Monday September 24 2012 - Top 10 Risk Management News

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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

George Lekatis
President of the IARCP
Dear Member,
As you can read at Number 4 of our list, economic activity has
continued to expand at a moderate pace in recent months.
Growth in employment has been slow, and the unemployment rate
remains elevated.
Household spending has continued to advance, but growth in business
fixed investment appears to have slowed.
The housing sector has shown some further signs of improvement, albeit
from a depressed level.
Inflation has been subdued, although the prices of some key commodities
have increased recently.
Longer-term inflation expectations have remained stable.
But…
Economic growth might not be strong enough to generate sustained
improvement in labor market conditions.
Strains in global financial markets continue to pose significant downside
risks to the economic outlook.

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

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To support a stronger economic recovery and to help ensure that
inflation, over time, is at the rate most consistent with its dual mandate,
the Federal Open Market Committee has agreed to increase policy
accommodation by purchasing additional agency mortgage-backed
securities at a pace of $40 billion per month.
The Committee also will continue through the end of the year its program
to extend the average maturity of its holdings of securities as announced
in June, and it is maintaining its existing policy of reinvesting principal
payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities.
These actions, which together will increase the Committee’s holdings of
longer-term securities by about $85 billion each month through the end of
the year, should put downward pressure on longer-term interest rates,
support mortgage markets, and help to make broader financial conditions
more accommodative.
The Committee will closely monitor incoming information on economic
and financial developments in coming months.
If the outlook for the labor market does not improve substantially, the
Committee will continue its purchases of agency mortgage-backed
securities, undertake additional asset purchases, and employ its other
policy tools as appropriate until such improvement is achieved in a
context of price stability.
Welcome to the Top 10 list.

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Bank for International Settlements
Core principles for effective banking
supervision
September 2012
The Basel Committee on Banking Supervision
has completed its review of the October 2006
supervision and the associated Core principles
methodology.
The revised Core Principles were endorsed by
banking supervisors at the 17th International
Conference of Banking Supervisors held in Istanbul, Turkey, on 13-14
September 2012.

Stress Testing Model
Symposium

Federal Reserve Bank of Boston

Address by Deputy Governor Matthew
Elderfield, to the Irish Funds Industry
Association

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2012 Monetary Policy Releases
Information received since the Federal
Open Market Committee met in
August suggests that economic
activity has continued to expand at a
moderate pace in recent months.

Growth in employment has been slow,
and the unemployment rate remains elevated.

Economic Activity, Prices, and Monetary Policy

Speech at a Meeting with Business Leaders in Yamaguchi
Ryuzo Miyao. Member of the Policy Board

The U.S. Economic Outlook and Implications for
Latin America
Dennis P. Lockhart
President and Chief Executive Officer
Federal Reserve Bank of Atlanta
Latin American Chamber of Commerce and the World
Affairs Council

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Basel ii / iii in Russia
The Bank of Russia considers it necessary to create legislative
fundamentals in Russia for introducing all the standards of banking
regulation and banking supervision established by the Basel Committee
on Banking Supervision (BCBS).

These include legislation empowering the Bank of Russia to set
requirements for credit institutions’ corporate governance, risk and
capital management systems, to exercise consolidated supervision, to use
professional judgment in supervisory practices, and also to define
disciplinary action against members of executive bodies and boards of
directors (supervisory boards) for faults in the activity of their credit
institutions.

The Importance of Strong
Risk Management: Insights
From The Examination
World
By Jason C. Schemmel, Community and Regional supervisory examiner
with the Federal Reserve Bank of Richmond

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Islamic finance developments in Pakistan
Keynote address by Mr Kazi Abdul Muktadir,
Deputy Governor of the State Bank of Pakistan,
at the Islamic Finance news (IFN) Roadshow 2012,
Karachi

Regulatory reform: getting it done

Remarks by Mr Stefan Ingves, Governor of Sveriges
Riksbank and Chairman of the Basel Committee on
Banking Supervision, at the 17th International
Conference of Banking Supervisors, Istanbul

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NUMBER 1

Bank for International Settlements
BIS, Core principles for effective banking
supervision
September 2012
The Basel Committee on Banking Supervision
has completed its review of the October 2006
supervision and the associated Core principles
methodology.
The revised Core Principles were endorsed by
banking supervisors at the 17th International
Conference of Banking Supervisors held in Istanbul, Turkey, on 13-14
September 2012.
Both the existing Core Principles and the associated assessment
methodology have served their purpose well in terms of helping countries
to assess their supervisory systems and identify areas for improvement.
While conscious efforts were made to maintain continuity and
comparability to the extent possible, the revised document combines the
Core Principles and the assessment methodology into a single
comprehensive document.
The revised set of twenty-nine Core Principles has also been reorganised
to foster their implementation through a more logical structure,
highlighting the difference between what supervisors do and what they
expect banks to do:
Principles 1 to 13 address supervisory powers, responsibilities and
functions, focusing on effective risk-based supervision, and the need for
early intervention and timely supervisory actions.
Principles 14 to 29 cover supervisory expectations of banks, emphasising
the importance of good corporate governance and risk management, as
well as compliance with supervisory standards.

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Important enhancements have been introduced into the individual Core
Principles, particularly in those areas that are necessary to strengthen
supervisory practices and risk management.
As a result, certain "additional criteria" have been upgraded to "essential
criteria", while new assessment criteria were warranted in other
instances.
Close attention was given to addressing many of the significant risk
management weaknesses and other vulnerabilities highlighted in the
financial crisis.
In addition, the review has taken account of several key trends and
developments that emerged during the last few years of market turmoil:
- the need for greater supervisory intensity and adequate resources to
deal effectively with systemically important banks;
- the importance of applying a system-wide, macro perspective to the
microprudential supervision of banks to assist in identifying,
analysing and taking pre-emptive action to address systemic risk;
and
- the increasing focus on effective crisis management, recovery and
resolution measures in reducing both the probability and impact of a
bank failure.
The Committee has sought to give appropriate emphasis to these
emerging issues by embedding them into the Core Principles, as
appropriate, and including specific references under each relevant
Principle.
In addition, sound corporate governance underpins effective risk
management and public confidence in individual banks and the banking
system.
Given fundamental deficiencies in banks' corporate governance that were
exposed during the crisis, a new Core Principle on corporate governance
has been added by bringing together existing corporate governance
criteria in the assessment methodology and giving greater emphasis to
sound corporate governance practices.
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Similarly, the Committee reiterated the key role of robust market
discipline in fostering a safe and sound banking system by expanding an
existing Core Principle into two new ones dedicated respectively to
greater public disclosure and transparency, and enhanced financial
reporting and external audit.
As a result of the Committee's review, the number of Core Principles has
increased from 25 to 29.
There are a total of 39 new assessment criteria, comprising 34 new
essential criteria and 5 new additional criteria.
In addition, 34 additional criteria from the existing assessment
methodology have been upgraded to essential criteria that represent
minimum baseline requirements for all countries.
A consultative version of the revised Core Principles was issued for public
consultation in December 2011.
The Committee appreciates the constructive comments received and
thanks those who have taken the time and effort to express their views on
the consultative document.

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Core Principles for Effective Banking Supervision (The Basel
Core Principles)
Executive summary

1. The Core Principles for Effective Banking Supervision (Core
Principles) are the de facto minimum standard for sound prudential
regulation and supervision of banks and banking systems.

Originally issued by the Basel Committee on Banking Supervision (the
Committee) in 1997, they are used by countries as a benchmark for
assessing the quality of their supervisory systems and for identifying
future work to achieve a baseline level of sound supervisory practices.

The Core Principles are also used by the International Monetary Fund
(IMF) and the World Bank, in the context of the Financial Sector
Assessment Programme (FSAP), to assess the effectiveness of countries’
banking supervisory systems and practices.

2. The Core Principles were last revised by the Committee in October
2006 in cooperation with supervisors around the world.

In its October 2010 Report to the G20 on response to the financial crisis,
the Committee announced its plan to review the Core Principles as part of
its ongoing work to strengthen supervisory practices worldwide.

3. In March 2011, the Core Principles Group was mandated by the
Committee to review and update the Core Principles.

The Committee’s mandate was to conduct the review taking into account
significant developments in the global financial markets and regulatory
landscape since October 2006, including post-crisis lessons for promoting
sound supervisory systems.

The intent was to ensure the continued relevance of the Core Principles
for promoting effective banking supervision in all countries over time and
changing environments.

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4. In conducting the review, the Committee has sought to achieve the
right balance in raising the bar for sound supervision while retaining the
Core Principles as a flexible, globally applicable standard.
By reinforcing the proportionality concept, the revised Core Principles
and their assessment criteria accommodate a diverse range of banking
systems.
The proportionate approach also allows assessments of compliance with
the Core Principles that are commensurate with the risk profile and
systemic importance of a broad spectrum of banks (from large
internationally active banks to small, non-complex deposit-taking
institutions).
5. Both the existing Core Principles and the associated Core Principles
Methodology (assessment methodology) have served their purpose well
in terms of helping countries to assess their supervisory systems and
identify areas for improvement.

While conscious efforts were made to maintain continuity and
comparability as far as possible, the Committee has merged the Core
Principles and the assessment methodology into a single comprehensive
document.

The revised set of twenty-nine Core Principles have also been reorganised
to foster their implementation through a more logical structure starting
with supervisory powers, responsibilities and functions, and followed by
supervisory expectations of banks, emphasising the importance of good
corporate governance and risk management, as well as compliance with
supervisory standards.

6. Important enhancements have been introduced into the individual
Core Principles, particularly in those areas that are necessary to
strengthen supervisory practices and risk management.

Various additional criteria have been upgraded to essential criteria as a
result, while new assessment criteria were warranted in other instances.

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Close attention was given to addressing many of the significant risk
management weaknesses and other vulnerabilities highlighted in the last
crisis.

In addition, the review has taken account of several key trends and
developments that emerged during the last few years of market turmoil:

- the need for greater intensity and resources to deal effectively with
systemically important banks;
- the importance of applying a system-wide, macro perspective to the
microprudential supervision of banks to assist in identifying,
analysing and taking pre-emptive action to address systemic risk;
- and the increasing focus on effective crisis management, recovery
and resolution measures in reducing both the probability and impact
of a bank failure.

The Committee has sought to give appropriate emphasis to these
emerging issues by embedding them into the Core Principles, as
appropriate, and including specific references under each relevant
Principle.

7. In addition, sound corporate governance underpins effective risk
management and public confidence in individual banks and the banking
system.

Given fundamental deficiencies in banks’ corporate governance that were
exposed in the last crisis, a new Core Principle on corporate governance
has been added in this review by bringing together existing corporate
governance criteria in the assessment methodology and giving greater
emphasis to sound corporate governance practices.

Similarly, the Committee reiterated the key role of robust market
discipline in fostering a safe and sound banking system by expanding an
existing Core Principle into two new ones dedicated respectively to
greater public disclosure and transparency, and enhanced financial
reporting and external audit.
8. At present, the grading of compliance with the Core Principles is based
solely on the essential criteria.
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To provide incentives to jurisdictions, particularly those that are
important financial centres, to lead the way in the adoption of the highest
supervisory standards, the revised Core Principles will allow countries the
additional option of voluntarily choosing to be assessed and graded
against the essential and additional criteria.
In the same spirit of promoting full and robust implementation, the
Committee has retained the existing four-grade scale of assessing
compliance with the Core Principles.
This includes the current “materially non-compliant” grading that helps
provide a strong signalling effect to relevant authorities on remedial
measures needed for addressing supervisory and regulatory shortcomings
in their countries.
9. As a result of this review, the number of Core Principles has increased
from 25 to 29.

There are a total of 39 new assessment criteria, comprising 34 new
essential criteria and 5 new additional criteria.

In addition, 34 additional criteria from the existing assessment
methodology have been upgraded to essential criteria that represent
minimum baseline requirements for all countries.
10. The revised Core Principles will continue to provide a comprehensive
standard for establishing a sound foundation for the regulation,
supervision, governance and risk management of the banking sector.
Given the importance of consistent and effective standards
implementation, the Committee stands ready to encourage work at the
national level to implement the revised Core Principles in conjunction
with other supervisory bodies and interested parties.

I. Foreword to the review

11. The Basel Committee on Banking Supervision (the Committee) has
revised the Core Principles for Effective Banking Supervision (Core
Principles).
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In conducting its review, the Committee has sought to balance the
objectives of raising the bar for banking supervision (incorporating the
lessons learned from the crisis and other significant regulatory
developments since the Core Principles were last revised in 2006) against
the need to maintain the universal applicability of the Core Principles and
the need for continuity and comparability.

By raising the bar, the practical application of the Core Principles should
improve banking supervision worldwide.

12. The revised Core Principles strengthen the requirements for
supervisors, the approaches to supervision and supervisors’ expectations
of banks.

This is achieved through a greater focus on effective risk-based
supervision and the need for early intervention and timely supervisory
actions.

Supervisors should assess the risk profile of banks, in terms of the risks
they run, the efficacy of their risk management and the risks they pose to
the banking and financial systems.

This risk-based process targets supervisory resources where they can be
utilised to the best effect, focusing on outcomes as well as processes,
moving beyond passive assessment of compliance with rules.

13. The Core Principles set out the powers that supervisors should have in
order to address safety and soundness concerns.

It is equally crucial that supervisors use these powers once weaknesses or
deficiencies are identified.

Adopting a forward-looking approach to supervision through early
intervention can prevent an identified weakness from developing into a
threat to safety and soundness.

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This is particularly true for highly complex and bank-specific issues (eg
liquidity risk) where effective supervisory actions must be tailored to a
bank’s individual circumstances.

14. In its efforts to strengthen, reinforce and refocus the Core Principles,
the Committee has nonetheless remained mindful of their underlying
purpose and use.

The Committee’s intention is to ensure the continued relevance of the
Core Principles in providing a benchmark for supervisory practices that
will withstand the test of time and changing environments.

For this reason, this revision of the Core Principles builds upon the
preceding versions to ensure continuity and comparability as far as
possible.

15. In recognition of the universal applicability of the Core Principles, the
Committee conducted its review in close cooperation with members of
the Basel Consultative Group which comprises representatives from both
Committee and non-Committee member countries and regional groups
of banking supervisors, as well as the IMF, the World Bank and the
Islamic Financial Services Board.

The Committee consulted the industry and public before finalising the
text.

General approach

16. The first Core Principle sets out the promotion of safety and
soundness of banks and the banking system as the primary objective for
banking supervision.

Jurisdictions may assign other responsibilities to the banking supervisor
provided they do not conflict with this primary objective.

6 It should not be an objective of banking supervision to prevent bank
failures.

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However, supervision should aim to reduce the probability and impact of
a bank failure, including by working with resolution authorities, so that
when failure occurs, it is in an orderly manner.

17. To fulfil their purpose, the Core Principles must be capable of
application to a wide range of jurisdictions whose banking sectors will
inevitably include a broad spectrum of banks (from large internationally
active banks to small, non-complex deposit-taking institutions).

Banking systems may also offer a wide range of products or services and
the Core Principles are aligned with the general aim of catering to
different financial needs.

To accommodate this breadth of application, a proportionate approach is
adopted, both in terms of the expectations on supervisors for the
discharge of their own functions and in terms of the standards that
supervisors impose on banks.

Consequently, the Core Principles acknowledge that supervisors typically
use a risk-based approach in which more time and resources are devoted
to larger, more complex or riskier banks.

In the context of the standards imposed by supervisors on banks, the
proportionality concept is reflected in those Principles focused on
supervisors’ assessment of banks’ risk management, where the Principles
prescribe a level of supervisory expectation commensurate with a bank’s
risk profile and systemic importance.

18. Successive revisions to existing Committee standards and guidance,
and any new standards and guidance will be designed to strengthen the
regulatory regime.

Supervisors are encouraged to move towards the adoption of updated and
new international supervisory standards as they are issued.

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Approach toward emerging trends and developments

(i) Systemically important banks (SIBs)

19. In the aftermath of the crisis, much attention has been focused on
SIBs, and the regulations and supervisory powers needed to deal with
them effectively.

Consideration was given by the Committee to including a new Core
Principle to cover SIBs.

However, it was concluded that SIBs, which require greater intensity of
supervision and hence resources, represent one end of the supervisory
spectrum of banks.

Each Core Principle applies to the supervision of all banks.

The expectations on, and of, supervisors will need to be of a higher order
for SIBs, commensurate with the risk profile and systemic importance of
these banks.

Therefore, it is unnecessary to include a specific stand-alone Core
Principle for SIBs.

(ii) Macroprudential issues and systemic risks

20. The recent crisis highlighted the interface between, and the
complementary nature of, the macroprudential and microprudential
elements of effective supervision.

In their application of a risk-based supervisory approach, supervisors and
other authorities need to assess risk in a broader context than that of the
balance sheet of individual banks.

For example, the prevailing macroeconomic environment, business
trends, and the build-up and concentration of risk across the banking

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sector and, indeed, outside of it, inevitably impact the risk exposure of
individual banks.

Bank-specific supervision should therefore consider this macro
perspective.

Individual bank data, where appropriate, data at sector level and
aggregate trend data collected by supervisors should be incorporated into
the deliberations of authorities relevant for financial stability purposes
(whether part of, or separate from, the supervisor) to assist in
identification and analysis of systemic risk.

The relevant authorities should have the ability to take pre-emptive action
to address systemic risks.

Supervisors should have access to relevant financial stability analyses or
assessments conducted by other authorities that affect the banking
system.

21. This broad financial system perspective is integral to many of the Core
Principles. For this reason, the Committee has not included a specific
stand-alone Core Principle on macroprudential issues.

22. In supervising an individual bank which is part of a corporate group, it
is essential that supervisors consider the bank and its risk profile from a
number of perspectives: on a solo basis (but with both a micro and macro
focus as discussed above); on a consolidated basis (in the sense of
supervising the bank as a unit together with the other entities within the
“banking group”) and on a group-wide basis (taking into account the
potential risks to the bank posed by other group entities outside of the
banking group).

Group entities (whether within or outside the banking group) may be a
source of strength but they may also be a source of weakness capable of
adversely affecting the financial condition, reputation and overall safety
and soundness of the bank.

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The Core Principles include a specific Core Principle on the consolidated
supervision of banking groups, but they also note the importance of
parent companies and other non-banking group entities in any
assessment of the risks run by a bank or banking group.

This supervisory “risk perimeter” extends beyond accounting
consolidation concepts.

In the discharge of their functions, supervisors must observe a broad
canvas of risk, whether arising from within an individual bank, from its
associated entities or from the prevailing macro financial environment.

23. Supervisors should also remain alert to the movement, or build-up, of
financial activities outside the regulated banking sector (the development
of “shadow banking” structures) and the potential risks this may create.

Data or information on this should also be shared with any other
authorities relevant for financial stability purposes.

(iii) Crisis management, recovery and resolution

24. Although it is not a supervisor’s role to prevent bank failures,
supervisory oversight is designed to reduce both the probability and
impact of such failures.

Banks will, from time to time, run into difficulties, and to minimise the
adverse impact both on the troubled bank and on the banking and
financial sectors as a whole, effective crisis preparation and management,
and orderly resolution frameworks and measures are required.

25. Such measures may be viewed from two perspectives:

(i) The measures to be adopted by supervisory and other authorities
(including developing resolution plans and in terms of information
sharing and cooperation with other authorities, both domestic and
cross-border, to coordinate an orderly restructuring or resolution of a
troubled bank); and

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(ii) Those to be adopted by banks (including contingency funding plans
and recovery plans) which should be subject to critical assessment by
supervisors as part of their ongoing supervision.

26. To reflect, and to emphasise, the importance of crisis management,
recovery and resolution measures, certain Core Principles include specific
reference to the maintenance and assessment of contingency
arrangements.

The existing Core Principle on home-host relationships has also been
strengthened to require cooperation and coordination between home and
host supervisors on crisis management and resolution for cross-border
banks.

(iv) Corporate governance, disclosure and transparency

27. Corporate governance shortcomings in banks, examples of which
were observed during the crisis, can have potentially serious
consequences both for the bank concerned and, in some cases, for the
financial system as a whole.

A new Core Principle, focused on effective corporate governance as an
essential element in the safe and sound functioning of banks, has
therefore been included in this revision.

The new Principle brings together existing corporate governance criteria
in the assessment methodology and gives greater emphasis to sound
corporate governance practices.

28. Similarly, the crisis served to underline the importance of disclosure
and transparency in maintaining confidence in banks by allowing market
participants to understand better a bank’s risk profile and thereby reduce
market uncertainties about the bank’s financial strength.

In recognition of this, a new Core Principle has been added to provide
more direction on supervisory practices in this area.

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Structure and assessment of Core Principles
Structure

29. The preceding versions of the Core Principles were accompanied by a
separate assessment methodology that set out the criteria to be used to
gauge compliance with the Core Principles.

In this revision, the assessment methodology has been merged into a
single document with the Core Principles reflecting the essential
interdependence of Core Principles and Assessment Criteria and their
common usage.

The Core Principles have also been reorganised: Principles 1-13 address
supervisory powers, responsibilities and functions, and Principles 14-29
cover supervisory expectations of banks, emphasising the importance of
good corporate governance and risk management, as well as compliance
with supervisory standards.

This re-ordering highlights the difference between what supervisors do
themselves and what they expect banks to do. For comparability with the
preceding version, a mapping table is provided in Annex 1.

Assessment

30. The Core Principles establish a level of sound supervisory practice
that can be used as a benchmark by supervisors to assess the quality of
their supervisory systems.

They are also used by the IMF and the World Bank, in the context of the
Financial Sector Assessment Programme (FSAP), to assess the
effectiveness of countries’ banking supervisory systems and practices.

31. This revision of the Core Principles retains the previous practice of
including both essential criteria and additional criteria as part of the
assessment methodology.

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Essential criteria set out minimum baseline requirements for sound
supervisory practices and are of universal applicability to all countries.

An assessment of a country against the essential criteria must, however,
recognise that its supervisory practices should be commensurate with the
risk profile and systemic importance of the banks being supervised.

In other words, the assessment must consider the context in which the
supervisory practices are applied.

The concept of proportionality underpins all assessment criteria even if it
is not always directly referenced.

32. Effective banking supervisory practices are not static.

They evolve over time as lessons are learned and banking business
continues to develop and expand.

Supervisors are often swift to encourage banks to adopt “best practice”
and supervisors should demonstrably “practice what they preach” in
terms of seeking to move continually towards the highest supervisory
standards.

To reinforce this aspiration, the additional criteria in the Core Principles
set out supervisory practices that exceed current baseline expectations
but which will contribute to the robustness of individual supervisory
frameworks.

As supervisory practices evolve, it is expected that upon each revision of
the Core Principles, a number of additional criteria will migrate to
become essential criteria as expectations on baseline standards change.

The use of essential criteria and additional criteria will, in this sense,
contribute to the continuing relevance of the Core Principles over time.

33. In the past, countries were graded only against the essential criteria,
although they could volunteer to be assessed against the additional

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criteria too and benefit from assessors’ commentary on how supervisory
practices could be enhanced.

In future, countries undergoing assessments by the IMF and/or the
World Bank can elect to be graded against the essential and additional
criteria.

It is anticipated that this will provide incentives to jurisdictions,
particularly those that are important financial centres, to lead the way in
the adoption of the highest supervisory standards.

As with the essential criteria, any assessment against additional criteria
should recognise the concept of proportionality as discussed above.

34. Moreover, it is important to bear in mind that some tasks, such as a
correct assessment of the macroeconomic environment and the detection
of the build-up of dangerous trends, do not lend themselves to a rigid
compliant/non-compliant structure.

Although these tasks may be difficult to assess, supervisors should make
assessments that are as accurate as possible given the information
available at the time and take reasonable actions to address and mitigate
such risks.

35. While the publication of the assessments of jurisdictions affords
transparency, an assessment of one jurisdiction will not be directly
comparable to that of another.

First, assessments will have to reflect proportionality.

Thus, a jurisdiction that is home to many SIBs will naturally have a higher
hurdle to obtain a “Compliant” grading10 versus a jurisdiction which only
has small, non-complex deposit-taking institutions.

Second, with this version of the Core Principles, jurisdictions can elect to
be graded against essential criteria only or against both essential criteria
and additional criteria.

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Third, assessments will inevitably be country-specific and time -
dependent to varying degrees.

Therefore, the description provided for each Core Principle and the
qualitative commentary accompanying the grading for each Core
Principle should be reviewed in order to gain an understanding of a
jurisdiction’s approach to the specific aspect under consideration and the
need for any improvements. Seeking to compare countries by a simple
reference to the number of “Compliant” versus “Non-Compliant” grades
they receive is unlikely to be informative.

36. From a broader perspective, effective banking supervision is
dependent on a number of external elements, or preconditions, which
may not be within the direct jurisdiction of supervisors.

Thus, in respect of grading, the assessment of preconditions will remain
qualitative and distinct from the assessment (and grading) of compliance
with the Core Principles.

37. Core Principle 29 dealing with the Abuse of Financial Services
includes, among other things, supervision of banks’ anti-money
laundering/combating the financing of terrorism (AML/CFT) controls.

The Committee recognises that assessments against this Core Principle
will inevitably, for some countries, involve a degree of duplication with
the mutual evaluation process of the Financial Action Task Force
(FATF).

To address this, where an evaluation has recently been conducted by the
FATF on a given country, FSAP assessors may rely on that evaluation and
focus their own review on the actions taken by supervisors to address any
shortcomings identified by the FATF.

In the absence of any recent FATF evaluation, FSAP assessors will
continue to assess countries’ supervision of banks’ AML/CFT controls.

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Consistency and implementation

38. The banking sector is only a part, albeit an important part, of a
financial system and in conducting this review of its Core Principles, the
Committee has sought to maintain consistency, where possible, with the
corresponding standards for securities and insurance (which have
themselves been the subject of recent reviews), as well as those for
anti-money laundering and transparency.

Differences will, however, inevitably remain as key risk areas and
supervisory priorities differ from sector to sector. In implementing the
Core Principles, supervisors should take into account the role of the
banking sector in supporting and facilitating productive activities for the
real economy.

II. The Core Principles

39. The Core Principles are a framework of minimum standards for sound
supervisory practices and are considered universally applicable.

The Committee issued the Core Principles as its contribution to
strengthening the global financial system.

Weaknesses in the banking system of a country, whether developing or
developed, can threaten financial stability both within that country and
internationally.

The Committee believes that implementation of the Core Principles by all
countries would be a significant step towards improving financial
stability domestically and internationally, and provide a good basis for
further development of effective supervisory systems.

The vast majority of countries have endorsed the Core Principles and
have implemented them.

40. The revised Core Principles define 29 principles that are needed for a
supervisory system to be effective.

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Those principles are broadly categorised into two groups: the first group
(Principles 1 to 13) focus on powers, responsibilities and functions of
supervisors, while the second group (Principles 14 to 29) focus on
prudential regulations and requirements for banks.

The original Principle 1 has been divided into three separate Principles,
while new Principles related to corporate governance, and disclosure and
transparency, have been added.

This accounts for the increase from 25 to 29 Principles.

41. The 29 Core Principles are:

Supervisory powers, responsibilities and functions
• Principle 1 – Responsibilities, objectives and powers:

An effective system of banking supervision has clear responsibilities and
objectives for each authority involved in the supervision of banks and
banking groups.

A suitable legal framework for banking supervision is in place to provide
each responsible authority with the necessary legal powers to authorise
banks, conduct ongoing supervision, address compliance with laws and
undertake timely corrective actions to address safety and soundness
concerns.

• Principle 2 – Independence, accountability, resourcing and
legal protection for supervisors:

The supervisor possesses operational independence, transparent
processes, sound governance, budgetary processes that do not undermine
autonomy and adequate resources, and is accountable for the discharge
of its duties and use of its resources.

The legal framework for banking supervision includes legal protection for
the supervisor.

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• Principle 3 – Cooperation and collaboration:

Laws, regulations or other arrangements provide a framework for
cooperation and collaboration with relevant domestic authorities and
foreign supervisors.

These arrangements reflect the need to protect confidential information.

• Principle 4 – Permissible activities:

The permissible activities of institutions that are licensed and subject to
supervision as banks are clearly defined and the use of the word “bank” in
names is controlled.

• Principle 5 – Licensing criteria:

The licensing authority has the power to set criteria and reject
applications for establishments that do not meet the criteria.

At a minimum, the licensing process consists of an assessment of the
ownership structure and governance (including the fitness and propriety
of Board members and senior management) of the bank and its wider
group, and its strategic and operating plan, internal controls, risk
management and projected financial condition (including capital base).
Where the proposed owner or parent organisation is a foreign bank, the
prior consent of its home supervisor is obtained.

• Principle 6 – Transfer of significant ownership:

The supervisor has the power to review, reject and impose prudential
conditions on any proposals to transfer significant ownership or
controlling interests held directly or indirectly in existing banks to other
parties.

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• Principle 7 – Major acquisitions:

The supervisor has the power to approve or reject (or recommend to the
responsible authority the approval or rejection of), and impose prudential
conditions on, major acquisitions or investments by a bank, against
prescribed criteria, including the establishment of cross-border
operations, and to determine that corporate affiliations or structures do
not expose the bank to undue risks or hinder effective supervision.

• Principle 8 – Supervisory approach:

An effective system of banking supervision requires the supervisor to
develop and maintain a forward-looking assessment of the risk profile of
individual banks and banking groups, proportionate to their systemic
importance; identify, assess and address risks emanating from banks and
the banking system as a whole; have a framework in place for early
intervention; and have plans in place, in partnership with other relevant
authorities, to take action to resolve banks in an orderly manner if they
become non-viable.

• Principle 9 – Supervisory techniques and tools:

The supervisor uses an appropriate range of techniques and tools to
implement the supervisory approach and deploys supervisory resources
on a proportionate basis, taking into account the risk profile and systemic
importance of banks.

• Principle 10 – Supervisory reporting:

The supervisor collects, reviews and analyses prudential reports and
statistical returns from banks on both a solo and a consolidated basis, and
independently verifies these reports through either on-site examinations
or use of external experts.

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• Principle 11 – Corrective and sanctioning powers of
supervisors:

The supervisor acts at an early stage to address unsafe and unsound
practices or activities that could pose risks to banks or to the banking
system.

The supervisor has at its disposal an adequate range of supervisory tools
to bring about timely corrective actions.

This includes the ability to revoke the banking licence or to recommend
its revocation.

• Principle 12 – Consolidated supervision:

An essential element of banking supervision is that the supervisor
supervises the banking group on a consolidated basis, adequately
monitoring and, as appropriate, applying prudential standards to all
aspects of the business conducted by the banking group worldwide.

• Principle 13 – Home-host relationships:

Home and host supervisors of cross-border banking groups share
information and cooperate for effective supervision of the group and
group entities, and effective handling of crisis situations. Supervisors
require the local operations of foreign banks to be conducted to the same
standards as those required of domestic banks.

Prudential regulations and requirements

• Principle 14 – Corporate governance:

The supervisor determines that banks and banking groups have robust
corporate governance policies and processes covering, for example,
strategic direction, group and organisational structure, control
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environment, responsibilities of the banks’ Boards and senior
management, and compensation.

These policies and processes are commensurate with the risk profile and
systemic importance of the bank.

• Principle 15 – Risk management process:

The supervisor determines that banks have a comprehensive risk
management process (including effective Board and senior management
oversight) to identify, measure, evaluate, monitor, report and control or
mitigate all material risks on a timely basis and to assess the adequacy of
their capital and liquidity in relation to their risk profile and market and
macroeconomic conditions.

This extends to development and review of contingency arrangements
(incuding robust and credible recovery plans where warranted) that take
into account the specific circumstances of the bank.

The risk management process is commensurate with the risk profile and
systemic importance of the bank.

• Principle 16 – Capital adequacy:

The supervisor sets prudent and appropriate capital adequacy
requirements for banks that reflect the risks undertaken by, and presented
by, a bank in the context of the markets and macroeconomic conditions
in which it operates.

The supervisor defines the components of capital, bearing in mind their
ability to absorb losses.

At least for internationally active banks, capital requirements are not less
than the applicable Basel standards.

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• Principle 17 – Credit risk:

The supervisor determines that banks have an adequate credit risk
management process that takes into account their risk appetite, risk
profile and market and macroeconomic conditions.

This includes prudent policies and processes to identify, measure,
evaluate, monitor, report and control or mitigate credit risk (including
counterparty credit risk) on a timely basis.

The full credit lifecycle is covered including credit underwriting, credit
evaluation, and the ongoing management of the bank’s loan and
investment portfolios.

• Principle 18 – Problem assets, provisions and reserves:

The supervisor determines that banks have adequate policies and
processes for the early identification and management of problem assets,
and the maintenance of adequate provisions and reserves.

• Principle 19 – Concentration risk and large exposure limits:

processes to identify, measure, evaluate, monitor, report and control or
mitigate concentrations of risk on a timely basis.

Supervisors set prudential limits to restrict bank exposures to single
counterparties or groups of connected counterparties.

• Principle 20 – Transactions with related parties:

In order to prevent abuses arising in transactions with related parties and
to address the risk of conflict of interest, the supervisor requires banks to
enter into any transactions with related parties on an arm’s length basis;
to monitor these transactions; to take appropriate steps to control or
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mitigate the risks; and to write off exposures to related parties in
accordance with standard policies and processes.

• Principle 21 – Country and transfer risks:

processes to identify, measure, evaluate, monitor, report and control or
mitigate country risk and transfer risk in their international lending and
investment activities on a timely basis.

• Principle 22 – Market risks:

The supervisor determines that banks have an adequate market risk
management process that takes into account their risk appetite, risk
profile, and market and macroeconomic conditions and the risk of a
significant deterioration in market liquidity.

This includes prudent policies and processes to identify, measure,
evaluate, monitor, report and control or mitigate market risks on a timely
basis.

• Principle 23 – Interest rate risk in the banking book:

The supervisor determines that banks have adequate systems to identify,
measure, evaluate, monitor, report and control or mitigate interest rate
risk in the banking book on a timely basis.

These systems take into account the bank’s risk appetite, risk profile and
market and macroeconomic conditions.

• Principle 24 – Liquidity risk:

The supervisor sets prudent and appropriate liquidity requirements
(which can include either quantitative or qualitative requirements or
both) for banks that reflect the liquidity needs of the bank.
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The supervisor determines that banks have a strategy that enables
prudent management of liquidity risk and compliance with liquidity
requirements.

The strategy takes into account the bank’s risk profile as well as market
and macroeconomic conditions and includes prudent policies and
processes, consistent with the bank’s risk appetite, to identify, measure,
evaluate, monitor, report and control or mitigate liquidity risk over an
appropriate set of time horizons.

At least for internationally active banks, liquidity requirements are not
lower than the applicable Basel standards.

• Principle 25 – Operational risk:

The supervisor determines that banks have an adequate operational risk
management framework that takes into account their risk appetite, risk
profile and market and macroeconomic conditions.

This includes prudent policies and processes to identify, assess, evaluate,
monitor, report and control or mitigate operational risk on a timely basis.

• Principle 26 – Internal control and audit:

The supervisor determines that banks have adequate internal control
frameworks to establish and maintain a properly controlled operating
environment for the conduct of their business taking into account their
risk profile.

These include clear arrangements for delegating authority and
responsibility; separation of the functions that involve committing the
bank, paying away its funds, and accounting for its assets and liabilities;
reconciliation of these processes; safeguarding the bank’s assets; and
appropriate independent internal audit and compliance functions to test
adherence to these controls as well as applicable laws and regulations.
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• Principle 27: Financial reporting and external audit:

The supervisor determines that banks and banking groups maintain
adequate and reliable records, prepare financial statements in accordance
with accounting policies and practices that are widely accepted
internationally and annually publish information that fairly reflects their
financial condition and performance and bears an independent external
auditor’s opinion.

The supervisor also determines that banks and parent companies of
banking groups have adequate governance and oversight of the external
audit function.

• Principle 28 – Disclosure and transparency:

The supervisor determines that banks and banking groups regularly
publish information on a consolidated and, where appropriate, solo basis
that is easily accessible and fairly reflects their financial condition,
performance, risk exposures, risk management strategies and corporate
governance policies and processes.

• Principle 29 – Abuse of financial services:

processes, including strict customer due diligence rules to promote high
ethical and professional standards in the financial sector and prevent the
bank from being used, intentionally or unintentionally, for criminal
activities.

42. The Core Principles are neutral with regard to different approaches to
supervision, so long as the overriding goals are achieved.

They are not designed to cover all the needs and circumstances of every
banking system. Instead, specific country circumstances should be more

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appropriately considered in the context of the assessments and in the
dialogue between assessors and country authorities.

43. National authorities should apply the Core Principles in the
supervision of all banking organisations within their jurisdictions.
Individual countries, in particular those with advanced markets and
banks, may expand upon the Core Principles in order to achieve best
supervisory practice.

44. A high degree of compliance with the Core Principles should foster
overall financial system stability; however, this will not guarantee it, nor
will it prevent the failure of banks. Banking supervision cannot, and
should not, provide an assurance that banks will not fail. In a market
economy, failures are part of risk-taking.

45. The Committee stands ready to encourage work at the national level
to implement the Core Principles in conjunction with other supervisory
bodies and interested parties.

The Committee invites the international financial institutions and donor
agencies to use the Core Principles in assisting individual countries to
strengthen their supervisory arrangements.

The Committee will continue to collaborate closely with the IMF and the
World Bank in their monitoring of the implementation of the
Committee’s prudential standards.

The Committee also remains committed to further enhancing its
interaction with supervisors from non-member countries.

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NUMBER 2

Stress Testing Model
Symposium
Federal Reserve Bank of Boston
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Note: You MUST download the excellent presentations at:
http://www.bostonfed.org/StressTest2012/index.htm
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The Federal Reserve and Board of Governors are organizing a
symposium on best practices and challenges as they relate
to stress testing.
The goal of the symposium is to improve our
understanding of how to develop a robust stress testing
framework.
Some of the questions that will be discussed include what are the top
three "must have" elements of a robust stress testing framework? What
type of scenarios should the supervisory and company-run stress test
consider?
What are quantitative approaches to modeling pre-provision net revenue
by business line?
Notes:
As part of the central bank, the Federal Reserve Bank of Boston promotes
sound growth and financial stability in New England and the nation.
The Bank contributes to local communities, the region, and the nation
through its high-quality research, regulatory oversight, and financial
services, and through its commitment to leadership and innovation.
The Boston Fed, the First District of the Federal Reserve System, serves
the New England region - Connecticut [except Fairfield County], Maine,
Massachusetts, New Hampshire, Rhode Island, and Vermont.

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NUMBER 3

Address by Deputy Governor Matthew
Elderfield, to the Irish Funds Industry
Association
Thank you very much, IFIA, for the invitation to
speak at this year's conference. IFIA plays an
important role in the Irish international financial
services sector and it is my pleasure to be here today to share some
thoughts about the regulatory agenda for the funds industry.
Before I do that, can I take a moment
to acknowledge the significant
contribution that has been made by
Gary Palmer, as the outgoing CEO of
IFIA, to the growth and success of the funds industry in this country and
to thank him publicly for the good working relationship he developed
with the Central Bank. Let me also welcome Gary’s successor and say that
I look forward to maintaining a good dialogue with Pat Lardner: indeed,
that has already begun.
IFIA is an important representative body because the funds industry is an
important sector for Ireland. You are all well versed on the key statistics
that illustrate this, in terms of assets under management (€1.2 trillion) or
number of employees in the sector (some 12,000 or so).
One statistic that is not so readily accessible – and required a bit of
digging around – is the number of investors in Irish regulated funds or
funds supported by Irish fund administrators.
There are in fact over 1.3 million such investors – a very significant
number indeed.
That shows the importance of the Irish market place in providing a
service to investors across Europe and the world.
And, indeed, it shows the important responsibility that we both have – as
industry and regulator – in ensuring high standards of investor protection.

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These investors place trust in the Irish system of regulation and our
reputation for maintaining high standards is vital to the success of the
international financial services sector including the funds industry.
The key message I have for you today is that getting the regulatory
framework right for investor protection is important for the reputation of
the IFSC and the success of the funds industry.
I want to explain that we have an opportunity to revisit and improve that
framework in Europe and domestically, with respect to our regulatory
processes, and by enhancing our approach to supervision.
The starting point for approaching regulation of the fund sector should be
an acceptance that funds are different.
The traditional concerns of the prudential supervisor do not apply to the
funds industry.
Nor do the traditional consumer protection issues relating to the sales
process apply directly: these are not relevant to the fund or funds service
provider per se, but are picked up elsewhere in terms of the regulatory
framework applying to investment firms and intermediaries.
Instead, our concern is one of investor protection along a number of
dimensions: ensuring that the investment that is available has an
appropriate risk profile for the type of customer involved; ensuring
adequate disclosure to investors so they can make an informed choice
about risk. addressing operational risks related to valuation or protection
of assets; and, reducing the risk of fraud and other financial crime
problems.
There is also a new dimension to funds regulation, going beyond investor
protection and considering the systemic risks posed by particular aspects
of the sector, which I will return to at the end of these remarks.
This different regulatory focus correctly argues for a different supervisory
approach.
This involves clear standards around investment products, which as you
know are mostly set at a European level.

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As a supervisor, it means the focus of effort is on the authorisation process
and ensuring robust arrangements are in place regarding the approval of
new funds and ensuring adequate disclosure.
Our supervisory model is also designed to place the emphasis of our work
on the fund service providers – both administrators and custodians –
rather than on the individual funds themselves.
Bearing this supervisory model in mind, let’s explore the individual
elements and consider what changes are afoot - and what scope there is to
re-engineer the current regulatory framework.
European Developments
It is right that we should start at the European level.
The EU is of ever increasing importance to the funds industry.
The volume of initiatives from Europe in financial services generally, but
with respect to funds in particular, seems at times overwhelming.
The structure of regulation and standard-setting in Europe has
undergone fundamental changes, with the advent of the European
supervisory authorities including ESMA.
And the rules that now emerge from Europe tend to have direct binding
effect on financial services firms, rather than being transposed and
sometimes modified by national authorities.
The trend is for more Europe, affecting more parts of financial services
regulation, with less national discretion.
This means that engagement in Europe is more important than ever.
At the Central Bank of Ireland our strategy has been to develop specialist
policy teams responsible for key areas of European directives and
regulations, to invest more time in the European and international
policy-making processes, to be more focused in our goals and to get in
early, trying to influence European developments while they are still at
the formative stage.

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It is important that industry also raises its game on engagement in
Europe and I would encourage IFIA to carefully re-examine its strategy
for European advocacy to ensure it is having maximum impact.
The need for engagement is immediate and pressing – and in the short
term Ireland will have a central role to play as Presidency of the EU in the
first half of 2013.
This will be a big responsibility and will involve a number of complicated
and high-profile portfolios, such as banking union and resolution and
MIFID II.
And in the funds industry there will also be important portfolios,
including UCITS V and UCITS VI.
We expect the AIFMD to have mostly completed the EU legislative
process by the time our Presidency begins, although certain technical
standards will remain to be issued.
The finalisation of Level II requirements for the sector is imminent and
some important issues remain unresolved.
The ball is currently in the Commission's court. A lot of disappointment
has been expressed that some of the issues that were heavily debated in
ESMA - and where we believe sensible proposals were reached - have
been revisited and changed.
I can understand that sense of frustration.
For example, we think it's important to recognise that the business model
of the funds industry involves a significant degree of delegation and
outsourcing of activity.
We hope that the final Level II text being developed by the Commission
reflects the very reasonable concerns that have been expressed by
stakeholders and regulators in this area.
In terms of UCITS V, there is still considerable debate on the appropriate
liability regime for custody.
I think it should be accepted that there will be alignment of the liability
regime in UCITS V with the standards in AIFMD.
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Given the substantial obligations which depositories will be asked to
comply with under AIFMD, we believe that UCITS V should mirror these
requirements, no more, no less.
Also, the Central Bank will seek to ensure that Ireland’s rigorous but
streamlined approach to the licensing and supervision of depositories is
reflected in UCITS V.
On UCITS VI, we are at an earlier stage in the process of consultation.
One central area of debate will be whether to revisit the types of assets
eligible for investment in the UCITS structure.
Our initial thinking at the Central Bank is that it would be inappropriate
to restrict the current set of eligible assets or to impose general
restrictions on OTC derivative instruments.
However, the current “no look through rule” does deserve further
examination in relation to particular areas such as indices, where we have
seen the eligible asset restrictions arguably being circumvented.
ESMA has already done some good work in its recent guidelines on the
use of indices, but there may be more that can be done.
We can also expect the output from the debate on shadow banking and
systemic risk in the money market funds industry to feature heavily in
UCITS VI.
As I mentioned, I will come back to this topic of shadow banking a bit
later.
Domestic Developments
Europe will clearly be the main driver of the regulatory framework for the
funds industry in Ireland.
But there is also, as you know, a domestic regulatory framework in place
that is not derived from EU law and which in many cases predates it.
The implementation of the AIFMD provides an opportunity to revisit this
framework.

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We are working hard on AIFMD implementation with the goal of
providing certainty to industry as soon as possible.
My colleague Gareth Murphy, who spoke to you last year, is chairing a
working group on AIFMD implementation involving representatives
from the Department of Finance and industry.
We will be consulting publicly on proposals very shortly.
This process provides an opportunity to revisit our domestic framework
for non-UCITS funds.
Let me take a little time to explain our approach and highlight one or two
issues under active discussion.
We believe it is important to use the implementation of the AIFMD as an
opportunity for a systematic rethink of our non-UCITS regime.
Our current domestic regime has evolved piecemeal over many years in
response to particular concerns and without any relevant EU standards to
refer to.
We now need to be prepared - in light of the implementation of this major
piece of European legislation - to re-examine those elements of the
existing domestic framework.
Our approach will be informed by the principals included in the
Taoiseach's strategy for the international financial services sector, namely
the need to carefully re-examine the case for domestic standards which
exceed EU requirements, in terms of establishing that they are in the
public interest.
We are prepared to retain additional domestic standards if we believe the
public interest test is met.
But our starting point is of a rigorous case-by-case reassessment of the
existing domestic framework to see whether these domestic requirements
need to be retained.
For example, one issue under discussion is whether we should establish a
new category of fund based purely on the minimum standards of the
AIFMD.
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This would provide a clear choice of a fund that is being managed in a
way fully compliant with the relevant EU standards for pass-porting fund
management without any additional domestic requirements on the fund,
except as directly required by existing Irish law.
This would be a major initiative and we want to see the matter very fully
considered before we decide on it.
As an alternative, or perhaps even in addition, we are also undertaking a
rigorous reassessment of our non-UCITS qualifying investor regime.
To what extent should the domestic standards for the QIF regime be
adjusted to reflect the AIFMD?
We are itemising the differences between the AIFMD requirements and
the QIF regime for funds and reviewing each in turn.
For example, our current domestic regime sets specific requirements on
directed brokerage programmes.
These requirements can be dis-applied in light of AIFMD where rules on
conflicts of interest, best execution and annual account disclosure
provide adequate comfort to investors.
This would seem to be a sensible area for potential adjustment.
There are a number of other areas to be considered, which will each be
examined in turn.
The introduction of the directive also provides an opportunity to revisit
the promoter regime for non-UCITS.
The AIFMD now imposes significant requirements on fund managers,
which would appear to meet many of the objectives of our current
domestic promoter framework.
We also believe there may be scope for us to provide additional guidance
on what we expect of directors when a fund runs into financial or
operational difficulties.
In that context, we plan to consult on proposals to remove the current
promoter regime at least for qualifying investor non-UCITS.

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I should caution that our domestic framework for non-UCITS will remain
in place where we believe it is in the public interest to do so.
But we're serious about rigorously and systematically challenging
ourselves as to which particular provisions are indeed appropriate to
retain.
This is a very big job. While we will have done a lot of work before going
to consultation, we will not have finalised our views on all these matters.
We will present what we hope will be seen to be a well-considered
approach, but we are very much open to submissions.
Our public consultation will offer you a real opportunity to challenge any
aspect of the envisaged approach. I urge you to take that opportunity.
Before I finish on the question of domestic regulation let me say a word
about the important role that industry bodies can play in supporting good
standards.
I would like to commend IFIA and the funds industry more generally for
rising to the challenge of developing its corporate governance code for
fund service providers.
This has helped raise standards in a pragmatic and sensible way.
It has helped improve governance in the industry and provided a practical
framework regarding the number of directors at funds.
You will have noted that a leading funds jurisdiction was heavily and
prominently criticised for its approach to multiple directorship.
By tackling this issue head-on in its corporate governance code, IFIA has
helped bolster the international reputation of the Irish fund sector.
I should note that we will be revisiting our existing statutory codes for
banks and insurance companies next year.
We will use that process to review the success and take-up of the IFIA
code.
Also on the horizon, MIFID II will be coming into force before too long
and will be prompting a reassessment of corporate governance standards
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P a g e | 45

for investment firms, which of course would include a number of fund
service providers.
Authorisation
If the starting point of the regulatory model for funds is about getting the
rulebook right - both in Europe and here in Ireland - it is equally
important to get the process of reviewing fund applications right.
I tend to get very good feedback from industry sources about the quality
of our authorisation and approval process for funds, not just here in
Dublin but when I speak to industry participants in London and New
York as well.
But we think there is scope to get better yet.
Mindful of industry expectations and also of the need to ensure an
effective and efficient use of resources, the Central Bank regularly
reassesses its internal processes and turnaround times for fund
authorisations.
However, in this area, we still rely extensively on manual processes and
handling hard copies of documents.
We want to move towards the receipt of information in electronic format.
And we want to develop automated workflow processes to make us more
efficient.
This is not just a matter of automating existing processes, but of
challenging ourselves to ensure our process is as efficient as possible.
We want to decompose the "as is" process for funds authorisation and
rigorously assess it, challenging its individual component parts, before
constructing our "to be" process under this re-engineering exercise.
Our intention is to engage closely with industry and to seek your advice:
tell us which aspects of the current process could work even better.
I caution that it will take a little time to implement these changes.
We don't want to rush and destabilise the current platform which is
working well.
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But we are committed to making improvements in efficiency without loss
of effectiveness.
These improvements go hand-in-hand with the introduction of online
reporting by individual funds which we consulted on in June.
The industry itself can play its part in improving the authorisation
process.
Sometimes the quality of applications can be uneven and incomplete.
At other times some stakeholders - often those highly inventive and
over-exuberant lawyers - can test the boundaries of what is an acceptable
interpretation of European law without giving sufficient consideration to
the difficult legal and policy questions involved.
The funds industry continues to grow. Innovation is a key feature of its
progress. Change is a positive driving force for all of us.
While there will always be a natural tension between financial regulation
and product innovation, the Central Bank is committed to proper and
active engagement with industry to resolve issues.
We regularly take stock of our approach, drawing on the output of
quarterly meetings with IFIA, bi-lateral engagement with law firms and
regular contact with fund promoters and investment managers at home
and abroad.
And we press matters with our colleagues in Europe when necessary.
Supervision
What then of our approach after authorisation, namely to supervision?
In our view, the structure of the industry here in Ireland and the risks that
it poses to the Central Bank’s objectives means that the principal (but not
exclusive) focus of our supervisory effort should be on the fund service
providers.
These are the management companies, fund administrators and
custodians that are so important in ensuring the key elements of investor
protection, such as accuracy of valuation and safeguarding of assets.
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Indeed, it is impractical (or at least prohibitively expensive) to have close
supervisory engagement with all individual funds.
This supervisory model is reflected in our PRISM system, which is the
new framework for risk-based supervision that the Central Bank has
implemented for all firms operating in the Irish financial services sector.
PRISM operates by calculating an impact categorisation of our more than
10,000 regulated entities to allow us to decide on the level of engagement
and therefore resources we will apply to any individual firm.
Under PRISM, fund service providers tend to have a higher impact
categorisation, with more subsequent engagement from supervisors (and
will therefore pay more).
As part of the introduction of the PRISM process there have been a few
structural changes in the way Supervision is operated by the Central
Bank.
On the ground, the differences you will note if your firm is in this category
are more effective liaison with your direct supervisory team as well as
more frequent on-site visits with yourselves by my staff.
I will be asking my supervisors to look more closely at where those
investor protection and financial stability risks I talked about earlier exist,
including challenging assumptions that lie behind business models and
strategies in the sector and the governance, systems and controls that
underpin them.
In contrast, each individual fund, in itself, has a limited potential impact
on financial stability and investors in the event of failure - and so, each of
the more than 5,000 funds domiciled in this jurisdiction - cannot and
should not expect the same level of supervisory engagement as afforded
to the fund service providers.
Our supervisory model, however, does provide capacity for us to react to
triggers and problems that emerge in individual funds as well as random
spot-checks.
We will also increasingly rely on the use of our thematic supervisory tool,
namely examining a specific issue across a cross-section of institutions.
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Shadow Banking
While individual funds may be low impact entities in our supervisory
model, the funds industry is of course a high impact sector viewed
collectively.
This is not just a question of investor protection.
Increasingly, the interest of the international regulatory community is
directed at the level of systemic risk posed by particular parts of the funds
industry, namely money market funds.
The backdrop to this interest is the risk of investor runs on money market
funds as a result of a threat of breaking the buck and the onward impact
of such a run on the markets in which those money market funds are
invested.
As you are no doubt aware, this is clearly on the regulatory agenda at the
G20, in IOSCO, at the European Commission and also in the US at the
SEC.
A few concluding thoughts on the regulatory agenda in this area.
My first high-level message, is that the industry in Ireland must be
prepared for change.
During the financial crisis, investor runs on MMFs led to a disruption in
the flow of finance to the real economy and necessitated dramatic
interventions by public financial authorities.
The Central Bank believes that regulatory reform should focus on the
need to reduce the probability of investor runs, to curb implicit support
from sponsors and to reduce the need for support from the taxpayer.
In order to avoid disruptive industry shifts, my preference is for
international alignment between Europe and the US in this area.
It appears that the SEC will not be driving further regulatory reform in the
short term.
European action may be needed to drive matters forward. IOSCO also
has an important role to play.
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P a g e | 49

But it is critically important that the U.S. perspective continues to be
articulated and heard.
The optimal outcome remains a shared perspective across the Atlantic on
reducing the risk of runs in this sector and we must do everything we can
to ensure that we can continue to move towards that goal.
What action should Europe take now?
Market conditions in European Prime MMFs which are earning negative
yields may pre-empt the conclusions of the FSB and other policy
decision-makers.
As you know, some promoters are contemplating new structures where
investors earn negative returns.
We should see how this plays out and in particular the investor response
to the structures that the promoters offer.
In the meantime, consultation exercises on this very question are well
advanced and the Central Bank has actively engaged in this debate.
Having regard for the experience of MMFs during the financial crisis and
more importantly for the low risk appetite of MMF investors for capital
losses, the Central Bank’s view is that a mandatory switch from constant
net asset value to variable net asset value does not adequately address the
fundamental problem of whether an investor run on a money market fund
may take place - though we would acknowledge it may affect the dynamic
of that run.
Substantial reform can be achieved through a range of measures such as
capital buffers, dilution levies for exiting investors and tighter liquidity
measures.
Indeed, it would appear that one of the recommendations of IOSCO -
which was mandated by the FSB to look at MMFs as part of the Shadow
Banking system - is to seek tighter rules on the liquidity of MMFs so as to
ensure that there is enough liquidity to meet redemptions.
It is worth noting that the SEC addressed this with their MMF reforms in
2010.

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P a g e | 50

The other key issue exposed by the financial crisis was that investors
expected sponsors to support MMFs where assets show excessive
volatility to the downside.
This in turn put pressure on the liquidity position of the sponsoring
institution which was invariably a bank with access to a central bank
liquidity window.
Future reform of the MMF industry should ensure that any insurance that
this ‘recourse to sponsor’ provides is properly charged to MMF investors.
In this regard, one of the other IOSCO recommendations is likely to be
the mandatory requirement of gates as a redemption tool, which to our
thinking would be sensible.
Where support from a sponsor is implicit it should be made explicit,
though it is worth acknowledging that this may have implications for the
capital requirements of the sponsor.
Whatever the detail of the reforms for money market funds, change is
coming and it will be significant.
As I said, my key message is to engage in the debate and be prepared to
adapt.
Conclusion
The more than 1.3 million investors who rely on the Irish fund sector
highlight the need for robust standards of investor protection in our
market.
Funds may be different from other financial services sectors, but it is still
vitally important to get the right regulatory framework in place so that
investor protection is assured.
This will improve the reputation of Ireland as an international financial
services sector and support the success of the funds industry.
There is an opportunity to re-examine the different elements of that
regulatory framework for investor protection: the standards in place at a
European level and domestic level, the processes the Central Bank uses to

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P a g e | 51

authorise new funds, the supervisory framework applied to the sector, and
the emerging standards relating to Shadow Banking.
As I have explained, the Central Bank is committed to a level of high
engagement with Europe in crafting that framework - and to rigorously
reassessing our domestic framework, processes and supervisory
approach.
We would encourage IFIA and the Irish fund sector to play its part in this
process by contributing to the regulatory dialogue at the European and
Irish level, by offering constructive ideas to address the changing
regulatory priorities of the post financial crisis world, and by maintaining
high standards of practice in the Irish market that ensure a continued
reputation for high standards of investor protection.

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P a g e | 52

NUMBER 4

2012 Monetary Policy Releases
Information received since the Federal
Open Market Committee met in
August suggests that economic
activity has continued to expand at a
moderate pace in recent months.
Growth in employment has been slow, and the unemployment rate
remains elevated.
Household spending has continued to advance, but growth in business
fixed investment appears to have slowed.
The housing sector has shown some further signs of improvement, albeit
from a depressed level.
Inflation has been subdued, although the prices of some key commodities
have increased recently.
Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster
maximum employment and price stability.
The Committee is concerned that, without further policy
accommodation, economic growth might not be strong enough to
generate sustained improvement in labor market conditions.
Furthermore, strains in global financial markets continue to pose
significant downside risks to the economic outlook.
The Committee also anticipates that inflation over the medium term
likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that
inflation, over time, is at the rate most consistent with its dual mandate,
the Committee agreed today to increase policy accommodation by
purchasing additional agency mortgage-backed securities at a pace of $40
billion per month.
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P a g e | 53

The Committee also will continue through the end of the year its program
to extend the average maturity of its holdings of securities as announced
in June, and it is maintaining its existing policy of reinvesting principal
payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities.
These actions, which together will increase the Committee’s holdings of
longer-term securities by about $85 billion each month through the end of
the year, should put downward pressure on longer-term interest rates,
support mortgage markets, and help to make broader financial conditions
more accommodative.
The Committee will closely monitor incoming information on economic
and financial developments in coming months.
If the outlook for the labor market does not improve substantially, the
Committee will continue its purchases of agency mortgage-backed
securities, undertake additional asset purchases, and employ its other
policy tools as appropriate until such improvement is achieved in a
context of price stability.
In determining the size, pace, and composition of its asset purchases, the
Committee will, as always, take appropriate account of the likely efficacy
and costs of such purchases.
To support continued progress toward maximum employment and price
stability, the Committee expects that a highly accommodative stance of
monetary policy will remain appropriate for a considerable time after the
economic recovery strengthens.
In particular, the Committee also decided today to keep the target range
for the federal funds rate at 0 to 1/4 percent and currently anticipates that
exceptionally low levels for the federal funds rate are likely to be
warranted at least through mid-2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke,
Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke;
Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom
Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L.
Yellen. Voting against the action was Jeffrey M. Lacker, who opposed
additional asset purchases and preferred to omit the description of the
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P a g e | 54

time period over which exceptionally low levels for the federal funds rate
are likely to be warranted.

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P a g e | 55

NUMBER 5

Economic Activity, Prices, and
Monetary Policy
Speech at a Meeting with Business Leaders in Yamaguchi
Ryuzo Miyao. Member of the Policy Board

Introduction

Thank you for giving me this opportunity to exchange views with people
representing Yamaguchi Prefecture, who have taken time to be here
despite their busy schedules.

Allow me to also express my gratitude for your cooperation with the
activities of the Bank of Japan's Shimonoseki Branch.

Today I will review economic activity and prices in Japan, whose
economy is heading toward recovery despite the effects of the global
economic slowdown, and then discuss the Bank's monetary policy.

My concluding remarks will touch briefly on the economy of Yamaguchi
Prefecture. Following my speech, I would like to listen to your views on
the actual situation of the local economy and your candid opinions.

I. Recent Developments in Economic Activity and Prices
A. Overview

After the turn of the year, economic activity in Japan started picking up
moderately; domestic demand has been firm, supported mainly by
reconstruction-related demand and policy effects.

While overseas economies as a whole are still in a deceleration phase,
domestic economic activity has also been firm.

Domestic demand -- including private consumption, public investment,
and housing investment -- has been improving and this improvement has
compensated for a delay in recovery in production and exports due to a
_____________________________________________________________

Monday September 24 2012 - Top 10 Risk Management News

Monday September 24 2012 - Top 10 Risk Management News

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