Basel iii Jobs and Regulations Discussed

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Basel iii Compliance Professionals Association (BiiiCPA)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 Web: www.basel-iii-association.com

Dear Member,

There are some interesting job openings
and descriptions:

Vice President - Bank Regulatory Policy /
Basel
Manhattan, NY, Salary $120,000-$180,000 / yr., Full -Time
“This individual will assist in interpreting and developing firm policy for
U.S. and international banking regulations related to capital and and
other regulatory reporting matters. They are seeking individuals with
prior Basel II and III and bank capital regulations experience.”

Finance and Risk Solution Architect
London, Salary £80,000 - £115,000 + Bonus
“We are currently looking for profiles with a consulting or business
stream background in the following areas for a new business practice in
the finance sector: we are looking for individuals with the following
background or experience: Risk Management in Capital or Liquidity
requirements, Financial Industry Regulatory Reporting such as FSA,
Dodd Frank, Basel II/III & Industry Best Practice, reporting strategies
& Global Transactions. Individuals will have a Business/Technical
Architectural Background ideally with some Business Analysis &
Consulting background.”

Business Analyst with Basel III Job
“We are actively seeking a contractor to lead a team in documentation,
design, and traceability of requirements in support of Basel III
implementation. This includes defining solutions to business/systems

www.basel-iii-association.com

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problems and ensuring the integrity of delivery through customer
acceptance and final disposition of solution for the Basel III project.
This is a minimum 6-8 month project with strong possibility of extension
or conversion to full time” employment.”

Very interesting job descriptions…
… and very interesting salary.

Dealing with financial systemic risk: the
contribution of macroprudential policies
Panel remarks by Jaime Caruana, General
Manager of the Bank for International
Settlements, Central Bank of Turkey/G20
Conference on "Financial systemic risk",
Istanbul
Abstract
There are important two-way interactions
between macroprudential policy and other areas of public policy.
These interactions put a premium on cooperative institutional
frameworks that recognise the complementarities between policy actions.
This means that, within a single jurisdiction, macroprudential authorities
should be independent and should focus primarily on mitigating systemic
risk while recognising that other policies will have an impact on the same
objective.
Cooperation between macroprudential policies across national borders
starts from the high level set by various international regulatory standards
and is improving with the explicit macroprudential frameworks recently
introduced for countercyclical capital buffers and the higher loss
absorbency requirements for systemically important banks.


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Greater cooperation, however, does not mean that we should disregard
that individual policies have specific objectives and that some hierarchy
of action is necessary.
Full speech
Let me thank the Central Bank of the Republic of Turkey and the G20
presidency of Mexico for having invited me to attend such an interesting
conference addressing the topic of financial systemic risk.
In my remarks today, I would like to explain how macroprudential
policies can greatly contribute to dealing with systemic risk and fostering
financial stability.
I will highlight a few key issues that we should focus on in order to make
this effective.
1. Trend towards strengthening the macroprudential
orientation of policy
The term "macroprudential" has gained currency in policy discussions
during the past four years.
Indeed, the recent financial crisis has given rise to a general trend towards
strengthening the macroprudential orientation of policy in countries with
very diverse institutional frameworks and financial structures.
This is very welcome: recent experience has taught us that we need to be
more focused on addressing system-wide risk, and this is precisely what
macroprudential policy is all about.
Macroprudential frameworks may be new, but mainly in the sense of
becoming explicit.
Many countries have been using prudential instruments to address
system-wide vulnerabilities without making reference to macroprudential
policies.


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For example, variable ceilings for loan-to-value (LTV) ratios have been
used repeatedly in Hong Kong and other Asian economies to slow down
frothy mortgage lending and ensure that banks do not overexpose
themselves to property risk.
Nevertheless, the more recent introduction of formal structures brings to
the fore issues of definition, delineation of responsibilities and
governance.
In my remarks today, I would like to underscore a critical aspect of
macroprudential policy and to offer a word of caution.
The critical aspect I am referring to is the strong two-way interactions
between macroprudential policy and other areas of public policy.
These interactions put a premium on cooperative institutional
frameworks that recognise the complementarities between policy actions,
both within and across jurisdictions.
This is a particularly important issue at the national level; but cooperative
frameworks are also essential at the international level, requiring both
sufficient information-sharing and reciprocity.
The word of caution is that we should be mindful that individual policies
have specific primary objectives and that some hierarchy of action is
necessary.
Let me explain.
2. Macroprudential policy is not the only area of policy that
influences systemic risk
Many other policies can affect the resilience of the financial system and
its ability to provide valuable services to the economy.
Quite apart from microprudential policy, the influence of monetary, fiscal
and tax policies, of financial reporting standards and of legal frameworks
is also very strong.


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For instance, prolonged periods of low policy rates affect leverage,
encourage financial market participants to take on risks and may at times
fuel asset price bubbles.
Conversely, instruments and actions aimed at mitigating and managing
systemic risk can have very important effects on the macroeconomy and
thus impinge on the objective of other policies.
For example, tightening capital requirements to protect banks from the
build-up of systemic risk during a credit boom can also cool down credit
expansion and, by extension, aggregate demand.
To be sure, a more stable, more resilient and less procyclical financial
system will improve the effectiveness of monetary and other policies.
So there are externalities in the interaction of different policies: there can
be positive complementarities when the policies are mutually reinforcing,
but also negative spillovers when one policy weakens the effectiveness of
another.
Hence, there is a need for coordination.
This is true both within a given jurisdiction and across borders.
3. The need for coordination within a single jurisdiction
Let me talk first about coordination within a single jurisdiction.
The interactions between policies suggest a few principles for instrument
design and deployment.
One such principle is that macroprudential policy instruments should be
in the hands of an independent authority with the explicit objective of
maintaining financial stability.
This is important, for two reasons: the lack of precise measurement to
quantify this objective, and policymakers' inevitable reliance on
judgment in pursuing it.


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Measurement presents a serious challenge for the design, governance and
accountability of macroprudential policy.
There are no readily available and widely accepted metrics of systemic
risk to help calibrate instruments or gauge policy performance, even ex
post, with much precision.
And it is notoriously difficult to answer the counterfactual question of
how things would have evolved had an alternative action plan been
adopted.
As a result, more than ever, policy needs to rely on a significant degree of
judgment.
One telling example relates to anticyclical policies.
All anticyclical policies have to work with real-time information that is
incomplete and imprecise.
Decisions rely on judgment to interpret the multitude of inputs.
This is not unique to macroprudential policy, but it is particularly evident
in this case: current technology provides far less in the way of robust
quantitative models to guide macroprudential policy in addressing both
the time and the cross-sectional dimensions of systemic risk.
As regards the time dimension, only recently have researchers been
attempting to be specific about what the financial cycle is and how to
characterise it.
A few features are worth mentioning:
It is possible to identify a well defined financial cycle that is best
characterised by the co-movement of medium-term cycles in credit and
property prices.
Such financial cycles are longer and more severe than business cycles.
The duration and amplitude of the financial cycle has increased since the
mid-1980s: financial cycles last, on average, around 16 years; but when


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considering only cycles that peaked after 1998, the average duration is
nearly 20 years, compared with 11 for previous ones.
Peaks in the financial cycle are closely associated with systemic banking
crises (henceforth "financial crises" for short).
Finally, the financial cycle and the business cycle are different
phenomena, but they are related.
Recessions associated with financial disruptions tend to be longer and
deeper.
As regards the cross-sectional dimension of systemic risk, we are also
uncertain about how best to map the systemic importance of financial
institutions onto their size, the extent and density of their links to others,
and the uniqueness of their economic function.
The need for judgment, combined with the need to resist powerful
political economy pressures, puts a premium on operational
independence.
Pressures may be high because the future rewards of macroprudential
policy actions tend to be uncertain, difficult to quantify and distant in the
future, whereas the costs are immediate and can be easily exaggerated.
Operational independence is easier to achieve if the relevant authority has
a clear mandate.
And it has to go hand in hand with accountability and clarity of
communication.
Policymakers need to be transparent about how policy decisions relate to
their mandate and to their economic assessments.
This helps anchor the public's expectations and the holding of the
authorities to account.
From this perspective, it is key to ensure the adequate involvement of the
central bank.


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One may even argue that it is preferable for the central bank to be the
macroprudential authority.
A second principle is that the control over instruments should be
commensurate with the objective of managing systemic risk.
Not many tools are purely macroprudential.
The vast majority are simply prudential tools tailored for use from a
macroprudential perspective through adjustments to their design and
calibration.
Capital requirements are a key tool but are not sufficient.
They need to be complemented with other instruments and more
intrusive supervision.
Given that we have to deal with human behaviour that is imperfectly
understood, combining instruments is more promising than relying on a
single one.
Liquidity requirements and instruments such as loan-to-value ratios or
limits on exposures have all been used and proven effective.
In addition, explicit resolution plans are also important: they address the
source of the problem, as they reduce the costs of (disorderly) failure.
More generally, all tools are inadequate in the absence of effective and at
times intrusive supervision: the incentives for regulatory arbitrage are
simply too powerful.
This means that there is a need for coordination in the use of various
instruments, through both the sharing of information and the
communication of assessments.
Moreover, this should be supported by a framework that allocates
responsibilities and accountability clearly.


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4. The international dimension
Let me now turn to the international dimension.
As long as we have open financial systems, risks in one country can affect
others.
Similarly, macroprudential policy can have spillovers across borders.
To what extent does this call for formal coordination?
Countries are developing their own policy frameworks to deal with the
cross-sectional and the time dimensions of systemic risk.
They are introducing arrangements to assess the banks that are
systemically important from a domestic perspective.
They are also introducing policy measures linked to rough indicators of
banks' systemic significance.
I would argue that, despite being the new kid on the block,
macroprudential policy is one of the economic policy areas in which
international coordination has gone furthest.
To be sure, we started from a very good basis, namely the existing
international regulatory framework for markets and institutions.
A number of independent international committees have proposed, and
countries around the globe have adopted, minimum prudential standards
for banks and market infrastructures.
And, importantly, more recently there have been concerted efforts to
promote consistent implementation across jurisdictions.
The Basel Committee on Banking Supervision has conducted significant
work in this area under the leadership of Stefan Ingves.
For my part, I would simply like to highlight two examples of
coordination in the macroprudential area: as regards its time dimension,
the design of the countercyclical capital buffers; and, as regards the


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cross-sectional dimension, the imposition of capital surcharges for
systemically important banks.
The countercyclical buffer is intended to counterbalance the procyclical
behaviour of banks by building up buffers in good times that can absorb
losses in times of stress.
It is a prudential instrument calibrated to achieve a macroprudential
objective.
Critically, the level of the buffer depends on the state of the financial cycle
in a given jurisdiction.
The framework allows for a large degree of judgment and tailoring to
local circumstances - there is no one-size-fits-all solution.
It also provides for international reciprocity: supervisors of foreign banks
should apply the same surcharge on these banks' exposures as the
supervisor in the host jurisdiction demands of the local banks.
This levels the playing field and addresses regulatory arbitrage.
A similar degree of coordination applies to the treatment of systemically
important banks.
The Basel Committee and the Financial Stability Board have developed a
framework to assess the banks that are globally systemically important
(G-SIBs).
By necessity, the assessment of capital surcharges and their application to
those banks comprise a joint decision at the international level, since the
relevant system is global.
Furthermore, the proposed framework to deal with the banks that are
systemically important from a domestic perspective (these are more
numerous than the G-SIBs) sets out principles that govern the interaction
between the assessment and actions of a bank's host supervisor and those
of its home supervisor. Cooperation is built into the framework.


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Macroprudential policy may be a recent addition to the toolbox of
policymakers, but it already embeds international cooperation.
I believe that this approach to international cooperation is a good one.
It fully recognises international spillovers while preserving national room
for manoeuvre in applying agreed principles.
Coordination is advanced through information-sharing, common
minimum standards and reciprocity.
5. The hierarchy of action
Let me now close by offering a cautionary remark concerning the
interaction between macroprudential policy and other policies.
As I noted earlier, macroprudential policy may have macroeconomic
effects.
Attempts to mitigate the financial cycle are likely to influence the
business cycle.
Prudential tools may affect credit and asset price dynamics and, by
extension, aggregate demand.
Because of that, it is essential to ensure that the hierarchy of policy tools
is clarified.
Macroeconomic management should first rely on macroeconomic tools
(monetary and fiscal policies) before asking for help from
macroprudential policy.
Financial stability is already a large enough job for macroprudential
policy.
It should remain focused on its main objective rather than trying to
smooth the business cycle.


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The temptation to bend prudential tools away from their primary
objective of financial stability to tackle shorter-term macroeconomic
fluctuations can be quite strong.
Given measurement uncertainties, the case for doing so is less compelling
than it appears.
It is in situations like these that the independence and accountability of
macroprudential frameworks are particularly valuable.
Moreover, financial stability is too big a burden to rest exclusively on
prudential and macroprudential policies; it needs the cooperation of other
policies: a more symmetrical monetary policy across the financial cycle,
fiscal policies that create additional space in financial booms, etc.
Finally, let me finish on a positive note.
Despite our limited knowledge about the impact of macroprudential
policies, there is significant room for effective action - for at least three
reasons:
First, potential policy conflicts are usually exaggerated.
It seems likely that, in most circumstances, macroprudential policy and
monetary policy will be complementary, tending to support each other
instead of conflicting.
It is important to realise that the financial cycles that matter for prudential
policy are of a much lower frequency than business cycles.
This suggests that, most of the time, monetary policy should be able to
treat macroprudential policy developments as a relatively slow-moving
background.
However, it also requires monetary policy to keep an eye on
developments over longer horizons in order to take into account the
effects of the gradual build-up and unwinding of financial imbalances.
This longer horizon diffuses some of the possible tensions between
monetary policy and macroprudential decisions.


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Second, there is already a growing body of research and experience that
has led to significant progress being made both conceptually and
operationally, for instance in the design and calibration of
macroprudential tools.
Third, some tools and indicators seem to produce reasonable results -
certainly better than doing nothing.
In particular, the credit gap indicator embedded in the Basel III
countercyclical capital buffer seems to provide good guidance for action.
Simulations indicate that following this indicator would help to produce
meaningful action (eg raising capital) at an early stage, before the
beginning of a financial crisis.
For example, the United States and the United Kingdom would have
started setting aside more capital in 1999, and the 2.5% buffers would have
been completed by 2002 and 2006 respectively, ie well before the financial
crisis.
Spain would have started even earlier, in 1997 (with the 2.5% buffer
completed in 1999).
Of course, the indicator would not have worked so well in some other
countries.
For instance, in the case of the Netherlands, it would have peaked too
early compared to the evolution of the financial cycle; nonetheless,
healthy buffers would have been built.
Also, the credit gap indicator has proved to be noisy for some large
emerging market economies such as Brazil and Turkey.
To be sure, this indicator can be supplemented with the information
coming from the analysis of other indicators.
These are just a few examples of the possibilities of one of the
instruments of macroprudential policies.


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They illustrate the potential but also the need to continue to work on how
the macroprudential approach can be formalised and applied to different
institutional frameworks in a way that strengthens other policies and
mitigates systemic risk.


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Chairman Ben S. Bernanke
At the "Challenges of the Global Financial System:
Risks and Governance under Evolving Globalization,"
A High-Level Seminar sponsored by Bank of
Japan-International Monetary Fund, Tokyo, Japan

U.S. Monetary Policy and International
Implications

Thank you. It is a pleasure to be here. This morning I will first briefly
review the U.S. and global economic outlook.

I will then discuss the basic rationale underlying the Federal Reserve's
recent policy decisions and place these actions in an international
context.

U.S. and Global Outlook

The U.S. economy has faced significant headwinds, and, although the
economy has been expanding since mid-2009, the pace of our recovery
has been frustratingly slow.

The headwinds include the effects of deleveraging by households, the
still-weak U.S. housing market, tight credit conditions in some sectors,
spillovers from the situation in Europe, fiscal contraction at all levels of
government, and concerns about the medium-term U.S. fiscal outlook.

In this environment, households and businesses have been quite cautious
in increasing spending.

Accordingly, the pace of economic growth has been insufficient to
support significant improvement in the job market; indeed, the
unemployment rate, at 7.8 percent, is well above what we judge to be its
long-run normal level.


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With large and persistent margins of resource slack, U.S. inflation has
generally been subdued despite periodic fluctuations in commodity
prices.

Consumer price inflation is running somewhat below the Federal
Reserve's 2 percent longer-run objective, and survey- and market-based
measures of longer-term inflation expectations have remained well
anchored.

The global economic outlook also presents many challenges, as you
know.

Fiscal and financial strains have pushed Europe back into recession.

Japan's economy is recovering from last year's tragic earthquake and
tsunami, and it continues to struggle with deflation and persistent weak
demand.

And in the emerging market economies, the rapid snap-back from the
global financial crisis has given way to slower growth in the face of weak
export demand from the advanced economies.

The soft tone of global activity is yet another headwind for the U.S.
economy.

Looking ahead, economic projections of Federal Open Market
Committee (FOMC) participants prepared for the Committee's
September meeting called for the economic recovery to proceed at a
moderate pace in coming quarters, with the unemployment rate declining
only gradually.

FOMC participants generally expected that inflation was likely to run at
or below the Committee's inflation goal of 2 percent over the next few
years.


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The Committee also judged that there were significant downside risks to
this outlook, importantly including the potential for an intensification of
strains in Europe and an associated slowing in global growth.

Federal Reserve's Recent Policy Actions

All of the Federal Reserve's monetary policy decisions are guided by our
dual mandate to promote maximum employment and stable prices.

With the disappointing progress in job markets and with inflation
pressures remaining subdued, the FOMC has taken several important
steps this year to provide additional policy accommodation.

In January, the Committee noted that it anticipated that economic
conditions were likely to warrant exceptionally low levels of the federal
funds rate at least through late 2014--a year and a half later than in
previous statements.

In June, policymakers decided to continue through year-end the maturity
extension program (MEP), under which the Federal Reserve purchases
long-term Treasury securities and sells short-term ones to help depress
long-term yields.

At its September meeting, with the data continuing to signal weak labor
markets and no signs of significant inflation pressures, the FOMC
decided to take several additional steps to provide policy
accommodation.

It extended the period over which it expects to maintain exceptionally low
levels of the federal funds rate from late 2014 to mid-2015.

Moreover, the Committee clarified that it expects to maintain a highly
accommodative stance of monetary policy for a considerable period after
the economic recovery strengthens.


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The FOMC coupled these changes in forward guidance with additional
asset purchases, announcing that it will purchase agency
mortgage-backed securities (MBS) at a pace of $40 billion per month, on
top of the $45 billion in monthly purchases of long-term Treasury
securities planned for the remainder of this year under the MEP.

The FOMC also indicated that it would continue to purchase agency
MBS, undertake additional asset purchases, and employ other tools as
appropriate until the outlook for the labor market improves substantially
in a context of price stability.

The open-ended nature of these new asset purchases, together with their
explicit conditioning on improvements in labor market conditions, will
provide the Committee with flexibility in responding to economic
developments and instill greater public confidence that the Federal
Reserve will take the actions necessary to foster a stronger economic
recovery in a context of price stability.

An easing in financial conditions and greater public confidence should
help promote more rapid economic growth and faster job gains over
coming quarters.

As I have said many times, however, monetary policy is not a panacea.

Although we expect our policies to provide meaningful help to the
economy, the most effective approach would combine a range of
economic policies and tackle longer-term fiscal and structural issues as
well as the near-term shortfall in aggregate demand.

Moreover, we recognize that unconventional monetary policies come
with possible risks and costs; accordingly, the Federal Reserve has
generally employed a high hurdle for using these tools and carefully
weighs the costs and benefits of any proposed policy action.

International Aspects of Federal Reserve Asset Purchases


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Although the monetary accommodation we are providing is playing a
critical role in supporting the U.S. economy, concerns have been raised
about the spillover effects of our policies on our trading partners.

In particular, some critics have argued that the Fed's asset purchases, and
accommodative monetary policy more generally, encourage capital flows
to emerging market economies.
These capital flows are said to cause undesirable currency appreciation,
too much liquidity leading to asset bubbles or inflation, or economic
disruptions as capital inflows quickly give way to outflows.

I am sympathetic to the challenges faced by many economies in a world
of volatile international capital flows.

And, to be sure, highly accommodative monetary policies in the United
States, as well as in other advanced economies, shift interest rate
differentials in favor of emerging markets and thus probably contribute to
private capital flows to these markets.

I would argue, though, that it is not at all clear that accommodative
policies in advanced economies impose net costs on emerging market
economies, for several reasons.

First, the linkage between advanced-economy monetary policies and
international capital flows is looser than is sometimes asserted.

Even in normal times, differences in growth prospects among
countries--and the resulting differences in expected returns--are the most
important determinant of capital flows.

The rebound in emerging market economies from the global financial
crisis, even as the advanced economies remained weak, provided still
greater encouragement to these flows.

Another important determinant of capital flows is the appetite for risk by
global investors.


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Over the past few years, swings in investor sentiment between "risk-on"
and "risk-off," often in response to developments in Europe, have led to
corresponding swings in capital flows.

All told, recent research, including studies by the International Monetary
Fund, does not support the view that advanced-economy monetary
policies are the dominant factor behind emerging market capital flows.
Consistent with such findings, these flows have diminished in the past
couple of years or so, even as monetary policies in advanced economies
have continued to ease and longer-term interest rates in those economies
have continued to decline.

Second, the effects of capital inflows, whatever their cause, on emerging
market economies are not predetermined, but instead depend greatly on
the choices made by policymakers in those economies.

In some emerging markets, policymakers have chosen to systematically
resist currency appreciation as a means of promoting exports and
domestic growth.

However, the perceived benefits of currency management inevitably
come with costs, including reduced monetary independence and the
consequent susceptibility to imported inflation.

In other words, the perceived advantages of undervaluation and the
problem of unwanted capital inflows must be understood as a
package--you can't have one without the other.

Of course, an alternative strategy--one consistent with classical
principles of international adjustment--is to refrain from intervening in
foreign exchange markets, thereby allowing the currency to rise and
helping insulate the financial system from external pressures.


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Under a flexible exchange-rate regime, a fully independent monetary
policy, together with fiscal policy as needed, would be available to help
counteract any adverse effects of currency appreciation on growth.

The resultant rebalancing from external to domestic demand would not
only preserve near-term growth in the emerging market economies while
supporting recovery in the advanced economies, it would redound to
everyone's benefit in the long run by putting the global economy on a
more stable and sustainable path.

Finally, any costs for emerging market economies of monetary easing in
advanced economies should be set against the very real benefits of those
policies.

The slowing of growth in the emerging market economies this year in
large part reflects their decelerating exports to the United States, Europe,
and other advanced economies.

Therefore, monetary easing that supports the recovery in the advanced
economies should stimulate trade and boost growth in emerging market
economies as well.

In principle, depreciation of the dollar and other advanced-economy
currencies could reduce (although not eliminate) the positive effect on
trade and growth in emerging markets.

However, since mid-2008, in fact, before the intensification of the
financial crisis triggered wide swings in the dollar, the real multilateral
value of the dollar has changed little, and it has fallen just a bit against the
currencies of the emerging market economies.

Conclusion

To conclude, the Federal Reserve is providing additional monetary
accommodation to achieve its dual mandate of maximum employment
and price stability.


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This policy not only helps strengthen the U.S. economic recovery, but by
boosting U.S. spending and growth, it has the effect of helping support
the global economy as well. Assessments of the international impact of
U.S. monetary policies should give appropriate weight to their beneficial
effects on global growth and stability.


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The new UK Regulator:
The Financial Conduct Authority

The Financial Conduct Authority (FCA)
will be the new regulator whose vision it is to make markets work well so
consumers get a fair deal.

It will be responsible for
requiring firms to put the
well-being of their customers at
the heart of how they run their
business, promoting effective
competition and ensuring that
markets operate with integrity.

The FCA will start work in 2013,
when it will receive new powers
from the Financial Services Bill
that is currently going through
parliament.

The Journey to the FCA sets out
how we will approach our
regulatory objectives, how we
intend to achieve a fair deal in
financial services for consumers
and where we are on this
journey.

Changes to authorisations
The UK regulatory structure will be changing in 2013, when the FSA will
split into two regulatory bodies the Financial Conduct Authority (FCA)
and the Prudential Regulation Authority (PRA).


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In April 2012, Supervision adopted the internal-twin peaks structure, and
now Authorisations are implementing a similar structure, with
assessments carried out by both the Prudential Business Unit (PBU) and
the Conduct Business Unit (CBU).

This change will only affect firms that will be dual regulated in future.

The application submission process will not change and we will continue
to seek to meet our statutory deadlines.

What will change is how the application is processed internally.

There will be a CBU case officer and a PBU supervisor responsible for
each application and they will coordinate to minimise duplication or the
impact on applicant firms and individuals.

The final decision will need to be agreed by both the PBU and the CBU to
ensure a single FSA decision during transition to the new regulatory
structure.

These changes will allow us to start to deliver, as far as possible, a model
that will mirror the future authorisation procedures in the PRA and the
FCA.

What is happening to the FSA Handbook?
At legal cutover, the FSA Handbook will be split between the FCA and
the PRA to form two new Handbooks, one for the PRA and one for the
FCA.
Most provisions in the FSA Handbook will be incorporated into the
PRA’s Handbook, the FCA’s Handbook, or both, in line with each new
regulator’s set of responsibilities and objectives.
Users of the Handbook will be able to access the following online:


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1. The PRA Handbook, displaying provisions which apply to
PRA-regulated firms
2. The FCA Handbook, displaying all provisions which apply to
FCA-regulated firms; and
3. To support the transition, a central version which will show the
provisions of both Handbooks, with clear labels indicating which
regulator applies a provision to firms.
The new Handbooks will reflect the new regulatory regime (for example,
references to the FSA will be replaced with the appropriate regulator), and
in some areas more substantive changes will be made to reflect the
existence of the two regulators, their roles and powers.
(This is likely to include such aspects as the future processes for
permissions, passporting, controlled functions, threshold conditions and
enforcement powers.)
The more substantive changes will be consulted on before the PRA and
the FCA acquire their legal powers.
Changes to the FSA Handbook as a result of EU legislation and FSA
policy initiatives will continue throughout this work.
After acquiring their powers, the FCA and the PRA will amend their own
suites of policy material as independent bodies in accordance with the
processes laid down in the Financial Services Bill, including cooperation
between them and external consultation.

What does this mean for firms?
This approach to the Handbooks for the FCA and the PRA has been
planned to ensure a safe transition for firms and the new regulators as the
new regime is introduced.
Firms will have a new regulator or regulators, and will consequently need
to assess how the new Handbooks of these bodies will apply to them.


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Dual regulated firms will need to look to both the PRA and the FCA
Handbooks, and FCA regulated firms to the FCA Handbook.

When will the changes be in the Handbook?
We expect to publish the new Handbooks before legal cutover.
This will allow firms and others time to adjust to the application of the
new Handbooks before the FCA and the PRA are fully operational.
The new Handbooks will not be available in detail before this.
Alongside the publication, we will publish material on how to interpret
the application of the Handbooks, where this is not dealt with in the
Handbooks themselves.
The FSA will continue to make changes to its Handbook in accordance
with the normal procedure, until the new bodies acquire their legal
powers.
The FSA Handbook will remain in force until the FCA and PRA acquire
their legal powers.


27

Launch of the Journey to the FCA
Speech by Martin Wheatley - Managing Director,
FSA, and CEO Designate, FCA at the Launch of
the Journey to the FCA event
Good morning. I would like to thank the Minister
Greg Clark for joining us today, for his supportive
words – and for demonstrating the Government’s
commitment to working alongside us to deliver better conduct regulation.
I would also like to thank Thomson-Reuters for hosting this morning.
Today is a big step forward on the road to becoming the new regulator,
and I am glad that you are all here to join us as we launch the Journey to
the FCA.
The FCA offers a huge opportunity for the regulator and firms to start
afresh, and work in partnership to reset how we deal with conduct in
financial services.
We see it as the role of the regulator to not only make the relevant markets
work well but also to help firms get back to putting their customers at the
heart of how they do business.
Regulation has a huge impact on the people and businesses that rely on
financial services, and we should never forget this.
We have approached the creation of the FCA in a thoughtful and
considered way, as the document we are sharing with you today shows.
We will regulate one of our most successful industries, central to the
health of our economy and a provider of two million UK jobs.
This makes our job an important one, and it will mean that we carry out
our work in a way that is as open and accountable as possible.
We spent the summer engaging with consumer organisations, and 500
firms from all areas of financial services, as we developed our thinking on
the FCA.


28

This allowed us to gather useful feedback and we will continue this open
working in the FCA.
We aim in the Journey to the FCA to demonstrate what our new
organisation will mean for the firms we regulate and the consumers we
are here to help protect.
I encourage you all to read it, and to give us your views.
We are clear about the type of regulator we want to become, and we want
to work with all of our stakeholders to get there and deliver regulation that
works better.
You have not yet had a chance to read the document, so let me explain a
bit more about what the FCA is going to be about.
The FCA has been set up to work with firms to ensure they put consumers
at the heart of their business.
Underlining this are three outcomes:
1. Consumers get financial services and products that meet their needs
from firms they can trust.
2. Firms compete effectively with the interests of their customers and the
integrity of the market at the heart of how they run their business.
3. Markets and financial systems are sound, stable and resilient with
transparent pricing information.
Reforming regulation is not just good for consumers, it will also be good
for firms. The industry’s standing has suffered as the mis-selling scandals
and other problems have taken their toll.
This has damaged the reputation of firms across the industry, whether
directly involved or not. We need to work with you to put that right.
While much of what we will do is new, we will also build on what has
worked well under the FSA.


29

We will keep up our policy of credible deterrence, pursuing enforcement
cases to punish wrongdoing.
And our markets regulation will continue to promote integrity and carry
on the FSA’s fight against insider dealing, which has secured 20 criminal
convictions since 2009.
We will continue to keep unauthorised firms from trying to take
advantage of consumers.
We will set high expectations for those firms that want to enter financial
services, while still allowing innovation and good ideas to flourish.
And we will take forward a strong interest in the fair treatment of
customers – an agenda that has been around for many years, but is still
key to the FCA.
There will, however, be important changes, and our approach will be
more forward-looking, better informed, and we will have a greater
appetite to get things done.
A new department will act as the radar of our new organisation –
combining better research into what is happening in the market, and
analysis of the risks to our objectives.
This will then feed into our policymaking and our supervision of firms.
We want to really understand what is happening to your customers, the
deal they are getting and the issues they face.
This will include getting a better understanding of why consumers act in
the way they do, so we can adapt our regulation to their common
behavioural traits.
Fewer firms will have regular direct contact with supervisors, as we shift
resources to allow us to deal more quickly and effectively with emerging
issues, and run more cross-industry projects to get to the root cause of
problems.


30

We will have new partners to work with and our relationship with the new
Prudential Regulation Authority will be crucial, and driven by a culture of
cooperation.
We will aim to bring our expertise to international debates, so that EU
and international policymaking works for UK consumers and firms.
All of this will be delivered by a new culture in the FCA. We will
encourage our staff to be more confident in making bold, firm and
predictable decisions.
To help us do our job, the Government intends to give the FCA new tools
to ensure that consumers get products that meet their needs.
This builds on one of the key lessons from past problems, which is that
regulation is often more effective if it steps in early to pre-empt and
prevent widespread harm.
We will reflect this in our supervision work when we look at how firms
design and sell their products.
But a key new power will mean that we can step in and ban the sale of
products that pose unacceptable risks to consumers for up to 12 months,
without consulting first.
We will also be able to ban misleading advertising.
We will use these new tools in a measured way – and while we will act
sooner, and more decisively, our approach will be based on a proper
understanding of the issues and a full consideration of the potential
solutions.
So whilst there may be times when we have to act rapidly, this is not
something that firms should be afraid of.
Firms selling the right products, in the right way, to the right consumers
have little to fear.
Our new approach will mean that we will take competition into account in
all our work.


31

We will weigh up the impact on competition of new measures we
propose.
We will also consider whether competition could lead to better results
than other action we could take.
In our work here, and in other areas, I am very conscious that we have to
work with firms.
Making regulation work better for us is also about allowing firms room to
try new ideas and develop their business.
Promoting competition will play an important part in this.
We are not here to stand in the way of progress that will be of benefit to
consumers.
Our goals as the FCA are clear: we will work for an industry that is better
at serving the needs of its customers.
I see this as an opportunity – not just for us but for the industry.
We can do our job better if we work with you, and I am pleased that so
many of the chief executives that I speak to are talking the same language
and have committed to rebuilding confidence and trust, and reconnecting
with their customers.
It is great hearing about these good intentions, but the difficult bit for us
all is to make sure this change actually happens.
There are challenges and opportunities for both us the regulator, and you
the industry.
It is a journey we have to walk together, as we put consumers back at the
heart of what we do.


32

Andrew G Haldane: The Bank and the
banks
Speech by Mr Andrew G Haldane, Executive
Director, Financial Stability, Bank of England,
at Queen’s University, Belfast

***
The views expressed within are not necessarily
those of the Bank of England or the Financial
Policy Committee.

I would like to thank Bethany Blowers, Forrest Capie, John Keyworth,
Victoria Kinahan, Emma Murphy, Varun Paul, Richard Roberts, and the
staff of the Bank’s archives for their comments and contributions.

In the light of the financial crisis, there is much to explain.

Doing so is not just important for reasons of accountability to the public.

Explaining and understanding errors of the past is absolutely essential if
policymakers are to learn lessons for the future.

To misquote someone none of you have ever heard of, those who forget
the errors of the past are doomed to repeat them.

During the course of its 318-year history, the Bank of England has had
plenty of crisis experience.

And encouragingly, on my reading of history, there is evidence of it
having learnt from this experience.

In response, radical reform of the Bank’s policymaking framework has
been commonplace.

There are few better examples than the radical reform of the Bank’s
transparency and accountability practices over the past twenty-five years.


33

Those reforms are continuing to the present day.

A wholly new framework for financial stability policy is being put in place
in the UK, perhaps the most radical in the Bank’s history.

I will discuss that framework later on.

This framework can be seen as an evolutionary response to crisis
experience, not just this crisis but a great many previous ones.

It is impossible to know if this framework will proof us against future
crises.

But in remembering those errors of the past, it gives us a fighting chance
of not repeating them.

So I want to take you on an historical journey charting the Bank of
England’s role in financial crises and its response to them.

Now, I know what you are thinking.

The evolution of financial stability in the UK viewed through the lens of
the Bank of England sounds deadly dull.

So I am going at least to try to add a touch of colour to the events and
personalities of the time.

The very beginning

Let’s start at the very beginning.

The Bank of England was put on earth, way back in 1694, to do none of
the things it does today – namely, preserving monetary and financial
stability.


34

Instead, it was a confection of the then monarchs, William III and Mary
II, to pay for their war debts.

At the time the Bank was little more than a branch, with a mere twenty
staff.

Pretty early in its life, however, the Bank began to involve itself in the
business of banking.

It began to grow its balance sheet by taking deposits from and extending
loans to other banks, typically by the practice of “discounting” bills of
exchange.

The Bank also issued its own notes which, due to the implicit backing of
the government, circulated as currency with the public.

At this stage, the Bank was far from being the nationalised, policymaking
body we know today.

Rather, the Bank was a quasi-private bank conducting its business for
quasi commercial ends.

Other banks at the time were engaged in similar commercial pursuits,
including often issuing their own notes.

Except, of course, they lacked the government as guarantor.

This made for a competitive, and at times rather antagonistic,
relationship between the Bank and the commercial banks.

This strained relationship lasted for the whole of the 18th and a good
chunk of the 19th centuries.

Was the Bank friend or foe, collaborator or competitor?


35

The commercial banks did not know. And the Bank – private in name but
public in finances – was itself in a state of mild schizophrenia.

These psychological flaws were exposed in the middle of the 19th century.
By then, the Bank had been granted monopoly rights to issue currency.

Quite literally, this cut the commercial banks out of a lucrative
money-making scheme.

This did little to ease competitive tensions between the Bank and the
banks.

This tension bubbled over in the famous case of Overend and Gurney
Bank. In the early part of the 19th century, Overend had grown rapidly to
become the largest discount house in London.

If not too big to fail, it was certainly large enough to look after itself – as
the Bank found out in 1860.

Two years earlier, the Bank had abolished the right of other banks to
come to it for cash by discounting bills.

The banks took umbrage.

With Overend and Gurney playing the role of shop steward, they
collectively withdrew £1.6 million from the Bank over three days in an
attempt to bring the Bank, if not to its knees, then at least to its senses.

Dark, anonymous messages were sent to the Bank, presumably not by
Twitter, warning: “Overends can pull out every note you have”.

In the event Overend eventually caved, returning to the Bank the notes
they had withdrawn apologetically – or at least semi-apologetically, as the
notes actually came back cut in half.


36

Six years later in 1866, when Overend and Gurney asked the Bank for an
emergency loan of £400,000, the answer was “No”.

The Bank won this battle, but was to lose decisively the war. Overend and
Gurney failed.

The City shook. Panic took hold.

The Bank was forced to lend £4 million – ten times the initial sum – to
support other banks.

There was a chorus of disapproval.

The Bank’s role in crisis management would never be the same again.

Supporting the financial system

Criticism of the Bank’s role in the Overend crisis came prominently from
Walter Bagehot, then-editor of The Economist and Bank-of-England
basher of his day.

He lambasted the Bank’s acting “hesitatingly, reluctantly and with
misgiving”.

Henry Gibbs, Governor of the Bank from 1875 to 1877, highlighted the
Overend experience as “the Bank’s only real blunder”.

Yet the Bank had also learned from this experience.

It had discovered that its role could be neither commercial nor
competitive.

Instead its role was as guardian of the financial system as a whole,
protecting banks from what is today called systemic risk.


37

In Bagehot’s words, the Bank should act as last resort lender to solvent
institutions against good collateral at a penalty rate.

It has done so ever since.

The Bank did not have to wait long to put its new-found role into practice.

On Saturday 8 November 1890 the Bank Governor of the day, William
Lidderdale, summoned his Directors. This itself aroused suspicion.

Bank directors were never seen at work at the weekend.
They typically departed for the country around Friday lunchtime.

(Let me tell you, things have changed for Bank of England Directors
since then.)

What Lidderdale told his Directors was electric.

There were serious liquidity problems at another big and famous bank,
Baring Brothers and Company.

But the Bank had not the faintest clue as to Barings’ true financial
position.

To rectify that, Lidderdale ordered an accountant’s report on Barings to
be brought to him with immediate effect.

And with that, he departed to London Zoo with his son.

The accountant’s report showed a solvent but illiquid Barings.

Back from the Zoo, Lidderdale began to construct a financial “lifeboat”
for Barings, with a contribution from the Bank but also from the
commercial banks.

This was the system acting in support of the system.


38

The lifeboat was launched and Barings was saved, in what has become
known as the “crisis that never became a drama”.

The Bank’s lifeboat has since been re-launched on more than one
occasion.

A second financial lifeboat – different in detail, but identical in principle –
was launched by the Bank of England in the early 1970s.

Then, it was intended to save the small banks rather than the large.

It, too, steadied some sinking ships.
Third time, however, was not so lucky.

On 24 February 1995, it was Barings Bank who were again knocking on
the Bank of England’s door for help.

Bank Directors were again summoned on a Saturday.

I myself was caught by a TV crew entering the Bank on that Saturday
morning, arousing suspicion something was amiss.

In fact, I had not been recalled to save the day.

(I believe I was filmed wearing a tracksuit.)

And I was as blissfully unaware of Barings’ problems as most of the rest of
the world.

(I was at the Bank completing a research paper on “A Structural Vector
Autoregressive Model of the Monetary Transmission Mechanism”.)

Life was easier then.


39

Nick Leeson, at the time a despised and corrupt rogue-trader, today a
much-admired reality- TV star and after-dinner speaker, had put a huge
hole in the Barings boat.

Over the weekend, then-Governor Eddie George tried hard to assemble a
lifeboat.

All visits to London Zoo were cancelled.

But the lifeboat failed and with it Barings.

That Barings was allowed to fail, and did so without rupturing the system,
is a key lesson for today, to which I will return later.

So what does this tell us about how the Bank of England’s role had
evolved on entering the 20th century?
The Bank now spoke and acted as steward of the financial system,
marshalling its own and others’ financial resources to keep the financial
system panic-free.

The Bank was at the frontline of crisis management.

But these episodes also contained lessons.

When the first Barings crisis came, the Bank had been reactive and
backfoot.

It had been blindsided by the risk to its own and the financial system’s
balance sheet.

The Bank was finding its feet as a crisis-container.

But in attitude and expertise, it was a world away from being an effective
crisis-preventer.


40

Supporting the economy

Fast forward to the start of the First World War.

William Lidderdale had been replaced as Bank Governor by Walter
Cunliffe.

Cunliffe was not what would these days be called an equal opportunities
employer.

The Bank’s staff rules were stifling and sexist – although were ahead of
their time compared to other City firms.

The Bank went 150 years without employing any women at all.

When they did, it was to do the work of 15–18 year old boys, sorting and
listing returned notes.

On getting married, women at the Bank were required to resign their
position.

The Bank was “Old Lady” by name but “Young Lady” by nature.

Cunliffe’s greatest achievement was his contribution to solving the
financial panic of 1914.

On Friday 24 July, the City woke to the threat of war as Austria made an
ultimatum to Serbia.

There was a worldwide scramble for the safety of cash.

Mass-selling led to stock markets closing in Europe, then New York, then
Australia.

London was not exempt. By 31 July, the London Stock Exchange had
closed for the first time in its near 150-year history.


41

Panic soon spread to the money markets, sucking liquidity and life out of
the financial system.

Unable to finance themselves, lending by the banks began to drain away,
starving the economy of credit and causing it too to crater.

This was truly a credit crunch.

Cunliffe’s plan, hatched with the Treasury, was to lift the liquidity burden
on the banks by purchasing the IOUs they were holding from overseas
borrowers which had become understandably illiquid on the outbreak of
war.

These bills were bought by the Bank and stored in its vaults, in what
became known as the “cold storage” scheme.

By freeing the banks’ balance sheets in this way, the cold storage scheme
was intended to stimulate credit.
It was only a limited success, with the banks still fearful about making
new loans because of the rising risk of default by overseas borrowers.

In response, the government announced an extension to the scheme, with
the government effectively insuring the banks against the credit risk on
these assets too.

It worked.

Within a couple of months, money market conditions had stabilised and
credit was once more flowing.

Cunliffe’s cold storage plan had averted a credit crisis.

The cold storage scheme was a piece of clever financial engineering by
the Bank, designed to support credit and the wider economy.


42

In the past few years, with credit growth and the economy weak, the Bank
has been in the vanguard of creating new pieces of machinery to serve a
similar end.

In 2008, the Bank introduced a Special Liquidity Scheme, or SLS, to help
finance UK banks’ legacy asset portfolio.

Over £180 billion of support was provided to the banks and has since
been repaid.

The SLS bears more than a passing resemblance to the first phase of the
cold storage scheme.

In June this year, the Bank announced a second scheme, the Funding for
Lending Scheme, or FLS. It provides liquidity support to UK banks on
terms which depend on their lending to the UK economy, thereby acting
as a direct incentive to stimulate new lending.

The FLS bears some resemblance to the second phase of cold storage.

The SLS and FLS may be less famous than JLS, the London R&B
boy-band.

But they are an important recognition of the Bank’s role in supporting
credit intermediation.

That role began in the early part of the 20th century with schemes like
cold storage.

The Bank’s role had expanded beyond its own doorstep, on which the
banks stood, to the doorsteps of households and companies up and down
the country seeking credit.


43

Supporting financial infrastructure

Yet one thing at least had stayed the same: in 1914, the Bank had only
acted when jolted into doing so by war.

Its role was still as crisis-container rather than preventer.

During the 1920s and 1930s, the Bank of England became Montagu
Norman’s Bank.

And Norman set about changing that.

Norman was not Cunliffe’s greatest fan and the feeling was clearly
mutual.

“There goes that queer-looking fish with the ginger beard again”,

Cunliffe is said to have observed about Norman.

“Do you know who he is? I keep seeing him creep about this place like a
lost soul with nothing better to do.”

Nor would Norman necessarily have ingratiated himself to today’s army
of Bank economists.

“You are not here to tell us what to do, but to explain why we have
done it” is the way Norman rebuked the Bank’s Chief Economist of the
day.

Norman saw the Bank’s role in expansive terms, as provider not just of
emergency help but as builder of infrastructure and supporter of industry.

The Bank became part of the post-war reconstruction effort.

Having spent 200 years tending to its back garden, the Bank began to
explore pastures new.


44

To take one example, in 1928 the Lancashire cotton industry was on its
knees.

These problems risked ricocheting back to the financial system, with at
least two of the big five UK banks up to their neck in cotton.

A plan was conceived involving consolidating the industry into a
Lancashire Textile Corporation.

This was to be financed with debt and shares issued and supported by –
you’ve guessed it – the Bank of England.

It was a bold and cunning plan. Unfortunately, it flopped.

The share issue by the Corporation in 1931 was a resounding failure,
leaving the underwriter with a large chunk of the shares.

The Bank ended up having to support the market.

It, too, found itself up to its neck in cotton.

Undaunted, the stage had nonetheless been set for the Bank’s on-going
involvement in financial infrastructure.

This came not a moment too soon. In the immediate post-war period,
the UK faced pressing financial infrastructure problems – the so-called
“Macmillan gaps”.

These gaps referred the inability of small firms to finance themselves with
long-term loans.

If these gaps sound strangely familiar, then they should.

The post-war Bank set about closing these Macmillan gaps with gusto.


45

In 1945 it set up two new financing entities – the Finance Corporation for
Industry (FCI) and the Industrial and Commercial Finance Corporation
(ICFC).

These were financially supported by banks and institutional investors,
providing a platform for the supply of longer term funding and venture
capital finance to small firms.

In 1973, the two corporations combined to form Finance for Industry
(FFI).

During the early 1980s, the company was rebranded as Investors in
Industry, commonly known as 3i.

In 1987, the entity went public as 3i Group.

This was not a flop.

Arguably, 3i and its predecessors were one of the largest feathers in the
Bank’s post-war cap, helping support generations of new businesses and
start-ups.

And those MacMillan gaps?
Regrettably, the crisis has re-opened them.

Today, small firms are once more starved of finance, including many here
in Northern Ireland.

Once again, the quest is on for a new financial infrastructure to help close
these gaps.

Through the 1980s and 1990s, there were further examples of the Bank
stepping in to close structural financial gaps.

When the UK’s high-value payment system started creaking in the early
1980s, the Bank designed and built a new, bullet-proof system.


46

Given the Bank’s somewhat chequered record on gender diversity up to
that point, it was rather unfortunately named CHAPS.

And indeed still is.

In 1993, the Bank stepped-in to rescue a flagging project to upgrade the
securities settlement process in the UK.

The Bank designed and built a new, safety-first, system which again
exists to this day.

Fortunately, we did not call this one BLOKES, but rather the
gender-neutral CREST.

Most recently, in the light of the crisis, the Bank has been at the forefront
of the debate about re-organising the structure of banking, with a
ring-fence or firewall between the basic retail and investment banking
sides of the business.

This structural approach is increasingly finding favour both in the UK
(through the proposals of the Vickers Commission) and internationally
(for example, through the Volcker proposals in the US and the recent
Liikanen proposals in Europe).

For the past half-century, the Bank’s structural agenda has become a
central feature.

But at the time it marked a radical departure from the Bank’s past.

Designing what are in effect financial public goods is a front-foot activity.

The Bank had grown a new limb, augmenting its crisis-management
right arm with a crisis-prevention left arm.


47

Stitching it all together

So far, I have made no real mention of monetary policy.

That is because, for much of its life up to the early 1970s, monetary control
at the Bank of England was pretty simple.

It came care of fixing the exchange rate – first to gold under the Gold
Standard and latterly in the post war period to the dollar.

With the demise of the dollar standard in the early 1970s, however, the
exchange rate anchor had been tossed overboard.

At the Bank of England, as elsewhere, the search was on for a new
nominal anchor.

Into this vacuum stepped Andrew Duncan Crockett. Crockett joined the
Bank in 1966 as a graduate entrant, just before the break-up of the Bretton
Woods dollar standard.

He set to work on the biggest problem of the day, locating a new nominal
anchor.

In so doing, he began working alongside another young(ish) new Bank
entrant, Charles Goodhart.

The result was a joint paper published in the Bank’s Quarterly Bulletin in
June 1970.

It was titled “The Importance of Money”.

Re-reading it now, it was a prophetic piece of work.

In the UK, it laid some of the analytical foundations for what, during the
late 1970s and 1980s, became monetarism.


48

More than that, the paper placed commercial bank money and credit at
the centre of the macro-economy.

It could as well have been titled “The Importance of Credit” or indeed
“The Importance of Banks”.

After a successful spell at the IMF, Crockett returned to the Bank of
England in 1989.

In 1994, he then became General Manager of the Bank for International
Settlements, the central banks’ central bank.

In central bank circles, change was in the air. Monetary policy was
embarking on a path which targeted inflation and which, unlike
monetarism before it, downplayed money and credit.

And the regulation of banks, long the preserve of central banks, was in
many countries being hived off to separate regulatory agencies.

What happened next was truly extra-ordinary.

Whether by coincidence or causality, the world experienced the largest
banking bubble in history.

Between 1990 and 2007, global bank balance sheets rose by a factor four.

On the eve of the crisis they had reached around $75 trillion, or almost 1.5
times the annual output of the entire planet.

At the Bank for International Settlements, Andrew Crockett saw trouble
brewing.

In 2000, he gave a speech calling for a “macro-prudential” approach to
regulation.


49

Crockett argued that central banks needed to look at, and act on,
developments across the whole financial system if systemic risk was to be
headed-off.

Credit booms, the like of which was occurring for real at the time, sowed
the seeds of that systemic risk.

The rest is of course history, as pre-crisis credit boom turned to
shuddering bust.

Or rather it would be history were it not for the fact that this crisis, whose
seeds were sown in the credit boom, is still with us.

Output in the UK is still well below its 2007 level.

The so-called Great Recession in the UK is already as severe as the Great
Depression of the 1930s.

In response, the policy framework has, once more, been radically
augmented.

Macroprudential policy is the next big thing.

It is now widely acknowledged as the missing policy link during the
pre-crisis period, the essential bridge between monetary policy and
regulation.

As I discuss below, this bridge is now being constructed through new
frameworks in the UK and internationally.

The Bank tomorrow

So where does all of this leave the Bank today and, indeed, tomorrow?

In the light of the crisis, we are moving to a wholly new structure for
financial policymaking in the UK.


50

In many important respects, this can be seen as building on the lessons of
history.

To illustrate that, let me set out some of its main features.

First, there is to be a radical shift in the organisation and approach to
supervising individual financial institutions.

The UK will move to a so-called “twin-peaks” regime.

That means in practice separating the safety and soundness aspects of the
regulation (so-called prudential) from the consumer protection aspects
(so-called conduct).

The prudential part will from next year sit in the Bank of England in a
new Prudential Regulatory Authority, or PRA.

This is much more than deck-chair rearrangement.

Accompanying this change will be a rootand-branch change in our
approach to supervision.

There will be a focus on the big risks – the Barings of yesteryear, the RBS
of yesterday.

Supervision will be front-foot, testing for stress before it strikes and visits
to the zoo need to be cancelled.

It will be also tolerant of bank failure – Barings Mark 2 rather than Mark 1
– so that market discipline can work its magic.

Second, during the course of the crisis, there has been a radical, if
underplayed, rethink of the Bank’s approach to supplying liquidity to the
banking system.


51

While not quite a change on the scale of the Overend and Gurney crisis,
this allows banks to access the Bank’s facilities against a much wider
range of collateral.

The Bank’s liquidity menu is now crystal clear, from which banks can
now themselves choose.

Third, an entirely-new piece of policy machinery has been introduced –
new not just for the UK, but internationally too.

In the UK, this is called the Financial Policy Committee or FPC.

It was put on earth to do macro-prudential policy, to act as the bridge, to
provide the missing link, to monitor the punchbowl before it is emptied
and before aspirin needs administering.

A year on, the FPC is doing just that.

Most recently the FPC has been navigating a particularly hazardous
course.

The financial system and economy are suffering the hangover from hell.

The FPC’s task is to keep the system safe in the face of heightened risks
of a relapse, while at the same time keeping the banks’ credit arteries
open to support the economy.

Both objectives are steeped in the Bank’s history – and both objectives are
embodied in the FPC’s remit.

The FPC has a remit, too, to strengthen the structural fabric of the
financial system, including through improved financial infrastructure.

That objective has a place deep in the Bank of England’s heart – from
Lancashire cotton mills of the 1930s, to 3i of the post-war years, to
CHAPs of the 1980s, to Vickers of the past few years.


52

Supporting and executing these new responsibilities will be a massive
task.

First and foremost, it will require the Bank to have a rich and diverse set
of skills.
Historically at least, the Bank has been skills-rich but diversity-poor.

But I am pleased to say that, too, has been changing for the better.

This year’s graduate intake has close to a 50/50 gender split.

One in seven of the intake is drawn from ethnic minorities.

Only a fifth come from Oxford or Cambridge.

The PRA’s arrival next year will broaden further the diversity of the
Bank’s skills and experience – legal, accountancy, banking, insurance.

The Bank’s policy committees, meanwhile, bring diversity of experience
and expertise to the decision-making table, from academe and the private
sector.

There has been a transformation, too, in the Bank’s approach to external
communications and transparency.

Think back twenty years.

Then, there were no quarterly Inflation Reports, no six-monthly Financial
Stability Reports and certainly no press conferences to accompany both.

Twenty years ago, there were no minutes of the deliberations of the
Bank’s policy committees (today, the MPC and FPC).

Back then, press interviews were rare and scripted to within an inch of
their life.


53

In the past year, Bank officials gave around 65 speeches and over 200
press interviews.

In Montagu Norman’s day, the combined total was one.

The days of “keeping the Bank out of the press and the press out of the
Bank” are well and truly gone.
Earlier this year, the Governor gave the Bank’s first live peacetime radio
address to the nation for 73 years.

The Bank Tweets, fortunately with rather less vigour than your average
Premiership footballer.

Soon we will have, for the first time in history, published minutes of the
Bank’s Court of Directors.

The Governor has appeared before the Treasury Committee on no less
than 47 occasions since he took office.

In 2011, a word search of “Mervyn King” in the press revealed more hits
than “Kylie Minogue”.

To my knowledge, this is the first time a sitting Bank of England
Governor has toppled the Aussie pop princess in the media opinion polls.

Given its new responsibilities, the Bank cannot fail to remain in the
public’s eye in the period ahead.

Transparency and accountability will remain the watchwords – and
rightly so.

Conclusion

When pressed by the Macmillan Committee in 1930 to explain the Bank’s
actions, Montagu Norman replied: “Reasons, Mr Chairman? I don’t have
reasons, I have instincts”.


54

I suspect such an answer would work less well with today’s Treasury
Committee, to say nothing of today’s media.

All public policymakers have an obligation to explain.

And all policymakers have an obligation to learn from past crises and past
mistakes.

That is the only way credibility can be built: not the avoidance of crises
and mistakes, which is impossible, but the recognition by the public that,
when they do happen, the crises are contained and the mistakes are
honest ones.

The Bank of England is embarking on the latest chapter in its 318-year
history.

We cannot avoid a crisis but, as with Barings in 1890, we can endeavour to
prevent it becoming a drama.

We will certainly be doing our best to prevent it becoming a tragedy like
that of the past few years.

If nothing else, this new chapter will have learnt from, and will build on,
the lessons of history.

Thank you.


55

The Federal Reserve Board
Two final rules with stress testing
requirements for certain bank holding
companies, state member banks, and
savings and loan holding companies

The Federal Reserve Board on Tuesday
published two final rules with stress testing requirements for certain bank
holding companies, state member banks, and savings and loan holding
companies.

The final rules implement sections 165(i)(1) and (i)(2) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act that require supervisory
and company-run stress tests.

Nonbank financial companies designated by the Financial Stability
Oversight Council will also be subject to certain stress testing
requirements contained in the rules.

"Implementation of the Dodd-Frank stress test requirement is an
important step in the Federal Reserve's efforts to promote the health of
the financial sector," Governor Daniel K. Tarullo said.

"Stress testing is a key tool to ensure that financial companies have
enough capital to weather a severe economic downturn without posing a
risk to their communities, other financial institutions, or to the general
economy."

The Federal Reserve will begin conducting supervisory stress tests under
the final rules this fall for the 19 bank holding companies that participated
in the 2009 Supervisory Capital Assessment Program and subsequent
Comprehensive Capital Analysis and Reviews.


56

The final rules also require these companies and their state-member bank
subsidiaries to conduct their own Dodd-Frank company-run stress tests
this fall, with the results to be publicly disclosed in March 2013.
In general, other companies subject to the Board's final rules for
Dodd-Frank stress testing will be required to comply with the final rule
beginning in October 2013.

Companies with between $10 billion and $50 billion in total assets that
begin conducting their first company-run stress test in in the fall of 2013
will not have to publicly disclose the results of that first stress test.

The Board's two final rules revise portions of the Federal Reserve's notice
of proposed rulemaking to implement the enhanced prudential standards
and early remediation requirements established under the Dodd-Frank
Act.

The Board coordinated closely with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation to ensure that
final stress testing rules issued by the agencies are consistent and
comparable.

The Board also coordinated with the Federal Insurance Office as required
by the Dodd-Frank Act.

The Federal Reserve will release the scenarios for this year's supervisory
and company-run stress tests no later than November 15, 2012.

As required by the Dodd-Frank Act, the scenarios will describe
hypothetical baseline, adverse, and severely adverse conditions, with
paths for key macroeconomic and financial variables.

To help firms prepare to estimate their losses and revenues under the
scenarios, the Federal Reserve on Tuesday released historical data for
variables likely to be used in the scenarios.


57

A revised version of these historical data, reflecting the latest information,
will be published along with the scenarios.

Important Parts
FEDERAL RESERVE SYSTEM

Annual Company-Run Stress Test Requirements for Banking
Organizations with Total Consolidated Assets over $10 Billion Other than
Covered Companies

AGENCY: Board of Governors of the Federal Reserve System (Board).

ACTION: Final rule.

SUMMARY: The Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act or Act) requires the Board to issue
regulations that require financial companies with total consolidated
assets of more than $10 billion and for which the Board is the primary
federal financial regulatory agency to conduct stress tests on an annual
basis.

The Board is adopting this final rule to implement the company-run
stress test requirements in section 165(i)(2) of the Dodd-Frank Act
regarding company-run stress tests for bank holding companies with total
consolidated assets greater than $10 billion but less than $50 billion and
state member banks and savings and loan holding companies with total
consolidated assets greater than $10 billon.

This final rule does not apply to any banking organization with total
consolidated assets of less than $10 billion.

Furthermore, implementation of the stress testing requirements for bank
holding companies, savings and loan holding companies, and state
member banks with total consolidated assets of greater than $10 billion
but less than $50 billion is delayed until September 2013.


58

DATES: The rule is effective on November 15, 2012.

Background

The Board has long held the view that a banking organization, such as a
bank holding company or insured depository institution, should operate
with capital levels well above its minimum regulatory capital ratios and
commensurate with its risk profile.

A banking organization should also have internal processes for assessing
its capital adequacy that reflect a full understanding of its risks and
ensure that it holds capital commensurate with those risks.

Moreover, a banking organization that is subject to the Board’s advanced
approaches risk-based capital requirements must satisfy specific
requirements relating to their internal capital adequacy processes in order
to use the advanced approaches to calculate its minimum risk-based
capital requirements.

Stress testing is one tool that helps both bank supervisors and a banking
organization measure the sufficiency of capital available to support the
banking organization’s operations throughout periods of stress.

The Board and the other federal banking agencies previously have
highlighted the use of stress testing as a means to better understand the
range of a banking organization’s potential risk exposures.

In particular, as part of its effort to stabilize the U.S. financial system
during the recent financial crisis, the Board, along with other federal
financial regulatory agencies and the Federal Reserve system, conducted
stress tests of large, complex bank holding companies through the
Supervisory Capital Assessment Program (SCAP).


59

The SCAP was a forward-looking exercise designed to estimate revenue,
losses, and capital needs under an adverse economic and financial market
scenario.

By looking at the broad capital needs of the financial system and the
specific needs of individual companies, these stress tests provided
valuable information to market participants, reduced uncertainty about
the financial condition of the participating bank holding companies
under a scenario that was more adverse than that which was anticipated
to occur at the time, and had an overall stabilizing effect.

Building on the SCAP and other supervisory work coming out of the
crisis, the Board initiated the annual Comprehensive Capital Analysis and
Review (CCAR) in late 2010 to assess the capital adequacy and the
internal capital planning processes of large, complex bank holding
companies and to incorporate stress testing as part of the Board’s regular
supervisory program for assessing capital adequacy and capital planning
practices at large bank holding companies.

The CCAR represents a substantial strengthening of previous approaches
to assessing capital adequacy and promotes thorough and robust
processes at large banking organizations for measuring capital needs and
for managing and allocating capital resources.

The CCAR focuses on the risk measurement and management practices
supporting organizations’ capital adequacy assessments, including their
ability to deliver credible inputs to their loss estimation techniques, as
well as the governance processes around capital planning practices.

In the wake of the financial crisis, Congress enacted the Dodd-Frank Act,
which requires the Board to issue regulations that require bank holding
companies with total consolidated assets of $50 billion or more (large
bank holding companies) and nonbank financial companies that the
Financial Stability Oversight Committee has designated to be supervised
by the Board (together, covered companies) to conduct stress tests
semi-annually, and requires other financial companies with total


60

consolidated assets of more than $10 billion and for which the Board is the
primary federal financial regulatory agency to conduct stress tests on an
annual basis (company-run stress tests).

The Act requires that the Board issue regulations that:

(i) Define the term “stress test”

(ii) Establish methodologies for the conduct of the company-run stress
tests that provide for at least three different sets of conditions, including
baseline, adverse, and severely adverse conditions

(iii) Establish the form and content of the report that companies subject
to the regulation must submit to the Board

(iv) Require companies to publish a summary of the results of the
required stress tests.

On January 5, 2012, the Board invited public comment on a notice of
proposed rulemaking (proposal or NPR) that would implement the
enhanced prudential standards required to be established under section
165 of the Dodd-Frank Act and the early remediation requirements
established under Section 166 of the Act, including proposed rules
regarding company-run stress tests.

The proposed rules would have required each bank holding company,
state member bank, and savings and loan holding company with more
than $10 billion in total consolidated assets to conduct an annual
company-run stress test using data as of September 30 of each year and
the three scenarios provided by the Board.

In addition, each state member bank, bank holding company, and
savings and loan holding company would be required to disclose a
summary of the results of its company-run stress tests within 90 days of
submitting the results to the Board.


61

The Dodd-Frank Act mandates that the OCC and the FDIC adopt rules
implementing stress testing requirements for the depository institutions
that they supervise, and the OCC and FDIC invited public comment on
proposed rules in January of 2012.

The Board is finalizing the stress testing frameworks in two separate
rules.

First, the Board is issuing this final rule, which implements the
company-run stress testing requirements applicable to bank holding
companies with total consolidated assets greater than $10 billion but less
than $50 billion and savings and loan holding companies and state
member banks with total consolidated assets greater than $10 billion.

Second, the Board is concurrently issuing a final rule implementing the
supervisory and semi-annual company-run stress testing requirements
applicable to large bank holding companies and nonbank financial
companies supervised by the Board.

Overview of Comments

The Board received approximately 100 comments on its NPR on
enhanced prudential standards and early remediation requirements.
Approximately 40 of these comments pertained to the proposed stress
testing requirements.

Commenters ranged from individual banking organizations to trade and
industry groups and public interest groups.

In general, commenters expressed support for stress testing as a valuable
tool for identifying and managing both microand macro-prudential risk.

However, several commenters recommended changes to, or clarification
of, certain provisions of the proposed rule, including its timeline for
implementation, reporting requirements, and disclosure requirements.


62

Commenters also urged greater interagency coordination regarding stress
tests.

A. Delayed compliance date
Commenters suggested that companies with total consolidated assets less
than $50 billion that have not previously been subject to stress-testing
requirements need more time to develop the systems and procedures to
be able to conduct company-run stress tests and to collect the information
that the Board may require in connection with these tests.

In response to these comments and to reduce burden on these
institutions, the final rule requires most bank holding companies, savings
and loan holding companies, and state member banks to conduct their
first stress test in the fall of 2013.

In addition, the final rule requires bank holding companies, savings and
loan holding companies, and state member banks with less than $50
billion in total consolidated assets to begin publicly disclosing their stress
test results in 2015 with respect to the stress test conducted in the fall of
2014.

Banking organizations that become subject to the rule’s requirements
after November 15, 2012 must comply with the requirements beginning in
the fall of the calendar year that follows the year the company meets the
asset threshold, unless that time is extended by the Board in writing.

For example, a company that becomes subject to the rule on March 31,
2013 must conduct its first stress test in the fall of 2014 and report the
results in 2015.

B. Tailoring

The proposed rule would have applied consistent annual company-run
stress test requirements, including the compliance date and the


63

disclosure requirements, to all banking organizations with total
consolidated assets of more than $10 billion.

The Board sought public comment on whether the stress testing
requirements should be tailored, particularly for financial companies that
are not large bank holding companies.

Several commenters expressed concern that the NPR that would have
applied stress testing requirements previously applicable only to large
bank holding companies, such as those conducted under the CCAR, to
smaller, less complex banking organizations with smaller systemic
footprints.

The Board recognizes that bank holding companies, savings and loan
holdings companies, and state member banks with total consolidated
assets less than $50 billion are generally less complex and pose more
limited risk to U.S. financial stability than larger banking organizations.

As a result, the Board has modified the requirements in the final rule for
these institutions, and expects to use a tailored approach in
implementation.

The final rule modifies the requirements for smaller banking
organizations in a number of ways.

First, as noted above, most banking organizations, other than state
member bank subsidiaries of the large bank holding companies that
participated in the SCAP, are not required to conduct their first stress test
until 2013.

The final rule also provides a longer period for smaller banking
organizations to conduct their stress tests.

Under the final rule, smaller banking organizations, other than state
member bank subsidiaries of SCAP bank holding companies, are not
required to report the results of the stress test until March 31.


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