Basel 3 August 2012

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Basel iii Compliance Professionals Association(BiiiCPA) 1200 G Street NW Suite 800 Washington, DC

20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.com

Dear Member,

Today we will start from the disclosure requirements on thecomposition of banks' capital.

Composition of capital disclosure requirements - Rulestext June 2012

The Basel Committee onBanking Supervision haspublished a set of disclosurerequirements on thecomposition of banks' capital.

During the financial crisis, marketparticipants and supervisors werehampered in their efforts toundertake detailed assessments of

banks' capital positions and makecross-jurisdictional comparisons.

The source of this difficulty wasinsufficiently detailed disclosureby banks and a lack of consistency in reporting betweenbanks and across jurisdictions.

This lack of clarity may have

contributed to uncertainty duringthe financial crisis.

The disclosure requirements aim to improve market disciplinethrough enhancing both transparency and comparability.Basel iii Compliance Professionals Association

(BiiiCPA)www.basel-iii-association.com

http://www.basel-iii-association.com/




































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Composition of capital disclosurerequirements Introduction

During the financial crisis, many market participants andsupervisors attempted to undertake detailed assessments of the

capital positions of banks and comparisons of their capitalpositions on a cross jurisdictional basis.

The level of detail of the disclosure and the lack of consistency inthe way that it was reported typically made this task difficult and

often made it impossible to do with any accuracy.

It is often suggested that lack of clarity on the quality of

capital contributed to uncertainty during the financialcrisis.

Furthermore, the interventions carried out by the authoritiesmay have been more effective if capital positions of the banks

were more transparent.

To ensure that banks back their risk exposures with a high qualitycapital 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 disclosurerequirements to improve transparency of regulatory capital and

enhance market discipline and noted that more detailed Pillar 3disclosure 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.

Basel iii Compliance Professionals Association(BiiiCPA)

www.basel-iii-association.com















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In addition, to improve consistency and ease of use of disclosuresrelating 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 willbe required to publish their capital positions according tocommon 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 thetransition period for the phasing-in of deductions ends on 1January 2018.

It is designed to meet the Basel I I I requirement to disclose allregulatory adjustments, including amounts falling below

thresholds for deduction, and thus enhance consistency andcomparability in the disclosure of the elements of capital between

banks and across jurisdictions.

This template may be used in advance of 1 January 2018 incertain circumstances, which are set out in Section 1.

Section 2: reconciliation requirements

A 3 step approach for banks to follow is established to ensurethat 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 thestarting point for reconciliation, the bank’s reported balance

sheet, will vary between jurisdictions due to the application of different accounting standards.


















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Section 3: main features template

A common template is established that banks must use to meetthe 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 Irequirement to provide the full terms and conditions of regulatorycapital instruments on their websites and the requirement toreport 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 thetransitional phase.

This template is established to meet the Basel I I Irequirement for banksto disclose the components of capital that are benefitingfrom the transitional arrangements.

Implementation date and frequency of reporting

National authorities will give effect to the disclosure requirementsset out in this document by no later than 30 June 2013.

Banks will be required to comply with the disclosure requirementsfrom the date of publication of their first set of financial statementsrelating to a balance sheet date on or after 30 June 2013 (with theexception of the Post 1 January 2018 template set out in Section1).

Furthermore, except as required in paragraph 7, banks mustpublish this disclosure with the same frequency as, andconcurrent with, the publication of their financial statements,irrespective of whether the financial statements are audited (iedisclosure will typically be quarterly or half yearly).

















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In the case of the main features template (Section 3) and provisionof the full terms and conditions of capital instruments (Section 4),

banks are required to update these disclosures whenever a newcapital instrument is issued and included in capital and whenever

there is a redemption, conversion/ write-down or other materialchange in the nature of an existing capital instrument.

Under Pillar 3, large banks are required to make certain minimumdisclosures 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 thesebanks will continue to be required under Basel I I I.

Banks’ disclosures required by this document must either beincluded in banks’ published financial statements or, at aminimum, these statements must provide a direct link to thecompleted disclosure on their websites or on publicly availableregulatory reports.

Banks must also make available on their websites, or throughpublicly 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 financialreports, bank websites or publicly available regulatory reports), alldisclosures 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 isset out in Annex 1, along with an explanation of its design.

















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The template is designed to capture the capital positions of banks after the transition period for the phasing-in of deductionsends 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 BaselI I I deductions in advance of 1 January 2018 (ie does not phase-inthe deductions or accelerates the phase-in period of deductions),

it can permit or require its banks to use the template in Annex 1 asan alternative to the transitional template described in Section 5

from the date of application of at least the full Basel I I Ideductions.

In such cases the relevant banks must clearly disclose that theyare 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 mustfollow to comply with the requirement of paragraph 91 of the

Basel I I I rules text, which states that banks should disclose “afull reconciliation of all regulatory capital elements back to the

balance sheet in the audited financial statements.”

This requirement aims to address the problem that at presentthere is a disconnect in many banks’ disclosure between thenumbers 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 linkbetween 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 regulatoryscope of consolidation.

















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Step 2: Expand the lines of the balance sheet under theregulatory scope of consolidation to display all of the

components that are used in the composition of capitaldisclosure template.

Step 3: Map each of the components that are disclosed in Step2 to the composition of capital disclosure template set out in

Section 1.

The 3 step approach outlined below is designed to offer thefollowing benefits:

The level of disclosure is proportionate, varying with the

complexity of the balance sheet of the reporting bank (ie banksare 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 addedby that step).

Market participants and supervisors can trace the origin of theelements 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 anyaccounting standard: firms are required to map all thecomponents of the regulatory capital disclosure templates back tothe balance sheet under the regulatory scope of consolidation,regardless of whether the accounting standards require thesource to be reported on the balance sheet.

Step 1: Disclose the reported balance sheet under theregulatory scope of consolidation

The scope of consolidation for accounting purposes and for regulatory purposes are often dif ferent.



















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This factor often explains much of the difference between thenumbers used in the calculation of regulatory capital and thenumbers used in a bank’s published financial statements.

Therefore, a key element in any reconciliation involves disclosinghow the balance sheet in the published financial statementschanges when the regulatory scope of consolidation is applied.

Step 1 is illustrated in Annex 2.

If the scope of regulatory consolidation and accountingconsolidation is identical for a particular banking group, it wouldnot need to undertake Step 1.

The banking group could simply state that there is no differencebetween the regulatory consolidation and the accountingconsolidation and move to Step 2.

In addition to Step 1, banks are required to disclose the list thelegal 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 toinvestigate the risks posed by unconsolidated subsidiaries.

Similarly, banks are required to list the legal entities included inthe regulatory consolidation that are not included in theaccounting scope of consolidation.

Finally, if some entities are included in both the regulatory scope

of consolidation and accounting scope of consolidation, but themethod of consolidation differs between these two scopes, banksare required to list these legal entities separately and explain thedifferences in the consolidation methods.

















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Regarding each legal entity that is required to be disclosed bythis paragraph, banks must also disclose its total balance sheet

assets and total balance sheet equity (as stated on theaccounting 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 sheetto display all of the components used in the definition

of capital disclosure template

Many of the elements used in the calculation of regulatory capitalcannot be readily identified from the face of the balance sheet.

Therefore, banks should expand the rows of the regulatory-scopebalance sheet such that all of the components used in the

composition of capital disclosure template (described in Section1) are displayed separately.

For example, paid-in share capital may be reported as one lineon the balance sheet.

However, some elements of this may meet the requirements for

inclusion in Common Equity Tier 1 (CET1) and other elementsmay only meet the requirements for Additional Tier 1 (AT1) or Tier

2 (T2), or may not meet the requirements for inclusion inregulatory capital at all.

Therefore, if the bank has some paid-in capital that feeds into thecalculation of CET1 and some that feeds into the calculation of

AT1, it should expand the ‘paid-in share capital’ line of thebalance sheet in the following way (also illustrated in Annex 2

(step 2)):In addition, as illustrated above, each element of the expanded

balance sheet must be given a reference number/letter for use inStep 3.

















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As another example, one of the regulatory adjustments is thededuction 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 thisis unlikely to be the case.

Firstly, the amount on the balance sheet may combinegoodwill, other intangibles and mortgage services rights.

MSRs are not to be deducted in full (they are insteadsubject to the threshold deduction treatment).

Secondly, the amount to be deducted is net of any relateddeferred tax liability.

This deferred tax liability will be reported on the liability side of the balance sheet and is likely to be reported in combinationwith other deferred tax liabilities that have no relation togoodwill or intangibles.

Therefore, the bank should expand the balance sheet in thefollowing way:

















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It is important to note that banks will only need to expandelements of the balance sheet to the extent that this is necessaryto 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 therequirements to be included in CET1, the bank would not need toexpand this line.

The level of disclosure is proportionate, varying with thecomplexity of the bank’s balance sheet and its capitalstructure.

Step 2 is illustrated in Annex 2.

Step 3: Map each of the components that are disclosed inStep 2 to the composition of capital disclosure templates

When reporting the disclosure template, described in Section 1and Section 5, the bank is required to use the referencenumbers/ letters from Step 2 to show the source of every input.

For example, the composition of capital disclosure templateincludes the line “goodwill net of related deferred tax liability”.

Next to the disclosure of this item in the definition of capitaldisclosure template the bank should put “a–d” to illustrate howthese components of the balance sheet under the regulatoryscope of consolidation have been used to calculate this item inthe disclosure template.

Additional comments on the 3 step approachThe Basel Committee considered requiring banks to use acommon template to disclose the reconciliation between banks’balance sheets and their regulatory capital.Basel iii Compliance Professionals Association
















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However, it does not feel that this would be possible at thisstage 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 templatemay be possible.

Therefore, the relevant authorities may design a commontemplate that is consistent with the 3 step approach set out aboveand 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 mainfeatures of regulatory capital instruments issued.

While banks will also be required to make available the fullterms and conditions of their regulatory capital instruments

(see section 4), the length of these documents makes theextraction of the key features a burdensome task.

The issuing bank is better placed to undertake this task thanmarket participants and supervisors that want an overview of the

capital structure of the bank.

Basel I I Pillar 3 guidance already includes a requirement thatbanks 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.”

However, the Basel Committee has found that this Basel I Irequirement is not met in a consistent way by banks.Basel iii Compliance Professionals Association
















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The lack of consistency in both the level of detail provided andthe 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 disclosethe main features of regulatory capital instruments in a consistentand comparable way, banks are required to complete a ‘mainfeatures template’.

This template represents the minimum level of summarydisclosure that banks are required to report in respect of eachregulatory capital instrument issued.

The template is set out in Annex 3 of this report, along with adescription 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 whenthe 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 thetemplate, such that the completed template would provide a‘main features report’ that summarises all of the regulatorycapital instruments of the banking group.

- The list of main features represents a minimum level of

required summary disclosure.

In implementing this minimum requirement, each BaselCommittee member authority is encouraged to add to this listif there are features that it is important to disclose in thecontext of the banks they supervise.


















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- Banks are required to keep the completed main featuresreport up-to-date, such that the report is updated and

made publiclyavailable 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 amountrecognised in regulatory capital at the latest reporting date, the

main features report should either be included in the bank’spublished financial reports or, at a minimum, these financialreports must provide a direct link to where the report can be

found on the bank’s website or publicly available regulatoryreporting.

Section 4: Other disclosure requirements

In addition to the disclosure requirements set out in Sections 1 to3, and aside from the transitional disclosure requirements set out

in Section 5, the Basel I I I rules text makes the followingrequirements in respect of the composition of capital:

Non-regulatory ratios

Banks which disclose ratios involving components of regulatorycapital (eg “Equity Tier 1”, “Core Tier 1” or “Tangible Common

Equity” ratios) must accompany such disclosures with acomprehensive explanation of how these ratios are calculated.

Full terms and conditions

Banks are required to make available on their websites the fullterms and conditions of all instruments included in regulatory

capital.

The requirement for banks to make available the full terms andconditions of regulatory capital instruments on their websites will

allow market participants and supervisors to investigate thespecific features of individual capital instruments.


















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An additional related requirement is that all banks must maintaina Regulatory Disclosures section of their websites, where all of

the information relating to disclosure of regulatory capital ismade available to market participants.

In cases where disclosure requirements set out in this documentare met via publication through publicly available regulatory

reports, the regulatory disclosures section of the bank’s websiteshould 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 theRegulatory 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 publishedfinancial reports must direct users to the relevant section of their

websites where the full set of required regulatory disclosure isprovided.

Section 5: Template during the transitional period

The Basel I I I rules text states that: “During the transition phasebanks are required to disclose the specific components of

capital, including capital instruments and regulatoryadjustments that are benefiting from the transitional provisions.”

The transitional arrangements for Basel I I I phase in theregulatory adjustments between 1 January 2014 and 1January 2018.

They require 20% of the adjustments to be made according toBasel I I I in 2014, with the residual subject to existing national

treatment.

In 2015 this increases to 40%, and so on, until the full amount of

the Basel

I I I adjustments are applied from 1 January2018.


















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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 thatexisting national treatments of the residual regulatory

adjustments vary considerably.

This complexity suggests that there would be particular benefitsin setting out detailed disclosure requirements during this period

to ensure that banks do not adopt different approaches that makecomparisons between them difficult.

This section of the composition of capital disclosure rules textaims 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 1January 2018 Disclosure Template, set out in Section 1, in a waythat captures existing national treatments for the regulatoryadjustments.

The use of a modified version of the Post 1 January 2018Disclosure Template, rather than the development of acompletely separate set of reporting requirements, should helpto reduce systems costs for banks.

The template is modified in just two ways:

(1)An additional column indicates the amounts of the regulatoryadjustments that will be subject to the existing nationaltreatment; and

(2)Each jurisdiction will insert additional rows in four separateplaces to indicate where the adjustment amounts reported in theadded column actually affect capital during the transition period.

The modifications to the template are set out in Annex 4, alongwith some examples of how the template will work in practice.

Banks are required to use the template for all reporting periods on

or after

the implementation date set out in paragraph 5, and banks arerequired to


















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report the template with the same frequency as the publicationof 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 touse 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 regulatoryadjustments.

For example, the disclosure template below includes theadjustment ‘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 newsection

detailing a certain component of regulatory capital.

The light grey rows with no thick border represent the sum cellsin the relevant section.

















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The light grey rows with a thick border show the maincomponents 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 appropriateparagraphs of the Basel I I I text.

















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Set out in the following table is an explanation of each row of thetemplate above.

Regarding the regulatory adjustments banks are required toreport deductions from capital as positive numbers andadditions to capital as negative numbers.

For example, goodwill (row 8) should be reported as a positivenumber, as should gains due to the change in the own credit riskof the bank (row 14).

However, losses due to the change in the own credit risk of thebank should be reported as a negative number as these areadded back in the calculation of Common Equity Tier 1.

















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41. In general, to ensure that the common templates remaincomparable across jurisdictions there should be no adjustmentsto the version banks use to disclose their regulatory capitalposition.

However, the following exceptions apply to take account of language differences and to reduce the reporting of unnecessary information:

















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- The common template and explanatory table above can betranslated 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 therows included the template above.

- Regarding the explanatory table, the national version canreference the national rules that implement the relevant

sections of Basel I I I.

- Banks are not permitted to add, delete or change thedefinitions of any rows from the common reporting template

implemented in their jurisdiction.

This will prevent a divergence of templates that couldundermine the objectives of consistency and comparability.

- This national version of the template will retain the same rownumbering 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 thatreference national specific regulatory adjustments (row 26, 41,

and 56).

The relevant national authority should insert rows after eachof these to provide rows for banks to disclose each of the

relevant national specific adjustments (with the totals reportedin rows 26, 41 and 56).

The insertion of any rows must leave the numbering of theremaining rows unchanged, eg rows detailing national specific

regulatory adjustments to common equity Tier 1 could belabelled Row 26a, Row 26b etc, to ensure that the subsequent

row numbers are not affected.

- In cases where the national implementation of Basel I I I appliesa

more conservative definition of an element listed in thetemplate


















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above, national authorities may choose between oneof 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 thedefinitions of elements as implemented in that jurisdiction,

clearly labelling them as being different from the Basel I I Iminimum definition, and require banks to separately disclose

the impact of each of these different definitions in the notes tothe template.

The aim of both approaches is to provide all the informationnecessary to enable market participants to calculate the capital

of banks on a common basis.

















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Step 2

Under Step 2 banks are required to expand the balance sheetunder the regulatory scope of consolidation (revealed in Step 1) toidentify all the elements that are used in the definition of capitaldisclosure template set out in Annex 1.

Set out below are some examples of elements that mayneed to be expanded for a particular banking group.

The more complex the balance sheet of the bank, the more itemswould need to be disclosed.

Each element must be given a reference number / letter that canbe used in Step 3.

















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Step 3

Under Step 3 banks are required to complete a column added tothe post 1 January 2018 disclosure template to show the source of

every input.

For example, the Post 1 January 2018 Disclosure Templateincludes the line “goodwill net of related deferred tax liability”.

Next to the disclosure of this item in the template the bank wouldbe required to put “a–d” to show that row 7 of the template hasbeen 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 thatthe 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 madeavailable to banks on the Basel Committee’s website.

To complete most of the cells banks simply need to select anoption from a drop down menu.

Using the reference numbers in the left column of the tableabove, 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 thespreadsheet’s 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 inSection 1 except for the following additions (all of which are

highlighted in the template below using cells with dotted bordersand capitalised text):

- A new column has been added for banks to report the amountof each regulatory adjustment that is subject to the existing

national treatment during the transition phase (labelled as the“pre-Basel III treatment”).

Example 1: In 2014 banks will be required to make 20% of theregulatory 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 doesnot 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 Iregulatory adjustment.

- While the new column shows the amount of eachregulatory adjustment that is subject to the existingnational 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 threesections on regulatory adjustments to allow each jurisdiction

to set out their existing national treatment.Basel iii Compliance Professionals Association
















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Example 2: Assume that the bank described in the bullet pointabove is in a jurisdiction that currently requires goodwill to bededucted from Tier 1. This jurisdiction will insert a new row inbetween rows 41 and 42, to indicate that during the transition

phase some goodwill will continue to be deducted from Tier 1 (ineffect 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 adjustmentsdescribed above, the transition period of Basel I I I will in some

cases result in the phasing-out of previous prudentialadjustments.

In these cases the new rows added in each of the three sectionson regulatory adjustments will be used by jurisdictions to set out

the impact of the phase-out.

Example 3: Consider a jurisdiction that currently filters outunrealised gains and losses on holdings of AFS debt securitiesand 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 notrecognised. The jurisdiction will therefore include a row

between rows 26 and 27 that allows banks to add back thisunrealised loss.

The bank will then report $40 mn in this row as an addition toCommon Equity Tier 1.

- To take account of the fact that the existing nationaltreatment of a Basel I I I regulatory adjustment may be to apply a

risk weighting, jurisdictions will also be able to add new rowsimmediately prior to the row on risk weighted assets (row 60).




















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These rows will need to be defined by each jurisdiction to listthe Basel III regulatory adjustments that are currently risk

weighted.

Example 4: Consider a jurisdiction that currently risk weightsdefined 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 cellin 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 betweenrow 59 and 60 that such assets are risk weighted at 200% duringthe transitional phase.

The bank will then be required to report a figure of $80 mn ($40mn * 200%) in that row.

















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MAS Consults on Proposed Review of Risk-basedCapital Framework for Insurance Business

Singapore, 22 June 2012

The Monetary Authority of Singapore (MAS) today releaseda 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. Itadopts a risk-focused approach to assessing capital adequacy andseeks to reflect the relevant risks that insurance companies face.

MAS is reviewing the framework, given evolving market practicesin the insurance industry and in international accounting andregulatory standards.

The review aims to improve the comprehensiveness of the riskcoverage and risk sensitivity of the framework, and is notexpected to result in a significant overhaul to the currentframework. Basel iii Compliance Professionals Association
















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1. The RBC framework for insurance companies was firstintroduced in Singapore in 2004.

It adopts a risk-focused approach to assessing capital adequacy

and seeks to reflect the relevant risks that insurance companiesface.

The minimum capital prescribed under the framework serves as abuffer to absorb losses.

The RBC framework also provides clearer information on thefinancial strength of insurers and facilitates early and effective

intervention by MAS, if necessary.

3. Whilst the RBC framework has served us well, MAS is embarkingon 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 CorePrinciples and Standards issued by the International

Association of Insurance Supervisors last year.

5. A risk-focused approach to capital adequacy continuesto be appropriate and relevant in the supervision of

insurers.

As such, the RBC 2 review is not expected to result in asignificant overhaul to the current framework.

Rather, the review aims to improve the comprehensiveness of therisk coverage and the risk sensitivity of the framework, as well as

defining more specifically, MAS supervisory approach with respectto the solvency intervention levels.

7. Section 2 of the paper details the proposed review in theareas of required capital.

















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This touches on the expansion of the current framework toaddress more risk types, the introduction of target criteria for riskcalibration, the 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 thebanking and insurance industries.

7. Section 4 sets out the two explicit solvency interventionlevels, the Prescribed Capital Requirement as well as the

Minimum Capital Requirement.

Having clear and transparent solvency intervention levels isuseful for insurers.

MAS expectations on the type of corrective capital actions to be

taken by insurers, and the urgency which these actions should betaken, will be referenced against these solvency levels.

9. 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).

10.The RBC 2 review will not just focus solely on the quantitativeaspects 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.


















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1.9 MAS hopes to work closely with the industry on the review, aswas the case when the RBC framework was first developed.

We anticipate that the industry will be involved through

workgroup participation, quantitative impact studies andconsultation feedback.

COMPONENTS OF REQUIRED CAPITAL

1. The RBC framework requires insurers to hold capital againsttheir risk exposures known as the Total Risk Requirements

(“TRR”).

Risks arising from an insurer’s assets and liabilities are groupedin to

three distinct components:

2. Component 1 (C1) requirement relates to insurance risksundertaken by insurers.

C1 requirement for general insurance business isdetermined by applying specific risk charges on an

insurer ’s premium and claims liabilities.

Risk charges applicable to different business lines varywith the volatility of the underlying business.

The requirement for life insurance business is calculated byapplying specific risk margin to key parameters affecting policyliabilities such as mortality, morbidity, expenses and policy

termination rates.

3.Component 2 (C2) requirement relates to risks inherent in aninsurer’s asset portfolio, such as market risk and credit risk.

It is calculated based on an insurer's exposure to variousmarkets including equity, debt, property and foreignexchange.

The C2 requirement also captures the extent of asset-liability mismatch present in an insurer ’s portfolio.

Basel iii Compliance Pr ofessionals Association(BiiiCPA)
















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- Component 3 (C3) requirement relates to assetconcentration risks in certain types of assets, counterparties

or groups of counterparties.C3 charges are computed based on an insurer’s 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 areexpected.

Inclusion of New Risk Types

4.The current RBC framework already captures most of the materialrisks such as market risk, credit risk, underwriting risk and

concentration risk.

For risks which are not specifically quantified under RBC, they areconsidered qualitatively under MAS risk based supervision and

MAS has the powers under the Insurance Act to imposeadditional capital requirements if necessary.

For the RBC 2 review, MAS is reviewing the risk coverage inline with evolving global regulatory and market developments.

Spread risk

6. The current RBC framework takes into account the creditrisk of corporate bonds but does not capture credit spread

risk.

In MAS annual stress testing exercise, insurers were found tobe

susceptible to credit spread shocks.

This is not surprising given that insurers hold a highproportion of

corporate bonds.

MAS proposes to explicitly capture credit spread risk under theRBC 2 framework.

















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This is similar to the credit spread shocks applied during stresstesting.

Spread risk results from the sensitivity of the value of assets and

liabilities to changes in the level or in the volatility of creditspreads over the

risk-free interest rate.

Proposal 1

MAS proposes to incorporate an explicit risk charge to capturespread risk within the RBC 2 framework.

Liquidity risk

5. Liquidity risk is the exposure to loss in the event thatinsufficient 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 onlybe 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 toquantify capital requirements for liquidity risk. MAS will

continue to assess the robustness of insurers’ liquidity riskmanagement through supervision.

Proposal 2

MAS proposes not to impose an explicit risk charge for liquidityrisk. MAS will work with the industry to conduct liquidity stress-

testing, and assess the soundness of the insurer ’s liquidity riskmanagement practices as part of MAS risk-based supervision.

Operational risk

9. Operational risk refers to the risk of loss arising fromcomplex operations, inadequate internal controls, processes

and information

















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systems, organisation changes, fraud or human errors, (or unforeseen catastrophes including terrorist attacks).

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 riskunder 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 jurisdictionshave explicitly introduced capital requirements for operational

risk in their capital framework.

8. Methodologies to quantify operational risk continue toevolve globally.

The insurance industry also does not presently collectsufficient operational risk data.

As such, MAS intends to start off with a simplified and pragmaticmethod to quantify the operational risk charge, and refine its

methodology in future as more data becomes available andpractices are more established internationally.

The proposed method is broadly similar to some of theapproaches used in other jurisdictions such as the EuropeanEconomic Area (under the standardised formula approach of

Solvency I I ) and Australia.

10.MAS proposes to put a cap on the amount of operational risk

charge such that it will not be larger than 10% of an insurer ’stotal risk requirements.

This is based on our observation on banks’ operational riskcharge as a percentage of the total capital requirements.

















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There is no evidence to suggest that an insurer ’s operationalrisk would be vastly different from that experienced by a bank.

Proposal 3

MAS proposes to incorporate an explicit risk charge tocapture operational risk within the RBC 2 framework,

calculated as:

x% of the higher of the past 3 years’ averages of (a) earnedpremium 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 usingwritten 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 inorder to build up sufficient data to better quantify or model

operational risks? Insurance catastrophe risk

2.10 While concentration risk is covered under the existingframework (as C3 risk requirements), it is only confined to asset

concentration risk.

The RBC framewor k 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.


















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Such claims experience can have a significant impact on aninsurer ’s solvency, particularly if the insurer has a concentration

of risks written in a particular area or business line.

Recent natural catastrophes in the region have shown thatinsurance 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 theRBC 2 framework.

One option would be to require insurers to construct acatastrophe scenario that is most relevant to them and has the

greatest impact, benchmarked to some target criteria (e.g. 1 in200 year event), and work out the capital that has to be set asideto meet that event net of reinsurance arrangements.

This is similar to the approach of allowing the use of internalmodels (As adopted under Swiss Solvency Test in Switzerland).

The second option (As adopted in Bermuda and in EuropeanEconomic Area under Solvency I I ) would be for the regulator to

prescribe a number of man-made and natural catastrophescenarios.

An explicit risk charge is then computed accordingly from acombination of these scenarios.

The third option would be to get the insurers to stress test on anumber of standardised catastrophe scenarios, and additionalcapital requirements would only be imposed for the insurers thatare more vulnerable.

This would, however, be less transparent.

13.As a target, MAS is of the view that it would be appropriate toadopt the first option, which is similar to allowing the use of internal models.


















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This option would ensure that the catastrophe scenarioconstructed by each insurer is relevant to its own business and

circumstances.

However, we recognise that insurers would need time to buildtheir own catastrophic risk modeling capabilities.

As such, for a start, MAS proposes to adopt the second optionto begin imposing specific risk charges for catastrophe risks.

Under this option, MAS intends to work with the industryassociations, 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.

2.13 For the life business, the explicit insurance catastrophe riskcharge 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 insurancecatastrophe 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 riskcharge computed accordingly from a combination of thesescenarios.

MAS intends to wor k with the industry associations, reinsurancebrokers and the other risk institutes/ academia in Singapore todesign relevant standardised catastrophic scenarios.


















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For life business, the explicit insurance catastrophic risk chargecan 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 reinsurancebranches).

MAS will, in consultation with the affected players, be reviewingthe 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

16.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 insurer ‟s financialcondition at a point in time, without any consideration of the

confidence level and time horizon.

Under RBC 2, MAS intends to recalibrate the risk requirementsbased on a specified risk measure, confidence level and time

horizon.

18. 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 havesufficient assets to meet its regulatory liabilities with

probability of a confidence level of 99.5% over a one year timehorizon; and


















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- 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 (“CTE”),expected shortfall or expected tail loss.

If an insurer holds capital equivalent to tVAR, it will havesufficient assets to meet the average losses that exceed the

predefined confidence level (of say 99.5%).

17.The VaR approach, while it has its limitations, is a generallyacceptedrisk measure for financial risk management.

It is easier to calibrate the risks under a VaR approach comparedto using tVaR. However, VaR, unlike tVaR, tends to underestimatethe exposure to tail events.

19.On balance, MAS proposes to adopt the VaR measure as it iseasier 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 moreappropriate for their business or risks.

















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Tail event analysis can also be done during the annual industrywide stress testing exercise or the insurer ’s 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 andis used commonly by most of the other major jurisdictions.

21.There will be a change in the approach in deriving mostof the asset-related risk requirements under RBC 2.

Instead of applying a fixed factor on the market value (e.g. 16% onthe equity market value for equity risk requirement) as per currentapproach, 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 aone year period.

The new risk requirement will be equivalent to the amount of change in Net Asset for each respective risk.

23. For insurance risk requirements, the approach will be similar.

For life business, the current insurance risk requirement iscomputed by applying prescribed loadings on best estimate

assumptions such as mortality, lapse and expense.

Under the new approach, the best estimate assumptions will beloaded up by some prescribed factors which will be calibrated at aVaR of 99.5% confidence level over a one year period which is the

proposed target criteria.Basel iii Compliance Professionals Association
















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For general business, prescribed factors will still be applied to thepremium 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 beused for calibration, as well as on the recommended calibrationfactors or shock scenarios to be used to achieve the proposed

new target criteria.

Proposal 5

MAS proposes to recalibrate risk requirements using the Valueat Risk (“VaR”) measure of 99.5% confidence level over a one

year period.

MAS will be engaging the industry on the calibration exercise, andtarget to finalise the calibration factors /shock scenarios by 1Q

2013.

Data would need to be collected for this purpose. Therecommended calibration factors or scenarios will be consulted

prior to its finalisation.

Diversification Benefits

24.Under RBC, the total risk requirements are obtained bysumming the C1, C2 and C3 risk requirements.

Within the C1 or C2 risk requirements, the underlying riskrequirements 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 II ), Australia and Bermuda have moved towardsallowing for diversification effects when combining various riskmodules, and even within sub-modules, using prescribedcorrelation matrices.

This has the effect of reducing the overall regulatory capitalrequirements.



















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The level of sophistication of the correlation matrices varies, andis based to some degree, on judgment.

24.MAS looked into the possibility of recognising

diversification benefits when aggregating the riskrequirements under RBC 2.

However, dependencies between different risks will vary asmarket conditions change and correlation has been shown to

increase significantly during periods of stress or whenextreme events occur.

In the absence of any conclusive studies to show

otherwise, MAS proposes not to take into accountdiversification 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.

Proposal 6

MAS proposes not to allow for diversification benefits whenaggregating the capital risk requirements. MAS is, however,

prepared to consider diversification benefits if the industry is beable to substantiate, with robust studies and research conducted

on the local insurance industry, that there are applicablecorrelations which can relied on during normal and stressed

times.

Use of Internal Model

26.MAS intends to allow insurers to use partial or full internalmodels 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 targetcriteria as the standardised approach, and be subject to MAS

approval.


















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2.26 The use of internal model will be looked at under the nextphase of the review, after the standardised approach has been

rolled out.

This will allow the larger and more complex insurers time toprepare themselves for a more sophisticated and tailored

approach.

MAS would also be able to check the reasonableness of theinternal 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 thenext phase of the RBC 2 review, after the implementation of the

standardised approach.

The internal model, which will be subject to approval by MAS, willhave to be calibrated at the same level as the standardised

approach.

COMPONENTS OF AVAILABLE CAPITAL

3.1 The amount of capital available to meet the TRR is referredto 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 anon-going basis.

They have no maturity date and, if redeemable, can only beredeemed at the option of the insurer.

















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They should be issued and fully paid-up and non-cumulative innature. 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 aguarantee of the issuer or related entity or other arrangementthat may legally or economically enhance the seniority of the

claims vis-à-vis the policyholders.

Tier 1 resources are generally represented by theaggregate of the surpluses of an insurer ’s insurance

funds.

A locally incorporated insurer may add to its Tier 1resources its paid-up ordinary share capital, its surplusesoutside of insurance funds and irredeemable and

noncumulative preference shares.

- Tier 2 resources are only applicable to locally incorporatedinsurers and consist of capital instruments that are of a lower

quality than that of Tier 1 resources but may be available toserve as a buffer against losses incurred by the insurer.

Examples of these instruments include redeemable or cumulative preference shares and certain subordinated

debt.Tier 2 resources in excess of 50% of Tier 1 resources will

not berecognised 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 isonly available to absorb losses of the participating fund, theallowance is adjusted to ensure that the unadjusted capital

ratio10 of the insurer is not greater than its adjusted ratio.


















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Alignment with Basel I I I

2. As an integrated supervisor overseeing banking and insuranceentities in Singapore, MAS seeks to ensure a level playing field

across the financial sectors by having a consistent regulatory andsupervisory framework for the regulated financial institutions.

The Tier 1 and Tier 2 capital components are largely alignedbetween the existing RBC framework for insurers and the capital

adequacy framework for banks under Basel I I I , with the exceptionof 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 highestquality).

Besides having to show greater capacity to absorb losses, thesehybrid capital instruments also need to have features that clearly

enable the instrument to undergo a principle write down or toconvert into common equity in the event of a bank stress.

4. To align with the capital adequacy framework for banks, MASproposes to incorporate the same Basel I I I features (i.e. equity

conversion or write-down on breach of regulatory capitalrequirements) as conditions for a capital instrument to be

approved by MAS as a Tier 1 resource (“Approved Tier 1Resource”).

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.Basel iii Compliance Professionals Association
















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This means that instruments that qualifies as Approved Tier 1resource must:

(a)Automatically convert to ordinary share capital, as and when

the insurer needs to absorb losses, and in any case, when theinsurer breaches its regulatory capital requirement;

(b)Be sub ject to write down as long as losses persist, as and whenthe 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 berecognised, as set out in the existing Insurance (Valuation and

Capital) Regulations 2004, will remain unchanged.

Treatment of Negative Reserves

4. For life business, policy liability is derived policy-by-policy bydiscounting 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 theexpected present value of the future receipts (like premium andcharges) exceed the expected present value of the future outgo

(such as benefit payments and expense payments), resulting ina negative reserve.

6.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 terminatedon valuation date, in which even the value of the liability in respect

of that policy may be negative to the extent of the amount due tothe insurer.”Basel iii Compliance Professionals Association
















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This means that negative reserves are not recognised unless oneexpects a recovery of monies (for example, surrender penalty in

the case of investment-linked policies).

6. Practices with regards to treatment of negative reservesdiffer internationally.

Under Solvency I I , the European Economic Area is consideringrecognising negative reserves as Tier 1 capital, while Canada

recognises part of the negative reserves as Tier 2 capital.

8. MAS current position of not recognising negative reserves as aform of capital is a conservative one because it is akin to

assuming a 100% lapse on all the policies, such that futurepremium receipts and charges are not recognised.

In practice, the lapse rate would not be 100%. Therefore, there isscope to reconsider the current position given that under RBC 2,

an insurer ’s net asset value will be shocked for insurance risk, andspecifically, lapse risk, at a 1-in-200 year level.

10.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 financialresource adjustment, rather than as Tier 1 or Tier 2 capital.

As the amount of negative reserves are currently sizeable in somelife insurers, MAS will need to carefully review and establish a

framework for calibrating the level of negative reserves that maybe recognised.

Proposal 9

MAS proposes to allow a part of the negative reserves to berecognised 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 Non- Guaranteed Benefits

9. When assessing the quality of capital resources, insuranceregulators are required under international standards to give

consideration to its characteristics, including “the extent to whichthe resource is available to absorb losses, the extent of the

permanent and/ or perpetual nature of the capital and theexistence of anymandatory servicing costs in relation to the

capital”.

10.Under the current RBC framework, as highlighted in Paragraph3.1, 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 unadjustedcapital 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 acapital item.

Proposal 10

MAS proposes to classify Aggregate of Allowances for Provision for Non-Guaranteed Benefits, where applicable, asa form of positive financial resource adjustment, rather than

as a capital item.

This applies to an insurer maintaining any participating fund, andsubject 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 ratioof the financial resources of the insurer (excluding the financial

resources of any

participating fund) to the total risk requirement (calibrated at99.5% VaR

















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over a one-year period) of the insurer (excluding suchrequirement arising from any participating fund); and

Unadjusted capital ratio, in relation to the insurer, means the ratio

of the financial resources of the insurer (including the financialresources 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 INTERVENTION LEVELS

1. Currently, under the Insurance (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 theoccurrence or potential occurrence of any event that would result

in the financial resources of the insurer being less than 120%, alsoknown as the financial resources warning event.

In practice, we would expect insurers to have capitalmanagement plans in place and hold a target CAR of more than

120%. In fact, all insurers generally hold at least a CAR of 150%.

3. International standards on capital adequacy prescribed by theIAIS 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 wouldnot intervene on capital adequacy grounds.

The PCR is calibrated such that the assets of the insurer willexceed the policy liabilities and other liabilities with a specifiedlevel of safety over a defined time horizon; and

















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b) Minimum Capital Requirement (“MCR”), 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.

3. Globally, major jurisdictions are moving towards meetingthe international standards of having a PCR and a MCR.

MAS believes that having such transparent and clear solvencyintervention levels would be most useful for insurers to better

understand MAS expectations on the type of corrective capitalactions required, and the urgency which they should be taken.

Prescribed Capital Requirement

5. Many insurance regulators of major jurisdictions havetargeted a confidence level of 99.5% in setting regulatory

capital requirements.

This corresponds to an implied credit rating of at least aninvestment grade.

MAS intends to calibrate the PCR of a solo insurer16 to the VaRof the insurer ’ s funds to a confidence level of 99.5% over a one

year period.

If an insurer ’s capital falls below its PCR, it will need to submit aplan to restore its capital position within 3 months.

As a countercyclical measure, MAS will have the flexibility anddiscretion 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 atboth the company level, as well as at an insurance fund

level.

















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Proposal 11

PCR is the higher supervisory intervention level at which theinsurer 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.

An insurer which breaches its PCR will need to submit a plan onhow to restore its capital position within 3 months.

If the PCR is met, MAS will not normally intervene on capitaladequacy grounds.

This does not preclude MAS from requiring an insurer to maintainfinancial resources above the PCR if there are other supervisory

concerns.

As a countercyclical measure, MAS will have the flexibility anddiscretion 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 wellas at an insurance fund level.

Minimum Capital Requirement

4.5 As for MCR, MAS plans to calibrate a solo entity MCR to theVaR of the insurer ’s funds to a confidence level of 90% over a

one year period.

This corresponds to an implied credit rating of B- and representsa 1 in 10 year event.

During the calibration stage, the MCR may be expressed as apercentage of the total risk requirements required under PCR for ease of computation and future monitoring.


















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2. Under current valuation rules, assets are to be valued at themarket value, or the net realisable value, in the absence of

market value. Policy liabilities are to be valued based on bestestimate assumptions, with provision for adverse deviation

(“PAD”).

Policy liabilities for life insurance are computed using aprospective discounted cash flow method while that for general

insurance consist of the premium liabilities and the claimsliabilities.

4. We have identified two areas that will be reviewed under RBC2.

Risk Free Discount Rate

Singapore dollar-denominated liabilities

6. Life insurers are currently required to calculate their policyliabilities using a prospective discounted cash-flow method, withMAS 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 theminimum condition liability of participating funds.

7. For Singapore dollar (“SGD”)-denominated liabilities, the riskfree discount rate is:

(a)Where the duration of a liability is X years or less, the marketyield of the Singapore Government Securities (“SGS”) of amatching duration as at valuation date;

(b)Where the duration of a liability is more than X years but lessthan 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(“LTRFDR”); and

(c) Where the duration of a liability is Y years or more, a stableLTRFDR.

















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The stable LTRFDR is to be calculated according to the following:

(a)Compute the average daily closing yield of the X-year SGSsince 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 valuesobtained under subparagraphs (a) and (b);

(d)Compute the prevailing average daily closing yield of the Y-year SGS over the past 6-month period;

(e)Allocate 90% weight to the estimated long-term yieldobtained in subparagraph (c), and 10% to the prevailing

average yield under subparagraph (d).

(f) The LTRFDR is then obtained by summing the two valuesin (e). Currently, X and Y are 10 and 15 respectively.

With effect from 1 Jan 2013, X and Y will be 15 and 2018.

5.6 When RBC was first introduced in 2005, the longestdated SGS available then was the 15-year SGS (which was

incepted in 2001).

Recognising that the 15-year SGS might not be liquid enoughand 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-termlife insurance liabilities, it makes liability values less sensitive

to market

















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movement in yields, resulting in short-term earnings volatilitydue to differences in discounting of the assets and liabilities.

5.7 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 usedin the derivation of the risk-free discount rate, that is, X and Y willbe 15 and 20 years respectively in the formula set out in Section

5.5. MAS intends to further enhance the market consistencyof the discount rate by incorporating the use of 30-year SGS yield.

Proposal13

MAS proposes the following two approaches with regards to therisk-free discount rate for SGD-denominated liabilities.(a) To keep to the same LTRFDR formula as set out in paragraph5.5, but

X and Y will now be 20 and 30respectively.

This is on the expectation that the 30-year SGS will haveadequate liquidity when RBC 2 is implemented. Thismeans:

-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: Interpolatedyields

(b) To remove the LTRFDR formula altogether,ie.,

-



















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Which of the above approaches is more appropriate?


Should MAS allow for some illiquidity premium adjustmentin the risk-free discount rate for valuing certain portfolios

such as annuity business?

8. We also considered the feasibility of using swap rates, insteadof SGS, for discounting purposes.

Some jurisdictions have moved to using swap rates for valuingpolicy liabilities, and a few insurers have asked MAS to

consider similar approaches in Singapore.

These insurers have fed back that the swap curve, extending tolonger durations with rates determined by market forces, would

provide a more accurate representation of risk-free market yields,with appropriate adjustments for credit risk.

10.MAS notes that the use of swap rates is typically allowed incertain 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 usedfor valuation should have reference to the government yieldcurve in that currency.

In Singapore, given that the government securities market isstill more liquid and deep than the swap market.


















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For example, for US-dollar denominated liabilities, the insurer will discount its liabilities according to the discounting

requirements set by the National Association of InsuranceSupervisors (“NAIC”) in US.

For liabilities denominated in currencies of EuropeanEconomic Area member states, the insurer will discount its

liabilities according to the discounting requirements set by theEuropean Commission under Solvency I I .

This proposal is premised on the fact that the insuranceregulator 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 requirementspertaining 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.


If the relevant foreign supervisory authority has not prescribedany 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 theforeign government securities of similar duration, and the yield

kept flat for liabilities extending beyond the longest available

government securities?

General insurance policy liabilities

5.13 MAS 319 is currently applicable to insurers writing lifebusiness only.

















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For general business, it is stated in guidelines ID 01/04 thatdiscounting of liabilities should be carried out where the impact of

such discounting is material.

Where discounting of liabilities is used, the discount rate adoptedshould be the gross redemption yield as at the valuation date of a

portfolio of government bonds (where applicable) with itscurrency and expected payment profile (or duration) similar to the

insurance liabilitiesbeing valued.

14.MAS proposes to extend the discounting requirements for lifebusiness (as set out in the previous proposals) to general

business. However, this would apply only to liabilities withdurations above 1 year.

Proposal 15

MAS proposes to extend the discount rate requirements for lifebusiness to general business as well, for liability durations above

1 year.

For liability duration of 1 year and less, no discounting would berequired.

Provision for Adverse Deviation

16.Under the current RBC framework, policy liabilities for both lifeand general insurance business are to be determined using best

estimates and a provision for adverse deviation (“PAD”)(commonly known as a risk margin).

17.For general business, the PAD for both claims liability andunexpired risk reserves are to be calculated at the 75% level of sufficiency, as set out in the Insurance (Valuation and Capital)Regulations 2004.

18.For life business, MAS 319 requires the PAD to be determinedusing more conservative assumptions so as to buffer againstfluctuations of the best estimate experience.

















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The determination of the level of PAD is left to theprofessional judgment of the appointed actuaries, who are

bound by the guidance note issued by the Singapore ActuarialSociety (“SAS”).

A common method adopted by the appointed actuaries is for theloadings for policy liabilities with PAD to be calculated as half of

the prescribed loadings for modified policy liabilities and modifiedminimum 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 inSolvency I I and the Swiss Solvency Test) is the cost-of-capital

method.

This method reflects the return on the capital a buyer wouldneed to support the liabilities acquired from the holder over

the whole run-off period.

This method involves applying a cost-of-capital rate to projectedrisk charges and then discounting the calculated cost of capital atthe 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 raisecapital for the portfolio, and is also consistent with what isassumed in the VaR assumptions under risk calibration.

18.Although it is harder to compute, the cost-of-capital methodhas been assessed as the most market consistent in practice by

some studies.


















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As such, MAS would like to seek the industry’s views onusing 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 lifeand general insurance liabilities, is appropriate?

If so, do you agree that it is appropriate to adopt a cost-of-capitalrate of 6% per annum?

As there is no evidence to suggest that the cost of providing theamount of available capital to support the policy liabilities wouldbe substantially different for life and general insurers, a uniformrate has been proposed for all types of insurers.

ENTERPRISE RISK MANAGEMENT

1.The RBC 2 review is not solely limited to the quantitativeelements of the RBC framework; it also focuses on MAS continuingefforts to improve industry standards on governance, controls

and in particular, risk management practices.

2.MAS has already issued a set of comprehensive guidelines onrisk management practices that applies both to a financialinstitution in general, as well as to an insurer specifically.

The guidelines cover board and senior management, internalcontrol, 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 managementguidelines to adopt a more holistic and enterprise-wide riskmanagement framework,

















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in line with evolving international standards on EnterpriseRisk 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 ineach activity or function.

The new requirements will set out MAS expectations on howinsurers identify and manage the interdependencies betweenkey risks, and how this will be translated into strategicmanagement actions and capital planning.

5.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 capitalmanagement so as to ensure optimal financial efficiency, andsufficient levels of solvency to ensure adequate protection of policyholders.

An insurer will be expected to carry out its own risk andsolvency assessment (“ORSA”).

The ORSA is a self-driven process by the insurer to assess theadequacy of its risk management practices, and both current andfuture solvency positions.

The Board and senior management of the insurer are expectedto take ownership of the process, which should be well-documented.In assessing its overall solvency needs, all identified relevant

and materialrisks are to be subjected to rigorous stress and scenariotesting.

7.We expect insurers to undertake its ORSA regularly andeffectively, giving due consideration to the dynamic interactionsbetween risks, and the link between risk management, businessstrategy and capital management.

















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The sophistication of an insurer ’s ERM framework should becommensurate with the nature, scale and complexity of the risks

that it bears.

Proposal 16

MAS proposes to introduce Enterprise Risk Managementrequirements, including those relating to Own Risk and Solvency

Assessment, to insurers. We will consult industry on the ERMrequirements and target to issue a final document by end of 2012.

PROPOSED TIMELINE

1. MAS ‟ proposed timeline for the various reviews outlined inSections 2 to 5 of this paper are as follows:

2. Finalise the calibration factors by 1Q 2013. During thecalibration stage, insurers would be involved in a few rounds

of quantitative impact studies;

3. Finalise the changes to the Insurance (Valuation andCapital) Regulations 2004 and Insurance (Accounts and

Statements) Regulations 2005 by 2Q 2013;

4. Implement the RBC 2 requirements (with the exception of theinsurance catastrophe risk charges which may need more time)

for accounting year ending 31 Dec 2013.

There will be at least 2 years of parallel run with the existingRBC framework, where the total risk requirements under RBC 2framework would be subject to a floor of a specified percentage

of the total risk requirements under the existing RBCframework.

This is to prevent any sudden release in capital requirements;Basel iii Compliance Professionals Association(BiiiCPA)
















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- Commence work on the internal model approach with theindustry after the implementation of RBC 2.

Proposal 17

MAS proposes to implement the RBC 2 requirements for theaccounting year ending 31 December 2013.

There will be at least 2 years of parallel run with the existing RBCframework and appropriate floors imposed to prevent sudden

release in capital requirements.

















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Basel I I I – CRD 4: Impact andstakes Introductory speech by Mr Christian Noyer, Governor of the Bank

of France and Chairman of the Board of Directors of the Bank for InternationalSettlements, at the Autorité de contrôleprudentiel (ACP) conference, Paris, 27June 2012.

Ladies and gentlemen,

I am delighted to welcome you today tothis new conference organised by theAutorité de contrôle prudentiel (ACP).

This morning, the conference will be dedicated to the impact andstakes of the Basel I I I reform and, this afternoon, to thesupervision of business practices in banking and insurance.

I would like to thank all the participants for the interest they haveshown in these crucial exchanges between regulators,

supervisors and market participants.

This conference is being held against the backdrop of aneconomic and financial environment that remains very difficult,characterised in particular in Europe by the ongoing sovereigndebt crisis.

Many questions surround the future of the European bankingsystem, which has already undergone major transformations in the

recent period while significant changes in its prudentialframework and the organisation of its supervision are currentlybeing reviewed.

Far from putting on the back burner questions concerning BaselIII and its application in Europe, that is to say CRD IV and itsproject to create a “single rule book” for European banks, Ibelieve, on the contrary, these developments underscore theimportance of better understanding the

















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current reform and taking time to reflect, in order to ensure thatthe new framework for banking regulation and the distribution of

supervisory responsibilities in Europe will deliver all their expected benefits.

Before leaving you to discuss in greater detail the impact andstakes of the Basel I I I reform, I would like to make a few remarks

on this topic in relation to the current environment.

1. Basel I I I and CRD IV represent a quantitative andqualitative leap aimed at addressing the shortcomings

highlighted by the current financial crisis

First, I believe that it would be useful to rapidly place the Basel I I Ireform in its context, in order to fully understand its scope.

Basel I I I is first and foremost a response to the financial crisis thatstarted in 2007.

This crisis and the subsequent wave of shocks to the bankingsystem have not merely resulted in a temporary loss of output for

the major advanced economies.

They have also had a lasting impact on employment, industrialproduction, the confidence of investors and households, and

needless to say on public finances, which make crisis exit evenmore difficult.

In response to these developments, the international communityadopted in 2009, under the impetus of the G20, an ambitious

reform programme including Basel I I I, which is a key element for the banking sector.

Indeed, a banking system that is more robust as a whole andcapable of absorbing major shocks is vital to avoid the repetition

of such chain reactions in the future.Basel iii Compliance Professionals Association(BiiiCPA)
















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In this respect, despite the delay in the reform agenda in theUnited States, Europe must clearly press forward: the credibility of

our banks and our economies is at stake.

Basel I I I is naturally based on Basel I I which establishes thecurrent capital adequacy rules.

However, Basel I I I goes further than merely changing andupdating the existing rules.

– Basel I I I indeed considerably strengthens the capitalrequirements that banks must meet, but this reform is more

extensive in that it significantly enhances the prudential

framework: in addition to capital requirements, it establishesliquidity requirements, and a leverage ratio is set to be introduced

in the medium term.

From this point of view, Basel I I I is a far-reaching reform of banking regulation.

– Furthermore, and most importantly, I believe that Basel I I I is amajor step forward in that it leads to a much closer interaction

than has been the case to date between the individual supervisionof banks, known as microprudential supervision, and the overall

supervision of the banking and financial system, or macroprudential supervision.

This broader view of banking supervision, taking account of all itsfacets, translates into a number of provisions and notably

introduces additional capital buffers (a capital conservationbuffer, a countercyclical buffer and a buffer for systemicallyimportant financial institutions) in excess of the regulatory

minimum.

Basel I I I therefore represents a quantitative and also a qualitativeleap.

Given the magnitude of the changes to be made, Basel I I I hasmajor repercussions on market participants, who must adapt

to this new environment.

















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These repercussions are both anticipated and desirable, butthe potentially negative consequences of this reform mustbe kept to a minimum.

In this respect, many associated risks were highlighted during itsdrafting and even more so recently, due to the current economicand financial difficulties.

These included the risk of a rise in the cost of credit or of a credit

crunch. Hence, the impact and stakes of Basel I I I must be

carefully analysed and

addressed.

2. The difficult economic environment stresses theimportance of implementing Basel I I I in an appropriatemanner but does not call into question the rationale of the reform

Without playing down the potential risks associated with theimplementation of Basel I I I, to which the ACP pays closeattention, I believe that this reform can be successfullyimplemented.

Allow me to mention some reasons for this conviction andoffer some avenues for actions:

– First, French banks, which have complied with Basel 2.5 rulessince December 2011, are in a strong position to meet the newcapital adequacy requirements when they come into force.

Moreover, French banks are ahead of the Basel I I I schedule.

Currently with Core Tier 1 capital ratios of over 9%, the mainFrench groups demonstrate their ability to meet the EuropeanBanking Authority deadline of 30 June 2012.


















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They should also fully comply with the new Basel I I Irequirements by 2013.

– The ACP is closely monitoring credit institutions’

preparations for BaselI I I. By doing so, any problems can be identified at an early stage

and issues relating to its implementation can be addressed,which I believe is

essential for a smooth transition.

More generally, in addition to the individual monitoring of banks’preparation, coordination between supervisors and the playersconcerned is also important to ensure a clear understanding of

the rules and identify any questions relating to the reform andtheir potential consequences.

The ACP liaises on a regular basis with the profession on allprudential matters.

Indeed, today’s conference is a prime illustration of this.

– It is also essential to closely monitor and take into account the

impact of the new regulations on the financial system and theeconomy and to assess the different interactions in order, if

necessary, to deal with the unforeseen consequences of Basel I I I.

In this respect, the ACP, which maintains close links to theBanque de France and operates under its aegis, is naturally

particularly attentive to and involved in all these matters.

This is why we are accompanying the prudential reform with more

general and macroeconomic reflections on the financing of theeconomy, and in particular on credit developments and the

relationship between banking regulation and monetary policy.

The new liquidity ratios therefore cannot be applied as they standas they do not take into account all their consequences and

interactions beyond the prudential objectives themselves, whichinclude in particular the


















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functioning of the interbank market, the level of intermediationor the conditions of monetary policy implementation.

I therefore believe that the work underway on the calibration of

these ratios is of the utmost importance in order to properlymanage all the consequences of these new rules.

Before handing the floor to Danièle Nouy, Secretary General of theAutorité de contrôle prudentiel, I would like to conclude with a fewwords on recent developments in Europe.

You are aware of my commitment to full harmonisation inEurope: this “single rule book” is the only way to achieve a truly

efficient single market.

You are also aware that the negotiations between the EuropeanCouncil and Parliament might reintroduce the national optionsthat the Commission had removed.

They may also, under a compromise text, render partly redundantand ineffective the responsibilities of supervisors of home andhost countries, as well as those of micro-prudential and macro-

prudential supervisors.

In this context, I believe that the creation of a banking unionis to be supported.

It would be a major development for banking supervision inEurope, which would bring numerous benefits and would enableus to efficiently address the current difficulties.

Such a development would most likely have very positiveconsequences in that it would be a step towards greater Europeanharmonisation.

Naturally, the benef its of such a reform would be more far-reaching but such questions go beyond the scope of today’sconference.


















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Questions regarding the impact and stakes of Basel I I I willalready give ample food for thought in the rich debates and

discussions this morning.

I wish you all a fruitful conference.

















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Anand Sinha: IT and governance in banks – somethoughts Address by Mr. Anand Sinha, Deputy Governor, Reserve

Bank of India at the Program for Independent Directors of Banksorganized by IDRBT, Hyderabad

Shri Sambamurthy, Director, IDRBT; Shri Prabhakar, Chairmanand Managing Director, Andhra Bank, Shri Rao, Managing

Director, SBH, Shri Siva Kumar, member of faculty, IDRBT,distinguished fellows of IDRBT; other members of the faculty;

and directors on the Boards of banks. Wish you all a very goodmorning.

Independent directors are looked upon by both the stakeholders

and regulators as important contributors to the value additiveand ethically positive oversight of executive managementactivities.

The organization of this programme, by IDRBT and its Director,Mr. Sambamurthy, which focuses on I T governance, I nformation

Security and the role of Board therein, is very timely as thesefactors have assumed critical importance in the sphere of

corporate governance in general and bank governance inparticular.

While talking about this programme organized by I DRBT, itwould be appropriate to recall, in brief, that this institution,

conceptualized in 1994 and established in 1996 by the RBI tofunction as a centre for research and development in banking

technology, has been commendably striving to meet itsobjectives.

It has to its credit several achievements like launch of Structured

Financial Messaging System (SFMS) and National FinancialSwitch (NFS) management; besides publication of guidance onbest practices and a number of research papers on topics of

contemporary relevance to the Indian banking industry.

Now, with the reviewed and redefined goals, the Institute is allset to support the banking Industry, by working at the

intersection of banking


















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and technology, mainly in the areas of financial networks andapplications, electronic payments and settlement systems,

security technologies for the financial sector, financialinformation systems and business intelligence.

I am sure the institute will continue to enrich the bankingIndustry in the times to come through its good work.

Corporate governance

Coming to the theme of this programme, I would dwell, first of all,on the concept of governance.

At the core of corporate governance is the principle of fiduciaryduty, centered on oversight of management functioning in order

to optimize stakeholder interests, within the limits of legal andregulatory compliance.

This had its origin and basis in the need to balance thepowers of executive management and the interests of

diffused owners, i.e. shareholders, through an oversightprocess.

This dominant view of governance comes from Agency theory,which emphasizes monitoring and control functions.

In this perspective, directors’ responsibilities take two forms:ensuring accountability to minimize downside risks and

enabling managerial entrepreneurship to reap upside potential.

Over a period of time, the optimization of shareholders’ interest

objective has broadened to include strategic efficiency and socialresponsibility.

Connotation of oversight has changed and expanded, to meaneffective leadership in guiding the management in strategicdecisions, creation of suitable structures and processes for

effective implementation and

















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monitoring of managerial performance; and ensuringcompliance with laws and regulations.

The scope of oversight has undergone further change with

implied inclusion of an ethic that transcends strict responseto regulations.

This interpretation of the meaning of governance and role of theBoard has gained greater currency in the wake of some big ticketevents like collapse of Enron, WorldCom, H IH insurance, and, inthe aftermath of the recent crisis, where a large part of the blame

was attributed, inter alia, to unethical conduct by banks andmarket participants.

Over all, the concept of governance has come to signifystrategic leadership support and objective oversight by the

Board to ensure optimized resource utilization, effectivecompliance and robust management.

It is in this overall context of governance that IT governance hasevolved as an area of great contemporary interest.

Information technology has grown from a mere enabler to anessential component of business processes in the bankingindustry where information and data are considered most

valued resources.

IT is a critical asset, not simply in enabling organizationalsuccess but also in providing opportunities for competitive

advantage.

IT and Indian banking

Banking in India, as all of us know, has traversed a long way fromthe days of manual work processes to mechanization, followed by

word processing on standalone PCs and onto IT basedapplications and so on.

As things stand today, it would be difficult to imagine a bank of any significance which does not have some or most of the key

processes being run on IT based applications.

















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Most of the customer related functions in banks, be it accountopening, transaction processing or account and data maintenance,are all run on IT enabled systems.

It is the reach and capacity of information technology that hasfacilitated banks to transcend the limitations of, geographicalspread, burgeoning transaction volumes and, to an extent, humanresources.

Banks are expanding their size and services to cater to fastincreasing customer needs through technology enabled paymentsystems, internet based access and innovative service deliverymodes.

Other important business activities of banks such asparticipation in securities, currency and money markets, besidescompliance functions like reserve maintenance, regulatoryreporting etc. are all having processes heavily dependent oninformation technology.

Even in case of internal work processes having largecomponent of manual processing, dependence on

computers and IT based communication mechanism isincreasingly felt.

Overall, banks are dependent on I T based systems for almost allof their activities, although the level of sophistication andrefinement in such systems may vary from bank to bank or acrossactivities or banking Industry segments (commercial banks,cooperative banks etc.).

Reasons for this are not far to seek.

Technology has become essential component for customer related and market related activities and participant bankscannot meet the requirements imposed by timelines or volumeswithout leveraging on technology.

Even for backend and internal work processes, cost and timeconstraints

are pushing banks to lean upontechnology.


















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It may not be possible to store and retrieve huge amounts of customer data, transaction data and business information, but

for the power of technology based systems.

More so, the globalization, competition and compliancerequirements make it imperative for banks to increasingly use IT

based platforms and applications for most of their activities.

It has become necessary for banks to use modern marketing aswell as customer service tools to survive in a competitive

environment; which involve large scale data collection, analysisand efficient communication which are not possible without the

help of IT .

IT and financial inclusion

IT has a great role to play in furthering the financial inclusiondrive, involving expansion of banking access to remotelocations in a cost effective way.

Reaching banking to the excluded segments has been thefocus of regulatory agenda and many initiatives have been taken

in this regard.

Of the 74,414 villages with a population of more than 2000identified as unbanked, 74,199 (99.7 per cent) villages have alreadybeen provided with banking services, on the back of concertedefforts of the banking fraternity encouraged by the Governmentand Reserve Bank of India.

In the next stage, it has been proposed to cover unbankedvillages with population less than 2000.

Considering the vast geographical expanse of the country, such agigantic task would not be possible at all without the help of technology.

Technology has the potential to cut down the costs, bring downthe barriers and make the financial inclusion a viable businessproposition.

















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Financial inclusion, apart from its social welfare enhancing role,should make a lot of business sense for banks in as much as theycan get a large stable pool of retail deposits which will contribute

very significantly to the robustness of the individual banks and to

financial stability at the systemic level.

Additionally, there would be small value but large volume of lending and other business.

What is constraining the full realization of this businesspotential is the comparatively large transaction costs.

Several technological efforts and innovations have been

made for increasing the reach which has reduced thetransaction costs.

However, much more needs to be done to make the financialinclusion an attractive and profitable business for banks.

IT in banking – concerns

While the increased deployment of IT certainly has its ownbenefits in terms of enabling banks to meet the business

requirements and enhance their service delivery capacity, such ITusage and dependence, however, bring in some new challenges

and concerns.

These challenges keep on getting more complex andqualitatively different, as technology keeps on evolving

rapidly.

For instance, technologies like cloud computing bring inadvantages and efficiencies along with new risks which have to be

managed.

Any delay in adoption of new technologies would only let thecompetition pass by the laggard institutions.

Cloud computing is an innovative concept which enables

participants to leverage on collaborative sharing of resources,which not only brings



















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down costs but also facilitates the participants to concentratemore on their core activities, leaving the management of IT

resources to the service providers.

This facility, by making the sophisticated applications affordable,has the potential to enable even the marginal players to make use

of the technology and develop their businesses.

However, this being a new technology data integrity andconfidentiality seem to be a major concern at this stage.

Further, if too many participants rely on a single service provider,it may lead to a risk of over-concentration inasmuch as the failure

of the service provider will be catastrophic.

Banks will have to assess the pros and cons of new technologiesand put in place adequate safe guards while adopting them.

As regulator and supervisor of the banking system in India, inter alia, its many other roles, RBI is concerned about the soundnessof the financial system in general and banking system inparticular.

While IT usage contributes to efficiency, it brings, along with it,certain issues such as, issues of technology selection withstrategic, financial and compliance considerations; processmanagement to ensure cost effective and timely service delivery;security of customer and business data at access, storage andretrieval level, as also the accuracy of data and information for internal and external reporting.

Important issues and concerns in this context have been flaggedby RBI in the I T vision document 2011–17 and the recentMonetary Policy statement (April 2012).

These concerns mainly revolve around the areas of governance, information security and MIS/ reporting andbanks have to address these issues, on priority.


















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Technology and information security

Information security is an area that needs constant andcontinuing attention, considering, particularly, the operational

risks associated with the use of technology.

Security and integrity of data, communication and storage hasacquired challenging dimensions as all of these activities are

carried out over technology enabled systems.

Internet and remote access are necessities today, while threatsthrough these modes come in newer forms each day.

Privacy and confidentiality of customer as well as businessdata are at stake.

Denial of service, disruption, permanent data loss andeven data manipulation are risks that cannot be ignored.

The IT management systems and processes in banks, therefore,have to be robust enough to meet these challenges effectively, on

continuing basis.

Any lapse in this regard can lead to several kinds of risks to thebank, its customers as well as other market participants,

depending on the size and significance of the institution as well asmagnitude of risk event.

Regulatory reporting and MIS

Another area of significant importance to the top managements,regulators and shareholders is the quality and efficiency of data

reporting. Indian banking, even today, has housekeeping, M ISand reporting processes which are largely interspersed with

manual intervention.Basel iii Compliance Professionals Association(BiiiCPA)
















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This has implications for the quality, consistency and timelinessof data, with the risk of subjective interpretation, manipulation

and delays, leading to potential adverse consequences in manyforms.

Even where the information collection and submission process islargely IT based, process design itself has to be in sync with

information and reporting requirements.

The top management, Board, regulators, the shareholders andcustomers may not get correct or timely information and

disclosures due to inadvertent or deliberate action on the part of those compiling or submitting information.

There have been instances of process design facilitatingmanipulation of data, with serious implications.

So, it is imperative that information systems are designed andmanaged in a way that data and information are efficiently and

accurately compiled and reported.

Automated data flow (ADF) initiative by RBI is a step in this

direction. Banks are being exhorted to ensure ADF

implementation at the earliest,

not only as a matter of regulatory comfort but also in their owninterest.

Benefits for banks in such implementation are many.

One, reduction in the number of procedures and sub-processesin procuring information, leading to enhanced efficiency on costand time parameters.

Two, more efficient internal monitoring, review and managerialdecision making, reducing the scope for misreporting.

Three, accurate and timely regulatory reporting leading toreduced risk of


















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adverse regulatory action and timely support for coursecorrection, where required.

I would urge the Independent Directors to provide an oversight in

their banks to this project so that the complete switchover toADF is achieved in a timely and efficient manner.

Regulatory compliance and single view of information

As we all know, banking regulation across the globe is beingtightened in the wake of recent financial crisis.

Both Basel I I, which, for large banks, focusses on internalprocesses for measuring and managing risks and, Basel I I I, haveenhanced the need for continuous monitoring of data on several

parameters to ensure continuing, rather than “point in time”compliance.

There are new regulatory provisioning requirements as well, whichcan be complied with, only by proper data collection, compilation,

and analysis and reporting.

It is mandated that business decision making and regulatoryreporting processes use the same data and information.

Any lapse in this regard is increasingly being viewed adverselyby the markets, customers, shareholders and regulators.

It may, in fact, become highly time and cost intensiveproposition for banks to collect, compile and report on the basis

of voluminous data on diverse parameters through processeshaving manual interventions.

The time criticality, even for internal reporting, is further amplified, by the fact that in a severely competitive market

environment, quick information dissemination and decisionmaking is an absolute requirement for growth and, may be for

survival itself.


















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Risks and opportunities have to be recognized quickly, followedby swift action to avoid being swamped by events.

So, it is in the interest of all stakeholders to ensure that there is

a single view of information and data in the banks withautomated/ straight through processing for internal and

external reporting.

As recent events have shown, ability to identify the risks intime and manage them effectively differentiates successful

institutions from the unsuccessful ones.

To survive in the fast changing environment, institutions arerequired to have complete handle on the risks they face whichhelps them in taking corrective action.

For this they need to have robust IT systems which cancollect risk information from across different businesssegments and different geographical locations in a timelyand comprehensive manner.

The systems should be able to process data and providenecessary reports to the management to enable quick actionwhere necessary.

Building of such systems involves significant investments and,therefore, requires, a dedicated focus from the Board and the topmanagements.

Weak and ineffective governance has been a very important

contributory factor to the current crisis and clearly this is an areawhich needs considerable improvement.

In this context, maintaining robust risk information technology(IT ) systems that can generate timely, comprehensive, cross-geography, and cross-product information on exposure is of vitalimportance and, therefore, needs closer attention of the Board.

Let me quote from a recent G-30 document “Toward EffectiveGovernance of Financial Institutions” which succinctlyemphasises the


















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role of risk information technology in financial Institutionsand the critical role Boards can play in implementing them.

Ultimately, the quality of risk information that FI boards

and management teams receive depends largely on thequality of the organization’s IT systems.

Ideally, FIs need risk IT systems that can gather risk informationquickly and comprehensively, producing global, cross-product,cross-legal entity estimates of their exposures promptly.

Unfortunately, few global FIs are capable of this.

They are hampered by legacy systems that are inefficient,costly, and burdensome.

Boards are well advised to press management to maintain – andwhere necessary increase – investment in risk IT systems, bothas a short-term priority and as part of a long-term strategicinitiative.

Risk IT investments must not be sidelined by necessaryupgrades to finance and customer data systems.

Instead, they must be integrated and prioritized.

Given that for many large firms, necessary investments will run toseveral billion dollars over the coming years, boards may need torethink their approach to evaluating management’s investment incore IT spending.

While some firms still have the audit or risk committeereview IT investments, others have establishedcommittees dedicated to IT oversight.

That is an interesting trend, and worth further consideration.

















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IT governance

Coming to I T governance, there are two ways to look at it.

One is to view it as a sub-set of overall corporate governance andthe other is to see it as a distinct concept/ discipline by itself.

There are arguments on both sides, but the former looksmore appropriate.

Corporate governance, with its holistic definition coveringfiduciary, strategic leadership/ guidance and ethics related roles,

is inclusive of IT strategy and IT management oversight as ITsystems and information are as valuable as any other resource for

a bank, and may be more.

Dependence on these resources and systems make it imperativethat these are managed and governed through an appropriate IT

governance framework (ITG).

There are several alternative ITG frameworks (over 14 as per a2009 research), with many more evolving, suitability of which

depends on the overall ecosystem in which a bank operates.

In an early research on governance, IT governancemechanisms were categorized into three: decision making,

alignment processes and communication approaches.

Some ITG frameworks like Cobit (Control Objectives for Information and Related Technologies), COSO (Committee of Sponsoring Organisations of the Treadway Commission) and

ITIL (Information Technology Infrastructure Library) provideguidance from micro level onwards.

AS 8015, the Australian standard for ICT governance, istargeted at strategic level.

















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However, there is no single dominant approach for ITG. Somerecent research has conceived ITG as having:

(i) Defensive or

(ii)Strategic approach where defensive approach refers topreventing or mitigating disasters while strategic approach aims

to create sustainable shareholder value by either reducing costsor creating a sustainable competitive advantage.

In practice, holistic understanding of legal, regulatory, businessand internal ethic environment contexts should determine the

suitability of the framework for a particular bank.

What is important is that ITG achieves its applicable objectives,both defensive and strategic, and enhances the overall corporate

governance in a bank, by facilitating maximization of benefits andminimization of risks emanating from I T deployment.

It focuses specifically on information technologysystems, their performance and risk management.

Role of board and independent directors

While we have discussed about governance in general and, ITgovernance in particular, one aspect which remains to bementioned is the importance of the role that independent

directors on the Boards of banks are expected to play.

Banks, basically, are organizations which mainly haveroles of intermediaries as well as financial market

participants.

Their soundness and stability has potential impact muchbeyond their own well being.Basel iii Compliance Professionals Association
















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So, the role of Board in banks is more focused oncompliance, organizational ethic and strategic guidance.

In the Indian banking context, Boards have a lot to contribute to

strategic ITG as the IT implementation is still evolving andstructures for robust oversight on acquisition, deployment and

management of IT systems and information security mechanismsneed closer attention and strengthening.

Investments required in acquisition, maintenance and regular upgradation of technology systems in banks, along with the need

to have appropriate human resource, are significant, and, therefore,require appropriate management controls and accountability

framework under a watchful Board.

Regulations and laws do contribute, but do not constitute thewhole story about governance, as recent global events have

shown.

Governance landscape, including I T governance, has much moreto be covered by quality of Board oversight than mere

compliance with the written word.

Good governance should be, and is often, the result of endogenous factors those that emerge from within, not without.

Governance is not about what decisions get made – that ismanagement – but it is about who makes the decisions and how

they are made.

Independent directors, with an assumption of higher level of

objectivity and professionalism, are expected to guide the banksin a manner that our banks as well as customers reap the fruits of

IT deployment while the risks are contained through appropriateassessment and mitigation measures.

Aristotle said “it is better for a city to be governed by a goodman than good laws”.


















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Board and its Directors can contribute towards governance,including IT governance, more than the law under which it isconstituted, and that is what is expected of them.

In conclusion, I would exhort the independent directors toperform their role at a level expected of them, so as to benefit theIndustry, economy and society and once again convey my thanksto IDRBT for organizing the program.

I wish the program great success. Thank you.

















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Monitoring indicators for intraday liquidity management -

consultative document

July 2012Intraday liquidity can be definedas funds that are accessibleduring the business day, usuallyto enablefinancial institutions to makepayments in real time.

The Basel Committee's proposedMonitoring indicators for intraday l

iquidity management areintended to allow bankingsupervisors to monitor a bank'sintraday liquidity riskmanagement.

Over time, the indicators will alsohelp supervisors to gain a better understanding of banks' payment and settlement behaviour and their management of intraday liquidity risk.

The Basel Committee welcomes comments on this consultativedocument. Comments should be submitted by Friday 14September 2012 by e-mail to: [email protected].

Alternatively, comments may be sent by post to the Secretariatof the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland.

All comments may be published on the website of the Bankfor International Settlements unless a comment contributor specifically requests confidential treatment.

Issued for comment by 14 September 2012Basel iii Compliance Professionals Association


http://www.bis.org/publ/bcbs225.pdf



mailto:[email protected]









































































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A. Background

1. The management of intraday liquidity risk forms a keyelement of a bank’s overall liquidity risk management

framework.

In September 2008, the Basel Committee on Banking Supervision(BCBS) published its Principles for Sound Liquidity Risk

Management and Supervision (Sound Principles), which setguidelines for banks on their management of liquidity risk and

collateral.

Principle 8 of the Sound Principles focuses specifically on

intraday liquidity risk and states that:

“A bank should actively manage its intraday liquidity positionsand risks to meet payment and settlement obligations on a timely

basis under both normal and stressed conditions and thuscontribute to the smooth functioning of payment and settlement

systems.”

3. Principle 8 identifies six operational elements that should beincluded in a bank’s strategy for managing intraday liquidity risk

and indicate that a bank should:

(i) have the capacity to measure expected daily gross liquidityinflows and outflows, anticipate the intraday timing of these flows

where possible, and forecast the range of potential net fundingshortfalls that might arise at different points during the day;

(ii)have the capacity to monitor intraday liquidity positions againstexpected activities and available resources (balances, remaining

intraday credit capacity, available collateral);

(iii)arrange to acquire sufficient intraday funding to meet itsintraday objectives;

(iv)have the ability to manage and mobilise collateral asnecessary to obtain intraday funds;

















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The aim of the proposed indicators is to enable bankingsupervisors to monitor a bank’s intraday liquidity risk

management and its ability to meet payment and settlementobligations on a timely basis, both in normal times and in

stressed scenarios.

Over time, the indicators will also enable supervisors to gain abetter understanding of payment and settlement behaviour

and the management of intraday liquidity risk by banks.

5.Given the close relationship between the management of banks’ intraday liquidity risk and the smooth functioning of payment and settlement systems, the indicators are alsolikely to be of benefit to overseers of payment and

settlement systems.

Close cooperation between banking supervisors and theoverseers is envisaged.

7.It should be noted that the proposed indicators are for monitoring purposes only and do not represent theintroduction of new standards around intraday liquiditymanagement.

B. Consultative document

9.This consultative document seeks comments on the design of the proposed indicators and on the supporting regulatoryreporting regime.

Although the indicators will apply specifically to internationally

active banks, they have been designed equally to apply to allbanks, including those that access payment and settlementsystems indirectly via the services of a correspondent bank.

11.This document sets out:

- The definition of intraday liquidity and the elements thatconstitute a bank’s intraday liquidity sources and needs;

















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- The detailed design of the proposed monitoring indicators of abank’s intraday liquidity risk in normal times;

-Proposed stress scenarios;

- Key application issues; and

- The proposed reporting regime.

9. Comments are welcomed on the proposed monitoringframework generally, but specifically on the following

questions:

(i) Do the proposed indicators adequately capture the intradayliquidity risk run by banks?

(ii) Are the stress scenarios identified in the paper comprehensive?

(iii) Is the proposed scope of application of the indicators clear?

(iv) What, if any, implementation challenges would theproposed reporting requirements present to banks?

(v) Are the different monitoring and reporting requirements for direct and indirect payment and settlement system participants

clear?

10. Further guidance on the detailed implementation of the

indicators will be issued by the BCBS when the proposals arefinalised.

C. Definition and constituent elements of intraday liquidity

11. I ntraday liquidity is defined by the CPSS as “Funds which canbe accessed during the business day, usually to enable financial

institutions to make payments in real time”.

















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For the purpose of this document, ‘business day’ is definedas the opening hours of the payment and settlement system(or group of systems) during which it is possible for a bank

to receive and make payments.

12.The following are the constituent elements of a bank’sintraday liquidity sources and needs.

Intraday Liquidity Sources

Own sources

- Reserve balances at the central bank;

- Eligible collateral pledged with the central bank;

- Unencumbered liquid assets on a bank’s balance sheet thatcan be freely transferred to the central bank and converted

into central bank money;

- Secured or unsecured, committed or uncommittedcredit lines available intraday;

- Balances with other banks that can be used for settlement onthe same day.

Other sources

- Payments received from other payment system participants,9including operations carried out in intraday, and/ or overnight

money markets;

- Payments received from ancillary systems.

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Intraday Liquidity Needs

These arise from:

-Payments that need to be made, directly or indirectly, to other

system participants, including operations carried out inintraday, and/ or overnight money markets;

- Payments to be made to ancillary systems;

- Contingent payments (eg as an emergency liquidity provider)relating to a payment system’s failure to settle procedures;

- Contingent intraday liquidity liabilities to customers.

- Payments arising from providing correspondent bankingservices

In practice, some customer banks’ payments are made to other customers of the same correspondent bank.

These payments do not give rise to intraday liquidity needs for the correspondent bank as they are made across its own booksand do not enter the payment system.

However, these ‘internalised payments’ do have intradayliquidity implications for both the sending and receiving

customer banks.

I I . The intraday liquidity monitoring indicators

13. A number of factors influence a bank’s usage of intradayliquidity in payment and settlement systems and the

vulnerability to intraday liquidity shocks.Basel iii Compliance Professionals Association(BiiiCPA)
















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As such, no single indicator can provide supervisors withsufficient information on intraday liquidity risks or on how well

risks are managed. For this reason a set of indicators is proposed.

These aim to monitor:

- A bank’s usage of, and requirement for, intraday liquidityboth in normal times and in times of stress;

- The intraday liquidity available to each bank on a daily basis,both in normal times and times of stress; and

- Changes in banks’ behaviour over time within the

payment and settlement systems.

A. The set of monitoring indicators

14. The detailed description of each indicator is set out below andstylised examples of the indicators are given in Annex 1.

The reporting requirements of each indicator are set out inSection D.

















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(i) Daily maximum liquidityrequirement

15.This indicator will show a bank’s daily maximumrequirement for intraday liquidity in normal times byestablishing its net cumulative intraday liquidity position over a period of time.

The net cumulative intraday liquidity position of a bank is thedifference between the value of its payments received and thevalue of its payments made at any point in the day.

The bank’s largest negative net cumulative position during the

day will determine its maximum intraday liquidity requirementon that day.

17.The indicator is shown in figure 1. A positive net cumulativeposition signifies that the bank has received more payments thanit has made at a point in time during the day.Conversely, a negative net cumulative position signifies that thebank has made more payments than it has received.

For direct participants, the net position represents thechange in its opening balance with the central bank.

For indirect participants, the net position represents thechange in the opening balance on its account(s) with itscorrespondent bank(s).

















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17.For the purpose of this indicator, intraday liquidity positionsshould be calculated on actual settlement times, rather than onsubmission times of payments to the system or to acorrespondent bank, as appropriate.

18.Assuming that a bank runs a negative net cumulative positionat some point intraday, it will need access to intraday liquidity to

fund this balance.

The minimum amount of intraday liquidity that a bank would needto have available on any given day would be equivalent to itslargest negative net cumulative position. (In the illustration above,the intraday liquidity requirement would be 10 units.)

21.Conversely, when a bank runs a positive net cumulativeposition at some point intraday, it has surplus liquidity availableto meet its intraday liquidity obligations.

This position may arise because the bank is relying on paymentsreceived from other system participants to fund its outgoingpayments.

















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The larger the positive net cumulative position, the greater abank’s usage of incoming payments to fund its own payment

obligations.

(In the illustration above, the largest positive net cumulativeposition would be 8.6 units.)

20. For an indirect participant, payments are made across thebank’s account(s) held with its correspondent bank(s).

The timing of receipts to, and payments made from, theaccount(s) will determine the bank’s intraday liquidity

usage/requirement.

(ii) Available intraday liquidity

21.This indicator will show the amount of intraday liquidityavailable to a bank on a daily basis in normal times.

Banks will be required to report the amount of intraday liquidityavailable to them at the start of each business day and the lowest

amount of available intraday liquidity by value on a daily basisthroughout the reporting period.

This will require banks to monitor changes to their availableintraday liquidity.

The indicator will enable supervisors to assess whether a bankhas sufficient intraday liquidity available on a daily basis to

meet its normal intraday liquidity requirement.

The ‘Own Sources’ of liquidity set out in Section I C above areavailable for inclusion in the calculation of this indicator.

23.Where banks manage collateral on a cross-currency and/ or cross-system basis, liquidity sources not denominated in the

currency of the intraday liquidity requirement and/ or which arelocated in a different jurisdiction, may be included in the

calculation of the indicator

















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if the bank can demonstrate to the satisfaction of its supervisor that the collateral can be transferred intraday freely to the

system where it is needed.

(iii) Total payments

23. This indicator will require banks to report the total value of their gross daily payments made and received in payment and

settlement systems.

This will enable supervisors to establish the overall scale of their payment and settlement activity.

(iv) Time-specific and other critical obligations

24.The Sound Principles state that a bank “should adoptintraday liquidity management objectives that allow it to

identify and prioritise time-specific and other critical obligationsin order to meet them when expected”.

These are obligations which must be settled at a specific time

within the day or have an expected intraday settlement deadline.

Failure to settle such obligations on time could result in financialpenalty, reputational damage or loss of future business.

26.This indicator has two components.

Banks will be required to report the volume and value of their time-specific and other critical obligations and the total number

and value of time critical obligations that were missed duringthe reporting

period.

This will enable supervisors to gain a better understanding of banks’ time-specific obligations and to monitor that those

obligations are being managed appropriately.

















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The following two indicators apply to banks which providecorrespondent banking services or extend intraday credit as part

of providing payment services to other customers.

(v) Value of customer payments made on behalf of financial institution customers

26. This indicator will require correspondent banks to report thegross value of their daily payments made on behalf of all of

their financial institution customers.

This will enable supervisors to gain a better understanding of thedrivers of a correspondent bank’s payment flows.

The bank will also be required to report the value of paymentssettled on behalf of each of its five largest financial institutioncustomers (by value), including “internalised payments” that aresettled across its books.

This will enable supervisors to assess the degree of paymentconcentration in the bank’s provision of correspondent banking

services

(vi) Intraday credit lines extended to financialinstitution customers

27. This indicator will require correspondent banks to report thetotal sum of intraday credit lines extended by them to all of their financial institution customers.

The correspondent bank will also be required to report thevalue of the credit lines extended to each of its largest fivefinancial institution customers (by value), distinguishingbetween secured and unsecured credit and committed anduncommitted lines.

















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For those same five customers, the bank will also be required toreport the maximum daily usage of credit lines granted, again

distinguishing between secured and unsecured and committedand uncommitted lines.

This indicator will enable supervisors to gain a better understanding of a bank’s correspondent banking business and

the extent of any concentration in its provision of intraday credit.

















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Synthesis of the Commentsfrom the Call for Evidence of the

Internal Market and ServicesDirectorate – General on the

fundamental review of theFINANCIALCONGLOMERATES

DIRECTIVE

EXECUTIVE SUMMARY

The Call for Evidence for theFundamental Review of the

Financial Conglomerates

Directive (hereafter "FICOD"),which was

announced in February 2012, aimed at engaging interestedstakeholders with the debate on the supervision of large complex

financial groups inEurope in the context of the Financial Conglomerates Directive

review.

The European Commission asked interested stakeholders to

reply to three sets of questions, relating to:

a) The general concept of supplementary supervision on groupsthat meet certain thresholds;

b) An invitation for comments on the European specificperspective on Joint Forum principles of supervision in their five

areas (Supervisory powers, Supervisory Responsibilities,Governance, Capital adequacy and liquidity and Risk

management),

c) Certain specific elements of the Financial Conglomerates

Directive. The Commission received 13 responses to the Call

for Evidence. More

than half of respondents represent banking and insuranceindustry views.

Other res ondents consist of rivate stakeholders and one

















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Five responses were received from the United Kingdom, andone from France, Portugal, the Netherlands, Germany and

Belgium each. Four responses were received from Europeanlevel organizations.

Many respondents welcome the idea of revisiting the currentsupervisory framework for financial conglomerates.

However, only a few are advocating for a strengthening of thecurrent supervisory regime for conglomerates.

The overall impression is that most respondents are satisfiedwith the current regulatory framework on financial

conglomerates and find it adequately ensures efficientsupervision in the EU.

Some agree that potential gaps arising from cross-sectoralrisks and unregulated entities need to be captured in order to

ensure effective supervision, however most respondentsbelieve that upcoming improvements in the sectoral

supervisory regimes already guarantee comprehensive group-wide supervision.

While many of the respondents acknowledge that coherencebetween sectoral rules could be improved, most claim that

current sectoral rules are sufficient and adequate.

Taking into account the fact that prudential frameworks (CRD,Solvency I I , shadow banking) are currently undergoing a review,they express the need for the new prudential rules to settle and

for the gaps, where supplementary regulation is necessary, tocrystallise.

Only a few respondents express more ambitious viewstowards strengthening supplementary supervision of financial

conglomerates.

They advocate for powers for supervisors to impose all grouprequirements on the parent entity whether regulated or

unregulated and for capturing special purpose vehicles (SPVs)within the scope of group supervision.

















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First set of questions - views on the generalconcept of supplementary supervision on groups

that meet certain thresholds

In the light of the objective of this kind of supervision, thedetection and correction of group risks in groups with many

different licenses (i.e. contagion, concentration of risks, conflictsof interest, management complexity, multiple use of capital), isthe concept of supplementing group risk related supervision to

the sector-specific supervision of individually authorized entitiesin a financial conglomerate still effective?

The majority of respondents share the opinion that the currentregulatory framework on financial conglomerates is adequate and

ensures efficient supervision.

Those respondents think that existing sectoral rules aresufficient and that proposed changes to current legislation

should be allowed to settle before further reform.

According to the some industry stakeholders, the upcoming

Solvency I I regime provides for an extensive set of rules for insurance groups' supervision.

Enhanced cooperation and information sharing will enablesupervisors to maintain a sufficient level of oversight at the group

level. Intragroup transactions and risk concentrations will becontinuously monitored and reported to the supervisors.

A few respondents think that financial conglomerates should besubject to a supplementary supervisory framework.

This is necessary for addressing cross-sectoral risks whichmay not be adequately addressed in sectoral group supervision

to ensure that all avenues for contagion between the twosectors are captured.

















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Is the application of this supplementary supervision only togroups that meet the cross-sector thresholds effective in the lightof the objective of this kind of supervision, or should it be appliedto a differently defined set of groups active in the financial sector?

As regards thresholds for identifying conglomerates, opinionsdiverge:

i) There is no need for specific thresholds, provided that thedefinition of a group in CRD is aligned with Solvency I I ,

ii) The 10% threshold should be removed, replacing it with analternative threshold,

iii) There is no need for any modification to current rules.

The majority of the respondents support the third option.

They are satisfied with the current provisions and find theapplication still effective.

They share the view that adding supplementary layers of

supervision onto financial conglomerates would overburden thefinancial industry and would not be effective.

The Solvency I I regime is sufficiently risk-based and as such,additional requirements at the financial conglomerates level

should not result in duplicate or contradictory requirements.

Some respondents acknowledge the need to revise the currentframework and some question current waiver provisions.

Few respondents suggest that entities that are notsubsidiaries (particularly holdings of 10%-20%) should not

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In view of the objective of this framework, is stress testingat sector-specific level only sufficient to take account of

unexpected scenarios in financial conglomerates?

While most respondents agree on the usefulness of stresstests for financial institutions, they are sceptical towardsstress tests at the conglomerate level.

Some industry stakeholders argue that Solvency I I is a risk-basedregime which in itself acts as a stress test of (re)insurers.

They feel that stress tests at the financial conglomerate levelwould be counterproductive.

Most respondents underline the priority of the implementationof the sectoral legislation and find the implementation of thestress testing analysis developed at the level of the individualsector more efficient.

Existing rules, issued at national, EU and Basel levels, aresufficient to check the resilience of firms and enable correctiveaction.

Those respondents that think that stress testing at the level of financial conglomerates would be useful recognise that it couldenable conglomerates to better evaluate and manage group-wide risks and to assess inter-sectorial effects.

In that case stress tests should be robust and consider sufficiently adverse circumstances.

Respondents, however, list possible practical limits to suchexercises (company law restrictions, the heterogeneity of thebusiness models, different techniques of measuring risks etc.)

Second set of questions related to the Joint Forumprinciples

1. Supervisory powers (Joint Forum principles 1-4)

















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The question is, whether, in the context of group widesupervision, supervisors in Europe should at all times be

empowered to access this head of the financial conglomerate inits leading role and impose corrective measures on this entity, if

it is not an authorized entity itself.

With regard to this question, there are two diverging views.

Half of respondents strongly advocate for providing thesupervisors with the ability to impose group requirements directly

on the parent entity whether regulated or unregulated, the other half think this question has to be addressed at the sectoral level.

Respondents that argue for the need to strengthen supervisorypowers towards the head of the financial conglomerate point out

that since it is the parent entity that generates controls andmanages group risk as well as raising and allocating capital, it isessential to be able to apply group requirements on that parent

entity directly even if it is unregulated.

It provides an extra dimension for enforcement of requirementsand it also creates an incentive for group boards to take sufficient

account of the possible impact of their actions on regulated

entities.

There should be a single point of contact for a financialconglomerate, regulated or not, on which the group supervisor

could enforce all group related supervisory requirements.

Financial conglomerates should be subject to supervisionsupplementary to supervision on a stand-alone, consolidated or

group basis, without duplicating or affecting the groupsupervision and regardless of the legal structure of the group.

This group of respondents support the reinforcement of powersof the coordinator supervisor, and the strengthening of

cooperation, coordination and infor mation exchange betweensupervisors within the college of supervisors.



















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They advocate for suitable supervisory discretion to be given tothe competent authorities to apply any rules on Financial

Conglomerates in a way that is proportionate to the nature of theconglomerate itself.

Respondents flag several related issues:

i) Possible distortion of competition in the form of lower requirements for financial conglomerates where the head of the

group is not a regulated entity;

ii)Existing conflict of supervisory and corporate laws, as to whether the ultimate parent undertaking of the group has the necessary

powers under corporate law to fulfil its obligations.

A transparent and consistent regime must allocateresponsibilities to the entity which has the means to comply with

it.

Those respondents that see that the question as needing to beaddressed at the sectoral level claim that the existing and

proposed EU regulatory framework for the banking sector deals

with this issue in an appropriate matter.

They feel that proposed (capital) rules enable corrective measureswhich should be sufficient to address risks to financial stability,including from unregulated parts of a group.

2. Supervisory responsibilities (Joint Forum principles 5-9)

The question is, whether the discretion to apply the rules in the

supervisory approach as chosen by the respective authorities iseffective in the context of cross-border and cross-sector groups,or whether other enforceable provisions (such as transparency,or obligatory cooperation, (see the Joint Forum document for more provisions) are necessary.

Most respondents are content with the current regulatoryframework.

















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They find it adequate and allowing for sharing of supervisoryapproaches and information within a college setting.

Respondents emphasize the importance of information-sharing

and supervisory coordination in a secure and efficientlyorganised manner.

A conglomerate s lead supervisor should remain clearlyaccountable.

It is essential to monitor national implementation of thesemeasures to ensure equivalence across jurisdictions.

In a European context where banking, insurance and securitiessector supervision is subject to the ESAs' mandate of preventing

regulatory arbitrage and promoting equal conditions of competition, it would be inconsistent not to also include financial

conglomerates in the same logic.

Another opinion advocates for building more productiveworking relationships between supervisors through the

college system, which would reduce the need for additional

detailed rules for financial conglomerates.

It is thought that the effectiveness of qualitative supervision willvary depending upon legal systems and the experience of

supervisors, and the effectiveness of cross-sector and cross-border supervisory colleges.

3. Governance (Joint Forum principles 10-14)

The question is whether explicit new or amended legal provisionsare necessary to achieve sound group-wide governance systemsin Europe, or whether sufficient legally clear provisions already

exist to implement the suggested principles.

The general view is that explicit new or amended legal provisionsare not necessary as the current regulatory framework on financial

conglomerates ensures sound governance of financialconglomerates and provides supervisors with sufficient tools to

intervene if needed.


















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Financial conglomerates-specific regulation should be limitedto the minimum necessary enabling the closure of any

identified gaps rather than establishing a full set of specificprinciples.

Most respondents think that the possibility for the coordinator supervisor to intervene in the governance of a conglomerate, toinfluence the structure of it, would be too far-reaching a power.

They advocate for flexible and principles-based governancerequirements for conglomerates.

Several respondents suggest that unregulated and non-financial

entities should be excluded from the governance specificrequirements, especially when corresponding requirements are

applied at sectoral level.

The opponents to this view would welcome more explicitgovernance requirements, such as adding group-wide

remuneration rules.

Supervisors should ensure that the conglomerate’s capital

management policy is robust and takes into account risksemanating from unregulated activities.

It should include in that exercise the regulated as well as non-regulated entities.

One respondent expressed an opinion that any reference tothe governance framework should be sufficiently broad to

encompass all possible local company law frameworks.

It was flagged that the element of public disclosure iscompletely overlooked.

Supervisors should also encourage public disclosure in severalareas (other than only risk concentrations, intra-group

transactions and exposures) such as the structure, remunerationelements, overall capital situation and stress testing results.

















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4. Capital adequacy and liquidity (Joint Forum principles15-20)

The question is, whether the European prudential framework

should remain confined to enforceable capital- and liquidity-ratios,and leave discretion to firms to ensure they always meet thoseminimum ratios, or that additional provisions are necessary, as

suggested by the Joint Forum, to ensure that a conglomerate'sinternal capital and liquidity policy is sufficient to meet the

required standards at all times in all of its authorized entities.

The majority of respondents are of an opinion thatadditional requirements are not needed and they support a

Pillar I I approach.

Existing and proposed sectoral prudential frameworks, includingthe use of Pillar I I , allow or will enable regulators to ensure thatfinancial conglomerates have sufficient capital and liquidity to

cover group risks.

Some respondents note that it is important that unregulatedentities that are part of a financial conglomerate are not treated

differently to unregulated entities that are part of other regulatedfinancial groups.

The interaction between unregulated entities and regulatedentities should be taken into account as "environmental"

factors as part of the Pillar I I supervisory review and evaluationprocess.

The requirements for banking and insurance should remain

different in order to ensure an efficient and relevant supervisionat the sectoral level. Some respondents support a global

supervisory oversight of financial conglomerates.

It has been pointed out that Solvency I I has two mandatorycapital requirements at group level and supervisors can impose

capital add-ons based on assessments of both Pillar I and I Iprovisions.


















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5. Risk management (Joint Forum principles 21-29)

Experts are invited to give their views on the Europeanimplementation of more specific regulation of group risks of this

kind and introducing relevant requirements at the level of thehead of a financial conglomerate.

The majority of respondents see no need for any further requirements at the financial conglomerate level.

According to them, all risks identified are adequately covered atthe sector-specific level and current rules allow for corrective

measures to be imposed at any regulated level.

It is argued that existing tools also allow the influencingof any unregulated head of the group.

In addition to that, several respondents stress the diversificationbenefits deriving from the different risk profiles of the banking

sector and insurance sector, as regards contagion and riskconcentration.

Given the wide range of changes taking place in these domains,allowing some time to better assess their end results seems

appropriate before embarking on implementing additionalminimum standard requirements.

Some respondents acknowledge that it would be beneficial tohave explicit requirements to address risk management culture

and tolerance.

Some support was expressed towards more detailedrequirements in FICOD Article 9 to ensure that the full spectrum

of risks is captured, particularly with respect to off balancesheet activities including special purpose entities (SPEs).

FICOD could have explicit requirements to determinewhether to consolidate an SPE and if so, what proportion.

















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This could include requirements for an assessment of the risktransfer between the financial conglomerate obligations towards

the SPE and a requirement to assess other factors such as controlor economic interconnectedness to determine whether contagion

risk is present (using stress and scenario testing whereappropriate).

Respondents note that coherence of the core principles of supervision for banks and insurance would be beneficial.

The objective should be to achieve regulation which is alignedwith the risks posed by institutions in their respective sectors

but whose design takes into account cross-sectoral effects.

Some support the development of cross-conglomerateconsolidated reporting of risks.

Third set of questions: essential elements of theFinancial Conglomerate Directive

The question is whether the structure of the Directive, of thisset of provisions that must supplement sector-specific

provisions, is clear and whether legal certainty is optimal. I f not,how could legal clarity and certainty be improved?

Most respondents are satisfied by the legal clarity and certaintyprovided by the Directive.

Issues flagged by several respondents are:

i) Possible conflicts between FICOD and national company law

particularly between the group-wide/centralized controlling-obligation of the superordinate entity versus the persisting

responsibility of the boards of the subordinated entities,Basel iii Compliance Professionals Association
















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ii) The failure of the present Directive to address the problem of how to enforce conglomerate-related duties and obligations over

anon-controlled minority-held (20-50%) conglomerate member,

iv)That the responsibility of evaluating the systemic relevanceof the risks posed by any economic group - and not solely the

financial conglomerate - could rest within the EuropeanSystemic Risk Board.

How could the definition of the relevant "group" andthe determination of responsible entities be

improved?

As regards the definition of a group and the determination of responsible entities, there are two opposing views. Some

respondents see the need for parent entity provisions ensuringpowers at both regulated entity level and at parent entity level.

In that respect provisions should allow the identification of theultimate parent, taking into account factors such as control and

ability of the entity to influence the group strategy and structure.

New provisions should be introduced to ensure that the parententity is responsible for requirements on corporate governance,

risk management including capital adequacy policy, riskconcentrations and intra group transaction monitoring and

reporting.

Other respondents support the current definition of a group.

They stress that the Directive should not cover non-regulated or non-financial entities since these are not covered by the sectoralrules.

The notion of a group in the FICOD should be consistent withsectoral rules (if banking groups are not required to consolidate a

SPV for example, the financial conglomerate should not beobliged to consolidate it either).


















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The question is whether the framework for prudentialsupervision of financial groups could benefit from this "legal

tandem" with company law, or whether the financial supervisionframework should be complete and clear in and of itself.

Respondents generally agree on the fact that effectivesupervision should be achieved through a clear and complete

supervisory framework.As regards company law, the views expressed are quite

heterogeneous:

i) Certain rules under the supervisory framework are impossibleto be applied under the national company laws,

ii) The prudential supervision framework for groups should beconstructed in such a way that it can accommodate the different

national company laws,

iii)Company law should act as lex generalis to becomplemented by particular sectoral rules catering for sector

specificities

iv)A conflict between supervisory law and corporate law could besolved by providing the obliged entity with the necessary powers

under corporate law to fulfil its obligations,

v) I t is important to wait for the final versions of CRD IV / CRRand Solvency I I , to analyse the conflicts with company law

and make suggestions on how to fit these regulatoryframeworks together.

















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02 July 2012

Statement by the Chancellor of theExchequer, Rt Hon George Osborne MP,

on LIBOR

Check against delivery

[Note: The London Interbank Offered Rate(LIBOR) is the average interest rate

estimated by leading banks in London thatthey would be charged if borrowing from

other banks]

Mr Speaker, on Thursday I updated the House on the FinancialServices Authority’s investigation into Barclays and the attemptedmanipulation of the LIBOR market in the years running up to andduring the crisis.

The House has just heard from the PM and I would like to givemore details of the steps we are taking.

This morning, I spoke to Marcus Agius, who confirmed that he

was resigning as Chairman of Barclays because of theunacceptable standards of behavior within the bank.

The Treasury Select Committee is calling the Chief Executive of Barclays to account for himself and for his bank on Wednesday.

I look forward to hearing his answers.

As I also said last week, every avenue of possible criminalinvestigations for individuals involved in attempted manipulation

of LIBOR is being explored.

However, in the view of its Chairman, Lord Turner, the powers thatwere given to the Authority do not allow it to pursue criminalsanctions.

People in the country ask why they didn’t have the necessary

powers. [Political content removed]

















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From now on, the multi-million pound fines paid by banks andothers who break the rules will go to the benefit of the public not

to other banks.

Mr Speaker, that brings me to the second question of the urgentchanges we need to make to the regulation of LIBOR to preventthis ever happening again, and to ensure that in future authorities

have the appropriate powers to prosecute those who engage inmarket abuse and manipulation.

I have today asked Martin Wheatley, the Chief Executive designateof the Financial Conduct Authority to review what reforms are

required to the current framework for setting and governingLIBOR.

This will include looking at:

- Whether participation in the setting of LIBOR shouldbecome a regulated activity;

- The feasibility of using of actual trade data to set thebenchmark; and

- The transparency of the processes surrounding thesetting and governance of LIBOR.

The review will also look at the adequacy of the UK’s currentcivil and criminal sanctioning powers with respect to financialmisconduct, and market abuse with regards to LIBOR.

And it will assess whether these considerations apply to other

price-setting mechanisms in financial markets - to ensure thatthese kinds of abuses cannot occur elsewhere in our financialsystem.

We need to get on with this – not spend years on navel gazingwhen we know what has gone wrong.

I am pleased to tell the House that Mr Wheatley has agreed toreport this summer so that the Financial Services Bill currentlybefore Parliament or the future legislation on Banking Reform canbe amended to give our regulators the powers they clearly need.


















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Mr Speaker, the review is essential to ensuring we mend thebroken regulatory system introduced by the last Government,

which allowed these abuses to happen.

But the manipulation of the most used benchmark interest ratereveals that there is a broader issue of the professional standards

and culture in some parts of the financial services industry thatwas allowed to grow up in the years before the crisis and which

may still need change.

I don’t think a long costly public inquiry is the right

answer. It would take months to set up and years to

report.

We know what went wrong.

We can’t wait until 2015 or 2016 to fix it.

In just six months time we will be bringing forward the BankingReform Bill that will implement the recommendations of Sir John

Vickers’ Independent Commission on Banking.

This will bring far reaching lasting change to the structure of British banks ring fencing retail banks from their investment

banking arms.

Let’s see if we can use this Banking Bill to make any further changes needed to the standards of the banking industry, and

the criminal and civil powers needed to regulate it and holdpeople to account for their behaviour.

As the PM said, we propose that Parliament establish aninquiry into professional standards in the banking industry.

The Government will in the coming days lay before both H ouses aMotion to establish a Joint Committee, drawn from the Commonsand the Lords.

It should be chaired by the Chair of the Treasury SelectCommittee, the Honourable Member for Chichester.



















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He and his Committee have already been quick off the mark ininvestigating the issue, and we certainly want their hearings this

week to proceed.

I propose that the Terms of Reference should be this: building onthe Treasury Select Committee’s work and drawing on the

conclusions of UK and international regulatory and competitioninvestigations into the LIBOR rate-setting process, consider

what lessons are to be learnt from them in relation totransparency, conflicts of interest, culture and the professional

standards of the banking industry.

I propose that it should be able to call witnesses under oath,including current Members of Parliament and Lords.

And I can confirm that we will provide the Committee with theresources it needs to do the job.

I would suggest to the House that we ask the Joint Committeeto report by the end of this year, 2012.

That is enough time to do the job – and do it well – but not solong that this issue drags on for years.

And it means, in very practical terms, that we can amend our Banking Bill to take on board its recommendations.

I hope all Parties will support the Motion we put forward.

The failure to regulate the banks in the boom years cost thiscountry billions.

The behaviour of some in the financial services has damagedthe reputation of an industry that employs hundreds of

thousands of people and is vital to the economic prosperity of

the country.

We’re changing the failed regulation; reforming the banks; nowit’s time to deal with the culture that flourished in the age of

irresponsibility and hold those who allowed it to do so toaccount.

I commend this statement to the House.

















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Report on Risks and Vulnerabilities of the Europeanbanking sector 11 July 2012

The annual report on Risks and Vulnerabilities of the European

banking sector by the European Banking Authority (EBA)describes the main developments and trends that affected theEU banking sector in 2011.

The current conjuncture

EU banks have undergone significant changes since 2007,with an accelerated pace in 2011 and 2012.

Funding structures have shifted considerably, towards thepredominance of official and retail sources of funding.

Capital levels have strengthened whilst profits have reduced,leading to significantly lower returns on equity.

Business models are adapting as banks retreat from someareas of business – such as investment banking or globalfinance –

particularly where economically affordable funding is nolonger availableand regulatory changes require more risk protection.

Further adjustments are likely.

The re-segmentation of banking markets within nationalboundaries,

















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particularly interbank funding, will significantly impact businessmodels going forward.

During 2011 and 2012 significant efforts have been made to

strengthen the EU banking sector in terms of both capital andfunding/ liquidity.

The EBA’s 2011 EU wide stress test reviewed credit soundness,sovereign holdings and funding costs.

However, as the situation deteriorated additional measures wererequired, leading among other steps to the EBA’s December 2011

Recapitalisation Recommendation.

The Recapitalisation entailed a system wide strengthening of participating banks’ capital bases to 9% core tier 1 and thus their

ability to absorb losses.

It was not a stress test, but was a necessary step in the progressto restore banks balance sheet.

National authorities will continue to pursue the process of balance

sheet repair by assessing individual banks’ asset valuations,especially for specific credit segments with a focus on

geographies and sectors such as property loans.

Market participants and rating agencies continue to seebanks and sovereigns as inextricably interlinked, leading toacute pressure on funding costs.

The ECB’s LTRO has meant that funding pressures have

eased somewhat following the ECB’s action but further measures will be required to return to sustainable funding.

Policy announcements as of June 2012 to potentially inject capitaldirectly into banks and undertake EU wide supervision appearedto improve market sentiment in this regard.


















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Nonetheless, as of mid-2012 the situation remains extremelyfragile with increasing uncertainty on asset quality, funding

capacity and concerns over the possibility of extreme events.

Banks and supervisors are considering, and putting in place,relevant emergency actions as a rapid deterioration of events

could lead to further significant change in the banking landscape.

Beyond 2012 – medium term supervisory risks

A return to sustainable funding, beyond the temporary solutionbrought by the LTRO, will require

(i) Restoring market confidence in EU banks,

(ii)A recalibration of banks strategies, business models, asset-liability mixes and risk-tolerance levels, and

(iii)Forward-looking and close monitoring by supervisors in 2012and beyond.

Lengthening maturity profiles, diversifying funding sources andmeeting the new liquidity requirements must all be balanced with

the challenges of increasing usage of collateral, rising assetencumbrance and changing market views on banks’ unsecured

liabilities.

The focus on secured and retail funding all create potentialchallenges on the prudential and consumer protection front.

These issues will absorb the efforts of both bank managementteams and supervisors in the years to come.

For the larger EU banking groups with material cross-border activities these efforts will have to continue to expand well

beyond national borders.

















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As banks adjust to the changing environment, further restructuring of their activities and business models is

expected.

Moreover, the need to address more vigorously asset qualitydeterioration

– particularly

(i) Where economies are in recession and

(ii)For higher-risk credit sectors like real estate – will come to the

fore. A number of tools are being used by banks and

supervisors to address

deteriorating asset quality.

For example, higher provisioning levels are being demanded andsome supervisors and banks are strengthening their loan-

modification and arrears management monitoring capacity tohelp identify inflection points where forbearance on potentiallyproblematic loans moves from being a risk mitigant to being a

risk in its own right.

Lower returns on equity, tougher funding conditions, and thesegmentation of the single market, are all key drivers for change in

banks business models.

Heightened supervisory attention will be paid to thesedevelopments to understand changes both within the bankingsystem and to monitor aspects of traditional banks which move

to other areas of the financial system.

Table 1 summarises the EBA’s views regarding the main risksand vulnerabilities in the EU banking sector in the short and

medium terms.Basel iii Compliance Professionals Association
















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Important parts of the

document Structure of EU

banks’ funding

EU banks are more dependent on wholesale funds than banksin other regions due to the specific dynamics of each market.

As examples, the Asian markets are characterised by a highsavings ratio as well as by a more reduced share of economicgrowth generated by bank lending.

In the US about three-quarters of outstanding residentialmortgages are not in originating banks’ balance sheets, beingsecuritised and held by GSEs and to a lesser extent via privatesecuritisation.

In contrast, a very large majority of mortgages in the EU –especially outside the UK and the Netherlands – are held in theoriginating banks’ balance sheets, being largely funded withcovered bonds raised in wholesale markets.

Also, to a greater extent than in the EU, the US business creditmarket is highly bank-disintermediated as practically all largecorporates and a significant number of larger SMEs issue directlyin the market.

Equally, large markets in the EU saw significant savingsdisintermediation in earlier years (savings shifting from bankdeposits to mutual funds and life insurance plans), on a far

broader scale than any corresponding credit disintermediation.

As a consequence, EU banks have had to rely increasingly onwholesale funds (market issuance but also corporate deposits) tounderpin their lending growth.

That being said, we note that a degree of savingsreintermediation back to bank deposits is now taking place inparts of the EU.

















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The ratio of customer deposit to total liabilities dropped fromabout 50% to 46% between 2009 and 2011 (chart 1).

The structure of funding explains why EU banks have beenparticularly affected by the crisis.

In fact, the last five years have seen a significant change in thedynamics of bank funding.

Before the crisis, EU banks were pursuing mostly asset-driven

strategies. Specifically, as funding was readily available at

affordable price points,

especially in the wholesale markets, banks were aiming primarily to

increase their assets, leading to excessive leverage whichgenerated unsustainably high earnings for several years.

The crisis and its implications on the availability of liquidityforced an abrupt strategic turnaround for banks, which havebeen since adopting

















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liability-driven strategies, aiming to obtain the funding at pricepoints which could justify generating assets at economically

viable costs.

Credit risk and asset quality

The sovereign crisis and, more generally, the macroeconomicconditions have obviously affected banks’ risk and solvency

profiles.

The EBA’s KRIs provide mixed indications about banks’exposure to credit risk.

The ratio of impaired loans to total loans increased from 4.5%to 5.6% between 2009 and 20111.

The variability across the sample is explained, among other things, by size: the difference between the top 15 and other banks

has been stable over the last 2 years at around 2 percentagepoints, with the former group of banks demonstrating more

resilience to credit risk than the others (Chart 5).

















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Looking at the stocks, accumulated impaired financial assets tototal gross assets remained stable at about 1.6%, with however

a significant increase of the dispersion (Chart 6).

As far as the level of provisions is concerned, the coverage ratio(i.e. ratio of specific provisions on loans to total loans) increaseduntil March 2011 and then slightly declined to 42% in December

2011.

The reduction was more pronounced for banks different from thetop 15 and the gap between these two categories increased at 5percentage points (Chart 7).

















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Overall, the time series of credit risk indicators over the last 9quarters signal that asset quality is being affected by theincreasingly deteriorating macroeconomic environment.

However, this is happening at a different pace across countriesand type of banks, as mirrored by increased variability.

This could be due to the fact that the crisis has been affectingcountries at different times and the impact of the secondmacroeconomic contraction may be delayed for some countriesand not yet visible in 2011-end data still.

Furthermore, there are indications that several banks haveadopted various forms of forbearance which allowed bothborrowers to more easily honour their obligation and banks topostpone the recognition of possible losses.

In fact, the more forward-looking picture from the RAQ shows thatthe respondents mostly expect that the impairment levels will notdecrease in the near term.Basel iii Compliance Professionals Association
















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Exposures towards small and medium enterprises are the mostfrequently mentioned driver for the expected increase in problem

loans.

















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Speech by Financial Secretary to theTreasury, Mark Hoban MP; Banking union

in the eurozone, Brussels

Thank you for inviting me here today. Sincethe financial crisis started in 2008-9, there has

been a drive to reform the regulation, cultureand structure of banking to strengthen the

stability and resilience of the sector.

The deepening crisis in the Eurozone andscandals,

whether the manipulation of LIBOR or rogue traders at Societe

Generale and UBS, demonstrate the need to continue thosereforms.

I want to talk today about how we work together to returnstability and integrity to the banking sector.

There is international consensus that tougher financialregulation is essential to safeguard stability and end the

problem of too big to fail.

The UK has been at the forefront of these efforts.

But as we have seen, the implications for the Eurozone areeven more profound.

The interdependence of states and banks needs to tackled if we are to stabilise the Eurozone.

Banking Union is the natural corollary of fiscal and monetary

Union, and so the decision to proceed with this is a great step inaddressing the crisis we face.

Urgently turning this plan into action, finding answers to thedifficult questions that will accompany doing so will be no easytask, but it is vital.

At the same time, we must work together to maintain the benefitsto our economies that a well functioning sector can deliver –

















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Through preserving and deepening the single market

With a common core of minimum standards that neither allows for protectionism, nor invites a race to the bottom.

Fear of the destabilising effects of a banking crisis has linkedbanks and governments together.

Taxpayers across Europe provided around four and a half trillionEuros in capital support and guarantees before LTRO to stave off

catastrophic collapse.

And the sobering examples of Spain and I reland show that therecan come a point at which banks become so large that even

Governments lack the capacity to stand behind them.

A stable, responsible sector will never exist in an environment inwhich banks enjoy gains when things go well, and taxpayers take

the pain when they don’t.

So we need regulation which does not allow for banks toprivatise gain and socialise loss.

And it is not just the structure of the sector that needs to change.

The events we have seen –in the recent scandals that haverightly attracted so much scrutiny – show that the culture of the

industry needs to change, and needs to change now.

The cynical attempts to manipulate financial benchmarks aresadly not the only example.

We have also seen revelations of rogue traders at SocieteGenerale and UBS; pervasive failures in risk management, and a

number of accusations of mis-selling of complex financialproducts.

This behaviour is not, and cannot be allowed to become,representative of the way business is done in London or in any

other financial hub.Basel iii Compliance Professionals Association
















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To address both the structural and the cultural failures in thesector, we must take action. And the UK is leading the way in

putting right what has gone so wrong.

The UK Government has taken a tough approach to bothsupervision and regulation, reflecting the sheer scale of the sector relative to our economy.

To bring long-term stability to the sector, we are combiningmicro and macro prudential supervision within the Bank of

England.

So that the monitoring and response to the threats to financialstability posed either by the sector as a whole or by individual

institutions are the responsibility of a single organisation.

To ensure that taxpayers are no longer perceived as liable for the risks taken by banks, we are implementing the Vickers

report.

Ring fencing retail operations of investment banks to protectdepositors; making creditors – not taxpayers – bear losses; and

ensuring critical functions continue in any future crisis.

We are balancing tougher regulation and supervision with theneed to maintain a competitive, efficient sector.

And to ensure appropriate standards of conduct, we arecreating a separate, independent, market and conduct of

business regulator with tougher powers to uphold integrity inmarkets and give appropriate protection to consumers.

From the moment we came into office, we demonstrated a

commitment to reform the financial sector.

And we are taking a further action to respond to theattempted manipulation of LIBOR to stamp out and

punish bad behaviour.

There will be a full Parliamentary inquiry into the lessons to belearned on transparency, conflicts of interest, and the professional

standard of the banking industry.

















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There will also need to be changes so that in future Libor isproperly regulated and attempts to manipulate it thwarted.

We will act quickly to restore any loss of confidence in its

integrity, transparency and utility.

We have already established a review into what reforms arerequired to the current framework for setting and governing

Libor, headed by the incoming CEO of our new FinancialConduct Authority.

And that inquiry will identify new criminal sanctions we can putinto law.

Indeed, we will need to go further now and work with theCommission to extend the market abuse regime to cover

attempted manipulation of benchmarks.

Regulators need full access to telephone records, includingthose with retail clients.

Retail customers can be responsible for market abuse, as well asvictims of it.

And as the investigation of the fixing of LIBOR and other ratesdemonstrated in the 21st Century, written records simply won't

suffice.

This will complement essential provisions in the commission’sMiFid proposal to ensure benchmarks are transparent and

operated fairly – helping to enhance surveillance and the abilityof supervisors to detect manipulation .

But the scandal over financial benchmarks also shows us howinternationalised the market has become - alleged manipulation of

Libor set in London, Euribor set in Brussels, and other leadingbenchmark rates, being investigated by competition authorities

and regulators in America, Japan, and across Europe.

Indeed, Japan has already settled with Citi for allegedmanipulation of TIBOR.


















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Together, we will deal with the culture that flourished in theage of irresponsibility and hold those who allowed it to do

so to account.

But it is not just here that we need to work together. Our work is acombination of programmes of national reforms and collectiveefforts at a European and global level.

Member states building a set of European Union wide reforms buthaving the flexibility to go further to be tougher to reflect their

national circumstances.

So the UK has led the debate here as well.

Higher capital and liquidity standards in Basel.

Moving all standardised derivative trades into central

clearing. Creating a comprehensive set of tools for recovery

and resolution of financial firms.

Ending the perceived implicit taxpayer guarantee.

Once implemented, our global and local banks will be stronger inlife and easier to deal with in death.

I am encouraged by the progress that we have made throughworking together on this with other European nations, andnations beyond the EU’s borders.

And there is still work to do – on derivatives regulation inparticular, there is a major loophole in the EU regime that allowsderivatives traded electronically not to be cleared centrally,impeding our goal of reducing systemic risk.

Whilst that is a matter that must be tackled together, there isanother which requires one group of member states to go further to reflect a set of circumstances that is common to them – theinterdependence of banks and sovereigns in the Eurozone.


















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We welcome the decisions already taken by the Eurogroupand the European council to establish banking union.

The crisis has shown us why a banking union is a

necessary part of monetary and fiscal union.

One of the largest fiscal risks faced by a government is thecontingent liability for its banking sector.

When countries need to deliver core financial stability tasks,like protecting depositors, and are unable to, it may be

necessary for other Member States in the currency union towork together to protect the currency as a whole.

As well as the mutual dependence of state and bank, we havealso seen the enhanced interdependencies between bankingsystems within a single currency – as contagion has spread

from Greece to Spain rather than to countries outside the euroarea.

And we have seen how the single interest rate of the countries inthe Euro Area can feed bubbles in one country whilst deliveringexcess liquidity in others. The impact of this on economicperformance is of course a strong driver of risk in the banking

sector.

For all these reasons, I see banking union as a necessary part of monetary and fiscal union.

A mutualised deposit insurance scheme for insured deposits –to ensure consumer confidence where states cannot standbehind failed banks.

A common fiscal backstop for crisis management.

And a Eurozone-level prudential supervisory authority – to alignfiscal and supervisory responsibility.

So I strongly support the euro area's decision to poolsovereignty and express solidarity through a banking union.

















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The UK has a vital interest in a fair, competitive and vibrantmarket. And we welcome the decisions that have so far been

taken:

We welcome ensuring a key role for the ECB as supervisor –with the credibility and legal mandate it carries.

We welcome the identification of the ESM as a tool for banking interventions, with the capacity to recapitalise

banks directly.

And we welcome the European Council’s statement that shouldMember States with a common currency wish to go further to

coordinate and integrate their policies, they must respect fully the

integrity of the single market and the EU as a whole.

There are now a number of design issues that need urgentattention:

- What will need to be done to directives on the DepositGuarantee Schemes and Resolution and Recovery?

- What more needs to be done in CRD 4, particularly asflexibility in macroprudential supervision becomes even

more important?

- What will be the scope of the banking union – how manybanks will be supervised by the ECB ? This cannot be limited

to the biggest banks only, since systemic risk comes fromsmaller institutions too.

- How will we ensure the EBA remains focussed on theinternal market?

-Do we still need resolution funds, now that an ESM can

be used?

- Who is in charge in a crisis? The euro area will need acredible resolution regime.

- What are the liabilities and risks already in the system?

These are just a few of the questions that spring to mind – I am

sure there are more. We will work closely with our Europeancolleagues to ensure that a strong solution can be found thatbenefits all.

















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In completing the design, we will need a system with strongsupervisory foundations and practice, that maximises thebenefits of the banking union, while mitigating the risks.

Maximising the benefits from common supervision and themutualisation of risk - breaking the link between sovereign andbank.

What President H ollande calls ‘integration solidaire’.

While minimising the risks of fragmenting the single market.Whilst supervision and resolution will be a matter for the 17, thesingle market and the single rule book will be a matter for all 27

member states.

The EBA will need to continue to set core minimum standardsfor all member states, and the system will need checks and

balances.

This is a standard concept – included in the LisbonTreaty, and reinforced by the European Council

statement.

Banking union must be put in context. I t is not a replacement for the single market in financial services – rather a specific set

arrangement to support the single currency.

And so, before I end, I would like to ask one final question – of theutmost importance - how we are going to protect the single

market?

The UK supports the treaty freedoms to non-discriminatory accessand fair competition – freedoms that must be upheld, and which

we will fight to maintain.

A banking union that erects barriers and looks inwards would notbe in anyone’s long-term interests.

To allow the protectionism to take hold and the single market tofragment will do nothing but shrink the global economy at a time

when it desperately needs help to grow.

All EU member states require open capital markets to

support our corporations.


















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And ultimately, a global reserve currency like the Euro or Dollar can only maintain its international standing if it can freely be

traded and cleared beyond the 17 Eurozone members, across theworld.

The EU is lucky enough to enjoy so many world-leading financialhubs – in Luxembourg, in Frankfurt, in Dublin, in Paris, and, of

course, in London.

London, and its partner hubs across Europe, mean thatbusinesses can gain access to capital and savers can invest in

products from outside their home country, without the need toimpose products and services on all local markets.

And I strongly believe that those hubs should continue to servethe wider economy, channelling the funds of savers to investmentopportunities, transforming our bank deposits into loans to our

businesses and helping businesses and individuals manage risk.

Helping European Governments raise almost €1 trillion in bondmarkets in 2010;

Helping European companies raise almost €3 trillion in funds

since 2006; And helping EU citizens save over €6 trillion in currentand savings

accounts.

But for us all to continue to enjoy these benefits – not just thebanks and the member states in which they locate – we must

have proportionate regulation that supports free choice throughpromoting a vibrant single market.

The scale and complexity of the challenges faced by the financialservices sector, and the global nature of the industry, mean wemust work together to solve them.

And as we do so, we must ensure we preserve the rewards fromallowing a well functioning global financial services sector toflourish, so that



















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organisations in one part of the world can help the economy of another to grow.

Through working together – through international agreements,

and through defending and advancing the Single Market asstrongly as we can, we can meet the dual challenge – enjoyingthe greatest benefits of a thriving globalised financial services

sector, while curbing its worst excesses.

Thank you.

















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FINMA publishes circulars on implementing Basel II Iand TBTF requirements

FINMA will put a new circular on eligible capital into effectstarting 1 January 2013 as well as revised circulars on capitalplanning, credit and market risk, disclosure and riskdiversification.

In doing so, the supervisory authority presents its implementingprovisions on the recently revised Capital Adequacy Ordinance(CAO) regarding the implementation of the Basel I I Irequirements and the "too big to fail" (TBTF) legislation.

Following the financial market crisis in 2008/ 2009, the new BaselIII regulations were drawn up under the leadership of the Groupof Governors and Heads of Supervision (GHOS) and the Basel

Committee on Banking Supervision (BCBS).

In line with these regulations, banks must hold more andqualitatively better capital.

At the same time, the TBTF regime was drafted which sets outadditional regulatory requirements for systemically importantinstitutions.

In order to implement the Basel I I I requirements and the newTBTF regime in Switzerland, FINMA is publishing today updatedcirculars as implementing provisions for the revised CAO whichwas adopted by the Federal Council in June 2012.Basel iii Compliance Professionals Association
















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The new circular and the aforementioned amended circularswill enter into force along with the CAO on 1 January 2013.

The implementing provisions set out in the FINMA circulars do

not, nevertheless, put all the elements of the Basel I I I frameworkinto practice.

Still to be implemented are the detailed disclosure obligations for eligible capital decided recently by the Basel Committee, and theprecise handling of credit risk exposure to central counterparties

which has yet to be published.

FINMA intends publishing its implementing provisions on thesematters as soon as possible so that those Basel I I I elements can

also come into force as of 1 January 2013.

Minimum changes compared with the consultation drafts

Integration of the Basel I I I international standards into the Swissregulatory framework was conducted by an existing national

working group whose representatives are from official bodies andthe industry. The revised drafts of the circulars were therefore notunexpected for many market participants and have been broadly

supported.

Any adjustments have mostly involved editorial changes. Mostreaction was triggered by the new circular on eligible capital

(FINMA-RS 13/ 01). As this circular has absorbed the key contentof FINMA-Circ. 08/34 "Core Capital – Banks", the latter has

become redundant and will be repealed as of 1 January 2013.

Changes to other circulars

The newly defined capital categories in the CAO have resulted inamending the quality of capital specified in FINMA Circ. 11/2

"Capital buffer and capital planning – banks".

The objections br ought forward in the consultation claimingthat the adjustments involved go beyond the ordinance in

terms of tightening


















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capital requirements were partly in FIN MA's interests.Changes to FINMA Circ. 11/2 will also enter into force on 1

January 2013.

Moreover, FINMA is repealing FINMA Circular 08/ 9 "Supervisionof large banks" as of 31 July 2012. I t will not be replaced, since

established supervisory practice and other regulationsadequately cover its content.

Its repeal does not in any way change the current supervisorypractice with respect to the two large banks: no additional

obligations will arise and those that exist will neither beamended nor abolished.

















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FI proposes higher requirements for the banks’ liquiditybuffers

Sweden shall act ahead of the EU and introducequantitative requirements regarding the banks’liquidity buffers.

The aim is to ensure that large banks and credit institutions holdsufficient liquid assets to be able to manage short periods

without access to market funding.

This is proposed by Finansinspektionen in a new regulation.

***

Finansinspektionen proposes quantitative requirementsregarding the liquidity buffers held by large banks and creditinstitutions.

To further contribute to a stable and smoothly-functioningfinancial system Finansinspektionen also wants the levels of theliquidity buffers to be made public.

The requirement for a liquidity coverage ratio means that a bank’sliquid assets must manage outflows over a period of 30 days of market stress.

The requirement is based on guidelines from the internationalBasel Committee on Banking Supervision regarding a Liquidity

Coverage Ratio (LCR), which are planned to be introduced withinthe EU during 2015.

The requirement to hold a liquidity buffer includes rulesregarding when the buffer can be used.

It is proposed that banks under stress that affects liquidityare not required to meet the liquidity coverage ratio.

















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The companies affected are those with a balance-sheet totalas of 30 September of the previous year that is higher than

SEK 100 billion.

The proposal applies to financial groups on group-level and isnot applied to individual companies that are part of a group.

At present, eight companies in Sweden would be coveredby this regulation.

The proposal will come into force on 1 January 2013.

About Finansinspektionen

The Swedish Financial Supervisory Authority,Finansinspektionen, is a public authority.

Our role is to promote stability and efficiency in the financialsystem as well as to ensure an effective consumer protection.

We authorise, supervise and monitor all companies operating inSwedish financial markets.

Finansinspektionen is accountable to the Ministry of

Finance. We supervise 3,900 companies

- Banks and other credit institutions

- Securities companies and fund managementcompanies

- Stock exchanges, authorised marketplaces andclearing houses

- Insurance companies, insurance brokers and mutual

benefit societies

















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Takaful: The Islamic insurance model

There are other rules and regulations that are a speciality of Islamic finance, though.

For instance, gambling, speculation and receiving interest arestrictly forbidden for Muslims.

In addition, a real transaction must underlie every financialtransaction.

“The principle of insurance is, however, based fundamentally

on uncertainty, which in Sharia-compliant contracts ispermitted only to a certain, unavoidable degree.

Today, the majority of jurists think that this degree of uncertainty is exceeded in conventional insurance,” said Dr

Ludwig Stiftl of Munich Re.

For that reason, a special construction, similar to mutualinsurance companies in Germany, was prescribed for takaful.

For instance, policyholders had to share in profits and lossesand, in addition, their funds had to be invested in accordance

with Sharia law.

In reality, takaful insurers were, of course, also competingwith conventional insurance undertakings, Dr Stiftl

continued.

“The total sum insured worldwide has increased three-fold since2005; the number of takaful companies has increased by a factor of around 30 over the same period.

This is inevitably leading to intense competition,” said Dr Stiftl,who was discussing takaful at the Conference with DrPhilippWakkerbeck (Booz

















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& Co.) and Volker Henke of the German InsuranceAssociation (Gesamtverband der Deutschen

Versicherungswirtschaft). Islamic banking ahead of sukuks, mutual funds and participations

While insurance premiums so far account for only a very smallproportion of all Sharia-compliant assets invested, the lion’s share

of capital passes through I slamic banking.

“That is followed by sukuks, Islamic mutual funds andparticipations,” said Ufuk Uyan,CEO of Kuveyt Türk

Participation Bank.

“Despite the financial crisis, over the past decade the market hasgrown by an average of 20 per cent a year.”

The centre of the Islamic financial services market was Malaysia,he said; the source was the Gulf States – and western nations

offered attractive marketing opportunities.

For example, there are more than four million Muslims

living in Germany.

“The German banking system is well suited to Islamic ideas of investment, since it is at heart risk-averse,” Uyan declared

during his introductory speech.

BaFin President König had earlier made it clear that the fact thata product had been developed in accordance with religious

principles was no problem in Germany:

“German financial supervision legislation is neutralregarding philosophies and religions.

















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Every financial services provider and every product must, however,satisfy the requirements of the relevant laws – insofar as they arecovered by them.

Same business, same risk, same rules.”

However, the Islamic finance industry is still living a shadowexistence here in Germany.

No Islamic bank is based here. Sharia-compliant financialservices are mostly niche products of the big banks.

“Although there is a market, for Islam-compliant investment

funds, for example, the potential is still limited at present,” saidDr Kilian Bälz of Amereller Legal Consultants.

Trading in I slamic products on international exchanges does notalways run smoothly, either, as Dr Jochen Biedermann of DeutscheBörse reported: “Generally, Sharia-compliant index products andsukuks trade only in small volumes, which tends to make marketsrather illiquid.”

Islamic financial products go through a screening process

The cost factor also plays a roll in investment decisions.

The majority of Islamic mutual funds have less than ahundred million US dollars invested in them.

Transaction costs are correspondinglydisproportionately high.

Charges are also incurred by the screening process that allproducts have to go through.


















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In this process the financial products are, among other things,examined by a committee of experts, the so-called Sharia Board,

to establish whether they are Islam-compliant.

In addition to indicators such as a company’s debt ratio,ethical and social exclusion criteria are also scrutinised.

“Islamic banking can make a valuable contribution for westernfinancial supervision.

It has, after all, come through the financial crisis with no notabledamage,” saidPeter Baier, head of BaFin’s technical cooperation

section.

Most derivatives are just as Sharia non-compliant as short-selling, subprime lending and futures.

These financial instruments are regarded as potential crisis

intensifiers. The price losses suffered by the banks have not

been reflected inIslam-compliant investments either, since their business models

are based first and foremost on interest and they may not,therefore, be held in the portfolios of Muslims.

For Zaid el-Mogaddedi, of the Institute for Islamic Banking andFinance, the fact that the I slamic financial world brings with it so

many unusual features – from participation constructions to taxmatters – is no reason for pre-judging it without hearing all the

evidence: “Essentially, Islamic banking is just banking.

It is open to anyone interested in ethical and faith-basedfinancial products,” el-Mogaddedi said:

“Alongside service-oriented marketing and competitiveproducts, continuous educational work to raise public awareness

is one of the key factors in establishing Islamic banking inEurope.”

















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Prof. Dr Matthias Casper of Münster University alsoconcurred: “We must understand Islamic financial products.A black box is not acceptable.”

BaFin’s second Islamic Finance Conference gave the 28 speakersand the audience an opportunity to discuss many interestingmatters.As expected, though, the question of whether the financialcrisis could have been prevented by the rules of Islamic financeremained unanswered.

















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Updated list of identified Financial Conglomerates

EBA has jointly published with E IOPA and ESMA the list of identified Financial Conglomerates, as at 1st July 2012, as requiredunder Article 4(3) of the Financial Conglomerates Directive.

Joint Committee

The Joint Committee is a forum for cooperation that wasestablished on 1st January 2011, with the goal of strengtheningcooperation between the European Banking Authority (EBA),European Securities and Markets Authority (ESMA) and EuropeanInsurance and Occupational Pensions Authority (EIOPA),collectively known as the three European Supervisory Authorities(ESAs).

Through the Joint Committee, the three ESAs cooperate

regularly and closely and ensure consistency in their practices.In particular, the Joint Committee works in the areas of supervision of financial conglomerates, accounting andauditing, micro-prudential analyses of cross-sectoraldevelopments, risks and vulnerabilities for financial stability,retail investment products and measures combating moneylaundering.

In addition to being a forum for cooperation, the Joint Committeealso plays an important role in the exchange of information with

the European Systemic Risk Board (ESRB) and in developing therelationship between the ESRB and the ESAs.

















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Basel I I I in the Kingdom of Saudi Arabia

Working Group (WG) to Implement Basel

I I I

1.Working Group on Capital Reforms

Banks should be represented by a senior officer (Chief FinancialOfficer, Chief Risk Officer, Strategic Planning, etc).

This WG would study Capital Reforms and examine the currentposition of Banks and assess what remains to be done for its full

implementation.

3. Working Group on Global Liquidity Standards

This WG will examine the under-mentioned new Global liquidityStandards for monitoring, observing and implementation in Saudi

Arabia.

- Liquidity Coverage Ratio (LCR)- Net Stable Funding Ratio (NSFR)

The WG will particularly focus on Basel I I I proposals. Banksshould be represented by senior staff members from Risk

Management, Treasury or Finance Department.

5. Working Group on Enhanced Risk Coverage

The WG will examine the proposals for enhanced riskcoverage for implementation in Saudi Arabia including the

following:

- Securitization- Trading Book

- Counterparty Credit Risk

The WG will particularly focus on Basel I I I proposals in relationto the above items.

















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Banks should be represented by a senior staff membersfrom Risk Management, Treasury or Finance Department.

4. Working Group on Enhanced Pillar 2 Reforms

This Working Group will focus on Basel I I I proposals on Pillar 2related reform, and their impact on ICAAP, Supervisory Review

process.

6. Pillar 3 Reforms

As in the past, SAMA will continue to develop any refinementsin Prudential Templates and Guidance notes through the Chief

Financial Officers' Committee

Major Refinements and References

Components of Basel I I I: Major Regulatory Overhaul of Regulatory and Prudential Framework

Summary of Basel Committee Reforms:1)Capital

- Quality and level of capital- Capital conservation buffer

-Countercyclical buffer

- Capital Ratios Phased in- Regulatory deduction phased in

- Non compliant instrument phased out

2) Risk Coverage- Securitizations / Re-securitizations

- Trading book- Counterparty Credit Risk

3) Containing Leverage- Leverage ratio

4) Pillar 2

















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- Risk concentration- Off balance-sheet items

- Reputational risk- Sound compensation practices

-Valuation and liquidity risk

- Sound stress testing practices

5) Pillar 3- Enhanced exposure on securitized assets, CDO's MBS,

Leverage Finance- Thematic Review in progress

6) Global Liquidity Standard and Supervisory Monitoring

- Liquidity Coverage Ratio- Net Stable Funding Ratio

- Supervisory Monitoring- Principles for Sound Liquidity Risk

- Management and Supervision

7) Systemic Risk and Interconnectedness- "Gone Concern" Contingent capital

-Risk coverage

- Cross-border bank resolution- Significant Financial I nstitutions (SIFI's)

















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From : Saudi Arabian MonetaryAgency To : All Banks

Attention : Managing Directors, Chief Executive Officers andGeneral Managers

Subject : Quarterly Monitoring of Capital Leverage Ratio in 2011and 2012

A major initiative announced by the Basle Committee (theCommittee) in its Basel I I reform package issued in December 2010relates to the Capital Leverage Ratio to be maintained by banks in

addition to the risk based capital ratio.

In this regard, excessive leverage in banks and the banking

system was a major cause of the global financial crisisnotwithstanding that such banks were carrying strong Basel I Irelated risk based capital ratios.

Consequently, the Committee agreed to introduce a non riskbased capital leverage ratio in addition to the risk basedcapital ratio in its overall Basel I I I Capital Adequacy regime.

The Capital Leverage Ratio is designed to be simple, assists inconstraining the build up of Leverage and accordingly acts as aback stop measure.

This Circular is intended to provide for the definition andcalculation of the Leverage Ratio which will serve as a basis for testing during the parallel run period.

In this regard, the Committee intends to have a monitoring period

to test a minimum leverage ratio of 3%, as well as the underlyingcomponents of the agreed definitions over January 2011 toJanuary 2012.

The testing will be carried out prior to the parallel run period(January 2013 to January 2017).

Therefore, the Agency requires the completion of the attachedPrudential Return to be submitted on a quarterly basis starting

January 2011.


















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The first quarterly return will be due in SAMA on 30 April 2011concerning data as of 31 March 2011.

Accordingly, to facilitate the quarterly submission and testing

of the capital leverage ratio, the guidance notes are attached.

All Banks must review and provide their comment by 28February, 2011.

















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LEVERAGE RATIOGuidance Notes1.Background and Objectives

- This is a simple non-risked based Capital Ratio designed tomeasure leverage based on Gross exposures with theexception of credit exposures which are net of specific

provisions and Tier 1 capital under Basel I I I.

- It provides a breaker from building excessive leverage in theBanks and the Banking systems.

- The basis of calculation is the average of the monthlyleverage ratio over the quarter.

2.Reporting to SAMA on a quarterly basis effectiveJanuary 2011

- Monitoring Period: January 2011 – January 2012Basel iii Compliance Professionals Association
















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- Parallel Runs: January 2013 – end 2017

- Migration to Pillar 1: January 2018

3. Gross Exposures – Schedule B, C and D

Exposures include On and Off-balance sheet items includesexposures relating to derivatives

3.1 On-Balance Sheet

All exposures On-balance sheet, non-derivatives are measured atnet of specific provisions and credit valuation adjustments

Netting of loans and deposits not allowed

Gross exposures measured through

- No netting through collaterals- All measurements in accordance with Accounting IFRS Rules

- No netting of offsetting debits and credit balance throughnetting schemes

Items deducted from capital do not contribute to leverage andshould also be deducted from the measures of on-balance sheet

exposures

All on balance sheets assets item to agree with balances withM-1.

3.2 Off-Balance Sheet including derivatives

These include liquidity facilities, unconditional andcancellable commitments, direct credit substitutes,

acceptances, standby letters credit, trade letters of credits,guarantees, etc. and derivatives outstanding.

All of balance sheet items including derivative are to be convertedto their cash equivalents utilizing credit conversion factor used

for in the Basle II


















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framework utilizing standardized approach. Consequently, thefollowing elements must agree.

All notional value to agree with M.1

All cash equivalent value to agree with Q17.5.2 for off-balancesheet items and Q17.5.3 for derivatives outstanding.

4. Capital – Schedule E

The capital is to be measured on the Tier 1 capital based onBasel I I I methodology Accordingly, it should agree with Q17.3

(Tier 1) figure.

It should be noted that under Basel I I I, Tier I will be amended toreflect the new definition.

6. Computation of Capital Leverage Ratio

Compute the Capital leverage ratio on a quarterly basis throughcapital

(D) divided by gross exposures (B+C) as a simple calculation.

6. Reporting and Monitoring Period

.The monitoring period will be from 31 March 2011 to December 2012.

. Banks are expected to report to SAMA on a quarterly basistheir leverage information as per the attached Prudential Return

to track in a consistent manner the underlying components of

the agreed definition and resulting ratio.

. The calculation should be as of quarter end 31 March, 30June, 30 September, 31 December of each year.

. The returns should be submitted within 30 days following thequarter end.


















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7. Parallel Runs

SAMA expects the January parallel runs to commenceeffective 1st January 2013 and to last until end of 2017.

Based on the parallel run period any final adjustment will bedone in the first half of 2017 with a view to migrate to Pillar – 1

Additional guidance will be issued in this regard in duecourse.

8. Bank Level Disclosure

Bank level disclosure of the capital leverage ratio and itscomponent will start on 1 January 2015.

10.Implementation as a regulatory measures

The actual implementation as a regulatory ratio and as acomponent of Pillar 1 is likely to commence from 1st January

2018.

















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Mario Draghi:Interview with Le

MondeInterview with Mr

Mario Draghi,President of the

European Central Bank, inLe Monde, conducted by

Mr Erik Izraelewicz, MsClaire Gatinois and Mr

PhilippeRicard

* * *

The International MonetaryFund (IM F) has revised

downwards itsglobal growth forecasts

because of Europe. Is therea risk of recession?

No. Since the start of the year, the risks of a deterioration in theeconomy that we had feared have certainly materialised in part.

The situation has gradually worsened, but not to the point of plunging the whole of the Monetary Union into recession.

We still expect a very gradual improvement in the situation bythe end of this year or the beginning of next year.

Thanks to the ECB?

The cuts in interest rates at the end of 2011 and in July shouldproduce their effects, as should the unprecedented LTROs,

three-year loans to banks, which we carried out to deal with therisk of a “credit crunch”, a restriction or an increase in the costs

for loans.

Should the ECB not do more to ease the economy, as theIMF has requested?


















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It now seems likely that it will fall sooner than expected, at theend of 2012.

Our mandate is to maintain price stability in order to prevent both

higher inflation and a generalised, broadly based fall in prices.

If we see such risks of deflation, we will act.

The European Council of 28 and 29 June was positively receivedby the markets which since then have expressed doubts.

The Summit was a success. For the first time, it seems to me,a clear message was given: exit the crisis with more Europe.

By putting in place a roadmap to create a Union with four building blocks

– financial, fiscal, economic and political – and deliveringtangible results: a financial union, one banking supervisor,allowing the rescue funds to recapitalise banks once this

supervision is in place.

And a calendar for implementation.

These are long-term solutions. Doesn’t something need to bedone about the urgency of the situation?

Let me tell you about my experience. In 1988 the DelorsCommittee set out the route towards Monetary Union, with a

goal, a timetable and commitments to be respected.

This prospect resulted in the Maastricht Treaty in 1992. Italy’sborrowing rates were very high at the time.

But as a result of its involvement in the project of MonetaryUnion, I taly saw an abrupt fall in its rates, before there was even

a decrease in the deficit, which stood at 11% of GDP!




















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This leads me to believe that if countries make firmcommitments, even of a long-term nature, this has an impact in

the short term.

The ECB has been criticised for not doing more for thegovernments. Is the ECB waiting for government efforts to be

made before acting?

This idea that there is bargaining between the governments andthe ECB is a “quiproquo”.

Our mandate is not to resolve the financial problems of countries,but to ensure price stability and to contribute to the stability of

the financial system in full independence.

What do you think of the growth pact held dear by FrançoisHollande?

It will certainly help, but we need to go further. Each countrymust also make efforts.

Are you thinking more of structural reforms than of a Keynesianstimulus?

Yes, although, in my view, the focus is too often on labour marketreforms, which do not always translate into increased

competitiveness because companies sometimes benefit frommonopolies or situation rent.

So we also need to look at the markets for products andservices and liberalise where necessary to increase

competitiveness.

Politically, these are difficult decisions to take.

A European agenda of the ref or ms to be undertaken would help

hugely. We also need to strengthen joint decision-making in

these areas at the

European level.



















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No. Putting an end to certain situation rents is a question of fairness, for employees and entrepreneurs, and for all citizens.

What do you think of the policies followed in France?

I welcome the continuation of fiscal consolidation, which remainsindispensable, and I also welcome the emphasis on growth

potential that will pave the way for recovery.

Debt reduction is vital.

And the country must respect its commitment to bring itsdeficit back down to 3% of GDP in 2013 so that it can continue

to benefit from low interest rates.

You are one of the most influential men in Europe, yet youare not elected. Does this not pose a problem for democraticlegitimacy?

I am cognisant of the importance of being accountable for our actions. I stand before the European Parliament about ten times ayear, and we are very active in terms of communication.

We stand ready to do more, if our powers were to be strengthened.

In the extraordinary conditions that we are experiencing, it isnecessary to see the ECB take a stand beyond monetary policy for matters that cannot be addressed by monetary policy, such ashigh public deficits, a lack of competitiveness or unsustainableimbalances, especially where financial stability may be at risk.Safeguarding the euro is part of our mandate.

When you arrived at the head of the ECB, you were consideredthe most German of the I talians. Is this still the case?

That’s up to you to judge! We have to maintain price stability inboth directions, face problems as they present themselves,and act without prejudice.

















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In some ways you are very German when you support thecalls for political union made by Angela Merkel

Any move towards a financial, budgetary and political union is,

to my mind, inevitable.

This will lead to the creation of new supranational entities. Insome countries the transfer of sovereignty – I prefer to say

sharing – that this implies is a major stake, in others it is noproblem.

But one must remember that with globalisation, it is precisely bysharing sovereignty that countries can better preserve it.

In the long term, the euro must be based on a greater degree of integration.

Is a Greek exit from the euro area still a leading concern?

Our unequivocal preference is for Greece to remain in the

euro area. But that is a matter for the Greek government. It

has stated itscommitment, now it must deliver results.

Regarding the renegotiation of the memorandum [to ease theausterity measures and reforms imposed on the country], I will

not take any stance before seeing the Troika’s report.

On Friday, 20 July, the finance ministers of the euro area

should have completed the aid plan for banks. Have they doneso? Will it suffice to prevent the country from defaulting?

One important point is the involvement of senior creditors of banks: the ECB believes that such involvement should be

possible in the case of the liquidation of a bank.

















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Savers must be protected, but creditors should be part of thesolution of the crisis.

It is a matter of limiting the involvement of taxpayers. They have

already paid a great deal!

Do you think you can go on holiday this summer in peace?

I never plan my holidays ahead and I only ever go away for a

few days. One thing is certain: I will not be going to Polynesia.

It’s too far.

So is the euro still in danger?

No, absolutely not. From the outside, analysts are seen to beimagining scenarios in which there is an explosion of the euro

area.

That underestimates the political capital that our leaders haveinvested in this union, as well as the support of European citizens.

The euro is irrevocable!

Having formerly worked for Goldman Sachs, what do you thinkof the Libor scandal?

It undermines trust in one of the cornerstones of the worldfinancial system.

Just think that hundreds of trillions of euro of financial

operations are based on the Libor and that in many countries allover the world people buy their homes with mortgages indexed

to the Libor.

The unspeakable personal behaviour and design flaws haveshown once again a faulty governance of the process.

















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Two inquiries are under way in the United Kingdom and in theUnited States, as well as an inquiry about the Euribor. They must

shine a light on these matters.

Does your time at Goldman Sachs make you uncomfortable?

No, indeed, I value this experience of the world of finance andof the private sector.

Obviously, there is much to do to rebuild the financial servicesindustry after the crisis.

Much has been done by the governments, by the regulators and

by the industry itself, but much still remains to be done.

Heads of State and Government want to place the ECB at theheart of bank supervision. Are you in favour of this?

The European Commission is responsible for preparing proposalson this in consultation with the ECB and the European

Parliament.

The fact that the central bank plays a role in bankingsupervision has worked well at national level, particularly in

France and I taly.

If this role fell to the ECB, it would work with nationalsupervisors, counting on their considerable experience and

abilities.

Do you not fear a conflict of interest between monetary policyand this supervisory role?

Monetary policy must be kept separate from banking supervisionso that the former is not contaminated by the latter. You can build

an independent structure, and at the same time benefit usefullyfrom information provided by supervision.


















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Would such a system have enabled the banking crisis inSpain to be avoided?

A centralised system is preferable to take account of the very high

degree of financial integration that a monetary union entails.

On the subject of Spain, the ECB has warned the country onseveral occasions not to let the current account deficit get out of

control and has also warned of the excessive growth of credit.

But in a monetary union, the fight against property bubblesstems from macro-prudential policies carried out at national level.

















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Elizabeth A Duke: Central bank cooperationin times of crisis

Speech by Ms Elizabeth A Duke, Member of theBoard of Governors of the Federal Reserve

System, at the Center for Latin AmericanMonetary Studies 60th Anniversary Conference,

Mexico City, 20 July 2012.

* * *

It is a pleasure to participate in this commemorative conferenceon the occasion of the 60th anniversary of the Center for Latin

American Monetary Studies (CEMLA).

Since its establishment in 1952, CEMLA has achieved a great dealon both the policy and research fronts to promote our understanding of monetary and banking issues in Latin Americaand the Caribbean.

The topic I have been asked to speak about today,“Central Bank Cooperation in Times of Crisis,” is veryimportant.

As we know, central banks typically work individually to

achieve objectives for their domestic economies.

In the case of the Federal Reserve, monetary policy isconducted to achieve our statutory objectives of maximumemployment and price stability.

And, of course, fostering a stable financial system is key toattaining these goals.

But the experience of the past few years has illustrated – first with

the global financial crisis and more recently with the strains inEurope – that cooperation and coordination among central banksaround the world may be necessary at critical junctures to achievethese domestic objectives.

In my remarks today, I will describe the evolution of the FederalReserve’s policies during and after the global recession andshow how many of those policies were undertaken incoordination with, or in parallel to, similar actions by other central banks.

















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I will start with the monetary policy responses of the FederalReserve and other central banks during the financial crisis.

I will then discuss the efforts that the Federal Reserve has made,often in cooperation with other central banks and international

partners, to help enhance financial stability.

Finally, I will focus on the challenges facing Latin Americancentral banks, whose economies and financial systems were

affected by the crisis itself, and by the responses of other centralbanks to the crisis.

Federal Reserve policies and coordination with other central banks

Although the financial crisis that emerged in the summer of 2007initially manifested itself as a sharp deterioration in U.S. mortgagemarkets, the roots of the problem ran deeper.

Indeed, the consequences of a credit boom combined withexcessive leverage, mispricing of risk, and deficiencies in risk

management became increasingly apparent.

And given the international extent of thesevulnerabilities and interconnections, the crisis quickly

became global.Central banks around the world responded forcefully.

From the outset, the Federal Reserve vigorously used itstraditional toolkit for managing short-term interest rates.

The Federal Reserve reduced the target federal funds rate from 5-1/4 percent in August 2007 to a range of 0 to 1/4 percent by the

end of 2008.

International coordination on policy rate decisions is rare, but inOctober 2008, the Federal Reserve announced a reduction in its

policy rate jointly with five other major central banks: the Bank of Canada, the Bank of England, the European Central Bank, the

Swedish Riksbank, and the Swiss National Bank.Basel iii Compliance Professionals Association
















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With clear signs of simultaneous economic slowing in manycountries, this coordinated action sent a strong positive signal tofinancial markets about policymakers’ collective intent to mitigate

the effects of the crisis on their economies.

Although not through directly coordinated actions, other centralbanks, including those in Latin America, were also reducing

policy rates.

The stresses in financial markets and liquidity shortages weresevere.

So, in addition to cutting policy rates, the Federal Reserve tookmeasures designed to provide liquidity first to banks and later to

other financial institutions.

A third set of measures involved the provision of liquidity toaddress pressures in commercial paper markets and at

money market funds.

These liquidity programs were largely unwound when financialmarkets improved.

As the Federal Reserve and other central banks worked toaddress liquidity shortages in their own markets, it became clear

that, as a result of globalization, firms were experiencing fundingshortages not only in domestic currencies, but in foreign

currencies as well.

In particular, dollar funding shortages appeared not just in theUnited States but in countries around the world, which, in turn,

exacerbated pressures in U.S. funding markets.

The Federal Reserve already was providing liquidity to foreignfinancial firms operating in the United States through its

discount window and other facilities.

To further address pressures in dollar funding markets andsupport the flow of credit to U.S. families and businesses, theFederal Reserve ultimately approved bilateral currency swap

arrangements with 14 foreign central banks, including two LatinAmerican central banks.



















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Under these swap arrangements, in exchange for their owncurrencies, foreign central banks obtained dollars from the

Federal Reserve to lend to financial institutions in their jurisdictions.

These swap arrangements pose essentially no risk to the FederalReserve:

They are unwound (with a fee paid by the central bank drawing onthe swap arrangement to the Federal Reserve) at the exact same

exchange rate that applied to the original transaction, they areconducted with major central banks with track records of prudent

decision making, and they are secured by the foreign currencyprovided by those central banks.

The success of these swap lines in alleviating fundingpressures and reducing interbank borrowing rates is atestament to the benefits of central bank cooperation.

Moreover, in addition to easing funding shortages, these swapsalso helped to allay market fears – they had a preventive as wellas a curative role.

For example, four of the central banks that participated in thesearrangements – Brazil, Canada, N ew Zealand, and Singapore –

did not end up drawing on the facilities, but it is generallybelieved that the existence of the lines helped prevent stressesthat could have otherwise developed.

As the financial crisis receded, the swap lines were closed inFebruary 2010.

However, swap lines with several foreign central banks werereopened in response to financial strains that developed inEurope.2F3

In many countries, policy rates fell to nearly zero. Withsubstantial economic slack remaining, these central banksfaced the challenge of finding ways to further ease monetarypolicy.

The Federal Reserve expanded its balance sheet through thepurchase of longer-term Treasury securities, agency debt, andagencymortgage-backed securities.

















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The idea was to put downward pressure on longer-term yields tospur demand and also to encourage some portfolio rebalancing

toward riskier assets and loans to the private sector.

More recently, the Federal Open Market Committee decided toextend the average maturity of its holdings of securities by

sellingshorter-maturity Treasury securities and buying longer-maturity

Treasury securities.

This maturity extension program created additional downwardpressure on long-term rates without expanding the size of the

Federal Reserve’s balance sheet.

In addition to using conventional monetary policy and balancesheet tools to provide monetary accommodation, communicationis an important tool used by central banks to enhance the

effectiveness of policy.

At the conclusion of each meeting, the Federal Open MarketCommittee issues a statement of policy actions taken and the

rationale for those actions.

Detailed minutes are published three weeks later, and lightlyedited transcripts are made public with a five-year lag.

In 2011, the Chairman began holding press conferences on aroughly quarterly basis to discuss economic projections

submitted by participants and actions taken at the meeting.

In August 2011, the Committee statement included forwardguidance that economic conditions are likely to warrant

exceptionally low levels of the federal funds rate at least throughmid-2013 – a date that was later extended to late 2014 – which put

further downward pressure on

longer-term interest rates.

In January 2012, the Committee released a statement of itslonger-run goals and policy strategy.Basel iii Compliance Professionals Association
















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At that same meeting, the Committee also began includingparticipant projections of the appropriate path of the federal

funds rate in the Summary of Economic Projections.

The Committee continues to discuss ways in whichcommunication can be used to enhance policy.

While these policy moves of the Federal Reserve were notcoordinated with other central banks, other central banks shared

these challenges and responded in broadly similar ways to expandtheir balance sheets.

For example, the Bank of England and the Bank of Japan alsoused

large-scale purchases of medium- and long-term governmentsecurities to provide stimulus.

In addition, several other foreign central banks, including theBank of Canada and the Bank of Japan, also more actively used

forward guidance about the path of policy rates.

Finally, the common challenges and problems of the past fewyears reinforced the importance of open discussion among the

world’s central banks.

Central bank leaders draw on collective experience throughdiscussion in such diverse international forums as the Bank for

International Settlements (BIS), Group of Twenty (G-20), andCEMLA.

CEMLA is an excellent example of what can be achieved bycentral bank cooperation through such means as courses and

seminars, international meetings, technical assistance, publicationof research studies, and exchange programs.

Cooperation in areas of supervision and regulationCentral banks around the globe have focused not just on

responding to the crisis, but also on working to minimize therisk of future crises by improving the soundness and stability of

the financial sector.

Indeed, the global financial crisis has underscored the importanceof the financial stability objective of central banks.

















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Given the global nature of financial markets and large financialinstitutions, coordination and cooperation among central banksand bank supervisors and regulators more generally is crucial in

achieving this goal. Let me provide a few examples of such efforts.

First, the crisis highlighted shortcomings in capital and liquidityrequirements. Central banks with bank supervisory

responsibilities have been heavily involved in designing andpromoting international frameworks to address these

shortcomings.

The Federal Reserve has supported the Basel Committee’sadoption of improved capital requirements that include raising

risk-weightings for traded assets, improving the quality of loss-absorbing capital through a new minimum common equity ratiostandard, creating a capital conservation buffer, and introducing

an international leverage ratio requirement.

The Federal Reserve has also supported the Basel Committee’swork on quantitative liquidity requirements and its work oncapital surcharges for banks of global systemic importance.

Another example of international cooperation on the regulatoryfront is the Financial Stability Board (FSB), which consists of

key financial regulators around the world, including the Federal

Reserve.

The FSB has identified a number of challenges that internationalcooperation among central banks and financial regulators are

helping to address.

One such challenge regards over-the-counter (OTC) derivatives.

To reduce the systemic risk of OTC derivatives, the G-20 leadershave agreed to require that standardized OTC derivatives be

cleared through a central counterparty.Another challenge is that of cross-border resolutions, and the

FSB has undertaken analytic work on how to improve theresolvability of financial firms that have a substantial international

presence.Basel iii Compliance Professionals Association
















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The FSB has also identified and spurred cooperative work ongaps in financial data and on the so-called shadow banking

system.

As a bank supervisor, the Federal Reserve has cooperated withforeign bank supervisors (including other central banks) throughparticipation in supervisory colleges, which are multilateral

standing working groups of supervisors formed for the purpose of enhancing effective consolidated supervision of an international

banking organization.

Supervisory colleges enhance the information exchange andcooperation of home and host supervisors to help them develop abetter understanding of the risk profile of a banking organization.

Lastly, at the Federal Reserve we have also been workingclosely with other U.S. agencies in the recently established

Financial Stability Oversight Council on the implementation of the financial stability reforms laid out in the Dodd-Frank Act.

One key aspect of this act is the focus on a “macroprudentialapproach” that pays attention to the financial system as a whole,

in addition to individual financial institutions and markets.

The greater emphasis on macroprudential tools has been

widespread. Indeed, the Federal Reserve has participated inanalyses of macroprudential tools and policies undertaken withother G-20 central banks at the BIS and with bank supervisors

on the Basel Committee.

One of the reasons that coordination is required for supervision and regulation is the substantial cross-border

operations of many financial firms.

The deleveraging of some global financial institutions with a

significant presence in Latin America and the potential effect oneconomic performance serves as a stark reminder of theinterlinkages of financial institutions and economies.

The deleveraging of these institutions also highlights the needto coordinate across regulators and acts as a catalyst to spur

greater action and information sharing.

















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Latin American central banks: crisis response andchallenges

Earlier I mentioned how central banks around the world, includingthose in Latin America, lowered policy rates in response to the

global financial crisis.

Although the crisis developed in advanced economies, LatinAmerican central banks, such as those in Brazil, Chile, Colombia,and Mexico, cut policy rates in 2009 as their economies werebeing hit hard through trade and financial linkages with advancedeconomies as well as through commodity price channels.

Their capacity to follow countercyclical policies was in strikingcontrast to many previous times of stress, when policy rates

could not be lowered for fear of frightening off internationalinvestors.

The fact that these Latin American economies were able to respondby lowering policy rates and also by boosting fiscal support is atestament to the decisive steps taken to strengthenmacroeconomic policies and financial systems, includingimprovements in the monetary frameworks under which their central banks operate.

Many Latin American economies staged quick and strongrecoveries from the global recession and subsequently started toraise policy rates to try to ward off overheating pressures.

Conversely, many advanced economies, with their prolonged softrecoveries, needed to continue to follow expansionary monetarypolicies.

Accordingly, as was also the case in emerging Asia, the monetarypolicy stance of several central banks in Latin America, such as

Brazil and Chile, diverged from those of advanced economies.

The resulting rise in interest rate differentials, on top of thegenerally stronger growth in Latin America, helped to fuel capitalinflows, which, at times, have proved challenging for thepolicymakers of these economies to manage.

















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Of course, more recently, with intensification of the crisis inEurope, some Latin American countries, most notably Brazil,

have again lowered their policy rates in response to concernsabout slowing growth.

Even within Latin America, however, the experience of economies has not been uniform.

In particular, Mexico, with its stronger ties to the United States,was hit earlier and harder than many other economies in the

region.

Even though Mexico’s recovery in the second half of 2009 wasstrong, it had less momentum and considerable economic slack

remained in the country.As such, the Bank of Mexico did not consider it necessary to

raise policy rates during its recovery period, unlike many other Latin American central banks.

These developments underscore an important point – that whilecentral banks may benefit from coordination and cooperation,taking the same policy stance at the same time typically will notbe the best choice for all central banks.

Accordingly, it is imperative for each central bank to havemonetary policy tools to appropriately address domesticobjectives independent of the actions of other central banks.

Conclusion

In this age of global financial integration, the Federal Reserve andother central banks often must cooperate to achieve their individual mandates.

This need for coordination has been especially true during the

recent crisis, when the actions of central banks working together proved very helpful in easing financial strains and boostingconfidence. Indeed, closer ties and more-open lines of communication across central banks are some positive outcomesof these difficult times.

















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This spirit of cooperation should continue as our respectivecentral banks work to pursue monetary policies appropriate for our own economies while supporting stable financial systems around

the world.

















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Preliminary internationalbanking statistics at end-

March 2012July 2012

Statistics at end-March 2012 arepreliminary and subject to change.

Large movements in the latest dataare highlighted in the Statistical

release.

Data are available via the BIS WebStatsinteractive query tool, in PDF formatand CSV files on the BIS website

(locational and consolidated bankingstatistics), and as a single PDF file in

detailed annex tables.

Final statistics, with an analysis of recent trends, will be releasedin conjunction with the forthcoming BIS Quarterly Review, to be

published on 17 September 2012.

Data at end-June 2012 will be released no later than 18 October

2012. The locational banking statistics at end-March 2012 include

for the first

time the positions of banks resident in Indonesia, ie theIndonesian

offices of domestically owned and foreign-owned banks.

The addition of Indonesia brings to 44 the number of countriesreporting the locational banking statistics. Indonesian data are

available fromend-2010.

At end-March 2012, banks in I ndonesia reported internationalclaims of

$69 billion (of which cross-border claims were $13 billion) andinternational liabilities of $72 billion (of which cross-border

















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positions and positions vis-à-vis residents denominated inforeign currencies.

Any queries regarding the locational or consolidated banking

statistics may be directed to [email protected] or [email protected], respectively.

BIS locational and consolidated international bankingstatistics Preliminary data at end-March 2012

Data at end-March 2012 are preliminary and subject to change.

Final data, with a detailed analysis of recent trends, will bereleased in conjunction with the forthcoming BIS QuarterlyReview, to be published on 17 September 2012.

Data at end-June 2012 will be released no later than 18 October 2012.

A summary of the latest data is presented in Tables 1 and 2, anddetailed breakdowns and time series data are available at www.b

is.org/statistics/bankstats.htm.

Large movements in the latest data are highlighted in thecommentary below.

Breaks in series and major data revisions are detailed in the

Annex. The locational banking statistics at end-March 2012

include for the firsttime the positions of banks resident in Indonesia, ie the

Indonesian

offices of domestically owned and foreign owned banks.

The addition of Indonesia brings to 44 the number of countriesreporting the locational statistics. I ndonesian data are available

from end-2010.






http://www.bis.org/statistics/bankstats.htm







































































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At end-March 2012, banks in Indonesia reported internationalclaims of

$69 billion (of which cross-border claims were $13 billion) andinternational liabilities of $72 billion (of which cross-border

liabilitieswere $23 billion).

Locational banking statistics

Cross-border claims of banks in the BIS reporting area were littlechanged between end-December 2011 and end-March 2012,

increasing by only $59 billion (0.2%) after adjusting for breaks inseries and exchange rate movements (Table 1A).

Outstanding cross-border claims stood at $30.7 trillion at end-March 2012.

Credit to non-banks increased by $112 billion (1.0%)between end-December and end-March 2012.

Banks continued to unwind their interbank (including inter-office)claims, albeit at a much slower pace than in the previous quarter:

the decline amounted to $53 billion (–0.3%) in Q1 2012 compared toa fall of $638 billion (–3.1%) in Q4 2011.

- Currency: US dollar-denominated cross-border claims fell by$171 billion. Euro denominated claims increased by $174

billion, driven by an increase in the cross border interbankpositions of banks resident in the United Kingdom.

Euro denominated claims on non-banks were almost

unchanged.

- Claims on developed economies: Cross-border claims onresidents of developed economies dropped by $12 billion.

The drop was driven by claims on banks, which fell by $18billion in the first quarter following a $513 billion decline in

interbank positions in the last quarter of 2011.

















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The largest reductions were recorded against banks in theUnited States, France and Switzerland.

These were largely offset by increased claims on banks inGermany and Japan.

Cross-border claims on nonbanks in developed economiesincreased marginally (+$6 billion).

Claims increased mainly against non-banks inLuxembourg ($39 billion) and France ($30 billion).

In contrast, claims on non-banks decreased in Germany (–$32billion), Greece (–$24 billion) and I reland (–$20 billion).

Cross-border claims on residents of Greece totalled $101billion at end-March 2012, compared to their peak of $251billion atend-September 2009.

- Claims on emerging markets: Cross-border claims on

emerging markets increased by $84 billion, after a $77billion decline in the previous quarter.

Credit to borrowers in Asia, mainly residents of China ($54billion), accounted for most of the increase.

- Holdings of securities: Banks’ holdings of securities issuedbynon-residents increased by $135 billion, after a cumulative $617

billion decline over the previous five quarters.

Holdings of non-bank securities accounted for most of theincrease ($117 billion), issued mainly by residents of theUnited States ($55 billion), the Netherlands ($16 billion),France ($23 billion) and Luxembourg ($22 billion).

















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Holdings of debt securities issued by non-banks in Greece,including government bonds, dropped by $22 billion.

Banks also increased their holdings of securities issued by

non-bank residents of emerging economies ($10 billion),mainly in Brazil and Mexico.

- Nationality of banks: The locational statistics by nationality of the parent bank indicate that the increase in internationalclaims, which sum cross-border claims and banks’ foreign

currency claims on residents (Table 1B), was driven by British($193 billion) and Japanese banks ($63 billion).

By contrast, international claims reported for the US andeuro area banking systems fell (–$198 billion and –$103

billion respectively).

- Cross-border funding: Cross-border liabilities to other banksand own offices increased by $57 billion and those to non-banks by $117 billion (Table 1A).

While banks in developed countries and offshore centres

tended to draw down their deposits, banks in Asia (especiallyChina, India and Indonesia) and Africa and the Middle East(mainly Saudi Arabia and Nigeria) continued to place fundswith banks in the BIS reporting area.

Consolidated bank claims on an immediate borrower basis

The consolidated international claims of banks in the BISreporting area totalled $19.8 trillion at end-March 2012,

representing an increase during Q1 2012 of $748 billion includingthe impact of exchange rate movements (Table 2A).

Quarterly changes for international claims in the consolidatedbanking statistics are not adjusted for exchange ratemovements because a currency breakdown is not reported.

















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Exchange rate movements exaggerated the quarterly increase inreported stocks during the first quarter.

In particular, the appreciation of the euro, pound sterling andSwiss franc against the US dollar between end-December andend-March 2012 contributed to an increase in the US dollar valueof outstandingnon-dollar claims.

- Sectoral structure: The share of international claims on thepublic sector of euro area countries as a whole rose by 1percentage point to 18%.

The exception was Greece, where the share on the publicsector declined by 11 percentage points to 44%, reflectingsales and write-downs of public sector debt during thequarter.

The share of interbank business in worldwide internationalclaims was unchanged at 40%.

- Maturity structure: The share of short-term claims was

unchanged at 51% of outstanding international claims at end-March 2012, but there were differences across borrowingregions.

Short-term claims on a number of oil-producing countriesin the Middle East and Africa increased noticeably.

Short-term claims on Cyprus, which had represented about60% of international claims on that country in the latter half

of 2011, fell to 48% at end-March 2012.

- Local office positions in local currency: Local currencyclaims of banks’ foreign offices were up 2% after adjustingfor currency movements.

















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The largest increases were reported vis-à-vis Germany, Japanand the United Kingdom.

Banks’ local funding in local currency increased by almost 4%,

driven by positions in the United States, Japan and Spain.

Consolidated claims and other exposures on anultimate risk basis

On an ultimate risk basis, which takes account of net risk transfersacross borrowing countries and sectors, other potential exposuresstood at $16.6 trillion at end-March 2012.

While in unadjusted terms they were largely unchangedcompared to end-2011, exchange rate movements masked adecline.

The share of guarantees extended (including credit defaultswaps sold), which account for 55% of other potential exposures,was unchanged, compared with the positions at end-2011 overall.

The share of derivatives contracts (24% of the total) wasdown by 1 percentage point.

As a counterpart to these moves, the share of creditcommitments (which account for 21% of other potentialexposures) was up by 1 percentage point overall.

















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