Monday April 9 2012 - Top 10 risk and compliance management related news stories and world events

International Association of Risk and Compliance
Professionals (IARCP)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.risk-compliance-association.com

Monday, April 9, 2012 - Top 10 risk and compliance
management related news stories and world events that (for
better or for worse) shaped the week's agenda, and what is next

George Lekatis
President of the IARCP

Dear Member,

In the States, President Obama signed the Jumpstart Our Business Startups
(JOBS) Act, a bipartisan bill that encourages startups and support small
businesses.

In the world, we will have interesting changes in risk management and
corporate governance, as the Financial Stability Board finds that the global
financial crisis highlighted a number of corporate governance failures and
weaknesses in financial institutions, including inappropriate Board structures
and processes, weak risk governance systems, and unduly complex or opaque
firm organisational structures and activities.

In Europe, we have a very important development.

The impact of the new Basel III framework is monitored semi-annually by both
the Basel Committee at a global level and the European Banking Authority
(EBA, formerly CEBS) at the European level, using data provided by
participating banks on a voluntary and confidential basis.

Well, in Europe, the aggregate Group 1 and Group 2 shortfall of liquid assets is
at approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion total
assets of the aggregate sample. [Group 1 banks are those with Tier 1 capital in
excess of €3 bn and internationally active. All other banks are categorized as
Group 2 banks]

A total of 158 banks submitted data for this exercise, consisting of 48 Group 1
banks and 110 Group 2 banks.

For the banks in the sample, monitoring results show a shortfall of liquid
assets of €1.15 trillion (which represents 3.7% of the €31 trillion total
assets of the aggregate sample) as of 30 June 2011, if banks were to make
no changes whatsoever to their liquidity risk profile.

Welcome to the Top 10 list.

Number 1 (Page 4)
April 2012 - Results of the Basel III
monitoring exercise as of 30 June 2011.
Since the beginning of 2011, the impact of the
new requirements related to the Basel iii
reforms is monitored and evaluated by the
Basel Committee on Banking Supervision on
a semi-annual basis for its member
jurisdictions.
At European level, this analysis is conducted by the European Banking
Authority (EBA), also based on the Basel III reform package as the CRD IV, the
European equivalent to the Basel III framework, has not yet been finalised.

Number 2 (Page 33)
The Financial Industry Regulatory Authority
(FINRA) issued a new Investor Alert called It Pays
to Understand Your Brokerage Account Statements
and Trade Confirmations to help guide investors through the key
elements of their account statements and trade confirmations.

Number 3 (Page 43)
President Obama signed the Jumpstart Our
Business Startups (JOBS) Act, a bipartisan bill that
enacts many of the President’s proposals to
encourage startups and support small businesses.

Number 4 (Page 48)
Learning more about Supervisory Agencies: BaFin
Since it was established in May 2002, the Federal
Financial Supervisory Authority (Bundesanstalt für
Finanzdienstleistungsaufsicht - known as BaFin for short) has brought
the supervision of banks and financial services providers, insurance
undertakings and securities trading under one roof.

Number 5 (Page 56)
Federal Reserve Policy Statement
on Rental of Residential Other Real
Estate Owned Properties
In light of the large volume of distressed residential properties and the
indications of higher demand for rental housing in many markets, some
banking organizations may choose to make greater use of rental
activities in their disposition strategies than in the past.

Number 6 (Page 64)
We have access to the minutes of
the Federal Open Market
Committee. Developments in
Financial Markets and the Federal Reserve's Balance Sheet
- Staff Review of the Economic Situation

Number 7 (Page 88)
Final rule and interpretive guidance.

Section 113 of the Dodd-Frank Act authorizes
the Financial Stability Oversight Council to determine that a nonbank
financial company shall be supervised by the Board of Governors of the
Federal Reserve System and shall be subject to prudential standards

Number 8 (Page 91)
The Alternative Investment
Management Association (AIMA), the
global hedge fund trade association, has expressed concern about the
European Commission’s new draft text for the implementation of the
Alternative Investment Fund Managers Directive (AIFMD).

Number 9 (Page 94)
Thematic review on risk governance
Questionnaire for national authorities

The global financial crisis highlighted a number of corporate
governance failures and weaknesses in financial institutions, including
inappropriate Board structures and processes, weak risk governance
systems, and unduly complex or opaque firm organisational structures
and activities.

Number 10 (Page 105)
The White House Blog
How Your Tax Dollars Are Spent

On Wednesday, the updated
Federal Taxpayer Receipt was
released, which lets you enter a few
pieces of information about the
taxes you paid last year and
calculates how much of your money
went toward different national
priorities like education, defense, and health care.

NUMBER 1

April 2012
Results of the Basel III monitoring exercise as of 30 June 2011

To assess the impact of the new capital and liquidity requirements set out in the
consultative documents of June and December 2009, both the Basel Committee
on Banking Supervision and the Committee of European Banking Supervisors
(CEBS) conducted a so-called comprehensive quantitative impact study
(C-QIS) for their member jurisdictions based on data as of 31 December 2009.

The main results of both impact studies have been published in December 2010.

After finalisation of the regulatory framework (referred to as “Basel III”) in
December 2010, the impact of this new framework is monitored semi-annually
by both the Basel Committee at a global level and the European Banking
Authority (EBA, formerly CEBS) at the European level, using data provided by
participating banks on a voluntary and confidential basis.

This report summarises the results of the latest monitoring exercise using
consolidated data of European banks as of 30 June 2011. A total of 158 banks
submitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2
banks.

[Group 1 banks are those with Tier 1 capital in excess of €3 bn and
internationally active. All other banks are categorised as Group 2 banks]

Member countries’ coverage of their banking system was very high for Group 1
banks, reaching 100% coverage for many jurisdictions (aggregate coverage in
terms of Basel II risk-weighted assets: 98.5%), while for Group 2 banks it was
lower with a larger variation across jurisdictions (aggregate coverage: 35.8%).

Furthermore, Group 2 bank results are driven by a relatively small number of
large but non-internationally active banks, ie the results presented in this report
may not be as representative as it is the case for Group 1 banks.

[There are 19 Group 2 banks that have Tier 1 capital in excess of €3 billion.
These banks account for 64.3% of total Group 2 RWA.]

Since the new EU directive and regulation are not finalised yet, no EU specific
rules are analysed in this report.

Accordingly, this monitoring exercise is carried out assuming full
implementation of the Basel III framework, ie transitional arrangements such as
phase-in of deductions and grandfathering arrangements are not taken into
account.

The results are compared with the respective current national implementation of
the Basel II framework.

In addition, it is important to note that the monitoring exercise is based on static
balance sheet assumptions, ie capital elements are only included if the eligibility
criteria have been fulfilled at the reporting date.

Planned management actions to increase capital or decrease risk-weighted
assets are not taken into account (“static balance sheet assumption”).

This allows for identifying effective changes in banks’ capital base instead of
identifying changes which are solely based on changes in underlying modelling
assumptions.

As a consequence, monitoring results are not comparable to industry estimates
as the latter usually include assumptions on banks’ future profitability, planned
capital and/or further management actions that mitigate the impact of Basel III.

In addition, monitoring results are not comparable to C-QIS results, which
assessed the impact of policy proposals published in 2009 that differed
significantly from the final Basel III framework.

The actual capital and liquidity shortfalls related to the new requirements by the
time Basel III is fully implemented will differ from those shown in this report as
the banking sector reacts to the changing economic and regulatory
environment.

The monitoring exercise provides an impact assessment of the following
aspects:

- Changes to banks’ capital ratios under Basel III, and estimates of any capital
shortfalls. In addition, estimates of capital surcharges for global systemically
important banks (G-SIBs) are included, where applicable;
- Changes to the definition of capital that result from the new capital standard,
referred to as common equity Tier 1 (CET1), including modified rules on
capital deductions, and changes to the eligibility criteria for Tier 1 and total
capital;
- Changes in the calculation of risk-weighted assets (RWA) resulting from
changes to the definition of capital, securitisation, trading book and
counterparty credit risk requirements;

- The capital conservation buffer;
- The leverage ratio; and
- Two liquidity standards – the liquidity coverage ratio (LCR) and the net
stable funding ratio (NSFR).

Key results - Impact on regulatory capital ratios and estimated capital
shortfall

Assuming full implementation of the Basel III framework as of 30 June 2011 (i.e.
without taking into account transitional arrangements), the CET1 capital ratios
of Group 1 banks would have declined from an average CET1 ratio of 10.2%
(with all country averages above the 7.0% target level) to an average CET1 ratio
of 6.5%.

80% of Group 1 banks would be at or above the 4.5% minimum while 44% would
be at or above 7.0% target level.

The CET1 capital shortfall for Group 1 banks is €18 bn at a minimum
requirement of 4.5% and €242 bn at a target level of 7.0% (including the G-SIB
surcharge).

As a point of reference, the sum of profits after tax prior to distributions across
the Group 1 sample in the second half of 2010 and the first half of 2011 was €102
bn.

With respect to the average Tier 1 and total capital ratio, monitoring results show
a decline from 11.9% to 6.7% and from 14.4% to 7.8%, respectively.

Capital shortfalls comparing to the minimum ratios (excl. the capital
conservation buffer) amount for €51 bn (Tier 1 capital) and €128 bn (total
capital).

Taking into account the capital conservation buffer and the surcharge for
systemically important banks, the Group 1 banks’ capital shortfall rises to €361
bn (Tier 1 capital) and €485 bn (total capital).

For Group 2 banks, the average CET1 ratio declines from 9.8% to 6.8% under
Basel III, where 87% of the banks would be at or above the 4.5% minimum and
72% would be at or above the 7.0% target level.

The respective CET1 shortfall is approx. €11 bn at a minimum requirement of
4.5% and €35 bn at a target level of 7.0%.

The sum of profits after tax prior to distributions across the Group 2 sample in
the second half of 2010 and the first half of 2011 was €17 bn.

Main drivers of changes in banks’ capital ratios

For Group 1 banks, the overall impact on the CET1 ratio can be attributed in
almost equal parts to changes in the definition of capital and to changes related
to the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWA
increase by 21.2%, on average.

For Group 2 banks, while the change in the definition of capital results in a
decline in CET1 of 25.9%, the new rules on RWA affect Group 2 banks far less
(+6.9%), which may be explained by the fact that these banks´ business models
are less reliant on exposures to counterparty and market risks (which are the
main drivers of the RWA increase under the new framework).

Reductions in Group 1 and Group 2 banks’ CET1 are mainly driven by goodwill
(-17.3% and -14.8%, respectively), followed by deductions for holdings of capital
of other financial companies (-4.4% and -7.0%, respectively).

As to the denominator of regulatory capital ratios, the main driver is the
introduction of CVA capital charges which result in an average RWA increase of
8.0% and of 2.9% for Group 1 and Group 2 banks, respectively.

In addition to CVA capital charges, trading book exposures and the transition
from Basel II 50/50 deductions to a 1250% risk weight treatment are the main
contributors to the increase in Group 1 banks’ RWA.

As Group 2 banks are in general less affected by the revised counterparty credit
risk rules, these banks show a much lower increase in overall RWA (+6.9%).

However, even within this group, the RWA increase is driven by CVA capital
charges, followed by changes related to the transition from Basel II 50/50 capital
deductions to a 1250% risk weight treatment, and to the items that fall below the
10/15% thresholds.

Leverage ratio

Monitoring results indicate a positive correlation between bank size and the
level of leverage, since the average LR is significantly lower for Group 1 banks.

Assuming full implementation of Basel III, Group 1 banks show an average
Basel III Tier 1 leverage ratio (LR) of 2.7%, while Group 2 banks’ leverage ratio
is 3.4%.

41% of participating Group 1 and 72% Group 2 banks would meet the 3% target
level as of June 2011.

If a hypothetical current leverage ratio was already in place, Group 1 and Group 2
banks’ LR would be 4.0% and 4.7%, respectively.

Liquidity standards

A total of 156 Group 1 and Group 2 banks participated in the liquidity monitoring
exercise for the end-June 2011 reporting period.

Group 1 banks have reported an average LCR of 71% while the average LCR for
Group 2 banks is 70%.

The aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2
trillion which represents 3.7% of the approx. €31 trillion total assets of the
aggregate sample.

Group 1 banks reported an average NSFR of 89% (Group 2 banks: 90%).

To fullfil the minimum standard of 100% on a total basis, banks need stable
funding of approx. €1.9 trillion.

Both liquidity standards are currently subject to an observation period which
includes a review clause to address any unintended consequences prior to their
respective implementation dates.

1. General remarks

In September 2010, the Group of Governors and Heads of Supervision (GHOS),
the Basel Committee on Banking Supervision’s oversight body, announced a
substantial strengthening of existing capital requirements and fully endorsed the
agreements reached on 26 July 2010.

Since the beginning of 2011, the impact of the new requirements related to these
capital reforms and the introduction of two international liquidity standards is
monitored and evaluated by the Basel Committee on Banking Supervision on a
semi-annual basis for its member jurisdictions.

At European level, this analysis is conducted by the European Banking
Authority (EBA), also based on the Basel III reform package as the CRD IV, the
European equivalent to the Basel III framework, has not yet been finalised.

This report presents the results of the latest monitoring exercise based on
consolidated data of European banks as of 30 June 2011. The monitoring
exercise provides an impact assessment of the following aspects:

- Changes to banks’ capital ratios under Basel III, and estimates of any capital
shortfalls. In addition, estimates of capital surcharges for global systemically
important banks (G-SIBs) are included, where applicable;

- Changes to the definition of capital that result in a new capital standard,
referred to as common equity Tier 1 (CET1), a reallocation of regulatory
adjustments to CET1 and changes to the eligibility criteria for Tier 1 and
total capital,

- Changes in the calculation of risk-weighted assets due to changes to the
definition of capital, trading book, securitisation and counterparty credit risk
requirements,

- The capital conservation buffer of 2.5%,

- The introduction of a leverage ratio and

- The introduction of two international liquidity standards – the Liquidity
Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR)

The related policy documents are:

- Revisions to the Basel II market risk framework9 and Guidelines for
computing capital for incremental risk in the trading book;

- Enhancements to the Basel II framework11 which include the revised risk
weights for re-securitisations held in the banking book;

- Basel III: A global framework for more resilient banks and the banking
system as well as the Committee’s 13 January press release on loss
absorbency at the point of non-viability;

- International framework for liquidity risk measurement, standards and
monitoring; and

- Global systemically important banks: Assessment methodology and the
additional loss absorbency requirement.

1.1. Sample of participating banks

The report includes an analysis of data submitted by 48 Group 1 banks from 16
countries and 110 Group 2 banks from 18 countries.

Table 1 shows the distribution of participation by jurisdiction.

Coverage of the banking sector is high, reaching 100% of Group 1 banks in some
countries (aggregate coverage in terms of Basel II risk-weighted assets: 98.5%).

Coverage of Group 2 banks is lower and varies across countries (aggregate
coverage: 35.8%).

Group 2 results are driven by a relatively small number of banks sufficiently
large to be classified as Group 1 banks, but that have been classified as Group 2
banks by their supervisor because they are not internationally active.

1.2. Methodology
“Composite bank” weighting scheme

Average amounts in this document have been calculated by creating a
composite bank at a total sample level, which implies that the total sample
averages are weighted.

For example, the average common equity Tier 1 capital ratio is the sum of all
banks’ common equity Tier 1 capital for the total sample divided by the sum of
all banks’ risk-weighted assets for the total sample.

Box plots illustrate the distribution of results

To ensure data confidentiality, most charts show box plots which give an
indication of the distribution of the results among participating banks.

The box plots are defined as follows:

1.3. Interpretation of results

The impact assessment was carried out by comparing banks’ capital positions
under Basel III to the current regulatory framework.

With the exception of transitional arrangements for non-correlation trading
securitisation positions in the trading book, results are calculated assuming full
implementation of Basel III ie without considering transitional arrangements
related to the phase-in of deductions and grandfathering arrangements.

This implies that the Basel III capital amounts shown in this report assume that
all common equity deductions are fully phased in and all non-qualifying capital
instruments are fully phased out.

As such, these amounts underestimate the amount of Tier 1 capital and total
capital held by a bank as they do not give any recognition for non-qualifying
instruments that are actually phased out over a 10 year horizon.

The treatment of deductions and non-qualifying capital instruments under the
assumption of full implementation of Basel III also affects figures reported in
the leverage ratio section.

The potential underestimation of Tier 1 capital will become less of an issue as
the implementation date of the leverage ratio approaches.

In particular, in 2013, the capital amounts based on the capital requirements in
place on the Basel III implementation monitoring reporting date will reflect the
amount of non-qualifying capital instruments included in capital at that time.

These amounts will therefore be more representative of the capital held by

banks at the implementation date of the leverage ratio (for more detail see
section 5).

In addition, it is important to note that the monitoring exercise is based on
static balance sheet assumptions, ie capital elements are only included if the
eligibility criteria have been fulfilled at the reporting date.

Planned bank measures to increase capital or decrease risk-weighted assets are
not taken into account.

This allows for identifying effective changes in bank capital instead of
identifying changes which are simply based on changes in underlying
modelling assumptions.

As a consequence, monitoring results are not comparable to industry estimates
as the latter usually include assumptions on banks’ future profitability, planned
capital and/or management actions that mitigate the impact of Basel III.

In addition, monitoring results are not comparable to prior C-QIS results, which
assessed the impact of policy proposals published in 2009 that differed
significantly from the final Basel III framework.

As one example, the C-QIS did not consider the impact of capital surcharges for
G-SIBs based on the initial list of G-SIBs announced by the Financial Stability
Board in November 2011.

To enable comparisons between the current regulatory regime and Basel III,
common equity Tier 1 elements according to the current regulatory framework
are defined as those elements of current Tier 1 capital which are not subject to a
limit under the respective national implementation of Basel II.

1.4. Data quality

For this monitoring exercise, participating banks submitted comprehensive and
detailed non-public data on a voluntary and best-efforts basis.

National supervisors worked extensively with banks to ensure data quality,
completeness and consistency with the published reporting instructions.

Banks are included in the various analyses that follow only to the extent they
were able to provide data of sufficient quality to complete the analyses.

2. Overall impact on regulatory capital ratios and estimated capital
shortfall

One of the core intentions of the Basel III framework is to increase the
resilience of the banking sector by strengthening both the quantity and quality
of regulatory capital.

Therefore, higher minimum requirements have to be met and stricter rules for
the definition of capital and the calculation of risk weighted assets apply.

As the Basel III monitoring exercise assumes full implementation of Basel III
(without taking into account any transitional arrangements), it compares
capital ratios under current rules with capital ratios that banks would show if
Basel III were already fully in force at the reporting date.

In this context, it is important to elaborate on the implications the assumption
of full implementation of Basel III has on the monitoring results.

The Basel III capital amounts reported in this exercise assume that all common
equity deductions are fully phased in and all non-qualifying capital instruments
are fully phased out.

Thus, these amounts may underestimate the amount of Tier 1 capital and total
capital under current rules held by banks as they do not give any recognition for
non-qualifying instruments which are actually phased out over a 10 year
horizon.

Table 2 shows the overall change in common equity Tier 1 (CET1), Tier 1 and
total capital if Basel III were fully implemented, as of 30 June 2011.

For Group 1 banks, the impact on the average CET1 ratio is a reduction from
10.2% to 6.5% (a decline of 3.7 percentage points) while the average Tier 1 and
total capital ratio would decline from 11.9% to 6.7% and from 14.4% to 7.8%
respectively.

Contrary to the current framework, for Group 2 banks average capital ratios are
higher than for Group 1.

The following chart gives an indication of the distribution of results among
participating banks.

It includes the respective regulatory minimum requirement (thick red line), the
weighted average (depicted as “x”) and the median (thin red line), ie the value
separating the higher half of a sample from the lower half (that means that 50%
of all observations are below this value, 50% are above).

80% of Group 1 banks would be at or above the 4.5% minimum requirement
while 44% would be at or above the 7.0% target level, ie it is expected that in the
next years banks will put in place several measures to increase high quality
capital.

With respect to Group 2 banks, 87% reported CET1 ratios at or above 4.5% while
72% would be at or above the 7.0% target level.

The reduction in CET1 ratios is driven both by a new definition of capital
deductions (numerator) and by increases in risk-weighted assets
(denominator).

Banks engaged heavily in trading or in activities subject to counterparty credit
risk tend to show the largest denominator effects as these activities attract
substantially higher capital charges under the new framework.

For Group 1 banks, the aggregate impact on the CET1 ratio can be attributed in
almost equal parts to changes in the definition of capital and to changes related
to the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWA
increase by 21.2%, on average.

For Group 2 banks, while the change in the definition of capital results
in a decline in CET1 of 25.9%, the new rules on RWA affect Group 2
banks far less (+6.9%), which may be explained by the fact that these
banks´ business models are less reliant on exposures subject to
counterparty credit risk and market risk (which are the main drivers of
the RWA increase under the new framework).

The Basel III framework includes the following phase-in arrangements
for capital ratios:

- For CET1, the highest form of loss absorbing capital, the minimum
requirement will be raised to 4.5% and will be phased in by 1 January
2015. Deductions from CET1 will be fully phased in by 1 January
2018;

- For Tier 1 capital, the minimum requirement will be raised to 6.0%
and will be phased in by 1 January 2015;

- An additional 2.5% capital conservation buffer above the regulatory
minimum capital ratios, which must be met with common equity,
after the application of deductions, will be phased in by 1 January
2019; and

- The additional loss absorbency requirement for G-SIBs, which
ranges from 1.0% to 2.5% and must be met with common equity,
after the application of deductions and as an extension of the capital
conservation buffer, will be phased in by 1 January 2019.

Table 3 and Chart 2 provide estimates of the additional amount of capital that
Group 1 and Group 2 banks would need between 30 June 2011 and 1 January 2022
to meet the target CET1, Tier 1 and total capital ratios under Basel III assuming
fully phased-in target requirements and deductions as of 30 June 2011.

For Group 1 banks, the CET1 capital shortfall is €18 bn at a minimum
requirement of 4.5% and €242 bn at a target level of 7.0%.

With respect to the Tier 1 and total capital ratios, the capital shortfall comparing
to the minimum ratios amount for €51 bn and €128 bn respectively.

For Group 2 banks, the CET1 capital shortfall is €11 bn at a minimum
requirement of 4.5% and €35 bn at a target level of 7.0%.

The Tier 1 and total capital shortfall calculated relative to the 4.5% minimum
amount for €18 and €22 bn, respectively.

The surcharges for G-SIBs are a binding constraint for 12 of the 13 G-SIBs
included in this monitoring exercise.

It should be mentioned, that the shortfall figures are not comparable to those of

the EBA recapitalisation exercise since the capital definitions and the
calculation of the risk-weighted assets differ.

Given these results, a significant effort by banks to fulfil the risk-based capital
requirements is expected.

3. Impact of the new definition of capital on Common Equity
Tier 1

As noted above, reductions in capital ratios under the Basel III framework are
attributed in part to capital deductions previously not applied at the common
equity level of Tier 1 capital.

Table 4 shows the impact of various deduction categories on the gross CET1
capital (i.e. CET1 before applying deductions) of Group 1 and Group 2 banks.

In the aggregate, deductions reduce gross CET1 of Group 1 banks by 37.2%
with goodwill being the most important driver, followed by holdings of capital
of other financial companies.

Deductions for defined benefit pension obligations and provisioning shortfalls
relative to expected losses tend to be the largest contributors to other
deductions across most countries.

For Group 2 banks, average results are similar: CET1 deductions reduce gross
CET1 by 37.4% due in particular to goodwill, and again followed by holdings of
capital of other financial companies as the second most important driver.

However, it should be noted that these results are driven by large Group 2 banks
(defined as those with Tier1 capital in excess of €3 billion). Without considering
these banks, the overall decline of gross CET1 due to deductions would be
22.6%.

Mortgage servicing rights related deductions have no impact, for both groups.

4. Changes in risk-weighted assets

Reductions in capital ratios under Basel III are also attributed to increases in
risk-weighted assets as shown in Table 5 for the following four categories:

Definition of capital:

Here we distinguish three effects: The column heading “50/50” measures the
increase in risk-weighted assets applied to securitisation exposures currently
deducted under the Basel II framework that are risk-weighted at 1250% under
Basel III.

The negative sign in column “other” indicates that this effect reduces the RWA.
This relief in RWA is mainly technical since it is compensated by deductions
from capital.

The column heading “threshold” measures the increase in risk-weighted assets
for exposures that fall below the 10% and 15% limits for CET1 deduction;

Counterparty credit risk (CCR):
This column measures the increased capital charge for counterparty credit risk
and the higher capital charge that results from applying a higher asset
correlation parameter against exposures to financial institutions under the IRB
approaches to credit risk.

The effects of capital charges for exposures to central counterparties (CCPs) or
any impact of incorporating stressed parameters for effective expected positive
exposure (EEPE) are not included;

Securitisation in the banking book:

This column measures the increase in the capital charges for certain types of
securitisations (e.g. resecuritisations) in the banking book; and

Trading book:
This column measures the increased capital charges for exposures held in the
trading book to include capital requirements against stressed value-at-risk,
incremental risk capital charge, and securitisation exposures in the trading
book (see section 4.2 for more details).

4.1. Overall results

Risk-weighted assets for Group 1 banks increase overall by 21.2% which can be
mainly attributed to higher risk-weighted assets for counterparty credit risk
exposures (+8.0%), followed by changes due to the new RWA treatment of

current Basel II 50/50 capital deductions (+5.9%) and the new trading book
rules (+4.2%).

The main driver behind the capital charges for counterparty credit risk is the
charge for credit valulation adjustments (CVA) while the higher asset
correlation parameter results in an increase in overall risk-weighted assets of
only 1.2%.

For Group 2 banks, aggregate RWA increase overall by 6.9%. The smaller
increase relative to Group 1 banks is as expected since Group 2 banks tend to
have less exposure to market risk and counterparty exposures.

However, even for Group 2 banks, CCR capital charges (2.9%) are the main
contributor to the change in RWA for Group 2 banks.

Moving Basel II 50/50 deductions to a 1250% risk weight treatment and
increases in RWA attributable to items that fall below the 10/15% thresholds
affect RWA by 2.2% each.

Chart 3 gives an indication of the distribution of the results across
participating banks and illustrates that the dispersion is much higher
within the Group 1 bank sample as compared to Group 2 banks.

4.2. Market risk-related capital charges

Table 6 presents details on the impact of the revised trading book capital
charges on overall risk-weighted assets for Group 1 banks.

Group 2 banks are not presented separately because the market risk
requirements have a very minor influence on overall Group 2 bank
risk-weighted assets. Some of these banks do not have any trading
books at all and are therefore not subject to any related capital charges.

Stressed VaR (2.1%), the incremental risk capital charge or “IRC”
(1.2%), and the capital charge for non-correlation trading securitisation
exposures under the standardised measurement method or “SMM
non-CTP” (0.7%) are the three most relevant drivers behind the
increase.

Increases in risk-weighted assets are partially offset by effects related to
previous capital charges (resulting from the event risk surcharge and
previous standardised or VaR-based charges for the specific risk capital
requirements of securitisations), and the changes to positions treated
with standardised measurement methods (column “SMM”).

4.3. Impact of the rules on counterparty credit risk (CVA only)

Credit valuation adjustment (CVA) risk capital charges lead to a 7.8%
increase in total RWA for the subsample of 36 banks which provided the
relevant data (6.8% for the full Group 1 sample).

A larger fraction of the total effect is attributable to the application of the
standardised method than to the advanced method.

The impacts on Group 2 banks are smaller but still significant, adding
up to an overall 3.5% increase in RWA over a subsample of 57 banks
(2.3% for the full Group 2 sample), totally attributable to the
standardised method.

Further details are provided in Table 7.

5. Leverage Ratio

A simple, transparent, non-risk based leverage ratio has been introduced
in the Basel III framework in order to act as a credible supplementary
measure to the risk based capital requirements.

It is intended to constrain the build-up of leverage in the banking sector
and to complement the risk based capital requirements with a non-risk
based “backstop” measure.

For the interpretation of the results of the leverage ratio section it is important to
understand the terminology used to describe a bank’s leverage.

Generally, when a bank is referred to as having more leverage, or being more
leveraged, this refers to a multiple of exposures to capital (i.e. 50 times) as
opposed to a ratio (i.e. 2.0%).

Therefore, a bank with a high level of leverage will have a low leverage ratio.

155 Group 1 and Group 2 banks provided sufficient data to calculate the leverage
ratio according to the Basel III framework.

In total, aggregate Tier 1 capital according to Basel III (numerator of the
leverage ratio) is €0.76 trillion for Group 1 banks while the total aggregate
exposure according to the definition of the denominator of the leverage ratio is
€27.69 trillion.

For Group 2 banks, the corresponding figures are €0.16 trillion (Tier 1 capital)
and €4.59 trillion (total exposure).

To illustrate the impact of the new capital framework, a hypothetical current
leverage ratio is shown assuming the leverage ratio was already in place.

This hypothetical ratio is based on the current definition of Tier 1 capital.

It is important to recognize that the monitoring results may underestimate the
amount of capital that will actually be held by the bank over the next few years.

The reason is as follows. The Basel III capital amounts reported in this
monitoring exercise assume that all common equity deductions are fully phased
in and all non-qualifying capital instruments are fully phased out.

Thus, these amounts ceteris paribus underestimate the amount of Tier 1 capital
and total capital under current rules held by banks as they do not give any
recognition for non-qualifying instruments which are actually phased out over a
nine year horizon.

In this exercise, Common Equity Tier 1, Tier 1 capital and total capital could be
very similar if all (or most) of the banks’ Additional Tier 1 and Tier 2
instruments are considered non-qualifying under Basel III.

As the implementation date of the leverage ratio approaches, this will become
less of an issue.

With respect to the total sample of banks, the average Basel III Tier 1 leverage
ratio is 2.8%.

Group 1 banks’ average Basel III LR is 2.7% while for Group 2 banks the
leverage ratio is significantly higher at 3.4%.

Assuming full implementation of Basel III at 30 June 2011, 41.3% of Group 1
banks would meet the calibration target of 3% for the leverage ratio while 80%

would be at or above the 4.5% minimum requirement for the risk-based CET1
ratio.

Regarding Group 2 banks, 71.6% show a leverage ratio at or above the target
level while 87% reported CET1 ratios at or above the CET1 minimum
requirement of 4.5%.

Using Tier 1 capital according to current rules in the numerator, the leverage
ratio is 4.1% for the total sample.

For Group 1 banks it is 4.0% (Group 2: 4.7%).

Comparing the average results for Group 1 and Group 2 banks, monitoring
results indicate a positive correlation between bank size and the level of
leverage, since the average LR is significantly lower for Group 1 banks.

Chart 4 gives an indication of the distribution of the results across participating
banks.

The thick red lines show the calibration target of 3% while the thin red lines
represent the 50th percentile19 (the “median”), ie the value separating the
higher half of a sample from the lower half (it means that 50% of all observations
fall below this value, 50% are above this value).

The weighted average is shown as “x”. For further information on the
methodology see section 1.2.

Table 8 shows the average Basel III leverage ratios and the capital shortfall
under the assumption that banks already fulfill the risk-based capital
requirements for the Tier 1 ratio of 6% and 8.5%, respectively.

The shortfall is the additional amount of Tier 1 capital that banks would need to
raise in order to meet the target level of 3% for the leverage ratio (i.e. after the
risk-based minimum requirements have been met).

Assuming that banks with a risk-based Tier 1 ratio below 6% would have raised
capital to fulfill the minimum requirement of 6%, 52% of Group 1 banks and
21% of Group 2 banks would not meet the calibration target of 3% for the
leverage ratio.

The additional shortfall related to the leverage ratio requirement would be €95
bn (Group 1) and €12 bn (Group 2), respectively.

Assuming that banks with a risk-based Tier 1 ratio below 8.5% would have
raised capital to meet the minimum requirement of 8.5%, 17% of both Group 1
and Group 2 banks would show a leverage ratio below the 3% target level.

The additional shortfall would be €17 bn and €10 bn for Group 1 and Group 2
banks, respectively.

6. Liquidity
6.1. Liquidity Coverage Ratio

One of the new minimum standards is a 30-day liquidity coverage ratio (LCR)
which is intended to promote short-term resilience to potential liquidity
disruptions.

The LCR has been designed to require banks to have sufficient high-quality
liquid assets to withstand a stressed 30-day funding scenario specified by
supervisors.

The LCR numerator consists of a stock of unencumbered, high quality liquid
assets that must be available to cover any net outflow, while the denominator is
comprised of cash outflows less cash inflows (subject to a cap at 75% of total
outflows) that are expected to occur in a severe stress scenario.

157 Group 1 and Group 2 banks provided sufficient data in the mid-2011 Basel
III implementation monitoring exercise to calculate the LCR according to the
Basel III liquidity framework.

The average LCR is 71% for Group 1 banks and 70% for Group 2 banks.

These aggregate numbers do not speak of the range of results across the banks.

Chart 5 below gives an indication of the distribution of bank results; the thick
red line indicates the 100% minimum requirement, the thin red horizontal lines
indicate the median for the respective bank group while the mean value is
shown as “x”.

34% of the banks in the sample already meet or exceed the minimum LCR
requirement and 39% have LCRs that are at or above 85%.

For the banks in the sample, monitoring results show a shortfall of liquid assets
of €1.15 trillion (which represents 3.7% of the €31 trillion total assets of the
aggregate sample) as of 30 June 2011, if banks were to make no changes
whatsoever to their liquidity risk profile.

This number is only reflective of the aggregate shortfall for banks that are
below the 100% requirement and does not reflect surplus liquid assets at banks
above the 100% requirement.

Banks that are below the 100% required minimum have until 2015 to meet the
minimum standard by scaling back business activities which are most
vulnerable to a significant short-term liquidity shock or by lengthening the
term of their funding beyond 30 days.

Banks may also increase their holdings of liquid assets.

The key components of outflows and inflows are presented in Table 9.

Group 1 banks show a notably larger percentage of total outflows, when
compared to balance sheet liabilities, than Group 2 banks.

This can be explained by the relatively greater contribution of wholesale
funding activities and commitments within the Group 1 sample, whereas, for
Group 2 banks, retail activities, which attract much lower stress factors,
comprise a greater share of funding activities.

Cap on inflows

Two Group 1 and 21 Group 2 banks reported inflows that exceeded the
cap. Of these, 7 fail to meet the LCR, so the cap is binding on them.

Composition of highly liquid assets

The composition of high quality liquid assets currently held at banks is
depicted in Chart 6.

The majority of Group 1 and Group 2 banks’ holdings, in aggregate, are
comprised of Level 1 assets; however the sample, on the whole, shows
diversity in their holdings of eligible liquid assets.

Within Level 1 assets, 0% risk-weighted securities issued or guaranteed
by sovereigns, central banks and PSEs, and cash and central bank
reserves comprise significant portions of the qualifying pool.

Comparatively, within the Level 2 asset class, the majority of holdings is
comprised of 20% risk-weighted securities issued or guaranteed by
sovereigns, central banks or PSEs, and qualifying covered bonds.

Cap on Level 2 assets

€53 billion of Level 2 liquid assets were excluded because reported Level
2 assets were in excess of the 40% cap.

40 banks currently reported assets excluded, of which 80.0% (20.4% of
the total sample) had LCRs below 100%.

Chart 7 combines the above LCR components by comparing liquidity
resources (buffer assets and inflows) to outflows.

Note that the €900 billion difference between the amount of liquid assets
and inflows and the amount of outflows and impact of the cap displayed
in the chart is smaller than the €1.15 trillion gross shortfall noted above
as it is assumed here that surpluses at one bank can offset shortfalls at
other banks.

In practice the aggregate shortfall in the industry is likely to lie
somewhere between these two numbers depending on how efficiently
banks redistribute liquidity around the system.

6.2. Net Stable Funding Ratio

The second standard is the net stable funding ratio (NSFR), a longer-term
structural ratio to address liquidity mismatches and to provide incentives for
banks to use stable sources to fund their activities.

156 Group 1 and Group 2 banks provided sufficient data in the mid-2011 Basel
III implementation monitoring exercise to calculate the NSFR according to the
Basel III liquidity framework.

37% of these banks already meet or exceed the minimum NSFR requirement,
with 70% at an NSFR of 85% or higher.

The average NSFR for each of the Group 1 bank and Group 2 samples is
89% and 90%, respectively.

Chart 8 shows the distribution of results for Group 1 and Group 2 banks;
the thick red line indicates the 100% minimum requirement, the thin red
horizontal lines indicate the median for the respective bank group.

The results show that banks in the sample had a shortfall of stable funding of
€1.93 trillion at the end of June 2011, if banks were to make no changes
whatsoever to their funding structure.

[The shortfall in stable funding measures the difference between balance sheet
positions after the application of available stable funding factors and the
application of required stable funding factors for banks where the former is less
than the latter. ]

This number is only reflective of the aggregate shortfall for banks that are below
the 100% NSFR requirement and does not reflect any surplus stable funding at
banks above the 100% requirement.

Banks that are below the 100% required minimum have until 2018 to meet the
standard and can take a number of measures to do so, including by lengthening
the term of their funding or reducing maturity mismatch.

It should be noted that the shortfalls in the LCR and the NSFR are not
necessarily additive, as decreasing the shortfall in one standard may result in a
similar decrease in the shortfall of the other standard, depending on the steps
taken to decrease the shortfall

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Abbreviations
C-QIS quantitative impact study
CCPs central counterparties
CCR counterparty credit risk
CET1 common equity tier 1
CRD capital requirements directive

CRM comprehensive risk model
CTP correlation trading portfolio

CVA credit value adjustment
DTA deffered tax assets
EBA European Banking Authority
EEPE effective expected positive exposure
GHOS Group of Governors and Heads of Supervision

G-SIB global systemically important banks
ISG Impact Study Group

IRC incremental risk charge
LCR liquidity coverage ratio
LR leverage ratio
MSR mortgage servicing rights
NSFR net stable funding ratio
OBS off-balance sheet
PFE potential future exposure

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International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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PSE public sector entities
RWA risk-weighted assets
SMM standardised measurement-method
VaR value at risk

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NUMBER 2

FINRA Issues New Investor Alert to Help Investors Understand
Their Brokerage Account Statements
WASHINGTON — The Financial Industry Regulatory Authority
(FINRA) issued a new Investor Alert called It Pays to Understand Your
Brokerage Account Statements and Trade Confirmations to help guide
investors through the key elements of their account statements and trade
confirmations.
FINRA is reminding investors that reviewing their account statements
not only helps them stay on top of their holdings, but also alerts them to
errors or broker or firm misconduct, such as unauthorized trading or
overcharging customers for handling transactions.
"Investors whose portfolios have taken a hit might not be keen to open
their account statements, but investors should review their statements
carefully—and immediately call the firm that issued the statement about
any fee they do not understand or transaction they did not authorize,"
said Gerri Walsh, FINRA's Vice President for Investor Education.
"Investors should also review trade confirmations as soon as they receive
them because a single keystroke can make the difference between 100 and
1,000 shares."
In most cases, brokerage firms are required to provide customers with
quarterly account statements and written notification of trade
confirmations at or before completion of a transaction.
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It Pays to Understand Your Brokerage Account Statements details in
plain language the key elements of account statements and "red flags"
that can help investors spot and avert problems.
Many account statements include an investment objective that
characterizes an investor's strategy, such as "growth" or "conservative."
Investors should ensure that this description, as well as the account
activity, accurately reflects their goals.
Consolidated account statements, which provide customers with a single
document that combines information on most or all of their financial
holdings regardless of where those assets are held, are growing in
popularity.
Investors should understand that these consolidated statements
supplement, but do not replace, the required brokerage account
statement.
Investors who receive both kinds of statements should keep in mind that
the official brokerage statement is used in case of a dispute with the
broker or firm.
It Pays to Understand Your Brokerage Account Statements explains that
trade confirmations disclose whether your broker acted as an agent for
you or whether the firm acted as a principal for its own account.
In equity transactions, if the firm acts as an agent, then the firm must
disclose the commission you were charged either on the confirmation or
upon request by you.
If the firm acts as principal, it is acting for its own benefit, and any
markup or markdown or commission-equivalent must be disclosed on the
confirmation.
Investors who find inaccuracies or discrepancies on any of their
statements should contact their broker or firm as soon as possible, and if
the problem is not resolved, FINRA urges investors to file a complaint
using FINRA's online Complaint Center.

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FINRA, the Financial Industry Regulatory Authority, is the largest
independent regulator for all securities firms doing business in the United
States.
FINRA is dedicated to investor protection and market integrity through
effective and efficient regulation and complementary compliance and
technology-based services.
FINRA touches virtually every aspect of the securities business – from
registering and educating all industry participants to examining
securities firms, writing rules, enforcing those rules and the federal
securities laws, informing and educating the investing public, providing
trade reporting and other industry utilities, and administering the largest
dispute resolution forum for investors and firms.

It Pays to Understand Your Brokerage Account Statements and
Trade Confirmations

FINRA often reminds investors to review their brokerage account
statements and trade confirmations—with good reason.
Not only do these documents help you stay on top of your investment
holdings, but they also provide valuable information that can alert you to
errors, or even misconduct by your broker or brokerage firm such as
unauthorized trading or overcharging customers for handling
transactions.
The accuracy of statements and trade confirmations is something
securities regulators take very seriously.
FINRA is issuing this alert to guide investors through the key elements of
their brokerage account statements and trade confirmations and to
provide tips that can help avoid problems.
Investors should review their statements carefully—and immediately call
the firm that issued the statement or confirmation about any transaction
or entry they do not understand or did not authorize, and re-confirm any
oral communication in writing with the firm.
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In most cases, brokerage firms are required to provide customers with
quarterly account statements and written notification of trade
confirmations at or before completion of a transaction.
Be aware that the brokerage firm you opened an account with may not be
the one that sends you your account statements and trade confirmations.
Introducing firms generally make recommendations, take orders and
have an arrangement with clearing and carrying firms, which are the ones
that finalize ("settle" or "clear") trades and hold the funds or securities.
If you work with an introducing firm, your statements most likely come
from the clearing firm.
Spotting Fraud: Appearance Counts
Keep an eye peeled for statements that look unprofessional, crooked or
altered in any way.
This may signal fraud. Check graphic elements such as logos—if a logo
has poor resolution or is inconsistent with other statements or
communications from the firm, it is a red flag.
In some cases, fraudsters simply cut and paste the logo of a legitimate
firm onto their own bogus statement.
Many account statements include an investment objective that
characterizes your investment strategy—for example "growth,"
"speculative" or "conservative."

Make sure this description accurately describes your financial goals, and
that the activity in your account reflects these goals.

Keep in mind that your financial objectives may change over time and
should be updated accordingly.

Consolidated Account Statements

Consolidated account statements are growing in popularity as a way to
provide customers with a single document that combines information
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regarding most or all of the customer’s financial holdings, regardless of
where those assets are held.

These consolidated reports offer a broad view of customers’ investments,
and may provide not only account balances and valuations, but also
performance data.

In many cases, these consolidated reports are prepared at the request of
the customer, who may also direct which of his or her accounts to include
and provide access to data for accounts not held by their brokerage firm.

Investors should understand that these communications supplement,
but do not replace, the required brokerage account statement.

If you receive consolidated statements—read them carefully.

Many of the red flags cited above also apply to consolidated statements.
But you shouldn’t substitute the reading of your brokerage statement
with reading only the consolidated one.

If you get both—read, compare and understand both—but keep in mind
that it is the official brokerage statement which is used in case of a
dispute with your broker or brokerage firm.

Carefully Review Your Trade Confirmations

Trade confirmations contain key trade details.

These include the date and time of the transaction, price at which you
bought or sold a security and the quantity of shares bought or sold.

When a single keystroke can make the difference between 100 and 1,000
shares, it is important to review this information carefully—and as soon as
you receive a confirmation. Confirmations also inform you of whether
your broker acted as an agent for you or another customer, or whether the
broker or brokerage firm acted as a principal for its own account.
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In equity transactions, if the firm acts as agent, that means the firm acts
on your behalf to buy or sell a security.

In this capacity, the firm must disclose the amount of the commission
you were charged either on the confirmation, or upon request by you.

If the firm acts as principal, it is acting for its own benefit, and any
markup, markdown or commission-equivalent must be disclosed on the
confirmation.

In bond transactions, if the firm acts as agent, it must disclose the amount
of the commission you were charged either on the confirmation, or upon
request by you, just as with equity transactions.

However, where the firm acts as principal and executes trades from its
own account at net prices the price you pay (or receive) for the bond
includes the firm’s markup or markdown.

The firm is not required to disclose this amount to you.

Don’t Be Shy

Don’t hesitate to ask your broker to provide the details about mark-up,
mark-downs or any fees or commissions associated with your investment.

These costs ultimately impact the overall return on your investment and
you have a right to know this information.

If you feel that these costs are excessive, you may file a complaint using
FINRA’s online Complaint Center.

As with account statements, trade confirmations also include the clearing
firm and its contact information, which may be extremely helpful should
you have trouble tracking down your investments, or in the event your
brokerage firm closes its doors.

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Many of the tips and red flags associated with account statements also
apply to trade confirmations.

In addition, the following checklist can help you avoid problems:

Check your trade confirmation against the information in your brokerage
statement for the period in which the trade took place.

Confirm the date and transaction amount. Contact the firm about any
trade you did not authorize, and re-confirm any oral communication in
writing with the firm.

Confirmations might indicate whether trades are unsolicited or solicited.

Check to be sure trades are properly categorized.

Treat as a red flag an investment that was the broker’s idea, but reflected
on the confirmation as an unsolicited trade.

Scrutinize any fees that might have been added—for example, handling
fees or mailing charges—and be sure to ask for an explanation for any
fees you had not expected or that seem unreasonable.

For example, FINRA recently took enforcement actions against five
brokerage firms that mischaracterized commissions on trade
confirmations and fee schedules to look like handling services and
postage charges.

Bottom Line

Always check to see if there are inaccuracies or discrepancies in any of
your statements—and, if so, contact your broker or firm as soon as
possible.

If the problem is not resolved, file a complaint using FINRA's online
Complaint Center.
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NUMBER 3

President Obama signed the JOBS Act - April 5, 2012.

Will Announce New Steps to Promote Access to Capital for
Entrepreneurs and Protections for Investors
WASHINGTON, DC – President Obama signed the Jumpstart Our
Business Startups (JOBS) Act, a bipartisan bill that enacts many of the
President’s proposals to encourage startups and support our nation’s
small businesses.

The President believes that our small businesses and startups are driving
the recovery and job creation.

That’s why he put forward a number of specific ways to encourage small
business and startup investment in the American Jobs Act last fall, and
worked with members on both sides of the aisle to sign these
common-sense measures into law today.

The JOBS Act will allow Main Street small businesses and high-growth
enterprises to raise capital from investors more efficiently, allowing small
and young firms across the country to grow and hire faster.

“America’s high-growth entrepreneurs and small businesses play a vital
role in creating jobs and growing the economy,” said President Obama.

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“I’m pleased Congress took bipartisan action to pass this bill. These
proposals will help entrepreneurs raise the capital they need to put
Americans back to work and create an economy that’s built to last.”

Throughout this effort, the President has maintained a strong focus on
ensuring that we expand access to capital for young firms in a way that is
consistent with sound investor protections.

To that end, the President today will call on the Treasury, Small Business
Administration and Department of Justice to closely monitor this
legislation and report regularly to him with its findings.

In addition, major crowfunding organizations sent a letter to the
President today committing to core investor protections, including a new
code of conduct for crowdfunding platforms.

In March of last year, the President directed his Administration to host a
conference titled “Access to Capital: Fostering Growth and Innovation for
Small Companies.”

The conference brought together policymakers and key stakeholders
whose ideas directly led to many of the proposals contained in the JOBS
Act.

A primary takeaway from the conference was that capital from public and
private investors helps entrepreneurs achieve their dreams and turn ideas
into startups that create jobs and fuel sustainable economic growth.

Key Elements of the JOBS Act

The JOBS Act includes all three of the capital formation priorities that the
President first raised in his September 2011 address to a Joint Session of
Congress, and outlined in more detail in his Startup America Legislative
Agenda to Congress in January 2012: allowing “crowdfunding,”
expanding “mini-public offerings,” and creating an “IPO on-ramp”
consistent with investor protections.

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The JOBS Act is a product of bipartisan cooperation, with the President
and Congress working together to promote American entrepreneurship
and innovation while maintaining important protections for American
investors.

It will help growing businesses access financing while maintaining
investor protections, in several ways:

• Allowing Small Businesses to Harness “Crowdfunding”:

The Internet already has been a tool for fundraising from many thousands
of donors.

Subject to rulemaking by the U.S. Securities and Exchange Commission
(SEC), startups and small businesses will be allowed to raise up to $1
million annually from many small-dollar investors through web-based
platforms, democratizing access to capital.

Because the Senate acted on a bipartisan amendment, the bill includes
key investor protections the President called for, including a requirement
that all crowdfunding must occur through platforms that are registered
with a self-regulatory organization and regulated by the SEC.

In addition, investors’ annual combined investments in crowdfunded
securities will be limited based on an income and net worth test.

• Expanding “Mini Public Offerings”:

Prior to this legislation, the existing “Regulation A” exemption from
certain SEC requirements for small businesses seeking to raise less than
$5 million in a public offering was seldom used.

The JOBS Act will raise this threshold to $50 million, streamlining the
process for smaller innovative companies to raise capital consistent with
investor protections.

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• Creating an “IPO On-Ramp”:

The JOBS Act makes it easier for young, high-growth firms to go public
by providing an incubator period for a new class of “Emerging Growth
Companies.”

During this period, qualifying companies will have time to reach
compliance with certain public company disclosure and auditing
requirements after their initial public offering (IPO).

Any firm that goes public already has up to two years after its IPO to
comply with certain Sarbanes-Oxley auditing requirements.

The JOBS Act extends that period to a maximum of five years, or less if
during the on-ramp period a company achieves $1 billion in gross
revenue, $700 million in public float, or issues more than $1 billion in
non-convertible debt in the previous three years.

Additionally, the JOBS Act changes some existing limitations on how
companies can solicit private investments from “accredited investors,”
tasks the SEC with ensuring that companies take reasonable steps to
verify that such investors are accredited, and gives companies more
flexibility to plan their access to public markets and incentivize
employees.

Additional Initiatives Announced Today to Promote Capital Access and
Investor Protection

• Monitoring of JOBS Act Implementation:

The President is directing the Treasury Department, Small Business
Administration and Department of Justice to closely monitor the
implementation of this legislation to ensure that it is achieving its goals of
enhancing access capital while maintaining appropriate investor
protections.

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These agencies, consulting closely with the SEC and key
non-governmental stakeholders, will report their findings to the President
on a biannual basis, and will include recommendations for additional
necessary steps to ensure that the legislation achieves its goals.

• Crowdfunding Platforms Commit to Investor Protections:

In a letter to President Obama, a consortium of crowdfunding companies
are committing to work with the SEC to develop appropriate regulation of
the industry, as required by the JOBS Act.

Members of this leadership group are committing to establish core
investor protections, including an enforceable code of conduct for
crowdfunding platforms, standardized methods to ensure that investors
do not exceed statutory limits, thorough vetting of companies raising
funds through crowdfunding, and an industry standard “Investors’ Bill of
Rights.”

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NUMBER 4

Learning more about Supervisory Agencies

BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht
Bundesrepublik Deutschland (Federal Republic of Germany)

Since it was established in May 2002, the Federal Financial Supervisory
Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - known
as BaFin for short) has brought the supervision of banks and financial
services providers, insurance undertakings and securities trading under
one roof.

BaFin is an independent public-law institution and is subject to the legal
and technical oversight of the Federal Ministry of Finance.

It is funded by fees and contributions from the institutions and
undertakings that it supervises.

It is therefore independent of the Federal Budget.

Organisation
Banking Supervision, Insurance Supervision and Securities
Supervision/Asset Management are three different organisational units
within BaFin – the so-called Directorates.

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International

The large number of players operating on the global financial markets has
been increasing steadily for many years now.

Even though there is no legal framework that is binding internationally,
markets are still expanding across borders.

Financial supervision, however, is still largely inward-looking, since
sovereign powers usually end at the national border.

Functions

BaFin operates in the public interest. Its primary objective is to ensure the
proper functioning, stability and integrity of the German financial system.

Bank customers, insurance policyholders and investors ought to be able
to trust the financial system.

BaFin has over 1,900 employees working in Bonn and Frankfurt am Main.

They supervise around 1,900 banks, 717 financial services institutions,
approximately 600 insurance undertakings and 30 pension funds as well
as around 6,000 domestic investment funds and 73 asset management
companies (as of March 2011).

Under its solvency supervision, BaFin ensures the ability of banks,
financial services institutions and insurance undertakings to meet their
payment obligations.

Through its market supervision, BaFin also enforces standards of
professional conduct which preserve investors' trust in the financial
markets.

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As part of its investor protection, BaFin also seeks to prevent
unauthorised financial business.

Legal basis

BaFin’s By-Laws represent a major set of precepts for how it acts.

They contain regulations governing its structure and organisation and its
rights and obligations.

They also govern the functions and powers of BaFin’s supervisory body,
its Administrative Council (Verwaltungsrat), and details of its budget.

BaFin also bases the way in which it carries out its supervisory activities
on the Mission Statement it gave itself shortly after it was established.
According to this Mission Statement, BaFin’s function is to limit risks to
the German financial system at both the national and international level
and to ensure that Germany as a financial centre continues to function
properly and that its integrity is preserved.

As part of the Federal administration, BaFin is subject to the legal and
technical oversight of the Federal Ministry of Finance, with the
framework of which the legality and fitness for purpose of BaFin's
administrative actions are monitored.

BaFin Text
Solvency II
Among other things, Solvency II – the project to reform the European
legal framework for insurance supervision – harmonises the solvency
capital requirements for insurance firms and groups.

Following the adoption of the Solvency II Directive in November 2009,
the focus in 2010 was on developing the implementing measures that are

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to be adopted and on performing the fifth quantitative impact study
(QIS5).

It is currently planned to make the initial amendments to the Solvency II
Directive at the end of 2011 by way of the Omnibus II Directive, for which
the European Commission presented a proposal on 19 January 2011.

This contains amendments to two key areas of legislation.

Firstly, it amends directives governing insurance and securities
prospectuses to reflect the new EU rules on financial market supervision
and in particular the new EU financial supervisory authorities that began
work on 1 January 2011.

For example, EIOPA is incorporated into the Solvency II Directive as the
successor to CEIOPS.

Provision is also made for the binding settlement of disputes by EIOPA.

Secondly, the proposal contains amendments to the Solvency II Directive.

For example, the Directive provides for the implementation of Solvency II
to be postponed by two months until 1 January 2013.

The Omnibus II Directive also enables the European Commission to
specify transitional requirements for individual elements of the
Framework Directive, with different maximum transition periods being
set for each area.

The Omnibus II Directive is of considerable significance for the
continuing evolution of Solvency II.
For technical reasons, the European Commission cannot present the
official draft of the Solvency II implementing measures until after the
Omnibus II Directive has been adopted.

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The Omnibus II Directive will therefore have a significant influence on
the ongoing work on the implementing measures.

Implementing measures
The Solvency II Directive gives the European Commission the authority
to adopt implementing measures for particular areas.

These are intended to add detail to the Directive and hence improve the
harmonisation and consistency of supervision in Europe.

In spring 2010, CEIOPS submitted its proposals in this area to the
Commission, which at the end of 2010 presented an initial informal full
draft of the implementing measures based on the proposals.

In 2011, this draft will be discussed further with the member states, with
specific consideration being given to the findings of QIS5.

The official draft of the Solvency II implementing measures will not be
presented by the Commission and discussed with the Council and the
Parliament until after the Omnibus II Directive has been adopted.

Impact studies
The QIS5 study conducted by the Commission in the year under review is
based on the Solvency II Directive and reflects the implementing
measures developed up until that time.

The objective was to test the quantitative impact of Solvency II in detail.
European insurance firms and groups were asked to take part in the study
between July and November 2010.

The results received from solo firms were initially evaluated by the
national supervisory authorities, while the data received from groups were
analysed by CEIOPS or EIOPA.

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All results and findings were incorporated into a European report, which
EIOPA presented to the Commission in March 2011.

In addition, BaFin published a national report.

The results of the study will have a major influence on the discussion
regarding the Solvency II implementing measures

Guidelines for supervisors
In future, the provisions of the Directive and the implementing measures
adopted by the European Council and the European Parliament will be
complemented by guidelines for supervisors adopted by EIPOA, with the
aim being to further harmonise supervisory practice in Europe.

The four existing CEIOPS and EIOPA working groups began work on
these guidelines in the year under review.

In addition, EIOPA will develop binding standards (on the design of the
yield curve, for example).

One of the working groups, the Financial Requirements Expert Group
(FinReq), has three areas of work: capital requirements (SCR/MCR), the
statement of technical provisions and own funds.

Among other things, it has drawn up initial proposals for guidelines
related to the procedure to be followed for the approval of
undertaking-specific parameters for use in calculating the solvency
capital requirement and the recognition of ancillary own funds.

In cooperation with the Groupe Consultatif, a forum of European
actuarial associations, it is also developing actuarial standards for
calculating technical provisions.

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The Internal Governance, Supervisory Review and Reporting Expert
Group (IGSRR) is responsible for the requirements for public disclosure
and supervisory reporting by undertakings, capital addons and the
valuation of assets and liabilities, and is developing guidance for
supervisors on what the supervisory process may look like under Solvency
II.

In doing so, it is focusing specifically on the evaluation of the own risk
and solvency assessment (ORSA) and the templates for future reporting
to supervisors.

On a closely related topic, consideration is being given to how and which
data may in future be exchanged electronically between national
supervisory authorities and with EIOPA.

In 2010, the Internal Models Expert Group (IntMod) developed guidance
on the use test and on calibration, showing supervisors and the insurance
industry how they can fulfil the future requirements.

The Group also drew up general guidelines on hitherto less-discussed
topics, such as the inclusion of profit and loss attribution in the internal
model.

The fourth CEIOPS/EIOPA working group, the Insurance Groups
Supervision Committee (IGSC), is drawing up guidance on practical
cooperation in the colleges and in coordinating measures.

The working group is also developing harmonised approaches for
identifying, reporting and assessing risk concentrations and intragroup
transactions.

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P a g e | 56

NUMBER 5

Federal Reserve Policy Statement on
Rental of Residential Other Real Estate Owned Properties
April 5, 2012
In light of the large volume of distressed residential properties and the
indications of higher demand for rental housing in many markets, some
banking organizations may choose to make greater use of rental activities
in their disposition strategies than in the past.
This policy statement reminds banking organizations and examiners that
the Federal Reserve’s regulations and policies permit the rental of
residential other real estate owned (OREO) properties to third party
tenants as part of an orderly disposition strategy within statutory and
regulatory limits.
[The term “residential properties” in this policy statement encompasses
all one-to-four family properties and does not include multi-family
residential or commercial properties.]
This policy statement applies to state member banks, bank holding
companies, nonbank subsidiaries of bank holding companies, savings
and loan holding companies, non-thrift subsidiaries of savings and loan
holding companies, and U.S. branches and agencies of foreign banking
organizations (collectively, banking organizations).
The general policy of the Federal Reserve is that banking organizations
should make good-faith efforts to dispose of OREO properties at the
earliest practicable date.

Consistent with this policy, in light of the extraordinary market
conditions that currently prevail, banking organizations may rent
residential OREO properties (within statutory and regulatory holding
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period limits) without having to demonstrate continuous active
marketing of the property, provided that suitable policies and procedures
are followed.

Under these conditions and circumstances, banking organizations would
not contravene supervisory expectations that they show “good-faith
efforts” to dispose of OREO by renting the property within the applicable
holding period.

Moreover, to the extent that OREO rental properties meet the definition
of community development under the Community Reinvestment Act
(CRA) regulations, they would receive favorable CRA consideration.

In all respects, banking organizations that rent OREO properties are
expected to comply with all applicable federal, state, and local statutes
and regulations.

Background
Home prices have been under considerable downward pressure since the
financial crisis began, in part due to the large volume of houses for sale by
creditors, whether acquired through foreclosure or voluntary surrender of
the property by a seriously delinquent borrower (distressed sales).

Creditors, in turn, often seek to liquidate their inventories of such
properties quickly.

Since 2008, it is estimated that millions of residential properties have
passed through lender inventories.

These distressed sales represent a significant proportion of all home sales
transactions, despite some ebb and flow, and thus are a contributing
element to the downward pressure on home prices.

With mortgage delinquency rates remaining stubbornly high, the
continued inflow of new real estate owned properties to the market

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P a g e | 58

--expected to be millions more over the coming years-- will continue to
weigh on house prices for some time.

Banking organizations include their holdings of such properties in
OREO on regulatory reports and other financial statements.

Existing federal and state laws and regulations limit the amount of time
banking organizations may hold OREO property.

In addition, there are established supervisory expectations for
management of OREO properties and the nature of the efforts banking
organizations should make to dispose of these properties during that
period.

Risk Management Considerations for Residential OREO
Property Rentals

In all circumstances, the Federal Reserve expects a banking organization
considering such rentals to evaluate the overall costs, benefits, and risks
of renting.

The banking organization’s decision to rent OREO might depend
significantly on the condition of individual properties, local market
conditions for rental and owner-occupied housing, and its capacity to
engage in rental activity in a safe and sound manner and consistent with
applicable laws and regulations.

Banking organizations should have an operational framework for their
residential OREO rental activities that is appropriate to the extent to
which they rent OREO properties.

In general, banking organizations with relatively small holdings of
residential OREO properties--fewer than 50 individual properties rented
or available for rent--should use a framework that appropriately records
the organizations’ rental decisions and transactions as they take place,

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P a g e | 59

preserves key documents, and is otherwise sufficient to safeguard and
manage the individual OREO assets.

In contrast, banking organizations with large inventories of residential
OREO properties-- 50 or more individual properties available for rent or
rented--should utilize a framework that systematically documents how
they meet the supervisory expectations described in the next section.

All banking organizations that rent OREO properties, irrespective of the
size of their holdings, should adhere to the guidance set forth in this
section.

Compliance with maximum OREO holding-period
requirements

Banking organizations should pursue a clear and credible approach for
ultimate sale of the rental OREO property within the applicable
holding-period limitations.

Exit strategies in some cases may include special transaction features to
facilitate the sale of OREO, potentially including prudent use of
seller-assisted financing or rent-to-own arrangements with tenants.

Compliance with landlord-tenant and other associated
requirements

Banking organizations’ residential property rental activities are expected
to comply with all applicable federal, state, and local laws and
regulations, including:

- landlord-tenant laws;

- landlord licensing or registration requirements; property maintenance
standards;

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P a g e | 60

- eviction protections (such as under the Protecting Tenants at
Foreclosure Act);

- protections under the Servicemembers Civil Relief Act; and

- anti-discrimination laws, including the applicable provisions of the
Fair Housing Act and the Americans with Disabilities Act.

Prior to undertaking the rental of OREO properties, banking
organizations should determine whether such activities are legally
permissible under applicable laws, including state laws.

When applicable, banking organizations should review homeowner and
condominium association bylaws and local zoning laws for prohibitions
on renting a property.

Banking organizations may use third-party vendors to manage properties
but should provide necessary oversight to ensure that property managers
fully understand and comply with these federal, state, and local
requirements.

Other considerations

Banking organizations should account for OREO assets in accordance
with generally accepted accounting principles and applicable regulatory
reporting instructions.

Banking organizations should also provide the appropriate classification
treatment for their residential OREO holdings.

Residential OREO is typically treated as a substandard asset, as defined
by the interagency classification guidelines.

However, residential properties with leases in place and demonstrated
cash flow from rental operations sufficient to generate a reasonable rate of
return should generally not be classified.

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P a g e | 61

Specific Expectations for Large-Scale Residential OREO
Rentals

Banking organizations with large inventories of residential OREO
properties that decide to engage in rental activities should have in place a
documented rental strategy, including formal policies and procedures for
OREO rental activities, and a documented operational framework.

Policies and procedures should clearly describe how the banking
organization will comply with all applicable laws and regulations.

Policies and procedures should include processes for determining
whether the properties meet local building code requirements and are
otherwise habitable, and whether improvements to the properties are
needed in order to market them for rent.

In addition, policies and procedures should establish operational
standards for the banking organization’s rental activities, including that
adequate insurance policies are in place, that property and other tax
obligations are met on a timely basis, and that expenditures on
improvements are appropriate to the value of the property and to
prevailing norms in the local market.

Policies and procedures should also require plans for rental of residential
OREO properties, down to the individual property level, that cover the
full holding period from the time the bank received title to ultimate sale
by the bank.

Plans should identify which properties would be eligible for rental.

Plans also should establish criteria by which properties are chosen
for marketing as rental properties, and the process by which rental
decisions should be made and implemented.

Plans should describe the general conditions under which the
organization believes a rental approach is likely to be successful,
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P a g e | 62

including appropriate consideration of rental market and economic
conditions in respective local markets.

Finally, policies and procedures should address all risk management
issues that arise in renting residential OREO properties.

Some risk elements parallel those found in other banking activities, for
example, the credit risk associated with tenants’ potential failure to make
timely rent payments, or potential conflict of interest issues such as the
use of a firm by a banking organization to both provide information on a
property’s value and list that property for sale on behalf of the banking
organization.

Other risks unique to such rental include:

Dealing with vacancy, marketing, and re-rental of previously occupied
properties;

Liability risk arising from rental activities, along with the use and
management of liability insurance or other approaches to mitigate that
liability and risk; and

Legal requirements arising from the potential need to take action
against tenants for rent delinquency, potentially including eviction. Such
requirements may include notice periods.

Banking organizations may need to develop new policies and risk
management processes to address properly these categories of risk.

In many cases, banking organizations will use third-party vendors (for
example, real estate agents or professional property managers) to manage
their OREO properties.

Policies and procedures should provide that such individuals or
organizations have appropriate expertise in property management, be in
sound financial condition, and have a good track record in managing
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P a g e | 63

similar properties.

Policies and procedures should also call for contracts with such vendors
to carry appropriate terms and provide, among other key elements, for
adequate management information systems and reporting to the banking
organization, including rent rolls (along with actual lease agreements),
maintenance logs, and security deposits and charges to these deposits.

Banking organizations should provide for adequate oversight of vendors.

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NUMBER 6

We have access to the minutes of the Federal Open Market
Committee

Developments in Financial Markets and the Federal Reserve's
Balance Sheet

Staff Review of the Economic Situation

The information reviewed at the March 13 meeting suggested that
economic activity was expanding moderately.

Labor market conditions continued to improve and the unemployment
rate declined further, although it remained elevated.

Overall consumer price inflation was relatively subdued in recent months.

More recently, prices of crude oil and gasoline increased substantially.

Measures of long-run inflation expectations remained stable.

Private nonfarm employment rose at an appreciably faster average pace in
January and February than in the fourth quarter of last year, and declines
in total government employment slowed in recent months.

The unemployment rate decreased to 8.3 percent in January and stayed at
that level in February.

Both the rate of long-duration unemployment and the share of workers
employed part time for economic reasons continued to be high.
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Initial claims for unemployment insurance trended lower over the
intermeeting period and were at a level consistent with further moderate
job gains.

Manufacturing production increased considerably in January, and the
rate of manufacturing capacity utilization stepped up.

Factory output was boosted by a sizable expansion in the production of
motor vehicles, but there also were solid and widespread gains in other
industries.

In February, motor vehicle assemblies remained near the strong pace
recorded in January; they were scheduled to edge up, on net, through the
second quarter.

Broader indicators of manufacturing activity, such as the diffusion
indexes of new orders from the national and regional manufacturing
surveys, were at levels suggesting moderate increases in factory
production in the coming months.

Households' real disposable income increased, on balance, in December
and January as labor earnings rose solidly.

Moreover, households' net worth grew in the fourth quarter of last year
and likely was boosted further by gains in equity values thus far this year.

Nevertheless, real personal consumption expenditures (PCE) were
reported to have been flat in December and January.

Although households' purchases of motor vehicles rose briskly, spending
for other consumer goods and services was weak.

In February, nominal retail sales excluding purchases at motor vehicle
and parts outlets increased moderately, while motor vehicle sales
continued to climb.

Consumer sentiment was little changed in February, and households
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remained downbeat about both the economic outlook and their own
income and finances.

Housing market activity improved somewhat in recent months but
continued to be restrained by the substantial inventory of foreclosed and
distressed properties, tight credit conditions for mortgage loans, and
uncertainty about the economic outlook and future home prices.

After increasing in December, starts of new single-family homes
remained at that higher level in January, likely boosted in part by
unseasonably warm weather; in both months, starts ran above permit
issuance.

Sales of new and existing homes stepped up further in recent months,
though they still remained at quite low levels.

Home prices were flat, on balance, in December and January.

Real business expenditures on equipment and software rose at a notably
slower pace in the fourth quarter of last year than earlier in the year.

Moreover, nominal orders and shipments of nondefense capital goods
declined in January.

However, a number of forward-looking indicators of firms' equipment
spending improved, including some survey measures of business
conditions and capital spending plans.

Nominal business spending for nonresidential construction firmed, on
net, in December and January, but the level of spending was still
subdued, in part reflecting high vacancy rates and tight credit conditions
for construction loans.

Inventories in most industries looked to be reasonably well aligned with
sales in recent months, although stocks of motor vehicles continued to be
lean.

_____________________________________________________________

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