Risk management presentation April 29 2013

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International Association of Risk and Compliance
Professionals (IARCP)
1200 G Street NW Suite 800 Washington, DC 20005-6705 USA
Tel: 202-449-9750 www.risk-compliance-association.com
Top 10 risk and compliance management related news stories
and world events that (for better or for worse) shaped the
week's agenda, and what is next
Dear Member,
I thought that I had seen everything, but I was
wrong.
Whospokeabout thefounderoftheEmirates, SheikhZayedbinSultanAl
Nahyan at El Paso,Texas?
Richard W. Fisher, President and CEO of the Federal Reserve Bank of
Dallas. Of course, heexplained theword―Emirates‖
Richard said:
Thefounder of theEmirates—acollectionof former ―Trucial States‖
alongthelowercoast oftheArabian Sea—wasSheikhZayedbin SultanAl
Nahyan, a wiseman whohadno formal education but knew of its
enormousvalue. He said, ―Education is a lanternwhich lightsthe dark
alleys of ignorance.‖
Doyou want toknow whichthe titleof the speech is?
Oil and Gas,BlondesandOver-Accessorized Brunettes, and
Ruthless, Hard-DrinkingCowboys(WithReference to Sheikh
Zayed, DianaNatalicio, My Nephew Charlesand President Peña
Nieto)
International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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Richard wantstoset the record straight. He said:
―I find that when I speak about my district in foreign lands—say, in New
YorkorWashington, D.C.—thereisastereotypicalreactionnot unlikethe
imageprojected by the TV showDallas.―Of course you are doingwell,‖
theysay.
―You are rich in oil and gas, blondesand over-accessorizedbrunettes,
and ruthless, hard-drinkingcowboys.‖
Today, I want to set the recordstraight.‖
Richard, theyareright tobelievethat!
Ok, I admit that your presentation is superb, and that you convinced me
in some ways, but I still believe that you are rich in blondesand
over-accessorizedbrunettesin Texas.

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Note: The aboveslideis about ―employment‖, not ―employment of
blondesand over-accessorizedbrunettes‖
Read moreat Number 2below.
Welcometo the Top 10list.
BestRegards,
GeorgeLekatis
President of the IARCP
General Manager, ComplianceLLC
1200G Street NW Suite
800,Washington DC
20005,USA
Tel: (202) 449-9750
Email: lekatis@risk-compliance-association.com
Web: www.risk-compliance-association.comHQ:
1220N. Market Street Suite804,
Wilmington DE 19801,USA
Tel: (302) 342-8828

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Report to G20 Finance Ministers and Central
Bank Governorson monitoring
implementation of Basel III regulatory reform
Full, timely and consistent implementationof Basel
III remainsfundamental tobuilding a resilient
financial system, maintainingpublicconfidence in regulatory ratiosand
providinga level playing field for internationallyactivebanks.
This report updatesG20 FinanceMinistersand Central Bank Governors
onprogressinadoptionoftheBaselIII regulatoryreformssincetheBasel
Committeeon BankingSupervision issueditsOctober 2012report
‗Oil and Gas, Blondesand Over-Accessorized
Brunettes, and Ruthless, Hard-Drinking
Cowboys‘
(WithReferencetoSheikh Zayed, DianaNatalicio, My
Nephew Charlesand President Peña Nieto)
Remarksat theUniversityof Texasat El PasoCentennial Lecture
Richard W. Fisher, President and CEO
Federal Reserve Bank of Dallas, El Paso, Texas

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Quantitative and qualitative monetary
easing
Speechby Mr Haruhiko Kuroda, Governor of the
Bank of Japan, at a meetingheld by theYomiuri International Economic
Society, Tokyo
RichardM. Ashton, DeputyGeneral
Counsel
Independent Consultants
Before the Subcommitteeon Financial Institutionsand Consumer
Protection, Committeeon Banking, Housing, and UrbanAffairs, U.S.
Senate, Washington, D.C.
Joint Committee
Report on
Risksand Vulnerabilities in the EU Financial System
TheEuropean financial system continuesto face a dauntingrangeof
interrelated risks, necessitatinga concerted responseby policymakers
both at the political level and from theEuropean System of Financial
Supervision, includingthe European SupervisoryAuthorities(ESAs), in
order to restorethe confidenceand trust that hasbeen erodedduring
recent years‘financial crisis.

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EU Bank Capital Requirements
Regulation and Directive
TheEU Capital RequirementsRegulation (CRR) and Directive (CRD)
aim tostabilize and strengthenthebanking system bymakingbanks set
aside more and higher qualitycapital asa cushion against crises.
Thenew rules should alsofoster a convergence of supervisory practices
acrosstheEU.
Banks that are better ableto withstandfuture crisesshould be more
capableof financinginvestment and growth.
EIOPA Guidelineson
preparing for Solvency II
On 27 March2013the European Insuranceand Occupational Pensions
Authority (EIOPA) publisheditsConsultationson Guidelineson
preparingfor SolvencyII along witha cover note tobe read in
conjunction withtheconsultations.
Monetary policy – many targets, many
instruments. Where do we stand?
Remarksby Mr Mervyn King, Governor of the Bank of England, at the
IM F Conferenceon ―Rethinkingmacro policy II: first stepsand early
lessons‖,Washington DC

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SME financing, market innovation and regulation
Speechby Mr Benoît Coeuré, Member of the Executive
Board of theEuropean Central Bank, at the plenary
Session 11―Challengesand feasibilityof diversifying the
financingof EU corporatesand SMEs‖, at the Eurofi
HighLevel Seminar,organisedin associationwiththeIrishPresidencyof
theCouncil of the EU, Dublin
Financial inclusion
Openingaddressby Mr Denton
Rarawa,Governor of Central Bank
of Solomon Islands,at
the10th Meetingof the Pacific
IslandsWorking Group (PIWG) on ―Financial inclusion‖, Honiara

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Report to G20 Finance Ministers and
Central Bank Governorson monitoring
implementation of Basel III regulatory
reform
April 2013
Summary
Full, timely and consistent implementationof
Basel III remainsfundamental to building a
resilient financial system, maintainingpublic confidencein regulatory
ratios and providinga level playing field for internationallyactivebanks.
This report updatesG20 FinanceMinistersand Central Bank Governors
onprogressinadoptionoftheBaselIII regulatoryreformssincetheBasel
Committeeon BankingSupervision issueditsOctober 2012report.
Thescope of this update is broader than previousprogressreportsto the
G20.
In additiontoreportingon the stepstaken by Basel Committeemember
jurisdictionstowardsimplementingtheBaselIII capitalstandards,which
wasthe focusof thelast report, this updatealsocoversdevelopmentsin
other Basel III regulatory standards, and banks‘progressin bolstering
their capital bases.
Thereport alsohighlightsspecific implementation-relatedshortcomings
that are surfacing, whichrequire continued policy and operational
attention.
BaselCommitteemembersagreedtobegin implementationof BaselIII‘s
capital standardsfrom 1January 2013, requiring that theytranslatethe
Basel III standardsintonational lawsand regulationsbeforethisdate.

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Sincethe Basel Committee‘sOctober 2012report, eight more member
jurisdictionshave issued final Basel III-basedcapital
regulations,bringing the total to14.
Eleven Basel Committee member jurisdictions now have final Basel III
capital rules in force: Australia, Canada, China, Hong Kong
SAR, India, Japan, Mexico, Saudi Arabia, Singapore, South Africa and
Switzerland.
Three BaselCommittee member jurisdictions–Argentina, Brazil and
Russia–haveissuedfinal rulesandwill bring themintoforcebyend2013.
Theother 13member countriesthat missed the1January 2013deadline
for issuing final regulationshave published their draft regulations:nine
countriesthat are alsomembersof the European
Union, Indonesia, Korea, Turkey and theUnitedStates.
The Basel Committee is urging those jurisdictions to issue final versions
of their regulations as soon as possible and to align their implementation
withthe internationallyagreedtransitionperioddeadlines.
It is particularlyimportant for member jurisdictionsthat are home to
globalsystemicallyimportant banks(G-SIBs) tocompletetheissuanceof
final Basel III regulations.
Despitesome delays in implementingBaselIII regulations,national
supervisorsare ensuring that internationallyactivebanks are, where
necessary, makingsteady progressin strengtheningtheir capital baseto
meet the new Basel III standards.
Thelatest data collected by theBasel Committeeindicatethat, for the 12
monthsending June2012,largeinternationallyactivebankson average
raised their capital ratios.
For example, the averageCommon EquityTier 1(CET1) capital ratios
rosefrom 7.1%to8.5% of risk-weightedassets.
For thosebanksthat do not yet meet thefully-phased in
requirements,CET1capital shortfallsfell from roughly €450billion to
€200billion.International Association of Risk and Compliance Professionals (IARCP)

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TheBaselCommittee‘sRegulatory ConsistencyAssessment Programme
(RCAP) introducedin 2012is helpingadvanceand deepen theBasel III
reform efforts.
TheRCAP is monitoring progressin introducingregulations, assessing
their consistencywiththe agreed international standards, and analysing
outcomesacrossbanksandregulatoryregimes, therebyhelpingtoensure
confidencein the regulatoryframework.
TheRCAP is alsohelpingemphasisethat issuingdomestic Basel
III-basedrulesalone doesnot guaranteeeffectiveimplementation.
Sound supervisory and industry practicesalong withrigorous
enforcement and analysisof intendedprudential outcomesare also
requiredfor effectiveimplementation of theBasel III framework.
Acentral element of theRCAP is the assessment of the content and
substanceof different jurisdictions‘regulations.
TheBasel Committeehaslaunched a series of theseassessmentsto
gaugethe consistencyof domestic regulationswiththe requirementsof
theBasel framework.
Thefirst three assessmentscovered final capital regulationsin Japan and
draft capital regulationsin the European Union and the UnitedStates.
Subsequently, theBasel Committeeassessedregulationsin Singapore
and isnow evaluatingBasel III capital regulationsin China and
Switzerland.
Evaluationsof regulationsinAustralia, Brazil and Canada will begin
duringthe second half of 2013.
There will alsobenew assessmentsof EU and US regulations
immediatelyafter theyare finalisedand issued.
TheCommitteeaimsto completea firstassessment of BaselIII capital
regulationsin every member jurisdictionby the end of 2015.

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TheRCAP alsostudies theconsistencyof regulations‘effectson banks.
This work, whichtheCommitteestartedin 2012,is analysingthe sources
of variation acrossbanksin their estimatesof risk weightedassets
(RWAs).
The first set of findings, which was published in January 2013, identified
considerable variation in the risk weighting of assets held in the trading
book dueto factorsother than risk exposures.
Preliminaryresultsfor the assetsheld in thebankingbook point in a
similar direction.
While some variationin RWAs is natural and desirable, excessive
variationdiminishesthe comparability of thereportedcapital ratios.
Further analysisisthereforeunder way, and areaswhere Basel Committee
standardsmight bemodifiedtoreduceexcessivevariationare becoming
apparent.
TheCommitteehasbegun to consider what form some of these
modificationsmight take.
Three typesof policyoptionsare emerging:
(i)Improving public disclosure and regulatorydata collectiontoaid the
understandingof banks‘calculationsof RWAs;
(ii) Narrowingthemodellingchoicesfor banks;and
(iii)Further harmonisingsupervisorypracticeswithregard to model
approvals(toreducethe level of variationin RWAs).
In this context, the Committee‘s fundamental review of the market risk
framework will address some of the key findingswith regard to the risk
measurement of tradingbook assets.

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TheCommitteecontinuesitsworktofinalisethedevelopment of its
post-crisisreforms, includingtheremainingoutstanding componentsof
theBasel III framework.
With respect to Basel III‘sliquidityreforms, the final form of the
LiquidityCoverageRatiowaspublishedin January 2013.
TheCommitteeintendsto finaliseitswork on the leverageratio in
2013,and most if not all work on theNet StableFunding Ratio, the
tradingbook, securitisationand largeexposuresshould be finishedin
2014.
It remainsessential, however, that theBasel frameworkbe adopted and
fullyimplementedin a timelymanner.
While the BaselCommitteecontinuestostrengthenitsimplementation
monitoring effortsand theRCAP, it urgesG20 FinanceMinistersand
Central Bank Governors torenew their commitment to completion of the
Basel III regulatory reforms consistently, expeditiouslyand completely.
Progressreport on Basel III implementation
Full, timely and consistent implementationof Basel III is fundamental to
buildinga resilient financial system, maintainingpublic confidencein
regulatoryratios and to providing a level playing field for internationally
activebanks.
Toaid in the implementationprocess, the Basel Committeehas put in
placetheRegulatoryConsistencyAssessment Programme (RCAP) to
monitor, review and report on Basel III implementation.
It coversthree areas:
(i)Thetiming of Basel standardsadoption;
(ii)Theconsistencyof domestic regulationswiththeBasel standardsand
identificationof material gaps;and
(iii)Theconsistencyof theregulations‘effects.

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This report providesan overview of the statusof Basel III (including
Basel II and 2.5).
It providesanupdateon policy development workand on the progress
bankshave madein adjustingto thenew Basel standards.
Thereport alsooutlinesprogresson:
(i)Completing thedevelopment and issuanceof standardsunder the
Basel framework;
(ii)Adoption of rulesand assessment of consistencybyBasel Committee
members;and
(iii)analyzing outcomes(eg impact studiesand international studiesof
consistencyin bank risk measurement practices).
(i) Completing the Basel III framework
Thecore componentsof the Basel III capital frameworkwerefinalised in
2011. Since then, theBasel Committeehassubstantiallycompletedthe
remainingcomponents(seeTable1).
Thecapital frameworksfor global and domestic systemicallyimportant
banks(G-SIBs and D-SIBs) werepublishedin 2011and 2012respectively.

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TheCommitteeissuedthefinal standardfortheLiquidityCoverageRatio
in January2013,withimplementationscheduledtocommence in 2015.
It isactivelyworkingtofinalisethespecificationoftheotherkeyelements
of the Basel III package:in particular, theleverageratioand the Net
StableFunding Ratio.
Agreement on the Liquidity Coverage Ratio
On 6 January2013,the Group of Central Bank Governorsand Headsof
Supervision(GHOS) – the governingbody of the Basel Committee–
endorsedthe revisedLCR.
TheLCR is one of theBasel Committee's key reformsto strengthen
global liquidityregulationswiththe goal of promotinga more resilient
bankingsector.
TheLCR promotesthe short-term resilienceof a bank'sliquidityrisk
profile.
It doesthis byensuringthat a bank hasan adequatestock of
unencumberedhigh-qualityliquid assetsthat can be converted intocash
easilyand immediatelyin privatemarketstomeet itsliquidityneedsfor a
30calendar day liquiditystressscenario.
It will improve the banking sector's ability to absorb shocks arising from
financial and economic stress, whatever the source, thusreducing the risk
of spilloversfrom thefinancial sector tothe real economy.
TheLCR will be introducedon 1January2015with theminimum
requirement at 60%, risingin equal annual stepsof 10percentagepoints
toreach 100% on 1January2019.
This graduated approach is designed to ensure that the LCR can be
introduced without disrupting the orderly strengthening of banking
systemsor the ongoing financingof economic activity.

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(ii) Adoption of Basel III-based regulationsand assessment of
consistency
Table2summarisestheoverall progressBasel Committeemembershave
madein implementingthe Basel risk-basedcapital framework asof
end-March2013.
Membershavemade considerableprogresssincethe last report was
publishedin October 2012.
Moredetail regardingtheimplementationstatusof each member
jurisdictioncan be found in the tablesinAnnex 1, which includesummary
information about the next stepsand theimplementation plansbeing
considered.
Basel II
Of the27Basel Committeemember countries, 24have nowimplemented
Basel II fully.

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TheUnited States,whichisone of the three jurisdictionsyet to fully
implement Basel II, hasissuedfinal regulationson BaselII; however, its
largest banks arestill on parallel run for implementingthe advanced
approaches.
Theremainingtwojurisdictions(Argentina and Russia) havealso
initiatedtheprocessfor the implementation of Basel II and planto issue
thefinal regulationsin 2013.
Basel 2.5
Thenumber of members whohave implemented Basel2.5 fullyhas risen
to22. Of theremainingfive members,threehave initiatedstepsto
implement theregulations.
Basel III
Eleven members havenow issued final Basel III rules, whichare legally
in force in these jurisdictions.
Threemembershaveissuedfinal rulesbut havenot yet brought theminto
force.
All remainingmembers have issueddraft rules.
Going forward, the monitoring of the adoption of the Basel standardswill
be broadened to include other components of the framework, such as the
LCR and the requirementsfor G-SIBs and D-SIBs.
Thebroadened monitoringwill alsobecome part of the periodic updates
publishedbythe Basel Committee, thenext of whichis expected in
October 2013.
Regardingnon-Basel Committeemember jurisdictions,in 2012the
Financial Stability Instituteof the Bank for International Settlements
publishedtheresultsof itsbiennial surveyon the adoption of the Basel
standards.

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Seventy non-member jurisdictionsparticipatedin the survey, and more
than half indicatedtheywerein the processof implementingBasel III.
Consistency of domestic regulationswith Basel standards
In 2012,the Committeeconducted the first detailed assessmentsof the
content and substanceof thefinal regulationsimplementingtheBaselIII
packagein Japan, and the draft regulationsin the European Union and
theUnited States.
TheCommitteecontinued theprogramme withthe assessment of
Singapore, whichwaspublished in March2012,and is currentlyin the
processof assessingSwitzerlandand China.
AssessmentsofAustralia, Brazil and Canada will commence later this
year.
Also, new assessmentsof theEU and USassessmentswill be conducted
oncetheir final Basel III regulationshave been published.
TheBasel Committeeurgesjurisdictionsto addressmaterial
inconsistenciesbetweendomesticregulationsand the globallyagreed
Basel frameworkidentifiedby the final assessments.
It will monitor progressin future reviewsaswell asfuture analysisof
prudential outcomes.
Theseassessmentscontributeto greater consistencyin thenational
adoption of BaselIII standards.
For example, in thecaseof Singapore, the MonetaryAuthority of
Singaporepromptly resolved a number of initial assessment findingsby
amending thedomestic regulationsthat implement Basel III.
Theseamendmentscontributedtoa more consistent domestic
implementationoftheBaselframework,and thusset apositiveprecedent
for future assessments.

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(iii) Regulatory outcomes
Bank progressin adjusting to Basel III capital standards
Since2010the BaselCommittee hasperiodicallymonitored theprogress
of a sampleof banksin itsmember jurisdictionsin adjustingtothe
minimum BaselIII requirementsfor capital and liquidity.
Atotal of 210banksparticipatedin themost recent study, including101
largeinternationallyactive(Group 1) banks and 109other (Group 2)
banks.
Overall, banks aremakingsubstantial progresstowardsmeeting the
Basel III minimum standards.
Graph 1showsbanks‘capital shortfallsassumingfull implementationof
theBasel III requirementsasof 30June2012,includingchangestothe
definitionof capital and risk-weightedassets,and ignoring phase-in
arrangements.
Group 1banksthat could not currentlymeet theminimum requirements
wouldhave had an overall shortfall of €3.7billion for the CET1minimum
capitalrequirement of 4.5%, risingto€208.2billionforaCET1target level
of 7.0% (ie includingthe capital conservation buffer); thelatter shortfall
alsoincludesthe capital surchargesfor G-SIBs accordingto theupdate
publishedbythe Financial Stability Board in November 2012where
applicable.
As a point of reference,the sum of profitsafter tax prior todistributions
acrossthesame sampleof Group 1banksbetween1July2011and 30June
2012was€379.6billion.
Compared toDecember 2011, theaggregate CET1 shortfall withrespect to
the4.5% minimum for Group 1banksimproved – theshortfall was€8.2
billion (68.7%) lower.

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At the CET1target level of 7.0% (plusthesurchargeson G-SIBsas
applicable), the aggregate CET1 shortfall for Group 1banks also
improved – it was€175.9billion(45.8%) lowerthan in December 2011.
Therevised G-SIB surchargesdid not significantlychange the amount of
theshortfalls.
Graph 2 showstheweightedaveragecapital ratios for the banksin the
sample.
TheweightedaverageCET1ratio for Group 1banksassumingfull
implementationof theBasel III requirementsimproved from 7.1% in
June2011to 8.5% in June 2012,while their total capital ratioincreased
from 8.6% to9.9%.
As of end-June2012,average capital ratiosunder the Basel III framework
for a consistent sample of Group 2 bankswerehigher than thosefor
Group 1banks, but had improved onlyslightly.
CET1ratios increasedfrom 8.8% in June 2011to 9.0% in June 2012,and
total capital ratiosimproved from 11.1%to 11.3% over the same period.

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Studiesof risk-weighted assetsand consistency of regulatory
outcomes
As part of its implementationprogramme, the Basel Committeeinitiated
studiesintotheconsistencyof thecalculation of the risk-basedcapital
ratio (theratioof capital toRWAs) acrossbanks.
Inconsistenciesin the measurement of risk-weightedcapital ratiosmay
stem from either calculationsof capital or risk weightedassets,ie the
numerator or the denominator of the ratio(Table3).
Thestudies initiallyfocused on the consistencyof measuring RWAs, the
denominator of theratio.

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With regard tothemeasurement of RWAs, the Baselstandards
deliberatelyallowbanks and supervisorssome flexibility in measuring
risksin order toaccommodatedifferencesin riskappetiteand local
practices,but alsowiththe goal of accommodatinggreater precision.
Somevariation in RWAsshould thereforebe expected.
In addition, from a financial stabilityperspective,some diversityin risk
management practicesis desirableto avoid a situation in whichall banks
act in a similar way, whichpotentiallycould createadditional instability.
However,excessivevariation – that is, that doesnot reflect material
differencesin theunderlying riskstakenby banks – is undesirable and
could be harmful tothe international level playing field.
As a first step, the Committeeexaminedin more detail thedrivers of
possibleinconsistenciesin themeasurement of RWAsfor thebanking
book and tradingbook of banks.
Importantly, theobjectiveof thisworkwasnot tojudgethecorrectnessof
banks‘modelling choicesor toassessthecompliance of supervisory
approachestakenin different jurisdictions.
Rather, theobjectivewastoobtain a preliminaryestimate of thepotential
for variationin RWAsacrossbanks and tohighlight aspectsof the Basel
standardsthat contribute to this variation.

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Thefindingsprovideadirectionfor policy optionsthat canbeconsidered
if theCommitteewishestonarrowthepotential forvariationinthefuture.
In January 2013, the preliminaryfindingsregardingthe RWAsin the
tradingbook werepublished.
Theanalysis investigatingRWAsin the bankingbook is under way, and
itsresultsare expectedto bepublishedin the comingmonths.
Analysisof risk-weighted assets in the trading book
In the tradingbook study, the Committeeundertook
(i)An analysis of publicly available data of largegloballyactivebanks
with significant tradingoperationsand
(ii)Ahypothetical test portfolio exerciseto examinewhat methodology
choicesarethe greatestpotential driversbehind the variabilityof internal
market riskmodel outcomes.
Thereview of publicdisclosuresfocusedon a sampleof 16 global banks
with significant tradingactivity.
Theobservationperiodincludedthemost recent changesrelatedtoBasel
2.5, whichhad takeneffect in some jurisdictionsbut not all.
Despitethe asynchronousadoption of Basel 2.5, value wasfound in
comparing market riskRWAs acrosspre- and post-Basel 2.5 jurisdictions
becausemany of theissuescarryover tothenew regime, for example
regardingthe contribution to RWAs from internal models and
standardisedapproaches.
For some banks, thedisclosuresrequired under Basel II (Pillar 3)
factored intothe analysisand provided a chancetoevaluatethe utilityof
such disclosures.
Basedon public disclosures,the analysisshowedconsiderablevariation
in averagepublishedRWAsfor tradingassetsand provided some

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indicationthat differencesin the composition and size of trading
positionsare correlatedwith banks‘averagemarket riskRWAs.
However,thequalityof disclosureswasgenerallyfound tobeinsufficient
toallowinvestorsand other interestedpartiesto assesshow much of the
variationreflectsdifferinglevelsof actual risk andhowmuchisaresult of
other factors.
Thefocusof the hypothetical test portfolioexercisewasto discover the
designelementsof internalmodelsthat havethegreatest potentialimpact
on thelevel of variability in market risk RWAs.
Hypothetical test portfoliosovercome thelimitationsencountered when
attemptingto usepublic and supervisorydata on real portfolios to
investigatepotential sourcesof variationbecausetheycontrol for
differencesin portfolio composition.
However,they showonly potential and not realised variation in outcome.
Moreover,inthiscase, theexercisefocusedon aseriesofsimplelongand
short positions,designedtoreveal theimpact of model designfeatures.
Toshed light on theeffect of different sources of variation on more
realisticportfolios, theCommitteeplanstoconduct afurtherhypothetical
test portfolio exerciselater in 2013.
This will includeother, more complex, hypothetical test portfolios, with
theaim ofhelpingtheCommitteetodeepenitsanalysisofthevariationin
risk measurement of trading booksacrossbanks.
Thehypothetical test portfolioexerciseindicatedthat there can be a
substantial differencebetweenthebank reporting the lowestRWAsand
thebank reportingthe highest.
This outcome isattributedto a rangeof factors:
- Asizeableportionof thevariation isduetosupervisorydecisions
applied either toall banksin a jurisdiction, or to individual banks.

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An exampleof the former wouldbe policy decisionstorestrict
modellingoptions(eg to disallowanydiversification benefit between
typesof risk).
An exampleof the latter would be the application of supervisory
multipliers:around onequarter of thetotal variation in the
hypothetical diversified portfolio could beattributed to thissingle
factor.
Thesesupervisoryactionstypicallyresult in higher capital
requirementsthan wouldotherwisebe the casebut can alsoincrease
thevariation in RWAs betweenbanks, particularlyacross
jurisdictions.
Thesesupervisoryactions,particularlyat anindividualbank level, are
oftennot disclosed.
- Another key sourceof variation ismodellingchoicesmade by banks.
Theexercisefound that a small number of keymodellingchoicesarethe
main driversof the remainingmodel-drivenvariability.
Thestudydid not seek to identify the optimal level of variation, but the
preliminaryfindingshighlight potential policy optionsthat could reduce
for variationwhereit is consideredexcessive.
Thesepolicy optionscomplement important policyinitiativesthat are
already under way, such asthe fundamental review of thetrading
book, and policy work on disclosures.
Thepolicyoptionsare further discussedbelow.
Analysisof risk-weighted assets in the banking book
TheCommitteeisfinalisingits first studyon sourcesof material
differencesacrossbanksin RWAsin thebanking book.

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Aswiththetradingbook, theCommitteehasbeenassessingtheextent to
whichthesevariationsare driven by differencesin risk levelsor in
practices,by analysing data and studying banks‘risk assessment and
quantification practices.
TheCommitteerevieweda widerangeof existinganalysesof RWAs
acrossbanksand countries toassessmethodologies and identify possible
driversof RWAvariation.
Thestudieshighlightedmany potential drivers,most of whichsuggested
that RWAdifferencesare due to both risk-basedand practice-based
factors.
Risk-based factors are those that stem from differences in underlying risk
at the exposure or portfolio level and in business models, including asset
classmix.
Practice-basedfactorsincludedifferencesin bank practices(eg
approachestorisk management and measurement) and in the regulatory
environment (eg supervisorypractices,implementinglawsand
regulationsincludingnational discretion, accounting standards).
While the focusof the studiesvaried acrossthese factors, noexisting
studycould pinpoint thedefinitivecausesof RWAdifferencesbetween
banks.
Supervisory data analysis
TheCommitteeanalysed supervisorydata it collectedaspart of its
ongoing capital monitoring.
Theanalysis covered 56large, internationallyactivebanking
organisationsand 44 non-internationallyactive banking organisationsin
15jurisdictions.
Theanalysis suggeststhat a major portionof the variation in RWAsis
drivenby asset classmix, a risk-baseddriver.

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Theremainingdispersion is duetodifferent risk weightswithin asset
classes– either from differencesin actual risk (risk-based) or its
measurement (practice-based).
Key practice-baseddrivers includethechoiceof modellingapproachfor
credit risk, capital floor adjustment, the treatment of defaultedand
securitisationexposures, aswell asthecalibrationof associated
probabilitiesof default (PDs) and losses-given-default (LGDs).
Many, although certainlynot all, of thesedriversreflect elementsof the
flexibilityprovided tobanksand supervisorswithin the Baselframework.
Portfolio benchmarking analysis
A portfolio benchmarking exercise was used to explicitly investigate the
magnitude of practice-based differences, by controlling for risk through
the useof common obligorsacrossbanks.
Thirty-twobanks from 13jurisdictionsparticipatedin the
exercise,reporting PD and LGD estimatesfor a set of
sovereign, bank, and corporateexposures.
The findings indicate that there is considerable consistency across banks
with regard to the relative riskinessof obligorsin the exercise (ie the rank
order in terms of risk), but that there are sizeable differencesin the levels
of the perceived risk.
Theanalysis suggeststhat different estimatesof the PD and/ or LGD for
thesameexposurescreatematerial differencesin risk-weightedassets
acrossbanks.
Range of practicesand meetingswith banks
TheCommitteealsoidentified and assessedthesignificanceof a list of
practice-baseddriversof RWA variation.

P a g e | 27
Many of thesedriversare provided for in theBasel standardsor in
individual countries‘implementation of theBasel framework.
Further insightson practiceswerecollectedthrough meetingsin March
2013with 12of the 32 banksthat participatedin theportfolio
benchmarkingexercise.
Themeetingsfocused on the banks‘RWA modellingpracticesfor
bankingbookexposureswithaviewtodevelopingabetterunderstanding
of the specific driversof observed variation.
Potential policy optionsand directions for future work
Thepreliminaryresultsfor both thetradingbook and the bankingbook
indicateconsiderablevariation in average risk-weightedassetsacross
banks,of whichonlya part can be explainedbyvariation in actual
risk-taking.
While some amount of variation isexpectedin any regime basedon
internalmodels, whereit is consideredexcessivethe findingssuggest a
potential direction for future policy work that could narrow down the
potential variation.
Generally, the analysis highlightsthree potential typesof policy options
that could be consideredin thefuture:
(i)Improvement of public disclosureand regulatorydatacollectiontoaid
in theunderstandingof risk-weightedassets;
(ii)Narrowingdownthemodellingchoicesfor banks, includingthrough
further use of floorsand/ or benchmarks;and
(iii)Further harmonisation of supervisory practiceswith regard to model
approvals.
At this stage, the suggestionsfor policyoptionsshould not be seen as
comprehensive, nor aspre-emptingany specific policy measures,but

P a g e | 28
rather aspotential directionsfor future work tobe consideredby the
Committee.
Furthermore, the potential policymeasuresshould not be seenas
mutuallyexclusive: some combination of the three could be appropriate
goingforward.
Morebroadly, the Committeehasbeen consideringthe appropriate
balancebetweenrisk sensitivity, comparabilityand simplicity.
In thenear term, theCommitteeintendstopublisha paper settingout its
thinkingon the relevant policy trade-offsand identifying potential policy
optionsthat the Committeeintendsto explore tomakethe regulatory
frameworksimpler and more comparable.
Annex 1
TheBasel III frameworkbuilds upon and enhancesthe regulatory
frameworkset out under BaselII and Basel2.5.
Thetablesherein thereforereviewmembers‘regulatoryadoptionof Basel
II, Basel2.5 and Basel III.
- BaselII, whichimprovedthemeasurement ofcredit riskandincluded
capture of operational risk, wasreleased in 2004and wasduetobe
implemented from year-end 2006.
TheFramework consistsof threepillars:Pillar 1containsthe
minimum capital requirements;Pillar 2 setsout the supervisory
review processand Pillar 3 correspondstomarket discipline.
- Basel 2.5, agreed in July2009, enhanced themeasurementsof risks
relatedtosecuritisation and trading book exposures.
Basel 2.5 wasduetobe implemented no later than 31December 2011.

P a g e | 29
- In December2010,theCommitteereleasedBaselIII, whichsethigher
levelsfor capital requirementsand introduceda new global liquidity
framework.
Committeemembersagreedtoimplement Basel III from 1January
2013,subjecttotransitional and phase-inarrangements.
In November 2011, G20 Leadersat theCannesSummit calledon
jurisdictionstomeet their commitment toimplement fullyand
consistentlyBasel II and Basel 2.5 by end 2011, and Basel III, starting in
2013and completingby 1January 2019.
In June 2012,G20 Leadersat the LosCabosSummit reaffirmed their call
for jurisdictionstomeet their commitments.
This messagewasreiteratedin Moscowin February 2013by theG20
FinanceMinistersand Central Bank Governors.
Methodology
Thedata contained in this annex arebasedon responsesfrom Basel
Committeemember jurisdictions.
Thefollowingclassificationis used for thestatusof adoption of Basel
regulatoryrules:
1.Draft regulation not published:no draft law,regulation or other official
document hasbeen made public todetail theplanned content of the
domesticregulatory rules.
This statusincludescaseswherea jurisdictionhascommunicated
high-levelinformationabout itsimplementation plansbut not detailed
rules.
2.Draft regulation published: a draft law, regulation or other official
document is alreadypublicly available, for examplefor public
consultation or legislativedeliberations.

P a g e | 30
Thecontent of the document hasto be specificenough to be
implemented whenadopted.
3.Final rule published:the domesticlegal or regulatory framework has
been finalisedand approved but isstill not applicableto banks.
4.Final rulein force: thedomesticlegal and regulatory frameworkis
already applied to banks.
In order tosupport and supplement the statusreported, summary
information about thenext stepsand theimplementationplansbeing
consideredby membersare alsoprovided for each jurisdiction.
In additiontothe statusclassification, a colour code is used toindicate
theimplementationstatusof each jurisdiction.

P a g e | 31

P a g e | 32

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P a g e | 34
Annex 2
Singapore review
In March2013, theBasel Committeecompleteditsassessment of
Singapore.
Theassessment evaluated the localregulationsestablishedby the
MonetaryAuthority of Singapore (MAS), whichimplementsBasel III in
Singapore.
Theregulationswerepublished in September 2012and further amended
in November 2012.
Additional regulationsimplementingassociateddisclosurerequirements
werepublishedin December 2012and werealsoconsidered in the
assessment.
Theassessment found that Singapore's overall capital regimeis in line
with therequirementsof theBasel framework.
Singapore'sregulationswerefound tobe ―compliant‖ in 12out of the 14
componentsassessed.
While twoother componentswereassessedas―largelycompliant‖, the
deviationswerenot consideredto be material by the assessment team.
As a result, the overall framework wasgraded withan overall assessment
outcome of ―compliant‖.
Theassessment team alsonoted Singapore's activeand continuing
commitment totheglobal regulatory reforms that form part of the
packageof reformsannounced by the Basel Committee.
In this regard, it must be highlightedthat the MonetaryAuthority of
Singapore (MAS) wasable to promptly resolvea number of initial

P a g e | 35
assessment findingsby issuing amendmentsto thedomestic rulesthat
implement Basel III.
Theseamendmentscontributedto thefavourableassessment outcome.
Annex 3
Sample of banks included in the Basel Committee‘s monitoring
exercise
In 2010 the Committee started periodically monitoring the progress of a
sample of internationally active banks in adjusting to the new Basel III
standardsfor capital and liquidity.

P a g e | 36
Thetablebelow showsthe distributionof participationby jurisdictionin
themost recent study.

P a g e | 37
‗Oil and Gas, Blondesand Over-Accessorized
Brunettes, and Ruthless, Hard-Drinking
Cowboys‘
(With Reference to Sheikh Zayed, Diana Natalicio, My Nephew
Charlesand President Peña Nieto)
Remarksat theUniversityof Texasat El Paso
Centennial Lecture
Richard W. Fisher, President and CEO
Federal Reserve Bank of Dallas, El Paso, Texas
I so appreciate being here at the University of Texas at
El Paso (UTEP), my first outing since returning from a
trip totheUnitedArab Emirates.
Thefounder of theEmirates—acollectionof former ―Trucial States‖
alongthelowercoast oftheArabian Sea—wasSheikhZayedbin SultanAl
Nahyan, a wiseman whohadno formal education but knew of its
enormousvalue.
He said, ―Educationis a lanternwhichlightsthedark alleysof
ignorance.‖
I mention this becauseI cannot think of an educator whoembodies this
practical dictum better than Diana Natalicio.
President Natalicioisa bright, shininglantern in the worldof education.
Actually, that‘san understatement:
Sheisa klieg light!
We are blessedto have her lead UTEP and move Texasand thenation
forwardon the frontiersof higher education.
I am tremendouslyhonored tobe introduced by her. Thank you, Diana.

P a g e | 38
I am goingto depart from my usual format today and rely heavily on
slides—slidesthat provide afactual basisfor what isgoingtobeadoseof
―Texasbrag.‖
With itsbranchesin El Paso, SanAntonio and Houston, the Federal
ReserveBank of Dallas—theFederal Reserve‘sEleventh District—covers
about 27millionpeople over 360,000squaremilesstretchingfrom
northern Louisiana tosouthern New Mexico.
Over 96percent of theeconomic output of the district comesfrom Texas.
I find that when I speak about my district in foreign lands—say, in New
YorkorWashington, D.C.—thereisastereotypicalreactionnot unlikethe
imageprojected by the TV showDallas.―Of course you are doingwell,‖
theysay.
―You are rich in oil and gas, blondesand over-accessorized
brunettes,and ruthless, hard-drinkingcowboys.‖
Today, I want to set the recordstraight.
PricesAre Presently Stable; Employment IsFar From Optimal;
the Efficacy of Quantitative Easing Is asYet Unclear
Theroadtodignityisthroughwork:Jobsprovidethemeansforeconomic
advancement.
As the nation‘scentral bank, the Federal Reserveistasked with
maintainingprice stability—a common monetary policy goal of all
responsiblecentral banks.
But under the lawscreated by Congressthat govern our franchise and
allowit to operateindependently, theFed worksunder a dual mandate—
toconduct monetary policy that keepspricesfrom inflatingor deflating
and to achievefull employment.
At the moment, and for the foreseeablefuture, neither inflationnor
deflationappearson the forecasthorizon.

P a g e | 39
However, the longer-term inflationaryconsequencesof themassive
quantitativeeasingprogramswehaveundertaken—programsI have
opposedin our Federal Open Market Committee(FOMC) meetingsbut
that have been approved by themajorityof the committee—
are asyet unclear.
Thoseaftereffectswill depend on how artful the committeewill be in
unwindingthat accommodation on a timely basis.
Indeed, one of the signal achievementsof Federal Reserve policy under
Ben Bernanke‘sleadershipis tohave formalizeda long-term inflation
target of 2 percent, something theFOMC had never beforedistinctly
declared.
Presently, the 12-month inflation rateis 1.6percent, accordingto our
calculationat the DallasFed, wherewedoa ―trimmedmean‖ analysisof
178itemsconsumersuse,includinggunsand beer (hopefullynot enjoyed
simultaneously) and thecost of gasoline,food, getting your hair cut or
your shoesrepaired, or buying an electronic device.
Given that thetrimmed mean analysis hasproven tobe an excellent
rule-of-thumbpredictorofheadlineinflationoneyear forward,wecansay
with some degreeof confidencethat, at present, wearekeepinginflation
at or below our 2percent target.
Employment, however, is not at a comfortablelevel.
Pick up anynewspaperor goto anynewswebsiteor broadcastmedium
and you will read or hear of the still-too-high unemployment rate that
bedevils our economy.
Monetarypolicyactswithalag, includingunorthodoxmonetarypolicy as
it is nowbeingconducted.
It wouldappear from some studies and from anecdotal evidencethat
companies are startingto usethecopiouscheap money theyhave access
tofor investing in capital projectsand employing increasingamountsof
workers.

P a g e | 40
But it isnot yet clearthat wewillachieveajustifiablebangforthetrillions
of bucksthe Fed hasfloodedtheeconomy with.
Onlytimewill tell if theefficacyof quantitativeeasingwehave
undertaken wasjustifiable in regard to job creation and deliveringon the
second component of our dual mandate.
Yet many things doemerge when you examine the entrailsof
employment data from acrossthe country.
Onethingis that you learna lot about Texas, whichis thefocusof my
remarks today.
‗If You Pull TexasOut of the Puzzle, the Country FallsDown‘
For thepast 22years, Texashasoutgrownthecountryby a factor of more
than 2-to-1.
Here is a slidethat showsthe percentageincreasein jobscreatedby
several largestatesand for the U.S.asa wholesince1990:

P a g e | 41
And here is a look at therate of job creationfor thosesame statesand the
U.S. asa wholesince2000:
We wereone of thelast statesto gointothe recent recession and one of
thefirst tocomeout. In termsofjobs,asof now,10stateshavecomeback
toor have exceededemployment levelsthat prevailed beforethe crisis:
Alaska, Louisiana, Massachusetts,NewYork, North
Dakota, Oklahoma, South Dakota, Texas,Utah and West Virginia.
The Federal Reserve has no index that measures the number of blondes
or ruthless cowboys in Texas, but we can account for the influence of oil
and gason our state‘swelfare:
Oil and gasextractionand mining support directlyaccountsfor 2.4
percent of our workforce—two-point-four percent.
And the energy sector‘stotal contribution toour state‘sgrossdomestic
product (GDP) is roughly 10 percent.
Soyes, the foreignersare correct: We have a strong energy sector in
Texas.

P a g e | 42
We are theNo. 1producer of oil and gasin the nation.
We producemore oil than Venezuelaand more natural gasthan Canada.
On net, high energypricesdo, indeed, benefit Texans.
But look at this slideof the number of jobscreated by sector in 2012:
Oil andgasandminingandtheir supportservicesaccountedfor22,100,or
lessthan 7percent, of the 335,500jobscreated in Texaslast year.
Professional and businessservicesaccounted for 74,200;
trade, transportationand utilities62,000;leisureand hospitality52,400;
educational and health services41,000;and construction 27,000.Each of
thesesectorscreatedmore jobsthan theenergy sector.
Of course,the oil and gassector haslargemultipliers,sotheoverall
economicimpact is greater than justthese22,100jobs.
TheUniversity of Texasat SanAntonio—your sister organization—
estimatesthat the EagleFord Shale generated over $61
billion in economicimpact in 2012.

P a g e | 43
As this chart shows, however,oursis a diversifiedeconomy, creatingjobs
acrossthespectrum.
―But thesejobsareall lowpaying,‖ our uninformed friendssay.And to
that I respond:―You are right.
We createmore low-paying jobsin Texasthan anybody else.
Yet look at this breakdownof job creationby income quartile for Texas
versustheUnited StatesminusTexasfor the past 10-plusyears‖:
We created a lot of low-payingjobs. But wealsocreated far more
high-paying jobs.
Most importantly, while the UnitedStateshasseen job destructionin the
twomiddle-incomequartiles, Texashascreated jobsfor thosevital
middle-incomeworkers,too.
Thebottom line—wehave experiencedgrowthacrossall sectorsand in
all income categories.

P a g e | 44
And it continues:In February, job growthin Texaswasan annualized6.9
percent.
Year todate, construction, tradeand transportation, and professional and
businessserviceshave ledthepack in what webelievewill be another year
ofemployment growththat, knock onwood, willapproach3percent.
Here aresomeotherfactsthat helproundout theeconomicpictureof our
state.
Our banksare more profitablethan thosein the rest of thenation …
In the housing sector, wehave fewerunderwatermortgages…

P a g e | 45
Robust new-homeconstruction …

P a g e | 46
And an export sector that hascome out of the recession like gee-whiz.
In, fact, you can seefrom this graph that without Texas,thetopblueline,
exportsfrom the rest of theUnited States, indicatedby the red line, are
hoveringaround thepeak level of 2008:
My littlenephew,Charles, wasplaying witha three-dimensional wooden
puzzle map of the United Statesin hispreschool classtheother day.
He camehome withthepiece that wasTexasand a smirk on hisface:
―Mom,‖ he said, ―guesswhat?If you pull Texasout of thepuzzle of the
UnitedStates,the rest of thecountry fallsdown!‖
Although littleCharleslivesin Massachusetts,he getsthepicture.
It came asno surprisewhena recent study by the highlyrespected
BrookingsInstitution, asreported in the Wall Street Journal last
week, revealed that only14of thenation‘s100biggest metropolitanareas
havemore peopleemployed than theydid before the 2007–09recession
and

P a g e | 47
that six of them arein Texas:Austin, San
Antonio, McAllen, Dallas,Houston and … El Paso.
―Robust employment in the oil and gasindustrieshelped the Texas
cities,‖the article read, ―although data from the TexasWorkforce
Commission suggeststhe job recovery hascome from a varietyof
industries.‖
Amen to that.
El Paso at a Crossroads
You‘ll notethat El Pasowasmentionedin theBrookingsstudy. Let‘s talk
a littleabout this uniquecity.
It‘s nosmall wonderthat of the 23,000studentsenrolledat UTEP, 77
percent areMexican–Americansand another 6percent commute from
Ciudad Juárez, acrossthe border.
El Pasois at the verynexusof the culturesand economiesof two
countries.
As Roberto Coronado, our economist and assistant vice president in
chargeat our El PasoBranch, likes topoint out, ―Given itsunique
geographicposition, El Pasois very good at importing recessionsboth
from the north and from the south of theRio Grande.‖
I wouldadd that it‘s alsogood at drawingfrom thebest of both countries
in recoveries.
TheEl Pasolabor market hasoutperformed that of theU.S.for several
years.
Here is a graph that showshow the El Pasoemployment picture has
changedrelativeto the U.S.sincethe onset of theGreat Recession:

P a g e | 48
Now, as the following chart demonstrates, it remains a fact that the local
employment picture is less bright in El Paso than in Texas‘s other major
metroareas.

P a g e | 49
Theunemployment rate here is hoveringaround 9 percent. El Paso‘s
unemployment rate hashistoricallybeen 2 percentagepointshigher than
theU.S. rate and 3.2percentagepointsabove the Texasrate.
In part, this isdue topopulation growth. El Pasohad more than 21
millionborder crossingsin 2011alone.
Most of thesevisitorscametoshop, but manystayed and looked for jobs.
Thesevisitorsincreasethe number of job seekersin theunemployment
equation, drivingthe rate upward.
Of additional concern is that El Pasoismore dependent on federal
government employment thananyotherTexascity, with5percent ofyour
workforcecoming from the public sector.
And that isbeforeaccounting for the payroll of Fort Blissitself and the
impact it hason private-sectoremployment and consumption.

P a g e | 50
Clearly, El Pasoisquitevulnerabletoconstrictionin thegrowthoffederal
spending. This will ultimatelypresent seriouschallengesasthe federal
government strugglesto right its fiscalimbalances.
The Good News
But there isgood newsthat offsetsthat risk:
ThankstotheNorthAmerican Free TradeAgreement, or NAFTA—an
agreement that, asDianamentioned, I played a rolein implementingas
deputyU.S. trade representative—El Pasois nolonger at theedgeof the
UnitedStatesbut, instead, at a strategic locationin thevast North
American market.
In this context, the maquiladorasof Ciudad Juárez become an important
factordeterminingEl Paso‘seconomicfate.
Therelationshipexistsvia a ricochet effect that beginswithU.S.
industrial activitypickingup, sayin automanufacturing, followedbynew
production ordersbeingsent toCiudad Juárez maquiladoraplantsand
then economicbenefits flowingback toEl Paso.
Theflowback toEl Pasocomesfrom firmson this sideof theborder
providinglogisticalsupport, insuranceand other servicestothe
maquiladoras—aswell asin the aforementioned form of maquiladora
employeesshoppingand consumingmore on thisside of the border.
And, asthis tableshows, it resultsin an increaseof high-value-added
salesof El Paso-basedservicesintoCiudad Juárez, making up for
reductionsin manufacturingjobson thissideof theborder:

P a g e | 51
Sigue México!
As the maquiladoraexampleillustrates,Mexicohasa significant impact
on thefate of theEl Pasoeconomy.
ThisisfortunatebecausetheMexicaneconomyisbeingtransformedtoa
greater degreethan most people here in El Norte understand.
On Sunday, theDallasMorningNewskindlyran an op-ed pieceI wrote
based on the workof our DallasFed economists, titled ―MexicoOutdoes
theU.S. on FiscalDiscipline.‖
Thearticle outlinesthe great progressMexicohasmade in transforming
itseconomy and thesignificant stepstaken by President EnriquePeña
Nietoin the footstepsof his predecessors, from President Calderon back
toPresident Salinas.
Here are thefacts:

P a g e | 52
MexicorecoveredmorequicklyfromtherecessionthantheUnitedStates.
Mexico‘s3.3percent GDP growth in 2012compareswiththeU.S.‘s1.7
percent.
Mexico,home to 1980shyperinflation and a poster child of that decade‘s
LatinAmerican debt crisis,hasrecorded a coreconsumer priceindex
annual inflation ratebelow 3percent for the last three months. In
fact, inflationin Mexicohastrended down for twodecadesfollowingtwo
important reforms:central bank independencein 1994and adoption of
inflationtargetingin 2001.
Meanwhile, the peso, floatingsincelate 1994, held itsownthrough the
global financial crisis.
And year todate, thepesohasgained 6.9percent against the dollar.
Low and stableinflation, together witha steadypeso, hasprotected the
purchasingpowerof the Mexicanconsumer and allowed nest eggsto
grow.
Thosenest eggscan now be safelydepositedin banks.
After a horrific banking crisisin 1994–95 and an ensuing decade of
stagnant lending, Mexico‘s banking industry is growing again and
financial access, whilestill limited, is expandingquickly.
Thenumber of Mexicanbanksincreased14.3percent in 2012;in the
U.S., thenumber of institutionscontracted3.1percent.
It maybesurprisingtoyou that Mexicanbanksarealsobettercapitalized
than U.S.banks.Asof Dec. 31,2012,equity-to-asset ratioswere11.1
percent at U.S.banksand 15.9 percent at Mexicanbanks.
On the fiscalfront, Mexico‘s2012budget deficit wasa respectable2.6
percent of GDP, whichcompareswith7 percent here.
For all their differences, Mexicanlawmakersontheright andthelefthave
a commitment tofiscal discipline.

P a g e | 53
Theyadopted a balanced-budget rule in 2006 and have chosen to abide by
it rather than take the ―kick the can down the road‖ approach of the U.S.
Congress.
As a result, Mexico‘snational debt is stableat 28percent of GDP, while
here it raced past $16 trillion in 2012,about 105percent of GDP.
Mexicohasalsoremaineda staunch proponent of free trade.
Exportsand importsnow make up 62percent of Mexicaneconomic
output versus17.5 percent asrecentlyas1980.
SinceMexico joined the GeneralAgreement on Tariffsand Trade (the
forerunner of theWorld TradeOrganization) in 1986and ratifiedNAFTA
in 1994, it hasforged 12 tradepactswith44 nations.
With all theprogressin themacro economy, banking, financeand trade,
structural reformsare what Mexiconow needstocatapult it toa
leadershiprole among emerging-market economies.
If President Peña Nieto‘sfirst 100days in office areany indication, this
criticalnext step is underway.
He hasengineeredthePactoporMéxico(Pact for Mexico)withtheother
politicalparties;arrested Elba Esther Gordillo, thecorrupt leaderof the
massivenational teachers‘union; brought a class-action suit against
CarlosSlim‘s growth-retardingtelecommunicationsempire; and begun a
national conversation about reformingthecountry‘swoefully
underperforming, yet potentiallyrich energysector.
If this effort at structural modernizationcontinues, Mexico‘sgrowthwill
increasesignificantly.
All of this will begood for El Paso. Just asEl Pasosufferswhenrecession
afflictsboth sidesof theborder, it will prosper asexpansion takeshold
here in the U.S.and in Mexico.

P a g e | 54
TheGood, the Bad and the Comical
Let me giveyou a pictorial summary of this lecture:
We are blessedby a force of nature named DianaNatalicio (aTexas
blonde, bythe way!) …
Courtesyof UTEP UniversityCommunications

P a g e | 55
By UTEP asa symbol of El Paso‘scritical place at thecrossroadsof
NorthAmerica…
By having the good fortune to live in Texas…

P a g e | 56
And by sharing a border withan increasinglysuccessful neighbor toour
south.
But wealsohave challenges.
It wouldbeunbecomingof a central banker tobeentirely optimistic—we
are a prettysober species.
Sohereis thebad news.
Here‘swhat is holding back the economic progressof El
Paso, Texas,MexicoandAmerica:
Yup—Washington.
TheFederal Reservehasprovided plentyof, if not toomuch, high-octane
fuel in the form of cheap and abundant money to propel the economy
forward.
Our southern neighbor, Mexico,is responsiblymanaging itsfiscal affairs
and structural reforms(asis our northern neighbor, Canada).

P a g e | 57
Texasisshowingthe nation the waytocreate jobsand encourage
prosperitywitha highlydiversified economy.
And yet Congressandexecutivebranchcannot agreeon abudget, or on a
path forward for taxesand spending, or on a regulatorystructurethat
incentivizesbusinessto put people back towork.
Thisisthesubjectofanentireseparatelecture.But tosummarizetheroot
fiscalproblem of past Congressesand administrations,Democrat- or
Republican-led, my staff found a clip onYouTubethat sumsit up better
than words:www.youtube.com/ watch?v=Df_6r_tZqGo.
That sketch saysit all.
We must all praythat our president and our congressionalrepresentatives
will find a wayto reversetheir spendthrift waysand do what isright by
puttingusback on thepath of fiscal probity.
El Pasoand Texashavedonewell despitethedisorderly behavior of our
nation‘sfiscalauthorities.
Imaginehow wellwewoulddo if theyactuallymanaged toget their act
together!
As weeagerlyawait that day, let usbe thankful for the exceptional nature
of this great state, this great city and thiswonderful university.
Ándale Pues
Gracias.

P a g e | 58
Quantitative and qualitative
monetary easing
Speechby Mr Haruhiko
Kuroda,Governor of theBank of
Japan, at a meetingheld by theYomiuri
International Economic Society, Tokyo
Introduction
It is a great honor tobe invitedto thismeetinghosted by theYomiuri
International Economic Society today. This ismy first speech as
Governorof the Bank of Japan.
Today, I wouldlike toexplain the ―Quantitativeand Qualitative
MonetaryEasing‖ that wedecided toembark on last week.
I. Basic thinking
WhenI wasappointedasthegovernor,I hadthefollowingbasicthinking
in mind.
Thefirst isthatweshoulddowhateverisnecessarytoovercome
deflation, whichhasbeen causing a deteriorationin Japan‘seconomy for
nearly15years.
TheBank of Japan hasengaged in a widerangeof monetaryeasing
efforts– includingthe implementation of the zero interest ratepolicy, the
quantitativeeasingpolicy, and comprehensivemonetary easing.
Despiteitscumulativeefforts, there havebeen noeasily derived concrete
results,and I have felt stronglythat weshould make all-out efforts to
utilizeevery possibleresourcebestowedupon the Bank, rather than to
adopt an incremental approach – or, put differently, toadopt gradualism.

P a g e | 59
Thesecond point is the importanceof committingstronglyand clearly
that the Bank is responsiblefor achievingthe pricestability target.
At the MonetaryPolicy Meetingheld in January, the Bank – on itsown
judgment – set theprice stabilitytarget at 2 percent in termsof the
year-on-year rate of changein the consumer price index (CPI) and made
a groundbreakingcommitment to achievethat target at theearliest
possibletime.
Regardingthe time frame for achieving thetarget, lookingat other
economies,many central bankshave been making effortstoachievethe
pricestabilityinthemedium term, withatimehorizonof about twoyears
for the effectsof monetary policyto permeatethe economy.
I have found it appropriate for Japan‘seconomy aswell to make a
commitment witha time horizon of about twoyears.
Thethird point isto conveythe Bank‘sstrong policystancetomarkets
andeconomicentitieswith clarityand intelligibility, therebydramatically
changingthe expectationsof market participantsaswell asfirms and
households.
During the course of 15 years of deflation, the public‘s behavior has been
based on the assumption that priceswould either decline or be unlikely to
rise.
It is necessaryto eliminatedeflationaryexpectationsthrough theBank‘s
strongcommitment and intelligible explanation.
And lastly, weshouldentera new phaseof monetaryeasingboth in terms
of quantityand qualityin order to underpin such a commitment.
There is a reasontoemphasize the qualitativeaspect of monetary easing
alongwith itsquantitativeaspect.
While the Bank of Japan and other central banks in advancedeconomies
havealmost exhaustedfurther declinesin short-term interest rates,they

P a g e | 60
now engagein policies to increasethesize of their balancesheetsaspart
of unconventional policy measures.
There is nowa broad consensuswith regard totheeffectof balancesheet
expansion.
That is, thecentral banks‘purchasesof government bondsand other
assetsfrom themarketshavetheeffect of encouragingfurther declinesin
long-term interest ratesand loweringrisk premia of asset pricesby
absorbingrisks– such asthe one stemmingfrom interestrate
fluctuations.
Consequently, it becomesimportant todeterminenot only how much
liquidityto supplybut alsohowto supplythat quantity.
Even withthe same amount of liquidity, purchasingshort-term T-Bills
producesdifferent effectsthan in the casewherethe Bank purchases
other assetssuch aslong-term JGBsand risk assetslike exchange-traded
funds(ETFs).
Thus, it is important to workon two aspectsof monetary easing, both in
termsof quantityand quality.
II. Introduction of the ―Quantitative and Qualitative Monetary
Easing‖
With thisbasicset of views,I assumed thegovernorshipand attendedthe
MonetaryPolicyMeetingonApril 3 and 4.
Followingdiscussion withother Policy Board members and taking into
account the staff view regardingpracticalities, wecame toa conclusion.
Thename of the quantitativeand qualitativemonetary easingthat we
introduced this timespeaksfor itself.
This is indeed a new phaseof monetary easingboth in termsof quantity
andquality.

P a g e | 61
Strong and clear commitment
First, the Bank decided– asI mentioned earlier – toconveya strong and
clear commitment.
TheBank clearlyannounced in a statement that ―[it] will achievethe
price stability target of 2 percent in termsof the year-on-year rate of
changein theconsumer price index (CPI) at the earliestpossibletime,
with a time horizonof about twoyears.‖
This is thedecisionof the Bank‘sPolicyBoard – namely, it expressesthe
will of theBank asan institution.
New phase of monetary easing both in termsof quantity and
quality
Next, the Bank decidedtoembark on thequantitativeand qualitative
monetary easingasa meansto underpin thiscommitment.
Concretely, witha view topursuing quantitativemonetary easing, the
Bank decidedtochangethemain operatingtarget for money market
operationsfrom theuncollateralizedovernight call rate (i.e., interest
rates) to themonetary base(i.e., quantity) and conduct moneymarket
operationssothat themonetary basewill increaseat an annual pace of
about 60–70trillion yen.
Themonetarybaseisthecurrencysuppliedtotheeconomy asawholeby
theBank; more specifically, it is the sum of banknotesand coinsin
circulation and financial institutions‘current account deposits at theBank
of Japan.
As of end-2012,its amount outstandingwas138trillionyen, and it is
expectedto reach about 200trillion yen at end-2013and 270trillion yen at
end-2014.
It will almostdoublein twoyears.

P a g e | 62
This accountsfor nearly60percent of nominal GDP, far abovethe levels
of anyother advanced economies.
As a meanstoincreasethe monetary base, the Bank decidedtopurchase
JGBssothat itsholdingof their amount outstandingon theBank‘s
balancesheet will increaseat an annual pace of about 50trillion yen.
Consequently, the Bank‘sholding of JGBswill be increasedfrom 89
trillionyen at end-2012to190trillionyen at end-2014.In short, it willmore
than doublein twoyears.
ThemonthlyflowofJGBpurchasesisexpectedtobecome7+ trillion
yen, becausetheBank needstocompensate for JGBsredeemed.
In termsof quality, in increasingthe purchasesof JGBs, thosewithall
maturitiesincluding40-year bondswill be made eligible for
purchase,and the averageremainingmaturityof the Bank‘s JGB
purchaseswill be extendedfrom slightlylessthan three years at present
to about sevenyears – equivalent to theaveragematurityof theamount
outstanding of JGBsissued.
We intend tostrengthenthe workingof monetary easingon the economy
andpricesbyencouraginga further decline not only in shorter-term
interest ratesbut alsoin those acrosstheyield curve.
Furthermore, witha view toloweringrisk premia of asset prices, the
Bank will purchaseETFs and Japan real estateinvestment trusts
(J-REITs) sothat their amountsoutstanding on the Bank‘sbalancesheet
will increaseat an annual paceof about 1trillion yen and about 30 billion
yen, respectively.
Intelligible monetary policy
In the implementationof the quantitativeand qualitativemonetary
easing, asmentioned earlier, wehavetaken account of theneed to
present our policy stanceintelligibly to marketsaswellasfirms and
households.

P a g e | 63
Until last week, theBank‘s purchasesof JGBshad been conducted
accordingto the followingtwotypesof operations:oneunder theAsset
PurchaseProgram introduced in October 2010and the other for
facilitating money market operations,often referred to asRinban
operations.
ThisreflectstheBank‘svariouseffortstotacklechallengesin responseto
changesin economiccircumstances.
In fact, thesetypes of operations, reflectingtheir objectives,had differed
in termsof thepurchasingmethodsused.
However,thisframeworkwassomewhat complicatedand entailed a
problem that the Bank‘sseriouseffortstocombat deflation bymonetary
easingwererather difficult for the market and thepublicto understand.
Basedon such recognition, the Bank hasterminatedtheAsset Purchase
Program and synthesized purchasingmethodsof JGBs.
Moreover,it hasdecided to expressthe target of JGBpurchasesasa net
increasein its JGBholdings– namely, at an annual pace of about 50
trillion yen.
We believethat these changeswill facilitateunderstanding of the Bank‘s
intentionwithregard to monetary easingin a straightforwardmanner.
As I mentioned earlier, theBank decided to adopt the monetary baseas
an indicator for quantitativeeasing.
This alsoreflectsour judgment that the monetary base – the total amount
of currencythat the Bank supplies tothe economy asa whole – will be the
most appropriate indicator for conveying the Bank‘s aggressive stance on
monetary easingto the public.
Continuation of monetary easing
TheBank will continuewith thequantitativeand qualitativemonetary
easingthat I have explainedthusfar, ―aiming toachievetheprice

P a g e | 64
stability target of 2percent, aslong asit isnecessaryfor maintainingthat
target in a stablemanner.‖
Obviously, there will be both upsideand downsiderisksto economic
activityand pricesgoingforward.
TheBank will examinethoseriskscarefullyand will not hesitate tomake
adjustmentsasappropriate, should circumstanceswarrant.
Onemay ask, whyisthere a connectionbetweenwhat I have just
mentioned and a time horizon of about two years?
In our view, the latest decisionsincludeall thenecessarymeasuresto
achievethe 2 percent target with that time horizon.
Nonetheless, it is not appropriatetosaythat the monetary easingwill
onlylast for twoyears.
Theeconomy entailsuncertainty, and there is alwaysa degreeof latitude
in people‘sexpectations;for example, some peoplemay not share the
view that theinflation rate will reach 2 percent in twoyears.
For everyone – includingthosewhoare somewhat skeptical – tobe
convinced that sufficient monetary easingwill be implemented, it is
appropriateto statethat the Bank will continuewithmonetary
easing, aimingto achievetheprice stabilitytarget of 2 percent, ―aslong
asit isnecessary.‖
Makingsuch a commitment will, in theend, further ensure the
achievement of thetarget in twoyears.
I alsowant toelaborate on the meaning of ―aslongasit is necessary.‖
TheBank doesnot believe2 percent inflation achievedat a certainpoint
in time isenough; rather, it believes2 percent inflation shouldbe
maintainedin a stablemanner.

P a g e | 65
Therefore,evenif theinflationratehits2percent at some point, theBank
could continuewiththe quantitativeand qualitativemonetaryeasingif it
is judged necessarytodo soin order tomaintainthat rate in a stable
manner.
Theoppositecould alsobe true. In short, analyzing thefundamental
movement of prices, the Bank intendsto continuewith monetary easing,
aslong asit isnecessary.
III. Effectsof the ―Quantitative and Qualitative Monetary
Easing‖
Transmission channels of monetary easing effects
I will next explainthe mechanism of achievingthe 2percent target under
thequantitativeand qualitativemonetaryeasing.
TheBank expectsthat the effectsof monetary easingwill permeatethe
economy and influencepricesprimarily through three channels.
First, thepurchasesof JGBs,ETFs, andJ-REITswill encouragea further
declinein long erterm interest ratesand lowerrisk premia of asset prices.
This will raise firms‘credit demand through a declinein fundingcosts.
Second, asa result of the Bank‘smassivepurchasesof JGBs,both
investorsand financial institutionsinvestingin JGBsareexpected toshift
from JGBsto such riskassetsasstocksand foreign-denominatedbonds
and/ ortoincreaselendingwithin their portfolios.
In economictextbooks,thisisreferredtoasa portfoliorebalancingeffect.
Theextension of theaverage remainingmaturityof JGB purchases
reflectsour understandingof such an effect.
Third, the commitment toachievetheprice stabilitytarget at theearliest
possibletime and thecontinuation of thenew phaseof monetary easing

P a g e | 66
are thought to drasticallychangetheexpectationsof marketsand
economicentities.
This is what I referred to earlier asthe eliminationof deflationary
expectations.
Arise in the expectedinflationratewill not only influenceactual prices
but alsostimulate private demand through a decline in real interest rates.
Developments in economic activity and prices
Lookingat recent developmentsin economicactivityand prices,it seems
that the conditionsare beingpreparedtodemonstratethe effectsof the
quantitativeand qualitativemonetary easingthrough the three
transmissionchannelsthat I just mentioned.
Indeed, Japan‘seconomyhasshownsome bright signs of pickingup.
Going forward, we expect the economy to return to a moderate recovery
path against the background of firm domestic demand and a pick-up in
growth ratesof overseaseconomies.
In recent months, conditionsin financial marketshave significantly
turned favorable dueto the abatement of global investors‘risk aversion
and expectationsfor domesticpolicies.
Theyear-on-year rateof changein the CPI hasrecentlybeen at around 0
percent or slightlynegative, but lookingto the future, it is expected to
turn positiveand start pickingup, mainly reflectingtheimprovement in
theaggregatedemand and supplybalance.
Looking at breakeven inflationrates– usingthe information content in
inflation-indexedbonds– and the resultsof economists‘and households‘
surveys, wehave increasingevidencethat inflationexpectationsare
startingto rise.
Behind thisare expectationsfor policiesincludingmonetary policy.

P a g e | 67
This indicatesthat policiescan moveexpectations.
TheBank expectsthat the quantitativeand qualitativemonetary easing
willsupport,inatimelymanner,thepositivemovementsthathavestarted
toappear in economic activityand financial markets,contributetoa
further pick-up in inflationexpectationsthat appear tohave risen, and
lead Japan‘seconomy to overcome deflation that haslasted for nearly15
years.
IV. Some points of discussion in the monetary policy conduct
After theannouncement of this time‘sdecision, some wonderif the Bank
can carry out the quantitativeand qualitativemonetary easingwhile
otherssaythat it hasgone too far.
In addition, weoften receivequestionsabout therelationshipbetween
monetarypolicy and other policiesconductedby the government.
In thefinal part of myremarks, I wishtoanswersome of thesequestions.
Execution of the quantitative and qualitative monetary easing
ThenewlyplannedpurchaseofJGBsat anannualpaceof50trillionyenis
massiveand goesbeyond theconventional knowledgeof market
participants.
In addition, theachievement of the monetary baseof 270trillion yen at
end-2014requires that financial institutions‘current account balances
held at the Bank reach175trillion yen.
Again, this isextremely large.
Furthermore, theextensionof the averageremainingmaturity from
slightlylessthan threeyears toabout seven years(i.e., allowingfor a
rangeof about six to eight years) necessitatesthepurchasesof JGBswith
longer maturity, including20- and 30-year bonds.

P a g e | 68
SuchJGBswithsuper-longmature tiesarelikelytobeheldtomaturityby
institutional investorsand their market is not soactive.
Against this background, somemarket participantswonderif theBank is
ableto purchasetheseJGBsin practice.
Toanswerthis question, wecan do this, in principle, solong asthe Bank
purchasesa widerange of JGBsthrough a competitiveauction.
I assure you that wewill achieveour commitment.
Having saidso, however,suchpurchasesby the Bank might not proceed
smoothlybecausetheygobeyond the market‘sconvention.
Tostart with, thesemeasures aremeant toencourage a furtherdeclinein
interest rates;thus, effectson the market are inevitabletosome extent.
As the Bank wantstofacilitatesuchoperations,it is vital to have the
cooperationofmarket participants,suchascounterparties‘activebidding
in the Bank‘smarket operations.
TheBank hasdecidedto set forumsfor enhanceddialoguewiththose
market participantsin order toexchangeviewspertainingtomoney
market operationsand market transactionsin general.
In fact, it hasalreadyinitiatedsuch dialoguewithvariousmarket
participantssincelastweek.
Relationship with financing the fiscal deficit
Once the Bank embarks on the large-scale purchase of JGBsunder the
quantitative and qualitative monetary easing, some worry that this will
result in financingthefiscal deficit.
TheJGBmarket remains stable,but if such purchasesby theBank were
regarded asmonetizing government debt, theJGBmarket might start
destabilizing, raisinglong-term interest ratesin a manner inconsistent
with the real economy.

P a g e | 69
This might not onlyoffset the monetaryeasingeffectsbut alsohave
negative effectson Japan‘sfinancial system and itseconomy asa whole.
Of course,the JGBpurchasesunder thequantitativeand qualitative
monetary easingareexecutedfor thepurposeof conductingmonetary
policy and not for the purpose of financingfiscal deficits.
Moreover,in order toavoid a possiblearousal of doubt regardingthe
Bank‘s increasingpurchasesof JGBsasfinancingfiscal deficits,it is vital
for the government toclearlyshow the future course of fiscal
consolidationand steadily make progressto reform the fiscalstructure.
On thispoint, the government – in the joint statement releasedwiththe
Bank in January– stated that ―in strengtheningcoordinationbetweenthe
Government and theBank of Japan, theGovernment will steadily
promotemeasuresaimed at establishinga sustainablefiscal structure
with a view toensuring the credibilityof fiscal management.‖
We stronglyexpect the government to move on that front.
BecausetheBank synthesized thepurchasingmethodsof JGBsthistime,
it temporarilysuspended theso-calledbanknoteprinciple.
This principleindicatesthat thepurchasesof JGBsconductedfor
facilitating moneymarket operationsare subjecttothelimitation that the
outstandingamount of long-term government bondseffectivelyheld by
theBank be kept below the outstanding balance of banknotesissued.
In reality, however, after the introduction of theAsset PurchaseProgram
in 2010,thetotal amount outstandingof JGBsheld by the Bank has
already exceeded theoutstandingbalanceof banknotes.
Basedon this recognition, the Bank hasdecided to temporarilysuspend
thebanknoteprincipleasit pursuesthequantitativeand qualitative
monetary easing.

P a g e | 70
In anycase,letmereiteratethat theBank willnot financethefiscaldeficit
during or after theperiod of thequantitativeand qualitativemonetary
easing, and thislineof thinking will not change.
Effect on exchange rate
We also hear comments about the relationship between monetary policy
and exchange rates against the background of the recent depreciation of
theyen.
On thispoint, wehave no intention toconduct monetary policytargeting
theexchangerate.
Theobjectiveof theBank‘s monetarypolicy is, obviously, topursuethe
stability of domesticprices.
It is true that, when a central bank takesaccommodativeactions,there is
a tendencyfor itscountry‘scurrencytodepreciate.
This, however, is merely a general observation, ceteris paribus.
For instance, if thegrowthpotential of theeconomy risesasa result of
monetary accommodationaswell asappropriatefiscal policyand the
growth strategy, its currencycould appreciaterather than depreciate.
In any event, the Bank‘smonetary policyis focused on achievingthe
domesticobjectivetoleadJapan‘seconomytowardovercomingdeflation.
Achieving this goal will eventuallyprovide the global economy with
favorableeffects.
I believe that the international community sharesa common
understandingonthesepoints.

P a g e | 71
Three-pronged strategy (three arrows)
At present, the government is determined to addresschallengesthat
Japan‘seconomy faces,includingtheovercoming of deflation, through
thecombination of three policy arrows– namely, bold monetary easing,
flexiblefiscal policy, and a growth strategythat promotes private
investment.
I think it is indeed an appropriate policy package.
Achieving theprice stability target of 2percent at theearliest possible
time,throughthefirstarrow(i.e., monetaryeasing) istheroleof theBank
of Japan.
As I have explainedto you today, the Bank will achievethis target under
itsown responsibility.
In addition, paralleltomonetary easing, if the government createsreal
demand and wagesand employment improve through the expansion of
consumptionand investment, thisis expectedtocontributetogenerating
a virtuouscycle that eventuallywill lead toa gradual pick-up in inflation.
It is in thissensethat the implementationof the other twoarrows
– namely, flexiblefiscalpolicy for the time being and a growthstrategy –
will lead to raisingthe growthoutlook, therebycontributingto the
achievement of theprice stability target more smoothly.
We havehigh expectationsthat thegovernment will make steady
progresson thesefronts.
Concluding remarks
For eight years beforeassuming the position of Governor of the Bank of
Japan, I lookedat Japan from overseasasPresident of theAsian
Development Bank.
No other country hassuffered from deflationfor nearly15 years.

P a g e | 72
Given that Japanesefinancial institutions, firms, and individualsplay
activerolesin eachAsian economy, I have often found it hard to accept
thecontrasting imageat home and abroad.
Theworldiseagerlywaitingfor Japan to overcome deflationand for
Japan‘seconomy torecover itseconomicstrength.
I believe steadyeffortstowardachievingthesegoalswill alsolead Japan
towardregainingitsinfluenceon the global society.
Thank you.

P a g e | 73
RichardM. Ashton, DeputyGeneral
Counsel
Independent Consultants
Before the Subcommitteeon Financial Institutionsand Consumer
Protection, Committeeon Banking, Housing, and UrbanAffairs, U.S.
Senate, Washington, D.C.
ChairmanBrown, RankingMember Toomey, and membersof the
subcommittee,thank you for the opportunity totestify regarding the
requireduseof third-party consultingfirms(consultants) in Federal
Reserveenforcement actions.
Use of Consultantsby Regulated Banking Organizations
At the outset, it might be helpful topoint out that regulated banking
organizationsroutinely choosetoretain consultantsfor a variety of
purposesapart from anysupervisorydirectiveby regulatorstodo so.
Bankingorganizationsdecidetoretain consultantsbecausethesefirms
can providespecializedexpertise,familiarity withindustry best practices,
a more objectiveperspective, and staffingresourcesthat theregulated
organizationsdonot have internally.
In this respect, reliance on consultantscan significantlycontribute tothe
overall efficient governance and management of these organizationsas
well asto their safeand sound operation and their compliance with
supervisoryexpectationsand legal requirements.
Use of Consultantsin Federal Reserve Enforcement Actions
In the vast majorityof Federal Reserve enforcement actions,the
organizationitself, usingitsown personnel and resources, isdirected to
take thenecessarycorrectiveand remedial action.

P a g e | 74
In appropriatecircumstances,the Federal Reserve hasfound that it can
beaneffectiveenforcement tool torequire regulated organizationsto
retaina consultant toperform specific taskson behalf of that
organization.
However,the mandatory useof a consultant hastypicallynot been a
frequent requirement in Federal Reserveenforcement actions.
And, importantly, consultantsare used to conduct workthat ordinarily
theorganizationitself wouldbe required to conduct.
At all times,theFederalReserveretainsauthorityto,anddoes,reviewand
supervisethe consultant's work in thesame manner asif theinstitution
conducted the work directly.
In all cases, theregulatedorganization isitself ultimatelyresponsible for
itsown safeand sound operationsand compliancewith legal
requirements.
As a general rule, our enforcement actions require the use of consultants
to perform specific functionsthat the organization involved should do but
hasshown that it cannot perform itself.
This may be becausea particular organizationlacksthenecessary
specialized knowledgeor experience.
Similarly, the organizationmay not havesufficient staffing resources
internally.
In addition, it may be necessaryto havea third partyundertake a
particular project becausea more objectiveviewpoint isrequired than
wouldbe provided by theorganization'smanagement.
Over the last 10 years, for instance, there were consultant requirementsin
an average of less than 15 percent of all formal enforcement actionstaken
bythe agency.

P a g e | 75
In additiontoformal enforcement actions,Federal Reserve examiners
may informallydirect organizationstoretain consultantsto undertake
designatedengagementson behalf of the organizationwhere
circumstanceswarrant.
In our enforcement actions,werequired theuseof consultingfirms to
perform several limited, specializedtypesof work.
In many of theseenforcement actions,an expert third party must be
retainedto review and submit a report on a specific area of the
organization's operations.
Thesemandatedreviewsbyconsultantshaveofteninvolvedanevaluation
of an organization'scomplianceprogram, its accounting practices,or its
staffing needsand the qualificationsand performanceof senior
management.
These enforcement directives usually require the organization to
incorporate the findings of the report into a plan to improve that
particular area of operations.
Federal Reserve regulatorsmay alsousetheproduct of a consultant's
workasa guide in developingtheongoing supervisionof the
organization.
Another type of enforcement actionwhereuseof consultantshasbeen
requiredinvolvessituationswhereexaminershave found seriouspast
deficienciesin anorganization's systemsfor monitoring compliancewith
Bank SecrecyAct and anti-moneylaundering (BSA/ AML) requirements.
In thesecases, our actionshave required a consultant retained by the
organizationto review certain kindsof transactionsthat occurredat the
organizationover a specificpast period of time and determinewhether
BSA/ AML reportswerefiled asrequired with regard to those
transactions.
Thesereviewsrequire the consultant to identify situationswherea
suspiciousactivityreport or a currencytransaction report should have

P a g e | 76
been filed, rather than to perform an assessment of the organization's
complianceprogram.
After receivingthe resultsof theconsultant'sreview, the organization
wouldthen file all the required reportswiththeappropriategovernment
agencies.
Finally, in severalrecent enforcement actionsthat requiredorganizations
toidentify and then compensateor otherwiseremediateinjured
consumers, the organizationshavebeen requiredtoretain consultantsto
administerthat process.
In theseactions,theconsultantswererequired tomake recommendations
about theappropriateremediationtoindividual consumersor tomake
remediationdecisionsabout individual consumersor review the
organization's remediationdecisions.
Federal Reserve Oversight of Consultant Performance
When enforcement actionsrequire a regulated banking organizationto
usea consultant tocarry out a particular function, the Federal Reserve
overseestheorganization's implementationof thisdirective.
Our standard practiceis torequire theorganization's retention of a
consultingfirm tobe first approved by theFederal Reserve.
Wetypicallylookat theparticularexpertiseandexperienceoftheselected
consultant.
Theresourcesand capacityof the firm tocarry out the particular
engagement are alsoexamined.
Whether theconsultant hasthe appropriate objectivityand separation
from management isalsoa keyfactorinassessingtheacceptabilityof the
firm.
Toassessobjectivity, weexaminethe extent and type of workthat the
consultant hasdone for the organizationin thepast.

P a g e | 77
Oneguidingprincipleis that a consultingfirm should not beallowedto
review or evaluate work that it haspreviouslydone for the organization.
How thesefactorsare evaluated is necessarilydetermined on a
case-by-casebasis,depending on thespecific type of task theconsultant
is beingrequired to perform.
However, the approval of particular consultants is not perfunctory; where
warranted we have disapproved a consultant that has been selected by an
organizationunder an enforcement order requirement.
Additionally, our general practice is toexplicitlyrequire that theletter
betweentheorganizationand theconsultingfirm orother documentation
that describesthescope, terms, and conditionsof the particular
engagement be approved by the Federal Reserve.
Thus, we are able to assesswhether the consultant'splanned work will be
consistent with what was intended in the enforcement action and whether
effectivesafeguardsof objectivitywill be maintained.
We alsooverseetheconsultant'sperformanceduring thecourse of the
engagement.
This oversight can involve obtainingand reviewinginterim progress
reportsfrom the consultant.
We alsocan call for periodic meetingswithconsultant personnel, which
can be asfrequentlyaseveryweek.
If a consultant is not meetingthe required standardsof performance, we
will inform theorganizationof the needed improvements, applying the
samecriteria asif the organizationwasperformingtheworkwith itsown
personnel.
In sum, it is important tonote that consultantsretained under Federal
Reserveenforcement actionsworkfor the organizationthat retained
them, and the organization, not the consultant, is responsiblefor

P a g e | 78
correcting thedeficienciesthat triggeredissuanceof the enforcement
action and for preventing their reoccurrence.
Requiring the use of consultants to assist in implementing corrective and
remedial measures is just one tool available to Federal Reserve regulators
in fashioningformal enforcement actions.
Our experiencehasshownthat consultantscan be expectedtoprovidethe
expertise, experience,and third-partyperspectiveneeded by theregulated
bankingorganizationtobetter meet supervisoryobjectives,including
assistingthe regulatedorganizationswithcorrectingparticular
governanceor operational deficienciesidentified through the supervisory
process.
However,in decidingto usethistool in appropriatecases, theFederal
Reservedoesnot cede itsregulatory responsibilitiesor judgment tothose
consultants.
We require that regulatedorganizationscomply withthesame basic
standardsof prudent practicesand compliancewith applicablelawsand
regulations,irrespectiveof whetheran organizationhas relied on the
assistanceof a consultant or not.
Use of Independent Consultants in the Independent
Foreclosure Review
Although it is not the specific subject of thishearing, it might be helpful
tonotebrieflytheindependent foreclosure reviewsrequired by the
consent ordersissued by the Office of theComptrollerof theCurrency
andtheFederal Reserve againstmajor mortgage servicingfirms, and the
roleof theindependent consultantsrequired under thoseorders.
In those mortgage servicing orders, the servicers were required to retain
independent consultants to review foreclosure files of borrowers within a
two-year period toidentify financial injurycausedby servicer error.

P a g e | 79
Recently, the regulatorsand 13 of theservicerssubject to theforeclosure
ordersentered intoagreementsunder which theseservicersmust make
cash paymentstoborrowersand provideother borrower assistance.
Thesepaymentsandotherassistancereplacetheindependent foreclosure
review by independent consultantsthat had been required of these
servicersunder the initial orders.
As wehaveexplained, theregulatorsacceptedtheseagreementswiththe
13servicersbecausethe agreementsprovided the greatest benefit to
borrowerspotentiallysubjectedto unsafeand unsound mortgage -
servicingand foreclosurepracticesin amore timelymanner than would
haveoccurredunder thereview process.
In practice, for theseservicers, the scopeof the inquiry required of the
consultantsto conduct the independent foreclosurereview proved over
timeto be more expansive, time-consuming, and labor-intensivethan
what is typically required of consultantsin Federal Reserve enforcement
actions.
Theresult wassignificant delaysin providing fundstoconsumers.
Accordingly, the decisionto replacethe review of individual foreclosure
files by the consultantswith agreementsto pay cash and provideother
assistancetoborrowerswasbased on the specializedand unprecedented
nature of theparticularreviewsthe consultantswererequired to
undertake.
Thank you again for the invitation toappear beforethesubcommittee
today. I wouldbe pleased to answeranyquestionsyou might have.

P a g e | 80
Joint Committee
Report on
Risksand Vulnerabilities in the EU Financial System
Executive Summary
TheEuropean financial system continuestoface a dauntingrange of
interrelated risks, necessitatinga concerted responseby policymakers
both at the political level and from theEuropean System of Financial
Supervision, includingthe European SupervisoryAuthorities(ESAs), in
order to restorethe confidenceand trust that hasbeen erodedduring
recent years‘financial crisis.
Compared withtheSeptember 2012report, near-term risksto the EU
financial system from the euroarea debt crisis(especiallybank funding)
havegenerallyabated withimproving market confidence.
However,financial institutions,in particular banks, remain vulnerableto
a sudden switch in sentiment.
There have alsobeen delaysto some of thekey policy responses(e.g.
SolvencyII, CRD IV) whichmayexacerbatesomeof thelongerterm risks
highlighted in this report.
Many of the risksarisefrom the still weak EU macro-economic
outlook, whichaffectsthe financial positionsof governmentsand private
sectorborrowersand the outlook for propertymarkets,and whichmay
leadtofurther deteriorationin the profitability and asset qualityof
banks,insurersand other financial market participants.
Policy announcementsby European leaders– especiallyon Outright
MonetaryTransactions(OMT) and theSingleSupervisoryMechanism
(SSM) – have significantlyreduced market perceptionsof tail risksand
ledto a narrowingof bank and sovereign credit spreads.

Risk management presentation April 29 2013

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Risk management presentation April 29 2013