- 1. P a g e | 1International Association of Risk and
ComplianceProfessionals (IARCP)1200 G Street NW Suite 800
Washington, DC 20005-6705 USATel: 202-449-9750
www.risk-compliance-association.comTop 10 risk and compliance
management related news storiesand world events that (for better or
for worse) shaped theweeks agenda, and what is nextDear Member,I
wastravellingfrom London to Dubai to
chairtheMarcusEvansconference(Strategic Risk &Compliance2013).
I had a headachewhen Iread:If a medicinedoesnot workasexpected, its
not necessarily becausethedosagewastoolow.Wow. Ishetalkingtome?He
wasnot. He wasnot even a doctor.He wasJaime Caruana, General
Manager of the Bank for InternationalSettlements, speakingabout
Hittingthe limitsof "outsidethebox" thinking? Monetarypolicy
inthecrisisand beyond.Speecheslikethat arenot usuallygoodwhenyou
haveaheadache, but asI am a Basel iii addict, it
workedhandsomelyfor me.Mr. Caruana continued:Prolonged
monetaryaccommodation
givesborrowers,financialinstitutionsandpolicymakersanincentivetokeep"kickingthecandowntheroad",
delaying necessary repair and reform.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com
2. P a g e | 2If I seesomeonekickingacandowntheroad, I
havetoremember whyhedoesit it is due to prolonged monetary
accommodation.I did not haveaheadacheanymore. I hadeven
startedunderstandingthenon-financial worldaround me!Mr. Caruana
continued:Theglobal bond market crash of 1994is a cautionarytale of
the risksinvolved in exitingfrom a prolongedperiod of
lowinterestrates.Unbelievable!ThisisthestresstestI waslookingfor.
Agreat scenario fora major investment bank I consult. Whois goingto
challengethat?Willsupervisoryauthoritiesdisagree?It isMr.
Caruanasownidea!Read moreat Number 1below.Timeforapuzzle now
whichisyour opinionabout theURL that follows?http:/ /
www.cbrc.gov.cn/ showWhist.doWhat is it about?No, you did not
findit! Dont lie tome!Ok, you saw it is*.cn ChinaOk, you saw it
is*gov.cn Government of ChinaBut what is the showWhist.do?Whist is
a classicEnglish trick-takingcard game which wasplayedwidelyin the
18th and 19th centuries.What?Websitesbelongingtothe
Chinesegovernment explore EnglishInternational Association of Risk
and Compliance Professionals
(IARCP)www.risk-compliance-association.com 3. P a g e |
3trick-takingcard games?According to Merriam-Webster, Whist is a
card game for four players intwopartnershipsthat isplayed withapack
of 52cardsandthat scoresonepoint for each trick in excessof six.No,
it is not about Whist.It is about Whistleblowers!AChinese
Sarbanes-Oxley(like) approach from theInternational Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 4. P a g e | 4Themain
functionsof the CBRC include:Toformulate supervisory rulesand
regulationsgoverningthe banking institutions, to authorize
theestablishment, changes,termination and businessscope of the
bankinginstitutions, to conduct on-siteexamination and
off-sitesurveillanceofthebanking institutions,and take enforcement
actionsagainstrule-breakingbehaviors, to conduct fit-and-proper
testson the seniormanagerial personnel of the banking
institutions.Welcometo the Top
10list.BestRegards,GeorgeLekatisPresident of the IARCPGeneral
Manager, ComplianceLLC1200G Street NW Suite800,Washington DC
20005,USATel: (202) 449-9750Email:
[email protected]:
www.risk-compliance-association.comHQ:1220N. Market Street Suite
804, Wilmington DE19801,USATel: (302) 342-8828International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 5. P a g e | 5Hitting
the limitsof "outside the box"thinking? Monetary policy in the
crisisandbeyondSpeechby JaimeCaruana, General Managerof theBank for
International Settlements,toOMFIF(GoldenSeries Lecture), London, 16
May2013Central bankshavehadto"think outsidethebox"
toaddressunprecedented financial instabilityand
toprovidemonetarystimulusin trying times.NIST Posts Initial
Analysisof RFIComments on CybersecurityFramework for Critical
InfrastructureTheNational Instituteof Standardsand Technology(NIST)
haspostedan initial analysisof hundredsof commentssubmittedby
industryandthepublic relatedtothe Presidents"Improving Critical
InfrastructureCybersecurity" ExecutiveOrder, issuedFeb.
12,2013.Opening Remarksat SEC Roundtable onCredit RatingsBy
Chairman MaryJo WhiteU.S. Securitiesand ExchangeCommission,
Washington, D.C.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 6. P a g e
| 6Raising the bar for the next phase of growthand development
sustaining transformativemomentumWelcomingaddressby Dr Zeti
AkhtarAziz, Governorof the Central Bank ofMalaysia, at the10th
IFSB(Islamic FinancialServicesBoard)Summit 2013The future of the
Islamic financial servicesindustryresilience,stabilityand
inclusivegrowth, Sasana Kijang, Kuala Lumpur.Changesin the Large
ExposureRegimeThis paper containsfull details of theproposalsto
substantiallyalter theLarge Exposure principlesandguidancethat
applytolicensed deposit takersthat are incorporated
inGuernsey.GovernorSarah Bloom RaskinAt the Society of Government
Economistsand theNational EconomistsClub, Washington, D.C.Prospects
for a Stronger RecoveryInternational Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
7. P a g e | 7Opening SpeechbyYolanda BanksMcCoy,Head
Investmentsand SecuritiesDivision,Cayman IslandsMonetaryAuthorityat
the 100WHF Cayman Event 2013APerspective on the U.S. Economic
Outlookand Monetary PolicyPresented by CharlesI. Plosser, President
and ChiefExecutiveOfficer, Federal Reserve Bank
ofPhiladelphiaGlobal InterdependenceCenters Central
BankingSeries:Recovery 2013 Strength orStagnation, Milan,
ItalyMichaelS. Gibson, Director, Division of BankingSupervisionand
RegulationCross-Border ResolutionBefore the Subcommitteeon National
SecurityandInternational Tradeand Finance, Committeeon Banking,
Housing, andUrbanAffair, U.S.Senate, Washington, D.C.In my remarks,
I wouldlike tofirst reflect on the improvementsthathavebeen madein
the last few years in theunderlying strength andresiliencyof the
largest U.S.bankingfirms, and thenturn to a discussionInternational
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 8. P a g e | 8of what
hasbeen accomplishedand what remainstobe accomplishedinfacilitating
a cross-border resolution.Adjustment and growth in the euro
areaSpeechbyMr PeterPraet, Memberof theExecutiveBoard of
theEuropean Central Bank, at theEuropean BusinessSummit, Brussels,
16May 2013.Many of you will have come acrosscommentatorswhoclaim
that adjustment is in fact inimicaltogrowth;and that
consolidatinggovernment budgetswhile
introducingstructuralreformsisthemain causeof our
currentdifficulties.International Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
9. P a g e | 9Hitting the limitsof "outside the box"thinking?
Monetary policy in the crisisandbeyondSpeechby JaimeCaruana,
General ManageroftheBank for International Settlements,toOMFIF
(Golden Series Lecture), London, 16May 2013Central bankshavehad
to"think outsidethebox" toaddressunprecedented financial
instabilityand toprovidemonetarystimulusin trying
times.Monetaryaccommodationhasbeen criticaltostabilisethe
financialsystem and the economy.But questionsremain about
theefficacyof such policies aslongasbalancesheetsand structural
headwindsare not more fullyaddressed.Monetaryaccommodation can only
be ashelpful asthe balancesheet, fiscal and structural policiesthat
accompanyit.Looking ahead, central banks will continueto
facedaunting challengesastheynavigateinunchartedwaters,includinghow
best tointegratenewperspectiveson the financial cycle and global
spilloversintotheirmonetarypolicy frameworks.Full speechLadies and
gentlemen,It is a great pleasureto behere at OMFIF.Thecrisisand
itsaftermath haveposed formidablechallengesfor
centralbanks.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 10. P a g
e | 10They have had to "think outside the box" to address
unprecedentedfinancial instability and provide monetary stimulusin
the face of theconstraint imposedby the zerolowerbound of
policyrates.Looking ahead, thechallengesremain daunting. Central
bankshave tonavigateunchartedwaters.In thenear
term,thequestionishowmonetarypolicycanbestcontributetowhat hassofar
beenanuneven recovery.Cant central banksdomuch more?Perhapsthe
relevant question iswhethercentral bankscan make up forinsufficient
action elsewhere.What monetary policycan substitutefor balancesheet
repair by banksandborrowers?What monetary policycan
removeimpedimentstoa workermoving froman overbuilt sector toa more
promisingone?Thesekindsof question require a medium-term
perspective, and in amedium-term perspectivemonetary
accommodationwill prove onlyasgoodasthebalancesheet,
fiscalandstructuralpoliciesthataccompanyit.From a longer-term
perspective, a challengeis tobetter integratefinancial
stabilityconsiderationsintomonetary policyframeworks.Therecent
crisisbrought theglobal financial system totheverge ofcollapseand
hashad dire social and economic consequences.This hasraised
fundamental questionsabout how to integratea
modernunderstandingofthefinancialsystem
intoourtraditionalmonetarypolicymodels.Theseareall
exceedinglydifficult questions,the situation isdifferentfrom
country to country and noone can claim to have a crystal ball
thatprovidesdefiniteanswers.International Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
11. P a g e | 11Yet, experiencedoesoffer at least some pointersfor
thefuture.In the following, I will thereforestart by
reviewingthemain insightssuggestedby monetaryhistory,
beforeturningtothe current challenges.Insightsfrom monetary
historyThepast century saw considerablechangesin the conduct of
monetarypolicy.Thesechangeswereoften the result of both
historicaleventsand newwaysof thinkingabout the roleof central
banks.Bytheend ofthe20thcentury, therewasaclearconsensusthat aremit
ofmonetarypolicy focused on price stabilityhad manybenefits.This
view reflectedlessonsfrom the painful experienceof
double-digitinflationratesand erratic growth that prevailed in
manycountriesworldwidein the1970s,and in some emerging market
economieswellintothe 1990s.Themain
reasonforthisdismalinflationandeconomicperformancewasthat monetary
policy neglectedprice stability.Instead, central banks pursuedother
goals,whichturned out to beinconsistent withpricestability.In many
advanced economies, for example, monetary policy
wastooaccommodativeduring the 1970s,and central banks endedup
pushingoutput beyond sustainablelevels.In emergingmarket economies,
politicalpressuresto generateseigniorageincome and financepublic
spendingprogrammesvia theprintingpresswerefrequent sourcesof high
inflation.In all theseexperiences,theneglect of price stability did
not improveeconomicperformance.International Association of Risk
and Compliance Professionals
(IARCP)www.risk-compliance-association.com 12. P a g e |
12Overtime, welearned, quitepainfully, that thereisnobeneficial
long-runtrade-offbetweeninflationand growth.Indeed, we learned that
high and volatile inflation ratesgo hand in handwith erratic
growth, large exchange rate swings, and even economic
andpoliticalcrises.Chastenedbytheseexperiencesofthe1970sand1980s,central
bankshadtorethink their roles.At that time, the result
wastoconsider a narrow mandate for pricestability.Tobe sure,
thisrequired a very painful adjustment process.Central bankshad
tosqueezeinflation out of their economiesat the costof recessions.
But that cost waswell worththe
price.Thosewhohadthecouragetotrywerevilifiedthen,
onlytoberecognisedashavingdone the right thingyears later.Another
lesson learnt during this period wasthat central bank autonomyis
criticalto achieveprice stability.Onemainunderlying
causeofinflationinstabilitywasthefailuretoshieldmonetarypolicymakers
sufficientlyfrom short-term political cycles.Somecentral banks,
such asthe Bundesbank and theSwissNationalBank, had led
theway.Theyenjoyed a high degreeof effectiveindependenceand, on
thisbasis,consistentlydeliveredlowerinflationthan their peersduring
thepost-BrettonWoodsera.Thesearehard-earned lessonsthat should not
be forgotten.Today, central banksare once again "thinkingoutsidethe
box" asnewchallengeshave arisen.International Association of Risk
and Compliance Professionals
(IARCP)www.risk-compliance-association.com 13. P a g e |
13Evenbeforethecrisis,concernsamongcentralbankersweregrowingthatthepolicy
environment waschangingin ways that calledfor a furtherevolution of
central banking.In particular, thenarrow focuson near-term domestic
price stabilitydidnotseem tobeenoughin anenvironment in
whichthefinancial cycleandglobal spilloverswerebecoming more
prominent.With respect to thefinancial cycle, wenow seethat
monetary policyplayed an important part in the build-upof financial
imbalancesduringthe2000s.After thebust of thedotcom boom, monetary
policy in the advancedeconomiesremained accommodativefor manyyears.
Interestrateswerelow,and credit and housepricessoared.Of course,
the relevanceof the financial cycle for central banksisnot
anentirelynew insight.Theforgingof manycentral banks, such asthat
of theFederal Reservein1913, wasthedirect result of
thebankingcrises of the 19th and early20thcentury.It became
lessrelevant in theearlypostwar period againstthebackground of
tightlyregulatedfinancial systems put in placeafter theGreat
Depressionand theSecond World War.But the far-reachingfinancial
deregulationpursued sincethe1970sallowedthe financial cycle
tore-emergeasa major macroeconomicforcethat grew ever
stronger.Globalisation, too, hasbeen changingthe policy environment
insignificant ways.In addition to the growing influence of global
factors on domesticinflation dynamics, globalisation appears to
have added fuel to themonetaryeasingin therun-up tothe recent
crisis.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 14. P a g
e | 14Theunusuallylowpolicy ratesprevailingin the major
advancedeconomiesaffectedothersvia a
resistancetocurrencyappreciationpressures.Many emerging market
economieskept interest rateslowerthan wouldhavebeen suggested by
domestic macroeconomic conditionsalone.In turn, their accumulation
of foreign exchangereservesput additionaldownward pressure on
yieldsin theadvanced economies.Thenet result
wasunusuallyaccommodativeglobalmonetaryconditions.Real
interestratesaverageda mere 1.5% globallybetween2002and 2007while
output grew robustlyat roughly4%.Managing the
post-crisisrecoveryWhile thepre-crisisperiod alreadygavecentral
banksmuch food forthought, the crisishasgiven them still more to
chew on.The financial crisishastested the crisis-management
readinessof centralbanks, and the subsequent phase their ability to
nurse the economy backtogrowth.Central bankshaverespondedin
anunprecedentedwayinboth
scaleandscope.Theyhaveprovidedampleliquidityin theirlenderof
lastresortfunctions,have committed tolow - often effectivelyzero -
interestrates,haveengaged in large-scalebalancesheet policies,have
augmentedthis withenhancedforward guidancelinked to
real-economyoutcomes,have put in
placetargetedlendingschemes,havepurchasedriskyassetsandsoon.Theresponseof
central bankshashad important benefits.Thereisnoquestionthat
inthemostacutephaseofthecrisisit preventedthefinancial system from
imploding, whichwouldhave brought the realeconomydown.International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 15. P a g e | 15Low
policyratesand theunprecedenteddeployment of
balancesheetpoliciesboosted confidence and improved financial
market conditions.And asdoubtsre-emergedin financial marketsmore
recently, centralbank measureseffectivelyreduced perceivedfinancial
tail risks.And yet, despitetheseunprecedentedactions,the global
recoveryhasbeen lacklustre.Fiveyears intothe recovery, economic
performanceis laggingpreviousonesat the same
stage.Economicactivityiswell below itspre-crisistrend in the major
advancedeconomiesand unemployment isstubbornly high.Thereis,
understandably, frustration about thisapparent lack of
traction.This frustration hasledsome to call for ever more monetary
policyactivism.But is it really justified?If a medicinedoesnot
workasexpected, itsnot necessarilybecausethedosagewastoolow.Maybe
instead the overall treatment, and the roleof the medicinewithinit,
should be reconsidered.Most likelysomethingelseis
needed.Balancesheet recessionsare special:it islessclearthan often
thoughtthat monetary policy can foster a quick and robust
recoveryin a balancesheet recession.When privatesector
balancesheetsneed repair, accommodativemonetarypoliciesare
lesseffective.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 16. P a g
e | 16When the problem is too much debt and agentsare in the mood
toretrench, it isunrealistic to expect monetary policy to revive
stronggrowthby loweringinterest rates.When financial
institutionsare weak, it isequallyunrealistic toexpectthem
toeffectivelytransmit monetary impulses.Moreover, it iswellknown by
now that growthtendsto beweakerafterfinancial crisesthanafter
ordinary economicdownturns.This is not just, or even primarily, a
question of deficient demand.It reflectstheneed for the economy
toreabsorb the aggregateand sectoralreal imbalancesthat built up
during the preceding unsustainableexpansion, hidden under the froth
of thefinancial boom.Suchboomstypicallyleavein their wakenot
onlytoomuchdebt, but alsotoomuch capital and labour in
thewrongsectors.Therefore, thechallengefor countriesin thenext few
years will be toreallocatelabour and capital among sectorsboth
within and acrossnational borders.Structural reform toremove
rigidities,not monetary policy, is the waytofacilitate this.True,
monetarypolicycan buy time toimplement thenecessarybalancesheet
repair and structural reforms.But it cannot substitutefor them.
After five yearsof buying time, onehastoaskwhetherthat timehasbeen
- or will be - used wisely.Refocusingthepolicymix to relymore on
repair and reform and not tooverburdenmonetary policy iscrucial
because thebalanceof risks ofprolonged very lowinterest ratesand
unconventional policiesis shifting.Thecostsare growingin relation
tothebenefits,for a number of reasons:International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 17. P a g e | 17First,
prolongedmonetaryaccommodation
givesborrowers,financialinstitutionsandpolicymakersanincentivetokeep"kickingthecandowntheroad",
delaying necessary repair and reform.Certainly, progresshasbeen
made in a very trying environment.But more needstobe done.Indeed,
the slow progress in the implementation of structural reforms andin
the deleveraging processmay signal that this delaying mechanism is
atwork.Persistent high unemployment ratesin many advanced
economiesindicatethechallengesof labour rigiditiesand sectoral
rebalancingthatstill face us.At the same time, although some
private sector deleveraging is occurringin some countries, and the
financial system is better capitalised, the totaldebt figuresare
not reassuring.Sincethe end of 2007, total debt of the G20
non-financial sector, bothprivateand public, hasrisen by more than
30trillionUS dollars,whichrunscounter todeleveraging, at least asI
understand the term.It is noteworthythat over thesameperiod global
central bank assetshaveincreasedby roughly10 trillion
USdollars.Second, prolonged accommodation canproduce other
unintendedsideeffects.In the 1970s,thedesire to lift output and
employment back topre-crisislevelsresulted in
surginginflation.Onemight arguethat the situation todayis
quitedifferent from then.Inflationhasremainedlowinmost
jurisdictionsand closetocentral banktargets.International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 18. P a g e |
18However,monetary stimulusmay find itswayintoasset
pricesandleveragebeforeinfluencinggoodsand servicesprice
inflation.Moreover,prolonged very low interest ratescan distort
marketsignals,mask underlying balancesheet weaknessesand undermine
theearningscapacityof banks, thebusinessmodels of life
insurancecompaniesand thesolvencyof pension funds.This may further
misallocatecredit, weakenfinancial institutionsbalancesheetsand
encourage excessiveand unwelcome risk-taking.Another significant
sideeffect arisesfrom global monetary policyspillovers.Persistently
low interest rates in the major advanced economies
generallyencourage capital flows to fast-growing emerging market
economies andput upward pressure on emerging market
exchangerates.This can complicatetheabilityof emergingmarket
central banks topursuetheir stabilisationgoals.On the onehand, if
central banksin emergingmarketskeep policy ratesvery low,capital
inflowswouldbe discouraged, but domesticcreditgrowthwouldbe
encouraged.If, on the other hand, theyraisepolicyrates,the risksof
destabilisingcapital flowswouldrise.Sofar, wehave been seeinga
combination of theseforcesat work.Despitesome slowingof capital
flowsover thepast year, private sectorcredit and propertypriceshave
been surgingin a number of theseeconomies,aswell asin someopen
advanced economies.Finally, prolonged accommodation
raisesriskstocentral banksthemselves.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 19. P a g e | 19If
economies remain weak and structural problems unresolved
despiterepeated rounds of further monetary stimulus, the
credibility of centralbanksmay suffer, and credibilityisimportant
for effectiveness.Let me insist here that resultsin the real
economy will depend on theextent that needed repair and reformsare
carried out.Resultswill dependtoa largeextent on factorsthat are
not under centralbanks control.Aviciouscircle can develop, with
awideninggapbetweenwhat centralbanksare expectedtodeliver and what
theyactuallycan deliver.This may ultimatelyunderminetheir
credibility and, withit, theirlegitimacyand effectiveness.All this
underscores the importance of being prepared for the eventualexit
from the extraordinarily accommodative monetary conditions
thathaveprevailed for thepast several years.While central
bankssurelyhaveall the toolsavailableto technicallyengineeran exit,
it cannot be taken for granted that it will be smooth.Theglobal
bond market crash of 1994is a cautionarytaleof the risksinvolved in
exitingfrom a prolongedperiod of low interestrates.At the same
time, wealsohave to recognise that the situation today israther
different from back then in at least one critical
dimension:centralbanksare much more transparent about their policy
intentionsnow andtheir communication is much better.This should
reducethe risk of major policysurprises.That said, thepolicy
environment central bankshave to grapplewithtodayis alsomuch more
complex in some important dimensions.Recordlevelsof debt have been
issued at very lowinterest rates.International Association of Risk
and Compliance Professionals
(IARCP)www.risk-compliance-association.com 20. P a g e | 20Central
banks,at leastfor now,areplaying animportant, if notdominant,
rolein keyfinancial market segments.So, asinterestratesrise and
central bankspare back and eventuallyreverselarge-scaleasset
purchases, financial marketswill have much todigest.Different
national conditionswill require unsynchronised exits,whichmay raise
additional complexities.Even in the current environment of enhanced
central bank transparencyand credibility, a choppyexit isa material
risk.It goeswithout saying that I wouldlovetobe proven
wrongaboutthis, and that a lot of work is beingdonetoreduce exit
risks.Monetary policy and the financial cycleAswepeer
furtherintothefuture, onekeychallengecentralbanksfaceishowtobetter
integrate financial stabilityconsiderationsintotheirmonetarypolicy
frameworks.Theeconomicand social damage of therecent
crisishaspainfullyshownwhat is at stake.And central banksmust
reflect on how they can forgea new consensusabout the
wayforward.This is not just a narrow operational issue, for
exampleabout how torespond to credit and asset priceboomsand
busts.It raises the much broader conceptual question of how to
shift ourtraditional purely macroeconomic perspective towards a
new, fullyintegratedmacro-financial perspective.As I seeit,
thecrisishasnot discredited thecore elementsof
pre-crisismonetarypolicy frameworks.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 21. P a g e | 21The
credibility of central banks as guarantors of price stability has
beeninstrumental in anchoring inflation expectations, on both the
downsideandtheupside, during the crisisand itsaftermath.Astrong,
credibleanchor helpsto counteract thedestabilisingforceshittingthe
economyand financial markets.At the same time, the
pre-crisismonetary policy frameworksdid notprevent the crisis from
happening.Theexperiencein therun-up suggeststhat central banksneed
to betterappreciatetheir rolein influencingthe financial cycle.For
thispurpose, byfinancial cycle I refer tothe combined
endogenousbehaviourof credit and asset prices,
particularlyhouseprices.Regulatoryreform obviouslyplays a keyrolein
mitigatingfinancialcycles,and wehavealready seen significant
progressin this area: betterandhigher buffers, the introduction of
countercyclical capital buffersunder thenew Basel III frameworkand
the development ofmacroprudential frameworksand tools.Tobe sure,
prudential and macroprudential measuresareclearlynecessary.But
theyalonewill not be enough and can
alsobecircumventedbyregulatoryarbitrage.This is whymonetary policy
hasa complementaryroletoplay. Thepolicyrate representsthe universal
price of leveragein a givencurrencyand cannot be bypassed easily.In
thisrespect, central banks will need toreflect onhow best to
respondtofinancial stability concernsin the
future.Thecrisishasclearlyshownthat financial stabilityis essential
for lastingprice stability.International Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
22. P a g e | 22Onelessonis that monetary policymay need to respond
moresymmetricallytothefinancial cycle than in the past -
tighteningmorestronglyin boomsand easinglessaggressively,
andpersistently, in busts.In practice,thismeanspaying
moreattentiontopolicychallengesbeyondtheconventional policy
horizonsof twoor soyears.When financial stabilityconcernsgrow,
policyhorizonsneed to belengthenedtotake accountof the fact that
the financial cycle isconsiderably longer than the
businesscycle.Analytical frameworksalsoneed tobetter reflect the
characteristicsoffinancial cyclesand their
interactionswithfinancial and macroeconomicstability.Central banks
pre-crisis workhorsemodels generallyassignednomeaningful roleto
macro-financial linkages.Thefinancial crisishasdemonstratedthat
suchanalytical perspectivesare woefullyinadequate.Another dimension
along whichcentral banksneedtoreflect is a betterappreciationof
global monetary policy spillovers.Global feedbackeffectsamplified
thepre-crisisfinancial boom, and wemight be seeingthis mechanismat
workagain.In a highly globalisedworld, keepingones ownhouse in
order surelyisnot enough.What doesthis mean in practice?It doesnot
require central banksto coordinate their policies closely.But, at a
minimum, it doescall for them toappreciate better the
globalsideeffectsandfeedbacksthat arisefromtheir
monetarypolicydecisions.International Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
23. P a g e | 23Thisisineachcentralbanks owninterest, especiallyif
thespillovershavethepotential
tofosterregionalfinancialinstabilitythat
endsincrisis,withsignificant global repercussionsthat swingback
tothe originatingcountries,like a boomerang.Aprecondition for this
shift in perspectiveis a more global analyticalapproachthat
factorsin interactionsand feedbacksappropriately.Finally,I donot
want toleaveyou withtheimpressionthat fiscalpolicyisirrelevant in
this discussion.Indeed, fiscal policy plays an important role in
financial stability, too. Thefinancial
crisishasdemonstratedtheimportanceof having the fiscalcapacityto
support thefinancial sectorthrough bank rescuepackagesandthe real
economy through fiscal buffers.But the financial crisishaspushed
fiscal policy in many economiesontoan unsustainablepath.This is a
lesson that wehave tokeep in mind for
thefuture.Accumulatingbudgetsurplusesin
goodtimesprovidesgovernmentswiththeabilityto respond flexiblyto a
financial crisiswithout putting fiscalsustainability at risk.In
other words,governmentsneed tofactor in the financial cycle and
tobuild up additional fiscal buffers during good timesthat can be
drawndownto providesupport in bad times.Summing upLet me sum up.
There is littledisagreement that thepast five yearshavebeen
unusuallychallenging.Central bankshaveplayed a critical rolein
managing the crisis and itsaftermath.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 24. P a g e | 24Theyare
now under huge pressuretopromote a sustainablerecoveryunder
difficult circumstances.And, lookingahead, they will continue to
find themselvesconfrontingmajor challenges.I have suggestedthat
monetary historyprovidesa
valuablecompasstonavigatethesetrickywaters:aclearfocusonlastingpricestability,
amoresymmetrical approach tothe financial cycle, and abetter
appreciationofglobal spillover effects- thesewouldappear tobe the
key elementsofstronger monetary policy frameworks.At the current
juncture, there is alsoa premium on central
bankcommunication.Central banksneedtoclearlycommunicate the
limitsof monetarypolicy, both to the public and toother
policymakers.The private sector and policymakers, who have been
facing their own setof daunting challenges in extraordinarily
difficult times, will have to playa larger rolein thenext legof
theglobal recovery.Crucially, thiswouldalsoallowcentral
bankstonormalise monetarypolicy in a manner consistent with a
return to sustainableand balancedgrowth.Thank you.International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 25. P a g e | 25NIST
Posts InitialAnalysisof RFIComments on Cybersecurity Framework for
CriticalInfrastructureTheNational Instituteof Standardsand
Technology(NIST) haspostedan initial analysisof hundredsof
commentssubmittedby industryandthepublic relatedtothe
Presidents"Improving Critical InfrastructureCybersecurity"
ExecutiveOrder, issuedFeb. 12,2013.NIST is makingthisinitial
analysisavailable asa statusupdate and tohelpprovidebackground for
a workshoplater thismonth to discussthecybersecurity
framework.TheExecutiveOrder callsfor NIST towork with
industrytodevelop avoluntary frameworkto reducecybersecurity
riskstothenations criticalinfrastructure, whichincludespower,water,
communication and othercritical systems.Thefirst step
towarddraftingthe frameworkwassolicitinginformationon current risk
management policies,existingstandardsandguidelines,and specific
industrypracticesfrom stakeholdersthrough aRequestfor Information
(RFI).ThesecommentsweredueApril 8, 2013.NIST received more than
200responsesand posted them publicly.NISTs approachtoanalyzing the
input from the RFI, aswell asidentificationof thecommon
cybersecurityframeworkthemesthatemerged asa result of the analysis,
is described in the paper,InitialAnalysis of Cybersecurity
Framework RFI Responses.In additiontoidentifying and describing
thecommon themes,this paperprovidesquestionsfor stakeholdersto
consider.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 26. P a g
e | 26Thepaper can be found athttp:/ / csrc.nist.gov/
cyberframework/ nist-initial-analysis-of-rfi-responses.pdfand
additional information about thecybersecurity critical
infrastructureframeworkproject isavailable at www.nist.gov/ itl/
cyberframework.cfmInformation on the 2nd Cybersecurity Framework
Workshop, May29-31,2013,at
CarnegieMellonUniversityisatwww.nist.gov/ itl/ csd/
cybersecurity-framework-workshop-may-29-31-2013.cfmCybersecurity
FrameworkRecognizingthat thenational and economicsecurityof
theUnitedStatesdependson the reliablefunctioningof critical
infrastructure,thePresidentunder theExecutiveOrder Improving
CriticalInfrastructureCybersecurity hasdirected NIST towork
withstakeholdersto develop avoluntary frameworkfor reducing cyber
risks to critical infrastructure.TheFrameworkwill consistof
standards, guidelines,and best practicestopromotethe protection of
critical infrastructure.Theprioritized, flexible,repeatable,and
cost-effectiveapproachof theframeworkwill help ownersand
operatorsof critical infrastructuretomanagecybersecurity-related
risk while protectingbusinessconfidentiality, individual privacyand
civil liberties.Background - NIST ResponsibilitiesNIST will develop
the Framework in a manner that is consistent withitsmission to
promoteU.S. innovation and industrial
competitiveness.TheFrameworkwill be developed by ongoingengagement
with, andinput from, stakeholdersin government, industry,
andacademia, includingan open public review and commentprocess,
workshopsand other meansof engagement.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 27. P a g e |
27Todevelop the Framework,N IST will use a Request for
Information(RFI) and ongoing stakeholder engagement to:(i)identify
existingcybersecurity standards, guidelines,frameworks,andbest
practicesthat areapplicabletoincreasethe security of
criticalinfrastructuresectorsand other
interestedentities;(ii)specifyhigh-priority gapsfor whichnew or
revised standardsareneeded;and(iii)collaborativelydevelop action
plansby whichthesegapscan beaddressed.TheFrameworkwill seekto
promote thewideadoption of practicestoincreasecybersecurity
acrossall sectorsand industry types.It willseek
toprovideownersandoperatorsaflexible,repeatableandcosteffectiverisk-basedapproachtoimplementingsecuritypracticeswhileallowingorganizationsto
expressrequirementstomultipleauthoritiesandregulators.Thebelow
presentation showstheprocessby whichNIST will
workwithstakeholdersto develop the Initial Framework.International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 28. P a g e | 28Initial
Analysisof Cybersecurity Framework RFI ResponsesIntroductionOn
February 26, 2013, NIST issued a Request for Information (RFI)
onDeveloping a FrameworkToImprove Critical
InfrastructureCybersecurity.Thepurposeofthispaper
istodescribethemethodologyusedtoperformtheinitial analysis of
thesubmitted responses, and toidentify anddescribethe Cybersecurity
Frameworkthemesthat emerged asa part oftheinitial analysis.This
initial analysiswill serveasthe basisfor additional discussion
andstudyat the Cybersecurity Framework Workshop #2 tobe hosted
atCarnegie MellonUniversity in Pittsburgh, Pennsylvania on May
29-31,2013.AnalysisMethodologyNIST implemented a consistent and
repeatable methodology to conductits initial analysis of the RFI
responses to Federal Register Notice 78 FR13024.a. Review and
Categorize RFI ResponsesEach submittedRFI response2wasreviewedand
analyzed byNIST.3Thereview of each RFI responseincluded:Analysisof
responsecoverageacrosscritical infrastructure
sectorsandorganizationtypes;Identification of sectionsof text
relevant to one or more of theRFIquestions;Categorization of
relevant text to category/sub-category, asshown inAppendix A;
andInternational Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 29. P a g e |
29Specificationof termsand phrasesthat identify keypointsin
eachcategorizedsection of relevant
text.Theresultingcategorizationwasthenusedtoidentify
commonalitiesandrecurringthemes.b. Identification of Commonalities
and Recurring ThemesCommonlyused termsand phrasesidentified during
theRFI responsecategorizationhelped identify commonalitiesand
recurringthemesamongresponses.Due to thevariancein terminologyand
nomenclature acrosssectors,NIST identifiedand normalizedtermsthat
expressed keypoints.For example, thetermssecurityrequirement,
security measure, andsecurity control wereoftenused
interchangeably.Tocorrelate these terms, NIST selectedthe term
security control to labelthisconcept.Theselected term allowsfor
consistencyin nomenclature. Examplesof commonly usedtermsand
phrasesinclude, but are notlimitedto:International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 30. P a g e | 30NIST
used the commonly used terms and phrases to group relevant textfrom
RFI responses. These groupings identified recurring and
commonthemes, whichwerethen separatedintothree categories:Framework
Principles:Characteristicsand considerationstheFrameworkmust
encompass.Common Points:Practicesidentifiedashaving
wideutilityandadoption.Initial Gaps: For the purposesof RFI input
analysis, initial gapsarethoseareaswhereRFI responseswerenot
sufficient tomeet the goal oftheExecutiveOrder.International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 31. P a g e |
31Theresultsof theinitial analysis of RFI
responses,includingthedescription of each Cybersecurity Framework
theme, identificationofassociated keytermsand phrases,summary
statistics, examplesof RFIresponses,and representativequestionsare
included in the followingsections.This information representsan
initial, high-level analysisof the inputsNIST hasreceived toassist
withthedevelopment of the Framework.Stakeholdersareaskedto evaluate
the themesidentified byNIST, determine if thesethemesare
reflectiveof the commentsreceivedInternational Association of Risk
and Compliance Professionals
(IARCP)www.risk-compliance-association.com 32. P a g e | 32through
theRFI, and assistin thoseareaswhereadditional
stakeholderengagement will be needed to develop a
sufficientlyrobust Framework.Toassist, NIST hasprovided a seriesof
representativequestionstoencouragediscussionon thesekey
themes.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 33. P a g
e | 33Opening Remarksat SEC Roundtableon Credit RatingsBy Chairman
MaryJo WhiteU.S. Securitiesand ExchangeCommission, Washington,
D.C.Goodmorningeveryone, and welcometotheSecuritiesand
ExchangeCommissionsCredit Ratings Roundtable, whichI havebeen
verymuch lookingforwardtoandwhichwill addressa rangeof
criticalsubjects.I wouldlike first to extend a special welcometoour
distinguishedMembersof Congressheretoday: Senator Franken, Senator
Wicker, andChairmanGarrett.Thank you for takingtime from your
hectic schedulestospeak toustoday.Thank you alsoin advancetoour
distinguishedpanelistsfor contributingyour time and knowledgeto
this roundtable.There aremany questionsabout the appropriateroleof
credit ratingsinour financial marketplacegenerally.We take all
thequestionsseriously.But today, our discussionswill center on
whether and how to change theagency assignment system and
alternatives to the compensation modelsnow in use.When
Congressenacted the Dodd-Frank Act, it notedthecritical"gatekeeper"
role played in thedebt market by NationallyRecognizedStatistical
RatingOrganizations(NRSROs).International Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
34. P a g e | 34It alsonoted thesystemic importanceof credit
ratingsand that creditratingagenciesare central tocapital
formation, investor confidence,andtheefficient performanceof
theU.S.economy.Congressalsocitedthe adverse impact on the economy
of
inaccurateratingsassignedtostructuredfinanceproductsduringthefinancialcrisis.And
it noted that in certain activities particularly advising arrangers
ofstructured financial products on potential ratings rating
agencies faceconflictsof interestthat need to be recognizedand
carefullymonitored.As a result, the Commission wascharged
withstudying thecredit ratingprocessfor structured productsand the
conflictsof interest associatedwith the issuerpay and subscriber
payrating agencymodels.We alsowereinstructedtoexaminethefeasibility
of establishinganassignedratingssystem and
alternatemeanstocompensateNRSROs.When reportingto
Congress,wewererequired tosubmitrecommendationsfor regulatory or
statutorychangesthat wouldbeneeded to implement our
findings.TheCommissionrequestedpubliccomment and, in
preparingthereport, the Commissions staff carefullyreviewedeach of
the commentlettersreceivedaswellasstudies,articles,and
testimonyregardingpotential conflictsof interestand
alternatecompensation models.Wealsomet withseveralNRSROs,
proponentsof alternativemodels,andother market participants.Relying
on theinformation gathered from theseefforts, the staff
reportdescribedpotential benefitsandconcernswiththesystemsproposed,
andidentifiedpotential regulatory or statutorychangesthat could
beundertaken with respect to eachproposal.Thestaff report
wasfiledwithCongressin December 2012.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 35. P a g e | 35Given
the complex issuesthe studybrought to our attentionand thevarying
and sometimesconflictingviewpointsexpressed, theCommissionsstaff
recommended conveninga roundtablededicated tothesetopicsduring
whichall sidescould discussthe issuesand thepotential
actionsthestudy addressed.Todayis the day for that discussion.As I
said, I am verymuch looking forwardto
hearingtheexchangeofideasbytodays speakersand
panelists,andusingwhat welearntodayasweconsider approachesand
appropriateresponses.BeforeI turn thefloorback toTom
Butler(directorof theSECs Office ofCredit Ratings), I wouldlike
tothank him and all of the staff from acrosstheCommission
whoprovided help and assistancein organizingthisroundtable.It
wastheir tirelesseffort and coordinated activitiesthat made
todaysextremelyimpressive assemblageof speakersand
panelistspossible.Thank you all.International Association of Risk
and Compliance Professionals
(IARCP)www.risk-compliance-association.com 36. P a g e |
36Addressing Conflicts of Interest In theCredit Ratings IndustryBy
CommissionerLuisA. AguilarU.S. Securitiesand
ExchangeCommissionRemarksat the Credit RatingsRoundtableWashington,
D.C.Good morning. I am very pleased tobe here attheRoundtable on
Credit Ratings.I strongly support theCommissionseffort
toevaluatewaystoimprove our credit ratingssystem.Effectiveoversight
of NationallyRecognizedStatistical RatingOrganizations(NRSROs) is
critical toensuringaccurateratingsandpromotinginvestor
confidence.Before I begin, however, let me issuethestandard
disclaimer that theviewsI expresstodayaremy own, anddonot
necessarilyreflecttheviewsof the U.S. Securitiesand Exchange
Commission(SEC orCommission), my fellowCommissioners,or membersof
thestaff.As an SEC Commissioner, I have focused singularlyon how
theSEC canbest serve theneedsof investors.It isclearthat
theroleplayed bycredit ratingagenciescanhaveanimpacton the
integrityof our marketsand investor confidence.Todays roundtableand
the CommissionsDecember 2012Report toCongressonAssigned Credit
Ratingsare direct outgrowthsof industrypracticesthat permitted
inaccurateratingsto underminethesecuritiesmarket and the integrity
of thecredit ratingsindustry.A number of studies have concluded
that inflated credit ratings, amongother factors, contributed to
the financial crisis by masking the true riskof
manymortgage-relatedsecurities.International Association of Risk
and Compliance Professionals
(IARCP)www.risk-compliance-association.com 37. P a g e | 37For
example, prior tothe financial crisis, NRSROs issuedcredit
ratingsfor tensof thousandsof U.S residential mortgagebacked
securities(RMBS) and collateralizeddebt
obligations(CDO).Amajorityof the productsreceivedAAA and other
investment-gradecredit ratingsdespitetheir risky
features.AlthoughAAA-rated securitieshavehistoricallyhad lessthan
1%probabilityof incurringdefaults,over 90% of theAAA ratingsgiven
tosubprime RMBSsecuritiesthat originated in 2006and
2007werelaterdowngradedby theNRSROs tojunk
status.Theselargenumbersof downgradesresulted in great harm and
requiresthat wemake sure theydont reflect a faultysystemic
process.Too that end, one of the key concerns raised by
commentators regardingthe current structure of the credit ratings
process is the issue of conflictsof interest associatedwiththe
issuer-pays model.Thismodel allowstheparty planningon issuinga
financial instrument topayan NRSRO for assigningthe rating.Anumber
of commentatorshaveargued that this
businessmodelencouragesratingsshopping bytheissuersand investment
bankssellingthesecurities,and resultsin undue pressure for NRSROs
togivefavorableratingstoattract business.Investorsuse credit
ratingstomake investment decisions, generallyoptingfor
investment-grade products thoserated asAAA toBBB-Productsthat
carrya greater risk are labeled below investment grade.Obviously,
productsthat receivean investment grade ratinghave a
muchbroadermarket in whichto sell.Asaresult,
therecanbeagreatdealofincentivetohaveaproduct ratedatinvestment
grade level.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 38. P a g
e | 38Therefore, it is important to establishprocessestoensure that
a productreceivethe appropriate ratinglevel.Afaulty system of
assigning credit ratingscan devastate the best financialplanning
and destroy financial security, particularly for investors that
areretired or nearing retirement.Given the importanceof credit
ratings,it is criticalthat credit ratingsbeissuedwith integrityand
transparency.It is clearthat thepast cannot be repeated.
Thefinancial crisis costAmericans$3.4 trillionin retirement
savingsand it triggeredthe worstcrisissincetheGreat
Depression.TheFinancial CrisisInquiry Committee concludedthat
thefailures ofthecredit ratingagencieswereessential cogsin
thewheelof financialdestruction [and] werekeyenablersof the
financial meltdown.I want tothank all of the panelistsfor
beingheretoday to share yourviews.All of you have important
informationtosharewithusabout the creditratingssystem, and I
appreciatethat youve taken thetime to be withus.As
todaysdiscussionunfolds, weshould remember
theneedsofinvestors,whodeservea credit ratingssystem that
istransparent, orderly, and that is not derailedby conflictsof
interest.Thank you.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 39. P a g
e | 39Raising the bar for the next phase ofgrowthanddevelopment
sustainingtransformative momentumWelcomingaddressby Dr Zeti
AkhtarAziz, Governor of theCentral Bank ofMalaysia, at the10th IFSB
(IslamicFinancial ServicesBoard) Summit 2013Thefuture of the
Islamic financialservicesindustry
resilience,stabilityandinclusivegrowth, SasanaKijang,
KualaLumpur.It is a great pleasureto welcomeyou to this 10th
IFSBSummit, on theTheFuture of the Islamic Financial
ServicesIndustry:Resilience, Stabilityand InclusiveGrowth.Bank
Negara Malaysia is most honored tohostthisyears summit, whichis
held in conjunction withthe 10th anniversary of the
IslamicFinancialServicesBoard (IFSB).It washere in Kuala Lumpur
10years agothat wewitnessedthemomentousoccasion of the IFSB
inauguration, that wastheculminationof international
collaborationamong the founding member countrieswiththesupport of
several keyinternational and multilateral institutions.Its landmark
establishment in 2002astheinternational
prudentialstandardsettingbodyfortheIslamicfinancemarkedamajor
milestoneintheeffort to strengthen the international infrastructure
for theIslamicfinancialsystem, steeringthepathforitssuccessful
integrationasaviablecomponent of the global financial
system.Adecadeon, the work of the IFSB in ensuring a
cohesivecross-borderregulatoryframeworkandtheinternationalbest
practicesthat are attunedtothe intrinsiccharacteristicsand
peculiaritiesof Islamic financialintermediation, haveserved to
underpin the development of a sound andInternational Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 40. P a g e |
40stableIslamic financial system, usheringin a phaseof rapid
growthandgreater internationalizationof the industry.Indeed, 10
years since the founding of the IFSB have been a period
ofsignificance, during which the Islamic financial services
industry hasgrownimpressivelywith
itslandscapedramaticallyevolved.This growthaccelerationhasbeen
accompanied by the wideningof itsgeographical
reachtranscendingitstraditional bordersin
Muslimmajoritycountriestothe more establishedfinancial centres.In
addition, Islamicfinancehasevolved asa comprehensivesystem
ofintermediationservicingall segmentsof society,
includinggovernments,businessesand householdsregardlessof
scaleofbusinessesand income levels.In this decade, Islamic
financehasalsoevolved from beingdomestic-centric tobecome
increasinglyinternationalized,intermediating funds across borders
and becoming a new vehicle thatbridges economies and fostering
closer financial linkages, particularlyamongemerging and developing
markets.As a form of financial intermediationthat is well
anchoredtoservetherealeconomy,
Islamicfinanceoffersdistinctpotentialtoachievethegoalsof
inclusivegrowthand financial stability.Its foundationshavebeen
strengthenedwiththe settingup of the IFSBandbeforethat,
theAccounting andAuditing Organisationfor IslamicFinancial
Institutions(AAOIFI), have taken the lead in settingtheprudential
and accountingstandardsfor the industry.Combined
withcontinuouscapacitybuildinginitiativesand
institutionaldevelopment, it hasresultedin the opportunityto
achievescaleand hasallowedthe Islamic financial servicesindustry
totransition intoadynamic, fast growingand competitive form of
financial intermediationfor the global community.International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 41. P a g e | 41TheIFSB
todayis celebratingitstenth anniversary in a
worldwhichischangingprofoundly.Anew growthand development agenda
isunfoldingbeforeus.Given the severe damage and devastation caused
by theglobal financialcrisisand the ensuingeconomicdownturns,
theroadto anenduringrecoveryand lastingprosperitydemandsa global
policy responsethatbrings about a new economictrajectorybuilt on a
strong, more inclusiveandmore sustainablegrowthpath.Common
challengesthat have alsocome to the forefront, such aspoverty,
increasinginequalityand the imperativefor greater socialcohesion,
have alsocalledfor theconstruction of policy
objectivesandstrategiesthat can enhancestability, social well
beingand environmentalsustainability.In the wakeof theglobal
financial crisis, there is consensuson the needfor a return
tofinancial systemsthat serve the real economy, and thedemandsfor
more responsiblefinancial practicesfrom the financialsector, that
alsoincludesthecommitment toachievesocio-economicgoals.In
response,theinternationalcommunityisprioritizingfinancialstabilitybystrengthening
financial regulation.This includesfinancial reforms aimed at
protectingdepositorsfromexcessiverisk-taking, over-leveragingand
unfetteredinnovation.Thereform initiativeshave alsofocused on
enhancingcapital andliquiditystandards, reinforcedby
movestostrengthen themacro-prudential orientation of regulationto
complementmicro-prudential supervisionto managetherisksarisingfrom
theinterdependencieswithin the financial system.Whilst thebreadth
of regulatory changesbeingconsideredcollectivelyendeavorto
strengthen financial system resilience,the key
challengeforInternational Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 42. P a g
e | 42policymakers and regulatorsgoing forwardis
alsotoachieveinclusiveandmore sustainablegrowth, whilst ensuring
financial stability.Whilst Islamicfinancehasbenefitedfrom a
well-developed, morecompetitiveand well regulatedeco-system, it
needsto build on andreinforcethesolid foundationsthat hasbeen
achieved in this decade.As the industry transitionsintoa new eraof
growthand development inthispost-crisisworld, thecompetitive
financial landscapeis beingredrawnby theevolving international
regulatory reforms, changingoperatingmodels, risingconsumer
expectationsand increasedcompetition.In this more
challengingenvironment, the successof sustainingthemomentum of
Islamic financeasatransformative agent for theeconomy, will hingeon
the abilityto keep raisingthe bar in thepursuit
ofaneffectivefunctioningand sound Islamicfinancial
system.Post-crisis,theincreasedemphasisfor
inclusiveandsustainableproductsaswell asresponsiblecorporate
behavior providesclear potential forIslamic financial players to
demonstrateleadershipby capitalizingoncore valuepropositionsof
Islamicfinancial
intermediation.Thereisalsoscopeforgreaterleverageontheadvancesoftechnologyandnew
institutional arrangementsthat can
enhanceoperationalexcellence,particularlydistribution channels for
extendingoutreach totherangeof usersfrom householdsto
microenterprisesand small andmedium scaleenterprises.In addition,
innovations in Islamic financial solutionswill need to takeinto
account the higher regulatory expectations for moretransparency,
and the need for the effective management of risks andcapital.This
involvesstrengtheningthe resilienceof theIslamicfinancial systemin
alignment withtheevolving international regulatory
developmentsthusraisingthebar of industry performance.TheIFSB
hasmade significant advancementsin leadingtheeffortstoInternational
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 43. P a g e |
43reviewspecific measuresput
forwardbytheBaselCommitteeforpossibleadoption in Islamic
finance.Further tothis is theimperativeto cultivate a strong risk
culture withininstitutions.Reinforced by a robust shariahgovernance
framework, it will ensure thatinnovationfor furthering
thedevelopment of Islamicfinanceisharnessedwithinthe boundariesof
the Shariah, which wouldavert overzealousinnovativeactivitiesthat
could underminefinancial stability.Let me concludemy
remarks.Muchhasbeenachieved, bothin termsof theroleand
contributionof theIFSB, and the advancement made by Islamic
financein this recentdecade.This hasbeen an outcome of
cumulativeeffortsto strengthen thefoundationsof the Islamic
financial system.As the industry gearsitself for the next phaseof
growth in themorechallengingenvironment, our commitment and
strategiesto keep raisingthebar tobring Islamicfinancetoanewlevel
will enhanceitsprospect tocontributeto achievingour shared vision
of inclusivegrowthin anenvironment of financial
stability.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 44. P a g
e | 44Changesin the Large ExposureRegimeCONSULTATION PAPERGUERNSEY
FINANCIALSERVICES COMMISSION1:Executive Summary1.1OverviewThis
paper containsfull details of theproposalstosubstantiallyalter
theLargeExposure principlesand guidancethat apply to
licenseddeposittakersthat are incorporatedin Guernsey.It is
proposedthat the new regime wouldtake effect from
1January2014.Theseproposalsincludechangestoenhancethequarterly
prudentialreporting tothe Commission and thiswouldaffect not only
licenseddeposit takersincorporatedin theBailiwick, but
alsothoselicenseddeposit takerswhoseprincipal place of
businessisoutsidethe Bailiwick.Thecontext for the review is that
theexistingPrinciple1/ 1994/ 24Principlesand Guidancetobe
followedby a locallyincorporatedlicenseddeposit taking institution
enteringinto a largeexposure paperpublishedbythe Commission in
1994nolonger adequatelyaddressestherisksassociated
withlargeexposures,particularlythosearisingfrom thesystemic and
market risks that became evident asa result of the2007/
2008financial crisis.In respect of largeexposures,the Commission
hastended tobe apragmatic supervisorrather than a rigid standard
basedsupervisor, and, it hasfrom timeto time
allowedsuitablycollateralisedlargeexposuresin excessof 25% of net
capital base.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 45. P a g
e | 45Given that anychange to a more restrictive approach may have
a businessimpact on licenseesthe Commission feelsthat it
isappropriate toseek theviewsof industry.TheCommission is
proposingto retain several elementsof itspragmaticapproachand in
seekingthe viewsof industry it will be open to
bilateraldiscussionswithlicenseesabout particular typesof
exposures.2. What is proposed?Thesubstantivechangesbeing proposed
in updated guidanceare asfollows:- Exposurestocentral
governmentsand market loansof lessthan 12monthsmaturity, whichare
exempt from the current largeexposureregime, will be deemed tobe
largeexposuresunder the new regime.- Thecurrent upstreamingregime
will changeto expressagreedexposure limitstoparent/ group banks asa
proportion(i.e. %) ofcapital baserather than a proportionof assets.
The upstreamingregimewill includeon balancesheet and off
balancesheet exposures.-
Exposurestothirdpartybankswillnormallybelimitedtoamaximumof 100%of
net capital base and will comprise cashplacements, holding of debt
instrumentsand off balancesheetexposures.Themaximum proportion (%)
of exposure will bedetermined accordingtotheratingofthethird
partybank, althoughlimitedflexibilitywillbepermitted in the caseof
exceptional short-term excesses.- In relationto exposuresto
sovereigns, theconcept of ZoneAandZoneB countrieswill be replaced
withtwodifferent OECD-basedgroupings- High IncomeOECD countries and
other countries.Exposureswill be capped at a maximum of 1000%of net
capital baseandwill be determinedaccordingto the rating of the
sovereign.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 46. P a g
e | 46- Exposurestoclientsorgroupsofconnectedclientswillbecappedat
amaximum of 25% of net capital base,unlessthe exposure is
securedbycash and/ or High Income OECD government securities,or
theexposureissubjecttoaparentalguarantee(whichinitselfwouldneedtobe
included in anyupstreaminglimit).Sub-participationagreementsthat
transfer credit risk off thebalancesheet of the Guernseybank will
alsobe considered.- Better definition of what constitutesconnected
clientswill beprovided.- Theprudential
reportingformswillbechangedtobettercapturelargeexposuresthat
havenot previouslybeenreported; e.g. holdingsof debtthat equateto
more than 10% of a banksnet capital base.In
accordancewithexpectedinternational developments, theCommission
alsoproposestocapturethe top twenty, rather thanthecurrent top ten,
largest exposures.Brancheswill be askedto report similar details,
but in termsof theirparental capital, sothat data on any
significant credit concentrationriskin a branch in Guernseythat may
impact on a head officeelsewherecanbecollected.- Breachesof
largeexposure limitswill be a reportable event.
TheCommissionisproposinga staged approach
todealingwithexposuresthat cannot be regularised.- The800%
aggregate limit on exposureswouldbe retained, butexposurestoGroup,
to thirdparty banksand tosovereignswouldbeexcludedfrom
thisaggregate.- Largeexposuresexistingprior tothe
intendedeffectivedate for thenew regime of 1January 2014wouldbe
grandfatheredin.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 47. P a g
e | 471.3 Rationale for changeThelargeexposureregimeisall about
capturing concentrationriskanditis coveredby s24of The Banking
Supervision(Bailiwick of Guernsey)Law, 1994.Conventional wisdom,
asdictatedby theCapital RequirementsDirectiveandthe Basel Core
Principlesfor EffectiveBanking Supervision, statesthat
noexposuretoaclient orconnectedgroupofclientsshouldequatetomore
than 25% of net capital.Short term interbank
exposureshavehistoricallybeen exempt from thisrequirement.Our
current environment reflectstheseexemptionsand
alsopermitsexposurestoclientstoexceed the25% limit.Whilst pure
concentration risk to singleobligor counterpartieswasnotseen asa
major direct contributor tothe2008financial
crisis,nonethelesselementsof concentration risk wereseen asindirect
contributors.Interconnectednesswithinand betweengroupswereseen
asmagnifiersof some exposures and concentrationsthrough sectoral
exposurestoparticular economicsectors(e.g. theIrish
propertydevelopment sector)affected credit assessmentsof
manyorganisations.That said,
theguidanceonlargeexposuresremainshistoricin
nature;theBaselCommitteeguidanceonmeasuringandcontrollinglargeexposuresdatesback
to 1991,and our own localregimehasnot been
significantlyupdatedsince1994.However,there havebeen substantial
changestothe EU largeexposureregime.These substantial changes have
their origin in late 2007 and early2008, when the Committee of
European Banking Supervisors(CEBS), which has since become the
European BankingAuthority, reportedto theInternational Association
of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 48. P a g e | 48European
Commission on the effectivenessof the largeexposureprovisionsof the
Capital RequirementsDirective.Thereport concluded that market
failuresassociatedwithsystemic riskand moral hazard applied
tointerbank exposuresregardlessof maturity.Accordingly,
thelargeexposureregimeforEU memberstateswasrevisedwith effect from
December 2010totighten largeexposurelimits,particularlyin
relationto interbank and intra-grouplending, whichtheEuropean
Commission agreed wasa major systemic risk in thewakeof the
financial crisis.Under the revised EU regime, short term
loanstobanks areno longerexempt and whilst limitednational
discretion is availabletomemberstatesin relationto intra-group
lending, loanstothird partybanksarenow capped at 25% of net
capital, unlessthe lendingbank is very small.In reality, bythe
timethechangestotheEU regimecame along, marketpracticehad
alreadychangedtoreflectthis more cautiousapproach tointerbank
lending.It isworthnotingthat theCEBS
conclusionswerealsoreflectedintheUKGovernmentsresponsetothe report
on bankingreform by theIndependent Commission on Banking(the
Vickers Report).TheHM Treasurywhitepaper BankingReform
deliveringstabilityand supporting a stableeconomy publishedin
June2012 envisagesthelimitingof a ring-fencedbanksexposure
tofinancialinstitutionsin ordertoprevent
systemicshocks.ClearlyGuernseyis not in the EU, but
neverthelesswewouldnot wishtobea completeoutlier in respect of
largeexposures.The Basel Core Principles for Effective Banking
Supervision do give thesupervisor some latitude in permitting minor
deviations from the 25%limit, but the economic climate that has
prevailed for all but the last fewyears combined with the
Commissions wish to be a pragmatic regulatorhasmeant that
theseminor deviations have been permittedmoreInternational
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 49. P a g e |
49frequentlyin thepast than is arguablynow prudent in the
currenteconomicand regulatoryclimate.Theguidance however,
remainsthesame and a changeis needed tomanageexpectationsand
formalise a prudent approach.In developing proposals for a new
large exposure regime the Commissionhashad regard to a number of
other regimes, including thoseoperating intheUK and theother Crown
Dependencies.None of theseare a good fit in their entirety for
thetype of bankingbusinessdone in and from within the Bailiwick.The
Commission has therefore tried to balance the requirements of
otherregimes against the type of banking business that exists in
theBailiwick, recognising also the intra-group funding that many
licenseesprovide.1.4 Who would be affected?Licensed deposit takers
that are incorporated in Guernsey would be thoseprincipally
affected, given that limits on exposures are being proposed
inrelationtocapital.However, the proposed revisions to the large
exposure regime includeenhanced quarterly prudential reporting for
all licensees and brancheswouldthereforebe affectedby
thesechangestothe BSL/ 2 reports.The CommissionTheGuernsey
Financial ServicesCommission is the regulatorybody
forthefinancesector in the Bailiwick of Guernsey. The
Commissionsprimaryobjectiveis toregulateand supervise financial
servicesinGuernsey, with integrity and efficiency, and in sodoing
help toupholdtheinternational reputation of Guernsey asa
financecentre.Tolearnmore:http:/ / www.gfsc.gg/ Banking/ News/
Documents/
Consultation%20paper%20for%20Commission%20website.pdfInternational
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 50. P a g e |
50GovernorSarah Bloom RaskinAt the Society of Government
EconomistsandtheNational EconomistsClub,Washington, D.C.Prospects
for a Stronger RecoveryThank you.I am very pleased to be here among
an audienceofprofessional economists,whichis
certainlypreferabletoappearingbefore an audienceof
unprofessionaleconomists.I like your kind! Your talents are needed
now morethan ever as we try to put the toolsof the
economicprofession toworkfor the common good.Its easyto be
aneconomist wholooksback on crisesand crashesandtries toexplain
whythey happened, but much harder tobe an
economistwhoseeffortsmanagetohelpstopthemfrom happeningin
thefirstplace.Economicpolicymaking, at itsbest, reflectsa
continuousstruggletomakesurethat
dataandexplanationsofsuchdataareconsistent withrealexperience.If
were to engagein this strugglehonestly, its noeasytask.It
involvesunderstandingnot just thereliabilityand signal in
variousdata, but alsoquestioningwhetherthedata accordswithour
understandingof actualexperience.So, to get thisright requires many
different perspectives,not just on thedata but on the underlying
realitiesthedata are trying to capture.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 51. P a g e |
51Government economistsunderstand that
non-economistsbringsomethingvaluabletothetablein policymaking--a
groundedperspectivein what ishappeningin theeconomy.With that said,
what is reallyhappening now in theAmerican economy?What
dotheeconomic dataweseeat theFederalReservecurrentlyshow,andhow do
wethink thesedata lineup withthe economicrealitiesofmost American
householdsand businesses?In my remarkstoday I will offer my
assessment of recent economicdevelopmentsand the economicoutlook,
and I will discussthe actionsthat the Federal Reserve hasbeen
taking, in light of itsview ofdevelopmentsand the outlook, to
support the economic recovery.Before I begin, I should notethat
theviewsthat I will be presentingaremy own and not
necessarilythoseof my colleagueson the Federal OpenMarket
Committee(FOMC) or the Board of Governors.Recent Economic and
Financial DevelopmentsFor thepast three and ahalf years the
U.S.economy hasbeen in arecovery--albeit a very weakone--from a
severefinancial crisisand thedeepest recessionof thepost-World War
II period.Theunemployment rate, whichreacheda high of 10percent in
thefall of2009,hassincecomedown2-1/ 2percentagepoints,to7.5percent
inApril.Theincreasein economic activityand thedeclinein the
unemploymentrate are, of course, welcome, but westill have a
longwaytogoto reachwhat feelslike a healthyeconomy.In fact, the
paceof recovery hasbeen slowerthan most had expected.Thegap
betweenactual output and theeconomys potential
remainsquitelarge,accordingtoestimatesfrom theCongressional
BudgetOffice, andtheunemployment rate today remainswellabove
levelsseen prior toInternational Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 52. P a g
e | 52therecession, and well above the level that theCommittee
thinkscan besustainedoncea full recovery hasbeen achieved.In
addition,
thenumberoflong-termunemployed--peoplewhohavebeenunemployed for
27weeksor more--remainshistoricallyhigh.My interpretationof
theeconomicdata that wehave receivedover thepast few quartersis
that the recovery hascontinued to gain traction.TheBureau of
EconomicAnalysis reportedlastmonth that real grossdomesticproduct
(GDP) roseatanannualrateof2-1/ 2percent inthefirstquarter of this
year after barelyexpandingat all in the fourth quarter
of2012.Thestep-up in growthin the first quarter partly reflecteda
rebound fromlast yearsdrought and Hurricane Sandy.Smoothingthrough
thesefactors, real GDP wasabout 1-3/4percentaboveitsyear-earlier
level in the first quarter, a modest gain that isaboutin linewith
thepaceof growthduring much of the recovery.Thestrength of
therecoveryamong thecomponentsof GDP has beenmixedrecently.In
termsof thehousing sector, there is noquestionthat manycommunities
and neighborhoodsweredevastatedby the effectsof thefinancial
crisis.Recently, weseethat overall demand hasbeen strengthening,
withbothhomesalesand pricesrisingmarkedlyin many areas.Both new and
existinghomesaleshavemovedup, on net, sincelate2011, and
housingstartsaveragedan annual rate of nearly1million unitsin
thefirst quarter of thisyear, up considerablyfrom theextremely
lowlevelsthat prevailedthrough 2011.Inventoriesof new homesfor
salehave becomequitelean in mostmarketsover the past year, a
notablechange from earlier in therecovery.International Association
of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 53. P a g e |
53Theincreasein activityin the housing sector hasbeendriven
byhistoricallylow mortgagerates, growingoptimismabout future
houseprices,continuedgainsin thejobmarket,
andsizablepurchasesofhomesbyinvestors.Elsewherein the household
sector, consumer spending--abouttwo-thirds of overall final
demand--hascontinued growingat a moderatepace.On thewhole,
familieshave benefitedfrom the modest improvement inthelabor
market, and risingstock pricesand reboundinghome
valueshavehelpedsome householdsrecoup part of
thewealththeylostduringtherecession.However, overall
wagegrowthhasbeen anemic, and manyhouseholdshavenot seen their
circumstancesimprove materially.As I describedin a speech
lastmonth, globalizationand technologicalchangehave continuedto
shift the occupationsand industrialdistribution of new
jobsavailable.Thesecurrentsof globalizationand technological
changecontinueontheir path, makingit morelikelythat
workerswhowerelaidoff during therecession wouldbe unableto find
reemployment that isof comparablequalityto their previousjobs.About
two-thirdsof all job lossesin the recessionwerein
middle-wageoccupations--suchasmanufacturing, skilledconstruction,
and officeadministrationjobs--but theseoccupationshave accounted
for lessthanone-fourth of the job growthduring the recovery.By
contrast, lower-wageoccupations, such asretail sales, foodservice,
and other lower-paying servicejobs, accounted for only one-fifth of
job lossesduring the recessionbut more than one-half of
totaljobgainsduring the recovery.As a result of thesetrends in job
creation, whichcould well havebeenexacerbated by thesevere nature
of thecrisis, the earningspotential forInternational Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 54. P a g e |
54manyhouseholdslikelyremainsbelow what theyhad anticipatedin
theyears beforethe recession.Moreover,asyou all know,
thetemporarypayroll taxcut hasnowexpired, and many
householdshaveseen their disposableincomesreducedfor
thisreasonaswell.Spendingin the businesssector
recentlyhasincreasedonlymodestly, perhapsdue in part totheeffect of
theserecent tax changeson consumers.Real spending on equipment and
software rose about 4 percent over thepast 12 months, according to
the most recent GDP report, a modest gainfor this categoryof
spending.Indicatorsfor capital investment in themonthsahead,
includingnewordersfor durable capital goodsand survey measuresof
businesssentiment, suggest that growth in businessspendingon new
equipmentand softwareis likelyto remain modest in
thecomingquarters.Turningtothe government sector, thelegislated
reduction in spendingbythe federal government is exertinga clear
and continuingdrag oneconomicactivity.Even prior tothebulk of
thespendingcutsassociatedwithsequestration, real
purchasesbythefederal government werereported tohavedroppedat an
annual rate of more than 8 percent in the first quarterof thisyear,
followingan even larger drop in the fourth quarter of
lastyear.Thesecutsin federal spending arelikely tobe an important
influence onthenear-term prospectsfor economicgrowth, and I will
saymore aboutthisissuein a moment.In contrast tothe federal
government, the budget outlook for stateandlocalgovernment
continuestoimprove, and thedrag on economicactivityfrom this
sectors cutbacksin spendinghasdiminishedconsiderably.International
Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 55. P a g e |
55Reflectingsome of these mixed influences,asI already noted, real
GDPhasbeen rising at a very modest rate, and the labor market
hasshownsimilarlymodest gainsover the past year,
withtheunemployment ratecomingdown about 1/2 percentagepoint.Tomore
fullyunderstand theexperienceof the 11.7millionAmericanswhocant
find work, welook to broadermeasuresof laborunderutilization, which
take intoaccount job seekerswhohave stoppedlookingfor
workbecausetheyhavebecome discouraged, and peopleworkingpart
timebut whowouldprefer toworkfull time.Recently, thesenumbers seem
to be coming down.Thegainsin payroll employment over thisperiodhave
been about in linewiththe declinein the unemployment rate,
although, asistypical, thepaceof job gainshasbeen somewhat
erraticin recent months.Sincethebeginningof theyear,
theincreasesinpayroll employment haveaveraged 196,000per month, a
littleabove the183,000 averagemonthlygainsobserved during
2012.Other indicatorsfrom the labormarket have
alsoshownsomeimprovement recently. Initial claimsfor unemployment
insurancehavedeclined sincelastsummer, and the number of job
openingsappearstobeincreasing.I hopetheseindicatorsmean
weareturning thecorner on some of thepainful costsassociatedwith
beingunemployed or underemployed inAmerica.Turningtoinflation,
recent datashowthat pricepressureshaveremainedsubdued. Both total
and core inflation wereonly about 1percent over the12monthsending
in March,below theFOMCs long-run objectiveof
2percent.Inflationisbeingrestrainedby the continued slack in labor
and productmarkets,while stableinflationexpectationshave offset
disinflationarypressuresto some extent.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 56. P a g e |
56Moreover,the increasein gasolinepricesthat wesaw earlier in
theyearappearsto have fullyreversed, and thepath of oil
futurespricesisdownward-sloping, suggestingthat energypricesare
likely to hold downheadlineinflationratesin the yearsahead.The
Economic OutlookLet me now turn to the outlook.As my Federal
Reserve colleaguesand I have noted in thepast, the paceof the
economic recoveryhasbeen restrainedby lingeringeffects of
thefinancial crisis.Assessingthecurrent strengthof
theheadwindsrelated totheselingeringeffectsisan important
determinant of theeconomic outlook for
thecomingyears.Unfortunately, current federal fiscal policy is
oneheadwindtotherecovery that hasintensifiedthisyear.In fact,
federal fiscal policy hasbeen tighteningsince2011, after havingbeen
quiteexpansionaryduring the recessionand earlyin the
recovery.Morerecently, actionsby theAdministration and
theCongresstoreducethebudget deficit have ledtofurther tighteningof
federal fiscal policy.As I already mentioned, both thetax
legislationsignedintolaw inJanuary and the sharp
spendingcutsassociatedwithsequestrationwilllikely
significantlyhinder GDP growththis year.Indeed, the Congressional
Budget Office hasestimated that thesechangesin fiscal policy
wouldreduceGDP growthby 1-1/2 percentagepointsthis year
relativetowhat weotherwisewouldhave achieved.Looking further ahead,
fiscal policyseemslikely toremain restrictiveatthefederal
level.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 57. P a g
e | 57Theheadwindsfrom thehousingsector have eased, and housing
marketactivityis likely tocontinuetocontributeto GDP growthover the
nextfew years.Theseheadwindshad been substantial, asthe aftermath
of the financialcrisisand housing bubble left many
homeownersunderwateron theirmortgages,a largeoverhang of vacant
homes, and mortgagecredit veryhard toobtain for anyone without an
excellent credit record and a sizabledownpayment.Therise in house
pricesover the past year or sohasliftedhousehold networthand pushed
some homeownersabovewateron their
mortgages.Thesedevelopmentsmayhelptoeasecredit
formanyhouseholdsaswell, although mortgagecredit
remainsverytight.In a speech last month, I described how thenet
declinein housingwealthsincetherecession hashad
particularlyacuteeffectson thebalancesheetsof lower- and
middle-incomehouseholds,which tend tohold a relativelyhigh share of
their total wealthin their homes.Householdsat the bottom of the
income distributionhave alsohad aharder time than
othersfindingjobsduringthe recovery and their
wageshavecontinuedtostagnate.In my view, the largeand
increasingamount of inequalityin income andwealth, whichhasbeen an
ongoing development for decades, may haveexacerbated the crisisand
I think more research is required todeterminewhetherit may
alsoposea significant headwindto the recovery from thecrisis for
yearsto come.So, whileI am hopeful that pressureswill easefurther
ashome pricescontinuetorebound, I alsobelievethat some of the
restraintson therecoverymay bequite long-lasting.Theheadwindfrom
the financial sector alsohasdiminishedsomewhatover thepast year and
should present lessof a restraint on
economicgrowththanhasbeenthecaseintherecent past. U.S.
equitypricesareupInternational Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 58. P a g
e | 58more than 10 percent sofar this year followinglast years13
percentincrease.Riskspreadsembeddedin the interest ratespaid by
manyAmericanbusinesses,although still abovetheir pre-crisislevels,
havealsomoveddownsubstantiallyover the past year tolevelsthat are
moderate, giventhestateof the broader economy.Thesituationin
Europe, although still uncertain, appearsto haveimproved sincelast
summer--aidedimportantlyby thepoliciesof theEuropean Central Bank
(ECB)--and thesedevelopmentshave ledto animprovement in financial
conditionsglobally.Policy actionsand promises,includingthe
ECBsprogram topurchasethesovereign debt of
vulnerableeuro-areacountriesand discussionsabout creatinga
bankingunion, appear tohave helpedmarketparticipantsnegotiatepast
some recent hurdles, includingthechallengesin forming a
governingcoalitionin Italyand thesevere bankingdifficultiesin
Cyprus.If policymakers in Europe can follow through on their
commitmentstofinancialintegrationandstructuralreforms,amongotherthings,financialstressin
Europe should continueto lessen, and European economiesshould
graduallyrecover from their current slump.If the economy in Europe
wereto begin togrow again, it could supportglobal economic
growthmore broadly.Thefinancial condition of the U.S.bankingsector
hasalsocontinued toimprovefrom the perspectiveof regulatory
capital.While much workremains for regulatorsand
banksimplementingpendingcapital requirements,most large,
medium-sized, andcommunitybanks are in stronger capital
positionstodaythan theywereprior tothe financial crisis.Although
not all, some consumersat least,
areseeingthebenefitsofimprovementsin financial
markets.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 59. P a g
e | 59In combination withlowinterestrates,the easingof financial
stresshasallowedsome homeownersto refinancetheir mortgagesto
lowertheirmonthlypayments, andsometypesof loans,suchasthosefor
purchasinga new or used car, have become availableto more
people.That said, weclearlystill have a long wayto goin
assuringthatAmericanshave accessto affordablecredit.As I noted, an
especiallylargenumber of people are unabletoobtainmortgagecredit,
and credit card borrowingis alsotight.Taken together,
theincomingdata and my own analysis of recentdevelopmentsin fiscal
policy suggest that the recovery will continueat amoderate pace,
and theunemployment rate will fall gradually.According to the
Summary of Economic Projectionsthat wasreleased byFederal Reserve
Board membersand Reserve Bank presidentsafter theMarchFOMC meeting,
mycolleaguesandI expectedrealGDPgrowthtostep up moderately this
year, risingroughly 2-1/2 percent after havingrisen 1-3/ 4percent
in 2012.In theprojection, participantsalsoexpectedtheunemployment
ratetobein therangeof 7.3to7.5percent by the end of theyear.Looking
a bit further ahead, FOMC participantslargely expected
theunemployment rate tocontinuereceding, but it wasexpected to
remainaboveitslong-run sustainablelevel for several
years.Meanwhile, inflationwasexpected to remain closetoor a
littlebelowtheCommitteesobjectiveof 2 percent, consistent with
ongoingslackin thelaborand product marketsand
well-anchoredinflation expectations.Monetary Policy DevelopmentsIn
light of this outlook and the risksaround theoutlook, it
hasbeenappropriatefor the Federal Reserve to continueto pursuea
highlyaccommodativemonetary policy.International Association of
Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 60. P a g e | 60As you
all know, duringthe financial crisisand at theonset of
therecession, the Federal Reserve took
strongeasingmeasures,cuttingthetargetforthefederalfundsrate--thetraditionaltoolofmonetarypolicy--tonearlyzero
by theend of 2008.During the recovery, wehave provided additional
accommodationthrough twonontraditional policytools aimed at putting
downwardpressure on longer-term interestrateseven withshort-term
ratesstuck atzero:(1) purchasesof Treasurysecuritiesand mortgage
backed securities and(2) communication about thefuture path of the
federal fundsrate.Our most recent policy actionshave sought
tostrengthentherecoveryinthefaceof only slowimprovementsin labor
market conditionsandsubdued inflationarypressures.After
lastSeptembers policy meeting, the FOMC announcedthat theFederal
Reserve wouldcontinueasset purchasesuntil theoutlook for
thelabormarket hasimproved substantiallyin the context of
pricestability.Then, at themeetingin December, theFOMC voted to
continuepurchasinglonger-term Treasurysecurities at a pace of
$45billion eachmonth and agencymortgage-backed securitiesat a
paceof $40billioneach month, and wehave maintainedthat paceof asset
purchasessofarthisyear.In consideringchangestothepace of asset
purchasesin thefuture, wetakeintoaccount judgmentsabout
boththeefficacyandpotential
costsofthesepurchases,includingpotential risksto inflation and
financialstability, aswellastheextent ofprogresstowardour
economicobjectives.At its December meeting, the FOMC also recast
itsforward guidance toclarify how the target for the federal funds
rate is expected to depend
onfutureeconomicdevelopments.International Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
61. P a g e | 61Specifically, wesaid that weanticipate that an
exceptionallylowfundsrate is likely tobe warrantedat least aslong
asthe unemployment rateremainsabove 6-1/ 2percent, inflation over
the period betweenone andtwoyears ahead isprojectedto be nomore
than 1/ 2percentagepointabove2 percent, and longer-term
inflationexpectationsremain
wellanchored.Thesethresholdsareintendedtomake monetarypolicy more
transparentandpredictabletothepublic by makingmore explicit our
intentiontomaintainpolicy accommodation aslongasneeded to promote a
strongerrecoveryin thecontext of price stability.Although it is
still tooearlyto assessthefull effectsof themost recentpolicy
actions,availableresearch suggeststhat our
previousassetpurchaseshaveeased financial conditionsand provided
meaningfulsupport to theeconomicrecovery.Given itsstatutorymandate,
theFOMCs policyactionsandcommunicationshave naturallysought
tolowerinterest ratesasa meansof strengthening aggregate demand,
promoting thepace of recoveryinthelabormarket, and
keepinginflationfrom fallingfurtherbelowtheratepreferredby the
Committeeover the longer run.We will continue to calibratemonetary
policy--including both theongoing pace of asset purchasesand
communicationsabout the likelypath of thefederal fundsrate--inlight
of our interpretationsof the latestdata and theimplicationsof
thoseinterpretationsfor the outlookforeconomicactivity, labor
market conditions,and inflation.ConclusionIn summary, the U.S.
economy has continued to recover from the effectsof the financial
crisis and deep recession, though at a pace that has
beendisappointinglyslow.Therecovery doesappear tohavepicked up
steam in some sectors, mostnotablyin housing, likely reflectingthe
easingof some of theheadwindsInternational Association of Risk and
Compliance Professionals (IARCP)www.risk-compliance-association.com
62. P a g e | 62that had been holdingback the paceof therecovery in
earlier years.However,federal fiscal policy remainsan important
source of restraint.In light of thesefactors,mostmembersof the FOMC
project a modestimprovement in thepace of therecoverythisyear
andnext, and, accordingly, a modest declinein theunemployment
rate.TheFederal Reserve will continueto conduct monetary policy
soastopromotea stronger economicrecovery in thecontext of
pricestability.International Association of Risk and Compliance
Professionals (IARCP)www.risk-compliance-association.com 63. P a g
e | 63Opening SpeechbyYolanda BanksMcCoy,Head Investmentsand
SecuritiesDivision,Cayman IslandsMonetaryAuthorityat the 100WHF
Cayman Event 2013Committee members, distinguishedguests, GAIM Ops
delegates, ladies andgentlemen:GoodAfternoon.It is anhonour tobe a
part of this afternoonsEvent, and I thank themembersof theCayman
Committeefor their invitation tospeak
withyoutoday.Theinvitationcame with the remit tooffer an updateon
thehedgefundindustryin theCayman Islands,soI proposetodoexactlythat
in thetimeallottedtome.TheCayman IslandsFundsIndustry hasperformed
exceptionallywelldespitecontinuedvolatilityin the global financial
markets.Asof31st March2013,theCayman
IslandsMonetaryAuthorityhad10,932regulated funds, whichcomprised of
8,282registeredfunds,399administeredfunds, 120licensedfundsand
2,131master funds.This is an 9.4% increaseover the same period last
year, wherewehad9,990 fundsunder our direct remit.Thenumber of
newfundsprocessedduringthequarter ended31st March2013was572compared
to1,722asat 31st March2012.Total master fundscomprised of 66% of
thecumulativenumber (or 376)comparedto81% of thecumulativenumber
(or 1,125)for the quarterended31st March
2012.Terminationstotalled81, comparedto176for thesameperiod
2012.International Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 64. P a g e | 64Growthin
the fund administration area remainsconservative, withnonew mutual
fund administratorslicenceapplicationsapproved duringthe3rd Quarter
of the fiscal year.As of 31st March 2013, there were123licensed
FundAdministratorscomparedto127for the sameperiod 2012.Of the total
licensed,88wereFull, 33Restricted and 2 Exempted.Thenumber is down
from the same period 2012due toi)Licenseesrestructuring their
businessaffairs and nolonger
requiringtheLicenceandii)byLicenseeswhowereno longer carrying on
licensableactivitiesand, consequently, nolonger needing the
Licence.Thesecurities investment businessalsocontinuestogrow
modestly.Although nonew licenceswereapproved in the3rd Quarter of
the fiscalyear, twonew licenceapplicationsare currentlybeing
processed.As of 31st March 2013, there were34licensed
SecuritiesInvestmentBusinessholderscompared to31duringthesameperiod
2012, and 1,834SIBL ExcludedPersons, compared to1,860in
thepreviousyear.Thehealth of theglobal hedge fundsindustry can be
gleaned from theInvestment Statistical Digest;an annual publication
of theAuthority thatoffersaggregate statisticaldata collated from
the FundsAnnual Returnsfiledby all regulatedfunds.We
anticipatepublicationof the 2011Investment Statistical Digest
inMay.Preliminarydata showsa slight increasein net assetsvalue,
increasingfrom US$1,727 billionin 2010to US$1,796billion in
2011.International Association of Risk and Compliance Professionals
(IARCP)www.risk-compliance-association.com 65. P a g e | 65Analysis
of the top 10 Investment Manager locationsindicatesthat
therehasbeen a shift in theNet Assetsby thelocation of the
InvestmentManager.TheTop 5 locationsremainedconstant with New York
(US$520billion)in thetop spot followedby United Kingdom
(US$319billion), Connecticut (US$215billion), California
(US$163billion) andMassachusetts(US$66billion).Thenext 5
sawsignificant movementswithIllinois(US$48 billion) andJapan (US$32
billion) moving up to6th and 8th, Switzerland(US$37billion)
fallingto7thandLichtenstein(US$27billion) droppingout of thetop
10completely.Notableyear-on-year movementsincludeJapan increasingby
US$17billion or 113%, Brazil increasingby US$7 billion or 47%,
UnitedKingdom decliningby US$23billion or 7%, Liechtenstein
decliningbyUS$5billion or 16% and Switzerlanddecliningby
US$12billion or 24%.This data depictsthetough
economicconditionsthat existed in Europeduring theyear 2011aswell
asthe larger influenceand market shareBrazil and theAsian
countriesare exertingand gainingin the HedgeFund Industry.As welook
ahead, the Cayman IslandsMonetaryAuthority remainscommitted and
poisedto remain the leadingdomicilefor hedge fundformations.For
Cayman Islandsregulatedfundswhowishtomarket in theEuropeanUnion,
theAuthority is progressingtalkswiththe European
SecuritiesMarketsAuthority (ESMA) in light of therecent
amendmentsto theMonetaryAuthority