurisdiction will therefore include a row between rows 26 and 27 that allows banks to add back this unrealised loss. The bank will then report $40 mn in this row as an addition to Common Equity Tier 1. - To take account of the fact that the existing national treatment of a Basel I I I regulatory adjustment may be to apply a risk weighting, jurisdictions will also be able to add new rows immediately prior to the row on risk weighted assets (row 60). These rows will need to be defined by each jurisdiction to list the Basel I I I regulatory adjustments that are currently risk weighted.
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Example 4: Consider a jurisdiction that currently risk weights defined benefit pension fund net assets at 200% and in 2014 a bank has $50 mn of these assets.
The transitional arrangements require this bank to deduct 20% of the assets in 2014. This means that the bank will report $10 mn in the first empty cell in row 15 and $40 mn in the second empty cell (the total of the two cells therefore equals the total Basel I I I regulatory adjustment).
The jurisdiction will disclose in one of the inserted rows between row 59 and 60 that such assets are risk weighted at 200% during the transitional phase.
The bank will then be required to report a figure of $80 mn ($40 mn * 200%) in that row.
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NUMBER 2
DARPA DEVELOPS TECH N OLOGIES FOR AIDING DISASTER RELI EF

JUNE 26, 2012 New sea and air delivery systems to enable direct support to disaster zones from offshore container ships During natural or man-made disasters, the U.S. armed forces rapidly deployable airlift, sealift, communication, and medical evacuation and care capabilities can supplement lead relief agencies in providing aid to victims. The Department of Defenses 2012 strategic guidance document includes humanitarian assistance and disaster relief operations as one of the missions for 21st Century defense. DARPAs Tactically Expandable Maritime Platform (TEMP) program has completed the design of innovative technologies to transform
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commercial container ships into self-contained floating supply bases during disaster relief operations, without needing port infrastructure.
The program envisions a container ship anchoring offshore of a disaster area, and the ships crew delivering supplies ashore using DARPA developed, modular on-board cranes and air- and sea-delivery vehicles. To allow military ships and aircraft to focus on unique military missions they alone can fulfill, it makes sense to develop technologies to leverage standard commercial container ships, used around the world daily, as a surge capacity for extended humanitarian assistance and disaster relief operations, said Scott Littlefield, DARPA program manager. DARPA recently completed the first phase of the program, which developed four key modular systems, all of which are transportable using standard 20-foot or 40-foot commercial shipping containers. The elements include: - Core support modulescontainer-sized units that provide electrical power, berthing, water and other life-support requirements for an augmented crew aboard the container ship. - Motion-stabilized cranesmodular on-board cranes to allow transfer of cargo containers at sea from the ship deck over the side and onto a sea-delivery vehicle. - Sea-delivery vehiclesCaptive Air Amphibious Transporters (CAAT) have air-filled pontoons on a tank tread-like design, enabling them to carry containers over water and directly onto shore. - Parafoil unmanned air-delivery systema low-cost, propeller-driven air vehicle that uses a parachute for lift and carries urgent supplies from the container ship to stricken areas on shore. While DARPAs investment in demonstrating the technology has completed, the information obtained should reduce risk for efforts of the
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military Services or other government organizations with a humanitarian assistance and disaster relief mission.
TACTICALLY EXPANDABLE MARITIME PLATFORM (TEMP)

During natural or manmade disasters, the U.S. armed forces, with rapidly deployable sealift, airlift, logistics, and medical care capabilities, may be called to supplement lead agencies or organizations providing humanitarian assistance and disaster relief support.
The goal of DARPAs Tactically Expandable Maritime Platform (TEMP) program is to investigate and develop modular technologies and modular systems that leverage globally used I nternational Organization for Standardization (ISO) shipping containers.
The vision is to enable humanitarian assistance and disaster relief over broad coastal areas without dependence on local infrastructure, using unmodified commercial containerships, thus freeing military ships to carry out other military missions.
Notes - for cold war fans especially

The Advanced Research Projects Agency (ARPA) which came to be known as DARPA in 1972 when its name changed to the Defense Advanced Research Projects Agency emerged in 1958 as part of a broad reaction to a singular event the launching by the Soviet Union of the Sputnik satellite on Oct. 4, 1957. While Sputnik itself a mere 2-foot-diameter ball beeping a radio signal does not seem to be a particularly significant technological achievement, it had massive psychological and political impact. As recounted in Roger D. Launius Sputnik and the Origins of the Space Age, found on the Web site for NASAs Office of H istory, The only appropriate characterization that begins to capture the mood on 5 October involves the use of the word hysteria.
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Launius wrote in the same document that then-Senate Majority Leader Lyndon B. Johnson recollected, Now, somehow, in some new way, the sky seemed almost alien.
I also remember the profound shock of realizing that it might be possible for another nation to achieve technological superiority over this great country of ours. For the United States to find itself behind the Soviet Union in entering space signified that something was seriously wrong not only with Americas space program but with the organization and management of advanced science and technology for national security. Sputnik evidenced that a fundamental change was needed in Americas defense science and technology programs. Out of this ferment in fact one of the first actions to emerge from it came a bold new concept for organizing defense advanced research the Advanced Research Projects Agency. This agency refocused and rejuvenated Americas defense technological capabilities. Moreover, DARPA instigated technological innovations that have fundamentally reshaped much of the technological landscape, with breakthrough advances in information technologies, sensors, and materials that have had pervasive economic and societal benefits.
The DARPA Model

DARPAs primary mission is to foster advanced technologies and systems that create revolutionary advantages for the U.S. military. Consistent with this mission, DARPA is independent from the military services and pursues higher-risk research and development (R&D) projects with the aim of achieving higher-payoff results than those obtained from more incremental R&D. Thus, DARPA program managers are encouraged to challenge existing approaches and to seek results rather than just explore ideas.
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Hence, in addition to supporting technology and component development, DARPA has funded the integration of large-scale systems of systems in order to demonstrate what we call today disruptive capabilities.
Underlying this high-risk high-payoff motif of DARPA is a set of operational and organizational characteristics including: relatively small size; a lean, non-bureaucratic structure; a focus on potentially change-state technologies; and a highly flexible and adaptive research program.
What is important to understand at the outset is that in contrast to the then-existing defense research environment, ARPA was designed to be manifestly different.
It did not have labs. It did not focus on existing military requirements. It was separate from any other operational or organizational elements. It was explicitly chartered to be different, so it could do fundamentally different things than had been done by the military service R&D organizations.
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NUMBER 3
EIOPA PUBLISHES GUIDELIN ES ON COMPLAINT S HANDLI NG BY INSURERS

- Insurers should put in place a complaints management policy, which is endorsed by their senior management - Insurers should have a complaints management function which enables complaints to be investigated fairly and possible conflicts of interest to be identified and mitigated - Insurers should provide information on complaints and complaints handling to competent national authorities or ombudsman
- On request or when acknowledging receipt of a complaint, insurers should provide written information regarding their complaints handling process and provide a response to a complaint without any unnecessary delay.
Frankfurt, 27 June 2012 The European I nsurance and Occupational Pensions Authority (EIOPA) published today its first set of Guidelines with a view to establishing consistent, efficient and effective supervisory practices and ensuring common, uniform and consistent application of EU law. The Guidelines in question cover complaints handling by insurance companies and seek to address two current areas of concern:
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( i ) I nformation asymmetry
I nsurers may not handle complaints in the best interests of policyholders, or policyholders may not know the standards to which insurers should adhere and may not be aware of the possibility to submit a complaint;
(ii) An existing regulatory gap

A current lack of EU rules on complaints handling by insurance companies, leading to a diverse number of national approaches and a potentially unlevel playing field. These Guidelines seek to promote a more convergent approach. The Guidelines, which are high level principles and are addressed to competent supervisory authorities only, aim to provide guidance on appropriate internal systems and control for complaints handling by insurers (such as having a complaints management policy and complaints management function in place) and render them more effective, and provide guidance on the provision of information and procedures for responding to complaints, thereby ensuring the adequate protection of policyholders and beneficiaries.
Since the Guidelines are high level principles, they have been supplemented by a more detailed Best Practices Report, which seeks to promote common supervisory approaches and practices regarding internal systems and controls and internal follow up of complaints.
EIOPA appreciates the importance of proportionality in applying these Guidelines to different sized insurance undertakings and aims to consider this as part of a follow up initiative. Gabriel Bernardino, Chairman of E IOPA, said: With these Guidelines, EIOPA aims to take an important step towards promoting more transparency, simplicity and fairness in the market for consumer financial products and services and thereby enhance consumer protection, one of our key objectives. The Guidelines fill an important regulatory gap and we expect competent supervisory authorities to make every effort to comply with them.
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We will be monitoring compliance with these Guidelines closely in the months ahead.
Notes:
These Guidelines are issued under Article 16 of E IOPAs founding Regulation, Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European I nsurance and Occupational Pensions Authority). Article 16(1) provides that [EIOPA] shall, with a view to establishing consistent, efficient and effective supervisory practices within the ESFS, and to ensuring the common, uniform and consistent application of Union law, issue guidelines and recommendations addressed to competent authorities or financial institutions.
Report on Best Practices by I nsurance Undertakings in handling complaints I ntroduction

The following Report contains a list of best practices for handling complaints by insurance undertakings. Their purpose is to contribute to enhancing customer protection as described in the underlying statutory objectives of E IOPA. They are based on Article 29(2), EIOPA Regulation whereby EIOPA may develop new practical instruments and convergence tools to promote common supervisory approaches and practices. They provide examples of best practices and are complementary to the Guidelines on Complaints Handling by Insurance Undertakings. These Best Practices are not legally binding on competent authorities or financial institutions as defined under Regulation 1094/ 2010 establishing EIOPA (the E IOPA Regulation) and are not subject to the comply or
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explain mechanism provided for under Article 16 of the E IOPA Regulation as their legal basis is Article 29(2).
Having regard to the Guidelines on ComplaintsHandling by I nsurance Undertakings (E IOPABoS12/ 069), on internal systems and controls:
Content of a complaints management policy

It is considered best practice for an insurance undertakings complaints management policy to include processes for: (i) Lodging a complaint with an insurance undertaking by any reasonable means (including complaints submitted by an authorised representative e.g. a family member or a solicitor) and confirmation that this is free of charge; (ii)Handling complaints received, including deadlines etc. (iii)The fair treatment of complainants; (iv)The proper treatment of a complainants information and personal data, according to the applicable legal framework; (v)Preventing, identifying and managing possible situations of conflicts of interest in complaints management; (vi)The prompt, equal, fair and efficient management of complaints, (vii)The adequate training of staff participating in complaints handling within the insurance undertaking; (viii)Internal reporting, follow up and monitoring of compliance with the complaints management policy.
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Organisation of the internal complaints management function

Irrespective of the specific model that insurance undertakings have adopted for complaints handling, it is considered best practice for insurance undertakings to: (i)Appoint one or more senior manager(s) with overall regulatory responsibility for the complaints management function; (ii)Ensure the necessary internal flows of information and reporting lines for complaints management. (iii) Control the effective and efficient treatment of complaints
Registration
Without prejudice to applicable EU /national legislation on record keeping/ data protection, it is considered best practice for: (i) An insurance undertakings register of complaints to contain all the necessary information on the complaints, including: (i) Subject of the complaint; (ii) Data on the complainant; (iii) Date of receiving and answering the complaint; (iv) Result/ outcome of the complaintshandling procedure; (iv) Class of the insurance referred to. (ii)Documentation relating to the complaint to be kept and archived in a secure manner for a reasonable period of time based on the nature of the complaint and the insurance undertaking involved. ( i i i ) I nsurance undertakings to provide information to complainants regarding their complaint, where reasonably requested by complainants.
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Reporting
The relevant supervisory authorities should be informed of any changes in the identity and contact details of members of senior management involved in the complaints management function as referred to above.
Internal follow up of complaints handling

It is considered best practice for an insurance undertaking to have in place the following processes in order to comply with the proper internal followup of complaints: (i)The collection of management information on the causes of complaints and the products and services complaints relate to; (ii)A process to identify the root causes of complaints and to prioritise dealing with the root causes of complaints; (iii)A process to consider whether the root causes identified may affect other processes or products;
(iv) A process for deciding whether root causes discovered should be corrected and how this should be done; and
(v)Regular reporting to senior personnel where information on recurring or systemic problems may be needed for them to play their part in identifying, measuring, managing and controlling risks of regulatory concern and keeping records of analysis and decisions taken by senior personnel in response to management information on root causes of complaints.
Guidelines on Complaints Handling by I nsurance Undertakings Introduction

1. According to Article 16 of the EIOPA Regulation and taking into account Recital 16 and Articles 41, 46, 183 and 185 of Directive
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2009/ 138/ EC of the European Parliament and the Council of 25 November 2009 on the taking up and pursuit of the business of Insurance and Reinsurance (Solvency I I ), which provide for the following:
-The main objective of insurance and reinsurance regulation and supervision is the adequate protection of policyholders and beneficiaries... -Member States shall require all insurance and reinsurance undertakings to have in place an effective system of governance which provides for sound and prudent management of the business. - Insurance and reinsurance undertakings shall have in place an effective internal control system. That system shall at least include administrative and accounting procedures, an internal control framework, appropriate reporting arrangements at all levels of the undertaking and a compliance function. - In the case of non life insurance, a duty for the insurance undertaking to inform the policyholder of the arrangements for handling complaints of policyholders concerning contracts including, where appropriate, the existence of a complaints body, without prejudice to the right of the policy holder to take legal proceedings. - In the case of life insurance, the duty for the insurance undertaking to communicate to the policyholder, in relation to the commitment, the arrangements for handling complaints concerning contracts by policyholders, lives assured or beneficiaries under contracts including, where appropriate, the existence of a complaints body, without prejudice to the right to take legal proceedings. 2. To ensure the adequate protection of policyholders, the arrangements of insurance undertakings for handling all complaints that they receive should be subject to a minimum level of supervisory convergence.
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3.These Guidelines shall apply from their final date of publication.

4.These Guidelines are issued by E IOPA under the powers set out in Article 16 of the E IOPA Regulation. 5.These Guidelines apply to authorities competent for supervising Complaints handling by insurance undertakings in their jurisdiction. This includes circumstances where the competent authority supervises Complaints handling under EU and national law, by insurance undertakings doing business in their jurisdiction under freedom of services or freedom of establishment. 6.Competent authorities must make every effort to comply with these Guidelines in accordance with Article 16(3) in relation to the arrangements of insurance undertakings for handling all complaints that they receive. 7.For the purpose of the Guidelines below, the following indicative definitions, which do not override equivalent definitions in national law, have been developed:
Complaint means:
A statement of dissatisfaction addressed to an insurance undertaking by a person relating to the insurance contract or service he/ she has been provided with. Complaints handling should be differentiated from claims handling as well as from simple requests for execution of the contract, information or clarification.
Complainant means:
A person who is presumed to be eligible to have a complaint considered by an insurance undertaking and has already lodged a complaint e.g. a policyholder, insured person, beneficiary and in some jurisdictions, injured third party.
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8. Furthermore, where an insurance undertaking receives a complaint about:

(i)Activities other than those regulated by the competent authorities pursuant to Article 4(2), E IOPA Regulation; or (ii)The activities of another financial institution for which that insurance undertaking has no legal or regulatory responsibility (and where those activities form the substance of the complaint) these Guidelines do not apply.
However, that insurance undertaking should respond, where possible, explaining the insurance undertaking's position on the complaint and/ or, where appropriate, giving details of the insurance undertaking or other financial institution responsible for handling the complaint.
9. Please note that more detailed provisions on insurance undertakings internal controls when handling complaints are contained in a Draft Best Practices Report on Complaints Handling by Insurance Undertakings (E IOPA_CP_1 1/ 010b).
1. Guidelines Guideline 1 - Complaints management policy

10. Competent authorities should ensure that: a)A complaints management policy is put in place by insurance undertakings. This policy should be defined and endorsed by the insurance undertakings senior management, who should also be responsible for its implementation and for monitoring compliance with it. b)This complaints management policy is set out in a (written) document e.g. as part of a general (fair) treatment policy (applicable to actual r potential policyholders, insured persons, injured third parties and beneficiaries etc.).
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c) The complaints management policy is made available to all relevant staff of the insurance undertaking through an adequate internal channel.
Guideline 2 - Complaints management function

11.Competent authorities should ensure that insurance undertakings have a complaints management function which enables complaints to be investigated fairly and possible conflicts of interest to be identified and mitigated.
Guideline 3 Registration
12.Competent authorities should ensure that insurance undertakings register, internally, complaints in accordance with national timing requirements in an appropriate manner (for example, through a secure electronic register).
Guideline 4 Reporting
13.Competent authorities should ensure that insurance undertakings provide information on complaints and complaints handling to the competent national authorities or ombudsman. This data should cover the number of complaints received, differentiated according to their national criteria or own criteria, where relevant.
Guideline 5 - Internal follow-up of complaints handling

14.Competent authorities should ensure that insurance undertakings analyse, on an ongoing basis, complaints handling data, to ensure that they identify and address any recurring or systemic problems, and potential legal and operational risks, for example, by: (i) Analysing the causes of individual complaints so as to identify root causes common to types of complaint;
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(ii)Considering whether such root causes may also affect other processes or products, including those not directly complained of; and
(iii) Correcting, where reasonable to do so, such root causes.
Guideline 6 Provision of information

15. Competent authorities should ensure that insurance undertakings: a)On request or when acknowledging receipt of a complaint, provide written information regarding their complaints handling process. b)Publish details of their complaints handling process in an easily accessible manner, for example, in brochures, pamphlets, contractual documents or via the insurance undertakings website. c)Provide clear, accurate and up to date information about the complaints handling process, which includes: (i)Details of how to complain (e.g. the type of information to be provided by the complainant, the identity and contact details of the person or department to whom the complaint should be directed); (ii)The process that will be followed when handling a complaint (e.g. when the complaint will be acknowledged, indicative handling timelines, the availability of a competent authority, an ombudsman or alternative dispute resolution (ADR) scheme etc.). d) Keep the complainant informed about further handling of the complaint.
Guideline 7 - Procedures for responding to complaints

16. Competent authorities should ensure that insurance undertakings: a) Seek to gather and investigate all relevant evidence and information regarding the complaint.
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b)Communicate in plain language, which is clearly understood.

c)Provide a response without any unnecessary delay or at least within the time limits set at national level. When an answer cannot be provided within the expected time limits, the insurance undertaking should inform the complainant about the causes of the delay and indicate when the insurance undertakings investigation is likely to be completed. d)When providing a final decision that does not fully satisfy the complainants demand (or any final decision, where national rules require it), include a thorough explanation of the insurance undertakings position on the complaint and set out the complainants option to maintain the complaint e.g. the availability of an ombudsman, alternative dispute mechanism, national competent authorities, etc. Such decision should be provided in writing where national rules require it.
Compliance and Reporting Rules

17.This document contains Guidelines issued under Article 16, E IOPA Regulation. In accordance with Article 16(3) of the EIOPA Regulation, Competent Authorities and financial institutions must make every effort to comply with guidelines and recommendations. 18.Competent authorities that comply or intend to comply with these Guidelines should incorporate them into their regulatory or supervisory framework in an appropriate manner. 19.Competent authorities shall confirm to E IOPA whether they comply or intend to comply with these Guidelines, with reasons for non compliance, by [dd mm yyyy]. 20.In the absence of a response by this deadline, competent authorities will be considered as non compliant to the reporting and reported as such.
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Final Provision on Review

21. These Guidelines shall be subject to a review by E IOPA.
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NUMBER 4
Speech by IFRS Foundation Chairman Michel Prada at IFRS Foundation Conference in Frankfurt
27 June 2012 On 27 June 2012 Michel Prada, Chairman of the I FRS Foundation Trustees, addressed the I FRS Foundation Conference in Frankfurt, Germany.
" Its a great pleasure to participate in this important event here in Frankfurt.
I m happy to have the opportunity to update you on recent and future developments at the I FRS Foundation, six months after I had the honour of being elected Chairman of the Foundation Trustees. I deliberately use the word honour because I am fortunate to be following in the footsteps of some quite remarkable people, among them Paul Volcker and my good friend Tommaso Padoa-Schioppa, who sadly passed away at the end of 2010. As you may know, the Trustees are responsible for the governance of the organisation and oversight of the I ASB. We are, inter alia, responsible for designing the strategy, providing the financing and resourcing of the organisation, and, most importantly, protecting the I ASBs technical independence while ensuring that their standard-setting activity follows an open, inclusive, thorough and robust due process. Among my fellow Trustees, we have former Finance Ministers, Presidents of Central Banks, business executives, securities commissioners and academics from around the world, all united in our shared commitment to the goals of the Foundation. I am delighted that my friend and fellow Trustee Clemens Brsig will be speaking after I finish.
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As a former Chairman of the Autorit des Marchs Financiers (AMF), the French securities regulator, and former Chairman of the Technical Committee of IOSCO, I was myself involved at the inception of the organisation in May 2000, when I OSCO endorsed the core set of International Accounting Standards (IASs) developed by the I ASBs part-time predecessor, the I nternational Accounting Standards Committee.
I served on the committee that selected the first set of Trustees, and it is fortuitous, but also extremely rewarding, to return to Chair the current group of Trustees.
The path towards global standards

When we set out on the path towards global standards for accounting and financial reporting more than a decade ago, we could not have imagined the level of success achieved in the following 10 years. Back then, no major economies used international accounting standards. In fact, at that time, if you wanted to use an internationally-recognised, high quality accounting standard, the only game in town was US GAAP. Nonetheless, the globally interconnected nature of financial markets meant that a national approach to financial reporting was no longer considered appropriate. As Paul Volker, the first Chairman of the Foundation used to say: international accounting standards are needed but cant be drafted in Connecticut. Investors seeking diversification and growth wanted to compare and contrast investment opportunities on an equal basis. Multinational companies wanted to eliminate the burden of a multitude of local reporting requirements and they sought the freedom to raise capital anywhere in the world.
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Meanwhile, as securities regulators, we were well aware of the headache of protecting domestic investors when they are investing internationally and have to deal with different and sometimes contradictory standards.
Indeed, several events came together to confirm the relevance of this strategy, to accelerate the work of the I ASB and to highlight its importance to the global financial system. Firstly, after several decades of failed attempts to develop a pan-European set of accounting standards, Europe decided in 2002 to switch tack and instead adopt, from 2005, the fledgling I ASs, now known as International Financial Reporting Standards or IFRSs, for the consolidated accounts of listed companies on regulated markets. Overnight, this transformed the I ASB from an interesting but somewhat obscure accounting think-tank into Europes accounting standard-setter. Secondly, in the United States a series of accounting scandals challenged the infallibility of US GAAP, which led the US Financial Accounting Standards Board (FASB) to consider its own fundamental reform of its standards. It made perfect sense for the I ASB and the FASB, under the Norwalk Agreement of 2002, to reform I FRSs and US GAAP in parallel, and so began a decade of work to improve the respective standards and bring about their convergence. Thirdly, the rapid growth experienced by emerging economies meant that they too needed high quality, internationally-recognised financial reporting standards. Many of these economies have well-developed capital markets that are home to major multinational companies. Most have the ambition of developing their own global financial centres, and the use of I FRSs is increasingly seen as a prerequisite for such financial centres to exist.
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Finally, the global financial crisis that began in 2007 and continues today provided a very clear illustration of the globally connected nature of financial markets and the pressing need for a single set of high quality global accounting standards.
That is why repeated G20 communiqus, including the one that was issued at the recent G20 Summit in Los Cabos, have supported the work of the I ASB and called for a rapid move towards global accounting standards. Thanks to the achievements of the last decade, IFRSs are firmly on the path to becoming those global standards. Today, companies in more than 100 countries are required or permitted to report using I FRSs. From this year, more than two-thirds of G20 members are required to use IFRSs, including, in the last two years, Brazil, Canada, Korea, Mexico and Russia. Almost half of Global Fortune 500 companies now report using I FRSs.
In those remaining economies yet to fully adopt I FRSs, we continue to see substantial progress being made.
I recently visited China and Japan to better understand their own preparations towards adoption of I FRSs. China has already substantially reformed its own financial reporting standards through what they call a continuous convergence process, which they understand as a process for incorporation and the differences between those standards and I FRSs appear now to be very small. Chinas commitment to I FRSs is hugely impressive and it is easy to understand why a country with 14 million accountants is going to take some time to complete its full transition to I FRSs.
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China is also actively involved in the organisation and already provides the secretariat for the I ASBs Emerging Economies Group and I have no doubt that China will play a full role in the future development of I FRSs.
I was also fortunate enough to spend some time in Japan, meeting with all relevant stakeholders. Once again, there is no doubt in my mind of Japans long-term commitment to I FRSs. Japan has continued to support the work of the I FRS Foundation and works in very close co-operation with the I ASB throughout the standard-setting process. Japan already permits the voluntary use of IFRSs for domestic companies. The number of Japanese companies electing to report using IFRSs is expected to increase rapidly over the next few years. Regardless of a formal Japanese decision to transition to IFRSs, once you have the largest, internationally-focused Japanese companies using the standards, then you have de facto adoption of I FRSs. Later this year I will visit I ndia. The Trustees stand ready to support our I ndian colleagues in their own transition to I FRSs. Also later this year, the I FRS Foundation will open an Asia-Oceania liaison office in Tokyo.
This first office outside of London is a clear indication of our desire to support jurisdictions across the Asia-Oceania region in their transition to IFRSs, as well as those economies that have already adopted the standards.
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Last, but not least, one of the most anticipated decisions is whether and how the United States will incorporate I FRSs into its own financial reporting regime.
The IASB and the FASB have spent 10 years since the Norwalk agreement laying the groundwork for this decision through a dedicated and fruitful effort of convergence. Recognising this work, in 2007, the US Securities and Exchange Commission (SEC) permitted foreign companies with a US listing to report using I FRSs and began to consult on the possibility of also adopting I FRSs for domestic companies. Today, the SEC oversees more than 100 companies listed on US markets that report using I FRSs. We await with interest the SECs final staff report on a pathway towards IFRS adoption and look forward to a positive outcome to the SECs deliberations. This is truly remarkable progress in little over 10 years. During the remainder of the conference you will hear about the many challenges facing the organisation, including the completion of the remaining convergence projects and our work to encourage those remaining jurisdictions to come fully on board. While recognising these challenges, I also ask you to keep in mind this remarkable progress that I have described. Along historical trends, the glass is most definitely more than half-full!
Becoming the global accounting standard-setter

So what does the future hold for the I FRS Foundation?
How do we consolidate the achievements of the last decade? What steps need to be taken to support the transition from international to truly global financial reporting standards?
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And in turn, what steps need to be taken for the I ASB to become the globally recognised accounting standard-setter?
In 2010 the Trustees, as well as the I FRS Foundation Monitoring Board, to whom the Trustees report, both set out to answer these questions by initiating independent but co-ordinated reviews. The Monitoring Board brings together public authorities and provides political legitimacy and accountability to our organisation. It set out to address institutional aspects of the governance of the I FRS Foundation, including its own composition and the relationship between the three tiers of the organisationthe I ASB, the Trustees and the Monitoring Board-that are today the basis of a well-accepted architecture. The Trustees began a far-reaching strategy review that looked at the IFRS Foundations mission, standard-setting process, governance and financing. Both the Monitoring Board and Trustees consulted widely, and in February 2012 we jointly published the conclusions of our respective studies. These opening remarks do not provide sufficient time to describe the 24 pages of the Monitoring Boards governance review or the 25 pages of the Trustees strategy review. If you are interested in the future direction of financial reporting, I strongly encourage each of you to download these reports from the website, because they map out our respective activities for the coming years. However, I would like to signpost what I consider to be the three most important conclusions of the Trustees strategy review. First, it was clear from the feedback we received that there are efficiencies to be gained in the way that IFRSs are developed.
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Over the last few years, the Trustees have overseen a substantial increase in the number of the I ASBs technical staff.
At the same time, we have seen a corresponding increase in the depth and breadth of the I ASBs consultation and outreach activities. However, as the I ASB adapts to become the global accounting standard-setter, we must also recognise that no single organisation can do this on its own.
Standard-setting has long been a collaborative exercise.

The quality and robustness of many recently developed standards owe a great deal to the many organisations and individuals who offer advice and guidance to the I ASB throughout the life cycle of the standard-setting process. Perhaps the best example of this is the interaction between the IASB as an international standard-setter and those national and regional organisations with an interest in accounting standard-setting.
At a national level, the I ASB has continued to work in close co-operation with the FASB, the Accounting Standards Board of Japan (ASBJ) and many other national standard-setting bodies, such as those that exist in Europe.
At the same time, we have seen the emergence of other regional bodies with an interest in standard-setting. Some of these are well-resourced organisations such as the European Financial Reporting Advisory Group (EFRAG), while others are less formal regional groupings such as the Asia-Oceania Standard Setters Group (AOSSG) or the Group of Latin American Standard Setters (GLASS). Each of these national and regional bodies has a great deal to contribute to the I ASBs standard-setting activities.
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The Trustees strategy review and the completion of the convergence programme with the FASB present an opportunity to give further consideration to the future relationship between the I ASB and national and regional bodies.
The Trustees strategy review foresees new ways of working with these groups. It calls on the I ASB to establish more structured and formal relationships with the standard-setting community around the world and to engage these bodies early in the process of standard-setting. The benefit will be better integration of the global perspective into the standard-setting process and perhaps a reduction in the risk of non-endorsement of a new standard. The review also describes possible ways to more fully integrate the activities of these organisations into the I ASBs formal standard-setting process. This work, led by Yael Almog, our recently appointed Executive Director, is now in progress and we are starting to discuss its details in the next few months. Second, the Trustees strategy review recognises that the goal of global accounting standards will be illusory if those standards are not endorsed and enforced on a globally consistent basis. That means everyone adopting the same set of standards, and those standards being applied in the same way. The I ASB is not a regulator and does not have enforcement capacities. Neither has it the resources or the expertise to monitor global adherence to the standards. Thankfully, there is an existing organisation, the I nternational Organization of Securities Commissions, or I OSCO, that does and deals with investor protection and quality of financial information.
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The I OSCO has recently completed a restructuring of its leadership and operational activities.
As a former Chairman of the I OSCO Executive and Technical Committees, this is an organisation that I know well and which can play a leading role in monitoring the implementation of global accounting standards. We have already begun discussions with I OSCO about how we can deepen our co-operation.
Last month, Yael and I travelled to Beijing to attend the annual I OSCO conference, where I had the privilege of joining a panel discussion on international standards.
The newly appointed Chairman of the I OSCO Board is Masa Kono, who also serves as Chairman of the I FRS Foundation Monitoring Board. At a technical level, I OSCOs new policy committee on accounting, auditing and financial reporting is well placed to work in close co-operation with the I ASB when considering consistent application of the standards. The I OSCO network is also well placed to provide extremely valuable practical input on how I FRSs are working in different parts of the world, which in turn will benefit the work of the IFRS Interpretations Committee and the I ASBs post-implementation review of major new Standards. There is a great opportunity to move forward and I have high hopes of a very successful ongoing partnership with I OSCO. Finally, the Trustees strategy review recommended a series of further enhancements to the I ASBs standard-setting process. These enhancements build on the already impressive due process framework and include recommendations on the transparency of the IASBs agenda-setting process, the development of an agreed methodology for field visits and effect analysis and more rigorous
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oversight of due process through the Trustees Due Process Oversight Committee, or DPOC.
The Trustees have already started to put these recommendations in place. For example, last month we appointed David Loweth, a former Technical Director of the United Kingdom Accounting Standards Board (ASB), to the position of Director for Trustee Activities. Davids appointment provides the DPOC with its own dedicated resource and further enhances the separation of Trustee oversight from the work of the I ASB. I have described three of the main findings of the strategy review. The Trustees are committed to implementing all of the recommendations of both reviews in full. We have already published for public comment the revised I ASB Due Process Handbook and will shortly publish revisions to the I FRS Foundation Constitution.
Conclusion
Ladies and gentlemen, in the brief time permitted I am pleased to report that we are continuing to make substantial progress. The IFRS Foundation annual report provides a fuller description of the topics that I have touched upon today. As a Trustee, I am not supposed to deal with the technicalities, but I am fully aware, like my fellow Trustees, of the difficult questions that the IASB has to deal with and of the quasi philosophical discussions that take place worldwide when designing global standards. A few days ago H ans Hoogervorst, Chairman of the I ASB and also a former securities regulator, delivered a speech in Amsterdam to address this challenge and I encourage you to read this speech on the website.
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His words remind us of the fundamental objective and of the intrinsic complexity of accounting and financial reporting: to provide those market participants who do not have direct access to basic data with a true and fair representation of the situation and performance of companies that they invest in or deal with.
This is a difficult task that has to deal with the rule of relativity of value and to confront different views and business models. The governance and strategy reviews build upon a decade of achievement and chart a course for the I FRS Foundation to master these complexities with full transparency and in cooperation with all parties involved, and for the I ASB to be recognised as the truly global accounting standard-setter. The formalisation of the I ASBs relationship with national and regional bodies with an interest in accounting standard-setting will increase the effectiveness of our work. The greater focus on the implementation of our standards, in part through an enhanced relationship with I OSCO and other international organisations, will help us to achieve the goal of truly global accounting standards. In addition, the enhancements to the I ASBs due process will further enhance confidence in the standard-setting process and will in turn improve the robustness of the Standards."
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NUMBER 5 06/27 /12
FASB Publishes Proposal for Disclosing Liquidity and Interest Rate Risk
Norwalk, CT, June 27, 2012 The Financial Accounting Standards Board (FASB) today issued for public comment a proposed Accounting Standards Update (ASU) intended to improve financial reporting about certain risks inherent in financial instruments and how they contribute to the reporting organizations broader risks. Stakeholders are asked to provide input by September 25, 2012. The Update is intended to address stakeholders concerns about how organizations disclose their exposures to certain risks related to financial assets, liabilities, obligations, and other financial instruments. Specifically, the ASU proposes new disclosures related to liquidity risk and interest rate risk, two risks that were prominent during the recent financial crisis and that continue to be relevant to reporting organizations on an ongoing basis. The FASB previously issued enhanced disclosure requirements about credit risk. The proposed liquidity risk disclosures are intended to provide information about the risk that the reporting organization will encounter difficulty when meeting its financial obligations, and would apply to all public, private, and not-for-profit organizations.
However, the nature of the disclosures will depend on whether the reporting organization is considered a financial institution, as defined by the proposed Update.
The proposed interest rate risk disclosures would apply only to financial institutions and are intended to provide information about the exposure
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of financial assets and financial liabilities to fluctuations in market interest rates.

As part of the FASBs financial instruments project, stakeholders consistently requested improved disclosures about an organizations exposure to interest rate risk and liquidity risk, said FASB Chairman Leslie F. Seidman. Therefore, the Board is proposing guidance that would help users of financial statements better understand organizations exposures to risks and the ways in which those risks are managed. The amendments in the proposed ASU on liquidity risk disclosures would require:
A financial institution to disclose the carrying amounts of classes of financial assets and financial liabilities in a table, segregated by their expected maturities, including off-balance-sheet financial commitments and obligations. A financial institution that is also a depository institution to disclose information about its time deposit liabilities, including the cost of funding in a table or list during the previous four fiscal quarters. An organization that is not a financial institution to disclose its expected cash flow obligations in a table, segregated by their expected maturities, without being required to include the reporting organizations financial assets in that table. All reporting organizations to provide their available liquid funds in a table, which includes unencumbered cash, high-quality liquid assets, and borrowing availability. All reporting organizations to provide additional quantitative or narrative disclosure of the organizations exposure to liquidity risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period. The amendments in the proposed ASU on interest rate risk disclosures would require a financial institution to disclose:
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The carrying amounts of classes of financial assets and financial liabilities according to time intervals based on the contractual repricing of the financial instruments.
An interest rate sensitivity table that presents the effects on net income and shareholders equity of hypothetical, instantaneous shifts of interest rate curves.
Quantitative or narrative disclosures of the organizations exposure to interest rate risk, including discussion about significant changes in the amounts and timing in the quantitative tables and how the reporting organization managed those changes during the current period. In May 2010, the FASB issued proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities-Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815). As a result of the FASBs outreach and feedback from stakeholders, the Board decided to publish this proposed Update separately from the classification and measurement aspects of the project on accounting for financial instruments. The FASBs redeliberations of the May 2010 proposed ASU are ongoing. The FASB has not yet decided on an effective date but plans to do so after seeking stakeholder comments.
Before the conclusion of the comment period, the Board will conduct additional outreach with preparers, users, and auditors of financial statements to solicit their input on the proposal.
Further information including the Exposure Draft, podcast, and a FASB In Focus a high-level summary of the proposalis available on the FASB website at www.fasb.org.
About the Financial Accounting Standards Board

Since 1973, the Financial Accounting Standards Board has been the
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designated organization in the private sector for establishing standards of financial accounting and reporting.
Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American I nstitute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information.
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NUMBER 6
Thomas M. Selman Executive Vice President, Regulatory Policy IRI Government, Legal and Regulatory Conference Washington, DC Monday, June 25, 2012 Thank you, Pat [Kelly, Vice President and Chief Compliance Officer, Prudential Annuities] for that introduction, and thanks also to I RI for the invitation to speak here today. One hundred years ago, the "Titanic" struck an iceberg and sank on her maiden voyage. During the night of April 15, 1912, more than fifteen hundred men, women and children perished in the lethally cold waters of the North Atlantic. Much has been written about the causes of this tragedy. The rivets installed in the shipyard were defective. The captain was reckless. The White Star Lineowner of the Titanicwas overconfident of the ship's sea-worthiness. In a commemorative article in the Wall Street Journal, Chris Berg described another cause for the enormous loss of life. According to Mr. Berg, lifeboat regulations issued by the British Board of Trade were outdated. The Board of Trade had not updated its lifeboat regulations for almost 20 years.
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Those regulations were written at a time when most people could not have imagined a ship so large.
Indeed, the Titanic had over 2,000 people onboard, but its lifeboats could only hold about 1,200 people.
According to Mr. Berg, the Board of Trade had become complacent about the danger and saw little reason to update its lifeboat regulations. Ships had become safer and the number of disasters had declined. The purpose of lifeboats was to ferry people to safety. They were not meant to hold passengers while a ship sank. Apparently the Board of Trade assumed that modern ships would sink at a slow rate, affording fewer lifeboats enough time to transport passengers to safety. Even so, the shipyard manager had suggested to the White Star Line that they equip the Titanic with 48 lifeboats28 more than it finally held. Those 48 lifeboats would have been sufficient to save all of the passengers. However, the White Star Line declined the shipyard manager's suggestion to increase the number of lifeboats. Instead, the company decided not to add more lifeboats until the Board of Trade required them. The Titanic's cruise line thus awaited orders from its regulator to increase the number of lifeboats onboard. No order came, so no lifeboats were added.
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Mr. Berg's take on the disasterthat it's easy to put regulations in place but harder to keep them up to datedoesn't only apply to ocean liners. The Titanic is a case study for all of us here today.
It provides at least three lessons for us as regulators and at least three lessons for you. The first lesson is that a regulator must periodically review its rules, its interpretation of those rules and the ways in which it inspects firms for compliance with those rules. The lifeboat standards of the Board of Trade were outdated. The Board did not account for the growth in the size of ships.
It assumed that what worked in the past would continue to work.

Regulation can't be staticit must evolve to reflect a world of constant change. If rules do not reflect reality, then how effective can they be? But at the same time, the industry and the public need certainty and predictability.
If regulators change rules too frequently, then we complicate your ability to comply.
You need and deserve a system of regulation that provides predictability and consistency. As a matter of fact, the whole purpose of adopting a rule is to establish a standard that the industry must follow. So dynamic regulation is important, but certainty is important too. In my view, a self-regulatory organization offers some distinct advantages in achieving a good balance between the two.
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Of course, we are not perfect.

Some may argue that at times we move too quickly or too slowly to modify a rule. But as an SRO we are, I believe, uniquely equipped to strike a reasonable balance between dynamic and predictable regulation. An SRO can tap industry expertise to ensure that rules are comprehensive, workable and effective.
An SRO can set ethical standards that exceed legal requirements, and are broader and more flexible than government regulation.
An SRO is not subject to government spending limits, and therefore can more rapidly respond and devote resources when an unanticipated problem develops. And an SRO can devote significant resources to education and training, which can be critical in helping both industry and investors understand how to adapt to changes in the markets. A good example of our ability to modernize our rule interpretations is the regulation of social media. As most of you know, FINRA has issued two sets of guidance concerning the uses of social media, and was the first regulator to do so. We will continue to work with the industry to ensure that the rules governing social media are practical to apply and effective in their protection of investors.
While an SRO can devote more resources to respond to an unanticipated problem, the speed with which we can update our rules is sometimes limited by the complexity of our rulemaking process.
The development of rules and rule amendments takes time. Here are the steps of a typical FINRA rulemaking:
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First, FIN RA staff develops an outline for a possible rule.

We discuss our idea with FIN RA's advisory committees, composed of industry and public members. The committees will describe any significant burdens that the proposal might impose on the industry. We will revise the proposal to reflect those committee comments that are consistent with the goals of investor protection.
Then we submit the revised proposal to our Small Firm Advisory Board for further comments from the small firm perspective.
We consider their comments and revise the proposal as necessary. Subsequently, we submit the proposal to our full Board of Governors for its approval with any changes the Board requests. Once the Board has approved a proposed rule, we normally issue the proposal for public comment and with those comments further refine the rule. We then file the proposal with the SEC, and the SEC staff may suggest changes to the rule. Before approving a FINRA rule, the SEC must issue the rule for public comment. It is not unusual for the SEC to request comment several times before it approves a rule. Our rulemaking is an open, transparent process, affording the industry and the public many opportunities to comment about the merits of the proposal, the burdens it could impose on the industry and the benefits it might provide to investors. These are good and necessary steps. But they can be time consuming and complex and they sometimes delay our efforts to modernize our rules.
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By way of example, FINRA recently amended its advertising rules.

This rule proposal went through five rounds of commentonce by FINRA and four by the SEC. But the positive outcome was the introduction of changes that simplify and modernize the advertising rules. The need for certainty and the complicated nature of our rulemaking impedes our ability to review our rules for currency. Nevertheless, as the Titanic experience illustrates, every regulator, including FINRA, must be willing to reconsider its rules, its interpretation of the rules and its application of the rules to the industry. Regulation must reflect the industry that we regulate. That is the second lesson from the Titanic disaster. Let us remind ourselves of how the British Board of Trade regulated lifeboats. Satisfied with the improved safety of cruise ships, with the introduction of the telegraph that enabled ships in distress to request assistance and the absence of any disasters, the Board of Trade continued to require only 16 lifeboats on a ship the size of the Titanic. The Board of Trade apparently neglected to consider how the shipping industry had changed. As Berg notes in his article, lifeboats were not designed to keep all the ship's passengers and crew afloat while the vessel sank.
In one case from 1909, it took a ship almost 36 hours to go under.

Lifeboats were intended to ferry passengers to nearby rescue ships during the supposedly lengthy period before a vessel submerged. But the Titanic sank in less than three hours.
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Sadly, it took the first rescue ship, the Carpathia, four hours to arrive, far too late for more than two-thirds of the Titanic's passengers.
A regulator must understand how the industry operates, how businesses have changed, and how, as a result of those changes, existing rules may have become anachronistic. A self-regulatory organization like FIN RA is particularly capable of understanding the businesses we regulate, and we always endeavor to frame our oversight according to this understanding of the business. We engage with the industry along many avenues, such as our advisory committees and in conferences like this. Those of you who lived through our adoption of a variable annuity rule will appreciate that FINRA took great pains to understand how the variable annuity business is conducted, how the proposed rule might affect that business and how the rule could be adjusted to accommodate legitimate business practices while protecting investors. This commitment to understand the industry is one of the great strengths of the SRO model. Our Office of Emerging Regulatory I ssues analyzes new products and services offered by the industry, to ensure that we understand their possible impact on customers and the soundness of firms. The work of this department as well as our examiners in the field, our Office of Fraud Detection and Market I ntelligence, and many other FINRA staff members, help us to understand better how business is being conducted today.
Perhaps most important, we are revising our examination process.

We want to ensure that our examinations are tailored to address the risks presented by various business models and practices.
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The third lesson from the Titanic tragedy for a regulator is that while we should consider the burdens that our rules impose on the industry, we must anticipate the possibility that the worst event can happen.
In the Titanic case, the record suggests that the Board of Trade was sensitive to the practical problems of requiring more lifeboats onboard ships, but the Board overlooked the potential for catastrophe. A regulator should consider the burdens that a rule may impose upon the industry, but remain vigilant for the prospect of catastrophe.
Maybe the probability of a catastrophe is small. But when the stakes are so high, even a small probability of disaster becomes relevant.
Did the small probability of a disaster at sea justify outdated lifeboat regulations? This is the sort of question that every regulator will face, and it is a question that no cost-benefit analysis can adequately address. Perhaps the financial crisis was our Titanic hour. In September 2008 all of us witnessed a breakdown in our financial system that had catastrophic consequences. Whether one agrees or disagrees with all of the provisions of the Dodd-Frank Act, almost everybody assumed in 2008 that Congress would enact sweeping legislation that could not have been enacted before the crisis. As Alex Pollock of the American Enterprise I nstitute has said:
"Here's as close to an empirical law of government behavior as you'll ever get: When government financial officerslike Treasury secretaries, finance ministers and central-bank chairmenstand at the edge of the cliff of market panic and stare down into the abyss of potential financial chaos, they always decide upon government intervention. This is true of all governments in all countries in all times."
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Mr. Pollock may have been speaking about government intervention like the TARP programs, but the corollary to his law of government behavior is that after a catastrophe the legislators will step in.
There are some decisions, whether to put enough lifeboats on the Titanic, whether to protect the financial system, that no cost-benefit analysis can resolve. I have said that the Titanic disaster provides three lessons for us, and three lessons for you.
The first lesson for you is to identify the risks that arise from developments in your business.
Don't become too dependent upon us, or the SEC, when you manage your risks. The managing director of the shipyard where the Titanic was built testified that he did not install extra lifeboats, but he did put the plans together in case the Board of Trade required more. But the Board never required more. Chris Berg makes the case that, the enormous loss of life was partially due to inertia and complacency. You must work every day to resist the common temptation of regulated firmsto allow an innovative program of risk management to deteriorate into a rote exercise. This temptation is understandable. We examine you, we issue rules and interpretations and guidance. It is easy to fall into complacency. But your approach should be one that focuses on the greatest risks to your customers. You should not wait for our detailed instructions to decide how to protect your customers. I assume that the active compliance that I suggest already exists in most of your firms.
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However, as the experience of the White Star Line in 1912 demonstrates, you must take it upon yourself to engage in independent, thoughtful analysis of how best to protect your customers.
The second, related lesson is that you should review your procedures regularly to ensure that they reflect existing business practices. In 1912, the fact that the Titanic might sink quickly should have caused the White Star Line to consider that more lifeboats would be necessary. Indeed, other ship lines had taken it upon themselves to increase the number of lifeboats. A financial services firm also must ensure that its compliance and supervisory systems reflect the products that it offers, the businesses in which it engages, and the types of customers that it serves. In our Notice on complex products, we emphasized the importance of ensuring that compliance takes into account the types of products that the firm is selling. Reps need to be trained on the products that they offer. If they do not understand the features of the products that they sellno matter how complex those products may bethen they may violate the suitability rule. Many firms have established a committee to vet new products. Part of the committee's function may be to recommend compliance measures with respect to the products that they approve.
Some firms also monitor the performance of complex products that they have approved for sale, to determine whether the products behaved as anticipated under different market conditions.
This approach helps to ensure that your compliance programs will reflect your new products and services.
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The third lesson is that you should keep in mind not merely the black letter law that applies to your business, but the purpose of the rules to which you are subject.
Often when FINRA or the SEC proposes a new rule, the industry will ask for more specificity concerning the application of the rule. Even after the rule has been adopted, the industry will often seek additional guidance. A case in point is our amended suitability rule. For the most part, the amendments codified longstanding interpretations of our suitability rule. However, we have received many questions from firms that we have answered in the form of extensive guidance. I sympathize with the industry's request for guidance concerning our rules, and we try to provide as much direction as possible. Compliance with the specific provisions of the law and our rules is, of course, critical. But we need to remember that laws and rules can never cover every possible scenario. In every business decision, firms must conduct their business with integrity, provide honest service and act in the customers' best interests. That is the purpose of our just and equitable principles of trade and our support of a fiduciary standard for the broker-dealer industry. These principles must be the bedrock of each firm.
The purpose of the fiduciary standard would be to ensure that at all times broker-dealers and their reps act in their customers' best interest even as they comply with the more specific requirements that FINRA or the SEC lays down.
Three lessons for us and three lessons for you. But they are interrelated.
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As a regulator, we should review our rules to ensure that they remain relevant.
And you should review your procedures to ensure that they reflect your business today. We need to understand your business, and you need to appreciate the fundamental purpose of our rules. This comes through a dialogue, which I believe an SRO model best provides. Finally, regulators must contemplate the possibility of a catastrophe, and so must you. Take the initiative in identifying concerns before they become major problems. We, and you, must be prepared for the worst. We need not turn to ancient history for that lesson.
Thank you.
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NUMBER 7
MAS Consults on Proposed Review of Risk-based Capital Framework for Insurance Business
Singapore, 22 June 2012 The Monetary Authority of Singapore (MAS) today released a consultation paper on the review of the Risk-Based Capital (RBC) framework for insurance business. The RBC framework was first introduced in Singapore in 2004. It adopts a risk-focused approach to assessing capital adequacy and seeks to reflect the relevant risks that insurance companies face. MAS is reviewing the framework, given evolving market practices in the insurance industry and in international accounting and regulatory standards. The review aims to improve the comprehensiveness of the risk coverage and risk sensitivity of the framework, and is not expected to result in a significant overhaul to the current framework.
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1.The RBC framework for insurance companies was first introduced in Singapore in 2004.
It adopts a risk-focused approach to assessing capital adequacy and seeks to reflect the relevant risks that insurance companies face. The minimum capital prescribed under the framework serves as a buffer to absorb losses. The RBC framework also provides clearer information on the financial strength of insurers and facilitates early and effective intervention by MAS, if necessary. 2.Whilst the RBC framework has served us well, MAS is embarking on a review (RBC 2) of the framework in light of evolving market practices and global regulatory developments. The review will take into account the revised I nsurance Core Principles and Standards issued by the I nternational Association of I nsurance Supervisors last year. 3.A risk-focused approach to capital adequacy continues to be appropriate and relevant in the supervision of insurers. As such, the RBC 2 review is not expected to result in a significant overhaul to the current framework. Rather, the review aims to improve the comprehensiveness of the risk coverage and the risk sensitivity of the framework, as well as defining more specifically, MAS supervisory approach with respect to the solvency intervention levels.
4.Section 2 of the paper details the proposed review in the areas of required capital.
This touches on the expansion of the current framework to address more risk types, the introduction of target criteria for risk calibration, the
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diversification benefits from correlations between risk types, and the usage of internal models.
5.Section 3 elaborates on the components of available capital. These include the treatment for negative reserves and aggregate provisions for non-guaranteed benefits. In addition, it is envisaged that there will be some degree of convergence with Basel I I I global capital standards, as MAS seeks to improve the alignment of capital standards between the banking and insurance industries. 6.Section 4 sets out the two explicit solvency intervention levels, the Prescribed Capital Requirement as well as the Minimum Capital Requirement. Having clear and transparent solvency intervention levels is useful for insurers. MAS expectations on the type of corrective capital actions to be taken by insurers, and the urgency which these actions should be taken, will be referenced against these solvency levels. 7.Section 5 sets out the proposed approach with regards to risk-free discount rate, and consults on an alternative approach to the derivation of the provision for adverse deviation (or risk margin). 8.The RBC 2 review will not just focus solely on the quantitative aspects of capital requirements. It also seeks to enhance insurers risk management practices. As such, the scope of the review includes qualitative aspects on Enterprise Risk Management, as outlined in Section 6. 9.MAS hopes to work closely with the industry on the review, as was the case when the RBC framework was first developed.
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We anticipate that the industry will be involved through workgroup participation, quantitative impact studies and consultation feedback.
COMPONENTS OF REQUIRED CAPITAL

1.The RBC framework requires insurers to hold capital against their risk exposures known as the Total Risk Requirements (TRR). Risks arising from an insurers assets and liabilities are grouped in to three distinct components:
- Component 1 (C1) requirement relates to insurance risks undertaken by insurers.

C1 requirement for general insurance business is determined by applying specific risk charges on an insurers premium and claims liabilities. Risk charges applicable to different business lines vary with the volatility of the underlying business.
The requirement for life insurance business is calculated by applying specific risk margin to key parameters affecting policy liabilities such as mortality, morbidity, expenses and policy termination rates.
- Component 2 (C2) requirement relates to risks inherent in an insurers asset portfolio, such as market risk and credit risk. It is calculated based on an insurer's exposure to various markets including equity, debt, property and foreign exchange. The C2 requirement also captures the extent of asset-liability mismatch present in an insurers portfolio. - Component 3 (C3) requirement relates to asset concentration risks in certain types of assets, counterparties or groups of counterparties.
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C3 charges are computed based on an insurers exposure in excess of the concentration limits as prescribed under the Insurance (Valuation and Capital) Regulations 2004.
2.The following paragraphs set out where enhancements are expected.
Inclusion of N ew Risk Types

3.The current RBC framework already captures most of the material risks such as market risk, credit risk, underwriting risk and concentration risk. For risks which are not specifically quantified under RBC, they are considered qualitatively under MAS risk based supervision and MAS has the powers under the I nsurance Act to impose additional capital requirements if necessary. For the RBC 2 review, MAS is reviewing the risk coverage in line with evolving global regulatory and market developments.
Spread risk
4.The current RBC framework takes into account the credit risk of corporate bonds but does not capture credit spread risk.
In MAS annual stress testing exercise, insurers were found to be susceptible to credit spread shocks. This is not surprising given that insurers hold a high proportion of corporate bonds. MAS proposes to explicitly capture credit spread risk under the RBC 2 framework. This is similar to the credit spread shocks applied during stress testing.
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Spread risk results from the sensitivity of the value of assets and liabilities to changes in the level or in the volatility of credit spreads over the risk-free interest rate.
Proposal 1
MAS proposes to incorporate an explicit risk charge to capture spread risk within the RBC 2 framework.
Liquidity risk
5.Liquidity risk is the exposure to loss in the event that insufficient liquid assets are available from the assets supporting the policy liabilities, to meet the cash flow requirements of policyholder obligations, or assets may be available, but can only be liquidated to meet policyholder obligations at excessive cost. 6.However, we do not propose to impose an explicit risk charge for liquidity risk as there is no well-established methodology to quantify capital requirements for liquidity risk. MAS will continue to assess the robustness of insurers liquidity risk management through supervision.
Proposal 2
MAS proposes not to impose an explicit risk charge for liquidity risk. MAS will work with the industry to conduct liquidity stress-testing, and assess the soundness of the insurers liquidity risk management practices as part of MAS risk-based supervision.
Operational risk
7.Operational risk refers to the risk of loss arising from complex operations, inadequate internal controls, processes and information systems, organisation changes, fraud or human errors, (or unforeseen catastrophes including terrorist attacks).
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Operational risk is recognised as a relevant and material risk that needs to be addressed in a supervisory framework.
Currently there is no explicit risk charge for operational risk under the RBC framework, though operational risk is assessed as part of MAS ongoing supervision of insurers. However, both Basel I I and a number of major jurisdictions have explicitly introduced capital requirements for operational risk in their capital framework. 8.Methodologies to quantify operational risk continue to evolve globally.
The insurance industry also does not presently collect sufficient operational risk data.
As such, MAS intends to start off with a simplified and pragmatic method to quantify the operational risk charge, and refine its methodology in future as more data becomes available and practices are more established internationally. The proposed method is broadly similar to some of the approaches used in other jurisdictions such as the European Economic Area (under the standardised formula approach of Solvency I I ) and Australia. 9.MAS proposes to put a cap on the amount of operational risk charge such that it will not be larger than 10% of an insurers total risk requirements. This is based on our observation on banks operational risk charge as a percentage of the total capital requirements. There is no evidence to suggest that an insurers operational risk would be vastly different from that experienced by a bank.
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Proposal 3
MAS proposes to incorporate an explicit risk charge to capture operational risk within the RBC 2 framework, calculated as: x% of the higher of the past 3 years averages of (a) earned premium income; and (b) gross policy liabilities, subject to a maximum of 10% of the total risk requirements. Where x = 4% (except for investment-linked business, where x = 0.25% given that most of the management of investment-linked fund is outsourced)
Consultation Question 1
Is this formula or bases chosen appropriate? Should we be using written premium or net policy liabilities instead? Should there be differences in the formula for different types of insurers, for example, direct life, direct general and reinsurers?
What type of data can the insurance industry start to collect in order to build up sufficient data to better quantify or model operational risks? Insurance catastrophe risk
2.10 While concentration risk is covered under the existing framework (as C3 risk requirements), it is only confined to asset concentration risk. The RBC framework does not capture insurance catastrophe risk, which is the risk that a catastrophe causes a one-time spike in claims experience, with a corresponding impact on claims and/ or liabilities. Such claims experience can have a significant impact on an insurers solvency, particularly if the insurer has a concentration of risks written in a particular area or business line.
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Recent natural catastrophes in the region have shown that insurance catastrophe risk is a real and relevant risk to insurers here which write risks in the region.
11.There are a few options to explicitly address this risk under the RBC 2 framework. One option would be to require insurers to construct a catastrophe scenario that is most relevant to them and has the greatest impact, benchmarked to some target criteria (e.g. 1 in 200 year event), and work out the capital that has to be set aside to meet that event net of reinsurance arrangements. This is similar to the approach of allowing the use of internal models (As adopted under Swiss Solvency Test in Switzerland). The second option (As adopted in Bermuda and in European Economic Area under Solvency I I ) would be for the regulator to prescribe a number of man-made and natural catastrophe scenarios. An explicit risk charge is then computed accordingly from a combination of these scenarios. The third option would be to get the insurers to stress test on a number of standardised catastrophe scenarios, and additional capital requirements would only be imposed for the insurers that are more vulnerable. This would, however, be less transparent. 12.As a target, MAS is of the view that it would be appropriate to adopt the first option, which is similar to allowing the use of internal models.
This option would ensure that the catastrophe scenario constructed by each insurer is relevant to its own business and circumstances.
However, we recognise that insurers would need time to build their own catastrophic risk modeling capabilities.
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As such, for a start, MAS proposes to adopt the second option to begin imposing specific risk charges for catastrophe risks.
Under this option, MAS intends to work with the industry associations, reinsurance brokers and the other risk institutes/ academia in Singapore to design relevant standardised catastrophic scenarios to derive explicit risk charges for insurance catastrophe risk. 13.For the life business, the explicit insurance catastrophe risk charge can be derived based on a pandemic event.
It is noted that a few major jurisdictions have used 1.5 deaths per 1,000 in deriving the insurance catastrophe risk charge for its life business.
We propose to adopt a similar approach.
Proposal 4
MAS proposes to incorporate an explicit insurance catastrophe risk charge in the RBC 2 framework.
This would be done through prescribing a number of man-made and natural catastrophe scenarios, with an explicit risk charge computed accordingly from a combination of these scenarios.
MAS intends to work with the industry associations, reinsurance brokers and the other risk institutes/ academia in Singapore to design relevant standardised catastrophic scenarios. For life business, the explicit insurance catastrophic risk charge can be derived based on a pandemic event.
14.Currently, the offshore insurance fund of reinsurers is subject to either a simplified solvency regime (in the case of locally incorporated reinsurers) or exempted from any capital or solvency requirements altogether (in the case of reinsurance branches).
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MAS will, in consultation with the affected players, be reviewing the capital treatment of the offshore insurance fund for all reinsurers, whether locally or foreign incorporated, under RBC 2.
There will be a separate consultation paper on this.
Target Criteria for Calibration of Risk Requirements

15.The RBC framework relies on the Fund Solvency Ratio (FSR) and the Capital Adequacy Ratio (CAR) as indicators of solvency at the fund and company level respectively. These ratios provide a snapshot of the insurers financial condition at a point in time, without any consideration of the confidence level and time horizon. Under RBC 2, MAS intends to recalibrate the risk requirements based on a specified risk measure, confidence level and time horizon. 16. There are 2 common risk measures used internationally:
- Value at Risk (VaR) this is the expected value of loss at a predefined confidence level (e.g. 99.5%).
Thus, if the insurer holds capital equivalent to VaR, it will have sufficient assets to meet its regulatory liabilities with probability of a confidence level of 99.5% over a one year time horizon; and - Tail Value at Risk (tVaR) this is the expected value of the average loss where it exceeds the predefined confidence level (eg 99.5%).
It is also known as the conditional tail expectation (CT E), expected shortfall or expected tail loss.
If an insurer holds capital equivalent to tVAR, it will have sufficient assets to meet the average losses that exceed the predefined confidence level (of say 99.5%).
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17.The VaR approach, while it has its limitations, is a generally accepted risk measure for financial risk management. It is easier to calibrate the risks under a VaR approach compared to using tVaR. However, VaR, unlike tVaR, tends to underestimate the exposure to tail events. 18.On balance, MAS proposes to adopt the VaR measure as it is easier to calibrate. Tail VaR can be considered under the internal model approach (see paragraphs 2.25 and 2.26), if insurers deem it to be more appropriate for their business or risks. Tail event analysis can also be done during the annual industry wide stress testing exercise or the insurers own risk and solvency assessment (see Section 6). 19.MAS also proposes to adopt a time horizon of one year, and a confidence level of 99.5%. This corresponds to an investment grade credit rating and is used commonly by most of the other major jurisdictions. 20.There will be a change in the approach in deriving most of the asset-related risk requirements under RBC 2.
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Instead of applying a fixed factor on the market value (e.g. 16% on the equity market value for equity risk requirement) as per current approach, we will now apply a shock to the Net Asset (Assets less Liabilities) and measure the impact of the shock.
The shock is calibrated at a VaR of 99.5% confidence level over a one year period. The new risk requirement will be equivalent to the amount of change in Net Asset for each respective risk.
21.For insurance risk requirements, the approach will be similar.

For life business, the current insurance risk requirement is computed by applying prescribed loadings on best estimate assumptions such as mortality, lapse and expense. Under the new approach, the best estimate assumptions will be loaded up by some prescribed factors which will be calibrated at a VaR of 99.5% confidence level over a one year period which is the proposed target criteria. For general business, prescribed factors will still be applied to the premium and claims liabilities, though the factors will now be calibrated at the new target criteria. 22.MAS will consult separately on the data and methodology to be used for calibration, as well as on the recommended calibration factors or shock scenarios to be used to achieve the proposed new target criteria.
Proposal 5
MAS proposes to recalibrate risk requirements using the Value at Risk (VaR) measure of 99.5% confidence level over a one year period. MAS will be engaging the industry on the calibration exercise, and target to finalise the calibration factors/shock scenarios by 1Q 2013.
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Data would need to be collected for this purpose. The recommended calibration factors or scenarios will be consulted prior to its finalisation.
Diversification Benefits
23.Under RBC, the total risk requirements are obtained by summing the C1, C2 and C3 risk requirements. Within the C1 or C2 risk requirements, the underlying risk requirements are also added together, without allowing for any diversification effects with the help of correlation matrices. Some major jurisdictions such as the European Economic Area (under Solvency I I ), Australia and Bermuda have moved towards allowing for diversification effects when combining various risk modules, and even within sub-modules, using prescribed correlation matrices. This has the effect of reducing the overall regulatory capital requirements. The level of sophistication of the correlation matrices varies, and is based to some degree, on judgment. 24.MAS looked into the possibility of recognising diversification benefits when aggregating the risk requirements under RBC 2. However, dependencies between different risks will vary as market conditions change and correlation has been shown to increase significantly during periods of stress or when extreme events occur. In the absence of any conclusive studies to show otherwise, MAS proposes not to take into account diversification effects for the aggregation of risk requirements under RBC 2. This approach is consistent with the capital framework for banks, where we do not allow for any diversification benefits when risks are combined.
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Proposal 6
MAS proposes not to allow for diversification benefits when aggregating the capital risk requirements. MAS is, however, prepared to consider diversification benefits if the industry is be able to substantiate, with robust studies and research conducted on the local insurance industry, that there are applicable correlations which can relied on during normal and stressed times.
Use of Internal Model

25.MAS intends to allow insurers to use partial or full internal models to determine the regulatory capital requirements in the longer run, in line with international best practices. The internal models will have to be calibrated at the same target criteria as the standardised approach, and be subject to MAS approval. 26.The use of internal model will be looked at under the next phase of the review, after the standardised approach has been rolled out.
This will allow the larger and more complex insurers time to prepare themselves for a more sophisticated and tailored approach.
MAS would also be able to check the reasonableness of the internal model assumptions and results against the experience of the standardised approach.
Proposal 7
MAS proposes to allow the use of partial or internal model in the next phase of the RBC 2 review, after the implementation of the standardised approach. The internal model, which will be subject to approval by MAS, will have to be calibrated at the same level as the standardised approach.
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COMPONENTS OF AVAILABLE CAPITAL

1.The amount of capital available to meet the TRR is referred to as financial resources (FR) under the RBC framework. FR comprises three components, namely Tier 1 resources, Tier 2 resources and the provision for non-guaranteed benefits. - Tier 1 resources are capital resources of the highest quality. These capital instruments are able to absorb losses on an on-going basis. They have no maturity date and, if redeemable, can only be redeemed at the option of the insurer. They should be issued and fully paid-up and non-cumulative in nature. They should be ranked junior to policyholders, general creditors, and subordinated debt holders of the insurer. Tier 1 resources should neither be secured nor covered by a guarantee of the issuer or related entity or other arrangement that may legally or economically enhance the seniority of the claims vis--vis the policyholders. Tier 1 resources are generally represented by the aggregate of the surpluses of an insurers insurance funds. A locally incorporated insurer may add to its Tier 1 resources its paid-up ordinary share capital, its surpluses outside of insurance funds and irredeemable and noncumulative preference shares. - Tier 2 resources are only applicable to locally incorporated insurers and consist of capital instruments that are of a lower quality than that of Tier 1 resources but may be available to serve as a buffer against losses incurred by the insurer. Examples of these instruments include redeemable or cumulative preference shares and certain subordinated debt.
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Tier 2 resources in excess of 50% of Tier 1 resources will not be recognised as FR.
- The allowance for provision for non-guaranteed benefits is applicable only to insurers who maintain a participating fund. As the allowance for provision for non-guaranteed benefits is only available to absorb losses of the participating fund, the allowance is adjusted to ensure that the unadjusted capital ratio10 of the insurer is not greater than its adjusted ratio.
Alignment with Basel I I I

2.As an integrated supervisor overseeing banking and insurance entities in Singapore, MAS seeks to ensure a level playing field across the financial sectors by having a consistent regulatory and supervisory framework for the regulated financial institutions. The Tier 1 and Tier 2 capital components are largely aligned between the existing RBC framework for insurers and the capital adequacy framework for banks under Basel I I I , with the exception of surpluses in the insurance funds or balance in the surplus account, which are insurance-specific in nature. However, Basel I I I has strengthened the equity-like characteristics needed for a hybrid capital instrument to be included in Tier 1 regulatory capital (i.e. capital of the highest quality). Besides having to show greater capacity to absorb losses, these hybrid capital instruments also need to have features that clearly enable the instrument to undergo a principle write down or to convert into common equity in the event of a bank stress. 3.To align with the capital adequacy framework for banks, MAS proposes to incorporate the same Basel I I I features (i.e. equity conversion or writedown on breach of regulatory capital requirements) as conditions for a capital instrument to be approved by MAS as a Tier 1 resource (Approved Tier 1 Resource).
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Proposal 8
MAS proposes to incorporate the same Basel I I I features (i.e. equity conversion or write-down on breach of regulatory capital requirements) for the Approved Tier 1 resource. This means that instruments that qualifies as Approved Tier 1 resource must: (a)Automatically convert to ordinary share capital, as and when the insurer needs to absorb losses, and in any case, when the insurer breaches its regulatory capital requirement; (b)Be subject to write down as long as losses persist, as and when the insurer needs to absorb losses, and in any case when the insurer breaches its regulatory capital requirement. The limits on the amount of Approved Tier 1 resource that can be recognised, as set out in the existing I nsurance (Valuation and Capital) Regulations 2004, will remain unchanged.
Treatment of N egative Reserves

4.For life business, policy liability is derived policy-by-policy by discounting the best estimate cash flows of future benefit payments, expense payments and receipts, with allowance for provision for adverse deviation. It is possible for the discounted value to be negative when the expected present value of the future receipts (like premium and charges) exceed the expected present value of the future outgo (such as benefit payments and expense payments), resulting in a negative reserve. 5.However, regulation 20(4) of the I nsurance (Valuation and Capital) Regulations 2004 states that A registered insurer shall not value the liability in respect of any liability to be less than zero, unless there are moneys due to the insurer when the policy is terminated on valuation date,
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in which even the value of the liability in respect of that policy may be negative to the extent of the amount due to the insurer.
This means that negative reserves are not recognised unless one expects a recovery of monies (for example, surrender penalty in the case of investment-linked policies). 6.Practices with regards to treatment of negative reserves differ internationally. Under Solvency I I , the European Economic Area is considering recognising negative reserves as Tier 1 capital, while Canada recognises part of the negative reserves as Tier 2 capital. 7.MAS current position of not recognising negative reserves as a form of capital is a conservative one because it is akin to assuming a 100% lapse on all the policies, such that future premium receipts and charges are not recognised. In practice, the lapse rate would not be 100%. Therefore, there is scope to reconsider the current position given that under RBC 2, an insurers net asset value will be shocked for insurance risk, and specifically, lapse risk, at a 1-in-200 year level. 8.Hence, MAS would like to consult on recognising a part of the negative reserves as financial resources. We propose for this to be in the form of a positive financial resource adjustment, rather than as Tier 1 or Tier 2 capital. As the amount of negative reserves are currently sizeable in some life insurers, MAS will need to carefully review and establish a framework for calibrating the level of negative reserves that may be recognised.
Proposal 9
MAS proposes to allow a part of the negative reserves to be recognised as a form of positive financial resource adjustment under Financial Resources.
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MAS will consult further on the amount to be recognised.
Treatment of Aggregate of Allowances for Provision for N onGuaranteed Benefits

9.When assessing the quality of capital resources, insurance regulators are required under international standards to give consideration to its characteristics, including the extent to which the resource is available to absorb losses, the extent of the permanent and/ or perpetual nature of the capital and the existence of anymandatory servicing costs in relation to the capital. 10.Under the current RBC framework, as highlighted in Paragraph 3.1, an insurer maintaining any participating fund is allowed to count as financial resources, the aggregate of allowances for provision for non-guaranteed benefits (APNGB), subject to the unadjusted capital ratio of the insurer remaining below the adjusted ratio. However, as these allowances do not meet the qualities required of a capital instrument, MAS will be reclassifying APNGB as a form of positive financial resource adjustment (FRA), instead of a capital item.
Proposal 10
MAS proposes to classify Aggregate of Allowances for Provision for Non-Guaranteed Benefits, where applicable, as a form of positive financial resource adjustment, rather than as a capital item. This applies to an insurer maintaining any participating fund, and subject to the condition that the unadjusted capital ratio remains below the adjusted capital ratio, where: Adjusted capital ratio, in relation to the insurer, means the ratio of the financial resources of the insurer (excluding the financial resources of any participating fund) to the total risk requirement (calibrated at 99.5% VaR over a one-year period) of the insurer (excluding such requirement arising from any participating fund); and
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Unadjusted capital ratio, in relation to the insurer, means the ratio of the financial resources of the insurer (including the financial resources of any participating fund) to the total risk requirement (calibrated at 99.5% VaR over a one-year period) of the insurer (including such requirement arising from any participating fund).
SOLVENCY I NTERVENTI ON LEVELS

1.Currently, under the I nsurance (Valuation and Capital) Regulations 2004, insurers have to maintain a minimum Capital Adequacy Ratio (CAR) of 100%. Registered insurers are also required to notify MAS about the occurrence or potential occurrence of any event that would result in the financial resources of the insurer being less than 120%, also known as the financial resources warning event. In practice, we would expect insurers to have capital management plans in place and hold a target CAR of more than 120%. I n fact, all insurers generally hold at least a CAR of 150%.
2.International standards on capital adequacy prescribed by the I AIS set out two transparent triggers for supervisory intervention when assessing the capital adequacy of an insurer:
a)Prescribed Capital Requirement (PCR), which is the higher solvency control level above which the insurance regulator would not intervene on capital adequacy grounds. The PCR is calibrated such that the assets of the insurer will exceed the policy liabilities and other liabilities with a specified level of safety over a defined time horizon; and b)Minimum Capital Requirement (M CR), which is the lower solvency control level at which, if breached, the insurance regulator would invoke its strongest actions, in the absence of appropriate corrective action by the insurer.
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3.Globally, major jurisdictions are moving towards meeting the international standards of having a PCR and a MCR.
MAS believes that having such transparent and clear solvency intervention levels would be most useful for insurers to better understand MAS expectations on the type of corrective capital actions required, and the urgency which they should be taken.
Prescribed Capital Requirement

4.Many insurance regulators of major jurisdictions have targeted a confidence level of 99.5% in setting regulatory capital requirements. This corresponds to an implied credit rating of at least an investment grade. MAS intends to calibrate the PCR of a solo insurer16 to the VaR of the insurer s funds to a confidence level of 99.5% over a one year period. If an insurers capital falls below its PCR, it will need to submit a plan to restore its capital position within 3 months. As a countercyclical measure, MAS will have the flexibility and discretion to allow insurers more time to restore its capital position, for example, during periods of market stresses. For avoidance of doubt, PCR needs to be maintained at both the company level, as well as at an insurance fund level.
Proposal 1 1
PCR is the higher supervisory intervention level at which the insurer is required to hold sufficient financial resources to meet the total risk requirements which corresponds to a VaR of 99.5% confidence level over a one-year period.
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An insurer which breaches its PCR will need to submit a plan on how to restore its capital position within 3 months.
If the PCR is met, MAS will not normally intervene on capital adequacy grounds. This does not preclude MAS from requiring an insurer to maintain financial resources above the PCR if there are other supervisory concerns. As a countercyclical measure, MAS will have the flexibility and discretion to allow insurers more time to restore its capital position, for example, during periods of market stresses. PCR needs to be maintained at both the company level, as well as at an insurance fund level.
Minimum Capital Requirement

5.As for MCR, MAS plans to calibrate a solo entity MCR to the VaR of the insurers funds to a confidence level of 90% over a one year period.
This corresponds to an implied credit rating of B- and represents a 1 in 10 year event.

During the calibration stage, the MCR may be expressed as a percentage of the total risk requirements required under PCR for ease of computation and future monitoring. For avoidance of doubt, MCR needs to be maintained at both the company level, as well as at an insurance fund level. 6.MAS intends to take its strongest enforcement actions if the MCR is breached. Such actions would include stopping new business, withdrawal of licence, or directing a transfer of portfolio to another insurer.
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Proposal 12
MCR is the lower supervisory intervention level at which the insurer is required to hold sufficient financial resources to meet the total risk requirements which corresponds to a VaR of 90% confidence level over a one-year period. If an insurer breaches its MCR, MAS may choose to invoke the strongest supervisory action (such as stopping new business, withdrawal of licence etc). MCR will be calibrated as a fixed percentage of the PCR. This percentage will be determined after quantitative impact studies are done. MCR needs to be maintained at both the company level, as well as at an insurance fund level.
VALUATION OF ASSETS AND LIABILITIES

1.An insurer needs to determine the value of its assets and liabilities before computing its solvency requirements. Valuation rules for the RBC framework are specified within the Insurance (Valuation and Capital) Regulation 2004 and the relevant Notices. 2.Under current valuation rules, assets are to be valued at the market value, or the net realisable value, in the absence of market value. Policy liabilities are to be valued based on best estimate assumptions, with provision for adverse deviation (PAD). Policy liabilities for life insurance are computed using a prospective discounted cash flow method while that for general insurance consist of the premium liabilities and the claims liabilities. 3. We have identified two areas that will be reviewed under RBC 2.
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Risk Free Discount Rate

Singapore dollar-denominated liabilities
4.Life insurers are currently required to calculate their policy liabilities using a prospective discounted cash-flow method, with MAS Notice 319 prescribing the use of the risk-free discount rate to determine the value of policy liabilities for non-participating policies, non-unit reserves of investment-linked policies, and the minimum condition liability of participating funds. 5.For Singapore dollar (SGD)-denominated liabilities, the risk free discount rate is: (a)Where the duration of a liability is X years or less, the market yield of the Singapore Government Securities (SGS) of a matching duration as at valuation date; (b)Where the duration of a liability is more than X years but less than Y years, a yield that is interpolated from the market yield of the X year SGS and a stable long term risk free discount rate (LTRFD R); and
(c)Where the duration of a liability is Y years or more, a stable LTRFDR.

The stable LTRFDR is to be calculated according to the following: (a)Compute the average daily closing yield of the X-year SGS since its inception; (b)Compute the average daily yield differential between the X-year and Yyear SGS since the inception of the Y-year SGS; (c)Derive an estimate long-term yield by summing the values obtained under subparagraphs (a) and (b); (d)Compute the prevailing average daily closing yield of the Y-year SGS over the past 6-month period;
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(e)Allocate 90% weight to the estimated long-term yield obtained in subparagraph (c), and 10% to the prevailing average yield under subparagraph (d).
(f)The LTRFDR is then obtained by summing the two values in (e). Currently, X and Y are 10 and 15 respectively. With effect from 1 Jan 2013, X and Y will be 15 and 2018. 6.When RBC was first introduced in 2005, the longest dated SGS available then was the 15-year SGS (which was incepted in 2001). Recognising that the 15-year SGS might not be liquid enough and could cause undue volatility in the risk-free discount rate as well as policy liabilities at the longer end, the LTRFDR formula was introduced. The use of a weighted average formula has kept the LTRFDR sticky and value of policy liabilities steady. Whilst this is reflective of the underlying nature of long-term life insurance liabilities, it makes liability values less sensitive to market movement in yields, resulting in short-term earnings volatility due to differences in discounting of the assets and liabilities. 7.We now have 20-year (incepted in 2007) and 30-year SGS (incepted in 2012) available in the market. With effect from 1 January 2013, the 20-year SGS yield will be used in the derivation of the risk-free discount rate, that is, X and Y will be 15 and 20 years respectively in the formula set out in Section 5.5. MAS intends to further enhance the market consistency of the discount rate by incorporating the use of 30-year SGS yield.
Proposal 13
MAS proposes the following two approaches with regards to the risk-free discount rate for SGD-denominated liabilities.
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(a)To keep to the same LTRFDR formula as set out in paragraph 5.5, but X and Y will now be 20 and 30 respectively.
This is on the expectation that the 30-year SGS will have adequate liquidity when RBC 2 is implemented. This means: -Durations 0 to year 20: Use prevailing yields of SGS -Durations 30 year and above: 90% of historical average yields (since inception) and 10% of latest 6-month average yield of 30-year SGS - Durations 20 to year 30: Interpolated yields (b) To remove the LTRFDR formula altogether, ie., - Durations up to 30 Years: Use prevailing yields of SGS - Durations 30 year and above: Keep the yield flat at the prevailing yield of 30-year SGS
Which of the above approaches is more appropriate?
Should MAS allow for some illiquidity premium adjustment in the risk-free discount rate for valuing certain portfolios such as annuity business? 5.8 We also considered the feasibility of using swap rates, instead of SGS, for discounting purposes. Some jurisdictions have moved to using swap rates for valuing policy liabilities, and a few insurers have asked MAS to consider similar approaches in Singapore.
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These insurers have fed back that the swap curve, extending to longer durations with rates determined by market forces, would provide a more accurate representation of risk-free market yields, with appropriate adjustments for credit risk.
9.MAS notes that the use of swap rates is typically allowed in certain jurisdictions because of insufficient supply of sovereign government bonds. In some countries, the bond market may not be as developed or liquid as the swap market. In fact, it is noted that where swaps do not exist or are not sufficiently liquid and reliable, the risk-free discount rate used for valuation should have reference to the government yield curve in that currency . In Singapore, given that the government securities market is still more liquid and deep than the swap market. MAS proposes to retain the use of SGS yields. 10.It is currently provided in MAS 319 that where an insurer implements an effective cash flow hedge or fair value hedge as defined under FRS 39 of the Accounting Standard, the insurer may elect to use the market yield of the SGS of a matching duration as at the valuation date for valuing such hedged Singapore dollar policy liabilities. For the hedged policy liabilities that have a duration exceeding the maximum duration available on the SGS yield curve, the market yield for the maximum duration SGS available shall be used. Where an insurer has elected to use the market yield of the SGS of a matching duration, it shall continue to do so as long as the designated liabilities remain a hedged liability as defined under FRS 39. MAS may at any time require the insurer to produce all necessary documentary evidence on the hedging of such policy liabilities within such time as may be specified by MAS.
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For the avoidance of doubt, MAS will be retaining this flexibility under RBC 2.
Non-SGD denominated liabilities

11.For liabilities denominated in a currency other than SGD, MAS 319 states that the risk-free discount rate to be used is the market yield of the foreign government securities of similar duration at the valuation date. Unlike for SGD-denominated liabilities, there is no similar concept of a LTRFDR here. 1 2 . I n the case of non-SGD denominated liabilities, MAS proposes to require insurers to follow the regulatory requirements pertaining to discounting as prescribed by the insurance supervisory authority in the jurisdiction issuing the currency. For example, for US-dollar denominated liabilities, the insurer will discount its liabilities according to the discounting requirements set by the National Association of I nsurance Supervisors (NAI C) in US.
For liabilities denominated in currencies of European Economic Area member states, the insurer will discount its liabilities according to the discounting requirements set by the European Commission under Solvency I I .
This proposal is premised on the fact that the insurance regulator in the jurisdiction issuing the currency will be best placed to set the discount rate for its home currency.
Proposal 14
MAS proposes that insurers follow the regulatory requirements pertaining to discounting as prescribed by the insurance supervisory authority in the jurisdiction issuing the currency, for valuing non-Singapore dollar denominated liabilities for both life and general business.
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If the relevant foreign supervisory authority has not prescribed any basis for discounting the liabilities denominated in that home currency, what should be the approach taken? Should the risk-free discount rate be the market yield of the foreign government securities of similar duration, and the yield kept flat for liabilities extending beyond the longest available government securities?
General insurance policy liabilities

13.MAS 319 is currently applicable to insurers writing life business only. For general business, it is stated in guidelines ID 01/ 04 that discounting of liabilities should be carried out where the impact of such discounting is material. Where discounting of liabilities is used, the discount rate adopted should be the gross redemption yield as at the valuation date of a portfolio of government bonds (where applicable) with its currency and expected payment profile (or duration) similar to the insurance liabilities being valued. 14.MAS proposes to extend the discounting requirements for life business (as set out in the previous proposals) to general business. However, this would apply only to liabilities with durations above 1 year.
Proposal 15
MAS proposes to extend the discount rate requirements for life business to general business as well, for liability durations above 1 year. For liability duration of 1 year and less, no discounting would be required.
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Provision for Adverse Deviation

15.Under the current RBC framework, policy liabilities for both life and general insurance business are to be determined using best estimates and a provision for adverse deviation (PAD) (commonly known as a risk margin). - For general business, the PAD for both claims liability and unexpired risk reserves are to be calculated at the 75% level of sufficiency, as set out in the I nsurance (Valuation and Capital) Regulations 2004. - For life business, MAS 319 requires the PAD to be determined using more conservative assumptions so as to buffer against fluctuations of the best estimate experience. The determination of the level of PAD is left to the professional judgment of the appointed actuaries, who are bound by the guidance note issued by the Singapore Actuarial Society (SAS). A common method adopted by the appointed actuaries is for the loadings for policy liabilities with PAD to be calculated as half of the prescribed loadings for modified policy liabilities and modified minimum condition liabilities for the participating policies. Put simply, the PAD is roughly half of the C1 risk requirements. 16.Internationally, there are a number of methods being used for deriving PAD or risk margin. One method which is gaining prominence (as prescribed in Solvency I I and the Swiss Solvency Test) is the cost-of-capital method. This method reflects the return on the capital a buyer would need to support the liabilities acquired from the holder over the whole run-off period.
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This method involves applying a cost-of-capital rate to projected risk charges and then discounting the calculated cost of capital at the risk-free rate of interest, to obtain the applicable risk margin.
Both Solvency I I and the Swiss Solvency Test adopt a cost-of-capital rate of 6% per annum. This rate corresponds to the spread above the risk-free interest rate that an investment grade insurer would be charged to raise capital for the portfolio, and is also consistent with what is assumed in the VaR assumptions under risk calibration. 5.17 Although it is harder to compute, the cost-of-capital method has been assessed as the most market consistent in practice by some studies. As such, MAS would like to seek the industrys views on using the cost-of-capital method in determining PAD.
Do you agree that the cost-of-capital approach, for computing the provision for adverse deviation for both life and general insurance liabilities, is appropriate? If so, do you agree that it is appropriate to adopt a cost-of-capital rate of 6% per annum? As there is no evidence to suggest that the cost of providing the amount of available capital to support the policy liabilities would be substantially different for life and general insurers, a uniform rate has been proposed for all types of insurers.
ENTERPRISE RISK MANAGEMENT

6.1 The RBC 2 review is not solely limited to the quantitative elements of the RBC framework; it also focuses on MAS continuing efforts to improve industry standards on governance, controls and in particular, risk management practices.
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2.MAS has already issued a set of comprehensive guidelines on risk management practices that applies both to a financial institution in general, as well as to an insurer specifically.
The guidelines cover board and senior management, internal control, credit risk, market risk, technology risk, operational risk (business continuity management and outsourcing), insurance core activities and insurance fraud. MAS is looking at further enhancing the risk management guidelines to adopt a more holistic and enterprise-wide risk management framework, in line with evolving international standards on Enterprise Risk Management (ERM ) and best practices. 3.The ERM requirements, which we will consult on and expect to issue by the end of this year, will go beyond addressing risks in each activity or function. The new requirements will set out MAS expectations on how insurers identify and manage the interdependencies between key risks, and how this will be translated into strategic management actions and capital planning. 4.The international standard on ERM advocates ERM systems to have close linkages between ongoing operational management of risk, longer-term business goals and strategy, and economic capital management so as to ensure optimal financial efficiency, and sufficient levels of solvency to ensure adequate protection of policyholders. An insurer will be expected to carry out its own risk and solvency assessment (ORSA).
The ORSA is a self-driven process by the insurer to assess the adequacy of its risk management practices, and both current and future solvency positions.
The Board and senior management of the insurer are expected to take ownership of the process, which should be well-documented.
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In assessing its overall solvency needs, all identified relevant and material risks are to be subjected to rigorous stress and scenario testing.
6.5 We expect insurers to undertake its ORSA regularly and effectively, giving due consideration to the dynamic interactions between risks, and the link between risk management, business strategy and capital management. The sophistication of an insurers ERM framework should be commensurate with the nature, scale and complexity of the risks that it bears.
Proposal 16
MAS proposes to introduce Enterprise Risk Management requirements, including those relating to Own Risk and Solvency Assessment, to insurers. We will consult industry on the ERM requirements and target to issue a final document by end of 2012.
PROPOSED TI MELI NE
1.MAS proposed timeline for the various reviews outlined in Sections 2 to 5 of this paper are as follows:
- Finalise the calibration factors by 1Q 2013. During the calibration stage, insurers would be involved in a few rounds of quantitative impact studies; - Finalise the changes to the I nsurance (Valuation and Capital) Regulations 2004 and I nsurance (Accounts and Statements) Regulations 2005 by 2Q 2013; - Implement the RBC 2 requirements (with the exception of the insurance catastrophe risk charges which may need more time) for accounting year ending 31 Dec 2013.
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There will be at least 2 years of parallel run with the existing RBC framework, where the total risk requirements under RBC 2 framework would be subject to a floor of a specified percentage of the total risk requirements under the existing RBC framework.
This is to prevent any sudden release in capital requirements; - Commence work on the internal model approach with the industry after the implementation of RBC 2.
Proposal 17
MAS proposes to implement the RBC 2 requirements for the accounting year ending 31 December 2013. There will be at least 2 years of parallel run with the existing RBC framework and appropriate floors imposed to prevent sudden release in capital requirements.
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NUMBER 9
Joint Statement from the United States and Japan Regarding a Framework for Intergovernmental Cooperation to Facilitate the Implementation of FATCA and I mprove International Tax Compliance I. General Considerations:
A.Building on their longstanding and close relationship with respect to mutual assistance in tax matters, the United States and Japan wish to intensify their co-operation in combating international tax evasion. B.On 18 March 2010 the United States enacted provisions commonly referred to as the Foreign Account Tax Compliance Act (FATCA), which introduce reporting requirements for foreign financial institutions (FFIs) with respect to certain accounts. FATCA, however, has raised some issues, including that financial institutions in Japan may not be able to comply with all of the reporting, withholding and account closure requirements of FATCA because of legal restrictions. C . I ntergovernmental cooperation to facilitate FATCA implementation would address these legal impediments to compliance, simplify practical implementation, and reduce FFI costs.
D . I n furtherance of the policy objectives of FATCA, the United States is open to adopting with interested countries, either an intergovernmental approach to implement FATCA (which would involve reporting by FFIs
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to their own governments followed by the automatic exchange of this information with the United States), or a framework for intergovernmental cooperation to facilitate the implementation of FATCA (which would provide for reporting directly between the FFIs and the United States in a manner consistent with FATCA requirements, supplemented by exchange of information on request).
E.Japan is supportive of the underlying goals of FATCA, and is interested in exploring a framework for intergovernmental cooperation to facilitate the implementation of FATCA and improve international tax compliance.
The United States affirms its willingness to cooperate with Japan by collecting and exchanging information under the existing income tax convention on accounts held in U.S. financial institutions by residents of Japan.
F.The United States and Japan would be willing to work with other FATCA partners and the OECD in the medium term on developing a common model for automatic exchange of information, including the development of reporting and due diligence standards. Such collaboration ultimately would enhance compliance and facilitate enforcement to the benefit of all parties. The United States and Japan are cognizant of the need to keep compliance costs as low as possible for financial institutions and other stakeholders and are committed to working together and with other cooperative jurisdictions over the longer term towards achieving common reporting and due diligence standards. G . I n light of these considerations, the authorities of the United States and Japan have agreed to explore a framework for intergovernmental cooperation to facilitate the implementation of FATCA and improve international tax compliance based on the existing bilateral tax treaty between the U.S. and Japan.
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I I . Key Elements of the Framework:

A.The U.S. authorities (the Treasury Department and the I nternal Revenue Service (IRS)) and the Japanese authorities (the Ministry of Finance (MOF), the National Tax Agency (NTA), and the Financial Services Agency (FSA)) would agree to a Framework pursuant to which, and subject to certain terms and conditions:
1.The Japanese authorities would agree to:

a.Direct and enable financial institutions in Japan, not otherwise exempt or deemed compliant pursuant to the Framework, to register with the IRS and confirm their intention to comply with official guidance issued by the FSA that is consistent with the obligations of participating FFIs under FATCA, including:
(i) Applying the due diligence rules prescribed under FATCA to identify U.S. accounts; (ii)Annually reporting, in the time and manner prescribed by the FATCA rules, the information required with respect to identified U.S. accounts directly to the I RS if consent is obtained from the U.S. account holders; and (iii)Annually reporting, in the time and manner prescribed by the FATCA rules, the aggregate number and aggregate value of accounts held by recalcitrant account holders to the I RS. b. Accept and promptly honor group requests made under the Framework by the U.S. competent authority for additional information about U.S. accounts identified as recalcitrant and reported on an aggregate basis by Japanese financial institutions. The Japanese competent authority would obtain the requested information from the identified Japanese financial institution and promptly exchange the information with the U.S. competent authority under Article 26 of the Convention Between the Government of the United States of America and the Government of Japan for the Avoidance
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of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on I ncome, signed on November 6, 2003, at Washington, DC.
2. The U.S. authorities would agree to:

a.Eliminate the obligation of each FFI in Japan to enter into a separate comprehensive FFI agreement directly with the I RS, provided that each FFI is registered with the IRS or is excepted from registration pursuant to the Framework or IRS guidance; b. I dentify in the Framework specific categories of Japanese financial institutions or entities (including in particular certain Japanese Pension funds) that would be treated as deemed compliant or exempt due to presenting a low risk of tax evasion; c.Eliminate U.S. withholding under FATCA on payments to Financial Institutions in Japan that have registered or entered into an FFI agreement with the IRS and conduct due diligence and reporting in a manner consistent with FATCA requirements or are treated as deemed compliant or exempt pursuant to the Framework (i.e., by identifying all such financial institutions as participating FFIs, deemed-compliant FFIs or exempt as appropriate); and d.Provide certain other measures to reduce burdens and simplify the implementation of FATCA.
B. I n addition, as a result of the Framework, financial institutions in Japan that comply with their obligations would not be required to:
1.Terminate the account of a recalcitrant account holder; or 2.Impose passthru payment withholding on payments to recalcitrant account holders, to FFIs organized in Japan that have registered or entered into an FFI agreement with the IRS, or are otherwise exempt or deemed compliant, or to FFIs in another jurisdiction with which the United States has in effect either an agreement for an intergovernmental
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approach to FATCA implementation or an agreement such as the Framework for intergovernmental cooperation to facilitate the implementation of FATCA and improve international tax compliance.
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NUMBER 10
Is globalisation great?
Stephen Cecchetti Economic Adviser at the Bank for International Settlements (BIS), and H ead of its Monetary and Economic Department Remarks prepared for the 1 1th BIS Annual Conference, Lucerne, Switzerland, 2122 June 2012
It is my pleasure and privilege to welcome all of you to the 1 1th BIS annual conference.
This year our theme is the future of financial globalisation. Anyone who has lived through the last five years must surely ask: Is globalisation great? Given the orientation of the BIS, we are forced to ask this question. In fact, I am led to ask two questions, namely: how much globalisation is good and how much finance is good. Over the next two days we will reflect on these questions. Let me give you my answers to my questions up front: financial deepening is great, but only up to a point. And, this means that the globalisation of finance is great, too; but only up to a point.
To see why I have come to these conclusions, I will take a minute to describe the relationship of finance to growth in general, and then draw out implications for cross-border banking; that is, the part related to the globalisation of finance. My comments build on work that has been going on at the BIS for some time.
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For most people, the term globalisation means cross-border trade in real goods and services; something that we would all agree has brought the greatest benefits to a large number of people.
Trade very clearly supports middle-class living standards, among other things putting literally tens of thousands of different products on the shelves of even a modest-sized supermarket. But this real side of globalisation relies on financial intermediaries to fund the trading of all this stuff across borders.
And the recent crisis showed how problems both on and off the intermediaries balance sheets can have very large, very real and very bad implications.
Many of us have started to ask if finance has a dark side. First, can a financial system get too big? Put differently, is there some optimal size for the financial industry after which it drags down the rest of the economy? Second, how far should countries go in outsourcing the provision of financial services? Does specialisation in financial services by some countries impose vulnerabilities on others? How we think about and answer these questions will surely have an impact on the financial systems structure and thus on the future of globalisation. Turning to some facts, consider the relationship between the size of a countrys financial system and growth.
We teach that, because it allocates scarce resources to their most efficient uses, one of the best ways to promote long-run growth is to promote financial development. And, a sufficiently well-developed financial system provides the opportunity for everyone households, corporations and governments to reduce the volatility of their consumption and investment.
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It sure sounds like finance is great. But experience shows that a growing financial system is great for a while until it isnt.
Look at how, by encouraging borrowing, the financial system encourages an excessive amount of residential construction in some locations. The results, empty three-car garages in the desert, do not suggest a more efficient use of capital! Financial development can create fragility.
When credit extension goes into reverse, or even just stops, it can induce economic instability and crises.
Bankruptcies, credit crunches, bank failures and depressed spending are now the all-too familiar landmarks of the bust that follows a credit-induced boom. What is more, financial development is not costless. The expansion of finance consumes scarce resources that could be used elsewhere. And finances large rewards attract the best and the brightest. When I was a student, my classmates dreamed of curing cancer, unifying field theory or flying to Mars. Those in todays cohort want to become hedge fund managers. Given finances booms and busts, is this the most efficient allocation for such scarce resources? I doubt it. So, when does financial deepening turn from good to bad and become a drag on the economy? Somewhat surprisingly, we get a consistent story regardless of how we measure financial development.
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In our 2011 paper for the Federal Reserve Bank of Kansas Citys Jackson Hole Symposium, Madhu Mohanty, Fabrizio Zampolli and I found that the effect of debt public, household or corporate turns from good to bad, when it reaches something like 90% of GDP, regardless of the type of debt.
To prevent adverse developments both natural and man-made policy should normally strive to keep debt levels well below this line. If we measure the scale of the financial industry by employment or output, as Enisse Kharroubi and I do in a paper completed earlier this year, we come to the same conclusion. When average growth in output per worker is plotted, as shown in Graph 1, against the share of employment in finance on the left and value added on the right, a parabola summarises the scatter. (Note that a multivariate regression lies behind these graphs, so that the parabola is a slice out of a more complex surface.) Again, the conclusion emerges that there is a point where both financial development and the financial systems size turn from good to bad. That point lies at 3.2% for the fraction of employment and at 6.5% for the fraction of value added in finance. Based on 2008 data, the United States, Canada, the United Kingdom and Ireland were all beyond the threshold for employment (4.1%, 5.7%, 3.5% and 4.5%). And the United States and I reland were also beyond the threshold for value added (7.7% and 10.4%).
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Moreover, the evidence suggests that a growing share of the financial system actually slows overall economic growth. Financial sector booms consume scarce resources, especially skilled labour and specialised capital. Panel regressions of the five-year average growth rate of labour productivity on, among other variables, the growth rate of the share of finance in total employment yield the strong negative relationship displayed in Graph 2.
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Faster-growing financial employment hurts average productivity growth, as does too much value added. In particular, a 1 percentage point increase in the growth rate in finances share of employment cuts average productivity growth by nearly one-third of one percentage points per year. Combined, these facts lead to the inescapable conclusion that, beyond a certain point, financial development is bad for an economy.
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Instead of supplying the oxygen that the real economy needs for healthy growth, it sucks the air out of the system and starts to slowly suffocate it. Households and firms end up with too much debt.
And valuable resources are wasted. We need to do something about this. If financial development is only good up to a point, it follows that financial globalisation might only be good up to a point. Financial globalisation is about making it irrelevant to investors and borrowers where the services and the funds they draw on are actually located. But the spillovers during the financial crisis, when one countrys troubles spread to others, raise the question: does it matter where the funds are coming from? That is, how should we think about cross-border flows and financial specialisation? As economists, we are trained to think that specialisation is great. Within an economy, we believe that when individuals exploit comparative advantage, it benefits everyone. And, we have created an entire infrastructure where, for example, I am able to write and speak about macroeconomic and financial stability policy full time, but still purchase groceries. The alternative, where I would barter my insights for food, would surely not work as well.
I ll let you be the judge of whether, in my specific case, the market is yielding the right social solution.
But for the world as a whole, global welfare is enhanced when we encourage international trade in goods and services.
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And international trade benefits emerging and advanced countries alike when it exploits comparative advantage. And this inevitably leads to specialisation.
Trade and specialisation reach their limits where economics meets national security. As an individual, I can rely on someone else to produce my food, trusting that some combination of the market and the legal system will look out for me.
But would a country want to outsource its entire food production?And what about energy?
National security concerns dictate that some amount of self-sufficiency is cultivated, simply as a precaution. Some concern about food and energy security is certainly warranted. The same is probably true for strategic technologies.
But clothing or coffee security is probably not worth worrying about. Where does finance stand on this spectrum between the essential and the superfluous?
More specifically, can countries become vulnerable by excessively specialising in finance or by overly relying on people outside their borders for the provision of financial services? H as financial globalisation gone too far in some countries? Over the past 30 years, the international financial system has come to be dominated by a relatively small number of large banks headquartered in a handful of advanced counties. Their growth has coincided with a push to remove impediments to the free flow of capital.
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As a result, a highly concentrated banking sector dominates the international provision of capital and maintains large balance sheet positions with respect to many countries.
And when these balance sheet linkages are large (relative to GDP or the capital stock or domestic tax base), problems in one countrys financial sector quickly transmit themselves to other countries and markets. In short, financial globalisation is bound up with a specialisation in financial services that makes countries much more vulnerable to each others mishaps. The experience of some countries during the crisis suggests that too much international capital, like too much debt, can be bad. For example, credit booms in the years preceding the crisis tended to outrun domestic funding and to depend on funds from abroad at the margin. Countries that relied heavily on international credit sources to finance domestic booms found themselves high and dry when these off-shore sources of funding went into reverse which happened as soon as the foreign creditor banks ran in to trouble. A few examples illustrate just how important cross-border credit can become. Graph 3 shows the cases of Ireland and Latvia.The light shaded areas depict credit provided by domestic banks to non-bank borrowers, that is, domestic credit. As you can see from the picture, Irelands non-bank borrowers also directly tapped cross-border bank credit (shown here as the green shaded area). Such credit which bypasses the domestic banking system and, as a result, is difficult for local authorities to monitor, much less to constrain accounted for almost half of total credit to non-financial borrowers in Ireland during the last decade!
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International credit can also flow into a booming economy indirectly. In Latvia, shown in the right-hand panel of Graph 3, banks financed their domestic credit expansion by borrowing from abroad. This indirect financing of domestic credit is shown as the dashed brown line. While the credit was actually extended by domestic banks (or local subsidiaries of foreign banks), the funds were raised cross-border.
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This indirect form of international credit from a foreign bank to a domestic bank and then on to a domestic borrower is often overlooked when people analyse credit booms.
However, by some measures, it is at least as important as direct cross-border credit. Graph 4 shows on the vertical axes the change in the credit-to-GDP ratio in emerging markets between 2002 and 2007. In the left-hand panel, the horizontal axis plots the change in direct cross-border credit; in the right-hand panel, the horizontal axis plots direct plus indirect cross-border credit. The faster cross-border credit grows, the faster domestic credit grows. And, the relationship in the right-hand panel including indirect cross-border credit is much stronger both statistically and economically. A 1 percentage point increase in direct and indirect cross-border credit is associated with a 1.6 percentage point increase in the ratio of credit to GDP. While, in principle, financial over-development and financial globalisation may be orthogonal, in practice, cross-border finance seems to be implicated in financial over-development. After trying to convince you that finance is only great up to a point, I have tried to persuade you that the same may apply to financial globalisation, at least in the form of cross-border banking. It provides us with opportunities, but there are also some pitfalls. As is often the case, you can have too much of a good thing. But I have less compelling evidence here, so I am left with a more tentative conclusion: financial globalisation is great most of the time but not always.
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During the conference, Philip Lane, in his paper on financial globalisation and the crisis, digs deeper into the role of global imbalances in driving cross-border balance sheet integration in the pre-crisis years.
Then, Alan Taylor systematically studies the relationship between credit and financial crises over the long haul. Tomorrow morning, Pierre-Olivier Gourinchas and Olivier J eanne offer us a view into a world in which safe and unsafe assets fight for room in global portfolios.
And, finally, Hyun Song Shin, in his paper with Valentina Bruno, provides a model for cross-border capital flows, including their dark side.
These presentations and the discussions that they spawn will give us new perspectives on the positive and normative aspects of financial globalisation. We hope to come away with a better understanding of both what may happen and what should happen to ensure that financial globalisation makes a positive contribution to growth and world welfare. Thank you all for coming, and I look forward to the next day and a half of discussion.
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Certified Risk and Compliance Management Professional (CRCMP) Distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:
A.The official presentations we use in our instructor-led classes (3285 slides)

The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/ Certified_Risk_Compliance_Tra ining.htm
B. Up to 3 Online Exams
You have to pass one exam. If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/ Questions_About_The_Certifica tion_And_The_Exams_1.pdf www.risk-compliance-association.com/ CRCMP_Certification_Steps_1.p df
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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-compliance-association.com/ Distance_Learning_and_Certific ation.htm
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International Association of Risk and Compliance Professionals (IARCP)

EIOPA Published Guidelines on Complaints Handling

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EIOPA Enhancing the European Market for Occupational Pension Provision

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Composition of capital disclosure requirements - Rules text June 2012

Composition of capital disclosure requirements Introduction

Section 1: Post 1 January 2018 disclosure template

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Section 2: reconciliation requirements

Section 3: main features template

Section 4: other disclosure requirements

Section 5: template during the transitional period

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I mplementation date and frequency of reporting

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Section 1: Post 1 January 2018 disclosure template

Section 2: Reconciliation requirements

The 3 steps require banks to:

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Additional comments on the 3 step approach

Section 3: Main features template

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that it is important to disclose in the context of the banks they supervise.

Section 4: Other disclosure requirements

Full terms and conditions

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Section 5: Template during the transitional period

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Annex 1 Post 1 January 2018 Disclosure Template

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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DARPA DEVELOPS TECH N OLOGIES FOR AIDING DISASTER RELI EF

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TACTICALLY EXPANDABLE MARITIME PLATFORM (TEMP)

Notes - for cold war fans especially

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The DARPA Model

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EIOPA PUBLISHES GUIDELIN ES ON COMPLAINT S HANDLI NG BY INSURERS

(ii) An existing regulatory gap