Risk management presentation May 27 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 wastravellingfrom London to Dubai to chair
theMarcusEvansconference(Strategic Risk &
Compliance2013). I had a headachewhen I
read:
―If a medicinedoesnot workasexpected, it's not necessarily becausethe
dosagewastoolow.‖
Wow. Ishetalkingtome?
He wasnot. He wasnot even a doctor.
He wasJaime Caruana, General Manager of the Bank for International
Settlements, speakingabout…
… ―Hittingthe limitsof "outsidethebox" thinking? Monetarypolicy in
thecrisisand beyond.‖
Speecheslikethat arenot usuallygoodwhenyou haveaheadache, but as
I am a Basel iii addict, it workedhandsomelyfor me.
Mr. Caruana continued:
―Prolonged monetaryaccommodation givesborrowers,financial
institutionsandpolicymakersanincentivetokeep"kickingthecandown
theroad", delaying necessary repair and reform.‖
International Association of Risk and Compliance Professionals (IARCP)
www.risk-compliance-association.com

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If I seesomeonekickingacandowntheroad, I havetoremember whyhe
doesit …
… it is due to prolonged monetary accommodation.
I did not haveaheadacheanymore. I hadeven startedunderstandingthe
non-financial worldaround me!
Mr. Caruana continued:
―Theglobal bond market crash of 1994is a cautionarytale of the risks
involved in exitingfrom a prolongedperiod of lowinterestrates.‖
Unbelievable!ThisisthestresstestI waslookingfor. Agreat scenario for
a major investment bank I consult. Whois goingto challengethat?Will
supervisoryauthoritiesdisagree?It isMr. Caruana’sownidea!
Read moreat Number 1below.
Timeforapuzzle now…
… whichisyour opinionabout theURL that follows?
http:/ / www.cbrc.gov.cn/ showWhist.do
What is it about?
No, you did not findit! Don’t lie tome!
Ok, you saw it is*.cn – China
Ok, you saw it is*gov.cn– Government of China
But what is the showWhist.do?
Whist is a classicEnglish trick-takingcard game which wasplayed
widelyin the 18th and 19th centuries.
What?Websitesbelongingtothe Chinesegovernment explore English

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trick-takingcard games?
According to Merriam-Webster, Whist is a card game for four players in
twopartnershipsthat isplayed withapack of 52cardsandthat scoresone
point for each trick in excessof six.
No, it is not about Whist.
It is about Whistleblowers!
AChinese Sarbanes-Oxley(like) approach from the…

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Themain functionsof the CBRC include:Toformulate supervisory rules
and regulationsgoverningthe banking institutions, to authorize the
establishment, changes,termination and businessscope of the banking
institutions, to conduct on-siteexamination and off-sitesurveillanceof
thebanking institutions,and take enforcement actionsagainst
rule-breakingbehaviors, to conduct fit-and-proper testson the senior
managerial personnel of the banking institutions.
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 Suite 804, Wilmington DE
19801,USA
Tel: (302) 342-8828

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Hitting the limitsof "outside the box"
thinking? Monetary policy in the crisisand
beyond
Speechby JaimeCaruana, General Managerof the
Bank for International Settlements,toOMFIF
(GoldenSeries Lecture), London, 16 May2013
Central bankshavehadto"think outsidethebox" to
addressunprecedented financial instabilityand toprovidemonetary
stimulusin trying times.
NIST Posts Initial Analysisof RFI
Comments on Cybersecurity
Framework for Critical Infrastructure
TheNational Instituteof Standardsand Technology(NIST) hasposted
an initial analysisof hundredsof commentssubmittedby industryand
thepublic relatedtothe President's"Improving Critical Infrastructure
Cybersecurity" ExecutiveOrder, issuedFeb. 12,2013.
Opening Remarksat SEC Roundtable on
Credit Ratings
By Chairman MaryJo White
U.S. Securitiesand Exchange
Commission, Washington, D.C.

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Raising the bar for the next phase of growth
and development – sustaining transformative
momentum
Welcomingaddressby Dr Zeti Akhtar
Aziz, Governorof the Central Bank of
Malaysia, at the10th IFSB(Islamic Financial
ServicesBoard)
Summit 2013―The future of the Islamic financial servicesindustry–
resilience,stabilityand inclusivegrowth‖, Sasana Kijang, Kuala Lumpur.
Changesin the Large ExposureRegime
This paper containsfull details of the
proposalsto substantiallyalter theLarge Exposure principlesand
guidancethat applytolicensed deposit takersthat are incorporated in
Guernsey.
GovernorSarah Bloom Raskin
At the Society of Government Economistsand the
National EconomistsClub, Washington, D.C.
Prospects for a Stronger Recovery

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Opening Speech
byYolanda BanksMcCoy,
Head – Investmentsand SecuritiesDivision,
Cayman IslandsMonetaryAuthority
at the 100WHF Cayman Event 2013
APerspective on the U.S. Economic Outlook
and Monetary Policy
Presented by CharlesI. Plosser, President and Chief
ExecutiveOfficer, Federal Reserve Bank of
Philadelphia
Global InterdependenceCenter's Central Banking
Series:Recovery 2013— Strength or
Stagnation, Milan, Italy
MichaelS. Gibson, Director, Division of Banking
Supervisionand Regulation
Cross-Border Resolution
Before the Subcommitteeon National Securityand
International Tradeand Finance, Committeeon Banking, Housing, and
UrbanAffair, U.S.Senate, Washington, D.C.
―In my remarks, I wouldlike tofirst reflect on the improvementsthat
havebeen madein the last few years in theunderlying strength and
resiliencyof the largest U.S.bankingfirms, and thenturn to a discussion

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of what hasbeen accomplishedand what remainstobe accomplishedin
facilitating a cross-border resolution.‖
Adjustment and growth in the euro area
SpeechbyMr PeterPraet, Memberof theExecutive
Board of theEuropean Central Bank, at the
European BusinessSummit, Brussels, 16May 2013.
―Many of you will have come acrosscommentators
whoclaim that adjustment is in fact inimicalto
growth;and that consolidatinggovernment budgets
while introducingstructuralreformsisthemain causeof our current
difficulties.‖

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Hitting the limitsof "outside the box"
thinking? Monetary policy in the crisisand
beyond
Speechby JaimeCaruana, General Managerof
theBank for International Settlements,to
OMFIF (Golden Series Lecture), London, 16
May 2013
Central bankshavehad to"think outsidethe
box" toaddressunprecedented financial instabilityand toprovide
monetarystimulusin trying times.
Monetaryaccommodationhasbeen criticaltostabilisethe financial
system and the economy.
But questionsremain about theefficacyof such policies aslongas
balancesheetsand structural headwindsare not more fullyaddressed.
Monetaryaccommodation can only be ashelpful asthe balance
sheet, fiscal and structural policiesthat accompanyit.
Looking ahead, central banks will continueto facedaunting challengesas
theynavigateinunchartedwaters,includinghow best tointegratenew
perspectiveson the financial cycle and global spilloversintotheir
monetarypolicy frameworks.
Full speech
Ladies and gentlemen,
It is a great pleasureto behere at OMFIF.
Thecrisisand itsaftermath haveposed formidablechallengesfor central
banks.

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They have had to "think outside the box" to address unprecedented
financial instability and provide monetary stimulusin the face of the
constraint imposedby the zerolowerbound of policyrates.
Looking ahead, thechallengesremain daunting. Central bankshave to
navigateunchartedwaters.
In thenear term,thequestionishowmonetarypolicycanbestcontribute
towhat hassofar beenanuneven recovery.
Can't central banksdomuch more?
Perhapsthe relevant question iswhethercentral bankscan make up for
insufficient action elsewhere.
What monetary policycan substitutefor balancesheet repair by banks
andborrowers?
What monetary policycan removeimpedimentstoa workermoving from
an overbuilt sector toa more promisingone?
Thesekindsof question require a medium-term perspective, and in a
medium-term perspectivemonetary accommodationwill prove onlyas
goodasthebalancesheet, fiscalandstructuralpoliciesthataccompanyit.
From a longer-term perspective, a challengeis tobetter integrate
financial stabilityconsiderationsintomonetary policyframeworks.
Therecent crisisbrought theglobal financial system totheverge of
collapseand hashad dire social and economic consequences.
This hasraised fundamental questionsabout how to integratea modern
understandingofthefinancialsystem intoourtraditionalmonetarypolicy
models.
Theseareall exceedinglydifficult questions,the situation isdifferent
from country to country and noone can claim to have a crystal ball that
providesdefiniteanswers.

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Yet, experiencedoesoffer at least some pointersfor thefuture.
In the following, I will thereforestart by reviewingthemain insights
suggestedby monetaryhistory, beforeturningtothe current challenges.
Insightsfrom monetary history
Thepast century saw considerablechangesin the conduct of monetary
policy.
Thesechangeswereoften the result of both historicaleventsand new
waysof thinkingabout the roleof central banks.
Bytheend ofthe20thcentury, therewasaclearconsensusthat aremit of
monetarypolicy focused on price stabilityhad manybenefits.
This view reflectedlessonsfrom the painful experienceof double-digit
inflationratesand erratic growth that prevailed in manycountries
worldwidein the1970s,and in some emerging market economieswell
intothe 1990s.
Themain reasonforthisdismalinflationandeconomicperformancewas
that monetary policy neglectedprice stability.
Instead, central banks pursuedother goals,whichturned out to be
inconsistent withpricestability.
In many advanced economies, for example, monetary policy wastoo
accommodativeduring the 1970s,and central banks endedup pushing
output beyond sustainablelevels.
In emergingmarket economies, politicalpressuresto generate
seigniorageincome and financepublic spendingprogrammesvia the
printingpresswerefrequent sourcesof high inflation.
In all theseexperiences,theneglect of price stability did not improve
economicperformance.

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Overtime, welearned, quitepainfully, that thereisnobeneficial long-run
trade-offbetweeninflationand growth.
Indeed, we learned that high and volatile inflation ratesgo hand in hand
with erratic growth, large exchange rate swings, and even economic and
politicalcrises.
Chastenedbytheseexperiencesofthe1970sand1980s,central bankshad
torethink their roles.
At that time, the result wastoconsider a narrow mandate for price
stability.
Tobe sure, thisrequired a very painful adjustment process.
Central bankshad tosqueezeinflation out of their economiesat the cost
of recessions. But that cost waswell worththe price.
Thosewhohadthecouragetotrywerevilifiedthen, onlytoberecognised
ashavingdone the right thingyears later.
Another lesson learnt during this period wasthat central bank autonomy
is criticalto achieveprice stability.
Onemainunderlying causeofinflationinstabilitywasthefailuretoshield
monetarypolicymakers sufficientlyfrom short-term political cycles.
Somecentral banks, such asthe Bundesbank and theSwissNational
Bank, had led theway.
Theyenjoyed a high degreeof effectiveindependenceand, on this
basis,consistentlydeliveredlowerinflationthan their peersduring the
post-BrettonWoodsera.
Thesearehard-earned lessonsthat should not be forgotten.
Today, central banksare once again "thinkingoutsidethe box" asnew
challengeshave arisen.

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Evenbeforethecrisis,concernsamongcentralbankersweregrowingthat
thepolicy environment waschangingin ways that calledfor a further
evolution of central banking.
In particular, thenarrow focuson near-term domestic price stabilitydid
notseem tobeenoughin anenvironment in whichthefinancial cycleand
global spilloverswerebecoming more prominent.
With respect to thefinancial cycle, wenow seethat monetary policy
played an important part in the build-upof financial imbalancesduring
the2000s.
After thebust of thedotcom boom, monetary policy in the advanced
economiesremained accommodativefor manyyears. Interestrateswere
low,and credit and housepricessoared.
Of course, the relevanceof the financial cycle for central banksisnot an
entirelynew insight.
Theforgingof manycentral banks, such asthat of theFederal Reservein
1913, wasthedirect result of thebankingcrises of the 19th and early20th
century.
It became lessrelevant in theearlypostwar period againstthe
background of tightlyregulatedfinancial systems put in placeafter the
Great Depressionand theSecond World War.
But the far-reachingfinancial deregulationpursued sincethe1970s
allowedthe financial cycle tore-emergeasa major macroeconomicforce
that grew ever stronger.
Globalisation, too, hasbeen changingthe policy environment in
significant ways.
In addition to the growing influence of global factors on domestic
inflation dynamics, globalisation appears to have added fuel to the
monetaryeasingin therun-up tothe recent crisis.

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Theunusuallylowpolicy ratesprevailingin the major advanced
economiesaffectedothersvia a resistancetocurrencyappreciation
pressures.
Many emerging market economieskept interest rateslowerthan would
havebeen suggested by domestic macroeconomic conditionsalone.
In turn, their accumulation of foreign exchangereservesput additional
downward pressure on yieldsin theadvanced economies.
Thenet result wasunusuallyaccommodativeglobalmonetaryconditions.
Real interestratesaverageda mere 1.5% globallybetween2002and 2007
while output grew robustlyat roughly4%.
Managing the post-crisisrecovery
While thepre-crisisperiod alreadygavecentral banksmuch food for
thought, the crisishasgiven them still more to chew on.
The financial crisishastested the crisis-management readinessof central
banks, and the subsequent phase their ability to nurse the economy back
togrowth.
Central bankshaverespondedin anunprecedentedwayinboth scaleand
scope.
Theyhaveprovidedampleliquidityin theirlenderof lastresort
functions,have committed tolow - often effectivelyzero - interest
rates,haveengaged in large-scalebalancesheet policies,have augmented
this withenhancedforward guidancelinked to real-economy
outcomes,have put in placetargetedlendingschemes,havepurchased
riskyassetsandsoon.
Theresponseof central bankshashad important benefits.
Thereisnoquestionthat inthemostacutephaseofthecrisisit prevented
thefinancial system from imploding, whichwouldhave brought the real
economydown.

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Low policyratesand theunprecedenteddeployment of balancesheet
policiesboosted confidence and improved financial market conditions.
And asdoubtsre-emergedin financial marketsmore recently, central
bank measureseffectivelyreduced perceivedfinancial tail risks.
And yet, despitetheseunprecedentedactions,the global recoveryhas
been lacklustre.
Fiveyears intothe recovery, economic performanceis laggingprevious
onesat the same stage.
Economicactivityiswell below itspre-crisistrend in the major advanced
economiesand unemployment isstubbornly high.
Thereis, understandably, frustration about thisapparent lack of traction.
This frustration hasledsome to call for ever more monetary policy
activism.
But is it really justified?
If a medicinedoesnot workasexpected, it'snot necessarilybecausethe
dosagewastoolow.
Maybe instead the overall treatment, and the roleof the medicinewithin
it, should be reconsidered.
Most likelysomethingelseis needed.
Balancesheet recessionsare special:it islessclearthan often thought
that monetary policy can foster a quick and robust recoveryin a balance
sheet recession.
When privatesector balancesheetsneed repair, accommodative
monetarypoliciesare lesseffective.

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When the problem is too much debt and agentsare in the mood to
retrench, it isunrealistic to expect monetary policy to revive strong
growthby loweringinterest rates.
When financial institutionsare weak, it isequallyunrealistic toexpect
them toeffectivelytransmit monetary impulses.
Moreover, it iswellknown by now that growthtendsto beweakerafter
financial crisesthanafter ordinary economicdownturns.
This is not just, or even primarily, a question of deficient demand.
It reflectstheneed for the economy toreabsorb the aggregateand sectoral
real imbalancesthat built up during the preceding unsustainable
expansion, hidden under the froth of thefinancial boom.
Suchboomstypicallyleavein their wakenot onlytoomuchdebt, but also
toomuch capital and labour in thewrongsectors.
Therefore, thechallengefor countriesin thenext few years will be to
reallocatelabour and capital among sectorsboth within and across
national borders.
Structural reform toremove rigidities,not monetary policy, is the wayto
facilitate this.
True, monetarypolicycan buy time toimplement thenecessarybalance
sheet repair and structural reforms.
But it cannot substitutefor them. After five yearsof buying time, onehas
toaskwhetherthat timehasbeen - or will be - used wisely.
Refocusingthepolicymix to relymore on repair and reform and not to
overburdenmonetary policy iscrucial because thebalanceof risks of
prolonged very lowinterest ratesand unconventional policiesis shifting.
Thecostsare growingin relation tothebenefits,for a number of reasons:

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First, prolongedmonetaryaccommodation givesborrowers,financial
institutionsandpolicymakersanincentivetokeep"kickingthecandown
theroad", delaying necessary repair and reform.
Certainly, progresshasbeen made in a very trying environment.
But more needstobe done.
Indeed, the slow progress in the implementation of structural reforms and
in the deleveraging processmay signal that this delaying mechanism is at
work.
Persistent high unemployment ratesin many advanced economies
indicatethechallengesof labour rigiditiesand sectoral rebalancingthat
still face us.
At the same time, although some private sector deleveraging is occurring
in some countries, and the financial system is better capitalised, the total
debt figuresare not reassuring.
Sincethe end of 2007, total debt of the G20 non-financial sector, both
privateand public, hasrisen by more than 30trillionUS dollars,which
runscounter todeleveraging, at least asI understand the term.
It is noteworthythat over thesameperiod global central bank assetshave
increasedby roughly10 trillion USdollars.
Second, prolonged accommodation canproduce other unintendedside
effects.
In the 1970s,thedesire to lift output and employment back topre-crisis
levelsresulted in surginginflation.
Onemight arguethat the situation todayis quitedifferent from then.
Inflationhasremainedlowinmost jurisdictionsand closetocentral bank
targets.

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However,monetary stimulusmay find itswayintoasset pricesand
leveragebeforeinfluencinggoodsand servicesprice inflation.
Moreover,prolonged very low interest ratescan distort market
signals,mask underlying balancesheet weaknessesand undermine the
earningscapacityof banks, thebusinessmodels of life insurance
companiesand thesolvencyof pension funds.
This may further misallocatecredit, weakenfinancial institutions'
balancesheetsand encourage excessiveand unwelcome risk-taking.
Another significant sideeffect arisesfrom global monetary policy
spillovers.
Persistently low interest rates in the major advanced economies generally
encourage capital flows to fast-growing emerging market economies and
put upward pressure on emerging market exchangerates.
This can complicatetheabilityof emergingmarket central banks to
pursuetheir stabilisationgoals.
On the onehand, if central banksin emergingmarketskeep policy rates
very low,capital inflowswouldbe discouraged, but domesticcredit
growthwouldbe encouraged.
If, on the other hand, theyraisepolicyrates,the risksof destabilising
capital flowswouldrise.
Sofar, wehave been seeinga combination of theseforcesat work.
Despitesome slowingof capital flowsover thepast year, private sector
credit and propertypriceshave been surgingin a number of these
economies,aswell asin someopen advanced economies.
Finally, prolonged accommodation raisesriskstocentral banks
themselves.

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If economies remain weak and structural problems unresolved despite
repeated rounds of further monetary stimulus, the credibility of central
banksmay suffer, and credibilityisimportant for effectiveness.
Let me insist here that resultsin the real economy will depend on the
extent that needed repair and reformsare carried out.
Resultswill dependtoa largeextent on factorsthat are not under central
banks' control.
Aviciouscircle can develop, with awideninggapbetweenwhat central
banksare expectedtodeliver and what theyactuallycan deliver.
This may ultimatelyunderminetheir credibility and, withit, their
legitimacyand effectiveness.
All this underscores the importance of being prepared for the eventual
exit from the extraordinarily accommodative monetary conditions that
haveprevailed for thepast several years.
While central bankssurelyhaveall the toolsavailableto technically
engineeran exit, it cannot be taken for granted that it will be smooth.
Theglobal bond market crash of 1994is a cautionarytaleof the risks
involved in exitingfrom a prolongedperiod of low interestrates.
At the same time, wealsohave to recognise that the situation today is
rather different from back then in at least one critical dimension:central
banksare much more transparent about their policy intentionsnow and
their communication is much better.
This should reducethe risk of major policysurprises.
That said, thepolicy environment central bankshave to grapplewith
todayis alsomuch more complex in some important dimensions.
Recordlevelsof debt have been issued at very lowinterest rates.

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Central banks,at leastfor now,areplaying animportant, if not
dominant, rolein keyfinancial market segments.
So, asinterestratesrise and central bankspare back and eventually
reverselarge-scaleasset purchases, financial marketswill have much to
digest.
Different national conditionswill require unsynchronised exits,which
may raise additional complexities.
Even in the current environment of enhanced central bank transparency
and credibility, a choppyexit isa material risk.
It goeswithout saying that I wouldlovetobe proven wrongabout
this, and that a lot of work is beingdonetoreduce exit risks.
Monetary policy and the financial cycle
Aswepeer furtherintothefuture, onekeychallengecentralbanksfaceis
howtobetter integrate financial stabilityconsiderationsintotheir
Theeconomicand social damage of therecent crisishaspainfullyshown
what is at stake.
And central banksmust reflect on how they can forgea new consensus
about the wayforward.
This is not just a narrow operational issue, for exampleabout how to
respond to credit and asset priceboomsand busts.
It raises the much broader conceptual question of how to shift our
traditional purely macroeconomic perspective towards a new, fully
integratedmacro-financial perspective.
As I seeit, thecrisishasnot discredited thecore elementsof pre-crisis

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The credibility of central banks as guarantors of price stability has been
instrumental in anchoring inflation expectations, on both the downside
andtheupside, during the crisisand itsaftermath.
Astrong, credibleanchor helpsto counteract thedestabilisingforces
hittingthe economyand financial markets.
At the same time, the pre-crisismonetary policy frameworksdid not
prevent the crisis from happening.
Theexperiencein therun-up suggeststhat central banksneed to better
appreciatetheir rolein influencingthe financial cycle.
For thispurpose, byfinancial cycle I refer tothe combined endogenous
behaviourof credit and asset prices, particularlyhouseprices.
Regulatoryreform obviouslyplays a keyrolein mitigatingfinancial
cycles,and wehavealready seen significant progressin this area: better
andhigher buffers, the introduction of countercyclical capital buffers
under thenew Basel III frameworkand the development of
macroprudential frameworksand tools.
Tobe sure, prudential and macroprudential measuresareclearly
necessary.
But theyalonewill not be enough and can alsobecircumventedby
regulatoryarbitrage.
This is whymonetary policy hasa complementaryroletoplay. The
policyrate representsthe universal price of leveragein a given
currencyand cannot be bypassed easily.
In thisrespect, central banks will need toreflect onhow best to respond
tofinancial stability concernsin the future.
Thecrisishasclearlyshownthat financial stabilityis essential for lasting
price stability.

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Onelessonis that monetary policymay need to respond more
symmetricallytothefinancial cycle than in the past - tighteningmore
stronglyin boomsand easinglessaggressively, andpersistently, in busts.
In practice,thismeanspaying moreattentiontopolicychallengesbeyond
theconventional policy horizonsof twoor soyears.
When financial stabilityconcernsgrow, policyhorizonsneed to be
lengthenedtotake accountof the fact that the financial cycle is
considerably longer than the businesscycle.
Analytical frameworksalsoneed tobetter reflect the characteristicsof
financial cyclesand their interactionswithfinancial and macroeconomic
stability.
Central banks' pre-crisis workhorsemodels generallyassignedno
meaningful roleto macro-financial linkages.
Thefinancial crisishasdemonstratedthat suchanalytical perspectives
are woefullyinadequate.
Another dimension along whichcentral banksneedtoreflect is a better
appreciationof global monetary policy spillovers.
Global feedbackeffectsamplified thepre-crisisfinancial boom, and we
might be seeingthis mechanismat workagain.
In a highly globalisedworld, keepingone's ownhouse in order surelyis
not enough.
What doesthis mean in practice?
It doesnot require central banksto coordinate their policies closely.
But, at a minimum, it doescall for them toappreciate better the global
sideeffectsandfeedbacksthat arisefromtheir monetarypolicydecisions.

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Thisisineachcentralbank's owninterest, especiallyif thespillovershave
thepotential tofosterregionalfinancialinstabilitythat endsincrisis,with
significant global repercussionsthat swingback tothe originating
countries,like a boomerang.
Aprecondition for this shift in perspectiveis a more global analytical
approachthat factorsin interactionsand feedbacksappropriately.
Finally,I donot want toleaveyou withtheimpressionthat fiscalpolicyis
irrelevant in this discussion.
Indeed, fiscal policy plays an important role in financial stability, too. The
financial crisishasdemonstratedtheimportanceof having the fiscal
capacityto support thefinancial sectorthrough bank rescuepackages
andthe real economy through fiscal buffers.
But the financial crisishaspushed fiscal policy in many economiesonto
an unsustainablepath.
This is a lesson that wehave tokeep in mind for thefuture.Accumulating
budgetsurplusesin goodtimesprovidesgovernmentswith
theabilityto respond flexiblyto a financial crisiswithout putting fiscal
sustainability at risk.
In other words,governmentsneed tofactor in the financial cycle and to
build up additional fiscal buffers during good timesthat can be drawn
downto providesupport in bad times.
Summing up
Let me sum up. There is littledisagreement that thepast five yearshave
been unusuallychallenging.
Central bankshaveplayed a critical rolein managing the crisis and its
aftermath.

P a g e | 24
Theyare now under huge pressuretopromote a sustainablerecovery
under difficult circumstances.
And, lookingahead, they will continue to find themselvesconfronting
major challenges.
I have suggestedthat monetary historyprovidesa valuablecompassto
navigatethesetrickywaters:aclearfocusonlastingpricestability, amore
symmetrical approach tothe financial cycle, and abetter appreciationof
global spillover effects- thesewouldappear tobe the key elementsof
stronger monetary policy frameworks.
At the current juncture, there is alsoa premium on central bank
communication.
Central banksneedtoclearlycommunicate the limitsof monetary
policy, both to the public and toother policymakers.
The private sector and policymakers, who have been facing their own set
of daunting challenges in extraordinarily difficult times, will have to play
a larger rolein thenext legof theglobal recovery.
Crucially, thiswouldalsoallowcentral bankstonormalise monetary
policy in a manner consistent with a return to sustainableand balanced
growth.
Thank you.

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NIST Posts Initial
Analysisof RFI
Comments on Cybersecurity Framework for Critical
Infrastructure
TheNational Instituteof Standardsand Technology(NIST) hasposted
an initial analysisof hundredsof commentssubmittedby industryand
thepublic relatedtothe President's"Improving Critical Infrastructure
Cybersecurity" ExecutiveOrder, issuedFeb. 12,2013.
NIST is makingthisinitial analysisavailable asa statusupdate and to
helpprovidebackground for a workshoplater thismonth to discussthe
cybersecurity framework.
TheExecutiveOrder callsfor NIST towork with industrytodevelop a
voluntary frameworkto reducecybersecurity riskstothenation's critical
infrastructure, whichincludespower,water, communication and other
critical systems.
Thefirst step towarddraftingthe frameworkwassolicitinginformation
on current risk management policies,existingstandardsand
guidelines,and specific industrypracticesfrom stakeholdersthrough a
Requestfor Information (RFI).
ThesecommentsweredueApril 8, 2013.NIST received more than 200
responsesand posted them publicly.
NIST's approachtoanalyzing the input from the RFI, aswell as
identificationof thecommon cybersecurityframeworkthemesthat
emerged asa result of the analysis, is described in the paper,Initial
Analysis of Cybersecurity Framework RFI Responses.
In additiontoidentifying and describing thecommon themes,this paper
providesquestionsfor stakeholdersto consider.

P a g e | 26
Thepaper can be found at
http:/ / csrc.nist.gov/ cyberframework/ nist-initial-analysis-of-rfi-respons
es.pdf
and additional information about thecybersecurity critical infrastructure
frameworkproject isavailable at www.nist.gov/ itl/ cyberframework.cfm
Information on the 2nd Cybersecurity Framework Workshop, May29-
31,2013,at CarnegieMellonUniversityisat
www.nist.gov/ itl/ csd/ cybersecurity-framework-workshop-may-29-31-20
13.cfm
Cybersecurity Framework
Recognizingthat thenational and economicsecurityof theUnitedStates
dependson the reliablefunctioningof critical infrastructure,thePresident
under theExecutiveOrder ―Improving CriticalInfrastructure
Cybersecurity‖ hasdirected NIST towork withstakeholdersto develop a
voluntary frameworkfor reducing cyber risks to critical infrastructure.
TheFrameworkwill consistof standards, guidelines,and best practices
topromotethe protection of critical infrastructure.
Theprioritized, flexible,repeatable,and cost-effectiveapproachof the
frameworkwill help ownersand operatorsof critical infrastructureto
managecybersecurity-related risk while protectingbusiness
confidentiality, individual privacyand civil liberties.
Background - NIST Responsibilities
NIST will develop the Framework in a manner that is consistent withits
mission to promoteU.S. innovation and industrial competitiveness.
TheFrameworkwill be developed by ongoingengagement with, and
input from, stakeholdersin government, industry, and
academia, includingan open public review and comment
process, workshopsand other meansof engagement.

P a g e | 27
Todevelop the Framework,N IST will use a Request for Information
(RFI) and ongoing stakeholder engagement to:
(i)identify existingcybersecurity standards, guidelines,frameworks,and
best practicesthat areapplicabletoincreasethe security of critical
infrastructuresectorsand other interestedentities;
(ii)specifyhigh-priority gapsfor whichnew or revised standardsare
needed;and
(iii)collaborativelydevelop action plansby whichthesegapscan be
addressed.
TheFrameworkwill seekto promote thewideadoption of practicesto
increasecybersecurity acrossall sectorsand industry types.
It willseek toprovideownersandoperatorsaflexible,repeatableandcost
effectiverisk-basedapproachtoimplementingsecuritypracticeswhile
allowingorganizationsto expressrequirementstomultipleauthoritiesand
regulators.
Thebelow presentation showstheprocessby whichNIST will workwith
stakeholdersto develop the Initial Framework.

P a g e | 28
Initial Analysisof Cybersecurity Framework RFI Responses
Introduction
On February 26, 2013, NIST issued a Request for Information (RFI) on
Developing a FrameworkToImprove Critical Infrastructure
Cybersecurity.
Thepurposeofthispaper istodescribethemethodologyusedtoperform
theinitial analysis of thesubmitted responses, and toidentify and
describethe Cybersecurity Frameworkthemesthat emerged asa part of
theinitial analysis.
This initial analysiswill serveasthe basisfor additional discussion and
studyat the Cybersecurity Framework Workshop #2 tobe hosted at
Carnegie MellonUniversity in Pittsburgh, Pennsylvania on May 29-
31,2013.
AnalysisMethodology
NIST implemented a consistent and repeatable methodology to conduct
its initial analysis of the RFI responses to Federal Register Notice 78 FR
13024.
a. Review and Categorize RFI Responses
Each submittedRFI response2wasreviewedand analyzed byNIST.3
Thereview of each RFI responseincluded:
•Analysisof responsecoverageacrosscritical infrastructure sectorsand
organizationtypes;
•Identification of sectionsof text relevant to one or more of theRFI
questions;
•Categorization of relevant text to category/sub-category, asshown in
Appendix A; and

P a g e | 29
•Specificationof termsand phrasesthat identify keypointsin each
categorizedsection of relevant text.
Theresultingcategorizationwasthenusedtoidentify commonalitiesand
recurringthemes.
b. Identification of Commonalities and Recurring Themes
Commonlyused termsand phrasesidentified during theRFI response
categorizationhelped identify commonalitiesand recurringthemes
amongresponses.
Due to thevariancein terminologyand nomenclature across
sectors,NIST identifiedand normalizedtermsthat expressed key
points.
For example, thetermssecurityrequirement, security measure, and
security control wereoftenused interchangeably.
Tocorrelate these terms, NIST selectedthe term security control to label
thisconcept.
Theselected term allowsfor consistencyin nomenclature. Examples
of commonly usedtermsand phrasesinclude, but are not
limitedto:

P a g e | 30
NIST used the commonly used terms and phrases to group relevant text
from RFI responses. These groupings identified recurring and common
themes, whichwerethen separatedintothree categories:
•Framework Principles:Characteristicsand considerationsthe
Frameworkmust encompass.
•Common Points:Practicesidentifiedashaving wideutilityand
adoption.
•Initial Gaps: For the purposesof RFI input analysis, initial gapsare
thoseareaswhereRFI responseswerenot sufficient tomeet the goal of
theExecutiveOrder.

P a g e | 31
Theresultsof theinitial analysis of RFI responses,includingthe
description of each Cybersecurity Framework theme, identificationof
associated keytermsand phrases,summary statistics, examplesof RFI
responses,and representativequestionsare included in the following
sections.
This information representsan initial, high-level analysisof the inputs
NIST hasreceived toassist withthedevelopment of the Framework.
Stakeholdersareaskedto evaluate the themesidentified by
NIST, determine if thesethemesare reflectiveof the comments
received

P a g e | 32
through theRFI, and assistin thoseareaswhereadditional stakeholder
engagement will be needed to develop a sufficientlyrobust Framework.
Toassist, NIST hasprovided a seriesof representativequestionsto
encouragediscussionon thesekey themes.

P a g e | 33
Opening Remarksat SEC Roundtable
on Credit Ratings
By Chairman MaryJo White
U.S. Securitiesand Exchange
Commission, Washington, D.C.
Goodmorningeveryone, and welcometothe
Securitiesand ExchangeCommission's
Credit Ratings Roundtable, whichI have
been verymuch lookingforwardtoand
whichwill addressa rangeof critical
subjects.
I wouldlike first to extend a special welcometoour distinguished
Membersof Congressheretoday: Senator Franken, Senator Wicker, and
ChairmanGarrett.
Thank you for takingtime from your hectic schedulestospeak tous
today.
Thank you alsoin advancetoour distinguishedpanelistsfor contributing
your time and knowledgeto this roundtable.
There aremany questionsabout the appropriateroleof credit ratingsin
our financial marketplacegenerally.
We take all thequestionsseriously.
But today, our discussionswill center on whether and how to change the
agency assignment system and alternatives to the compensation models
now in use.
When Congressenacted the Dodd-Frank Act, it notedthecritical
"gatekeeper" role played in thedebt market by NationallyRecognized
Statistical RatingOrganizations(NRSROs).

P a g e | 34
It alsonoted thesystemic importanceof credit ratingsand that credit
ratingagenciesare central tocapital formation, investor confidence,and
theefficient performanceof theU.S.economy.
Congressalsocitedthe adverse impact on the economy of inaccurate
ratingsassignedtostructuredfinanceproductsduringthefinancialcrisis.
And it noted that in certain activities — particularly advising arrangers of
structured financial products on potential ratings — rating agencies face
conflictsof interestthat need to be recognizedand carefullymonitored.
As a result, the Commission wascharged withstudying thecredit rating
processfor structured productsand the conflictsof interest associated
with the issuerpay and subscriber payrating agencymodels.
We alsowereinstructedtoexaminethefeasibility of establishingan
assignedratingssystem and alternatemeanstocompensateNRSROs.
When reportingto Congress,wewererequired tosubmit
recommendationsfor regulatory or statutorychangesthat wouldbe
needed to implement our findings.
TheCommissionrequestedpubliccomment and, in preparingthe
report, the Commission's staff carefullyreviewedeach of the comment
lettersreceivedaswellasstudies,articles,and testimonyregarding
potential conflictsof interestand alternatecompensation models.
Wealsomet withseveralNRSROs, proponentsof alternativemodels,and
other market participants.
Relying on theinformation gathered from theseefforts, the staff report
describedpotential benefitsandconcernswiththesystemsproposed, and
identifiedpotential regulatory or statutorychangesthat could be
undertaken with respect to eachproposal.
Thestaff report wasfiledwithCongressin December 2012.

P a g e | 35
Given the complex issuesthe studybrought to our attentionand the
varying and sometimesconflictingviewpointsexpressed, the
Commission'sstaff recommended conveninga roundtablededicated to
thesetopicsduring whichall sidescould discussthe issuesand the
potential actionsthestudy addressed.
Todayis the day for that discussion.
As I said, I am verymuch looking forwardto hearingtheexchangeof
ideasbytoday's speakersand panelists,andusingwhat welearntodayas
weconsider approachesand appropriateresponses.
BeforeI turn thefloorback toTom Butler(directorof theSEC's Office of
Credit Ratings), I wouldlike tothank him and all of the staff from across
theCommission whoprovided help and assistancein organizingthis
roundtable.
It wastheir tirelesseffort and coordinated activitiesthat made today's
extremelyimpressive assemblageof speakersand panelistspossible.
Thank you all.

P a g e | 36
Addressing Conflicts of Interest In the
Credit Ratings Industry
By CommissionerLuisA. Aguilar
U.S. Securitiesand ExchangeCommission
Remarksat the Credit RatingsRoundtable
Washington, D.C.
Good morning. I am very pleased tobe here at
theRoundtable on Credit Ratings.
I strongly support theCommission’seffort to
evaluatewaystoimprove our credit ratings
system.
Effectiveoversight of NationallyRecognizedStatistical Rating
Organizations(―NRSROs‖) is critical toensuringaccurateratingsand
promotinginvestor confidence.
Before I begin, however, let me issuethestandard disclaimer that the
viewsI expresstodayaremy own, anddonot necessarilyreflecttheviews
of the U.S. Securitiesand Exchange Commission(―SEC‖ or
―Commission‖), my fellowCommissioners,or membersof thestaff.
As an SEC Commissioner, I have focused singularlyon how theSEC can
best serve theneedsof investors.
It isclearthat theroleplayed bycredit ratingagenciescanhaveanimpact
on the integrityof our marketsand investor confidence.
Today’s roundtableand the Commission’sDecember 2012Report to
CongressonAssigned Credit Ratingsare direct outgrowthsof industry
practicesthat permitted inaccurateratingsto underminethesecurities
market and the integrity of thecredit ratingsindustry.
A number of studies have concluded that inflated credit ratings, among
other factors, contributed to the financial crisis by masking the true risk
of manymortgage-relatedsecurities.

P a g e | 37
For example, prior tothe financial crisis, NRSROs issuedcredit ratings
for tensof thousandsof U.S residential mortgagebacked securities
(―RMBS‖) and collateralizeddebt obligations(―CDO‖).
Amajorityof the productsreceivedAAA and other investment-grade
credit ratingsdespitetheir risky features.
AlthoughAAA-rated securitieshavehistoricallyhad lessthan 1%
probabilityof incurringdefaults,over 90% of theAAA ratingsgiven to
subprime RMBSsecuritiesthat originated in 2006and 2007werelater
downgradedby theNRSROs tojunk status.
Theselargenumbersof downgradesresulted in great harm and requires
that wemake sure theydon’t reflect a faultysystemic process.
Too that end, one of the key concerns raised by commentators regarding
the current structure of the credit ratings process is the issue of conflicts
of interest associatedwiththe ―issuer-pays‖ model.
Thismodel allowstheparty planningon issuinga financial instrument to
payan NRSRO for assigningthe rating.
Anumber of commentatorshaveargued that this businessmodel
encouragesratingsshopping bytheissuersand investment banksselling
thesecurities,and resultsin undue pressure for NRSROs togive
favorableratingstoattract business.
Investorsuse credit ratingstomake investment decisions, generally
optingfor ―investment-grade‖ products– thoserated asAAA toBBB-
Productsthat carrya greater risk are labeled ―below investment grade.‖
Obviously, productsthat receivean investment grade ratinghave a much
broadermarket in whichto sell.
Asaresult, therecanbeagreatdealofincentivetohaveaproduct ratedat
investment grade level.

P a g e | 38
Therefore, it is important to establishprocessestoensure that a product
receivethe appropriate ratinglevel.
Afaulty system of assigning credit ratingscan devastate the best financial
planning and destroy financial security, particularly for investors that are
retired or nearing retirement.
Given the importanceof credit ratings,it is criticalthat credit ratingsbe
issuedwith integrityand transparency.
It is clearthat thepast cannot be repeated. Thefinancial crisis cost
Americans$3.4 trillionin retirement savingsand it triggeredthe worst
crisissincetheGreat Depression.
TheFinancial CrisisInquiry Committee concludedthat ―thefailures of
thecredit ratingagencieswereessential cogsin thewheelof financial
destruction … [and] werekeyenablersof the financial meltdown.‖
I want tothank all of the panelistsfor beingheretoday to share your
views.
All of you have important informationtosharewithusabout the credit
ratingssystem, and I appreciatethat you’ve taken thetime to be withus.
As today’sdiscussionunfolds, weshould remember theneedsof
investors,whodeservea credit ratingssystem that is
transparent, orderly, and that is not derailedby conflictsof interest.
Thank you.

P a g e | 39
Raising the bar for the next phase of
growthanddevelopment – sustaining
transformative momentum
Welcomingaddressby Dr Zeti Akhtar
Aziz, Governor of theCentral Bank of
Malaysia, at the10th IFSB (Islamic
Financial ServicesBoard) Summit 2013
―Thefuture of the Islamic financial
servicesindustry – resilience,stabilityand
inclusivegrowth‖, SasanaKijang, Kuala
Lumpur.
It is a great pleasureto welcomeyou to this 10th IFSBSummit, on the
―TheFuture of the Islamic Financial ServicesIndustry:
Resilience, Stabilityand InclusiveGrowth‖.
Bank Negara Malaysia is most honored tohostthisyear’s summit, which
is held in conjunction withthe 10th anniversary of the IslamicFinancial
ServicesBoard (IFSB).
It washere in Kuala Lumpur 10years agothat wewitnessedthe
momentousoccasion of the IFSB inauguration, that wastheculmination
of international collaborationamong the founding member countrieswith
thesupport of several keyinternational and multilateral institutions.
Its landmark establishment in 2002astheinternational prudential
standardsettingbodyfortheIslamicfinancemarkedamajor milestonein
theeffort to strengthen the international infrastructure for theIslamic
financialsystem, steeringthepathforitssuccessful integrationasaviable
component of the global financial system.
Adecadeon, the work of the IFSB in ensuring a cohesivecross-border
regulatoryframeworkandtheinternationalbest practicesthat are attuned
tothe intrinsiccharacteristicsand peculiaritiesof Islamic financial
intermediation, haveserved to underpin the development of a sound and

P a g e | 40
stableIslamic financial system, usheringin a phaseof rapid growthand
greater internationalizationof the industry.
Indeed, 10 years since the founding of the IFSB have been a period of
significance, during which the Islamic financial services industry has
grownimpressivelywith itslandscapedramaticallyevolved.
This growthaccelerationhasbeen accompanied by the wideningof its
geographical reachtranscendingitstraditional bordersin Muslim
majoritycountriestothe more establishedfinancial centres.
In addition, Islamicfinancehasevolved asa comprehensivesystem of
intermediationservicingall segmentsof society, including
governments,businessesand householdsregardlessof scaleof
businessesand income levels.
In this decade, Islamic financehasalsoevolved from being
domestic-centric tobecome increasinglyinternationalized,
intermediating funds across borders and becoming a new vehicle that
bridges economies and fostering closer financial linkages, particularly
amongemerging and developing markets.
As a form of financial intermediationthat is well anchoredtoservethe
realeconomy, Islamicfinanceoffersdistinctpotentialtoachievethegoals
of inclusivegrowthand financial stability.
Its foundationshavebeen strengthenedwiththe settingup of the IFSB
andbeforethat, theAccounting andAuditing Organisationfor Islamic
Financial Institutions(AAOIFI), have taken the lead in settingthe
prudential and accountingstandardsfor the industry.
Combined withcontinuouscapacitybuildinginitiativesand institutional
development, it hasresultedin the opportunityto achievescaleand has
allowedthe Islamic financial servicesindustry totransition intoa
dynamic, fast growingand competitive form of financial intermediation
for the global community.

P a g e | 41
TheIFSB todayis celebratingitstenth anniversary in a worldwhichis
changingprofoundly.
Anew growthand development agenda isunfoldingbeforeus.
Given the severe damage and devastation caused by theglobal financial
crisisand the ensuingeconomicdownturns, theroadto anenduring
recoveryand lastingprosperitydemandsa global policy responsethat
brings about a new economictrajectorybuilt on a strong, more inclusive
andmore sustainablegrowthpath.
Common challengesthat have alsocome to the forefront, such as
poverty, increasinginequalityand the imperativefor greater social
cohesion, have alsocalledfor theconstruction of policy objectivesand
strategiesthat can enhancestability, social well beingand environmental
sustainability.
In the wakeof theglobal financial crisis, there is consensuson the need
for a return tofinancial systemsthat serve the real economy, and the
demandsfor more responsiblefinancial practicesfrom the financial
sector, that alsoincludesthecommitment toachievesocio-economic
goals.
In response,theinternationalcommunityisprioritizingfinancialstability
bystrengthening financial regulation.
This includesfinancial reforms aimed at protectingdepositorsfrom
excessiverisk-taking, over-leveragingand unfetteredinnovation.
Thereform initiativeshave alsofocused on enhancingcapital and
liquiditystandards, reinforcedby movestostrengthen the
macro-prudential orientation of regulationto complement
micro-prudential supervisionto managetherisksarisingfrom the
interdependencieswithin the financial system.
Whilst thebreadth of regulatory changesbeingconsideredcollectively
endeavorto strengthen financial system resilience,the key challengefor

P a g e | 42
policymakers and regulatorsgoing forwardis alsotoachieveinclusive
andmore sustainablegrowth, whilst ensuring financial stability.
Whilst Islamicfinancehasbenefitedfrom a well-developed, more
competitiveand well regulatedeco-system, it needsto build on and
reinforcethesolid foundationsthat hasbeen achieved in this decade.
As the industry transitionsintoa new eraof growthand development in
thispost-crisisworld, thecompetitive financial landscapeis being
redrawnby theevolving international regulatory reforms, changing
operatingmodels, risingconsumer expectationsand increased
competition.
In this more challengingenvironment, the successof sustainingthe
momentum of Islamic financeasatransformative agent for the
economy, will hingeon the abilityto keep raisingthe bar in thepursuit of
aneffectivefunctioningand sound Islamicfinancial system.
Post-crisis,theincreasedemphasisfor inclusiveandsustainableproducts
aswell asresponsiblecorporate behavior providesclear potential for
Islamic financial players to demonstrateleadershipby capitalizingon
core valuepropositionsof Islamicfinancial intermediation.
Thereisalsoscopeforgreaterleverageontheadvancesoftechnologyand
new institutional arrangementsthat can enhanceoperational
excellence,particularlydistribution channels for extendingoutreach tothe
rangeof usersfrom householdsto microenterprisesand small and
medium scaleenterprises.
In addition, innovations in Islamic financial solutionswill need to take
into account the higher regulatory expectations for more
transparency, and the need for the effective management of risks and
capital.
This involvesstrengtheningthe resilienceof theIslamicfinancial system
in alignment withtheevolving international regulatory developmentsthus
raisingthebar of industry performance.
TheIFSB hasmade significant advancementsin leadingtheeffortsto

P a g e | 43
reviewspecific measuresput forwardbytheBaselCommitteeforpossible
adoption in Islamic finance.
Further tothis is theimperativeto cultivate a strong risk culture within
institutions.
Reinforced by a robust shariahgovernance framework, it will ensure that
innovationfor furthering thedevelopment of Islamicfinanceisharnessed
withinthe boundariesof the Shariah, which wouldavert overzealous
innovativeactivitiesthat could underminefinancial stability.
Let me concludemy remarks.
Muchhasbeenachieved, bothin termsof theroleand contributionof the
IFSB, and the advancement made by Islamic financein this recent
decade.
This hasbeen an outcome of cumulativeeffortsto strengthen the
foundationsof the Islamic financial system.
As the industry gearsitself for the next phaseof growth in themore
challengingenvironment, our commitment and strategiesto keep raising
thebar tobring Islamicfinancetoanewlevel will enhanceitsprospect to
contributeto achievingour shared vision of inclusivegrowthin an
environment of financial stability.

P a g e | 44
Changesin the Large Exposure
Regime
CONSULTATION PAPER
GUERNSEY FINANCIAL
SERVICES COMMISSION
1:Executive Summary
1.1Overview
This paper containsfull details of theproposalstosubstantiallyalter the
LargeExposure principlesand guidancethat apply to licenseddeposit
takersthat are incorporatedin Guernsey.
It is proposedthat the new regime wouldtake effect from 1January2014.
Theseproposalsincludechangestoenhancethequarterly prudential
reporting tothe Commission and thiswouldaffect not only licensed
deposit takersincorporatedin theBailiwick, but alsothoselicensed
deposit takerswhoseprincipal place of businessisoutsidethe Bailiwick.
Thecontext for the review is that theexistingPrinciple1/ 1994/ 24
―Principlesand Guidancetobe followedby a locallyincorporated
licenseddeposit taking institution enteringinto a largeexposure‖ paper
publishedbythe Commission in 1994nolonger adequatelyaddressesthe
risksassociated withlargeexposures,particularlythosearisingfrom the
systemic and market risks that became evident asa result of the
2007/ 2008financial crisis.
In respect of largeexposures,the Commission hastended tobe a
―pragmatic‖ supervisorrather than a rigid standard based
supervisor, and, it hasfrom timeto time allowedsuitablycollateralised
largeexposuresin excessof 25% of net capital base.

P a g e | 45
Given that anychange to a more restrictive approach may have a business
impact on licenseesthe Commission feelsthat it isappropriate toseek the
viewsof industry.
TheCommission is proposingto retain several elementsof itspragmatic
approachand in seekingthe viewsof industry it will be open to bilateral
discussionswithlicenseesabout particular typesof exposures.
2. What is proposed?
Thesubstantivechangesbeing proposed in updated guidanceare as
follows:
- Exposurestocentral governmentsand market loansof lessthan 12
months’maturity, whichare exempt from the current largeexposure
regime, will be deemed tobe largeexposuresunder the new regime.
- Thecurrent upstreamingregime will changeto expressagreed
exposure limitstoparent/ group banks asa proportion(i.e. %) of
capital baserather than a proportionof assets. The upstreaming
regimewill includeon balancesheet and off balancesheet exposures.
- Exposurestothirdpartybankswillnormallybelimitedtoamaximum
of 100%of net capital base and will comprise cash
placements, holding of debt instrumentsand off balancesheet
exposures.Themaximum proportion (%) of exposure will be
determined accordingtotheratingofthethird partybank, although
limitedflexibilitywillbepermitted in the caseof exceptional short-
term excesses.
- In relationto exposuresto sovereigns, theconcept of ZoneAand
ZoneB countrieswill be replaced withtwodifferent OECD-based
groupings- High IncomeOECD countries and other countries.
Exposureswill be capped at a maximum of 1000%of net capital base
andwill be determinedaccordingto the rating of the sovereign.

P a g e | 46
- Exposurestoclientsorgroupsofconnectedclientswillbecappedat a
maximum of 25% of net capital base,unlessthe exposure is secured
bycash and/ or High Income OECD government securities,or the
exposureissubjecttoaparentalguarantee(whichinitselfwouldneed
tobe included in anyupstreaminglimit).
Sub-participationagreementsthat transfer credit risk off thebalance
sheet of the Guernseybank will alsobe considered.
- Better definition of what constitutes―connected clients‖will be
provided.
- Theprudential reportingformswillbechangedtobettercapturelarge
exposuresthat havenot previouslybeenreported; e.g. holdingsof debt
that equateto more than 10% of a bank’snet capital base.
In accordancewithexpectedinternational developments, the
Commission alsoproposestocapturethe top twenty, rather thanthe
current top ten, largest exposures.
Brancheswill be askedto report similar details, but in termsof their
parental capital, sothat data on any significant credit concentrationrisk
in a branch in Guernseythat may impact on a head officeelsewherecan
becollected.
- Breachesof largeexposure limitswill be a reportable event. The
Commissionisproposinga staged approach todealingwith
exposuresthat cannot be regularised.
- The800% aggregate limit on exposureswouldbe retained, but
exposurestoGroup, to thirdparty banksand tosovereignswouldbe
excludedfrom thisaggregate.
- Largeexposuresexistingprior tothe intendedeffectivedate for the
new regime of 1January 2014wouldbe grandfatheredin.

P a g e | 47
1.3 Rationale for change
Thelargeexposureregimeisall about capturing concentrationriskandit
is coveredby s24of The Banking Supervision(Bailiwick of Guernsey)
Law, 1994.
Conventional wisdom, asdictatedby theCapital RequirementsDirective
andthe Basel Core Principlesfor EffectiveBanking Supervision, states
that noexposuretoaclient orconnectedgroupofclientsshouldequateto
more than 25% of net capital.
Short term interbank exposureshavehistoricallybeen exempt from this
requirement.
Our current environment reflectstheseexemptionsand alsopermits
exposurestoclientstoexceed the25% limit.
Whilst pure concentration risk to singleobligor counterpartieswasnot
seen asa major direct contributor tothe2008financial crisis,nonetheless
elementsof concentration risk wereseen asindirect contributors.
Interconnectednesswithinand betweengroupswereseen asmagnifiers
of some exposures and concentrationsthrough sectoral exposuresto
particular economicsectors(e.g. theIrish propertydevelopment sector)
affected credit assessmentsof manyorganisations.
That said, theguidanceonlargeexposuresremainshistoricin nature;the
BaselCommitteeguidanceonmeasuringandcontrollinglargeexposures
datesback to 1991,and our own localregimehasnot been significantly
updatedsince1994.
However,there havebeen substantial changestothe EU largeexposure
regime.
These substantial changes have their origin in late 2007 and early
2008, when the Committee of European Banking Supervisors
(CEBS), which has since become the European Banking
Authority, reportedto the

P a g e | 48
European Commission on the effectivenessof the largeexposure
provisionsof the Capital RequirementsDirective.
Thereport concluded that market failuresassociatedwithsystemic risk
and moral hazard applied tointerbank exposuresregardlessof maturity.
Accordingly, thelargeexposureregimeforEU memberstateswasrevised
with effect from December 2010totighten largeexposure
limits,particularlyin relationto interbank and intra-grouplending, which
theEuropean Commission agreed wasa major systemic risk in thewake
of the financial crisis.
Under the revised EU regime, short term loanstobanks areno longer
exempt and whilst limitednational discretion is availabletomember
statesin relationto intra-group lending, loanstothird partybanksare
now capped at 25% of net capital, unlessthe lendingbank is very small.
In reality, bythe timethechangestotheEU regimecame along, market
practicehad alreadychangedtoreflectthis more cautiousapproach to
interbank lending.
It isworthnotingthat theCEBS conclusionswerealsoreflectedintheUK
Government’sresponsetothe report on bankingreform by the
Independent Commission on Banking(―the Vickers Report‖).
TheHM Treasurywhitepaper ―BankingReform – deliveringstability
and supporting a stableeconomy‖ publishedin June2012 envisagesthe
limitingof a ring-fencedbank’sexposure tofinancialinstitutionsin order
toprevent systemicshocks.
ClearlyGuernseyis not in the EU, but neverthelesswewouldnot wishto
bea completeoutlier in respect of largeexposures.
The Basel Core Principles for Effective Banking Supervision do give the
supervisor some latitude in permitting ―minor deviations‖ from the 25%
limit, but the economic climate that has prevailed for all but the last few
years combined with the Commission’s wish to be a pragmatic regulator
hasmeant that these―minor deviations‖ have been permittedmore

P a g e | 49
frequentlyin thepast than is arguablynow prudent in the current
economicand regulatoryclimate.
Theguidance however, remainsthesame and a changeis needed to
manageexpectationsand formalise a prudent approach.
In developing proposals for a new large exposure regime the Commission
hashad regard to a number of other regimes, including thoseoperating in
theUK and theother Crown Dependencies.
None of theseare a good fit in their entirety for thetype of banking
businessdone in and from within the Bailiwick.
The Commission has therefore tried to balance the requirements of other
regimes against the type of banking business that exists in the
Bailiwick, recognising also the intra-group funding that many licensees
provide.
1.4 Who would be affected?
Licensed deposit takers that are incorporated in Guernsey would be those
principally affected, given that limits on exposures are being proposed in
relationtocapital.
However, the proposed revisions to the large exposure regime include
enhanced quarterly prudential reporting for all licensees and branches
wouldthereforebe affectedby thesechangestothe BSL/ 2 reports.
The Commission
TheGuernsey Financial ServicesCommission is the regulatorybody for
thefinancesector in the Bailiwick of Guernsey. The Commission’s
primaryobjectiveis toregulateand supervise financial servicesin
Guernsey, with integrity and efficiency, and in sodoing help touphold
theinternational reputation of Guernsey asa financecentre.
Tolearnmore:
http:/ / www.gfsc.gg/ Banking/ News/ Documents/ Consultation%20pap
er%20for%20Commission%20website.pdf

P a g e | 50
GovernorSarah Bloom Raskin
At the Society of Government Economists
andtheNational EconomistsClub,
Washington, D.C.
Prospects for a Stronger Recovery
Thank you.
I am very pleased to be here among an audienceof
professional economists,whichis certainlypreferable
toappearingbefore an audienceof unprofessional
economists.
I like your kind! Your talents are needed now more
than ever as we try to put the toolsof the economic
profession toworkfor the common good.
It's easyto be aneconomist wholooksback on crisesand crashesand
tries toexplain whythey happened, but much harder tobe an economist
whoseeffortsmanagetohelpstopthemfrom happeningin thefirstplace.
Economicpolicymaking, at itsbest, reflectsa continuousstruggleto
makesurethat dataandexplanationsofsuchdataareconsistent withreal
experience.
If we're to engagein this strugglehonestly, it's noeasytask.It involves
understandingnot just thereliabilityand signal in variousdata, but also
questioningwhetherthedata accordswithour understandingof actual
experience.
So, to get thisright requires many different perspectives,not just on the
data but on the underlying realitiesthedata are trying to capture.

P a g e | 51
Government economistsunderstand that non-economistsbring
somethingvaluabletothetablein policymaking--a groundedperspective
in what ishappeningin theeconomy.
With that said, what is reallyhappening now in theAmerican economy?
What dotheeconomic dataweseeat theFederalReservecurrentlyshow,
andhow do wethink thesedata lineup withthe economicrealitiesof
most American householdsand businesses?
In my remarkstoday I will offer my assessment of recent economic
developmentsand the economicoutlook, and I will discussthe actions
that the Federal Reserve hasbeen taking, in light of itsview of
developmentsand the outlook, to support the economic recovery.
Before I begin, I should notethat theviewsthat I will be presentingare
my own and not necessarilythoseof my colleagueson the Federal Open
Market Committee(FOMC) or the Board of Governors.
Recent Economic and Financial Developments
For thepast three and ahalf years the U.S.economy hasbeen in a
recovery--albeit a very weakone--from a severefinancial crisisand the
deepest recessionof thepost-World War II period.
Theunemployment rate, whichreacheda high of 10percent in thefall of
2009,hassincecomedown2-1/ 2percentagepoints,to7.5percent in
April.
Theincreasein economic activityand thedeclinein the unemployment
rate are, of course, welcome, but westill have a longwaytogoto reach
what feelslike a healthyeconomy.
In fact, the paceof recovery hasbeen slowerthan most had expected.
Thegap betweenactual output and theeconomy's potential remainsquite
large,accordingtoestimatesfrom theCongressional BudgetOffice, and
theunemployment rate today remainswellabove levelsseen prior to

P a g e | 52
therecession, and well above the level that theCommittee thinkscan be
sustainedoncea full recovery hasbeen achieved.
In addition, thenumberoflong-termunemployed--peoplewhohavebeen
unemployed for 27weeksor more--remainshistoricallyhigh.
My interpretationof theeconomicdata that wehave receivedover the
past few quartersis that the recovery hascontinued to gain traction.
TheBureau of EconomicAnalysis reportedlastmonth that real gross
domesticproduct (GDP) roseatanannualrateof2-1/ 2percent inthefirst
quarter of this year after barelyexpandingat all in the fourth quarter of
2012.
Thestep-up in growthin the first quarter partly reflecteda rebound from
last year'sdrought and Hurricane Sandy.
Smoothingthrough thesefactors, real GDP wasabout 1-3/4percent
aboveitsyear-earlier level in the first quarter, a modest gain that isabout
in linewith thepaceof growthduring much of the recovery.
Thestrength of therecoveryamong thecomponentsof GDP has been
mixedrecently.
In termsof thehousing sector, there is noquestionthat many
communities and neighborhoodsweredevastatedby the effectsof the
financial crisis.
Recently, weseethat overall demand hasbeen strengthening, withboth
homesalesand pricesrisingmarkedlyin many areas.
Both new and existinghomesaleshavemovedup, on net, sincelate
2011, and housingstartsaveragedan annual rate of nearly1million units
in thefirst quarter of thisyear, up considerablyfrom theextremely low
levelsthat prevailedthrough 2011.
Inventoriesof new homesfor salehave becomequitelean in most
marketsover the past year, a notablechange from earlier in therecovery.

P a g e | 53
Theincreasein activityin the housing sector hasbeendriven by
historicallylow mortgagerates, growingoptimismabout future house
prices,continuedgainsin thejobmarket, andsizablepurchasesofhomes
byinvestors.
Elsewherein the household sector, consumer spending--about
two-thirds of overall final demand--hascontinued growingat a moderate
pace.
On thewhole, familieshave benefitedfrom the modest improvement in
thelabor market, and risingstock pricesand reboundinghome values
havehelpedsome householdsrecoup part of thewealththeylostduring
therecession.
However, overall wagegrowthhasbeen anemic, and manyhouseholds
havenot seen their circumstancesimprove materially.
As I describedin a speech lastmonth, globalizationand technological
changehave continuedto shift the occupationsand industrial
distribution of new jobsavailable.
Thesecurrentsof globalizationand technological changecontinueon
their path, makingit morelikelythat workerswhowerelaidoff during the
recession wouldbe unableto find reemployment that isof comparable
qualityto their previousjobs.
About two-thirdsof all job lossesin the recessionwerein middle-wage
occupations--suchasmanufacturing, skilledconstruction, and office
administrationjobs--but theseoccupationshave accounted for lessthan
one-fourth of the job growthduring the recovery.
By contrast, lower-wageoccupations, such asretail sales, food
service, and other lower-paying servicejobs, accounted for only one-
fifth of job lossesduring the recessionbut more than one-half of total
jobgainsduring the recovery.
As a result of thesetrends in job creation, whichcould well havebeen
exacerbated by thesevere nature of thecrisis, the earningspotential for

P a g e | 54
manyhouseholdslikelyremainsbelow what theyhad anticipatedin the
years beforethe recession.
Moreover,asyou all know, thetemporarypayroll taxcut hasnow
expired, and many householdshaveseen their disposableincomes
reducedfor thisreasonaswell.
Spendingin the businesssector recentlyhasincreasedonly
modestly, perhapsdue in part totheeffect of theserecent tax changes
on consumers.
Real spending on equipment and software rose about 4 percent over the
past 12 months, according to the most recent GDP report, a modest gain
for this categoryof spending.
Indicatorsfor capital investment in themonthsahead, includingnew
ordersfor durable capital goodsand survey measuresof business
sentiment, suggest that growth in businessspendingon new equipment
and softwareis likelyto remain modest in thecomingquarters.
Turningtothe government sector, thelegislated reduction in spending
bythe federal government is exertinga clear and continuingdrag on
economicactivity.
Even prior tothebulk of thespendingcutsassociatedwith
sequestration, real purchasesbythefederal government werereported to
havedroppedat an annual rate of more than 8 percent in the first quarter
of thisyear, followingan even larger drop in the fourth quarter of lastyear.
Thesecutsin federal spending arelikely tobe an important influence on
thenear-term prospectsfor economicgrowth, and I will saymore about
thisissuein a moment.
In contrast tothe federal government, the budget outlook for stateand
localgovernment continuestoimprove, and thedrag on economic
activityfrom this sector's cutbacksin spendinghasdiminished
considerably.

P a g e | 55
Reflectingsome of these mixed influences,asI already noted, real GDP
hasbeen rising at a very modest rate, and the labor market hasshown
similarlymodest gainsover the past year, withtheunemployment rate
comingdown about 1/2 percentagepoint.
Tomore fullyunderstand theexperienceof the 11.7millionAmericans
whocan't find work, welook to broadermeasuresof labor
underutilization, which take intoaccount job seekerswhohave stopped
lookingfor workbecausetheyhavebecome discouraged, and people
workingpart timebut whowouldprefer toworkfull time.
Recently, thesenumbers seem to be coming down.
Thegainsin payroll employment over thisperiodhave been about in line
withthe declinein the unemployment rate, although, asistypical, the
paceof job gainshasbeen somewhat erraticin recent months.
Sincethebeginningof theyear, theincreasesinpayroll employment have
averaged 196,000per month, a littleabove the183,000 averagemonthly
gainsobserved during 2012.
Other indicatorsfrom the labormarket have alsoshownsome
improvement recently. Initial claimsfor unemployment insurancehave
declined sincelastsummer, and the number of job openingsappearsto
beincreasing.
I hopetheseindicatorsmean weareturning thecorner on some of the
painful costsassociatedwith beingunemployed or underemployed in
America.
Turningtoinflation, recent datashowthat pricepressureshaveremained
subdued. Both total and core inflation wereonly about 1percent over the
12monthsending in March,below theFOMC's long-run objectiveof 2
percent.
Inflationisbeingrestrainedby the continued slack in labor and product
markets,while stableinflationexpectationshave offset disinflationary
pressuresto some extent.

P a g e | 56
Moreover,the increasein gasolinepricesthat wesaw earlier in theyear
appearsto have fullyreversed, and thepath of oil futurespricesis
downward-sloping, suggestingthat energypricesare likely to hold down
headlineinflationratesin the yearsahead.
The Economic Outlook
Let me now turn to the outlook.
As my Federal Reserve colleaguesand I have noted in thepast, the pace
of the economic recoveryhasbeen restrainedby lingeringeffects of the
financial crisis.
Assessingthecurrent strengthof theheadwindsrelated totheselingering
effectsisan important determinant of theeconomic outlook for the
comingyears.
Unfortunately, current federal fiscal policy is oneheadwindtothe
recovery that hasintensifiedthisyear.
In fact, federal fiscal policy hasbeen tighteningsince2011, after having
been quiteexpansionaryduring the recessionand earlyin the recovery.
Morerecently, actionsby theAdministration and theCongresstoreduce
thebudget deficit have ledtofurther tighteningof federal fiscal policy.
As I already mentioned, both thetax legislationsignedintolaw in
January and the sharp spendingcutsassociatedwithsequestrationwill
likely significantlyhinder GDP growththis year.
Indeed, the Congressional Budget Office hasestimated that these
changesin fiscal policy wouldreduceGDP growthby 1-1/2 percentage
pointsthis year relativetowhat weotherwisewouldhave achieved.
Looking further ahead, fiscal policyseemslikely toremain restrictiveat
thefederal level.

P a g e | 57
Theheadwindsfrom thehousingsector have eased, and housing market
activityis likely tocontinuetocontributeto GDP growthover the next
few years.
Theseheadwindshad been substantial, asthe aftermath of the financial
crisisand housing bubble left many homeownersunderwateron their
mortgages,a largeoverhang of vacant homes, and mortgagecredit very
hard toobtain for anyone without an excellent credit record and a sizable
downpayment.
Therise in house pricesover the past year or sohasliftedhousehold net
worthand pushed some homeownersabovewateron their mortgages.
Thesedevelopmentsmayhelptoeasecredit formanyhouseholdsas
well, although mortgagecredit remainsverytight.
In a speech last month, I described how thenet declinein housing
wealthsincetherecession hashad particularlyacuteeffectson the
balancesheetsof lower- and middle-incomehouseholds,which tend to
hold a relativelyhigh share of their total wealthin their homes.
Householdsat the bottom of the income distributionhave alsohad a
harder time than othersfindingjobsduringthe recovery and their wages
havecontinuedtostagnate.
In my view, the largeand increasingamount of inequalityin income and
wealth, whichhasbeen an ongoing development for decades, may have
exacerbated the crisisand I think more research is required todetermine
whetherit may alsoposea significant headwindto the recovery from the
crisis for yearsto come.
So, whileI am hopeful that pressureswill easefurther ashome prices
continuetorebound, I alsobelievethat some of the restraintson the
recoverymay bequite long-lasting.
Theheadwindfrom the financial sector alsohasdiminishedsomewhat
over thepast year and should present lessof a restraint on economic
growththanhasbeenthecaseintherecent past. U.S. equitypricesareup

P a g e | 58
more than 10 percent sofar this year followinglast year's13 percent
increase.
Riskspreadsembeddedin the interest ratespaid by manyAmerican
businesses,although still abovetheir pre-crisislevels, havealsomoved
downsubstantiallyover the past year tolevelsthat are moderate, given
thestateof the broader economy.
Thesituationin Europe, although still uncertain, appearsto have
improved sincelast summer--aidedimportantlyby thepoliciesof the
European Central Bank (ECB)--and thesedevelopmentshave ledto an
improvement in financial conditionsglobally.
Policy actionsand promises,includingthe ECB'sprogram topurchase
thesovereign debt of vulnerableeuro-areacountriesand discussions
about creatinga bankingunion, appear tohave helpedmarket
participantsnegotiatepast some recent hurdles, includingthechallenges
in forming a governingcoalitionin Italyand thesevere banking
difficultiesin Cyprus.
If policymakers in Europe can follow through on their commitmentsto
financialintegrationandstructuralreforms,amongotherthings,financial
stressin Europe should continueto lessen, and European economies
should graduallyrecover from their current slump.
If the economy in Europe wereto begin togrow again, it could support
global economic growthmore broadly.
Thefinancial condition of the U.S.bankingsector hasalsocontinued to
improvefrom the perspectiveof regulatory capital.
While much workremains for regulatorsand banksimplementing
pendingcapital requirements,most large, medium-sized, and
communitybanks are in stronger capital positionstodaythan theywere
prior tothe financial crisis.
Although not all, some consumersat least, areseeingthebenefitsof
improvementsin financial markets.

P a g e | 59
In combination withlowinterestrates,the easingof financial stresshas
allowedsome homeownersto refinancetheir mortgagesto lowertheir
monthlypayments, andsometypesof loans,suchasthosefor purchasing
a new or used car, have become availableto more people.
That said, weclearlystill have a long wayto goin assuringthat
Americanshave accessto affordablecredit.
As I noted, an especiallylargenumber of people are unabletoobtain
mortgagecredit, and credit card borrowingis alsotight.
Taken together, theincomingdata and my own analysis of recent
developmentsin fiscal policy suggest that the recovery will continueat a
moderate pace, and theunemployment rate will fall gradually.
According to the Summary of Economic Projectionsthat wasreleased by
Federal Reserve Board membersand Reserve Bank presidentsafter the
MarchFOMC meeting, mycolleaguesandI expectedrealGDPgrowthto
step up moderately this year, risingroughly 2-1/2 percent after having
risen 1-3/ 4percent in 2012.
In theprojection, participantsalsoexpectedtheunemployment ratetobe
in therangeof 7.3to7.5percent by the end of theyear.
Looking a bit further ahead, FOMC participantslargely expected the
unemployment rate tocontinuereceding, but it wasexpected to remain
aboveitslong-run sustainablelevel for several years.
Meanwhile, inflationwasexpected to remain closetoor a littlebelowthe
Committee'sobjectiveof 2 percent, consistent with ongoingslackin the
laborand product marketsand well-anchoredinflation expectations.
Monetary Policy Developments
In light of this outlook and the risksaround theoutlook, it hasbeen
appropriatefor the Federal Reserve to continueto pursuea highly
accommodativemonetary policy.

P a g e | 60
As you all know, duringthe financial crisisand at theonset of the
recession, the Federal Reserve took strongeasingmeasures,cuttingthe
targetforthefederalfundsrate--thetraditionaltoolofmonetarypolicy--to
nearlyzero by theend of 2008.
During the recovery, wehave provided additional accommodation
through twonontraditional policytools aimed at putting downward
pressure on longer-term interestrateseven withshort-term ratesstuck at
zero:
(1) purchasesof Treasurysecuritiesand mortgage backed securities and
(2) communication about thefuture path of the federal fundsrate.
Our most recent policy actionshave sought tostrengthentherecoveryin
thefaceof only slowimprovementsin labor market conditionsand
subdued inflationarypressures.
After lastSeptember's policy meeting, the FOMC announcedthat the
Federal Reserve wouldcontinueasset purchasesuntil theoutlook for the
labormarket hasimproved substantiallyin the context of pricestability.
Then, at themeetingin December, theFOMC voted to continue
purchasinglonger-term Treasurysecurities at a pace of $45billion each
month and agencymortgage-backed securitiesat a paceof $40billion
each month, and wehave maintainedthat paceof asset purchasessofar
thisyear.
In consideringchangestothepace of asset purchasesin thefuture, we
takeintoaccount judgmentsabout boththeefficacyandpotential costsof
thesepurchases,includingpotential risksto inflation and financial
stability, aswellastheextent ofprogresstowardour economicobjectives.
At its December meeting, the FOMC also recast itsforward guidance to
clarify how the target for the federal funds rate is expected to depend on
futureeconomicdevelopments.

P a g e | 61
Specifically, wesaid that weanticipate that an exceptionallylowfunds
rate is likely tobe warrantedat least aslong asthe unemployment rate
remainsabove 6-1/ 2percent, inflation over the period betweenone and
twoyears ahead isprojectedto be nomore than 1/ 2percentagepoint
above2 percent, and longer-term inflationexpectationsremain well
anchored.
Thesethresholdsareintendedtomake monetarypolicy more transparent
andpredictabletothepublic by makingmore explicit our intentionto
maintainpolicy accommodation aslongasneeded to promote a stronger
recoveryin thecontext of price stability.
Although it is still tooearlyto assessthefull effectsof themost recent
policy actions,availableresearch suggeststhat our previousasset
purchaseshaveeased financial conditionsand provided meaningful
support to theeconomicrecovery.
Given itsstatutorymandate, theFOMC's policyactionsand
communicationshave naturallysought tolowerinterest ratesasa means
of strengthening aggregate demand, promoting thepace of recoveryin
thelabormarket, and keepinginflationfrom fallingfurtherbelowtherate
preferredby the Committeeover the longer run.
We will continue to calibratemonetary policy--including both the
ongoing pace of asset purchasesand communicationsabout the likely
path of thefederal fundsrate--inlight of our interpretationsof the latest
data and theimplicationsof thoseinterpretationsfor the outlookfor
economicactivity, labor market conditions,and inflation.
Conclusion
In summary, the U.S. economy has continued to recover from the effects
of the financial crisis and deep recession, though at a pace that has been
disappointinglyslow.
Therecovery doesappear tohavepicked up steam in some sectors, most
notablyin housing, likely reflectingthe easingof some of theheadwinds

P a g e | 62
that had been holdingback the paceof therecovery in earlier years.
However,federal fiscal policy remainsan important source of restraint.
In light of thesefactors,mostmembersof the FOMC project a modest
improvement in thepace of therecoverythisyear and
next, and, accordingly, a modest declinein theunemployment rate.
TheFederal Reserve will continueto conduct monetary policy soasto
promotea stronger economicrecovery in thecontext of pricestability.

P a g e | 63
Opening Speech
byYolanda BanksMcCoy,
Head – Investmentsand SecuritiesDivision,
Cayman IslandsMonetaryAuthority
at the 100WHF Cayman Event 2013
Committee members, distinguished
guests, GAIM Ops delegates, ladies and
gentlemen:GoodAfternoon.
It is anhonour tobe a part of this afternoon’sEvent, and I thank the
membersof theCayman Committeefor their invitation tospeak withyou
today.
Theinvitationcame with the remit tooffer an updateon thehedgefund
industryin theCayman Islands,soI proposetodoexactlythat in thetime
allottedtome.
TheCayman IslandsFundsIndustry hasperformed exceptionallywell
despitecontinuedvolatilityin the global financial markets.
Asof31st March2013,theCayman IslandsMonetaryAuthorityhad10,932
regulated funds, whichcomprised of 8,282registeredfunds,399
administeredfunds, 120licensedfundsand 2,131master funds.
This is an 9.4% increaseover the same period last year, wherewehad
9,990 fundsunder our direct remit.
Thenumber of newfundsprocessedduringthequarter ended31st March
2013was572compared to1,722asat 31st March2012.
Total master fundscomprised of 66% of thecumulativenumber (or 376)
comparedto81% of thecumulativenumber (or 1,125)for the quarter
ended31st March 2012.Terminationstotalled81, comparedto176for the
sameperiod 2012.

P a g e | 64
Growthin the fund administration area remainsconservative, withno
new mutual fund administrators’licenceapplicationsapproved during
the3rd Quarter of the fiscal year.
As of 31st March 2013, there were123licensed FundAdministrators
comparedto127for the sameperiod 2012.
Of the total licensed,88wereFull, 33Restricted and 2 Exempted.
Thenumber is down from the same period 2012due to
i)Licenseesrestructuring their businessaffairs and nolonger requiring
theLicenceand
ii)byLicenseeswhowereno longer carrying on licensableactivities
and, consequently, nolonger needing the Licence.
Thesecurities investment businessalsocontinuestogrow modestly.
Although nonew licenceswereapproved in the3rd Quarter of the fiscal
year, twonew licenceapplicationsare currentlybeing processed.
As of 31st March 2013, there were34licensed SecuritiesInvestment
Businessholderscompared to31duringthesameperiod 2012, and 1,834
SIBL ExcludedPersons, compared to1,860in thepreviousyear.
Thehealth of theglobal hedge fundsindustry can be gleaned from the
Investment Statistical Digest;an annual publication of theAuthority that
offersaggregate statisticaldata collated from the FundsAnnual Returns
filedby all regulatedfunds.
We anticipatepublicationof the 2011Investment Statistical Digest in
May.
Preliminarydata showsa slight increasein net assetsvalue, increasing
from US$1,727 billionin 2010to US$1,796billion in 2011.

P a g e | 65
Analysis of the top 10 Investment Manager locationsindicatesthat there
hasbeen a shift in theNet Assetsby thelocation of the Investment
Manager.
TheTop 5 locationsremainedconstant with New York (US$520billion)
in thetop spot followedby United Kingdom (US$319
billion), Connecticut (US$215billion), California (US$163billion) and
Massachusetts(US$66billion).
Thenext 5 sawsignificant movementswithIllinois(US$48 billion) and
Japan (US$32 billion) moving up to6th and 8th, Switzerland(US$37
billion) fallingto7thandLichtenstein(US$27billion) droppingout of the
top 10completely.
Notableyear-on-year movementsincludeJapan increasingby US$17
billion or 113%, Brazil increasingby US$7 billion or 47%, United
Kingdom decliningby US$23billion or 7%, Liechtenstein decliningby
US$5billion or 16% and Switzerlanddecliningby US$12billion or 24%.
This data depictsthetough economicconditionsthat existed in Europe
during theyear 2011aswell asthe larger influenceand market share
Brazil and theAsian countriesare exertingand gainingin the Hedge
Fund Industry.
As welook ahead, the Cayman IslandsMonetaryAuthority remains
committed and poisedto remain the leadingdomicilefor hedge fund
formations.
For Cayman Islandsregulatedfundswhowishtomarket in theEuropean
Union, theAuthority is progressingtalkswiththe European Securities
MarketsAuthority (ESMA) in light of therecent amendmentsto the
MonetaryAuthority Law (2012Revision) that facilitiestheAuthority
enteringintocooperation agreementswithour EU counterparts.
TheMonetaryAuthority (Amendment) Bill, 2013waspassed by the
LegislativeAssembly on 15March 2013,and contained amendmentsto:
further protect the interest of investorsand tomake further provision in
respect of the exchangeof information.

P a g e | 66
Other areasof focusare tax information exchangeagreements;
depositories;delegation and private equity/closed-ended funds.
We are confident that CIM Awill be in a position in the near future to
enter intoMOUs withour EU counterparts basedon themodel MOU
developed by ESMA.
Approximately 23% of Cayman-regulated fund assetsare managedby a
European Manager.
In the areaof Corporate Governance, theAuthority’s consultationon
CorporateGovernancestandardsintheCayman Islandsfinancialservices
sectorclosed on 18th March2013.
Thenumber of responsesreceived to the consultationwassizeable;
considerably more that thenorm for public consultation.
Responsescame from both thedomestic industry associationsand
industrystakeholdersfrom a number of jurisdictions.
In relation to thesurveyconducted by GreenwichAssociates, theresponse
rate tothesurveywasexceptional withthe responseratiotoinvitessent
beingapproximately5timesmore than thenorm for this type of survey.
Respondentswerepredominantlyfrom the Cayman Islands,United
Statesand Europe witha few from Asia.
Resultshave proved very beneficial and will be incorporatedintoour
CorporateGovernanceconsultationwork.
We are in the processof collatingall of thedata and wethank everyone
whotook the timeto respond.
It is our objectiveto publish the resultsof the Corporate Governance
surveyonce finalized.

P a g e | 67
Turning our focustotheUnited States, and more specificallyFATCA, a
number of updatesand implementingnoticeshave been issuedby the
IRS sinceFATCA wasannounced.
Most recently, on 17January 2013,the IRSand theUS Treasury
Department released the regulationsfor implementingthe FATCA
requirements(Reference:RIN 1545–BK68).
Theseregulationshavethe followingimpact on the fundsindustry:
1.TheFund wouldhavetoregisterwiththeIRS via theIRS' secureonline
webportal;
2.TheFund wouldhave to enter intoa complianceagreement (the FFI
Agreement) withtheIRS to conduct duediligenceon account holdersor
complywiththetermsof an applicableintergovernmental agreement
(―IGA‖);
3.TheFund wouldhave to annuallydisclosecertain information about
U.S. account holdersand account holdersthat are foreign entitiesin
whichU.S.personshold a substantial ownershipinterest;
4.TheFund wouldhave to withholdon paymentstocertain account
holders(beginning 1January, 2014);and
5.TheFund wouldhave to undertakeadditional complianceobligations
set forth in the final Regulationsor suchIGA.
On 15 March2013,the Ministerfor Financial Servicesannounced the
Government’sintention toopt for a Model 1IGAwiththe United States
for the implementationof FATCA in theCayman Islands.
ThesuccessfulconclusionofaModel1agreement wouldmeanthat funds
will be obligatedtoreport information requiredunder FATCA tothe
Cayman IslandsGovernment, whichwill then automaticallytransmit the
information to the IRS.

P a g e | 68
Thefundswouldtherefore not be required to enter intoseparate FFI
agreementswiththeIRS to be FATCA compliant.
TheMinisterfor Financial Servicesalsoannounced on 15 March2013the
Government’sintention toenter intoa similar arrangement for the
automatic exchangeof information with theUnited Kingdom.
TheGovernmentsof Jersey,Guernseyand the Isleof Manhave similar
agreementswiththeUK that werecommitted toduring the1st quarter of
2013.
While today’s presentationhasbeen brief in content, I trust wecan all
agree that there have been a number of developmentsaffectingthe
Cayman Islands’hedge fund sector in recent times.
While weall recognize that theregulatoryarchitecturehaschangedand
will continuetochange, CIMA remainsengagedand committed in
growingthe localfundsindustry, fosteringa vibrant and competitive
industry and preservingthe jurisdiction’sreputation.
Ladies and gentlemen, thank you for your attention and I wishyou a
pleasant evening.

P a g e | 69
APerspective on the U.S. Economic
Outlook and Monetary Policy
Presented by Charles I. Plosser, President and
Chief Executive Officer, Federal Reserve Bank
of Philadelphia
Global InterdependenceCenter's Central
BankingSeries:Recovery 2013— Strength or
Stagnation, Milan, Italy
Note: President Plosserpresented similar
remarks on May14, 2013before the SNS (Center for Businessand Policy
Studies)and theSIFR (The Institutefor Financial Research) in
Stockholm, Sweden.
Introduction
It is a pleasure tobe here withmy colleague,Eric Rosengren, president
of the Federal Reserve Bank of Boston, tocontinuethisdistinguished
series of conferenceson central banking hosted by the Global
InterdependenceCenter (GIC).
David Kotok, MichaelDrury, and Ben Craig have gathered another
impressivegroup of policymakers, academics,and economiststo discuss
thestateof our recovery.
You may know that the GIC hasbeen basedin Philadelphiafor more
than 30 years, and for the past year, it hasbeen a tenant in our building.
I am assured that fact hashad no influenceon the order of our speakers
thismorning.
Around theworld, centralbankersandpolicymakersmoregenerallyhave
been challengedover the past five years asthey struggled in the faceof the
worstglobal recessionsincethe Great Depression.

P a g e | 70
Thankfully, many economiesaround theworldare now in modest
recoveries.
Yet no one can be satisfied withthepaceof theserecoveries.
I have oftendescribedthe progressof this global recovery astwosteps
forwardand one step back again. Europe hasparticularlystruggled, and
manychallengesremain.
This morning, I am going to concentrateon theoutlook for the U.S.
economy, whichis now nearingthefourth anniversary of an economic
recoverythat officiallybegan in mid-2009.
Before I begin, though, I must note that theviewsI expresshere aremy
ownand not necessarilythose of the Federal Reserve Board of Governors
or my colleagueson the Federal OpenMarket Committee(FOMC).
Economic Conditions
I will start witha discussionof inflation, sincein my view, preserving
price stability is themost important function of a central bank.
In a worldof fiat money, monetary policyhas theultimateresponsibility
for preservingthepurchasing powerof a nation'scurrency.
That is not tosaythat central bankershavealwayslived up tothat
responsibility.
Over the 100-year history of the FederalReserve, for instance,itsprice
stability recordhasbeen mixed.
At times, theFederal Reserve hasbeen successful, but at other times,it
hasnot.
Federal Reserve policycontributed to thedramatic deflationof the
1930s,and it stoked the rapid inflationof the 1970s.
However, economistsand central bankershave learned from thepast.

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