Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages)

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)

www.risk-compliance-association.com

International Association of Risk and Compliance Professionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

Top 10 risk and compliance management related news stories and world events that (for better or for worse) shaped the week's

agenda, and what is next

George Lekatis President of the IARCP

“Our lives are defined by opportunities, even the ones we miss.” ― F. Scott Fitzgerald, The Curious Case of Benjamin Button Dear Member, They missed it! Countries “missed” Basel 2 and Basel 2.5 (forget Basel 3). No, they did not choose to ignore it, to minimize the cost for their banks or to play the regulatory arbitrage game… they just missed it. Don’t be so polite Basel Committee! According to their report to the G20 Leaders on Basel III implementation, June 2012: “There are jurisdictions which have missed the globally-agreed implementation dates for Basel II and 2.5” “As of end-May 2012, 21 of 27 Basel member countries have implemented Basel II, which had been due to come into force from end-2006” “Among the 29 global systemically important banks (G-SIBs) identified in November 2011, nine are headquartered in jurisdictions that have not yet fully implemented Basel II and/or Basel 2.5” Read more at No 1 (page 5). Welcome to the Top 10 list.

http://www.risk-compliance-association.com/

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Basel Committee on Banking Supervision Report to G20 Leaders on Basel III implementation, June 2012

There are jurisdictions which have missed the globally-agreed implementation dates for Basel II and 2.5.

There are also jurisdictions that have not made enough progress to date on Basel III and thus pose concern as to their ability to meet the agreed Basel III implementation date.

As of end-May 2012, 21 of 27 Basel member countries have implemented Basel II, which had been due to come into force from end-2006.

Status of Basel II, Basel 2.5 and Basel III adoption

Financial Stability Report 2012

First half year report

EIOPA’s Financial Stability Committee (FSC) has updated its report on financial stability in relation to the insurance and occupational pension fund sectors in the EU/EEA.

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The translation (Japanese to English) is ready! Insurance Inspection Manual (Inspection Manual for Insurance Companies)

The Thermal Management Barrier

New DARPA program seeks to cool chips, chip stacks from within

The continued miniaturization and the increased density of components in today’s electronics have pushed heat generation and power dissipation to unprecedented levels.

UCITS Management Companies

The Omnibus Directive requires ESMA to establish a list all authorisations granted to UCITS management companies in the European Union.

ESMA is currently working on the IT solution to establish this list on its website. The list will centralise all the relevant information in this regard received from all national competent authorities.

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PCAOB to Host Public Meeting on Auditor Independence and Audit Firm Rotation in San Francisco

The Public Company Accounting Oversight Board announced today that it will host its second public meeting to discuss ways to enhance auditor independence, objectivity, and professional skepticism, including through mandatory rotation, or term limits, for audit firms.

Subject: Liquidity Comptroller’s Handbook Revisions and Rescissions

The Office of the Comptroller of the Currency (OCC) recently revised the “Liquidity” booklet of the Comptroller’s Handbook, which replaces a similarly titled booklet issued in February 2001.

Interview with Gabriel Bernardino, Chairman of EIOPA, conducted by Silke Wettach, WirtschaftsWoche (Germany)

Speech by the Financial Secretary to the Treasury, Mark Hoban MP; the CityUK Debate 2012-2020 and beyond: financial services

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NUMBER 1

Basel Committee on Banking Supervision

Report to G20 Leaders on Basel III implementation June 2012

Introduction and summary

At their 2010 summit in Seoul, the G20 Leaders endorsed the Basel III regulatory framework as follows:

“We endorsed the landmark agreement reached by the BCBS on the new bank capital and liquidity framework, which increases the resilience of the global banking system by raising the quality, quantity and international consistency of bank capital and liquidity, constrains the build-up of leverage and maturity mismatches, and introduces capital buffers above the minimum requirements that can be drawn upon in bad times.”

In November 2011, the Leaders, at their summit in Cannes, emphasised the importance of implementing Basel III:

“We are committed to improve banks' resilience to financial and economic shocks. Building on progress made to date, we call on jurisdictions to meet their commitment to implement fully and consistently the Basel II risk-based framework as well as the Basel II additional requirements on market activities and securitisation by end 2011 and the Basel III capital and liquidity standards, while respecting observation periods and review clauses, starting in 2013 and completing full implementation by 1 January 2019.”

This interim report details the progress the members of the Basel Committee on Banking Supervision have made to date in implementing the Basel III regulatory framework (including Basel II and Basel 2.5, which now form integral parts of Basel III).

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The report also describes various implementation issues identified through the comprehensive process the Committee has adopted to monitor members’ implementation of Basel III.

Compared to the status at end-September 2011 and end-March 2012, when the Committee published previous reports, significant progress has been observed.

However, there are jurisdictions which have missed the globally-agreed implementation dates for Basel II and 2.5.

There are also jurisdictions that have not made enough progress to date on Basel III and thus pose concern as to their ability to meet the agreed Basel III implementation date.

As of end-May 2012, 21 of 27 Basel member countries have implemented Basel II, which had been due to come into force from end-2006.

In addition, Indonesia and Russia have implemented Basel II’s Pillar 1 (minimum capital requirements).

Argentina, China, Turkey and the United States are in the process of implementing Basel II.

With regard to Basel 2.5, which was due to be implemented from end 2011, 20 member countries have final rules that are in force.

Argentina, Indonesia, Mexico, Russia, Turkey and the United States have not issued final regulations.

Russia and the United States have issued draft regulations which partially cover Basel 2.5.

Saudi Arabia has issued final regulations but these have not yet come into force.

Among the 29 global systemically important banks (G-SIBs) identified in November 2011, nine are headquartered in jurisdictions that have not yet fully implemented Basel II and/or Basel 2.5.

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Draft Basel III regulations have not yet been issued by seven Basel Committee member jurisdictions: Argentina, Hong Kong SAR, Indonesia, Korea, Russia, Turkey and the United States.

The majority of these jurisdictions believe they can issue final regulations in time to implement by the deadline of 1 January 2013.

However, for others, depending on their domestic rule-making process, meeting the deadline could be a significant challenge.

In addition to monitoring whether its members have issued regulations to implement the Basel III rules, the Basel Committee has established a process to review the content of the new rules.

This second level of review is meant to ensure that the national adaptations of Basel III are consistent with the minimum standards agreed to under Basel III.

The Basel Committee has initiated peer reviews of the domestic regulations of the European Union, Japan and the United States to assess their consistency with the globally agreed standards.

The findings of these reviews are preliminary since the formulation of national standards is still ongoing and the analysis is not yet completed.

Nevertheless, there is a possibility that national implementation will be weaker than the globally-agreed standards in some key areas.

The Basel Committee urges G20 Leaders to call on jurisdictions to meet their commitments made in Cannes to implement Basel III fully and consistently, and within the agreed timetable.

A third level of implementation review conducted by the Basel Committee examines whether there are unjustifiable inconsistencies in risk measurement approaches across banks and jurisdictions and the implications these might have for the calculation of regulatory capital.

This review of banks’ risk-weighting practices includes the use of test portfolio exercises, horizontal reviews of practices across banks and jurisdictions, and joint on-site visits to large, internationally-active banks.

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The Basel Committee firmly believes that full, timely and consistent implementation of Basel III among its members is essential for restoring confidence in the regulatory framework for banks and to help ensure a safe and stable global banking system.

The Committee will provide an updated progress report to G20 Finance Ministers and central bank governors at their meeting in November 2012.

That report will provide

(i) An update on Basel Committee members’ domestic rule-making,

(ii) The final outcome of the regulatory consistency assessment of the European Union, Japan and the United States, and

(iii) Preliminary findings from the Committee’s deeper analysis on banks’ risk measurement approaches and regulatory capital calculations.

This interim report is based on the information that was available to the Basel Committee on 31 May 2012.

Subsequent to this date, further information has become available in both the EU and US but there has been insufficient time to assess whether these latest developments are compliant with the Basel text for this interim report.

Basel standards

In June 2004, a package of reforms known as Basel II introduced more risk-sensitive minimum capital requirements for banks, including an enhanced measurement of credit risk, and capture of operational risk.

Basel II also reinforced the requirements by setting out principles for banks to assess the adequacy of their capital and for supervisors to review such assessments to ensure banks have the necessary capital to support their risks.

It also strengthened market discipline by enhancing transparency in banks’ financial reporting.

The deadline for implementation of the Basel II framework by member jurisdictions was the end of 2006.

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In July 2009, enhancements to the measurement of risks related to securitisation and trading book exposures were agreed in response to early lessons from the 2007/08 crisis.

An implementation deadline of the end of 2011 was set for these reforms, referred to as Basel 2.5.

In December 2010, the Basel Committee published Basel III, a comprehensive set of reforms to raise the resilience of banks. Basel III addresses both firm-specific and broader, systemic risks by:

- Raising the quality of capital, with a focus on common equity, and the quantity to ensure banks are better able to absorb losses;

- Enhancing the coverage of risk, in particular for capital market activities;

- Introducing additional capital buffers for the most systemically important institutions to address the issue of “too big to fail”;

- Introducing an internationally harmonised leverage ratio to serve as a backstop to the risk-based capital measure and to contain the build-up of excessive leverage in the system;

- Stronger standards for supervision (Pillar 2), public disclosures (Pillar 3), and risk management;

- Introducing minimum global liquidity standards to improve banks’ resilience to acute short term stress and to improve longer term funding; and

- Introducing capital buffers which should be built up in good times so that they can be drawn down during periods of stress.

The implementation period starts from 1 January 2013 and includes transitional arrangements until 1 January 2019.

The transitional arrangements are available to give banks time to meet the higher standards, while still supporting lending to the economy. The liquidity requirements, leverage ratio and systemic surcharges come into force on a phased approach starting from 2015 and will, therefore, be assessed later and are not covered in this report.

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Design of the Committee’s Basel III Implementation Review Programme

In January 2012, the Group of Central Bank Governors and Heads of Supervision (GHOS), the Basel Committee’s oversight body, endorsed the comprehensive process proposed by the Committee to monitor members’ implementation of Basel III.

The process consists of the following three levels of review:

- Level 1: ensuring the timely adoption of Basel III;

- Level 2: ensuring regulatory consistency with Basel III; and

- Level 3: ensuring consistency of outcomes (initially focusing on risk-weighted assets).

The Basel Committee has published two “Level 1” progress reports. It has agreed on a detailed “Level 2” assessment process and started reviews of the European Union, Japan and the United States.

Its “Level 3” reviews analyse existing data on risk measured by banks’ models and are designing processes for deeper analysis.

The Basel Committee has worked in close collaboration with the Financial Stability Board (FSB) given the FSB’s role in coordinating the monitoring of implementation of regulatory reforms.

The Committee designed its programme to be consistent with the FSB’s Coordination Framework for Monitoring the Implementation of Financial Reforms (CFIM) agreed by the G20.

The objectives and the process of each of the three levels of review are as follows.

Level 1: Timely adoption of Basel III

The objective of the “Level 1” assessment is to ensure that Basel III is transformed into domestic regulations according to the agreed international timelines.

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It does not include the review of the content or substance of the domestic rules. Each Basel Committee member jurisdiction’s status is reported in a simple table.

Separately, the Financial Stability Institute (FSI) of the Bank for International Settlements is surveying non-Basel Committee member countries.

The outcome of this work will be published by the FSI in the coming months.

Level 2: Regulatory consistency

The objective of the “Level 2” assessments is to ensure compliance of domestic regulations with the international minimum requirements.

Delays or failures to adopt domestic regulations identified by the Level 1 review will feed into the Level 2 assessment.

All Level 2 assessments will be summarised using the following four-grade scale: compliant, largely compliant, materially non-compliant and non-compliant.

The Committee intends to produce an overall assessment, as well as assessments of the main components of Basel III.

All Basel Committee member countries will be assessed over time.

The Committee decided to prioritise its reviews, focusing first on the home jurisdictions of global systemically important banks (G-SIBs).

The first reviews commenced in February 2012 with the European Union, Japan and the United States.

A summary of the process for the Level 2 reviews is included in appendix 2 of this report.

Level 3: Risk-weighted assets consistency

The objective of the “Level 3” assessments is to ensure that the outcomes of the new rules are consistent in practice across banks and jurisdictions.

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It extends the findings of Levels 1 and 2, both of which focus on national rules and regulations, to supervisory implementation at the bank level.

The Committee has established two expert groups, one on the banking book and the other on the trading book.

These groups will identify areas of material inconsistencies in the calculation of risk-weighted assets (RWAs, or the denominator of the Basel capital ratio).

Depending on the outcome, the work may result in policy recommendations to address identified inconsistencies.

Preliminary findings

Level 1

The tables in appendix 1 show member countries’ implementation status as of end-May 2012. The tables use the following number codes:

- “1” for draft regulation not published,

- “2” for draft regulation published,

- “3” for final rule published, and

- “4” for final rule in force.

Summary information about the next steps and the implementation plans being considered by members are also provided for each jurisdiction.

Separate tables are produced for each of Basel II, Basel 2.5 and Basel III.

For Basel II and 2.5, which should be implemented already according to the agreed timetable, countries that have fully implemented are shown in green; those in the process of implementing are shown in yellow; and those that have not yet issued draft regulations are shown in red.

Compared to the status at end-September 2011 and end-March 2012, when the Committee published previous reports, significant progress has been observed.

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However, there are jurisdictions which have missed the globally-agreed implementation dates for Basel II and

2.5. There are also jurisdictions that have not made enough progress to date on Basel III and thus pose concern as to their ability to meet the agreed Basel III implementation date.

Basel II

Three-quarters of member countries have implemented the Basel II requirements.

Of the remaining six countries, Indonesia and Russia have implemented Pillar 1 (minimum capital requirements) but not Pillar 2 (supervisory review process) or Pillar 3 (disclosure and market discipline).

Turkey expects to be fully compliant by July 2012. China has issued final regulations and is currently assessing applications for advanced approaches submitted by large banks.

The United States is in “parallel run” (ie running both Basel I and Basel II calculation for its largest banks), although Basel I rules remain the legal minimum.

Argentina implemented rules on operational risk in April 2012.

Basel 2.5

Again, a majority of Basel Committee member countries (20 out of 27 Basel Committee members) have implemented the requirements, but a significant minority are either still in the process of implementation or have not started the process for implementation.

Russia and the United States have issued draft regulations covering the market risk elements of the enhancements.

The US regulations were modified in December 2011 to incorporate restrictions on the use of credit ratings as set forth in the Dodd-Frank regulatory reform legislation.

Other member countries which have not implemented Basel 2.5 are Argentina, Indonesia, Mexico, Saudi Arabia and Turkey.

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Basel III

Three countries – India, Japan and Saudi Arabia – have published final regulations necessary for implementing the Basel III package from 1 January 2013.

Full application starts in Japan at the end of March 2013 to match Japanese banks’ fiscal year end.

The European Union has published several rounds of draft directives and regulations (CRD4/CRR) and is expecting to have final rules by the end of June.

The EU level regulations implement most elements of the Basel III package directly.

This means there is no need for national regulations to transpose the regulations into their domestic legislation.

The following seven member jurisdictions have not issued draft regulations: Argentina, Hong Kong SAR, Indonesia, Korea, Russia, Turkey and the United States.

The majority of these countries believe they can finalise regulations in time for the agreed start date of 1 January 2013.

However, for others, depending on the domestic rule-making process, meeting the deadline could be a significant challenge.

Level 2

The first three Basel III regulatory consistency assessments are currently under way for the European Union, Japan and the United States, which are being conducted in parallel.

In the initial phase of the Level 2 assessment process, the jurisdictions have been asked to complete a detailed self-assessment questionnaire and to provide all components of the regulations that implement Basel III at the domestic level.

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After receiving the completed questionnaires, peer review teams of supervisors have reviewed the completed self assessment and drafted an initial list of preliminary findings.

The European Union, Japan and the United States are at different stages of Basel III implementation.

Given these differences, the depth of the preliminary Level 2 findings differs.

The reviews are still work in progress and this interim report is based solely on preliminary findings that are subject to further review as the analysis progresses.

Currently, the peer review teams are in the process of further analysing the preliminary findings based on additional clarifications that were received from the jurisdictions concerned.

The review teams are also working on the assessment of the potential materiality of their findings, using quantitative bank-specific data that was provided by the authorities.

An important element in the second phase of the assessment will be an on-site visit where the teams will discuss their findings with the authorities to further narrow down the materiality of the findings to arrive at a final assessment.

The on-site visits are tentatively scheduled in June and July. The final report is expected to be submitted to the Basel Committee in September 2012, and will be published shortly thereafter.

The absence of any item among the topics mentioned above does not necessarily mean that the review team will not add new items to the list of issues for further investigation during the progress towards the final report.

European Union

The review of the European Union (EU) rules related to Basel III has been complicated by the absence of a stable EU text implementing Basel III.

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As a pragmatic choice, the review team selected the Third Danish Presidency Compromise proposals for the basis of this interim report.

This choice does not imply any endorsement by the assessment team of these proposals, but simply responds to the need to use the most recent draft such that the text remains stable for the time required to complete the interim review.

At the time this interim report was prepared, the final version of CRD4/CRR – the rules for implementing Basel III in the European Union – were not yet published.

Therefore the number and nature of the findings set out in the Basel Committee’s final report may change substantially from those contained in this interim report to the extent that the final CRD4/CRR rules differ from the Third Danish Compromise proposals.

Besides the changing nature of the EU proposals, the assessment has also been difficult due to the particularities of the EU rule-making process.

This meant that the European Commission (EC) was unable to complete the requested self-assessment questionnaire, beyond mapping the Basel framework to the July 2011 EC proposals and providing explanatory notes on the compliance of key areas of the EU regulation with Basel III.

Unlike the other assessments, which have benefited from country self-assessments, the EU review team has not been able to draw on a comprehensive self-assessment from which to begin its assessment process.

Despite these difficulties, the review team conducted a detailed preliminary assessment of the EU framework.

This assessment benefited from face-to-face discussions between the leader of the review team and EC staff as well as with representatives from the European Banking Authority, the European Central Bank, the Danish Presidency, and the nine EU countries which are also BCBS members.

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The initial assessment process has identified a large number of features of the current EU Basel III proposals that will require further investigation. Most of these issues will probably prove either consistent with the Basel framework, or immaterial in practice.

There seems to be a small number of issues, however, that are potentially material and will need to be subject to a detailed assessment by the review team.

The EU framework has been developed with the principle of “maximum harmonisation.”

This is designed with the aim of achieving a high level of harmonisation of banking rules and limiting divergence between the approaches taken by individual national authorities.

While not a matter of direct relevance to the assessment in the first instance, the ability for an individual national regulator to comply with Basel III where EU regulation is found to be inconsistent will depend on the degree of “maximum harmonisation” at the EU level.

In this case, it may work to limit the room an individual regulator has to adopt compliant regulations on its own.

The review team has identified the following specific areas of potential difference. These areas require further review and/or an assessment of their potential materiality before definitive conclusions can be drawn:

Definition of Capital

There are three specific issues that warrant particular attention:

The Basel III rules require banks to deduct significant investments in unconsolidated financial entities, including insurance entities, from the highest quality form of capital (Common Equity Tier 1 – CET1).

The CRD IV/CRR proposals give competent authorities the possibility to permit banks not to deduct insurance holdings under certain conditions.

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The review team will need to assess whether the CRD IV/CRR proposals are consistent with the Basel requirements that only permit approaches other than deduction where it can be demonstrated that these are more conservative (ie would produce higher capital requirements) than the deduction approach.

The Basel III rules are explicit that for joint stock companies, only common shares, which comply with a list of substantive criteria, can be included in CET1.

However, the CRD IV/CRR proposals recognise any capital instrument, which satisfies a list of substantive criteria in line with Basel III, as part of CET1 even if they might not be common shares.

The review team will need to evaluate whether this deviation from Basel III has the potential to undermine the quality of capital that banks should have to absorb losses.

Basel III requires that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss.

This requirement has been acknowledged in the CRD IV/CRR proposals but not reflected according to the Basel rules.

Going forward, the review team will closely monitor how this requirement is being reflected in the EU regulations, including within the forthcoming EU resolution and crisis management rules.

Pillar 1: Credit Risk – Internal Ratings-Based (IRB) Approach

Under the Basel rules, a bank electing to use an internal model to calculate its regulatory capital requirements for credit risk (IRB Bank) may only permanently apply the standardised approach for non - significant or immaterial business units or asset classes (referred to as the “partial use exemption”).

The CRD IV/CRR framework allows IRB banks to permanently use the standardised approach for some exposures under certain conditions that might not appear to be related to the immateriality or non-significance described above.

In particular, an IRB Bank in the EU is able to permanently apply a zero risk weight to EU sovereign exposures after receiving the permission of the competent authorities.

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The review team will need to further analyse the consistency of the CRD IV/CRR framework with the Basel rules regarding the permanent partial use available to IRB Banks, with special focus on internationally active banks’ sovereign exposures.

Next steps

The review team’s key focus going forward will be to resolve consistency issues, and assess the materiality of any inconsistency.

The latter will be mainly based on bank-specific data.

The nine EU member countries of the Basel Committee have undertaken to assist with securing the data that will be needed for the materiality assessment.

Response from the European Commission

Two preliminary points need to be made. First, from the point of view of banking regulation, the European Union (EU) is a single jurisdiction: laws adopted at EU level are agreed by, and apply to, all EU Member States.

Second, the EU has chosen to apply the Basel rules to all its banks (as well to investment firms), not just large, internationally active banks; the law therefore needs to allow national authorities to exercise a certain level of proportionality in applying the rules.

The first point is particularly important with respect to the “maximum harmonisation” principle referred to in the report.

In this context, the assessment fails to provide valid arguments on why the degree of harmonisation pursued in the EU could be considered an issue for any of the specific areas of potential difference mentioned in the report.

The second point is relevant to all the specific issues listed in the report. For example, the possibility for IRB banks to permanently use the standardised approach for certain exposures was never meant to be used for internationally active banks and supervisors were (and will continue to be) expected not to approve it for those banks.

Concerning the specific issues, there are some additional points.

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Firstly, the proposed approach on significant investments in insurance reflects the existence of strict and harmonised rules for insurance and financial conglomerates at EU level, takes into account the recently revised Joint Forum's principles for financial conglomerates supervision, provides appropriate incentives for insurance companies' capitalisation and prevents double counting of capital.

The assessment should take these facts into account.

Secondly, the concept of common shares does not exist in a large number of EU Member States, which explains the choice of approach based on the characteristics of capital instruments, rather than their form.

Nevertheless, publicly listed banks are expected to meet their CET1 requirement only with shares meeting the 14 criteria.

Furthermore, specific monitoring powers have been conferred upon the European Banking Authority in order to identify any misuse of this approach by banks.

Lastly, the European Commission expects to adopt legislation implementing the point-of-non-viability requirement before summer of this year.

Japan

By end March 2012, the Japanese authorities published final rules implementing Basel III with respect to the definition of capital and risk-weighted assets (RWA), while the Basel II and Basel 2.5 regulation had already been transposed into domestic rules previously.

The documents for the Japan Level 2 review include notices, supervisory guidelines, inspection manuals and Qs and As issued by the FSA to spell out the detailed interpretation, all of which are binding.

Where applicable, the Japanese authorities have provided data for 16 internationally active banks, which account for more than 50% of the Japanese banking assets.

Japan has issued final Basel III regulations.

This means that the review of Japan is more detailed than the reviews of the European Union and United States where the assessments are based on drafts.

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The review is based on the English translation of the Japanese rules, most of which have been translated into English.

In specific cases, the review team compared the English translation of the documents with the original Japanese text to verify the translation.

A final judgment of the potential discrepancies in the translation will be subject to further analysis.

The Japanese authorities also have provided supplemental information requested by the team.


Overall, the preliminary analysis of Japan’s Basel II/III framework suggests broad consistency with the majority of the sections of the Basel rules.

The analysis, however, revealed certain differences that will be the focus of further review by the assessment team:

(I) The Basel III capital rules are not fully implemented (additional guidance is under preparation) and deviate in specific areas, while the rules for capital buffers are planned to be published only in 2015, one year ahead of the Basel III schedule for the implementation;

(II) Most Pillar 2 rules are not in place; and

(III) There are a number of issues in certain aspects of risk measurement, both in terms of Pillar 1 and 2, for which the review team will seek further clarification.

Definition of Capital and Capital Buffers

While the Japanese authorities have already finalised the rules concerning the definition of capital and RWA, more detailed guidance to ensure consistency with the Basel III text is not yet established.

This is particularly relevant in the areas concerning the recognition of stock acquisition rights as common equity Tier 1 capital and the deduction of deferred tax assets.

The implementation team has also identified potential deviations in the areas of the recognition criteria for additional Tier 1 instruments as well as with respect to the cut-off date for the grandfathering of state aid

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instruments, which need to be investigated further in order to understand the potential impact.

For the capital buffers (capital conservation, countercyclical), the domestic rules are not yet in place.

The Japanese authorities plan to issue the rules by 2015, ie, one year ahead of the international schedule for implementation (2016).

Loss absorbency at the point of non-viability (PON) is partially implemented, such as the resolution scheme in Japan’s deposit insurance law.

The authorities are currently analysing how to organise the linkage between PON requirements and the domestic resolution scheme and plan to finalise the details of the framework by the end of 2012.

Pillar 1 - Minimum Capital Requirement

For securitisation, several areas of deviation have been identified, such as in terms of re-securitisation, for ABCP exposures under the Standardised Approach and specific aspects in terms of the Internal Assessment Approach (IAA) and the Supervisory Formula Approach (SFA).

Other areas of credit risk will also be subject to further analysis.

In terms of counterparty credit risk and cross-product netting, the Internal Model Method (IMM) is not yet implemented.

While in practice no bank has adopted the IMM, implementation into domestic regulation is still desirable.

Concerning market risk, the team has identified areas of non-compliance with respect to the treatment of smaller trading books (<100 billion JPY and no larger than 10% of the bank’s total assets) and the treatment of commodity risk, where Japanese legislation only allows banks to use the simplified approach (for those banks that choose the Standardised Measurement Method, SMM).

In the former case, banks with trading activities slightly below the materiality threshold would benefit from this exception.

While this issue is unlikely to have systemic implications, capital adequacy could be slightly overstated. Banks’ commodity risk is limited,

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but the ultimate judgement of materiality will be subject to additional analysis.

With regard to operational risk, some of the detailed requirements with regard to the Advanced Measurement Approach (AMA) are not specified in the notice.

Japan indicates that each of the detailed requirements in the Basel Accord is validated in the process of assessment as necessary.

Pillar 2 – Supervisory Review Process

In terms of Pillar 2, most of the rules are currently not implemented in Japan.

While there is a lack of implementation, the authorities seem to be in a position to impose additional capital charges by the Banking Act.

In practice, however, the FSA does not generally appear to take such an approach.

Rather the FSA examines the appropriateness of banks' comprehensive risk management and, if necessary, the FSA requires banks to take remedial action to mitigate the risks instead of requiring an additional capital charge.

Next steps

The team will follow-up with the Japanese authorities to seek clarification and data with a view towards completing a preliminary final assessment of compliance and materiality in June.

These findings will then be further discussed and assessed during the on-site visit scheduled for early July in order to determine a final assessment and drafting of the final report, to be shared with the authorities in the second half of July.

The final report will be delivered to the Basel Committee in September.

Response from the Japanese authorities

The Japanese authorities appreciate the detailed analysis done by the assessment team to date. In particular, the authorities welcome the acknowledgement of broad consistency with the majority of the sections of the Basel rules.

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The FSA is in the process of developing Qs and As and supervisory guidelines which will supplement the notices, and once they are published, issues identified as lack of implementation rules in this report will be rectified.

We disagree with the report’s assertion that our rules on the recognition of additional Tier 1 instruments deviate from Basel III.

The cut-off date for the grandfathering of state aid instruments is set on 31 March 2013 instead of 1 January 2013 merely reflecting the fact that the Japan’s fiscal year starts in April and ends in March.

With regard to the credit and securitisation parts of Pillar 1, some additional rules need to be incorporated into our domestic rules, and the FSA intends to develop necessary notices and guidelines in the coming period.

However, the current rules do not result in any material overstatement of capital ratios.

Most of the additional elements needed are only relevant to advanced model methods such as IMM and IAA, which no Japanese bank has adopted yet.

Regarding the market risk exception for banks with small trading book, our impact analysis shows that the impact is very limited and is at most 0.34% of total RWA.

As for commodity risk, banks are allowed to choose between the IMA and simplified SMM, which are both fully compliant with the Basel text. Banks with material commodity exposures use IMA.

In terms of Pillar 2, the overall process and framework is provided in the supervisory guidelines and inspection manuals and forms the basis for on-site and off-site review by the FSA.

There are, however, some specific areas where details are not well documented yet (eg those related to IMM, residual risk and implicit support).

The FSA intends to develop domestic rules on those elements in the near future.

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United States

As noted above, at the time of this interim assessment, the US authorities had not published the final rule to implement the improvements to the Basel II market risk framework (Basel 2.5), nor had they published the proposed regulations to implement Basel III.

[On 7 June, the Federal Reserve’s Board of Governors published final Basel 2.5 and draft Basel III rules. The review team has not had time to assess whether these latest developments are compliant with the Basel text for the interim report, rather these and/or any subsequent texts will form part of the final assessment.]

These are major components of the Basel Committee’s reform programme.

Therefore, the number and nature of findings set out in the final report may change substantially from those contained in this interim report if the United States makes progress in its rulemaking process prior to the finalisation of this report.


The review team has identified a number of overarching issues related to the US implementation of the Basel standards:

Adoption of Basel 2.5 and Basel III regulations

The absence of the final rule on Basel 2.5 and the proposed rule on Basel III represents a potentially significant gap in US implementation and has thus far limited the assessment conducted by the review team to the US adoption of Basel II and to the proposed US rules for Basel 2.5.

Scope of application

US core banks are required to adopt the advanced Basel II standards, while all other banks remain subject to the Basel I standards, unless they elect to be subject to Basel II standards (these are referred to as opt-in banks).

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The Basel Framework is explicitly directed at “internationally active” banks – though this expression has not been defined.

Basel Committee member countries are not required, therefore, to apply the framework to all their banks.

However, the review team intends to assess whether the US definition of core banks inadvertently results in any non-core US bank with substantial international activities not being subject to Basel II standards.

US authorities’ selection of Basel II approaches

The US agencies have implemented the advanced Basel II approaches, but not the less advanced Basel II approaches.

While jurisdictions are not required to implement the less advanced Basel II approaches, the manner in which the US agencies have implemented Basel II implies that US core banks that do not comply – or cease to comply – with the requirements of the advanced approaches are subject to approaches that differ from those contemplated in the Basel II framework for banks that do not qualify for the advanced approaches.

In the United States, the advanced Basel II approaches applicable to core banks are complemented by three other capital requirements, which the US authorities have asserted result in higher minimum capital requirements:

(i) A permanent floor calculated under the agencies’ general risk-based capital rules (which currently implement Basel I);

(ii) The non-risk-weighted US leverage ratio; and

(iii) The Pillar 2 requirements, including those under the Federal Reserve Board’s “capital plan rule”.

However, a core bank that does not satisfy the conditions for the advanced Basel II approaches remains subject to a Basel I-based calculation of risk-weighted assets, thus not being subject to Basel II minimum capital requirements.

For example, Basel I does not include a charge for operational risk.

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The review team intends to discuss with the US authorities the basis for their applying a Basel I-based approach for the calculation of risk-weighted assets to core banks that do not qualify for the advanced approaches rather than the options provided by the simplified, standardised and foundation approaches under Basel II.

Notes

The Level 2 assessment team of the United States is being conducted by a team of experts led by Mr Arthur Yuen (Hong Kong Monetary Authority).

The full review team comprises: Mr Thierry Bayle (Banque de France), Mr Pierpaolo Grippa (Banca d’Italia), Mr Sebastijan Hrovatin (European Commission), Mr Carlos Luna (National Banking and Securities Commission of Mexico) and Mr Naruki Mori (Bank of Japan). The team is supported by Mr Maarten Hendrikx of the Basel Committee Secretariat.

The definition of core banks includes any depository institution (ie bank or savings association) meeting either of the following two criteria:

(i) Consolidated total assets of $250 billion or more; or

(ii) Consolidated total on-balance sheet foreign exposure of $10 billion or more;

or any US-chartered bank holding company (BHC) meeting any of the following three criteria:

(i) Consolidated total assets (excluding assets held by an insurance underwriting subsidiary) of $250 billion or more;

(ii) Consolidated total on-balance sheet foreign exposure of $10 billion or more; or

(iii) Having a subsidiary depository institution that is a core bank or opt-in bank.

Finally, any depository institution that is a subsidiary of a core or opt-in bank is also a core bank.

Under the “capital plan rule”, based on the Comprehensive Capital Analysis and Review (CCAR) framework using stress tests, bank holding companies with consolidated assets of greater than $50 billion must demonstrate their ability to maintain capital above existing minimum

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regulatory capital ratios and above a tier 1 common ratio of 5 percent under both expected and stressed conditions over a minimum nine-quarter planning horizon.

Basel II parallel run

At the time this interim report was prepared, none of the core US banks had received permission to exit the transitional parallel run, which would require a bank to base its capital requirements on the advanced Basel II approaches (supplemented by the additional requirements discussed above).

The regulatory capital ratios of the core US banks continue to be based on risk-weighted assets calculated according to the general (Basel I) risk-based capital rules, and there is no rule requiring banks to hold more capital as a consequence of higher risk-weighted assets as calculated under the advanced Basel II approaches.

The review team will assess the consistency of US transitional arrangements with the corresponding Basel II standards and whether this may lead to a situation in which core banks that are not allowed to leave the parallel run over an indeterminate period are effectively subject to lower capital requirements than those provided for by Basel II for banks that do not qualify for the advanced approaches.

Elimination of references to external credit ratings

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) mandates the US agencies to remove references to and requirements of reliance on external credit ratings from regulations and to replace them with appropriate alternatives for evaluating creditworthiness.

As a first step in this context, in December 2011 the US agencies issued a notice of proposed rulemaking (NPR) that contains alternative methodologies for calculating specific risk capital requirements for debt, securitisation and equity positions under the market risk capital rules.

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The review team will engage with the US agencies to assess – both in qualitative and quantitative terms – whether the proposed rulemaking is at least as robust as the corresponding Basel requirements.

In addition to the overarching issues, the review team has identified a number of specific areas of potential difference based on its assessment of the components of Basel II rules and the proposed rules for Basel 2.5.

These areas require further review and/or an assessment of their potential materiality – taking into account that their relevance may be diminished once Basel III is implemented. So far, the main areas identified include:

Definition of capital

The current US capital treatment of insurance subsidiaries of bank holding companies differs from the Basel II full deconsolidation and deduction approach.

This could result in a potential overstatement of capital ratios.

The Basel II treatment is however superseded by Basel III, and the issue may turn out to be irrelevant if the United States alters its treatment to align with Basel III.

Pillar 1 – Minimum capital requirements

The Basel criteria for credit risk mitigation – such as requirements for collateral management, operational procedures, legal certainty and risk management processes – appear absent from the current US regulations, while the scope of eligible collateral and guarantors seems to be larger than those specified by the Basel Framework.

Differences have also been identified in the definitions and/or treatment of specific asset classes (eg credit card exposures and leasing).

Further, certain overarching principles, such as the IRB approaches’ minimum requirements’ “use test”, appear not to be explicitly enshrined in regulation.

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Concerning the treatment of securitisation exposures, the main area of difference relates to the removal of references to external credit ratings and the consistency with the Basel requirements.

Another area relates to the treatment of securitisations containing early amortisation features which appears to deviate from the Basel treatment.

With regard to operational risk, the main area of difference relates to the possibility as permitted in the US rules of using risk mitigants other than insurance to hedge operational risk.

This contrasts with the Basel Framework, which only allows insurance as a risk mitigant.

Concerning market risk, the proposed replacement of external credit ratings with new creditworthiness metrics for specific risk poses an issue of alignment with the Basel standards.

It also raises the question of whether the resulting capital charges would be equally or comparably robust.

Pillar 2 – Supervisory review process

Regarding securitisations, potential significant differences have been identified for the treatment of provision of implicit support and of the recognition of protection against first loss credit enhancements and related supervisory actions.

Next steps

The first stage of the assessment – the qualitative review of the US self-assessment – has progressed according to schedule.

However, due to the delay in publishing the final Basel 2.5 rule and the proposed Basel III rule, the review team’s completion of the US review within the agreed timelines has become increasingly challenging.

The on-site component of the review, in which the review team will meet face-to-face with the US agencies, is currently scheduled for 25 – 29 June 2012.

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Response from the US authorities:

The US agencies welcome the opportunity to respond to the interim report on the US banking agencies’ implementation of the Basel framework.

We wish to comment on three of the overarching issues raised in the report.

First is the scope of application, where a question is raised, does the US application of Basel II standards to “core banks,” as they are called in the report, cover all banks with significant international activities?

The US agencies are confident that it does.

The second issue is the selection of Basel II approaches.

The interim report notes that the United States has implemented the advanced approaches, but has not offered any of the less advanced approaches as options for core banks, as allowed by the Basel framework.

The report goes to suggest that, in this regard, the US implementation may fall short.

The possible implication is that jurisdictions that only adopt the advanced approaches ought to develop their own versions of less advanced approaches that are close to the Basel II options and apply these to non-qualifying internationally active banks.

The US agencies do not see any requirement for this in the Basel framework and, indeed, we would note that using Basel I is specifically permitted.

The third issue is related and concerns the Basel II parallel run process.

Here, the review team say that they want to look into whether “core” banks not allowed to leave the parallel run ... are effectively subject to lower capital requirements [than the Basel II less advanced approaches].”

This is a fair question.

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However, as noted in the report, the US Basel I implementation is complemented by a leverage ratio requirement and the Federal Reserve Board’s capital plan rule, which covers all “core” holding companies.

Unsatisfactory capital plans have severe and specific regulatory consequences.

Moreover, the Board’s 2012 Comprehensive Capital Analysis and Review framework required enough capital to meet the Basel III transition schedule.

Taken together, these and other US requirements such as the prompt corrective action regime are both demanding and effective relative to Basel standards.

The US agencies fully support the efforts of the Basel Committee to monitor progress in implementing the Basel capital framework in different jurisdictions and look forward to working with the US Level 2 review team in the months ahead as they complete their work.

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Level 3

Analysis of risk-weighted assets in the banking book

In December 2011, the Basel Committee approved a work plan to evaluate sources of material differences in risk-weighted assets (RWAs) across banks using the Internal Ratings-Based (IRB) approach for credit risk in the banking book, and assess the extent to which RWA calculations are consistent with relevant Basel standards.

The work, conducted by representatives of 30 regulatory agencies from 23 countries, relies on a combination of top-down analysis of data as reported by banks, bottom-up portfolio benchmarking, observation of the range of practices across banks and supervisors, and on-site work at banks as appropriate.

The work distinguishes between variations in RWAs that are risk-based (those due to differences in underlying risk at the exposure/portfolio level) and those that are practice-based (eg those due to model selection or calibration of model parameters, exercise of judgement, application of national discretion, etc).

Practice-based variations can be further subdivided into differences that are specifically provided for under the Basel Framework (eg IRB rollout, national discretions), and others that arise more from differences in interpretation of standards in the framework or from specific practices such as those related to calibration of risk parameters.

Recommendations to narrow the variation in RWAs are appropriate primarily for practice-based RWA variation.

To date, work has considered and assessed a wide range of existing analyses of RWAs across banks and countries.

Most studies acknowledge that underlying differences in risk are likely to be a key driver in variations in RWA; these include differences in risk arising from differences in business model and portfolio mix.

However, most studies also conclude that at least some of the variation in RWAs could be attributable to practice-based factors.

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For example, several studies from the regulatory community raise model calibration (particularly PD and LGD estimation) and the stage of IRB adoption as potential drivers of RWA variation.

On the other hand, external analysts have focused more on differences in the application of supervisory principles, with regulatory and accounting approaches being frequently cited as reasons for differences in RWA measurement.

Existing studies reveal that, while there are many potential candidates, there is no definitive consensus on the true sources of RWA differences across banks, or on the extent to which differences are due to differences in risks or differences in practices.

Thus, additional work is clearly necessary, and is being pursued.

To extend existing analyses and determine an appropriate focus for regulatory efforts to enhance convergence, the group is undertaking additional high-level analyses of RWA variation using supervisory data from the Basel Committee’s Capital Monitoring Group (CMG).

- The CMG has collected information on Basel II RWA, capital requirements, and risk parameters semi-annually since end-June 2008. The data are extracted from national reporting frameworks of member countries, and submitted to the Basel Committee Secretariat in standardised reporting templates.

- The analytical framework that will be applied to the CMG data combines existing methods with additional approaches being developed as part of this project.

- The sources and materiality of RWA differences will be assessed

across portfolios, across banks, and across countries, with a focus on particular drivers believed to play a material role in RWA dispersion.

- To safeguard data confidentiality, results will be presented in

anonymised or aggregated form.

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Conclusions based on top-down analysis of aggregated data as described above are necessarily limited.

Thus, that analysis is being supplemented with bottom-up analysis using test portfolios, in which the risk parameters banks assign to groups of common exposures are compared and analysed.

The portfolio exercise is currently in development.

- Informed by a comprehensive stock-take of similar exercises conducted by the industry and by various regulatory authorities, the initial focus has been narrowed to wholesale credit.

Similar analysis can be extended to other types of credit at a later stage based on the lessons and conclusions of the initial exercise.

- A data collection template has been developed, together with instructions for completion of the template.

- A list of exposures is being developed to be provided to participating banks; banks will be asked to respond with PD and LGD estimates for each exposure.

- The composition of the hypothetical portfolio has not been finalised, but is being designed to ensure maximum overlap across participating banks, and includes large sovereign borrowers, large financial institutions, and large non-financial corporate borrowers.

Output from this work will include various benchmark analyses, including pair-wise rank-ordering analysis, analysis of the distribution of PD and LGD estimates across banks, and assessment of how the impact of the observed parameter estimates on RWAs depends on different risk profiles or business strategies.

Quantitative analysis using either aggregated data or hypothetical portfolio results can highlight sources of RWA variation, but will not necessarily pinpoint the reasons for that variation.

Therefore, work is also under way to identify the specific practices that might underlie differences in RWAs.

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- In a first phase, an extensive list of potential drivers of RWA differences has been developed, drawing on existing supervisory knowledge and judgement and informed by analysis of existing studies. The list of drivers has been divided into those related to underlying risk or risk profile, and those related to practices.

- The potential significance of the drivers has been assessed based on both magnitude and prevalence; the assessments of significance currently are being refined.

- Further analyses will be conducted to assess the materiality and the

nature of a selected number of drivers.

The work described here – combining top-down data analysis, bottom-up portfolio benchmarking, and supervisory evaluation of the range of practice in specific areas – will extend the preliminary conclusions from prior analyses by identifying selected industry and supervisory practices that appear likely to be causing differences in RWA and capital across institutions and countries that are not reflective of underlying risk.

Specific recommendations for narrowing of the range of practice will be provided to the Basel Committee for consideration and possible action as appropriate.

The analytical framework developed for analysing RWA differences can also serve as an approach for ongoing monitoring of RWA differences.

Analysis of risk-weighted assets in the trading book

This interim report contains the initial findings of the potential drivers of differences in market risk-related risk-weighted assets (mRWA) using data that is publicly disclosed by banks in financial and regulatory reports.

The scope of these initial findings is therefore limited, since the analysis applies to public data prior to the implementation of Basel 2.5 and is

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based only on those banks for which sufficient data was available to make meaningful comparisons.

The Committee’s task force is currently working on completing the public data analysis by, among others, evaluating the utility of non-public supervisory data.

In addition, it is performing a test portfolio exercise in which the mRWA calculations of banks are compared on a common set of positions, with the results to be further investigated by means of on-site visits.

A number of banks have volunteered to be included in the test portfolio exercise, which is well under way and the first results are expected in the second half of this year.

The task force will include the findings of this complementary work in a final report that is expected by the end of this year.

Based on public disclosures by a sample of 17 large banks with significant trading activities, the analysis reveals considerable differences in mRWA as a ratio to total trading assets reported in financial disclosures.

Such variation can be justified when it reflects the varying risk profile of trading activities, given the differences in trading strategies and business models among the banks.

In this regard, a preliminary analysis of the public disclosures on a subset of banks in the sample suggests that those banks that trade risky assets, such as distressed loans or less liquid equities, exhibit a higher ratio of mRWA to total trading asset.

However, the results are not conclusive, as there remains substantial unexplained variation, and in many instances public disclosures are insufficient to explain the observed variation in mRWA ratios across banks.

One potential policy response is therefore to investigate further improvements in public disclosures for market risk, for instance, by including more information about mRWA and its components and providing more direction to banks regarding Pillar 3 disclosure.

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These policy options will be investigated further.

Notes: This graphic presents banks in increasing order of average market risk weighted assets (mRWA) calculated as the ratio of mRWA to Trading Assets, showing the substantial variation, from below 5% to about 45%.

Trading Assets is defined as the value of all instruments in the trading account, including securities, traded loans, and net derivatives with a positive replacement value.

To put banks on a comparable basis the measurement of total trading assets has been adjusted for the effect of different accounting regimes.

In particular, the data has been adjusted to take into account the different approaches to netting of derivatives.

Source: public information based on banks’ financial and public regulatory reporting.

For bank A data is based on Q4 2010 for all other banks data is from Q2 2011.

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The preliminary analysis shows a number of potential reasons for variation in mRWA (the list does not reflect a ranking in order of importance as the analysis does not allow for that at this stage):

- Differences due to variation in the composition of trading assets as evident to some extent in public disclosures.

- Differences in the way that banks apply accounting requirements to their business model in allocating assets between the trading and banking books, for example, the treatment of securities financing transactions and loans.

- Differences in methodology and inputs for market risk models used for regulatory capital calculations.

- Differences in supervisory approaches, with some jurisdictions relying more heavily on the internal models approach and integrated VaR models while others continue to use the standardised approach selectively for some debt and equity positions.

- Differences in regulatory add-ons and notably the use of VaR multipliers higher than the minimum of 3 to account for model uncertainty.

With regard to the last two points, the analysis indicates that some of the variation in mRWA as a percentage of total trading assets may be related to the degree of reliance on internal models based on Value-at-Risk (VaR).

Banks for which internal models have a more important role in determining mRWA tend to show a lower average ratio of mRWA to total trading assets compared to banks for which models have a lesser role, with standardised approaches more important.

This is in line with expectations as the standardised approach provides for less hedging and diversification benefits and is therefore generally more conservative than the internal models approach.

At the same time, however, there remains substantial unexplained variation, as there is a wide range of mRWA ratios for banks with similar

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reliance on models and also banks with similar mRWA ratios but varying degrees of reliance on internal models.

This variation will be examined further by means of the test portfolio exercise that is currently under way.

It should be noted that the relationship between the degree of reliance on internal models and the ratio of mRWA as percentage of total RWA may change in the future. Basel 2.5 implementation (from end-2011) is expected to raise the capital charge for banks using internal models approaches for market risk and the fundamental review of the trading book aims to strengthen the relationship between the models-based and standardised approaches by establishing a closer link between the calibration of the two approaches. This may reduce the importance of the degree of reliance on internal models as an explanatory factor behind the observed differences among banks.

Notes: The horizontal axis shows mRWA from internal models approach (IMA) as percentage of total mRWA.

The vertical axis shows total mRWA as a percentage of total trading assets.

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The sizes of the circles in the figure indicate the size of trading assets (in USD) for each bank.

It should be noted that the ratio of IMA as percentage of total mRWA is an imperfect proxy for degree of reliance on internal models as for some banks a low ratio may still imply a high degree of reliance on internal models, for instance, when the internal model produces a very low mRWA compared to total mRWA.

Source: public information based on banks’ financial and public regulatory reporting. Of the 17 banks in the sample, sufficient disclosure was only available for 14 banks in quarter 4, 2010 and for only 7 banks in quarter 2, 2011.

The task force has a work programme in place to further analyse the drivers of difference in mRWA across global banks.

This includes:

- Completing the analysis of public data to test, refine, and extend these initial findings;

- Evaluating the utility of internal supervisory data to better understand the drivers of observed differences;

- Identifying key drivers of IRC (Incremental Risk Charge), VaR and stressed VaR based on existing domestic supervisory knowledge of bank’s models (and at a later stage CRM, Comprehensive Risk Measure).

The objectives of this work are to identify the key aspects of model methodology that drive the differences in internal models based approaches and to assess the materiality of these drivers at a high-level.

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This work will support the test portfolio exercise and help to focus attention to those areas of the internal models that most likely contribute to differences;

Performing a test portfolio exercise to compare and assess the mRWA calculations by a sample of large, internationally-active banks for a set of hypothetical trading portfolios.

The aim of the exercise is to measure potential mRWA variability due to the implementation of VaR, stressed VaR and IRC models. In addition, banks are being requested to complete questionnaires to specify the workings of their internal models;

Carrying out selected on-site visits to some participating banks to allow for a deeper investigation of the sources of variability in the calculated mRWA. It should be stressed that the on-site visits will not be model-validation exercises, but are meant to provide further information about the workings of the banks’ internal models and the resulting mRWA numbers from the test portfolio exercise. This exercise will help to identify the major sources of mRWA variability due to modelling choices in large banks. However, as it is a hypothetical portfolio exercise it will not be able to explain mRWA variability due to the differing business strategies of large trading banks.

Further work

The Basel Committee will continue to work to attain the full, timely and consistent implementation among its members.

The Committee will update G20 in November on its work on all of the three levels.

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Level 1

The Level 1 reports will continue to be published until all Basel Committee members have fully implemented the requirements.

The next publication of the tables in appendix 1 will reflect the position as at end September 2012.

Level 2

Final reports for the three Level 2 assessments of the European Union, Japan and the United States are expected to be published in September. Some follow-up work may be required after September depending on the findings of the reviews.

Additional work will also include the new liquidity requirements, the leverage ratio, and the surcharges for systemically important banks, once the Committee concludes its review on any revision or final adjustments for these elements of the framework.

In line with the three current reviews, the review of liquidity requirements, the leverage ratio and systemic surcharges will take place ahead of the deadline and assess draft regulations where appropriate according to the staggered implementation dates.

A review of Singapore will commence later in 2012, and reviews of China and Switzerland in 2013.

This schedule will mean that all countries which are home of G-SIBs will have been reviewed before the middle of 2013.

Reviews of Australia and Brazil will take place during the second half of 2013.

The Basel Committee is collaborating with the IMF and World Bank to ensure that its schedule is complementary and non-duplicative to the IMF and World Bank’s FSAP review process.

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Level 3

The two Level 3 groups assessing the consistency of risk-weighted assets in the banking book and trading book will continue their detailed analyses, including hypothetical portfolio exercises, questionnaires horizontally reviewing practices across banks and jurisdictions and on-site visits to banks.

Preliminary conclusions from the detailed analyses should be available in the fourth quarter of 2012.

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NUMBER 2

Status of Basel II, Basel 2.5 and Basel III adoption:

Number code:

1 = draft regulation not published; 2 = draft regulation published; 3 = final rule published; 4 = final rule in force.

Country Basel III

Next steps - Implementation plans

Argentina 1 On-going work to draft preliminary documents.

Australia 2 Draft rules for capital requirements issued on 30 March 2012. Draft rules to implement liquidity requirements issued in November 2011 for public consultation until 17 February 2012.

Belgium (2) (Follow EU process - third compromise text published)

Brazil 2 Draft regulation published for public consultation on 17 February 2012.

Canada 2 On 1 February 2011, banks were directed to meet the 7% CET1 standard as of January 2013. Regulations for (i) non-viability contingent capital and (ii) transitioning for non-qualifying instruments published August and October 2011 respectively. Draft regulation for definition of capital and counterparty credit risk issued to banks in March 2012.

China 2 Draft regulation combines BII, B2.5 and BIII. Public consultation ended in 2011. Final rule expected to come into force in Q3 2012. Will be applied to all banking institutions.

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Argentina

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Australia

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Belgium

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Brazil

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Canada

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#China

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France (2) (Follow EU process - third compromise text published)

Germany (2) (Follow EU process - third compromise text published)

Hong Kong 1, 3 (3) Bill passed by the Legislative Council on 29 February 2012 and published for the purpose of creating rule-making powers for the implementation of Basel III. (1) Industry consultation underway on policy proposals for inclusion in rules. Consultation on draft text of rules scheduled for second half of 2012.

India 2 Draft regulation released for comments on 30 December 2011.

Indonesia 1 Draft regulation to be released for consultation with industry in Q2 2012.

Italy (2) (Follow EU process - third compromise text published)

Japan 3 Draft regulation published on 7 February 2012 - Final rules published on 30 March 2012 - Implementation of final rules (end of March 2013 - In Japan, the fiscal year for banks starts in April and ends in March).

Korea 1 Draft regulation to be published in the first half of 2012.

Luxembourg (2) (Follow EU process - third compromise text published)

Mexico 1 Final rule expected in Q2 2012.

The Netherlands

(2) (Follow EU process - third compromise text published)

Russia 1 Draft regulations under development.

Saudi Arabia 3 Final regulation issued to banks.

Singapore 2 Public consultation on draft ended in February 2012. Final rule is expected to be published in mid-2012.

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#France

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Germany

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Hong Kong

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#India

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Indonesia

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Italy

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Japan

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Korea

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Luxembourg

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Mexico

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#The Netherlands

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#The Netherlands

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Russia

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Saudi Arabia

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Singapore

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South Africa 1 Draft amendments to legislation issued on 30 March 2012 for consultation.

Spain (2) (Follow EU process - third compromise text published)

Sweden (2) (Follow EU process - third compromise text published)

Switzerland 2 Public consultation on draft regulation on Basel III has been finished in January 2012. Decision on final rules text expected until mid-2012. Final SIFI regulation (level: Banking Act) adopted by Parliament on 30 September 2011 - Draft SIFI regulation (level: accompanying ordinances) was published in December 2011; decision on final rule text expected before end-2012.

Turkey 1 Draft regulation expected to be published in mid-2012.

United Kingdom

(2) (Follow EU process - third compromise text published)

United States 1 Draft regulation for consultation planned during Q2 2012. Basel 2.5 and Basel III rulemakings in the United States must be coordinated with applicable work on implementation of the Dodd-Frank regulatory reform legislation.

European Union

2 Third compromise text (directive and regulation) published by the Danish Presidency on 28 March 2012.

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#South Africa

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Spain

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Sweden

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Switzerland

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#Turkey

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#The United Kingdom

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#The United Kingdom

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#The United States

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#European Union

http://www.bis.org/publ/bcbs/b3prog_dom_impl.htm#European Union

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NUMBER 3

Financial Stability Report 2012

First half year report

Introduction EIOPA’s Financial Stability Committee (FSC) has updated its report on financial stability in relation to the insurance and occupational pension fund sectors in the EU/EEA. The current report covers developments in financial markets, the macroeconomic environment, and the insurance, reinsurance and occupational pension fund sectors as of 4 May 2012 unless otherwise indicated.

Summary of main issues and conclusions INSURANCE SECTOR Lately, the relatively positive development of insurers experienced in recent years, has started to reverse. This has shown in solvency ratios as well as profitability and to an extent also premium growth. Though the solvency situation of insurers is only reflected on a Solvency I basis1 in this report right now, the development of key value drivers (e.g. low yield environment in a number of currency zones in Europe) indicates that the situation also puts significant pressure on market values.

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Nevertheless, Solvency I ratios for insurers are still at a comfortable level with ~200% at the end of 2011. Following up on last report’s risk perception, EIOPA has analysed the sector’s resilience to a possible longer lasting low interest rate environment as well. Although the sector overall seems to be capable of coping with these challenges for some time, EIOPA continues to monitor the situation closely. However, if accompanied by other potential threats materialising, the situation might look different, e.g. in case of renewed turmoil due to the failure of governments to stabilise fiscal situations, a strong weighing of these developments on economic growth, or a disruptive unwinding of currency risk (e.g. as a consequence of developments in Greece). While first order effects of such an event on the European insurance sector as a whole seem limited (according to EIOPA analysis conducted), local insurers are likely to suffer and second order effects might also hit other European insurers, though mainly through the potentially triggered disruption of financial markets (e.g. sovereigns, banks and equities).

REINSURANCE SECTOR In 2011, a large number of very severe natural catastrophes occurred, making 2011 the costliest year ever for the reinsurance sector. The natural catastrophe losses exceeded by far the heavy losses of the previous record year 2005 (with hurricanes Katrina, Rita, Wilma). At the same time, the financial crisis worsened, with interest rate levels generally remaining low. As a consequence the reinsurance undertakings were confronted with huge challenges regarding both the liability side and the asset side of the balance sheet.

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However, at the beginning of 2011 the overall reinsurance industry was very well capitalised. As a consequence the reinsurers dealt well with the challenging environment; the capital reduction was only very modest. Several years of relatively benign payouts as well as the recovery of the financial markets had led to reinsurance capacities substantially in excess of demand. Altogether, the international reinsurance market remained relatively stable in 2011 and saw only modest price increases at the beginning of 2012. Raising prices largely could not yet be seen in spite of the many natural catastrophes in 2011. The renewals at the beginning of 2012 as well as at April 1 led to some marked increases in reinsurance prices in the regions and segments affected by losses. But overall the rates have gone up only modestly, last but not least due to the extensive absence of major loss events in Europe and North America. Furthermore, there is an increased capital flow into the reinsurance market. In the background of the financial crisis investors are searching for relatively safe investments, exerting a moderating effect on the rates.

OCCUPATIONAL PENSION FUNDS SECTOR The members and beneficiaries of Institutions for Occupational Retirement Provisions (IORPs) are currently concentrated mainly in a few Member States, but continue to grow in importance across Europe; in some Member States reforms are in place to foster this growth in the future.

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A trend is observed towards defined contribution schemes, which leave sponsors less vulnerable to market downturns as risks are borne mainly by members and beneficiaries. Data for 2011 (provided by supervisors on a best effort basis) document a grave evolution in the funding positions of IORPs, especially for the larger defined benefit (DB) systems such as UK and NL, where levels in 2011 seem to have declined below 100%. The low yield environment in both countries is a key driver behind this development, as it forces the market value of liabilities up. At the same time both systems also result in low expected future asset returns given the dominance of debt investments for most occupational pensions in most countries. Supervisors have taken actions to address these low funding levels. In NL funds are obliged to participate in a recovery programme as their coverage ratio (assets divided by technical provisions) drops below the required level (on average 120%). The UK pensions regulator is also running recovery programmes and has published a statement in April setting out expectations of trustees of DB IORPs starting valuations under the current conditions. Other recent trends include an increase in sovereign debt exposures of IORPs in 2011 with respect to 2010. At least in high yield countries this is focussing on shorter maturities. Given current turbulent market conditions, a number of regulators have emphasised the increasing importance of proper governance processes and increasing reporting requirements, also including regular scenario analyses and stress tests.

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Recent developments FINANCIAL MARKET DEVELOPMENTS The macroeconomic environment is still challenging in many European countries and thus a main source of concern for financial stability. Unease over government debt levels remains and political uncertainty continues to influence markets also after the relatively strong policy responses at the European level. Overall, the political and economic climate continues to weigh on growth prospects in Europe, although there are regional differences. Figure 1 shows the evolution of two leading European business cycle indicators for the economic cycles six months ahead. The OECD index shows a somewhat declining trend in macroeconomic output, although possibly at a slower pace than in previous months. The ZEW Eurozone indicator had improved at the beginning of 2012 after having reached levels comparable with those observed during the financial crisis in 2008. The latest figure, however, indicates that the sentiment is again deteriorating slightly.

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Note: The figure shows leading indicators for the economic cycle six months ahead. Two indicators are depicted. One derives from the ZEW (Zentrum für Europäische Wirtschaftsforschung) Eurozone expectation of economic growth and the other from OECD. The former is plotted in blue on the left hand axis and the latter is plotted in green on the right hand axis. The OECD updated its methodology for the calculation of the indicator in April 2012 to use GDP as a reference series. Several European countries are facing continued economic downturn. Figure 2 shows the development in GDP in several large European countries. Only in a few countries is the GDP back to pre crisis levels.

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In several countries, GDP seems to be sloping downwards. Combined with deleveraging by the banking sector in Europe and the fiscal consolidation path followed by major governments, growth prospects for several countries seem dim, at least in the short term. The fact that fiscal consolidation and bank deleveraging is occurring in many countries at the same time increases the disruptive potential of the situation. At the same time, there is little evidence of inflationary tendencies which might have been expected given the debates at the political level on growth oriented instruments and global fiscal expansionary policies. Figure 3 shows that overall inflation expectations are well anchored at around 2% at a five year horizon.

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Note: The figure shows the evolution of the rate of the 5 year EUR inflation swap. It is noted that the swap rate is not adjusted for any inflation or other risk premia. Combined with high levels of Government debt following the banking crisis which started in 2008, this situation has led European government bond yields to diverge further. Government bond yields are high compared to the last few years for many European countries and several currently show an increasing trend.

LEGISLATIVE AND REGULATORY DEVELOPMENTS A number of legislative and regulatory developments have been reported by 29 Members and Observers on the basis of an EIOPA survey on national regulatory reforms which have been adopted in the second half of 2011 and the first part of 2012.

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The volatility in the capital market and the turbulence experienced in the Eurozone sovereign debt market are perceived as the major thrust of the regulatory and legislative changes reported by most of the responding countries. As a reaction to the impact of sovereign risk on the solvency position of the insurance undertakings, in several countries changes were made in the valuation approach to sovereign bonds (DE, DK, GR, IT). Supervisory engagement also included increasing the required frequency of reporting of sovereign, banking and other asset class exposures by insurance undertakings and groups (IE, LU, SI). To deeply explore potential risk concentration areas and market vulnerabilities ad hoc risk analyses, legislative amendments and reporting requests have been made (BE, FR, IT, PL). The composition of the asset portfolios held by insurance undertakings and the asset allocation policies are closely monitored in many territories (BE, DE, EE, FR, GR, IE, IT, PL, RO) as well as the liquidity position (BE, CY, PT, PL, RO) as a consequence of higher lapse rates. Likewise in house Stress Test exercises were widely performed, or are planned to be conducted in 2012, to assess the insurers’ ability to absorb additional shocks as well as the impacts of relatively large movements in risk factors using new stress test calculations, methodologies or additional adverse financial contexts (EE, FR, FI, LU, NO, PL, CZ). Low yield valuation exercises are also considered to be a key instrument to be further used to investigate financial weaknesses of the domestic market players. In this context, and in preparation of 2012 European stress testing, several countries have already launched or are planning to conduct a QIS5bis exercise over the current year. Following up on the regular and ad hoc monitoring of the solvency and capital positions of undertakings, more than half of the responding

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countries reported the need to adopt additional supervisory measures to prevent or solve solvency strains. In few countries a need was seen to put in place targeted actions or to request ad hoc data (EE, MT, SE) on the basis of concern over the high risk profile of individual companies. This has broadly led to a review of the annual, quarterly or monthly reporting packages (LU, LI, SE) which in some cases have also been amended or newly implemented to allow an impact assessment of the new prudential requirements to be adopted under the Solvency II framework. Action plans to gradually implement the new prudential requirements have already been initiated in the observed period (second half 2011 first half 2012) and will be carried out over the year 2012 (DE, LI, MT, FR). These mainly consist in exercises for evaluating the preparedness and affectedness of the industry by SII requirements, supported in some countries by dedicated meetings and by on site visits carried out as part of the Internal Model pre application process and of the Solvency II implementation process. Similar programs, started before the observed period, are ongoing and broadly performed in many other European jurisdictions.

Developments in the European insurance sector INSURANCE SECTOR DEVELOPMENTS Overall, the reported data from a sample of large European insurers indicates a slight worsening in profitability and solvency levels while new business is quite sluggish for a significant number of reporting groups. Life insurance premiums have increased by only 3% on average though more than half of the participating groups reported declining premiums. While in traditional life insurance, with a guarantee component, premiums declined by around 10% on average, unit linked life insurance

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recorded higher premiums (+3%). In non life business, premiums decreased on average by 2% while more than half of the sample experienced higher premiums. The highest increases in premiums have been seen in marine / aviation / transport (+24%), while in credit /suretyship premiums shrank by 17%.

Source: EIOPA, based on worldwide consolidated financial information received from a sample of 24 large European insurance groups from AT, CH, DE, ES, FR, IT, NL, SE and UK (22 groups for 2011 data).

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Source: EIOPA, based on worldwide consolidated financial information received from a sample of 24 large European insurance groups from AT, CH, DE, ES, FR, IT, NL, SE and UK (22 groups for 2011 data). Overall profits of surveyed groups decreased from 2010 to 2011 – when considering the median group, profits were some 17% lower. Return on equity also decreased (from 9.6% to 7.8% for the median group) though the dispersion especially on the lower end of the distribution was significantly lower in 2011 than in 2010.

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Source: EIOPA, based on worldwide consolidated financial information received from a sample of 28 large European insurance groups from AT, CH, DE, ES, FR, IT, NL, SE and UK (25 groups for 2011 data). Though 2011 was characterised by a large number of unusually costly natural catastrophes, profitability of the large non life insurance groups did not deteriorate: Net claims incurred grew less than net premiums so combined ratios were quite stable. Overall, it declined from 99% to 97%. Also this trend was observed for a majority of surveyed groups.

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Source: EIOPA, based on worldwide consolidated financial information received from a sample of 22 large European insurance groups from AT, CH, DE, ES, FR, IT, NL, SE and UK (18 groups for 2011 data).

LOCAL MARKET DEVELOPMENTS

In addition to the quantitative answers based on the fast track reporting summarised above, members have provided qualitative assessments of market conditions, key aspects of the life and non life insurance sectors, and the main risks and challenges as they are observed in local markets. In EIOPA’s view the insurance sector across Member States appears to be generally resilient. In spite of adverse market conditions and sluggish economy, life and non life companies are sufficiently capitalised in terms of solvency ratios following the current regime. A large group of Members reported that solvency ratios in their national markets suffered end 2011 from decreases in market valuation and sovereign debt crisis, however, some insurers have already recapitalised and others announce to do it during the year 2012.

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Overall, in the majority of the Member States (DE, DK, ES, FR, IT, UK) a stabilisation in the upcoming 6 to 12 months is expected. In a significant number of Member States a decline in gross premiums in the life sector has been observed recently, primarily due to the sluggish economic activity in some countries. Continued high unemployment also makes it difficult financially for many individuals to purchase new products. In addition, in some Member States the demand for classical life insurance products decreased slightly compared to last year which may be somehow related to the trend in many Member States to marketing towards unit linked or zero guarantee products. While a few Member States report slight improvements in financial results of life and non life companies, in most Member States, insurers were affected by adverse market conditions, low interest rates and by the sovereign debt crisis. Hence, lower returns on assets due to volatile financial markets, low interest rates, the sovereign debt crisis and the macroeconomic downturn, are highlighted as the main causes for the mixed financial results of the European life and non life sectors. In particular, the currently available information pointed out that financial market developments during the second half of 2011 contributed to a deterioration of the solvency situation of the insurers in Europe, however, the sectors are reported to remain well capitalised. A number of key aspects and developments in the European life and non life insurance sectors have been reported by Members. As life insurers examine how to reduce the capital strains caused by guaranteed products, the prolonged low interest rate environment will depress the yields for new cash flow and maturing bonds.

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Therefore there is an increased trend in many Member States (DE, FI, NO, SE, UK) towards marketing unit linked or zero guarantee products. A particular issue pertains to the lapse rates which deteriorate in some of the Member States (AT, BE, FR, IT) which may be somehow related to weak macroeconomic environment. In particular in some Member States were observed higher lapse rates during the last quarter of 2011 but latest information available point out to a decrease (FR) or a stabilisation in 2012 (AT, BE, IT, SE). In terms of assets held by insurance companies, in a few Member States, insurers determined concentration limits for asset management, reducing exposures to or even banning euro peripheral sovereign. Furthermore, in the majority of Member States most insurers wrote down the value of Greek government bonds in the second quarter. In a large group of Member States there has also been an allocation from peripheral low graded government bonds to higher graded government bonds, equity and high graded non financial corporate bonds (DE, FR, UK, FI, NO). Moreover, in a few Member States it is expected that insurers shorten maturities, hold cash and favour liquid assets (FR, IT).

Risk and Challenges

The overarching and somewhat interconnected risk themes, which have been on the economic agenda for some time now, remain mainly unchanged: (i) sovereign risk; (ii) the low yield environment, and the risk of not meeting issued interest rate guarantees; and (iii) the search for yield and the additional risk assumed in this process.

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Emerging themes may well follow on the back of these three well known risk factors. The list could contain events such as further developments in the sovereign bond markets in Europe, renewed strains on the banking sector, further deterioration of the US economy and fiscal budget, imbalances and further uneven growth rates within the euro area economies and following political and macroeconomic risks.

SUPERVISORY RISK ASSESSMENT FOR THE INSURANCE SECTOR

As regards the risk themes highlighted by Members, some of the risk factors which are affected more for adverse financial markets conditions and a weaker economic environment are seen now to be more relevant. The risks expected to increase: sovereign, property and credit to corporates and households emerge simultaneously in a sluggish economic environment such as Europe experienced in the past months. Moreover, in an environment where government yields are located at low levels, interest rate guarantees become hard to fulfil. Furthermore, as a result of a weak economic recovery, the remaining economy and industrial enterprises face difficulties, and the average credit rating of governments and industrial corporations would therefore deteriorate. Hence, investment opportunities in lower rated investment vehicles, such as, for example, sub investment grade bonds, increase in supply, making it relatively easier for insurance companies to engage in such investments. As highlighted by several Members, it is important to be vigilant and to contain and monitor these risks described above. Otherwise, it can be envisaged that weaker capitalised insurance companies could suffer unsustainable losses from their investment activities.

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Indeed, macroeconomic conditions indicate that 2012 will likely be another year in Europe of low GDP growth, low interest rates and moderate equity market performance. Even if the economic recovery continues, insurers may find that the assets underpinning their balance sheets have decreased in value. EIOPA Members and Observers have been asked to assess risks and challenges according to the probability of a materialisation and the impact on the national insurance markets. While for the Autumn 2011 EIOPA Financial Stability Report a more comprehensive list of 45 risks and challenges is used as the basis for the risk assessment, many of them being of a structural nature, the list used in the this Spring Report is primarily focussed on market and credit risks. Based on the responses from 29 Member States4, the following risks and challenges are classified as the most imminent, ranked by the product of the scores for probability and potential impact. Sovereign risk, equity risk, low interest rates as well as credit risk of banks are the risks with highest overall rankings. Especially the first of these items is considered to have an increased probability of materialisation and also the impact of such a scenario is expected to be significant.

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Over the last six months eight of the 10 risks mentioned above have increased according to the feedback of national supervisors. The highest increases are reported with regard to equity risk, property risk and liquidity risk. On the contrary, natural catastrophes and currency risk are considered to be stabilised compared with data from six months ago. For the next six months three risks are expected to increase further, due to turbulences in the financial markets and as a consequence of a sluggish economy, e.g. credit risk on sovereigns, property risk and credit risk to corporates and households. Conversely, interest rate risk related to a prolonged period of low interest rates is expected to decrease slightly.

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Developments in the European reinsurance sector MAJOR LOSS EVENTS IN 2011 AND AT THE BEGINNING OF 2012

The year 2011 has set new records. At about USD 380bn, global economic losses far surpassed 2005, the previous record year with losses of USD 220bn and make 2011 a year of unprecedented losses. Original insured losses totalled USD 105bn, slightly more than 2005´s USD 101bn (in original values). The most destructive loss event of the year 2011 was the devastating earthquake of 11 March in Tohoku, Japan, which alone (including the tsunami and without considering the consequences of the nuclear accident) accounted for overall losses of USD 210bn and insured losses of about USD 35bn - 40bn. It was the costliest natural catastrophe of all times and the strongest earthquake (magnitude of 9.0) ever recorded in Japan. The earthquake was also the most severe natural catastrophe in 2011 relating to fatalities: 15,840 people were killed, roughly more than the half of all people who have been victims of natural catastrophes in 2011. However, the figure does not include the countless people who died as a result of the famine following the worst drought in decades on the Horn of Africa, which was the greatest humanitarian catastrophe of the year 2011. The second most expensive natural catastrophe in 2011 for the insurance industry was again a very severe earthquake. On 22 February, New Zealand´s second largest town, Christchurch, was partly destroyed by an earthquake with a magnitude of 6.3, which caused insured losses of about USD 13bn and overall losses of roughly USD 16bn.

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These two large earthquakes were responsible for making geophysical events the dominant loss drivers in 2011. Nearly two thirds of economic losses and about half the insured losses stemmed from geophysical events. The long term average contribution of geophysical events has been just 22% of the economic losses and only 10% of the insured losses. So 2011 was exceptional not only due to its extraordinarily high losses, but also because of significant deviations of the distribution of the losses to the different perils. Since the hurricane season was relatively harmless the storm related insured losses reached only 37% of all insured losses in 2011 compared with 76% in the long term average. Again, untypically, more than 50% of all insured storm losses stemmed from devastating thunderstorms and tornado outbreaks in the USA which accounted for an absolute record of insured losses of about USD 26bn. A further record in 2011 represents the flooding in Thailand. With overall losses of about USD 40bn and insured losses of about USD 10bn the flooding in Thailand was not only by far the country´s most expensive catastrophe to date, but also the world´s most expensive flood disaster.

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A prominent role played the increased importance of Thailand regarding the global manufacturing supply chains. A large number of key component manufacturers were affected by the flooding, leading to production delays and disruptions at client businesses. As a consequence insured losses caused by production disruptions soared up. So, despite the dominant geophysical events in 2011, the weather related events in total were also very severe, leading to the second highest values recorded since 1980 in terms of overall and insured losses (in 2011 currency units). Even without the earthquakes, 2011 would have been an extreme natural catastrophe year. Moreover, the distribution of insured losses between the continents in 2011 was also exceptional. Asia accounted for 44% of all insured losses, whereas North America and Europe together accounted for fewer than 40% in 2011 contrary to the long term average of more than 85% of all insured losses. The absence of major loss events in the Western developed countries with a high insurance density left the insured losses in relation to the overall losses at a low level and is one major reason why overall the rates only increased relatively modest in spite of the heavy losses in 2011. By contrast, loss activity during the first three months of 2012 has been relatively light. Insured losses during the quarter are expected to be less than USD 5bn, significantly lower than losses of over USD 50bn in the first three months of 2011.

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The sinking of the cruise ship Costa Concordia, regional tornado outbreaks in the US and earthquakes in Mexico and Chile were the most significant losses that occurred in the first quarter of 2012. Despite the heavy losses of 2011, the reinsurance market continues to function normally and has sufficient capital. At the end of 2011, the reinsurance capacity was only three percent under the level of 2010. The renewals in January and April reveal that sufficient capacity was available in the market in spite of the heavy losses and the challenging macroeconomic environment (particular low investment yields and increased investment volatility). Several years of relatively benign payouts as well as the recovery of financial markets had led to reinsurance capacities substantially over the demand, which depressed the prices.Consequently the rates did not rise largely, which is very different from other post loss markets. There are, of course, some marked increases in reinsurance prices in the regions and segments affected by losses, especially regarding the Asia Pacific region. But overall the rates have gone up only modestly, last but not least due to the extensive absence of major loss events in Europe and North America. Particularly the demand for reinsurance in the US, where reinsurance demand far exceeds that of any other region, continues to be very sensitive to price. The 2011 hurricane season was relatively harmless. The model version changes (RMS v.11) were often already reflected in underwriting processes to varying degrees based on previous loss experience with the result of a less increased demand for reinsurance than expected earlier.

Annex 1: Country abbreviations

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AT Austria BE Belgium BG Bulgaria CY Cyprus CZ Czech Republic DE Germany DK Denmark EE Estonia ES Spain FI Finland FR France GR Greece HU Hungary IE Ireland IS Iceland IT Italy LI Liechtenstein LT Lithuania LU Luxembourg LV Latvia MT Malta NL Netherlands NO Norway PL Poland PT Portugal RO Romania SE Sweden SI Slovenia SK Slovakia UK United Kingdom CH Switzerland

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NUMBER 4

The translation (Japanese to English) is ready!

Insurance Inspection Manual (Inspection Manual for Insurance Companies) Points of Attention for Inspections with Use of This Manual (1) This inspection manual shall apply to all insurance companies, including the overseas offices of Japanese insurance companies (overseas branches, locally incorporated entities, representative offices, etc. provided however, that the determination of whether to include these offices in the inspection subject to this manual shall be judged in view of applicable laws and regulations, including the local regulatory framework), as well as Japanese branches of foreign insurance companies, etc. and specified corporations. (2) When the insurance company is a company with a committee system, inspections shall be conducted from the viewpoint of whether the Board of Directors, committees (such as the nomination, compensation, and audit committees), executive officers, and other corporate structures exercise their empowered authority, etc., paying attention to the following points: - 1) The authority to execute business is bestowed on executive officers,

and in principle, directors do not have the authority to execute business.

- 2) The Board of Directors may delegate, by resolution, the authority to make business decisions to executive officers.

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- 3) The purpose of the Board of Directors is to supervise the execution of the respective duties performed by directors and executive officers.

- 4) Auditing authority is bestowed on the audit committee, and not on individual audit committee members. (Audit committee members appointed by the audit committee may exercise the authority of the audit committee.)

(3) In the case where an executive director (non-director) assumes the roles and responsibilities that would normally be assumed by a director in charge of a specific business operation, it is necessary to conduct a comprehensive review as to whether the Board of Directors has assigned the officer authority similar in effect to that which would be granted to a director in charge, whether the focus of the responsibility is made clear, and whether the Board of Directors sufficiently monitors the execution of the relevant business operation. Based on the findings thereof, the inspector should determine whether the executive officer is performing the roles and responsibilities required for a director in charge, as specified in the checklists of this manual. (4) Furthermore, when due to certain special reasons, it is necessary to conduct an inspection of subsidiaries, etc., of insurance companies or parties conducting business on their behalf, examinations as may be required shall be conducted in accordance with the applicable sections of this manual. (5) Unless specified otherwise, items expressed in the question form such as “does the company…” or “is the company…” refer to requirements that must be met by insurance companies. Meanwhile, items preceded by “It is desirable…” refer to best practices recommended for insurance companies, unless specified otherwise. With regard to items accompanied by “for example,” insurance companies are not required to fully comply letter-by-letter with the criteria and requirements specified therein.

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They are merely examples of items that may be useful for checking whether insurance companies are meeting certain criteria and requirements, in a manner befitting the scale and nature of their business. (6) The following are definitions and uses of some of the key terms in this manual - 1) Items that are defined as roles of “the Board of Directors” are items

for which the Board of Directors itself needs to determine substantial matters related thereto. However, this shall not preclude another deliberative body, division or department from discussing draft proposals for decision.

- 2) The “Board of Directors or organization equivalent to the Board of Directors” includes, in addition to the Board of Directors, other entities that decide matters concerning corporate management, with the participation of senior managers such as a council of managing directors and a corporate management council (hereinafter referred to as the “Council of Managing Directors, etc.”). It is desirable that decisions concerning items specified as the prerogatives of the Board of Directors or organization equivalent to the Board of Directors be made by the Board of Directors itself. In the case where the decision - making authority is delegated to the Council of Managing Directors, etc., it is necessary to make sure that the delegation has been made in a clear manner, that a follow-up review is provided for through the compilation of the minutes of meetings of the Council of Managing Directors, etc., and that a sufficient check-and-balance system is ensured, through arrangements such as requiring reports to be made to the Board of Directors, and allowing corporate auditors to attend meetings of the Council of Managing Directors, etc.

- 3) The “business locations” refers to organizations, other than the head office, which includes branches, regional offices, business line

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headquarters, business offices, overseas branches, and overseas corporations. The term “business locations, etc.” refers to business locations, and also includes service centers (including loss investigation operations), overseas representative offices and other locations that are not engaged in sales activities, and business locations other than the head office.

- 4) The “manager” refers to persons in senior managerial positions in management divisions (including directors). Furthermore, the term also refers to the head of a business location, or senior managers thereof (including directors) with levels of responsibility equivalent to or higher than the head of a business location.

- 5) The “employees, etc.” refers to employees, sales representatives, and insurance agents of insurance companies.

- 6) The “insurance sales representatives” refers to sales representatives

and insurance agents, but does not include insurance brokers. - 7) The “policyholders” refers to persons who are parties to insurance

contracts with insurance companies.

- 8) The “policyholders, etc.” refers to policyholders, insured persons, and beneficiaries.

- 9) “Internal rules” are rules that specify arrangements on an insurance

company’s business in accordance with its corporate management policy, etc. that are applicable within the company.

It should be noted that internal rules do not necessarily have to specify detailed procedures.

- 10) The “marketing and sales division” refers to a division,

department, or business location engaged in sales business. For

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example, a division involved directly or indirectly in sales or engaged in sales promotion planning is a marketing and sales division.

- 11) The “legal checks, etc.,” which includes a compliance check,

means, for example, a validation of the consistency and compatibility of internal rules and the legality of transactions and business operations by personnel in charge of legal affairs, a division in charge thereof, personnel in charge of compliance, the compliance control division, and in-house or outside lawyers and other experts.

- 12) “Monitoring” refers to not only surveillance but also

implementation of specific pre-emptive measures such as issuing warnings.

- 13) The “risk profile” of a financial institution refers to the sum of

features of various risks to which the institution is exposed.

Checklist for Business Management (Governance) (for Basic Elements)

Checkpoints

- In order to protect customers by ensuring the sound and appropriate management of business and fairness of insurance solicitation of an insurance company, under appropriate governance, thorough implementation of legal compliance, proper insurance solicitation and customer protection, and accurate management of various risks across all businesses of the insurance company are needed.

- In order to enable an insurance company to conduct business management (governance) effectively, officers and employees, as well as organizations within the company must perform their respective roles and responsibilities.

To be more specific, directors and other executives are responsible for nurturing work ethics and cultivating a company-wide culture that attaches importance to internal control.

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The representative directors, non-representative directors and corporate auditors must understand their own roles in the various processes of internal control and fully involve themselves in the processes.

Also, it is important that the Board of Directors and the Board of Auditors function effectively and that the functions of a check-and-balance system among divisions and departments, and the functions of internal audits by the Internal Audit Division are executed appropriately.

- The inspector should determine whether the insurance company’s business management (governance) system is functioning effectively throughout the institution and whether the management is performing its roles and responsibilities appropriately by way of reviewing, with the use of the check items listed in this checklist, the effectiveness of the functions of five basic elements, namely a system of

(1) Business management (governance) by the representative directors, non-representative directors and the Board of Directors,

(2) Internal audits,

(3) Audits by corporate auditors,

(4) External audits, and

(5) Checking by actuaries.

- If the insurance company’s management fails to recognize weaknesses or problems recognized by the inspector, it is also necessary to explore, in particular, the possibility that the Internal Control System is not functioning effectively, and review the findings thereof through dialogue.

- The inspector should review the status of improvements with regard to the major issues pointed out on the occasion of the last inspection and determine whether or not effective improvement measures have been developed and implemented.

Checklist for Legal Compliance

Checkpoints

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- The development and establishment of a legal compliance system is one of the most important tasks for an insurance company in order to secure the sound and appropriate management of its business.

Therefore, the company’s management is charged with and responsible for taking the initiative in developing and establishing the legal compliance system that covers the company’s entire business by deciding a basic policy on legal compliance and developing an organizational framework, etc..

- The inspector should determine whether the legal compliance system is functioning effectively and whether the roles and responsibilities of the insurance company’s Board of Directors are being appropriately performed by way of reviewing, with the use of check items listed in Chapter I., whether the management is appropriately implementing

(1) Policy development,

(2) Development of internal rules and organizational frameworks and

(3) Assessment and improvement activities.

- If any problem is recognized as a result of reviews conducted with the use of the check items listed in Chapter II and later in this checklist, it is necessary to exhaustively examine which of the elements listed in Chapter I are absent or insufficient, thus causing the said problem, and review findings thereof through dialogue between the inspector and the insurance company.

- If the company’s management fails to recognize weaknesses or problems recognized by the inspector, it is also necessary to explore in particular the possibility that the Internal Control

System is not functioning effectively and review findings thereof through dialogue.

- The inspector should review the status of improvements with regard to the issues pointed out on the occasion of the last inspection that are not minor and determine whether or not effective improvement measures have been developed and implemented.

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To read more

http://www.fsa.go.jp/en/refer/manual/hoken_e/h-all.pdf

http://www.fsa.go.jp/en/refer/manual/hoken_e/h-all.pdf

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NUMBER 5

ICECOOL TO CRACK THERMAL MANAGEMENT BARRIER, ENABLE BREAKTHROUGH ELECTRONICS

June 07, 2012

New DARPA program seeks to cool chips, chip stacks from within

The continued miniaturization and the increased density of components in today’s electronics have pushed heat generation and power dissipation to unprecedented levels.

Current thermal management solutions, usually involving remote cooling, are unable to limit the temperature rise of today’s complex electronic components.

Such remote cooling solutions, where heat must be conducted away from components before rejection to the air, add considerable weight and volume to electronic systems.

The result is complex military systems that continue to grow in size and weight due to the inefficiencies of existing thermal management hardware.

Recent advances of the DARPA Thermal Management Technologies (TMT) program enable a paradigm shift — better thermal management.

DARPA’s Intrachip/Interchip Enhanced Cooling (ICECool) program seeks to crack the thermal management barrier and overcome the limitations of remote cooling.

http://www.darpa.mil/Our_Work/MTO/Programs/Thermal_Management_Technologies_(TMT).aspx

http://www.darpa.mil/Our_Work/MTO/Programs/Thermal_Management_Technologies_(TMT).aspx

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ICECool will explore ‘embedded’ thermal management by bringing microfluidic cooling inside the substrate, chip or package by including thermal management in the earliest stages of electronics design.

“Think of current electronics thermal management methods as the cooling system in your car,” said Avram Bar-Cohen, DARPA program manager.

“Water is pumped directly through the engine block and carries the absorbed heat through hoses back to the radiator to be cooled.

By analogy, ICECool seeks technologies that would put the cooling fluid directly into the electronic ‘engine’.

In DARPA’s case this embedded cooling comes in the form of microchannels designed and built directly into chips, substrates and/or packages as well as research into the thermal and fluid flow characteristics of such systems at both small and large scales.”

The ICECool Fundamentals solicitation released today seeks proposals to research and demonstrate the microfabrication and evaporative cooling techniques needed to implement embedded cooling.

Proposals are sought for intrachip/interchip solutions that bring microchannels, micropores, etc. into the design and fabrication of chips.

Interchip solutions for chip stacks are also sought.

“Thermal management is key for advancing Defense electronics,” said Thomas Lee, director, Microsystems Technology Office.

“Embedded cooling may allow for smaller electronics, enabling a more mobile, versatile force.

Reduced thermal resistance would improve performance of DoD electronics and may result in breakthrough capabilities we cannot yet envision.”

THERMAL MANAGEMENT TECHNOLOGIES (TMT)

Significant enhancements in fundamental device materials, technologies and system integration have led to rapid increases in the total power consumption of DoD systems.

http://www.darpa.mil/Our_Work/MTO/Personnel/Dr_Avram_Bar_Cohen.aspx

http://www.darpa.mil/External_Link.aspx?url=https://www.fbo.gov/spg/ODA/DARPA/CMO/DARPA-BAA-12-50/listing.html

http://www.darpa.mil/Our_Work/MTO/Personnel/Dr_Thomas_Lee.aspx

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In many cases, power consumption has increased while system size has decreased, leading to an even greater problem with heat density.

Thermal management of DoD systems often imposes the main obstacle to further enhancements.

The overarching goal of the DARPA Thermal Management Technologies (TMT) Program is to explore and optimize new nanostructured materials and other recent advances for use in thermal management systems.

The program is divided into five technical efforts:

o Thermal Ground Plane (TGP)

o Microtechnologies for Air-Cooled Exchangers (MACE) o NanoThermal Interfaces (NTI) o Active Cooling Modules (ACM) o Near Junction Thermal Transport (NJTT)

The TGP effort is focused on high-performance heat spreaders which use two-phase cooling to replace the copper alloy spreaders in conventional systems.

The goal of the MACE effort is to enhance air-cooled exchangers by reducing the thermal resistance through the heat sink to the ambient, increasing convection through the system, improving heat sink fin thermal conductivity, optimizing and/or redesigning the complimentary heat sink blower, and increasing the overall system (heat sink and blower) coefficient of performance.

The NTI effort is focused on novel materials and structures that can provide significant reductions in the thermal resistance of the thermal interface layer between the backside of an electronic device and the next layer of the package, which might be a spreader or a heatsink.

http://www.darpa.mil/Our_Work/MTO/Programs/TMT/Thermal_Ground_Plane_(TGP).aspx

http://www.darpa.mil/Our_Work/MTO/Programs/TMT/Microtechnologies_for_Air-Cooled_Exchangers_(MACE).aspx

http://www.darpa.mil/Our_Work/MTO/Programs/TMT/NanoThermal_Interfaces_(NTI).aspx

http://www.darpa.mil/Our_Work/MTO/Programs/TMT/Active_Cooling_Modules_(ACM).aspx

http://www.darpa.mil/Our_Work/MTO/Programs/TMT/Near_Junction_Thermal_Transport_(NJTT).aspx

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ACM will investigate active cooling of electronic devices using techniques such as thermoelectric coolers, sterling engines, etc.

The goal of the Near Junction Thermal Transport (NJTT) effort of the TMT program is to achieve a 3x or greater improvement in power handling from GaN power amplifiers through improved thermal management of the near junction region.

Collectively, research in these areas will improve thermal resistance barriers at all layers of all DoD systems.

At the completion of these efforts, targeted insertions of specific TMT structures into DoD platforms will lead to further developments.

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NUMBER 6

UCITS Management Companies

The Omnibus Directive requires ESMA to establish a list all authorisations granted to UCITS management companies in the European Union.

ESMA is currently working on the IT solution to establish this list on its website. The list will centralise all the relevant information in this regard received from all national competent authorities.

As a temporary solution, the list below contains hyperlinks to the webpages of the EU countries and their national competent authorities giving access to national registers that contain the list of authorised UCITS management companies. ESMA draws users' attention to the fact that some hyperlinks do not give direct access to the list of UCITS management companies authorised. Also, investors should note that for some competent authorities the information is only available in the national language.

Austria (Finanzmarktaufsicht – FMA) German link: http://www.fma.gv.at/de/unternehmen/suche-unternehmensdatenbank.html English link: http://www.fma.gv.at/en/companies/search-companies.html

http://www.fma.gv.at/de/unternehmen/suche-unternehmensdatenbank.html

http://www.fma.gv.at/de/unternehmen/suche-unternehmensdatenbank.html

http://www.fma.gv.at/en/companies/search-companies.html

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Belgium (FSMA) Dutch link: http://www.fsma.be/nl/Supervision/finbem/bhv/Article/lijsten/bhv1.aspx French link: http://www.fsma.be/fr/Supervision/finbem/bhv/Article/lijsten/bhv1.aspx

Bulgaria (Financial Supervision Commission) http://www3.fsc.bg/ERiK/runner?lang=BG

Cyprus (Cysec)

Non applicable

Czech Republic (Czech National Bank – CNB)

Czech link:

https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_l... English link: https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_l...

Denmark (Finanstilsynet) Danish link: http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-... English link: http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-...

http://www.fsma.be/nl/Supervision/finbem/bhv/Article/lijsten/bhv1.aspx

http://www.fsma.be/nl/Supervision/finbem/bhv/Article/lijsten/bhv1.aspx

http://www.fsma.be/fr/Supervision/finbem/bhv/Article/lijsten/bhv1.aspx

http://www.fsma.be/fr/Supervision/finbem/bhv/Article/lijsten/bhv1.aspx

http://www3.fsc.bg/ERiK/runner?lang=BG

https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_lang=cz&p_DATUM=07.03.2012&p_hie=HI&p_rec_per_page=108&p_ses_idx=5

https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_lang=cz&p_DATUM=07.03.2012&p_hie=HI&p_rec_per_page=108&p_ses_idx=5

https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_lang=en&p_DATUM=07.03.2012&p_hie=HI&p_rec_per_page=108&p_ses_idx=53

https://apl.cnb.cz/apljerrsdad/JERRS.WEB15.BASIC_LISTINGS_RESPONSE_3?p_lang=en&p_DATUM=07.03.2012&p_hie=HI&p_rec_per_page=108&p_ses_idx=53

http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-soegning.aspx?sc_lang=da&ctid=52

http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-soegning.aspx?sc_lang=da&ctid=52

http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-soegning.aspx?sc_lang=en&ctid=52

http://www.finanstilsynet.dk/Tal-og-fakta/Virksomheder-under-tilsyn/VUT-soegning.aspx?sc_lang=en&ctid=52

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Estonia (Estonian Financial Supervision Authority) http://www.fi.ee/index.php?id=1784

Finland (Finanssivalvonta) Finish link: http://www.finanssivalvonta.fi/fi/Fiva/Valvottavat/Pages/Valvottavat.aspx Swedish link: http://www.finanssivalvonta.fi/se/FI/Tillsynsobjekt/Pages/Tilsynsobjekt.... English link: http://www.finanssivalvonta.fi/en/About_us/Supervised/Pages/superviseden...

France (Autorité des marchés financiers – AMF) http://www.amf-france.org/bio/default.aspx?lang=fr&Id_Tab=0

Germany (BaFin) http://www.bafin.de/cln_117/nn_724052/DE/Unternehmen/Fonds/Investmentfon...

Greece (Hellenic Capital Market Commission) http://www.hcmc.gr/pages/aedak.asp?catID=113

Hungary (Hungarian Financial Supervisory Commission) http://www.pszaf.hu/data/cms547573/hataronatnyulo_bef_alapkezelok_2012_0...

http://www.fi.ee/index.php?id=1784

http://www.finanssivalvonta.fi/fi/Fiva/Valvottavat/Pages/Valvottavat.aspx

http://www.finanssivalvonta.fi/fi/Fiva/Valvottavat/Pages/Valvottavat.aspx

http://www.finanssivalvonta.fi/se/FI/Tillsynsobjekt/Pages/Tilsynsobjekt.aspx

http://www.finanssivalvonta.fi/se/FI/Tillsynsobjekt/Pages/Tilsynsobjekt.aspx

http://www.finanssivalvonta.fi/en/About_us/Supervised/Pages/supervisedentities.aspx

http://www.finanssivalvonta.fi/en/About_us/Supervised/Pages/supervisedentities.aspx

http://www.amf-france.org/bio/default.aspx?lang=fr&Id_Tab=0

http://www.bafin.de/cln_117/nn_724052/DE/Unternehmen/Fonds/Investmentfonds/investmentfonds__node.html?__nnn=true

http://www.bafin.de/cln_117/nn_724052/DE/Unternehmen/Fonds/Investmentfonds/investmentfonds__node.html?__nnn=true

http://www.hcmc.gr/pages/aedak.asp?catID=113

http://www.pszaf.hu/data/cms547573/hataronatnyulo_bef_alapkezelok_2012_03_20.xls

http://www.pszaf.hu/data/cms547573/hataronatnyulo_bef_alapkezelok_2012_03_20.xls

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Iceland (Financial Supervisory Authority – Fjármálaeftirlitið) http://fmeenvefur.eplica.is/supervision/supervised-entities/

Ireland (Central Bank of Ireland) http://registers.financialregulator.ie/DownloadsPage.aspx

Italy (Consob) http://siotec.bancaditalia.it/sportelli/jsp/layout/home.jsp?detail=inter.

Latvia (Financial and Capital Market Commission) Latvian link: http://www.fktk.lv/lv/tirgus_dalibnieki/ieguldijumu_parvaldes_sabiedri/ English link: http://www.fktk.lv/en/market/investment_management_companie/investment_m...

Liechtenstein http://register.fma-li.li/fileadmin/user_upload/dokumente/publikationen/...

Lithuania (Central Bank of Lithuania) Lithuanian link: http://www.lb.lt/valdymo_imones?pg=valdymo_imones_licencijuotos_lietuvoje English link: http://www.lb.lt/management_companies

Luxembourg (CSSF)

http://fmeenvefur.eplica.is/supervision/supervised-entities/

http://registers.financialregulator.ie/DownloadsPage.aspx

http://www.fktk.lv/lv/tirgus_dalibnieki/ieguldijumu_parvaldes_sabiedri/

http://www.fktk.lv/lv/tirgus_dalibnieki/ieguldijumu_parvaldes_sabiedri/

http://www.fktk.lv/en/market/investment_management_companie/investment_management_firms/

http://www.fktk.lv/en/market/investment_management_companie/investment_management_firms/

http://register.fma-li.li/fileadmin/user_upload/dokumente/publikationen/Investmentunternehmen/de/120418_Umstellung_auf_UCITS_IV.pdf

http://register.fma-li.li/fileadmin/user_upload/dokumente/publikationen/Investmentunternehmen/de/120418_Umstellung_auf_UCITS_IV.pdf

http://www.lb.lt/valdymo_imones?pg=valdymo_imones_licencijuotos_lietuvoje

http://www.lb.lt/valdymo_imones?pg=valdymo_imones_licencijuotos_lietuvoje

http://www.lb.lt/management_companies

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http://www.cssf.lu/entites-surveillees/

Malta (Financial Services Authority) http://mfsa.com.mt/pages/licenceholders.aspx

Netherlands (AFM) Dutch link: http://www.afm.nl/nl/professionals/registers/alle-huidige-registers.aspx?type={883BCFF1-0F26-442F-9FAF-A39FF911B109}&filter1=1 English link: http://www.afm.nl/en/professionals/registers/alle-huidige-registers.aspx?type={883BCFF1-0F26-442F-9FAF-A39FF911B109}&filter1=1

Norway (Finanstilsynet) Norwegian link: http://www.finanstilsynet.no/no/Venstremeny/Konsesjonsregister/ English link: http://www.finanstilsynet.no/en/Secondary-menu/Finanstilsynet-registry/

Poland (Polish Financial Supervision Authority) Polish: http://www.knf.gov.pl/dla_rynku/PODMIOTY_rynku/Podmioty_rynku_kapitalowe... English: http://www.knf.gov.pl/en/about_the_market/Capital_market/entities/Invest...

Portugal (Comissão do Mercado de Valores Mobiliários – CMVM)

http://www.cssf.lu/entites-surveillees/

http://mfsa.com.mt/pages/licenceholders.aspx

http://www.afm.nl/nl/professionals/registers/alle-huidige-registers.aspx?type=%7B883BCFF1-0F26-442F-9FAF-A39FF911B109%7D&filter1=1

http://www.afm.nl/nl/professionals/registers/alle-huidige-registers.aspx?type=%7B883BCFF1-0F26-442F-9FAF-A39FF911B109%7D&filter1=1

http://www.afm.nl/en/professionals/registers/alle-huidige-registers.aspx?type=%7B883BCFF1-0F26-442F-9FAF-A39FF911B109%7D&filter1=1

http://www.afm.nl/en/professionals/registers/alle-huidige-registers.aspx?type=%7B883BCFF1-0F26-442F-9FAF-A39FF911B109%7D&filter1=1

http://www.finanstilsynet.no/no/Venstremeny/Konsesjonsregister/

http://www.finanstilsynet.no/en/Secondary-menu/Finanstilsynet-registry/

http://www.finanstilsynet.no/en/Secondary-menu/Finanstilsynet-registry/

http://www.knf.gov.pl/dla_rynku/PODMIOTY_rynku/Podmioty_rynku_kapitalowego/index.html

http://www.knf.gov.pl/dla_rynku/PODMIOTY_rynku/Podmioty_rynku_kapitalowego/index.html

http://www.knf.gov.pl/en/about_the_market/Capital_market/entities/Investment_fund_management_co.html

http://www.knf.gov.pl/en/about_the_market/Capital_market/entities/Investment_fund_management_co.html

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http://web3.cmvm.pt/english/sdi2004/IFs/app/ifs_por_tipo.cfm?gr_tab_cod=...

Romania (Romanian National Securities Commission – CNVM) http://www.cnvmr.ro/RCNVM/index.htm

Slovak Republic (Central Bank of Slovakia) Slovak link: http://www.nbs.sk/sk/dohlad-nad-financnym-trhom/dohlad-nad-trhom-cennych... English link: http://www.nbs.sk/en/financial-market-supervision/securities-market-supe...

Slovenia (Securities Market Agency – Agencija za trg vrednostnih papirjev) Slovenian link: http://www.a-tvp.si/Default.aspx?id=101 English link: http://www.a-tvp.si/Eng/Default.aspx?id=101

Spain (Comisión Nacional del Mercado de Valores - CNMV) www.cnmv.es/Portal/Consultas/Busqueda.aspx?id=23

Sweden (Finansinspektionen) Swedish link: http://www.fi.se/Tillstand/Foretagsregistret/Foretagsregistret-Foretag-per-kategori/?typ='FONDBO'

http://web3.cmvm.pt/english/sdi2004/IFs/app/ifs_por_tipo.cfm?gr_tab_cod=%24%3ECF%24%3C0%20%20%0A

http://web3.cmvm.pt/english/sdi2004/IFs/app/ifs_por_tipo.cfm?gr_tab_cod=%24%3ECF%24%3C0%20%20%0A

http://www.cnvmr.ro/RCNVM/index.htm

http://www.nbs.sk/sk/dohlad-nad-financnym-trhom/dohlad-nad-trhom-cennych-papierov/kolektivne-investovanie/zoznam-dohliadanych-subjektov/zoznam-tuzemskych-spravcovskych-spolocnosti-a-ich-podielovych-fondov

http://www.nbs.sk/sk/dohlad-nad-financnym-trhom/dohlad-nad-trhom-cennych-papierov/kolektivne-investovanie/zoznam-dohliadanych-subjektov/zoznam-tuzemskych-spravcovskych-spolocnosti-a-ich-podielovych-fondov

http://www.nbs.sk/en/financial-market-supervision/securities-market-supervision/collective-investment/list-of-supervised-entities/list-of-domestic-management-companies-and-their-mutual-funds

http://www.nbs.sk/en/financial-market-supervision/securities-market-supervision/collective-investment/list-of-supervised-entities/list-of-domestic-management-companies-and-their-mutual-funds

http://www.a-tvp.si/Default.aspx?id=101

http://www.a-tvp.si/Eng/Default.aspx?id=101

http://www.cnmv.es/Portal/Consultas/Busqueda.aspx?id=23

http://www.fi.se/Tillstand/Foretagsregistret/Foretagsregistret-Foretag-per-kategori/?typ=%27FONDBO%27

http://www.fi.se/Tillstand/Foretagsregistret/Foretagsregistret-Foretag-per-kategori/?typ=%27FONDBO%27

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English link: http://www.fi.se/Folder-EN/Startpage/Authorisation/Company-register/Company-register-Company-per-category/?typ=%27FONDBO%27

United Kingdom (Financial Services Authority – FSA) http://www.fsa.gov.uk/register/home.do

http://www.fi.se/Folder-EN/Startpage/Authorisation/Company-register/Company-register-Company-per-category/?typ=%27FONDBO%27

http://www.fi.se/Folder-EN/Startpage/Authorisation/Company-register/Company-register-Company-per-category/?typ=%27FONDBO%27

http://www.fsa.gov.uk/register/home.do

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NUMBER 7

PCAOB to Host Public Meeting on Auditor Independence and Audit Firm Rotation in San Francisco

Washington, D.C., June 12, 2012

The Public Company Accounting Oversight Board announced today that it will host its second public meeting to discuss ways to enhance auditor independence, objectivity, and professional skepticism, including through mandatory rotation, or term limits, for audit firms.

The meeting will be held ***Thursday, June 28, 2012, in San Francisco, CA***.

The Board issued a concept release on Aug. 16, 2011, that invited commenters to discuss measures that might meaningfully enhance auditor independence, objectivity and professional skepticism. The release included a number of questions related to mandatory audit firm term limits, such as whether the PCAOB should consider a firm rotation requirement for audit tenures of more than 10 years, or for the largest issuer audits only. "This is a complex subject that raises important issues about how to fulfill the audit's core purpose," said PCAOB Chairman James R. Doty. "I look forward to building upon the constructive discussion started with the comments received on the PCAOB concept release and the public meeting in Washington earlier this year."

http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx

http://pcaobus.org/Rules/Rulemaking/Pages/Docket037Comments.aspx

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The first public meeting on auditor independence and audit firm rotation was held March 21-22, 2012 in Washington, D.C., and a webcast can be viewed on the PCAOB website. The San Francisco meeting will consist of panel discussions, during which panelists will be invited to present their views on the matters raised in the concept release and board members will have the opportunity to ask panelists follow-up questions. The schedule and list of panelists will be made available closer to the meeting date. The meeting will be held at the Hilton San Francisco Financial District, 750 Kearny Street, San Francisco, CA 94108. It will be open to the public, and also available via webcast on the PCAOB website.

http://pcaobus.org/News/Webcasts/Pages/03212012_PublicMeeting.aspx

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NUMBER 8

Subject: Liquidity Date: June 8, 2012 Description: Comptroller’s Handbook Revisions and Rescissions

The Office of the Comptroller of the Currency (OCC) recently revised the “Liquidity” booklet of the Comptroller’s Handbook, which replaces a similarly titled booklet issued in February 2001.

This revised booklet provides updated guidance to examiners and bankers on assessing the quantity of liquidity risk exposure and the quality of liquidity risk management.

The major revisions to this booklet include the following:

Narrative more heavily focused on management of liquidity, including

o Emphasis on the importance of maintaining appropriate levels of highly liquid assets, and

o Enhanced discussion regarding the importance of a well-developed planning process for contingency funding.

Additional guidance—particularly for those examiners responsible for examining large and internationally active banks—from the September 2008 “Principles for Sound Liquidity Risk Management and Supervision,” issued by the Basel Committee on Bank Supervision and formally adopted by the OCC and other U.S. banking regulatory agencies.

Addition of eight appendixes providing specific guidance to examiners and bankers on a variety of topics and examples of fundamental liquidity management reports.

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In accordance with the OCC’s supervision-by-risk approach, examiners will generally use the liquidity core examination procedures, which can be found in the 2010 “Community Bank Supervision” booklet and the 2010 “Large Bank Supervision” booklet in the Comptroller’s Handbook. Examiners will supplement the procedures listed in these booklets, as appropriate, with the updated procedures detailed in the “Liquidity” booklet, for additional analysis of liquidity risk. With the issuance of this guidance, the following Office of Thrift Supervision guidance pertaining to liquidity risk is hereby rescinded:

Examination Handbook: Liquidity

o Section 510, “Funds Management” (and related program)

o Section 530, “Liquidity Risk Management” (and related program and appendixes)

o Section 560, “Deposits/Borrowed Funds” (and related program and questionnaire)

Chief Executive Officer Memo #295, “Monitoring and Documenting the Use of Funds from Federal Financial Stability and Guaranty Programs”

The OCC’s “Funds Management” booklet of the Comptroller’s Handbook has also been rescinded, effective immediately. OCC Advisory Letter 2001-5, “Brokered and Rate-Sensitive Deposits,” has been rescinded, while the “Joint Agency Advisory on Brokered and Rate-Sensitive Deposits” has been incorporated into the “Liquidity” booklet as an appendix.

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Liquidity Comptroller’s Handbook June 2012

This booklet provides guidance to examiners and bankers on assessing the quantity of liquidity risk exposure and the quality of liquidity risk management. The sophistication of a bank’s liquidity management process depends on its business activities and appetite for risk, as well as the overall level of liquidity risk. A well-managed bank, regardless of size and complexity, must be able to identify, measure, monitor, and control its exposure to liquidity risk in a timely and comprehensive manner. Liquidity core procedures can be found in the Community Bank Supervision Handbook (January 2010) and in Examiner View (EV). This handbook provides examiners with supplemental procedures for further analyzing the quantity and quality of liquidity risk. Examiners should refer to the Bank Supervision Process Handbook for further guidance on CAMELS Rating System. Additional guidance, particularly for those examiners responsible for examining large and internationally active banks, is provided in the September 2008 “Principles for Sound Liquidity Risk Management and Supervision,“ issued by the Basel Committee on Banking Supervision (BCBS) and formally adopted by the OCC and other U.S. banking regulatory agencies in that same year.

Background

Traditionally, banks have relied on local retail deposits (transaction and savings accounts) to support asset growth.

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Most retail deposit balances are federally insured, stable, and relatively inexpensive. Funding dynamics at community, midsize, and large banks, however, have evolved over time. Technological advances in the delivery of financial products and services, the removal of interstate banking restrictions, and the deregulation of interest rates paid on deposit accounts changed both depositor and banker behavior. Legislative reforms were intended to give depository institutions the tools to compete with other market participants for deposits, but they also increased competition among the banks themselves. The combination of these reforms and technological advances also made it easier for depositors, looking for better returns on their money, to leave their local markets. Consequently, in some cases, retail bank deposit growth did not keep pace with asset growth. Some banks became reliant on alternative deposit, nondeposit, and offbalance-sheet funding sources to cover the shortfall in traditional retail deposit funding. Changes in technology, product innovation, and funding dynamics create new challenges for liquidity managers. Intense competition and declining customer loyalty increase the rate sensitivity of traditional retail deposits. As banking customers are now using deposit accounts more as transaction vehicles than savings vehicles, thereby maintaining lower average excess balances, bankers can no longer rely upon historically inelastic depositor behavior. Thus, the reliance on alternative sources of funding from the wholesale and brokered markets exposes banks to more rate and liquidity sensitivity than the reliance on traditional retail deposits did.

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Moreover, many banks have increased their use of products with embedded optionality on both sides of the balance sheet, which makes it more challenging to manage the corresponding cash flows. Liquidity risk management systems and controls must keep pace with these changes and added complexities. Given these changes in funding dynamics, liquidity management is more complex and requires a more robust risk management process. To effectively identify, measure, monitor, and control liquidity risk exposure, well-managed banks supplement traditional liquidity risk measures like static-balance-sheet ratios with more prospective analyses. Bankers and examiners should have, at a minimum, a sound understanding of a bank’s

projected funding sources and needs under a variety of market

conditions.

net cash flow and liquid asset positions given planned and unplanned

balance sheet changes.

projected borrowing capacity under stable conditions and under

adverse scenarios of varying severity and duration.

highly liquid asset and collateral position, including the eligibility and

marketability of such assets under a variety of market environments.

vulnerability to rollover risk.

funding requirements for unfunded commitments over various time horizons.

projected funding costs, as well as earnings and capital positions

under varying rate scenarios and market conditions.

Definition

Liquidity is a financial institution’s capacity to readily meet its cash and collateral obligations at a reasonable cost.

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Maintaining an adequate level of liquidity depends on the institution’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or the financial condition of the institution. A bank’s liquidity exists in its assets readily convertible to cash, net operating cash flows, and its ability to acquire funding through deposits, borrowings, and capital injections. By definition, liquidity risk is the risk that an institution’s financial condition or overall safety and soundness is adversely affected by an inability (or perceived inability) to meet its obligations. An institution’s obligations, and the funding sources used to meet them, depend significantly on its business mix, its balance sheet structure, and the cash flow profiles of its on- and off-balance sheet obligations. In managing its cash flows, an institution confronts various situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints on the ability to convert assets into cash or in accessing sources of funds (i.e., market liquidity), and contingent liquidity events. Changes in economic conditions or exposure to credit, market, operational, legal, and reputation risks also can affect an institution’s liquidity risk profile and should be considered in the assessment of liquidity and asset or liability management. In assessing a bank’s liquidity position, examiners should consider a bank’s access to funds as well as its cost of funding. Depending on the current interest rate and competitive environments, undue reliance on wholesale or market based funding may increase a bank’s cost structure. The cost of acquiring or renewing such funding is purely market driven, as opposed to rates paid on retail deposits, which may be set at

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management’s discretion within the parameters of local and national market conditions. Rising or high funding costs, especially in comparison to peer and market rates, is a sign of potential liquidity problems.

Importance of Liquidity Management

Liquidity is the lifeblood of any institution, but it is particularly crucial to highly leveraged entities such as banks. More broadly, the financial crisis beginning in 2008 demonstrated how liquidity problems and risks can be transmitted throughout the entire financial system. For all banks, the immediate and dire repercussions of insufficient liquidity makes liquidity risk management a key element in a bank’s overall risk management structure. The OCC expects all banks to manage liquidity risk with sophistication equal to the risks undertaken and complexity of exposures. Critical elements of a sound liquidity risk management process established by the board include

appropriate corporate governance and active involvement by

management.

appropriate strategies, policies, procedures, and limits used to manage

and control liquidity risk, even in stressed conditions.

appropriate liquidity risk measurement and monitoring systems.

active management of intraday liquidity and collateral.

maintaining an appropriately diverse mix of existing and potential

future funding sources.

adequate levels of highly liquid marketable securities, with no legal,

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regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations.

comprehensive contingency funding plans (CFP) sufficient to address potential adverse liquidity events and emergency cash flow needs.

adequate internal controls surrounding all aspects of liquidity risk

management.

Sources of Liquidity

Structural changes in banks’ deposit bases have prompted banks to take advantage of improved access to wholesale and market-based funding sources. Examples of alternative funding sources include federal funds lines, repurchase agreements (repos), correspondent bank lines, Federal Home Loan Bank (FHLB) advances, Internet deposits, deposit-sharing arrangements, and brokered deposits. Access to these funds providers enables banks to meet funding requirements while still maintaining adequate funding diversification. Funds from the wholesale markets can be accessed at a variety of tenors that provide bankers with greater flexibility to manage their cash flows and liquidity needs. On the other hand, too much reliance on wholesale and market-based funding sources elevates a bank’s liquidity risk profile. Bankers who are unfamiliar with wholesale funding markets may become overly complacent during stable economic times. Funding through alternative sources exposes banks to the heightened interest-rate and credit sensitivity of these funds providers. Providers of wholesale funding often require a bank’s more liquid

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assets as collateral, which may impair the overall liquidity of a bank’s asset base. Further, if that collateral becomes less liquid, or its value becomes uncertain, wholesale funds providers may be unwilling to extend or roll over funding at maturity. A bank’s financial condition as well as market or systemic events unrelated to the institution may adversely affect the cost to a bank to acquire funds or its ability to access the wholesale markets. As a bank’s reliance on wholesale and market-based funding increases, so should the quality of liquidity risk-management processes. These processes should include periodic assessments of a bank’s exposure to changes in market conditions, and a bank should develop corresponding risk control systems to accompany these assessments. Asset sales and securitization are also important sources of bank liquidity. Banks of all sizes have increased the use of asset sales and securitization to access alternative funding sources, manage concentrations, improve financial performance ratios, and more efficiently meet customer needs. Some of these transactions, however, carry explicit recourse provisions within contractual documents, as well as the potential implied recourse associated with a bank’s desire to maintain access to future funding by repurchasing or otherwise supporting securitizations that exhibit performance problems. As a result, examiners should be aware of situations in which banks might overestimate the risk transfer of sales and securitization or may underestimate the commitment and resources required to manage this process effectively. Such mistakes may lead to highly visible problems during the life of a transaction that could impair future access to the secondary markets.

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A bank’s role and level of involvement in asset sales and securitization activities determine the degree of risk to which it is exposed. Off-balance-sheet positions can serve as both a source of liquidity and a potential, sometimes unexpected, drain on liquidity. Banks with a substantial amount of unfunded loan commitments may be required to fund such obligations unexpectedly and on short notice. Other off-balance-sheet commitments, such as legally binding and nonlegally binding support for securitizations, asset-backed commercial paper conduits, and other market based funding vehicles, can affect a bank’s liquidity position. In addition, collateral required for covering adverse mark-to-market changes in derivative hedging and trading activities may reduce the stock of liquid assets. Often, the fulfillment of nonlegally binding off-balance-sheet commitments is necessary to preserve the reputation of the institution, as well as to allow a bank continued access to that segment of the financial markets. On the other hand, off-balance-sheet activities may provide additional sources for liquidity. Banks can supplement their liquidity position by maintaining lines of credit with correspondent banks or their respective FHLB. Sound liquidity management includes the analysis of and planning for the operational and contingent sources and uses of funds associated with off-balance-sheet activities.

Relationship of Liquidity Risk to Other Banking Risks

Bankers and examiners must understand and assess how a bank’s exposure to other risks may affect its liquidity. The OCC defines and assesses eight categories of risk.

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In addition to liquidity, these risk types include credit, interest rate, price, operational, compliance, strategic, and reputation. These categories are not mutually exclusive—any product or service may expose a bank to multiple risks—and a real or perceived problem in any area can erode a bank’s liquidity position or affect its funding costs, thereby increasing its liquidity risk. If a bank does not properly manage these exposures, the risks eventually undermine the institution’s liquidity position. Both the “Community Bank Supervision” and the “Large Bank Supervision” booklets of the Comptroller’s Handbook discuss in detail the OCC’s risk definitions and risk assessment process.

To read more: http://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/liquidity.pdf

http://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/liquidity.pdf

http://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/liquidity.pdf

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NUMBER 9

Interview with Gabriel Bernardino, Chairman of EIOPA, conducted by Silke Wettach, WirtschaftsWoche (Germany)

Mr Bernardino, how much does EIOPA currently know about occupational pensions in the EU?

Bernardino: We currently have very little data from pension funds at the European level. We don’t have a common language and national regimes considerably vary from each other, which makes it even more difficult to have comparable data for different countries. We cannot easily assess the sustainability of the funds and the soundness of their promises. A common and transparent framework that ensures comparable data would be extremely useful in this case. So how are you going to proceed with it? Bernardino: If we had comparable data we could conduct stress tests the way we already do for insurers. We have no scheduled date, but this is in our plans in the near future. What do you expect from the IORPs stress test? After the stress tests in the banking sector the picture was insufficient. Bernardino: European pension funds manage in total 3 trillion EUR in assets.

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They are represented in assets everywhere which makes them relevant for the economy and for the stability of our financial system. That is why EIOPA proposes to conduct annual stress tests for the big pension funds at the European level. At the same time supervisory authorities should perform stress tests at the national level. Smaller IORPs can be tested on a less frequent basis. What we want to know while conducting stress tests is where the future vulnerabilities are? But here we are talking about a very long term perspective. With the banking stress tests there were a lot of national reflections. Nobody wanted to see national champions failing. Will the situation in occupational pensions be different? Bernardino: We have now a very sensitive discussion on the pensions side and it was expected. The truth must finally be put on the table. And how exactly does the truth look like? Bernardino: Occupational pensions are now under a great pressure. Everywhere be it Germany, the Netherlands or the UK population and labour force are contracting. At the same time stock markets become very volatile and have a tendency to go down. The long term interest rates are also decreasing. All this threatens those pension promises that were made in the past. But if we deny the reality, we will not take any action.

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And I am afraid that on the occupational pensions if we don’t act, we might be heading towards an inter-generational conflict, when the pensions of future generations might be significantly reduced. What are policy holders going to face? Bernardino: It is quite simple: if I make a promise to pay based on a certain assumption and this assumption changes, then either I can pay less or I request higher contribution. In the Netherlands we already witness the consequences: occupational pension funds cut their payments because market interest rates are lower than it was originally anticipated. Are the Netherlands smarter than the others? Bernardino: Some countries are more transparent. And this is exactly what we require from others when we suggest a “holistic balance sheet” or an extended solvency balance sheet. Each employee will exactly know the risks he bears and which payments he will get. So such a reality+driven check+up would be beneficial for everybody. Perhaps some funds are absolutely not interested that their true condition comes to light? Bernardino: Some funds discount long term liabilities with too high interest rates. If you use more prudent and real discount rates they will report huge underfunding. And of course companies do not want that it comes out, but it is not a secret. How good are the funds’ managers? Bernardino: The quality varies and in any case it must be improved. The current low interest rates make IORPs search for interesting investments.

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And this makes it very important for fund managers not just to outsource asset management. Those who, however, instruct a third party to invest in derivatives or structured financial instruments, should at least have a thorough understanding of the possible consequences. The industry expects that the EU is going to set up the same capital requirement for the IORPs as for the insurers. Is that correct? Bernardino: We do not want just to copy the requirements for insurers. However, let’s take a situation when a company has a pension plan and transfers the risk to the IORP like it used to do with an insurance company. In this situation why can’t the same regulation be applied to the IORP?. But this should not be the case if pension funds act as investment vehicles and their risk is taken by the company or a protection fund. Some German critics fear that the Commission´s plans could destroy the German system. Do you understand their fears? Bernardino: It is not our intention to destroy any kind of systems and our goal is not to design a perfect regulation, which makes occupational pensions so expensive that nobody can afford them. But the worst scenario would be if those pension promises on which everybody counted, fail. This is why we must act. Ultimately, it is like the debt crisis: it emerged not because people know little about economics, but because they were denying the reality. And this is always expensive.

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NUMBER 10

12 June 2012

Speech by the Financial Secretary to the Treasury, Mark Hoban MP; the CityUK Debate 2012-2020 and beyond: financial services

Good morning and thank you for inviting me to speak here today. It’s a pleasure to speak with, and alongside, so many leading policy makers and industry leaders, and I’d like to thank CityUK for organising this debate.

At a time of such unprecedented change for the financial system, it is absolutely vital that Governments, regulators and companies continue to work together through these challenging times.

We face the substantial, long term task of strengthening the financial system for the future, learning the lessons from the recent years of financial and economic instability that have affected economies around the world.

It’s only by doing so that we can ensure we build a platform from which the UK can build on its world leading strengths in financial services.

Strengths which include London consistently ranking first in the Global Financial Centres Index.

Ranking as the most attractive destination in Europe for investment according to Ernst & Young.

A financial services sector that originates more cross-border bank lending than any other country, home to Europe’s largest Insurance and asset management industries, and the world’s largest foreign exchange market.

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And a sector that is home to over 250 branches and subsidiaries of foreign banks, channelling more investment into the UK than any other sector.

We are committed to maintaining and strengthening the UK’s role as the leading global financial centre because we know the vital role the sector plays in our economy.

Contributing one in every seven pounds of GDP.

Employing over two million people in financial and related professional services firms across the UK.

And helping UK companies raise almost £450 billion in funding since 2005.

The strength of the UK’s financial sector and our dependence upon it presents us with a challenge which the Chancellor has called the British dilemma.

How can we create a successful but stable financial services sector? How can we preserve the innovation that fuels the sector’s success without putting the wider economy at risk?

Our answer to the British dilemma is to build a strong and proportionate regulatory regime.

Safeguarding the stability of our financial sector as a foundation for sustainable growth, and protecting the competition and innovation that drives its success.

I do not believe that strong and proportionate regulation is a hindrance to the success of financial services in the UK, rather I think it is an essential platform for a successful global financial centre, ensuring that the UK remains an attractive destination for international business, a place where businesses can trade with each other with confidence.

So we are pursuing an ambitious programme of reforms to address the lessons of the financial crisis to safeguard London as a global financial sector.

Central to this programme is reform of the regulatory architecture – abolishing the failed and discredited tripartite system of supervision.

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In its place, a new Prudential Regulatory Authority, an independent subsidiary of the Bank, will take responsibility for micro-prudential regulation.

And a new Financial Policy Committee, sitting within the Bank, will monitor risks across the financial system. Its purpose will be to identify bubbles as they develop, spot dangerous interconnections across the system, and stop excessive levels of leverage before it’s too late.

Together, these bodies will bring judgement and foresight to the task of supervision, rather than mere box ticking.

At the same time it will also take into consideration the impact on economic growth when pursuing financial stability … not neglecting the fact that stability is itself a vital precondition of growth.

The legislation to achieve this critical change in the way British banking operates had its second reading in the House of Lords yesterday and we hope to receive Royal Assent by the end of this year.

And as well as ensuring the UK’s regulatory institutions are fit for purpose, we are addressing the structural problems with the sector itself that caused so much trouble when the crisis hit.

The UK is taking significant steps to improve bank resolvability and address the ‘too big to fail’ issue through the Independent Commission on Banking, reforms that are ambitious in their scope and proportionate in their impact.

We have already committed to implement the Commission’s recommendation to ring fence investment banking practices from retail banking.

Ensuring that when a bank does fail, services that are vital to families, businesses and the whole economy continue without resorting to taxpayer money.

We have already committed to introduce additional loss absorbency requirements on ring fenced retail banks.

Ensuring that large retail banks hold equity capital of at least 10 per cent, with minimum a loss absorbing capacity for the bigger banks of at least 17

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per cent. To ensure that shareholders and bondholders bear the costs of failure, not taxpayers.

And later this week, the Government will publish its White Paper setting out its final proposals for further reforms to the UK banking sector, based on the ICB’s recommendations.

Of course, financial services are an international industry, and regulation has to reflect that reality.

So it is right that much of the debate on regulatory reform is being driven at the international level.

Against the backdrop of continuing instability in Europe, it is critical that we seek regulatory reform that ensures stability, creates opportunities for sustainable growth in the future, and removes the distorting effect of arbitrage.

Abroad, as at home, we need to tackle the issue of ‘too big to fail’ and the perceived implicit guarantee of financial institutions that continues to distort fair and open competition globally. Through the G20, we have agreed that supervisors need to be able to go further to address the risks posed by the largest and most interconnected banks.

This means applying additional loss absorbency requirements to further reduce the risk that these high impact banks fail...

... developing internationally consistent Recovery and Resolution Plans that will require firms to take early action to generate capital and liquidity in stress...

...and ensuring that supervisors have the tools and powers to intervene early and ensure an orderly resolution where a bank does fail.

The UK is leading the development of these new toolkits. On RRPs, we have already started a pilot project with the six of the largest UK banks, and we expect all banks to develop their own plans by the end of the year.

Reforms to tackle inter connectedness between banks are therefore vital.

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We only need to look across the channel to understand the magnitude of the inter connectedness not just between banks, but between banks and public finances and between public finances and monetary union.

The Eurozone crisis needs a response that deals with specific weaknesses in the governance of the single currency. We have, for some time, argued that the “remorseless logic” of monetary union requires closer fiscal integration in the eurozone.

As the Chancellor wrote this weekend, we chose not to join the euro precisely because we would lose national sovereignty and control of our monetary policy.

A banking union is a necessary part of the fiscal and monetary union that the Eurozone is committed to. That is why we will not be taking part in the banking union.

Britain’s place is in the internal market, not the Eurozone block. As the Eurozone integrates, so Europe will have to ensure that it does not do so at the expense of the single market – one of Europe’s greatest achievements.

A Europe that achieved Eurozone stability at the cost of the single market would undermine the benefits that have been achieved through a diverse and ever widening market that promotes competition, offers choice and provides opportunities for growth, investment and jobs

But abroad, as at home, we must also be mindful of the impact that inconsistent, discriminatory and disproportionate regulation can have: stifling growth, restricting investment, lowering business returns, imposing higher costs on investors.

That means ensuring that regulation is based on evidence and rigorous analysis.

Ensuring that internationally agreed regulatory standards are implemented fully and consistently at national level.

And ensuring that regulation protects the open and competitive markets that are critical to fostering renewed growth across all our economies and vital to London’s continuing success as a global financial centre.

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That is why the UK is taking on a lead role on financial services internationally and in Europe.

Full, consistent and non-discriminatory implementation of these agreements is essential to ensure the stability of the international financial system, but also to protect free and open competition that allows all our sectors to thrive.

And it is not just here that we are safeguarding the Single Market. Through our negotiations on the array of European regulatory reforms, we are securing agreement and supporting the Commission in its duty to uphold single market principles that are vital to support growth.

For example, it is vital that derivatives in any currency can be cleared in any country so on EMIR we have worked hard to ensure a clear recognition of the principle of non-discrimination in the Council.

That is also why we are challenging the ECB’s location policy in the ECJ.

And on MiFID, we continue to make the case against unnecessary barriers to trade within the EU and between the EU and third countries. London thrives not just through trade within Europe’s borders, but also through trade outside those borders.

On the basis of the current proposals, it seems that no third country would meet EU rules, so from the moment that MiFID is passed and until equivalence decisions are taken, it would close the EU market entirely to any new third country firm, as well as choking off opportunities for our firms in some of the strongest and fastest growing emerging economies.

So we couldn’t trade with a new Japanese securities house; seek capital from China or invest in Africa.

It’s worth reminding ourselves that EU financial services are a powerful force in the international market, accounting for about a quarter of financial services exports worldwide, and responsible for managing just under half of global bank assets.

At a time when we have to do everything we can to attract investment to support the economic recovery we cannot cut ourselves off from the rest of the world.

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Of course this works both ways. We have to resist proposals that seek to raise barriers to UK or European investment in the rest of the world.

Which is why we are concerned, along with many other countries, about the extra-territorial application of the Volcker Rule as currently drafted.

There is a significant risk that the Rule will restrict US banks from trading in non-US sovereign debt, and a risk that non-US banks may be restricted in their ability to transact with US investors.

It is absolutely vital that, as we strengthen the global regulatory framework, we do so in a way that balances stability with the maintenance of global markets, sustaining economic growth.

And it is equally important that we protect UK financial services as we do so – protecting that pole position that I mentioned at the beginning of my speech.

Protecting the Businesses and families that rely on the vast range of services and expertise it provides: foreign exchange and commodity markets; maritime and trade finance; insurance and reinsurance; and many more besides.

And protecting UK financial services’ ability to access markets beyond Europe – when around half of the UK’s financial services trade is with countries outside Europe, we must ensure that European regulation does not risk the opportunities we enjoy from key international growth markets at a time when we so vitally need inward investment.

As I said at the outset, London is a leading global financial centre and we are committed to supporting and maintaining the UK’s position as the world’s leading financial services centre.

And we remain committed to attracting the world’s most ambitious and innovative financial services companies to the UK.

I believe that to achieve this it is essential that we reform regulation to remedy the failures of the last decade, safeguarding an innovative and successful financial services sector, without putting the wider economy at risk.

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We will continue to work with all of you here today, to ensure that we realise that ambition, embedding proportionate, consistent and non-discriminatory regulation, to promote a competitive, stable and successful financial services sector.

Notes

Mark Hoban was appointed Financial Secretary to the Treasury in May 2010.

Mark was appointed the Shadow Financial Secretary to the Treasury in December 2005. Between November 2003 and December 2005 he was Shadow Minister for Schools. Prior to November 2003, he was an Opposition Whip. Between 2001 and 2003 Mark was a member of the Select Committee on Science and Technology.

Mark was born in 1964. He has an economics degree from the London School of Economics. After graduating he qualified as a Chartered Accountant, and went on to work for PricewaterhouseCoopers between 1985 and 2001. Mark has been the MP for Fareham since June 2001.

http://www.hm-treasury.gov.uk/speech_fst_120612.htm#primaryContentFull

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Monday June 18 2012 - Top 10 Risk Compliance News Events (114 pages)

Education

hong kong sar

central bank governors

international association

issued draft regulations

minimum capital requirements

basel iii implementation

basel iii rules

implementing basel iii