Risk Management Presentation December 10 2012

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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, What is the Micro Macro Schizophrenia? It is the tension between the micro-prudential imperative to require more capital, more quickly, and macro-prudential concerns over the implications for pro-cyclicality and sovereign debt sustainability.
Who said that?

Matthew Elderfield, Deputy Governor of the Central Bank of Ireland. Matthhew continues: So, is there a cure for the Micro-Macro Schizophrenia condition?
Well, there are perhaps three competing schools of thought regarding treatment: what we might call the St Augustine, Schwarzenegger and Dell cures.
Read more at N umber 5 of our list. Another interesting development:
What is better, to be a risk manager, or a risk manager with Basel I II skills?
I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com
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Basel I I I Jobs, Salary Trend in UK
Risk Management Jobs, Salary Trend in UK
Read more at N umber 1 below.
Welcome to the Top 10 list.
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Basel I I I Risk Experts vs. Risk Management Experts

It is interesting to feel the market. Do you make more money as a risk manager, or a risk manager with Basel iii knowledge?What do you believe?
The Comptroller of the Currency Speaks to Community Bankers About Risk Management
Remarks by Thomas J. Curry, Comptroller of the Currency, Before the 8th Annual Community Bankers Symposium, Chicago, I llinois
SEC Chairman Mary Schapiro to Step Down Next Month

After nearly four years in office, SEC Chairman Mary L. Schapiro announced that she will step down on Dec. 14, 2012. Chairman Schapiro, who became chairman in the wake of the financial crisis in January 2009, strengthened, reformed, and revitalized the agency.
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On learning from history truths and eternal truths

Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at the Norwegian Academy of Science and Letters, Oslo
Micro-macro schizophrenia Banking Union and the European capital dilemma

Address by Mr Matthew Elderfield, Deputy Governor of the Central Bank of Ireland and Alternate Chairman of the European Banking Authority, to Bloomberg, Dublin
Deleveraging and monetary policy

Speech by Peter Praet, Member of the Executive Board of the ECB, Hyman P. Minsky Conference on Debt, deficits and unstable markets, Berlin
Opening Remarks at the H igh Level Seminar of Macro prudential policy: Asian Perspective
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EMIR: The bigger picture and looking forward

Speech by David Lawton, Director of Markets, FSA at the Tradetech Conference [Note: EM IR is the acronym for the European Market I nfrastructure Regulation].
The Governor of the Bank of England

Her Majesty the Queen has been pleased to approve the appointment of Mark Carney as Governor of the Bank of England from 1 July 2013.
He will succeed Sir Mervyn King.
UBS trading losses in London: FINMA finds major control failures

The proceedings launched by the Swiss Financial Market Supervisory Authority FINMA into UBS's trading losses in London have highlighted serious deficiencies in risk management and controls at UBS's I nvestment Bank.
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Basel I I I Experts vs. Risk Management Experts

It is interesting to feel the market. Do you make more money as a risk manager, or a risk manager with Basel iii knowledge?What do you believe? Source: IT Jobs Watch, that provides a unique perspective on today's information technology job market. http:/ / www.itjobswatch.co.uk/ jobs/ uk/ basel%20iii.do
Note: This is not an advertisement. We have no affiliation or any other relationship with IT J obs Watch and the stakeholders of IT J obs Watch
Basel I I I Top 30 Related I T Skills in UK
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Basel I I I Jobs, Salary Trend in UK
Risk Management Jobs, Salary Trend in UK
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Basel I I I Salary H istogram in UK
Risk Management Salary Histogram in UK
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Basel I I I , Top 9 Job Locations in UK
Risk Management, Top Job Locations in UK
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The Comptroller of the Currency Speaks to Community Bankers About Risk Management
Remarks by Thomas J. Curry, Comptroller of the Currency, Before the 8th Annual Community Bankers Symposium, Chicago, I llinois Good morning. I ts a pleasure to be here in Chicago, and to have this opportunity to talk about some of the issues affecting community banks. The past few years have been extraordinarily challenging for all financial institutions and for community banks and thrifts in particular. Margins are under pressure, the regulatory environment is evolving, and creditworthy borrowers are hard to find. Commercial real estate, a bread-and-butter product for many community institutions, is still suffering from high vacancy rates, as well as a significant level of problem assets. However, the environment is getting better for small banks and thrifts. I dont want to minimize the difficulties, but we are seeing real improvements in asset quality, liquidity, underwriting, and capital, among other indicators. The number of problem banks is beginning to stabilize, and the volume of problem assets is falling. After the financial crisis and the recession that followed, these steady signs of improvement are welcome indeed. But as the industry moves to a better place, we ought to ask ourselves what it was that differentiated the more than 460 banks and thrifts that
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failed over the past few years from those that not only survived, but in many cases thrived.
Clearly, the ones who made it had stronger capital, better liquidity management, better underwriting, and, in most cases, smaller asset concentrations. They are the ones who stuck to their knitting, served their communities, and didnt try to reach too far for profits. They are the community banks that maintained their reputations, and were able to build upon their customers trust and confidence. But as important as each of those characteristics was, the strength of the community banks that prospered in difficult times came from more than just the sum of those parts. In fact, I would say it was something far more fundamental. They managed to prosper through hard times because they had effective risk management systems in place. In one sense, thats almost self-evident. After all, banking is a business of managing risk, of understanding how decisions that are made today will affect the condition of the bank in the future, and planning accordingly. And importantly, the banks that were successful werent those with the fanciest systems. They were the institutions that focused on understanding the risks they were taking on and anticipating the future consequences of those risks. I d like to spend the rest of my time today on the subject of risk management, and in particular on enterprise risk management.
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And yes, thats a subject broad enough to capture almost everything you do in managing your institutions.
But I ll limit my comments to a few specific areas that I think are particularly important today, including capital planning, stress testing, and operational risk, which I m sure will be more than enough for the time we have available. If you havent seen it yet, then I would encourage you to take a look at the OCCs Semiannual Risk Perspective, which we published for the first time this spring. The report highlights three areas of risk that are front and center for the OCC, and each of them illustrates the importance of enterprise risk management. The first has to do with the aftereffects of the housing-driven boom-to-bust credit cycle. The second involves the challenge of increasing revenues in a slow-growth economy, and the third is focused on the potential for banks and thrifts to take excessive risks to improve profitability. None of this is really new: weve seen booms turn into busts before, and weve dealt with the consequences that followed. And of course, weve gone through cycles where revenue growth and earnings were hard to come by, and some banks and thrifts took on inappropriate risks to compensate. But there is something different about this cycle.
Its been far more challenging than any I ve experienced in my working career, and it has been far more painful to work through it.
And for all the improvements were seeing, creditworthy borrowers who want loans are still hard to find.
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This is a time where banks and thrifts of all sizes need to manage their operations carefully to ensure that they arent planting the seeds for the next crisis.
Reaching out on the risk spectrum for earnings can be problematic. We have seen institutions cutting back on operating controls to enhance income, and this is a cause for concern. And I would say thats where a strong enterprise risk management or a strong risk assessment system comes in. Enterprise risk management is an integrated approach to identifying, assessing, managing, and monitoring risk in a way that maximizes business success. It starts at the top, with the board and senior management making decisions about the institutions business model and its appetite for risk, but it cant be successful unless those policies are filtered into the banks culture. A strong risk culture is proactive, and it drives the way your bank sets strategy and makes decisions. It also translates into how your management team and employees anticipate and respond to risk throughout the bank. This means that individual risks arent considered only within the lines of business or by function, although the board and management can and should think about them in this way. It also means that risk and risk management are considered in their totality across the bank, as well as how different risks are related and interact with one another. So one aspect of enterprise risk management involves sharing information and breaking down the silos.
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For example, your loan staff should be talking with compliance staff when developing new products or services.
This is especially important, and weve seen problems in the past when silos prevent these two groups from talking to each other. The fact is, everyone with a vested interest in new product decisions should be involved in the conversation, and that includes your supervisor. The regulatory agencies can be good resources to help you make sure youve identified all aspects of new product decisions that should be considered. Another key element of risk management involves taking advantage of the guidance issued by the OCC and other regulators and tailoring it to your own unique circumstances. Stress testing is an example. Our guidance describes a variety of methods that community banks can use to stress test their portfolios, and provides one example of a simple stress test framework. However, each institution is different, and every bank and thrift will need to decide for itself what method is most appropriate for its own specific circumstances. The key hereand the purpose of the guidancewas to encourage community banks to do some simple stress testing, and to help them understand how to do it. I want to underscore that were not requiring community banks to have the types of sophisticated models and processes that we expect from larger institutions, or that we think banks have to go hire consultants to meet our expectations.
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What we really want to see is that your banks do consider some form of stress testing or sensitivity analysis of your key loan portfolios on at least an annual basis.
The goal is to help you analyze what ifswhat happens if a group of borrowers or an industry segment runs into problemswhat will be the impact on your loan portfolios, your earnings and your capital. Community banks that have incorporated such concepts and analyses into their credit risk management and strategic and capital planning processes have demonstrated the ability to minimize the impact of negative market developments more effectively than those that did not use stress testing. Risk management is also a key element of a banks capital planning process, a point that we highlighted in guidance issued earlier in the year. In fact, the first step in capital planning is the identification and evaluation of all material risks. Again, every bank is different in the way it funds itself, its willingness to enter new lines of business, or its tolerance for asset concentrations, among other factors. Not every risk can be offset by the addition of capitaloverly high CRE concentrations, for examplebut once risks are identified, management and the board can begin to assess the institutions capital needs. Of course, capital isnt the only buffer available to banks and thrifts to provide a cushion against economic shocks. A well-managed allowance for loan and lease losses is also a vital risk management tool, and its one that I hope each of you is monitoring very closely. As the quality of some classes of assets has improved and charge-offs have moderated, there has been a tendency to reduce quarterly
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provisions, in many cases to levels that are inadequate to cover charge-offs.

It would be short-sighted to say that banks and thrifts cant engage in some level of reserve releases, given the improvement weve seen in the fundamentals, and we at the OCC arent saying that. But I have warned on several occasions lately that we are monitoring this trend very closely, and were ready to take action if necessary. In this context, let me say that this is a trend each of you should be monitoring as well. One of the key lessons of the financial crisis has to do with the importance of capital and reserves. If you are letting your reserves decline rapidly, our examiners will want to see that you have a carefully-considered strategy for matching the allowance to risk in your loan portfolio. Finally, I said toward the outset that I wanted to discuss operational risk.
I doubt that any single area of risk management has occupied as much of my time since I became Comptroller in April as operating risk.
From the foreclosure processing mess to fair lending violations to credit card marketing issues, the risk of loss that results from the failures of people, processes, systems, and external events has become a significant safety and soundness issue. I m sure that all of you noted that the problems I cited are all ones that involved large banks and thrifts, not community institutions. However, I want to caution each of you to be particularly vigilant about monitoring and managing operational risk, particularly in areas that involve the fair treatment of your customers.
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Op-risk failures are the surest way to undermine the reputation of your bank, and one of the greatest advantages community banks and thrifts have in todays marketplace is their reputation.
Your customers trust you and want to do business with you, and that is a vital resource that you should protect at all costs. The op-risk example highlights one key aspect of enterprise risk management, and that is the competitive advantage it confers on those who do it well.
Whether it is taking the steps necessary to safeguard your reputation or matching your long term capital needs against your risk profile, risk management should not be viewed as a defensive strategy, but as a proactive means of gaining a competitive advantage in the market.
The reason I am so concerned about all of this is simple. Community banks and thrifts play a vital role in supporting local economies throughout the country, and Americas families and communities cant be successful unless you are. So our goal in promoting sound risk management is to help ensure that the nations smaller banks and thrifts remain healthy, profitable, and strong enough to serve communities across the United States. Thank you.
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SEC Chairman Mary Schapiro to Step Down N ext Month

After nearly four years in office, SEC Chairman Mary L. Schapiro announced that she will step down on Dec. 14, 2012. Chairman Schapiro, who became chairman in the wake of the financial crisis in January 2009, strengthened, reformed, and revitalized the agency. She oversaw a more rigorous enforcement and examination program, and shaped new rules by which Wall Street must play. It has been an incredibly rewarding experience to work with so many dedicated SEC staff who strive every day to protect investors and ensure our markets operate with integrity, said Chairman Schapiro. Over the past four years we have brought a record number of enforcement actions, engaged in one of the busiest rulemaking periods, and gained greater authority from Congress to better fulfill our mission. Chairman Schapiro is one of the longest-serving SEC chairmen, having served longer than 24 of the previous 28. She was appointed by President Barack Obama on Jan. 20, 2009, and unanimously confirmed by the Senate. During her tenure, Chairman Schapiro worked to bolster the SECs enforcement and examination programs, among others. As a result of a series of reforms, the agency is more adept at pursuing tips and complaints provided by outsiders, better able to identify wrongdoers
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through vastly upgraded market intelligence capabilities, and more strategic, innovative and risk-focused in the way it inspects financial firms.
In each of the past two years, the agency has brought more enforcement actions than ever before, including 735 enforcement actions in fiscal year 2011 and 734 actions in FY 2012. In addition, the SEC engaged in one of the busiest rulemaking periods in decades.
Due to new rules now in place, investors can get clear information about the advisers they invest with, vote on the executive compensation packages at companies they invest in, benefit from additional safeguards that protect their assets held by investment advisers, and get access to more meaningful information about company boards and municipal securities.
Ive been so amazed by how hard the men and women of the agency work each and every day and by the sacrifices they make to get the job done, added Chairman Schapiro. So often they stay late or come in on weekends to polish a legal brief, review a corporate filing, write new rules, or reconstruct trading events. And despite the complexity and the intense scrutiny, they always excel at what they do. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the agency has implemented a new whistleblower program, strengthened regulation of asset-backed securities, laid the foundation for an entirely new regulatory regime for the previously unregulated derivatives market, and required advisers to hedge funds and other private funds to register and be subject to SEC rules. During Chairman Schapiros tenure, the agency worked to improve the structure of the market by approving a series of measures that have
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helped to strengthen equity market structure and reduce the chance of another Flash Crash.
Among other things, the Commission for the first time has required the exchanges to create a consolidated audit trail that will enable the agency to reconstruct trading across various trading venues. Chairman Schapiro previously served as a commissioner at the SEC from 1988 to 1994. She was appointed by President Ronald Reagan, reappointed by President George H.W. Bush in 1989, and named Acting Chairman by President Bill Clinton in 1993. She left the SEC when President Clinton appointed her as chairman of the Commodity Futures Trading Commission, where she served until 1996. She is the only person to have ever served as chairman of both the SEC and CFTC. As SEC chairman, Schapiro also serves on the Financial Stability Oversight Council, the FHFA Oversight Board, the Financial Stability Oversight Board, and the I FRS Foundation Monitoring Board.
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The SEC -- Revitalized, Reformed and Protecting Investors

As Chairman of the U.S. Securities and Exchange Commission, Mary L. Schapiro helped strengthen and revitalize the agency; oversaw a more rigorous enforcement program; and, shaped new rules by which Wall Street must play. During her tenure, the agencys dedicated work force brought a record number of Enforcement actions, swiftly reacted to the May 6, 2010 Flash Crash, and achieved significant regulatory reform to protect investors.
Executive Summary
Reforming and Revitalizing the SEC --During Chairman Schapiros tenure, the agency: - Streamlined its enforcement procedures to launch investigations more quickly - Developed its first national, centralized database for all tips and complaints and established an office to triage them - Created specialized enforcement units to harness expertise and experience - Eliminated a layer of management to put more expert attorneys back on the front lines - Modernized its technology and upgraded its case management system
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- Established a new whistleblower program already paying dividends

- Established a new division to focus on risk and economic analysis - Created new corporate disclosure units - Bolstered its ranks by hiring more experts in risk management, quantitative analytics, trading, portfolio management, valuation skills -- and stepped up training - Enhanced collaboration by creating cross-agency working groups and making it a criteria for performance evaluations - Created the agency's first-ever Office of the Chief Operating Officer - Improved the agencys financial reporting, eliminating material weaknesses
Achieved Record Results in Enforcement and Inspections

- Brought a record number of enforcement actions -- including 735 enforcement actions in FY 2011 and a near-record 734 actions in FY 2012 - Returned more than $6 billion since FY 2009 to harmed investors - Obtained more than $11 billion in ordered disgorgements and penalties since FY2009 - Brought an increased average of 50 Ponzi scheme cases each year between FY 2009 and 2012 more than twice as many as compared to FY 2007 and 2008
- Filed actions against 129 individuals and institutions stemming from the financial crisis, including more than 50 CEOs, CFOs and other senior officers
- Brought financial-crisis related actions against Fannie Mae and Freddie Mac, State Street, American Home Mortgage, New Century,
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IndyMac, Bancorp, Countrywide, Brookstreet, Citigroup, Wachovia Capital Markets, Goldman Sachs, Evergreen, J.P. Morgan Securities, Bank of America, Charles Schwab, Morgan Keegan, TD Ameritrade, and others
- Brought a record number of enforcement actions against investment advisers - Increased the amount of enforcement actions involving municipal securities
- Brought a record number of enforcement actions against investment advisers

- Increased the amount of enforcement actions involving municipal securities - Introduced new tools, similar to those used by criminal authorities, to secure the cooperation of persons who are on the inside - Prosecuted the largest insider trading scheme ever discovered, winning a record $92.8 million fine in the civil case against the CEO of the Galleon H edge Fund - Witnessed gains from a new Aberrational Performance I nquiry focused on hedge funds - Embraced a risk-based approach targeting examinations of registered firms, bringing a 50% increase in the rate at which exams result in referrals to the enforcement division - Imposed first-ever penalty against an exchange for rule violations - Launched an initiative to address concerns arising from reverse mergers and foreign issuers
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Investor-Focused Rulemaking
- Experienced one of the busiest rulemaking periods in decades, including proposing or adopting more than of the rules required by the Dodd-Frank Act. - Enhanced safeguards for investors assets held by investment advisers - Proposed and began adopting an entirely new regulatory regime for the previously-unregulated derivatives market - Required companies to let shareholders weigh in on executive compensation and "golden parachute" compensation arrangements - Required advisers to hedge funds and other private funds to register and be subject to SEC rules leading to the registration of about 4,000 of them -- and implemented a new reporting regime. - Required companies to disclose their use of conflict minerals and required resource extraction companies to disclose payments to governments - Adopted widely-hailed 2010 rules to enhance the resiliency of money market funds - Curtailed pay-to-play practices by advisers to government clients, like public pension plans - Provided investors with more meaningful and more-timely information regarding municipal securities and issued a report recommending ways to improve the structure of the municipal securities market - Provided investors with more meaningful information about company boards and risk management
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- Required advisers to provide clients with brochures that plainly disclose such things as the advisers business practices, fees, conflicts of interests and disciplinary information
- Adopted new rules designed to help revitalize the asset-backed securities market by encouraging better disclosure - Proposed rules to create a new and more equitable framework governing the way in which investors pay the costs for mutual funds to be marketed and sold
- Proposed rules to help clarify the meaning of a date in a target date funds name and enhance the information in fund advertising and marketing materials in order to assist investors preparing for retirement
Addressed the Structure of the Market

- Approved measures that have helped to reduce the chance of another Flash Crash occurring - Approved single stock and market wide circuit breakers that have helped to limit the impact of technology errors in the market - Clarified up front for investors how and when erroneous trades would be broken - Required broker-dealers to put in place risk controls and effectively prohibited unfiltered access to the exchanges - Required, for the first time, the exchanges to establish a consolidated audit trail system that will enable regulators to track detailed order/trade information across the securities markets - Eliminated stub quotes - Set up a new system to collect information that will inform future rulemaking regarding high frequency trading
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Reforming and Revitalizing the SEC

Streamlined enforcement procedures to launch investigations more quickly This eliminated the need for attorneys to obtain clearance from the full Commission before initiating an investigation or commencing settlement negotiations. Developed the SECs first national, centralized database for all tips and complaints and set up an office to triage them The system allows information to be effectively sorted, stored and compared regardless of how the information is received. A new Office of Market Intelligence reviews and analyzes the information to conduct market surveillance, to determine whether to open new investigations or route data to existing investigations, and to discover emerging trends that need to be watched. Created specialized enforcement units to harness experience -- The five new national specialized units allow the enforcement unit to build specialized expertise and institutional experience in areas including Structured and New Products, Market Abuse, Municipal Securities and Public Pensions, Asset Management, and FCPA. They allow the agency to better detect trends, links and patterns related to fraudulent conduct, and to more effectively investigate suspicious activity in these areas. Eliminated a layer of management to put more expert attorneys on the front lines of investigations -- This returned experienced attorneys to investigations and litigation. Modernized the agencys technology and upgraded its case management system Three systems have been increasing efficiency, including 1) A new eDiscovery system that is giving investigators faster access to information by vastly expanding their ability to parse evidence and drill down on key subjects;
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2)An enhanced case management system that is providing a clearer view into the progress of every investigation and enforcement action, as well as aggregated statistics and performance metrics; and
3)A new system, TRENDS, that is helping the National Exam Program become more uniform in the way it does its exams and ensuring that staff enter exams fully prepared. Advocated and established a new whistleblower program that is paying dividends-- A new program, advocated by Chairman Schapiro, incentivized insiders to come forward with information regarding possible securities law violations. The new program has helped to reduce the length of investigations; paid out its first reward; and, generated more than 3,000 tips. Established a new division to focus on risk and economic analysis -- The Division of Risk, Strategy and Financial Innovation serves as the SECs think tank, improving the agencys ability to track and respond to new products, trading practices and risks. Staffed with academics, economists and financial industry professionals, this division enhances the SECs cost/ benefit analysis capabilities. Created new corporate disclosure units The division that focuses on corporate disclosures set up new groups each to concentrate closely on the largest financial institutions, structured finance products, and capital markets trends. Hired new skill sets and stepped up training -- The agency has brought on board experts in risk management, trading, quantitative analytics, portfolio management and valuation skills to help it keep pace with those it regulates. And, it has more than doubled its training resources to ensure that veteran employees are up-to-date on the financial industrys latest developments. Enhanced collaboration by creating cross-agency working groups and making it a part of performance evaluations -- Chairman Schapiro
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emphasized the need for collaboration to ensure rulemakings and studies benefit from the insight of the full spectrum of agency expertise.
She also created a host of cross-functional teams to develop the tips and complaints database, establish requirements for the new consolidated audit trail, conduct the Muni Field hearings; address life settlements; and, study how to establish a fiduciary duty for both I nvestment Adviser and broker-dealers. She also incorporated collaboration criteria into performance evaluations. Created the agency's first-ever Office of the Chief Operating Officer This position has enhanced agency efforts -- around information technology, financial reporting and records management -- to refocus resources and make the agency more efficient and effective. Improved the agencys financial reporting, eliminating material deficiencies -- The SEC improved its internal controls, as the GAO reported that the agency had no material weaknesses for the second year in a row, and no significant deficiency in the area of information systems, a key area for strong financial reporting.
Overseeing a Successful Enforcement and Exam Program

Brought a record number of enforcement actions In FY 2011, the agency brought 735 enforcement actions -- more than at any time in the agencys history. And, in FY 2012, it brought a near-record 734 actions. Returned more than $6 billion to harmed investors -- Since FY 2009, the agency has identified and tracked down investors who were harmed by wrongdoing, and returned $6.75 billion to them. Obtained more than $11 billion in ordered disgorgements and penalties The agency obtained $2.4 billion in FY 2009; $2.85 in FY 2010; $2.8 billion in FY 2011; and $3.1 billion in FY 2012.
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Brought an increased average of 50 Ponzi scheme cases --Between FY 2009 and 2012, the agency brought approximately 50 Ponzi cases each year, up from 22 per year between 2007 and 2008.
Filed actions against 129 individuals and institutions stemming from the financial crisis -- The actions resulted in $2.6 billion in disgorgement, penalties and other financial relief. The institutions involved in the SECs credit crisis cases included Fannie Mae and Freddie Mac, J.P. Morgan Securities, Goldman Sachs, State Street, American H ome Mortgage, New Century, I ndyMac, Bancorp, Countrywide, Brookstreet, Citigroup, Wachovia Capital Markets, ICP Asset Management, Taylor, Bean & Whitaker, Evergreen, Bank of America, Charles Schwab, Evergreen, Morgan Keegan, and TD Ameritrade, and Stifel, Nicolaus & Co. Brought actions against more than 50 CEOs, CFOs and other senior officers in connection with the financial crisis The agency has charged individuals in all but 8 of the financial-crisis related cases it has brought. A $67.5 million settlement with the former Countrywide Financial CEO resulted in the largest-ever penalty paid by a public companys senior executive in an SEC settlement. Brought a record number of enforcement actions against investment advisers -- The SEC filed record numbers of enforcement actions against investment advisers and investment companies in FY 2011 and 2012. Increased the amount of enforcement actions involving municipal securities -- In FY 2012, the SEC filed more than double the number of enforcement actions related to municipal securities than it filed the previous year. Included in these actions were charges against the former mayor and city treasurer of Detroit in a pay-to-play scheme involving investments in the citys pension funds, and Goldman Sachs for violations of various municipal securities rules resulting from undisclosed in-kind
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non-cash contributions that one of its investment bankers made to a Massachusetts gubernatorial candidate.
Encouraged greater cooperation with insiders -- The agency introduced new cooperation tools, similar to those used by criminal authorities, to secure the cooperation of persons who are on the inside. This program is helping investigators to obtain information and the assistance of witnesses earlier in investigations, enabling the agency to build stronger cases more quickly.
The SEC used this tool for the first time, among many, in 2010 when it charged a former executive of Carters I nc. with financial fraud but not the company, which cooperated with the agency.
Detected and prosecuted the largest insider trading scheme ever discovered The agency won a record $92.8 million fine in the civil case against Raj Rajaratnam, Galleon H edge Fund CEO. Rajaratnams parallel criminal conviction resulted in an 1 1-year prison sentence and $64 million in fines and forfeitures.
In addition to Rajaratnam, the SEC has won civil judgments or negotiated favorable settlements with other traders, analysts, researchers and high-ranking executives.
SEC support helped lead to pleas and criminal convictions for more than 50 other members of the conspiracy, including former Goldman Sachs board member and former Managing Director of McKinsey & Company, Rajat Gupta. The number of SEC insider trading actions filed since October 2009 have been the most in SEC history for any three-year period. Witnessed gains from a new Aberrational Performance I nquiry This collaborative effort-with Risk Fin and the exam unit--uses quantitative analytics to search for hedge fund advisers whose claimed returns are unusual enough to raise a red flag.
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For instance, in 2011, as a result of a sweep, the agency charged four hedge fund advisers for inflating returns, overvaluing assets and other actions that materially misled and harmed investors.
In 2012, the SEC charged three advisory firms and six individuals as part of this initiative to combat investment adviser fraud. Embraced a risk-based approach for targeting examinations -- By making its program more risk-based, the examination program has seen a 50% increase in its rate of referrals to the enforcement unit.
The new program developed and improved algorithms that use publicly available data from registered entities to target those whose behavior is consistent with increased risk of unethical or illegal actions.
Imposed first-ever penalty against an exchange The penalty stemmed from rules violations that gave certain customers an improper head start on trading information. Launched an initiative to address concerns arising from reverse mergers and foreign issuers --Deregistered the securities of nearly 50 companies and filed more than half a dozen fraud actions against foreign issuers and executives since the initiative began.
Engaging in One of the Busiest Rulemaking Periods

Experienced one of the busiest rule-writing periods in decades -- In both 2010 and 2011, the Commission proposed and/ or adopted about 70 rules, concept releases or interpretive releases each year. In addition, the Commission proposed or adopted about 80% of the rules required by the Dodd-Frank Act, including adopting 36 rules, proposing more than 39 other rules and conducting 15 studies required by the Act. Enhanced safeguards for investors assets -- In cases where registered investment advisers retain custody of a clients assets, advisers are now required to hire an independent public accountant to conduct an annual "surprise exam" to verify those assets actually exist.
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In addition, the adviser must obtain a written report -- prepared by an accountant registered and inspected by the Public Company Accounting Oversight Board -- assessing the safeguards that protect the clients' assets.
The agency has proposed similar rules for registered broker-dealers who retain custody. Proposed an entirely new regulatory regime for the previously unregulated derivatives market The agency has laid the groundwork for an entirely new system that includes defining a series of terms related to securitybased swaps; establishing a process for clearing transaction, trading on execution facilities and storing data in repositories; developing standards for operating and governing of clearing agencies; specifying steps that end-users must follow when engaging in transactions; and establishing registration requirements. Required companies to let shareholders weigh in on executive compensation -- The agency adopted rules allowing shareholder to approve executive compensation and "golden parachute" arrangements.
It also joined with other regulatory agencies to propose rules requiring certain large financial institutions to disclose the structure of their incentive-based compensation practices, and prohibit such institutions from maintaining compensation arrangements that encourage inappropriate risks.
In addition, the agency adopted rules requiring exchanges and national securities associations to prohibit the listing of any equity security of an issuer that does not comply with new compensation committee and compensation adviser requirements.
Required advisers to hedge funds and other private funds to register and be subject to SEC rules leading to the registration of about 4,000 of them -- The SEC adopted rules requiring advisers to hedge funds and other private funds to register with the SEC as part of the Dodd-Frank Act.
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As a result, the agency can now see the full landscape of hedge funds, rather than just a sliver based on those who registered voluntarily.
In tandem with the CFTC, the Commission also adopted a new rule that would require hedge fund advisers and other private fund advisers to report systemic risk information to the Financial Stability Oversight Council. The SEC adopted a rule defining family offices that will be excluded from the definition of an investment adviser under the I nvestment Advisers Act. The SEC also adopted a rule defining advisers to venture capital funds, who are required to report basic information to the SEC and the public. Required companies to disclose their use of conflict minerals and required resource extraction companies to disclose payments to governments The SEC adopted rules, under the Dodd-Frank Act, that require companies to disclose annually whether they use conflict minerals that originate from the Democratic Republic of the Congo or adjoining countries because of concerns that the exploitation and trade of these minerals by armed groups is helping to finance conflict in the region and is contributing to a humanitarian crisis. The agency also adopted rules under the Dodd-Frank Act that require resource extraction companies to disclose payments to governments. Adopted widely-hailed rules to enhance the resiliency of money market funds -- The SEC adopted rules to make money market funds more resilient by strengthening credit quality, liquidity and maturity standards, as well as introducing stress testing requirements and mandating new reporting of money market fund holdings.
In addition, the SEC made available to investors the detailed information about a fund's investments and the market-based price of its portfolio known as its "shadow NAV" (net asset value) or mark-to-market valuation.
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The Chairman also called upon the Financial Stability Oversight Council to act to make such funds less susceptible to destabilizing runs like occurred during the credit crisis.
Curtailed pay-to-play practices by advisers to government clients, like public pension plans The agency prohibited the use of campaign contributions and related payments to influence the awarding of contracts for the management of public pension plan assets and similar government investment accounts. Provided investors with more meaningful and more-timely information regarding municipal securities The Commission expanded existing rules prohibiting brokers, dealers, and municipal securities dealers from purchasing or selling municipal securities unless they reasonably believe that entities issuing the securities have agreed to disclose such things as annual financial statements and notices of certain material events, such as payment defaults and rating changes. The new rules expand coverage to variable rate demand obligations, improve disclosure of tax risk, strengthen disclosure of important events and establish more specific filing deadlines.
The Commission also issued a report laying out a range of recommendations to improve the structure of the municipal market.
Provided investors with more meaningful information about company boards --The Commission required companies to file detailed information about the structure of their boards; the qualifications of their directors and nominees; the fees and conflicts of compensation consultants; and the relationship between a company's overall compensation policies and its risk profile. Required advisers to provide clients with a brochure of key information The Commission improved and updated a form so that clients of investment advisers can now get details most relevant to them, written in plain English, such as the advisers business practices, fees, conflicts of interests and disciplinary information.
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It also required brochure supplements to give resume-like information about the individuals at an investment advisory firm.
Further, it ensured investors have easy access to the brochures, Form ADV, Part 2, which are filed electronically and posted on the SECs website. Adopted new rules designed to help revitalize the asset-backed securities market by encouraging better disclosure The new rules require issuers of asset-backed securities:
1)To disclose the history of the requests they received and repurchases they made related to their outstanding asset-backed securities; and
2) To conduct a review of the assets underlying those securities. Proposed rules to create a new and more equitable framework governing the way in which investors pay the costs for mutual funds --The proposed rules would create a new and more equitable framework for the way in which investors pay the marketing and sales costs so-called 12b-1 fees -- for mutual funds.
In addition, the rules would limit the amount of asset-based sales charges that individual investors pay.
Proposed rules to help clarify the meaning of a date in a target date funds name -The Commission proposed rules to help investors to better assess the anticipated investment glide path and risk profile of a target date fund by, for example, requiring graphic depictions of asset allocations in fund ads. The rules, which would require an asset allocation tag line adjacent to a target date funds name in an ad, also would enhance the information in ads and marketing materials to help investors prepare for retirement.
Improving the Structure of the Market

Approved a series of measures that have helped to reduce the chance of another Flash Crash occurring Months before the Flash Crash, Chairman Schapiro launched a comprehensive review of the structure of
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the markets and, following May 6, summoned the exchange heads to Washington to hammer out a series of measures to address the issues raised by that days volatile trading.
Approved a variety of circuit breakers to help limit the impact of technology errors in the market -- The Commission approved a proposal establishing a limit up-limit down mechanism that prevents trades in individual exchange-listed stocks from occurring outside of a specified price band. It also approved market-wide circuit breakers that when triggered, halt trading in all exchange-listed securities throughout the U.S. markets. Clarified up front for investors how and when erroneous trades would be broken -- The new rules approved by the Commission outline when an erroneous trade would be broken, so that market participants are less likely to flee when computer glitches occur. Required broker-dealers to put in place risk controls and effectively prohibited unfiltered access to the exchanges -- The Commission approved new rules that require broker-dealers to implement controls and supervisory procedures to manage the financial and regulatory risks of market access, particularly the technology systems that enter orders in to the marketplace. The rules also assured broker-dealers would implement risk controls to reduce the chance of computer glitches. Approve a first-ever consolidated audit trail system -- The Commission approved a new rule requiring the exchanges and FINRA to submit a comprehensive plan for developing, implementing, and maintaining a consolidated audit trail.
The audit trail will collect and accurately identify every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.
The new measure will increase the data available to regulators investigating illegal activities and it will significantly improve the ability
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to reconstruct broad-based market events in an accurate and timely manner.

Eliminated stub quotes --The Commission approved new rules proposed by the exchanges and FIN RA to strengthen the minimum quoting standards for market makers and effectively prohibit stub quotes in the U.S. equity markets. Set up a new system to collect market and trading data -- The new system will inform future rulemaking regarding high frequency trading
ADDITIONAL I NVESTOR PROTECTI ON MEASURES

- Issued a record number of investor alerts and bulletins - Established an investor advisory committee - Created a new investor.gov website and upgraded sec.gov
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Jan F Qvigstad: On learning from history truths and eternal truths Speech by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), at the Norwegian Academy of Science and Letters, Oslo,
I have received valuable assistance in preparing this speech. Outside the Bank, I would like to thank Mike Bordo, Marc Flandreau, H enrik Mestad, Henrik Syse and Knut Syds ter. At the Bank, I would like to thank the following persons in particular for their contributions: yvind Eitrheim, Amund Holmsen, Jon Nicolaisen, ystein Olsen, ystein Sjlie, Birger Vikren NS Mari Aasgaard Walle.
I would also like to thank H elle Snellingen for her contribution to the translation of the text into English.
Introduction
All scientific and scholarly disciplines have a particular, and not immutable, set of truths. Mathematics and theology are possible exceptions, though for different reasons. As the late Professor Knut Sydster underscored when assisting me with this speech; in mathematics new results are proved on the basis of fundamental axioms and become new truths.
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Theology also relies on truths, even eternal truths.

Even if logical proofs of Gods existence have long been an important pursuit, it is safe to say that the truths in theology today stem from faith. The discipline of economics can readily be formulated in the language of mathematics, and economic models are usually tested empirically before gaining acceptance. Conflicts arise when theories that appear to be patently true are unsupported by empirical evidence, or when contradictory theories find support at the same time. In other words, we economists are in a borderland between faith and the strict proofs of mathematics. The notion of learning from history cannot easily be explored without invoking the American physicist Thomas Kuhn. This year is the 50th anniversary of the publication of his groundbreaking work, The Structure of Scientific Revolutions. According to Kuhn, disciplines progress within an established set of truths a paradigm. Observations irreconcilable with the paradigm are tolerated as inexplicable. Eventually, however, the number of inexplicable observations can become so overwhelming that the paradigm breaks down. New truths have to be established a paradigm shift occurs. Such shifts can be painful. The old paradigm will usually be defended by those whose training lies in a more distant past, often persons in positions of leadership in academia and government bureaucracy.
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Long before Kuhn, H enrik Ibsen touched upon the same idea in An Enemy of the People.
Dr. Stockman talks about the few who attain the new truths, unlike the compact majority that have yet to embrace them. Social scientists, like economists, face some peculiar problems when attempting to learn from history. First, we do not have a laboratory in which we can perform experiments. Second, economic policy is part of the reality we observe. The outcome of a particular measure will depend both on shifting economic conditions and on economic agents expectations of the effect of that measure. It goes without saying that in a situation like that, drawing useful lessons from history can be a challenge. Scientific truths provide a common basis for further research and development, but they can be a scourge if they are not challenged. The recognition of economic correlations lays the groundwork for good economic policy, resulting in a better life for more people. The outcome can be disastrous if the established truths lay the foundation for bad economic policies. Economics as a discipline has in the past hundred years undergone several prominent paradigm shifts, with widespread impacts and implications.
What have we learned from 1930 to the present day?

More than five years have passed since the turbulence in financial markets began.
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Todays situation resembles the one Governor Nicolai Rygg described in his annual address in 1933:
The figures for world output are truly disheartening. A recent estimate of the number of unemployed is an appalling 30 million. Except for the phrasing and style, that speech could be cut and pasted from that address in 1933 to describe the situation today.
The queues of the unemployed that we used to see in 1930s-vintage black-and-white photographs we are now seeing on television in living colour.
Youth unemployment in southern Europe is especially high. The Red Cross is setting up food banks in Spain. The middle class is being hit by higher taxes, lower pensions and unemployment. Political scientists tell us that this is a recipe for social and political unrest. In May 1945, the work began to rebuild our country after the Second World War. At that time, Friedrich Georg Nissen was the highest-ranking official in the Ministry of Finance. Nissen trained in the law, and the photograph of him in Einar Lies book on the history of the Ministry of Finance shows a man formally dressed in a three-piece suit. He believed that the central government budget should be balanced each year.
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Fiscal policy was conducted based on this principle, which leading politicians also agreed with.
Tax revenue was to be spent, but not a penny more. Broadly speaking, the prevailing paradigm up until the Great Depression of the 1930s both in economic policy and in economic theory was that the authorities role should be limited to keeping domestic order and ensuring a stable and predictable regulatory and operating framework. Prices adjust automatically to supply and demand, and the general view was that markets were self-correcting. Following the Depression, a new truth emerged, with John Maynard Keynes and N orways own Ragnar Frisch at the forefront: prices and wages do not adjust that quickly nor can we expect that markets will automatically ensure full employment. Hence, government should play a more active role in economic policy. At the Ministry of Finance, Nissen kept to the traditional view. But the political leadership, and eventually the younger economists who started at the Ministry, had other plans. The economy was to be managed. Keynes idea that the budget should be used actively to manage demand and output over an economic cycle was to them an obvious truth. In a Kuhnian sense, the older civil servants had to go for the new thinking to gain ground. The legal experts at the Ministry had to give way to the young economists. The new regulatory regime was enthusiastically implemented after the war, and crowned with success.
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The contrast between the blight of the interwar years and the postwar boom was stunning.
The ambition was not only to keep unemployment low. Which industry sectors should be allowed to invest? What type of dwellings should we build? Who should be able to buy a car and have a telephone installed?
In the 1950s and 1960s, these were questions in respect of which the central government had firm views.
Keynes, regulation and planning were predominant truths in the former government building for several decades. Yet neither did these truths remain eternal. In the 1970s, deficits ballooned when the government used countercyclical policies to build a bridge over the global downturn. But it was a bridge to nowhere. I nflation took off and government finances were strained to breaking point. The policy of micro-managing the economy had gone too far. Wage and price controls at the end of the 1970s, the last gasp of the postwar paradigm, did little to help. Norway was close to being placed under IM F administration.
In fact, it was not possible to steer the economy towards permanent prosperity.
The old doctrines collapsed. New ideas for managing the economy took shape because the old
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system no longer functioned.

Underlying the new truths was the notion that economic policy needed to operate through the proper market incentives and that economic policy must be sustainable and predictable. At the Ministry of Finance, the new ideas took hold primarily because a younger generation was taking over, just as when N issen was pushed aside. Political micro-management lost considerable traction. Through the 1990s and up to the mid-2000s, economic growth was high and both inflation and unemployment low in much of the world. Cyclical fluctuations were moderate. The new truths appeared to be working well. This period is known as the Great Moderation.
But underneath the positive developments, imbalances were building up both within and across countries.
As we have all experienced, it is easy to ignore the bill as long as the food keeps coming and the conversation keeps flowing. Countries and governments can live with deficits for a while, but sooner or later the bill has to be paid. Budget deficits and high sovereign debt levels meant that the authorities had little slack when the financial crisis hit in autumn 2008. Countries rapidly embarked on an unavoidable path of fiscal austerity at the very time that demand was falling and unemployment rising. Unsound fiscal policies have particularly severe consequences when they coincide with a financial crisis.
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Capital markets were unable to manage the large pool of savings from emerging market economies in Asia.
Safe yields had fallen and the search for returns provided fertile ground for creativity in financial markets. Governments worldwide allowed the banking system to grow in the belief that regulations were sufficiently stringent, that a large banking sector is a benefit and that banks self-interest would prevent them from taking excessive risk. The regulations, which in the 1980s were regarded as overly rigid, had been introduced during the crisis of the early 1930s as a still-vivid memory. The well-known Glass-Steagall Act had been passed in 1933 precisely to prevent financial sector excesses. Banks that took deposits from the public were subjected to strict rules concerning the amount of risk they could take.
Deposits were guaranteed by deposit insurance, and banks could draw on central bank liquidity if necessary.
Investment banks whose customers were professional investors had a freer hand, but no safety net. Banking gradually became a growth industry in many countries. Strict regulations in one country prompt banks to flee to another. The result was the dilution or elimination of many regulations that attempted to rein in the imagination of the financial sector. The rationale behind the Glass-Steagall Act was discarded. This trend was universal.
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Unfettered financial markets were apparently a success.

Mortgage-backed securities enabled more Americans to become homeowners, and a bullish stock market was good for pension funds as long as it lasted. Big banks can easily give rise to big ideas about the importance of a country. But the financial crisis showed that big banks above all give rise to a political headache and a massive bill for taxpayers. Banks that are so large that they can undermine the entire financial system cannot easily be allowed to fail. The Basel Committee on Banking Supervision seeks to ensure that different countries operate on a level playing field. While this is a good thing, the result was often compromise whereby the country with the weakest regulations set the standard.
One must also recognize that the new rules introduced in the 1980s did not take into account banks ability and creativity in terms of circumventing these rules.
Rules intended to mitigate the risk of financial instability actually encouraged banks to take on ever more risk. What do economists do when regulations do not work? Well, paradoxically, what we do is argue that we need to regulate more and better. There is now a version I I I of the Basel rules, which have grown from 37 to 616 pages.
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Andy Haldane, Executive Director of Financial Stability at the Bank of England estimates that, all together, the rules once they are fully incorporated in national legislation in Europe will number 30,000 pages.
Is this really the way to go? Has the pendulum swung too far? Are we facing a new paradigm shift?
In spite of lessons learned: back to square one

The philosopher Henrik Syse has reminded me of this very phenomenon. Truths we took to be eternal often prove to bear the stamp of their time. We then find new truths and throw out the old ones. Following the policy failures in the 1970s, many economists believed that Keynes and his disciples were wrong, and Keynesian almost became a term of abuse, referring to irresponsible government spending. But to draw such a conclusion is to go to extremes. Keynesian policy is often appropriate in a contractionary period, but it also involves saving in times of growth a component that had been widely forgotten. The economists Carmen Reinhart and Kenneth Rogoff have summarised the experience of financial crises all over the world over the past 800 years. They show that history repeats itself. The truth most often proclaimed in boom periods just before the bubble bursts is the belief that this time is different, which is also the ironic title of the book.
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Although history never repeats itself exactly, some key features recur: one recurring feature is that boom periods are confused with an increase in the economys growth capacity.
Good times are mistakenly interpreted as perfectly normal. When times are good, it is difficult to gain acceptance for setting aside funds. There are always unsolved tasks in a society, and these tasks attract attention. In the 1930s, Ragnar Frisch understood that it is difficult for politicians to recognise good times at the time. He believed that it was the task of economists to ascertain the cyclical situation. When the crisis arrived in 2007, government finances were in disorder. Deficits and debt rose to such high levels that it was difficult for many countries to borrow money. When credibility is lost and lenders draw the line, Keynesian policy has reached its limit. These countries now have no other choice than to cut welfare schemes and public spending. The political fury we are now witnessing in Athens, Madrid and Rome is being directed at todays political leaders. Perhaps their rage should be directed at those who were in positions of responsibility in the good times, instead of at those who are now left with the washing-up. We have furthered our understanding of economics over the many decades since Keynes, Frisch and others laid the basis of modern economics after the 1930s crisis.
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Theories have become more advanced, and methods and calculations far more complex.
We have reams of regulations. Perhaps one lesson to be learnt from history is that the simplest method can sometimes be the best, as Andy Haldane has argued. Friedrich Georg N issens rule that budgets should always balance was not particularly sophisticated, but if his ideas had been followed before the crisis, many countries would now be better off. However, the principles behind Nissens ideas were not completely unfamiliar when European politicians drew up the Maastricht Treaty at the beginning of the 1990s. The Treaty contained simple rules for economic policy: budget deficits should be below three percent and government debt below 60 percent of GDP. The rules sparked debate, and academics the world over including in Norway ridiculed them as far-fetched and hopelessly rigid. And as so often before, the rules soon sank into oblivion particularly after the major EU countries Germany and France had pushed them aside. In retrospect, we can acknowledge that simple rules of thumb can often be useful. A current account deficit exceeding 4 percent of GDP is often a harbinger of future problems. Spain is a case in point: government finances were fairly healthy, but deficits were building up in the private sector. Inflation of more than 4 percent is usually a sign of economic instability.
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If unemployment in a country is persistently above 4 percent, there is probably something wrong both with the functioning of the labour market and with the level of political ambition.
And the financial crisis has shown that total banking sector lending in the most heavily indebted countries has often been more than 4 times GDP. In this situation, any rescue packages would be too expensive for taxpayers Ireland and I celand are two examples. This is a familiar element in our everyday lives. Speed limits are an example of such a rule. Calculating the optimal speed for a specific car on a specific road is extremely complicated. It would require considerable knowledge of both mechanics and physics. Speed limits help us.
Of course, it might be optimal to drive faster or slower than the speed limit, but the rule is simple to understand and easy to enforce.
This simple rule helps to shape our behavioural patterns to ensure efficiency and safety in the traffic system. Simple rules can also make it easier to resist the temptation to postpone problems. Economists call this the time inconsistency problem.
Odysseus solved his time inconsistency problem by having himself tied to the mast and instructing his crew to plug their ears with wax and ignore him when he would later ask them to steer the ship towards the song of the Sirens.
That was an easy rule for the crew to follow.
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But rules can be too simple.

They must be used only as points of reference, not as excuses for doing nothing. Economic policy rules should be common knowledge. An independent body should be established to tell us when we are speeding, and procedures must be in place to implement measures to solve the problem. The new "Fiscal Compact" in the euro area is a tightening of the Maastricht Treaty, precisely to prevent the simple rules from being broken. We should be less concerned about what is completely right and correct according to the prevailing truths, and more concerned about avoiding major mistakes, irrespective of what the truth might be. And this is the line of thinking behind our inflation target for monetary policy and the fiscal rule for oil revenue spending. We must be humble and constantly search for new knowledge. But as I have shown, there is a tendency for this humility to vary with the business cycle. Marc Flandreau and Mike Bordo tell me that during upturns, the colossal blunders of yesterday are forgotten by politicians, journalists and central bank governors, but not by economic historians. And right now, their profession is enjoying its golden age.
Simple economic rules can perhaps prevent countries from getting into difficulties, but once the rules have been broken and the crisis is a fact, the solution is anything other than simple.
Real problems must be solved by real measures.
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That takes time and is painful, as we are witnessing in Europe today. Much of the adjustment in real terms is still to come, and there is still some way to go before we will be able to say that the global economy is on safe ground. The full consequences of inadequate regulation of financial institutions became visible only after the crisis was a fact. However, macroeconomic imbalances were widely recognized beforehand. In the mid-2000s, Federal Reserve Chairman Alan Greenspan raised the key rate to reduce the US savings deficit. But long-term interest rates were kept low by the Asian savings surplus that found its haven in the US. International organisations such as the I MF and the OECD pointed out what needed to be done, but the solution required measures to be implemented by a number of countries with differing interests and finding a good solution for the global community proved to be too difficult. The global community is nonetheless sometimes able to make decisions that benefit all countries. I witnessed this myself in Washington at the I MFs meeting in October 2008 following the Lehman Brothers collapse. The alternative then was a black hole.
In that kind of situation, it is easier to reach agreement.

In many ways, central banks are the response the authorities could apply when crises arose.
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Central banks were established to exercise control over the monetary system, enabling states to issue banknotes people could trust and providing banks with a bank for their own deposits and from which they could, in the last resort, borrow from in times of crisis.
Confidence in the monetary unit is the mainstay of our financial system. The following may serve as an illustration: I t costs 50 re to produce a banknote. For every 100-krone banknote Norges Bank issues, we apparently create wealth of NOK 99.50 out of thin air. But people still sleep soundly in their beds including those with money under their mattresses because we are confident that the money can be exchanged for real goods. It is, of course, tempting to take advantage of this confidence. History is full of kings and governments who have attempted to do just that. In 1716, the Scottish economist John Law established a bank that soon assumed the role as the first central bank of France. John Law saw the possibility of printing banknotes to finance promising development projects in the New World. Excessive confidence in the potential for profits fuelled both the printing presses and equity prices in Paris. The bubble burst and John Law fled to I taly.
Today, the European Central Bank and the central banks in the UK and the US are using money they have produced themselves to purchase government bonds and other securities.
They are taking advantage of the confidence the central bank enjoys to buy time to enable European countries to tackle the underlying problems.
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Some lessons
Tonights theme is Learning from history. And in this title lies a question, in both the positive and normative senses. The answer to the question of whether we actually learn from history would probably have to be yes and no. Sometimes we learn, sometimes we do not.
Economic crises seem to be a necessary precondition for learning.

And this may still be the case. We have some capacity to learn from our own mistakes particularly if they are traumatic enough but limited capacity to learn from other peoples mistakes. This is something we recognise from raising children.
To the frustration of their parents, children seem to be more interested in having their own experiences than listening to parents advice, however good it might be.
The answer to the normative question should we learn from history? is obviously yes. And which lessons should we learn? Allow me to venture to select three lessons on the basis of what I have said so far. First: the simplest solution is often the best. Simple rules, whether for fiscal policy or banking regulation, will often prevent the worst errors.
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And when the yellow warning light starts flashing, action must be taken.
Second: confidence is essential, also for economic policy. Confidence is easily eroded and difficult and costly to restore. Confidence must be earned. The resolution of todays crisis will also follow a smoother path if there is confidence in institutions banks, central banks and governments.
Borrowing costs will then decrease more quickly, the need for government cuts will diminish accordingly, and the good times will return sooner.
Third: we have no magic wand. If a country has real economic problems, real adjustments must be made to solve them. Central banks cannot solve the problems, but what they can do is lend money when there is none available elsewhere, giving countries more time to implement necessary reforms. Deficits must be reduced. Unrestrained printing of money has led to problems on many occasions through history. If printing money is not followed up by action in euro area countries, in the UK and in the US Mario Draghi, Mervyn King and Ben Bernanke run the risk of being recorded in history in the same chapter as the Scotsman John Law. The full title of my speech today is Learning from history: truths and eternal truths.
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I have ventured to outline three lessons that are hopefully are universally valid.
But we can never be sure. I mentioned I bsens Enemy of the People. Allow me to conclude with Doctor Stockmanns comments: Yes, believe me or not, as you like; but truths are by no means as long-lived as Methuselah as some folk imagine. A normally constituted truth lives, let us say, as a rule seventeen or eighteen, or at most twenty years seldom longer. Ibsens play has been long-lived. It is still performed all over the world, 130 years after it was written. Not because the Norway of the 1880s never loses its appeal, nor because Doctor Stockmann found eternal truths. It is because the play raises questions of a more enduring nature. Perhaps we have to recognise that the closest we can get to eternal truths is, precisely, eternal questions?
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Matthew Elderfield: Micro-macro schizophrenia Banking Union and the European capital dilemma
Address by Mr Matthew Elderfield, Deputy Governor of the Central Bank of Ireland and Alternate Chairman of the European Banking Authority, to Bloomberg, Dublin, 26 November 2012.
European regulators face a dilemma a bad case of policy schizophrenia in deciding the pace of the next steps of bank recapitalisation.
With the fiscal policy break full on, and the monetary policy throttle full back, what is the right calibration for prudential capital policy? From the micro-prudential perspective, the answer is more and faster. From the macro prudential perspective, fear of pro-cyclicality and debt sustainability might suggest: take care.
This has been a central dilemma for policymakers in the Eurozone in many countries.
As I would like to discuss today, this will be a key policy choice for the European Central Bank under a banking union. The European summit conclusions of 29 June gave official birth to the concept of a banking union and the single supervisory mechanism. These steps arose out of the pressing need to break the debilitating link between weak banking systems and constrained sovereign finances. While there is a continuing debate on the details, this is to be done by facilitating the direct recapitalisation of banks, from pooled European
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resources following the successful introduction of a common European banking supervisor, for Eurozone countries.
Banking union also holds out the prospect of strengthening the framework for European banking supervision, if implemented successfully. Creating some distance between supervisors and the banks they regulate (and, indeed, from the political systems of the banks they regulate) can help improve the capacity for challenge and ensure a broader, more detached, perspective on problems. Bringing in a foreigner to do your supervision is not, alas, the magic solution to all the woes of a banking system. But the single supervisory mechanism holds open the prospect of an institutional framework, a broader skill set and more diversity of experience that should help insulate supervisors from the pressures subtle and direct, cultural and political that come from long-time and close proximity to their regulatory charges and their champions. In addition to strengthening banking supervision and breaking the link between banks and sovereigns, the banking union also may allow the development of a deeper single market, although here there are considerable uncertainties and potential risks due to the fact that only a subset of the European Union will be taking the steps towards banking union. The proposed way to square the circle between the single market and the banking union is to provide for a bifurcation between regulation and supervision.
Banking supervision for the Eurozone (and opt-in countries) will be undertaken by the single supervisory mechanism operated by the ECB.
But regulation, that is to say the process of agreeing policy on rules, will remain with the EBA.
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However, matters are not quite so straightforward and concerns have been raised in a number of quarters.
For example, the distinction between supervisory standards or practices on the one hand and regulations on the other is easier in the abstract and becomes blurred in some areas. In the space left for national discretion under current EU directives and regulations, should the EBA seek to develop a common single market rulebook or should the ECB do its own thing?
I would think that where issues arise from divergent interpretations of existing EU law or of differences in definitions and standards, the EBA and all 27 supervisors should have an opportunity to discuss and consider efforts at further convergence before the ECB sets off on its own.
However, in areas of supervisory practices (such as SREP, risk assessment, inspection methodologies and the like) I would think it makes sense to preserve some flexibility for national discretion at the level of the 27, but that it will be essential for the ECB to move forward with plans to develop a common supervisory model. What would, however, be more worrying is if the different principal supervisors in the single market, now including the ECB, were to take measures that sought to ring fence or discourage cross-border banking structures or activities that spanned their respective domains. In this respect, my personal view is that the ECBs stance towards Euro clearing by LCH is an unfortunate precedent and it is important that this philosophy does not spill over into banking supervision. But equally, it is important that the FSAs approach to incoming branches and to liquidity and capital support from banking groups based elsewhere in the EU does not undermine the single market. This issue underlines another important role that the EBA plays, beyond that of policy and rule maker: its mediation mandate to resolve disputes between supervisors and ensure the application of EU law.
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This is a crucial role which has yet to be tested in earnest.

And it could be of increasing importance as a tool to tackle supervisory actions which undermine the operation of the single market for banks. Both the policy-making and mediation roles of the EBA raise what has become a key issue in the political negotiations on the banking union, namely the voting arrangements that will apply in the future. It is clear that the concerns of the UK and other out countries will need to be addressed. I think it would be unfortunate if the ins caucus sought to agree a common position on matters before engaging in debate around the EBA table, so as to benefit from the views of other countries and indeed I would not see the caucus leading to a block vote, as individual supervisors will still retain their responsibility for policy-making. But, as I said, the governance and voting arrangements for the EBA clearly need to change. Another key point of discussion relates to the scope of the ECBs responsibilities in terms of the number of banks it is responsible for, and the speed with which its new mandate is implemented. It is clear that at the outset, a core group of systemically important banks will be subject to direct ECB supervision, albeit with some supervisory tasks delegated to national supervisory authorities. However, an open question subject of considerable debate relates to the timing of any subsequent assumption of responsibility for banks from programme countries and/or smaller banks. Broadly casting the ECBs mandate to cover all banks will avoid any disruptive capital flows between institutions subject to the two different regimes, and will also acknowledge the fact that severe problems have arisen from clusters of banks that sit below any obvious systemic
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threshold, but which nevertheless have imperilled the finances of governments.

Ireland and Spain are, of course, examples of this. This approach was considered at the October EU summit. There is, however, a practical question regarding the speed with which the ECB can reasonably assume responsibility and potential reputational risk for such a large universe of credit institutions, even with a model involving significant delegation of tasks to national authorities. This points to the need to articulate some transitional arrangements. One approach might be a transitional phase of supplemental, but not direct ECB supervision, for the wider set of small banks. In this interim period, the ECB would issue its supervisory manual for use by national supervisory authorities for the smaller banks too. And, crucially, the ECB could be given the power to step in to inspect the financial soundness of any particular bank or subset of banks outside of the systemic group but which are flashing red on its radar. A small supervisory SWAT team could be sent in to kick the tires alongside the national supervisor that retains direct supervisory responsibility. And, if necessary, the ECB could elect to bring particular banks under its direct supervisory power.
This would allow it to gradually expand its remit during the transitional period and have the absolute right to troubleshoot problems beyond the systemic group, which is surely what recent experience has proved necessary.
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Another key challenge will be to develop the operating model of the ECBs new supervisory responsibilities.
I have two thoughts here. First, while the high-level governance framework of the ECBs supervisory responsibilities (as distinct from its monetary policy ones), remains under negotiation, it seems likely that there will be some sort of high-level supervisory board put in place. At the other end of the spectrum, will be the national supervisory authorities conducting decentralised tasks. The exact design of the arrangements for escalation and decision making between the two are of crucial importance. While there will necessarily be a framework of committees and panels for certain types of decisions and policy-making, it is vital that there is clear accountability and the capacity for decisive executive decision-making, particularly in times of crisis. In moments of crisis or market disruption, supervisors are required to take dozens of decisions in short periods of time. It is important that the organisational design of the single supervisory mechanism recognises this reality. Indeed, this is the negative flipside that distance between supervisor and bank can bring. So, one reasonable design principle both for the regulated bank in search of a speedy answer and for the depositor in need of decisive supervisory action one such principle must be that of efficiency and effectiveness in the escalation and decision making process of the new supervisor. My second thought on the ECBs new operating model relates to supervisory culture.
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A clearly articulated supervisory culture and philosophy will be important for guiding front-line supervisors and for ensuring consistency in practice.
It is important that supervisors who engage day-to-day with banks understand the risk appetite of senior management and their willingness to tackle problems. Tone and culture, as well as the underlying supervisory model, will be key in setting expectations. Seventeen national supervisors (at least) will be converging into a new pan-European structure, uniting diverse cultures rooted in different market structures, as well as reflecting a range of different supervisory practices. Should the focus be on rule breaches or risks? Business models or audit reports? Should supervisors talk more to the CEO or to the compliance officer? How central a role should enforcement play for prudential breaches? And how should senior management distil down the essence of the new supervisory model and approach, so that it can be communicated and understood easily by both firms and front-line staff? For example, in Ireland, our new approach is one of assertive, risk based supervision underpinned by a credible threat of enforcement. That is designed to put a few concepts front and centre: that we operate a risk-based approach, differentiating based on impact and probability; that there are consequences and accountability for non-compliance; and that our supervisors are empowered to insist upon actions to mitigate risk where we are not satisfied by the explanation from a firms management.
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The best driver for creating this common supervisory culture and model is through the development jointly by the supervisors that will use it of a risk assessment framework.
This will provide a common vocabulary across the banking union for the description and identification of risk, and set out clear rules of the game for supervisors regarding risk appetite and how problems are to be mitigated. It will therefore be an early, important task, for the ECB to develop a common risk assessment framework and a protocol for on and off-site inspections. Stepping back from this long to-do list, it must be pretty obvious what the central challenge is for the new single supervisory mechanism. The key first call to be made is around the European capital question: is there enough capital in the European banks, in light of asset quality problems and the requirements of CRD IV, and, if not, how quickly should you remedy the deficit? This raises the policymaking dilemma, which one might call Micro Macro Schizophrenia: the tension between the micro-prudential imperative to require more capital, more quickly, and macro-prudential concerns over the implications for pro-cyclicality and sovereign debt sustainability. Its most obvious form may be found in peripheral Eurozone countries but the condition is, of course, widely observed! The micro-prudential supervisors concern for more capital, faster, is rooted in skepticism over the asset quality of the European banks balance sheets, due to practices of forbearance and failure to recognise embedded losses. It is compounded by the concern that the use of bank internal models, creating risk weights from historical losses, is masking or understating problems.
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And it is heightened by the imminent challenge facing the European banks as they start on the foothills of CRD I V / Basel 3 implementation, with the five-year transition to higher capital requirements just beginning and the banks collectively facing a staggering capital gap of 349.3billion.
The micro-prudential supervisor who argues for tougher, faster bank capital standards might also pray in aid of a macro-prudential argument: that a lengthy transition incentivises banks to hoard capital and avoid lending, so get it over with! However, there are two other competing macro-prudential concerns. One is pro-cyclicality. The Basel 3 framework addressed the pro-cyclicality problem, but perhaps like a general fighting the last war it sets out the case for a countercyclical buffer to be built up to provide a drag on frothy, imprudent lending in good times. But times are now certainly not good, so is there a case for the release of capital or the deferral of new requirements? The argument here is that increasing capital requirements inhibit lending and encouraged deleveraging, therefore harming growth. In a speech prior to his exposition on the Dog and Frisbee, the Bank of Englands Andy Haldane hinted that there might be a case to be made for some such adjustment. Adair Turner shortly after tackled the question of the design of countercyclical buffers, but dismissed the case for any relaxation in Basel 3 implantation on the grounds that the Basel Committees analysis showed that the long-term benefits of sticking to the plan outweighed the costs. However, he acknowledged risks to SME lending.
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And perhaps the Basel analysis might have a different colour if it was conducted now in the depths of the sovereign debt crisis?
The other macro-prudential concern is around debt sustainability and the linkage between weak banking systems and stressed sovereign finances. The problem here, of course, is that if countries with sovereign debt concerns need to borrow more to recapitalise their banks, then this harms their debt sustainability requires more austerity, which in turn impacts on the real economy and feeds back into the banks.
This is a highly damaging feedback loop that needs to be broken.

The former US Treasury Secretary Hank Paulson famously spoke about the need for a bazooka to sort out the crisis, by which he meant using a vast amount of money to convince the markets that the problem has been solved. But for countries with debt problems, they need to borrow more to afford the ammunition for the bazooka, so their debt sustainability gets worse.
The room for manoeuver for ever tougher capital requirements brought forward faster and faster is therefore severely constrained.
In this respect, the feedback loop will only be broken by investment, rather than borrowing, from outside of the loop. This, of course, is where the banking union is supposed to come in, but back to that in a minute. This micro-macro dilemma has more than faint echoes of the debate on fiscal policy.
Is more austerity needed or is there a case for stimulus?

Do you stick to Plan A or move to Plan B.
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The recent I MF analysis on the fiscal multiplier whereby it contended that fiscal corrections in certain countries have a larger than previously considered drag on growth casts new light, indirectly, on the dynamic of the bank-sovereign debt negative feedback loop.
If you want to embrace the micro-prudential instinct for ever more capital but need to cut spending to get there, be wary of the multiplier impact back into the economy and on the business prospects of the banks you are trying to strengthen in the first place. So, is there a cure for the Micro-Macro Schizophrenia condition? Well, there are perhaps three competing schools of thought regarding treatment: what we might call the St Augustine, Schwarzenegger and Dell cures. The St Augustine approach proposes: make me very, very capital virtuous, but not yet. The policymaker is advised to adopt even tougher capital rules in the future, but to push back their start date and in the meantime use relaxation and/ or deferral of prudential capital standards as a countercyclical stimulus to the economy, perhaps like the Roosevelt administration apparently did in the New Deal. The St Augustine solution seems to suffer a number of defects, however. It creates an even bigger eventual capital ascent for the banks. Doesnt the yet bigger capital mountain ahead cast a long shadow and still encourages hoarding?
Indeed, it seems that one lesson from the Basel implementation process is that transition periods have only limited value as markets anticipate their end point and put pressure on banks to be early adopters: to be fair to the industry, this was a point they made at the time.
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But most fundamentally, the St Augustine approach suffers from the fact that the compelling logic of Basel 3 has not really changed and that there is every possibility the banks need more capital to get through their current travails, not just some future ones.
The contrasting treatment is the Schwarzenegger cure, to be specific the approach which involves a muscular saviour arriving from the future to protect the present day. The answer here is to fast forward Basel 3 implementation and immediately bring forward the full future requirements of 2018 to the present day of 2013. The argument here is to get it all over with quickly and avoid a half-decade of anaemic growth caused by constrained lending as banks slowly meet Basel 3, hoarding capital and deleveraging along the way. This prudent, conservative approach has a lot going for it and is appealing to a micro-prudential regulator. In Ireland we have sought to put the loan losses in the banks behind them by rigorously capitalising for future projected losses. Our tool has been the stress test, in its capital shortfall variant: you project forward losses over a three year period under a severe stress scenario, calculate the shortfall that arises against a prescribed hurdle rate and, crucially, require that to be filled now. In I reland we went a step further and used an outside party, to come up with a wholly independent calculation of projected loan losses. This lead to a capital requirement that was 8 billion higher than that projected by the banks themselves. That is the equivalent to 4.9% of Irish GDP. In UK GDP terms, the amount would have been 76 billion.
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This is clearly a significant number no matter which way you look at it. And then as a further measure we required an additional buffer of capital for projected losses beyond the stress test period, to a value of 5.3bn. Should I reland or other EU member states adopt the Schwarzenegger school and fast forward all the way to Basel 3 as soon as possible? As I say, that has strong attractions for a micro-prudential supervisor. But there are two absolutely necessary conditions for this to make sense. First, it would have to be absolutely clear that the tougher capital requirement cannot be met by deleveraging, as that would defeat the purpose and exacerbate the macro-prudential problem. Second, we have the sovereign debt negative feedback loop to worry about. Accelerated Basel implementation shouldnt come at the cost of worse debt sustainability. So, this approach also only makes sense if there is European direct capital support to make this happen. In the absence of these essential conditions, we then have the third approach, the Dell school. This is, of course, named after Michael Dell, one of the innovators of just-in-time manufacturing. This involves making sure that banks stay above their current minimum capital requirements, and living with that just up until the point of need of recapitalization and public support, to meet Basel 3 or stress losses. Call this a just-in-time approach to backstops, if you like.
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Banks therefore make their slow progress towards full Basel 3 compliance step-by-step.
This may involve a protracted period of uncertainty, but you are not adding fuel to the sovereign debt crisis fire by trying to accelerate the implementation process through more sovereign borrowing. Which school of thought would I adopt to resolve the micro-macro dilemma? In a nod to the St Augustine school, it certainly makes sense to take off the table any thought about attempting to impose an additional counter-cyclical buffer for the foreseeable future. With the end point of CRDIV clear, supervisors should require European banks to set out their capital plans for achieving their trajectory to full compliance with CRD I V. Banks should start reporting on a full end point CRDIV basis to their supervisors, so the size of the task is very transparent to us.
And they should build on the EBA recapitalisation process, maintaining the quantum of capital that meets the EBA requirements as a platform for further progress to CRDIV.
It will be informative to see the banks projections regarding loan losses and future profitability in assessing the realism of their plans. And it will be necessary to stress test them, which should be done in a coordinated way at an EU level orchestrated by the EBA. This will allow supervisors to assess the realism and resilience of the plans. I think some fine-tuning of the stress test approach makes sense. Trying to satisfy insatiable market expectations of conservatism in a stress test risks being very pro-cyclical.
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Rather than calculating a capital shortfall for immediate remedy, the recent US stress tests have moved to using the stress test as a tool for restricting dividends and share repurchases.
This would seem to be a useful refinement that Europe could follow too. Stress tests were originally conceived as diagnostic tools, considering a range of scenarios and providing a basis for management and supervisory judgement, rather than as automatic capital formulae. However, if the stress tests show a banks plans to be hopelessly implausible, then it may indeed be better to bite the bullet and look to an early capital injection or explicit backstop. There is, however, also a need for a rigorous examination of asset quality. Apparently higher capital ratios provide illusory comfort if they are based on avoidance of embedded loan losses. Ireland has taken a very stringent approach to asset quality reviews. We have used third parties to assess the quality of legal security and loan file data integrity, as well as conducting detailed loan file reviews and independently modelling loan losses. We have also pressed the Irish banks to re-underwrite their mortgage and SME portfolios that are in arrears to establish a more granular view of embedded losses. And we have required more rigorous provisioning practices and disclosure of impairment.
However, it is clear that Ireland is not the only jurisdiction where significant questions have been raised over the asset quality underlying banks actual balance sheet strength.
It makes sense to undertake a pan-European asset quality review exercise of some sort.
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Capital plans, diagnostic stress tests and rigorous asset quality reviews would seem a reasonable course of action to underpin and strengthen a Dell-style just-in-time approach to the capital problem.
But there is another crucial element that needs to be in place, in case the need for capital injections does in fact arise. This raises the last subject I want to mention: the appropriate sequencing of the introduction of the single supervisory mechanism with a new European resolution mechanism.
And related to this is the question of the role of the ESM concerning direct bank recapitalisation.
The sequencing debate goes something like this: if the single supervisory mechanism is implemented in the course of 2013 - and a pan-European Deposit Guarantee Scheme is a distant prospect when should you introduce new resolution powers, ESM direct recapitalisation and/ or a pan European resolution Authority and Fund? There is an Irish-orientated debate on retrospective ESM recapitalisation, but I want to put that to one side and argue that for the banking union to be a success for Europe as a whole it is important that the sequencing debate is concluded sensibly. You do not want the ECB to start its new mandate without the full toolkit of European resolution and recapitalization arrangements operational and at hand. To do otherwise places the new single supervisory mechanism in a precarious position at the moment of its inception.
What, for example, of the question of accountability for triggering the use of taxpayer funds?
One of the mantras behind banking union from creditor countries is that liability means the need for responsibility.
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In other words, mutualisation of risk through direct recapitalization requires joint supervisory control and responsibility.
But I would suggest the reverse applies too and creates an awkward scenario for the ECB. The ECB may wish to exercise its supervisory discretion and require more capital even when minimum Pillar 1 requirements are met, such as through Pillar 2 charges, stress test results or maybe even accelerated CRDIV implementation.
But these actions could trigger the use of national taxpayer funds and therefore a vicious cycle of further sovereign debt, more austerity for particular taxpayers (to which it has no accountability) and a negative feedback into the bank it is trying to sort out.
If a European institution is taking on the responsibility of such an important call then surely some European arrangements need to be in place to deal with the consequences? This is an invidious position to impose on the new supervisor right at its birth. To switch from analogies bazooka-like, it is a distinctly unpleasant situation to be asked to put out a fire, but to find your fire extinguisher is half full and that the only way to get a re-load is to increase debt and austerity. So, this then, is my overriding and final conclusion. To be a success, the new single supervisory mechanism of the banking union needs to have a well-considered relationship with the EBA and a strong commitment to the single market. It needs to have a best practice supervisory toolkit, effective and efficient decision-making procedures, a top-notch risk assessment framework and a robust, jointly shared, supervisory culture.
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But above all, the European political process needs to ensure that the new resolution rules and ESM direct recapitalisation tools are fully operational for the new supervisor when it takes on its onerous responsibilities.
If not, the ECB itself is at risk of succumbing to a very nasty case of micro-macro schizophrenia.
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Deleveraging and monetary policy

Speech by Peter Praet, Member of the Executive Board of the ECB, Hyman P. Minsky Conference on Debt, deficits and unstable markets, Berlin It is a great pleasure to join you on the occasion of the Levy Economics I nstitutes H yman P. Minsky Conference. The financial crisis erupted five years ago when the leverage cycle that had accompanied the great moderation abruptly reversed. Since then, the euro area and large parts of the global economy have been swept by several waves of financial shocks.
And each wave has unleashed strong deleveraging forces throughout the affected economies.
Deleveraging often reflects a necessary adjustment process. And it does not necessarily warrant policy intervention. At the same time, it bears the risk of becoming abrupt and disorderly, thus threatening price stability by dislodging the provision of credit and the transmission of monetary policy signals to the real economy.
In the worst case, it may lead to a full-blown financial meltdown via selfsustained adverse feedback loops of the kind envisioned by Hyman P. Minsky.
Central banks have a role in ensuring that the economy does not move towards divergent dynamics that would be inconsistent with price stability.
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To this end, they have a range of policy tools at their command which may be used to control deleveraging pressures.
But, of course, strong accommodative central bank intervention may create moral hazard, thus discouraging needed adjustment efforts and possibly leading to the accumulation of new imbalances. In my remarks today, I will discuss how the ECB navigated through the crisis in view of the complex balancing act between disruptive deleveraging processes and moral hazard. I will argue that forceful action was needed to fend off acute downward pressures on price stability. In illustrating this point, I will often come back to the concept of the transmission mechanism, which is fundamental to a central banks ability to maintain price stability. I will also focus on the specificity of the approach adopted by the ECB during the crisis in order to maintain price stability.
And I will relate it to the challenges faced by a single monetary policy in the multi-country context of the euro area.
This may have implications for the process of deleveraging in the economy. To contain moral hazard concerns, the ECB has consistently conveyed to market participants and the general public that it responds symmetrically to upside and downside pressures on price stability. Moreover, it adopted additional safeguards against moral hazard, such as the explicit conditionality attached to our recently announced Outright Monetary Transactions. At the same time, we have used and will continue to use our influence to ensure that the overall institutional architecture of Economic and
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Monetary Union (EMU) becomes incentive-compatible, also beyond monetary policy.
Monetary policy during the global financial crisis

Let me elaborate on the ECBs response in the different phases of the crisis, starting with the global phase before the crisis became combined with a sovereign debt crisis in some euro area countries. The first phase of the financial crisis with Lehman Brothers failure being the watershed can be described as a bank run on a global scale. In contrast to a classic run, it centred on wholesale deposits rather than retail deposits. But the dynamics were the same in that they essentially reflected an evaporation of confidence in banks. The spark that ignited this crisis was a bout of general uncertainty about the health of financial-intermediary balance sheets in the context of huge losses made by some obviously systemic banks. As financial intermediaries no longer trusted each other, they shortened the maturity of their exposures, charged higher premia or withdrew from the market altogether. The fuel which fed the flames of the crisis, in a context in which previously much vaunted hedges had become meaningless, was a large maturity mismatch and high leverage in the financial sector. This translated perceived vulnerability into actual vulnerability. Finally, the wind which fanned the flames came from the feedback loop associated with fire sales. Despite its dramatic effects, devising a response to this first phase of the crisis might, at first, seem like a case study in a standard monetary economics curriculum.
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Bagehots analysis of the UK banking panic of 1866 delivered the insight that the central bank has to lend freely against good collateral at a high rate.
Also, Friedman and Schwartzs analysis of the Great Depression suggested that the central bank has to accommodate liquidity preference shocks. However, although these insights may provide inspiration, they do not provide an off-the-shelf recipe.
Bagehot did not have in mind a monetary regime of fiat money and had a clear view of which banks were sound and which were not.
Friedman and Schwartz argued that the Federal Reserve should have stabilised M2, which collapsed in the early 1930s. But only stated this as a general rule without a detailed prescription. As a result, it remained unclear how to implement it, starting from a situation in which the soundness of banks was uncertain and the usual monetary instruments were different. There was also no consensus in the economic literature on how to think about the monetary policy stance when markets are suddenly unable to perform in the manner which most theorists prefer to assume: would it be just the overnight market rate normally controlled by the central bank or a broader concept encompassing the whole risk-free yield curve, or perhaps even including other rates and asset prices? The ECBs response to the crisis was to deepen the policy it adopted in good times in order to also address bad times. In simple terms, this policy required us to continue to decide the appropriate level for the short-term interest rate, while ensuring that the transmission mechanism works as effectively as possible.
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The transmission mechanism is the long chain of reactions that lead from a policy-rate change to its final impact on the real economy and inflation via the effects on the whole array of interest rates, asset prices and monetary and financial indicators more generally.
In normal times, the ECB decides on the appropriate level of the short-term interest rate and provides the necessary liquidity to make such a rate prevail in the overnight market. A forecast of the necessary amount of liquidity is based on the need for liquidity by banks at the aggregate level. And the money market fulfils the task of distributing the liquidity across individual banks in an efficient manner as the banks themselves provide intermediation. In normal times, the change in the overnight rate is then transmitted to the whole array of interest rates via arbitrage and somewhat predictable relationships, both along the inter-temporal dimension and the intra-temporal dimension. Trust in the stability of such relationships led most of the academic literature prior to the crisis to focus on the policy rate (or equivalently on the overnight market rate) as a summary indicator of financial and monetary conditions although this trust often was not shared outside the academic literature. Incidentally, I note that the idea that what matters for the transmission mechanism is the whole array of interest rates and asset prices as well as balance sheets, and not just any specific short-term interest rate has been a crucial theme in monetarist thinking.
And monetarists argued that monetary aggregates provide a handy summary indicator of the changes in the various yields and asset prices.
From the beginning of the financial crisis, the first element of the transmission mechanism the money market ceased to function properly.
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Liquidity premia soared and arbitrage transactions became thin.

With the collapse of Lehman Brothers, financial tensions affected almost all asset classes, leading to a pronounced liquidity preference shock. As a result of the ensuing self-sustained deleveraging process, interest rates and asset prices can lose contact with or change their relationship to the central bank policy instruments. In such circumstances, a central bank needs to regain control of the transmission mechanism, meaning that it must steer financial and monetary conditions in a way that is consistent with its price stability mandate. The ECB responded to these challenges by cutting its policy rate the main refinancing operation (MRO) rate and by switching to a fixed-rate full allotment regime. Under such a regime, the central bank stands ready to satisfy fully the demand for liquidity against collateral at the prevailing policy rate. In the absence of a functioning interbank market, that demand for liquidity is in excess of the banks liquidity needs under normal conditions. Note that this regime can be maintained at any policy rate level, due to the presence of a corridor in the ECBs operational framework. It simply implies that excess liquidity pushes the overnight rate down towards the rate paid on the deposit facility. It also implies that the corridor can provide for a way to detach the decision to provide liquidity from the decision to set the interest rate. Let me illustrate this point with an example.
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If market interest rates and bank lending rates move in a manner inconsistent with a change in the policy rate, the central banks ability to influence the real economy and inflation may be impaired.
The central bank can try to correct this. Traditional wisdom is based on making an even larger change in the policy rate so that the impact on financial and monetary conditions is of the originally-desired size. But another solution is to anchor other rates directly to the central bank policy intentions by the provision of liquidity.
The fixed-rate full allotment regime can achieve this outcome because, in effect, it squeezes out the premium at short maturity via the intermediation role taken up by the central bank.
This assumes, however, that the counterparties of the central bank are still fundamentally sound. A similar logic can also be applied to longer maturities. The central bank can provide liquidity at longer maturity at the average policy rate that will prevail in the future over this maturity. This can be done at any level of policy rate. The existence of the deposit facility provides a floor to the overnight rate. And the central bank can extend its influence over term credit by lengthening the maturity of its lending operations. One notable application of this logic was the 12-month refinancing operation enacted in December 2009. In this operation, the ECB stood ready to satisfy fully the demand for liquidity at one-year maturity. The interest rate charged on this liquidity was the average MRO rate that would prevail over the life of the operation.
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This type of measure is distinct from attempts to flatten the risk-free yield curve via forward guidance which is often discussed in the literature.
The reason is that it is aimed at squeezing out the premium faced by banks over and above the current and expected policy rate. Let me recall that, in the euro area, about three-quarters of corporate finance comes from banks. Hence, anchoring banks funding conditions to the desired level can help ensure that lending rates faced by households and firms continue to reflect policy intentions. This was indeed the case during the first phase of the crisis, with lending rates declining in tandem with policy rates according to standard regularities. Central banks willingness to accommodate the increased demand for liquidity may, however, be ineffective in preventing a destructive deleveraging process, unless two additional elements are addressed. First, there is a need to remove the stigma associated with accessing central bank liquidity. The ECB did so by providing liquidity at an attractive price via monetary policy operations in which a broad number of counterparties have access. Second, deleveraging forces and fire sales have a direct impact on the value of collateral. To address this situation, the ECB broadened its collateral rules, thereby also enabling banks to take full advantage of central bank liquidity. At the same time, the ECB tightened its own risk-control measures to mitigate the risk it absorbed.
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Monetary policy in the period of the sovereign debt crisis

As we all know, the crisis did not remain restricted to the banking sector. In fact, from 2010 onwards, several euro area countries have experienced a severe sovereign debt crisis. The driving forces of this evolution varied across countries. Some countries had already built up weak fiscal positions before the crisis, which emerged as a major vulnerability in the downturn. Others were overburdened by the fiscal costs of domestic banking crises. But irrespective of its origins, in all cases an adverse feedback loop between bank and government balance sheets emerged, which then spilled over national borders. This adverse sovereign-bank nexus was nurtured by the large holdings of sovereign debt on bank balance sheets. When market scrutiny of public finances and investors risk aversion suddenly increased, sovereign yields started rising. The implied, actual or potential, losses for overly exposed banks raised the spectre of additional public support. As a consequence, the credit standings of sovereigns and banks have moved in tandem and both have found it increasingly difficult to maintain market access. In several jurisdictions, the access of the banking sector to funding markets was heavily impaired. There was a real threat of a second wave of disruptive deleveraging. And as banks had already shed parts of their external and other non-core assets in the first wave, less room was left for banks to protect domestic credit.
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The propensity for banks to pass on the ECBs monetary policy signals to the real economy fell markedly.
In other words, there were renewed risks that the monetary policy transmission channel could become severely impaired. But this time the ECB faced a new challenge: the dislocation had taken on a distinctly national dimension. Financial market fragmentation along national borders had become the new reality. The ECBs response to this second phase of the crisis has been guided by the same principle as in the first phase: decide on the appropriate level of the policy rate to maintain price stability and preserve, to the extent possible, the proper working of the transmission mechanism. Moreover, the experience we accumulated during the first phase helped us in designing measures aimed at providing abundant liquidity, while avoiding stigma effects.
The ECB conducted two three-year lending operations indexed to the MRO (in December 2011 and February 2012).
The operations were aimed at alleviating adverse funding conditions for banks by allowing them to satisfy their additional liquidity needs. The net liquidity injection amounted to around 520 billion taking into account the shifting of liquidity out of other operations. One key result was that the longer-term refinancing operations (LTROs) provided banks with a more certain medium-term funding situation, in line with the longer maturity of the operations. The months following these operations saw a broad stabilisation of financial conditions.
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Money and credit figures indicated that an abrupt and disorderly adjustment in the balance sheets of credit institutions had been avoided.
Funding conditions for banks generally improved, and increased issuance activity and a re-opening of some segments of funding markets could be observed. However, the root-problems of the sovereign debt crisis were only partly addressed by Members States. Hence, tensions in sovereign debt markets did not take long to resurface. These tensions took a form that was specific to the institutional features of the euro area: markets started questioning the irreversibility of the common currency, thus pricing in redenomination risk in sovereign bond yields of vulnerable countries. The ensuing disruptive dynamics risked undermining one of the key motivations for introducing the euro, namely to provide a lasting safeguard against currency crises, such as the one experienced in Europe in the years 1992-93. The main symptom of these problems was a pronounced movement towards financial market fragmentation. For example, the cuts we made in the MRO rate over the period had very heterogeneous effects on funding conditions in different countries. In some countries, retail lending rates declined, but in others they hardly moved or even increased. As a consequence, the singleness of monetary policy in the euro area was no longer guaranteed. And the countries in greatest need of a further expansionary impulse were the ones that were impacted least by cuts in the policy rates.
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This drags down their domestic economies and further weakens their fiscal positions.
To mitigate the dynamics of such self-sustaining fragmentation, the ECB decided to adopt Outright Monetary Transactions (OMTs). OMTs provide for interventions in government bond markets, with no ex ante limits, for countries that are subject to effective conditionality of a programme under the European Stability Mechanism (ESM). The aim of OMTs is to directly address excessive risk premia in government bond markets that reflect in particular unwarranted perceptions of redenomination risk and are a key source of impairment in monetary policy transmission. By imposing conditionality, OMTs aim to strike a balance between counteracting adverse tail risk and preserving incentives. Specifically, OMT conditionality ensures that countries commit themselves to a path of ambitious fiscal consolidation and structural reform, thereby preserving fiscal sustainability. This has two functions: first, it mitigates the balance sheet risk associated with outright purchases; second, it preserves the monetary policy rationale for OMTs. If countries were to reduce their adjustment efforts in response to ECB intervention, the beneficial effects of OMTs on the monetary policy transmission would be undermined by weaker fiscal and macroeconomic fundamentals. Therefore, conditionality is an inherent feature of OMTs.
Specific challenges facing the single monetary policy for the euro area
The twin banking and sovereign debt crises, with heterogeneous manifestations across the single currency area, has put a premium on deleveraging or at least a curb on leveraging both in the banking sector and government sector.
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This contrasts with the greater emphasis on household sector deleveraging as driver of the US balance sheet recession in the wake of the financial crisis, to take the words of Koo.
It also contrasts with the greater emphasis on corporate sector deleveraging in the Japanese case over the past two decades. In part reflecting these circumstances, the ECBs approach during the crisis has also been different to that of other major central banks. The ECBs main focus has been on collateralised lending, whereas the focus of other major central banks has been on large-scale asset purchases. This has had, in turn, implications for the pace and size of deleveraging in the euro area economy. In this respect, the ECBs approach can be seen as more indirect than the approach based on large-scale asset purchases. Both approaches, by supporting the capacity of the monetary and financial sector at large to acquire assets, can support asset prices and lending, which is conducive to a smooth deleveraging process in the economy. Asset purchases directly create scarcity in the instrument being purchased. This exerts an upward pressure on prices, and, through portfolio rebalancing effects, may also affect the prices of other assets. However, direct asset purchases involve a difficult choice for the central bank: it must take a decision on which assets to buy, necessarily interfering with relative asset prices and income distribution. Collateralised lending involves such decision only at the level of the definition of the collateral and its eligibility conditions.
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This can also influence the prices of collateral, but the role of selecting which assets to buy or sell is essentially outsourced to the banking system, that is, to many private agents.
Hence, collateralised lending leaves the price discovery process and the allocation of savings to market mechanisms. The specificity of the ECBs approach must be seen against the background of the bank-based financing structure of the euro area economy which I mentioned earlier in contrast to the more market-based financing in the United States for instance. It must also be seen against the specific institutional environment in which the ECB operates characterised by a multi-country context. Some commentators suggest that governments should always take on leverage when there is excessive deleveraging in the private sector. But this option rapidly reaches its limits in the presence of debt sustainability concerns. And it has done so more quickly in the euro area than in other economies where the institutional framework is different. In a context of macroeconomic imbalances across the euro area countries and financial market fragmentation, the Eurosystem balance sheet has expanded in size, with an increased concentration of liquidity provision to banking systems in countries under strain. The asymmetric distribution of the ECBs action across the euro area has attracted attention, also from a political viewpoint. What is insufficiently reflected in this debate is that this asymmetry is endogenous and is a result of the single monetary policy. This asymmetric action across the euro area is also reflected in increased Target balances on the balance sheets of Eurosystem central banks.
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Such an endogenous shift in composition has acted as an internal adjustment mechanism, whereby the fallout of funding pressures in the banking system has been directed into the Eurosystem and away from the real economy.
This has buffered the adjustment of the real economy and kept trade and financial flows flowing across euro area countries, thereby preventing disorderly deleveraging. It has provided time for governments individually and collectively to address the adjustment needs and undertake the appropriate reforms. But this time needs to be used effectively. The ECBs non-standard measures have been ensuring that solvent banks are not liquidity-constrained so that they continue lending to the real economy without a disorderly deleveraging process. However, there are limits to what monetary policy can and should credibly do: monetary authorities cannot be expected to solve problems which lie well outside their current official remit.
The delicate balancing act

More generally, a central bank should be aware that it is constantly required to exercise a delicate balancing act. On one hand, it may need to provide backstops to remove tail risks that could otherwise result in severe downward pressure on price stability. On the other hand, by mitigating a crisis which largely reflects shortcomings in other policy areas and excesses in the financial sector, the central bank may alter incentives for different actors to correct imbalances. If domestic policy-makers and other economic actors delay necessary reforms because they can count on the central bank to provide support whenever market conditions deteriorate, monetary policy may become insufficiently effective, as well as biased towards the short term.
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In the words of Herv Hannoun, the Deputy General Manager of the Bank for International Settlements, a central bank has to constantly guard not only against the risk of fiscal dominance but also financial dominance.
I would like to give one example. A central bank can commit itself to engaging in extraordinary monetary policy interventions and to swiftly reversing them as conditions improve. But would this commitment be sufficient to align the incentives of all the actors involved? In the economic jargon, is this promise time consistent? Or will other economic agents expect the policy-maker to deviate from its stated intention and adjust their actions accordingly? Economic literature stresses two elements that add credibility to such commitments: strong institutional frameworks setting out clearly defined objectives; and the adoption of rule-type behaviour that consistently and predictably determines the response of policy-makers to specific circumstances. These elements allow a policy-maker to steer the expectations of other actors in line with its long-term intentions, thereby mitigating the time inconsistency problem. As regards monetary policy, the institutional framework set up for EMU central bank independence and price stability objective being the key elements has proved to be strong and effective.
The crisis has shown, in my view, that the rule-type behaviour has to be provided by a symmetric reaction of central banks to financial forces.
In particular, a strong reaction to financial distress in the downturn has to be matched by a strong reaction to financial imbalances during the building-up phase.
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What is the best way to do this?

I believe that a more symmetric reaction to financial forces can be best ensured by according a prominent role to the analysis of money and credit developments in monetary policy decisions, especially if this is complemented by appropriate macro-prudential measures. But it should be recognised that monetary policy is only one element of the overall institutional framework. The current sovereign crisis is largely the outcome of severe shortcomings in the institutional architecture of EMU, which was not capable of fostering prudent fiscal, structural and financial policies. But policy-makers have reacted to these shortcomings and have set in motion ambitious reforms to strengthen economic governance in Europe. Earlier today, my colleague Vtor Constncio discussed the rationale of this reform agenda in great detail. I will therefore not elaborate on this. But I would like to echo his assessment. The repair of the institutional architecture of EMU will contribute to addressing the underlying causes of the crisis, thereby also supporting the smooth functioning of EMU in the future.
Conclusions
Let me conclude. The crisis brought about several waves of financial turmoil that threatened to spiral out of control. In line with its price stability mandate, the ECB intervened in each of these episodes so as to tackle the specific threats to the monetary policy transmission that arose with each incarnation of the crisis.
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The policy actions of the ECB, and of all other major central banks, have been able to repeatedly ward off self-sustaining feedback loops characterised by disorderly deleveraging.
The challenge ahead for central banks consists, in my view, of combining such a backstop role during a crisis with a credible commitment to adopting symmetric behaviour in the run-up phase of financial imbalances.
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Opening Remarks at the H igh Level Seminar of Macro prudential policy: Asian Perspective
Distinguished Managing Director Kahn, Distinguished First Deputy Managing Director Lipsky, Ladies and Gentlemen,
Good Morning. It is a pleasure to meet friends old and new in Shanghai in this beautiful autumn to discuss macro-prudential policy.
On behalf of the Peoples Bank of China, I want to extend the warmest welcome to representatives from international organizations and officials from central banks, ministries of finance and financial regulators. Reviewing the global financial crises in history, we know that a crisis will prompt fresh institutional reforms in addition to causing massive damages.
Since the outbreak of this round of crisis, the international community has agreed on the need to strengthen efforts to implement macro prudential policy.
In the past few decades, the many new developments in financial sector undergone, as reflected in positive feedbacks and pro-cyclicality in the economic and financial system, worked together with various other factors and ingredients such as insufficient early warning, inappropriate management and contagion, and produced the worst crisis since the Great Recession. A key lesson from this crisis is that risk prevention should focus not only on single financial institution or single sector, but also on systemic risks. Macro-prudential policy is the very solution that addresses systemic risks.
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After the outbreak of the crisis, the I nternational Monetary Fund and the Financial Stability Board stated clearly that implementing macro-prudential policy should be central banks responsibility.
Countries have since then also enhanced central banks macro-prudential policy functions in their financial reform. At the request of G20 financial summit, the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS) and other standard-setting bodies are working to develop institutional arrangements and tools to strengthen macro-prudential policy, establish mechanism to mitigate pro-cyclical factors, raise regulatory standards on systemically important financial institutions, and improve risk disposal and settlement arrangements. The international practice of strengthening macro prudential policy will be a boost to Chinas financial reform and development. The Chinese financial system has basically withstood the shocks of the recent crisis because of the following reasons. First, continued economic growth has created a benign environment. Second, after the Asian financial crisis, joint stock reform of state-owned commercial banks enhanced their overall strength and resilience and strengthened the foundation for financial stability. Third, the financial legislation system and supervision ability has improved. Fourth, the financial market, including delivery of services and product innovation, was not sophisticated, and this helped ward off crisis. Currently, Chinas financial system faces the challenge of guarding against systemic risks. On one hand, to address deep-rooted problems in the economic structure and the uneven and unbalanced growth, it is necessary to adopt
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sustainable and sound macro-economic policies; the expansion of domestic credit supplies remains strong and cross-border capital movement contains potential risks.
Excessive liquidity, inflation, asset price bubbles, periodic non performing loans and other risks may build up and undermine asset quality and resilience of Chinas financial sector. One the other hand, in the past few years, many financial institutions are offering cross-sector and cross-market products; financial share-holding companies have established complex internal structures and moved into diversified businesses; new-type of financial institutions are heavily involved in the financial market activities. Given Chinas domestic situation, the stability of the financial system and macro-economic policies are directly related. Due to the large share of bank credit in total financing, there is a close relationship between fluctuation of credit supply and economic cyclical change on one hand and systemic financial risks on the other. Therefore, the establishment of counter-cyclical adjustment mechanism is our priority in strengthening macro prudential policy. The Peoples Bank of China, with a mandate in Chinas macro-economic management and financial stability, needs to build a counter-cyclical adjustment mechanism to increase flexibilities in macro-economic management. Meanwhile, it is necessary to strengthen monitoring on systemically important financial institutions to prevent and properly manage potential systemic risks. Macro-prudential policy is a relatively new concept in China. To avoid misunderstanding and simplification of it as just capital requirement, capital buffer, liquidity, leverage, etc, first of all, we need to clarify its essential meaning, framework and concrete content.
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In general, firstly macro-prudential policy is counter-cyclical.

Secondly, it needs to deal with market failure such as herding phenomena to enhance financial market soundness and prudence of market participants. Thirdly, along with globalization, rapid expansion of financial market, increasing complex financial instruments and trading, it is necessary to formulate and implement broader international standards. Today, thanks to an IM F initiative, we gather to discuss macro prudential framework based on lessons learned in crisis, to analyze macro prudential policy tools and their effects, to reflect the changing roles of central banks in macro prudential management. We need to reexamine the relationship between monetary policy, financial stability and macro prudential management, and its policy implications. These are very challenging topics and deserve thorough discussion. I wish this seminar a great success! Thank you!
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EMIR: The bigger picture and looking forward

Speech by David Lawton, Director of Markets, FSA at the Tradetech Conference [Note: EM IR is the acronym for the European Market I nfrastructure Regulation]. Thank you for inviting me here today to speak. As we draw nearer to the implementation of EM IR, I d like to use this time to take a step back and sketch out a reminder of how we got to EM IR and the outcomes we hope it will achieve. I ll touch on some of the practical issues firms are facing and the key challenges in implementing this regulation. We are all well versed on what these markets offer: OTC derivatives are used in a variety of ways, including hedging, investing, exploiting arbitrage opportunities and position-taking.
They help with the pricing of risk, add liquidity to the markets and play a vital role in the risk management of their users.
From a regulators perspective, in December 2009 we had a black box. No one had a clear picture of the risks within these markets, and more importantly, no one had the means of gaining that clear picture. This made it difficult for regulators to gauge the concentration of risk-taking and during the crisis to make timely interventions in a proportionate and meaningful way. As these markets grew in this ad hoc way, the sophistication of risk management around these markets did not keep up.
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There was a build up of large counterparty exposures not being managed appropriately.
We had a cats cradle of transactions inappropriately risk managed with limited transparency of the overall counterparty credit risk exposure. There were risks in basic operational risk management with market participants running large backlogs of unconfirmed trades while the market was increasing in volume. This lack of transparency in the market abetted the seizing up of trading because no one was sure which institution was exposed to what risks and whether the collateral would cover the risk.
Key points on EMIR

The case for regulation in this area after the crisis was indisputable and unavoidable. I ll quickly recap some the requirements coming out of the legislation. We are now close to the implementation of a regulation that will address a number of the risks posed by the OTC market to financial stability. Now that the ESMA technical standards have been published, we can work with the substance of the regulation to prepare for implementation.
There will be a reporting obligation for all counterparties to all derivatives contracts to report post trade contract details to a registered trade repository. This requirement will capture all exchange and OTC derivative trades, intragroup trades, trades with non-financial counterparties. OTC derivative contracts that ESMA determines are suitable, will be subject to a mandatory clearing obligation to be cleared through a central counterparty .
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This will apply to contracts between any combination of financial counterparties or non financial counterparties that are above the clearing threshold. A reminder of the clearing threshold for firms: 1bn in gross notional value for OTC credit and equity derivatives; 3bn in gross notional value for interest rate and FX and 3bn in gross notional value for commodities and others on a combined threshhold. Exempted from this clearing threshold are transactions designed to reduce risks to commercial activity or treasury financing activity.
ESMA will decide whether contracts already cleared by a CCP need mandatory clearing with regard to contract standardisation and liquidity. The first clearing obligations are likely to be Q4 2013 There will be new risk mitigation requirements for all uncleared OTC derivative trades. These requirements are around timely confirmation, dispute resolution, reconciliation and portfolio compression. For counterparties subject to the clearing obligation, there will be additional requirements around initial and variation margin and daily valuation (for their uncleared trades).
Challenges
These regulations provide a number of challenges, but one of the key challenges for me and my staff is ensuring that you are ready for implementation starting at the end of 2012. I do not want to sound glib about the challenges ahead for industry, and indeed, for regulators in implementation.
Were all aware that these regulations require commitment, cost and early engagement with the obstacles to successful implementation.
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There is still uncertainty around the interpretation of some of the rules in EM IR. This is not a new phenomenon in the implementation of legislation. Whenever new rules come into force, there is always uncertainty about the practical implementation, and EM IR is no different in this respect. We are working with our European peers to navigate through this uncertainty, and I welcome the European Commission and ESMA publishing FAQs to help provide clarification. I would note however that there are some advantages to uncertainty, and it may be beneficial not to codify interpretations too early on. There continues to be uncertainty around the timing of implementation. This is subject to a large number of dependencies, so accurate forecasts cannot be given as yet. What I can do however is give you my current best guess on the timetable:
Entry into force of level 2: late Q1 2013 First clearing obligations: Q4 2013 Reporting requirement July 2013 for credit and interest rate derivatives, January 2014 for all other classes. 90 days for backloading. Collateralisation of non-cleared trades consultation likely H1 2013. In the bilateral collateralisation of uncleared trades there are still some open policy questions around the details on the calculation of margining levels. The Working Group on Margin Requirements formed by the principal prudential, markets and payment system regulators has been formed to create standards for margining as a tool to mitigate the risks in the
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non-cleared part of the market and are due to present final proposals by end - 2012.
Were working hard to get the right balance between an appropriate level of protection and something that is feasible to implement. The data we have from the QIS has made this debate more practical and we will be actively engaged in work to finalise global principles.
Practical advice for firms

There are some clear areas which industry can get started on.
Now that the Technical Standards on EM IR have been published, we know there will be no further carve outs for firms.
Firms that do not have exemptions need to have a strategy on how they will meet their obligations. This is not a gentle introduction for firms that have previously been shielded from the link between their transactions and systemic risk. We know this is not an easy task. I am pleased that many firms we speak to already have well developed EMIR implementation projects in place. EM IR is a wide-reaching regulation which affects the majority of financial market participants but with a different impact on each. Like Tolstoy's unhappy families one might say that, on EMIR, all of our stakeholders are unhappy in different ways. There are a lot of different obligations in EM IR, and being ready to meet all of them will require a fairly complex plan for most firms. A good place to start with preparations would be establishing clearing arrangements. This may be more straightforward for the larger banks if you are already members of clearing houses for all the cleared markets in which you are active. But you need to check that this is the case.
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For the buy side and others within the clearing obligation, it is likely to be more of a challenge.
If you cannot become a clearing member you will need to enter into client clearing or indirect clearing arrangements with a broker. We know that onboarding for these arrangements can take several months and that capacity will be severely constrained if there is a rush to sign up during 2013. So I would certainly encourage firms in this situation to start the process of establishing client clearing arrangements now. Similarly high up the list of priorities is getting ready for the non-margin aspects of bilateral risk mitigation. The rules around exchanging variation and initial margin are unlikely to come in until the second half of 2013 at the earliest, but operational risk-management tools come in earlier, with mandatory confirmation timetables likely around March and rules on dispute resolution, portfolio reconciliation, and portfolio compression coming in six months later. Some of these, particularly the new time limits for confirmations, could prove challenging for parts of the market still relying significantly on paper-based processes, so I encourage you to start considering now how you will meet them. Then of course there is reporting. I know that the several firms have already established connectivity with one or more trade repositories. If you do not yet have that connectivity, then you will need to start considering it. We anticipate that smaller firms may well choose to delegate their reporting requirements to larger firms that they trade with. If you do plan on using the delegation route, you will need to make sure that your counterparties are willing to accept that responsibility. Finally, there are EM IR's various exemptions.
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For non-financial firms, there is an exemption from the clearing and bilateral collateralisation obligations for hedging transactions.
For non-financials who expect all of their derivatives trading to fall within this definition, you will need checks to ensure this is the case. For those who expect to have some non-hedging business you will need systems to count your group-wide non-hedging transactions to see whether your total notional non-hedging business breaches one of the asset class thresholds and therefore brings your firm within the clearing obligation.
For all firms with intragroup derivatives transactions, you will need to consider whether you meet the terms of EM IR's intragroup exemption and submit the necessary notification or application to your regulator.
The FSA will have an automated process for submitting these notifications early next year. These are not challenges that will go away overnight but, again, I would encourage you to engage as much as possible. Consider whether you need to amend existing or enter into new bilateral credit support documentation to meet new margin requirements. Review existing operational processes to ensure they conform with the new technical standards. Establish appropriate segregation arrangements. Provide notifications in good time to regulators if intending to rely on exemption. And please, provide feedback to us if there are other challenges you are finding in implementation.
Looking forward
What I would to do now is look a little further ahead, beyond implementation, and sketch out the sort of regime these regulations are working towards.
The requirements within EM IR for trade reporting will mean that we can develop a clearer picture of risk.
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We will have a credible source of data on OTC derivatives transactions which we will use to build a picture of the true risks within in the financial system.
This will help us to, where necessary, formulate regulatory and supervisory interventions that promote financial stability and reduce systemic risk. Much of the reporting on EMIR and Dodd Frank describes the CCPs as the big winners of the G20 commitment, but I would not underestimate the challenge these regulations have set down for CCPs.
They have to become financially stronger, moving from being able to sustain the collapse of their largest counterpart, to their two largest counterparts.
There will be further challenges for them in the work of CPSS IOSCO in the development of recovery and resolution regimes. Regulation will involve large scale investment in I T for infrastructure providers. CCPs will have to manage new relationship, and client clearing will be administratively challenging, having to put in place systems and processes that are compliant over 27 different bankruptcy regimes (more if active outside EU). Well have a more mature and sustainable OTC derivative market. It may become smaller and more expensive, but thats in our view a justified trade off given the impact this market can have on financial stability. Regular valuation and reconciliation requirements will mean counterparties will know their true exposures. Increased initial margin requirements, segregation requirements and portfolio compression will reduce contagion risk. These raft of measures are part of the wider pattern in the European post trade agenda.
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These changes will require innovation in the business models of firms to respond to the need for greater transparency, more capital, and in general greater cost of doing business.
This is part of a period of demanding changes in the business models of post trade infrastructures, both in terms of what they offer their clients and operationally in their risk-management practices and systems. We are already starting to see new business models evolve in this climate as the demand for collateral increases, we are starting to see innovation in collateral optimisation and a growth in the development of ancillary and supporting activities in the post trade space. We are mindful that change can bring further risk. It would be unfortunate if new firms bought new, unmanaged risk to the market. We are working to mitigate risks that may arise from implementing these reforms. One particular example is around collateral transformation. These reforms will oblige many firms to post collateral who may not currently hold collateral eligible assets. We expect this to encourage growth in collateral transformation services, where banks and others offer to lend collateral assets in exchange for a charge over some other, non-collateral eligible asset. The repo market could be particularly relevant here in allowing firms to temporarily exchange assets for cash. We need to ensure that this activity does not pose new risks. So the work the FSB is doing to examine the case for new regulation of the repo markets is particularly important. More broadly, bank supervision will need to take full account of new risks which banks become exposed to by offering collateral transformation services.
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Measuring success
The tricky thing about a policy initiative whose true success can only be judged in the next serious crisis, is that if, as we hope, that next big crisis is some time away, we need some way of assessing our success in the meantime. There are a few useful measures we could look to. Regulators will have much more and better quality information with which to supervise and oversee markets. As a regulator a key measure for me is that I ll be able to see better the interconnectedness of firms and that will help me work for financial stability. When a firm tips from going concern to administration we will have easier sight of their impact and can make earlier assessments of the proportionate level of intervention. The second success measure for me, is stress and back testing, particularly for CCPs. While every crisis is different, if CCPs can show that they would be financially strong enough to meet extreme but plausible historical and hypothetical scenarios, we can be that much more confident that they will be able to cope with whatever the next crisis throws at them. And on the other side of the safety vs efficiency trade off, we would look at whether the derivatives market is continuing to serve its role in transferring risk to those most willing and able to bear it. If derivatives hedging is no longer available to the real economy at a realistic price, this would be a significant problem. These are the kinds of success measures we will look to as these reforms are implemented.
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Conclusion
So to summarise: - Use us and ESMA and the guidance we can give to identify clear strategies for the how you will implement the requirements that will fall on you. - Expect to see changes in the business models of your peers and new ones grow up as firms respond to the need for greater capital, greater transparency contract, and the higher cost of doing business - These measures are a necessary step in ensuring that OTCD markets are appropriately risk managed and transparent. They will help to ensure that they become a more reliable cog in the financial markets machine and one that we hope will prove reliable the next time serious stress hits.
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The Governor of the Bank of England

Her Majesty the Queen has been pleased to approve the appointment of Mark Carney as Governor of the Bank of England from 1 July 2013. He will succeed Sir Mervyn King. Welcoming the appointment the Chancellor of the Exchequer, the Rt Hon George Osborne MP, said: Mark Carney is the outstanding candidate to be Governor of the Bank of England and help steer Britain through these difficult economic times. He is quite simply the best, most experienced and most qualified person in the world to do the job. He has done a brilliant job for the Canadian economy as its central bank Governor, avoiding big bail outs and securing growth. He has been chosen by the rest of the world to be the chair of the international body, the Financial Stability Board, charged with strengthening global financial regulation after the financial crisis. Along with its central role in monetary policy, this Government has put the Bank of England back in charge of regulating our financial system so that we dont repeat the mistakes of the last decade. Mark Carney is the perfect candidate to take charge of the Bank as it takes on these vital new responsibilities. He will bring strong leadership and a fresh new perspective.
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I look forward to working with Mark as we continue to rebalance our economy, deal with our debts, and equip Britain to succeed in the global race.
We needed the best and in Mark Carney weve got it.
Notes for editors

1.Mr Carney is currently Governor of the Bank of Canada, having taken up his office on 1 February 2008. He also currently serves as Chairman of the Financial Stability Board (FSB) and as a member of the Board of Directors of the Bank for International Settlements (BIS). He is also a member of the Group of Thirty, and of the Foundation Board of the World Economic Forum. 2.Prior to becoming the Governor of the Bank of Canada, Mr Carney was Senior Associate Deputy Minister of Finance (2004 2007) and Deputy Governor of the Bank of Canada (2003 2004). Prior to that, Mr Carney had a thirteen-year career with Goldman Sachs in its London, Tokyo, New York and Toronto offices. Mr Carney has a bachelor's degree in economics from Harvard University (1983 1988) and a Masters and Doctorate in economics from Nuffield College, Oxford University (1991 1995). 3.Mr Carney was born in Fort Smith, Northwest Territories, Canada in 1965. As a Canadian citizen he is a subject of H er Majesty The Queen. He is married to Diana Fox Carney, an economist and British citizen. They have four daughters. Mr Carney has indicated he intends to apply for British citizenship. 4. Mr Carney has indicated he intends to serve for five years.
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5.Under the Bank of England Act 1998, as expected to be amended by the Financial Services Bill which is currently being considered by Parliament, the Governor of the Bank of England is appointed by H er Majesty the Queen on advice from the Prime Minister.
He was advised by the Chancellor of the Exchequer, who oversaw the appointment process, and, as with other public appointments, consulted the Deputy Prime Minister. The selection panel for the recruitment process comprised Sir Nicholas Macpherson, Permanent Secretary H M Treasury; Tom Scholar and John Kingman, Second Permanent Secretaries, H M Treasury; and Sir David Lees, Chair of the Court of the Bank of England. 6.Her Majesty The Queen has also been pleased to approve, under the Bank of England Act 1998 as amended by the Banking Act 2009, the Chancellor and Prime Ministers recommendations for the re-appointment of Charles Richard Bean as Deputy Governor of the Bank of England for Monetary Stability from 1 July 2013. Mr Bean has agreed to stay on for a year to help oversee the extension of the Bank of Englands responsibilities and the transition to the new Governor. He has asked to stand down on 30 June 2014.
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UBS trading losses in London: FIN MA finds major control failures

The proceedings launched by the Swiss Financial Market Supervisory Authority FINMA into UBS's trading losses in London have highlighted serious deficiencies in risk management and controls at UBS's Investment Bank. In FINMA's view, the fraudulent transactions executed by the rogue trader would have been detected sooner if these deficiencies had not existed. As soon as the unauthorised trading activities became known, FINMA imposed preventive measures to limit UBS's operational risks. Now that its proceedings have been completed, FINMA is appointing an independent third party to ensure that corrective measures are successfully implemented. In September 2011, FINMA together with the UK regulator, the FSA, launched a comprehensive independent investigation into the events at UBS (press release). Its aim was to clarify the circumstances that led to serious unauthorised trading losses at UBS's London office and review the control mechanisms at UBS's I nvestment Bank. In December 2011, FINMA initiated formal enforcement proceedings (press release). Today, FINMA is publishing a summary report detailing the conclusions of the proceedings and disclosing the measures it has taken as well as those implemented as a first step immediately after the trading losses became known.
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The far-reaching immediate measures ordered by FINM A include capital restrictions and an acquisition ban on the I nvestment Bank.
Moreover, any important, new business initiative which the I nvestment Bank intends taking must initially be approved by FINM A. In order to monitor the progress of the measures imposed, FINMA is appointing an independent investigator and, at a later stage, will engage an audit firm to review whether the steps taken by UBS have proved effective. FINMA is also further examining whether UBS must increase capital backing for its operational risks.
Background to the trading losses

In mid-September 2011, UBS discovered that trader X, who was employed on the Exchange-Traded Fund (ETF) desk of its I nvestment Bank in London, had been engaging in unauthorised trading. The ETF desk traded in a variety of financial instruments designed to meet the investment needs of UBS clients. The desk also traded on its own account. As a director-level employee, trader X executed transactions for the bank's account in excess of his defined limits and concealed the risk exposures. By using a range of prohibited mechanisms, he succeeded for a substantial period in covering up the actual scale of his trading positions and the risk they posed. The mechanisms used included one-sided internal futures positions, the delayed booking of transactions and fictitious deals with deferred settlement dates. UBS suffered losses of USD 2.3 billion. Trader X also created a mechanism, which he referred to as the "umbrella", for smoothing out profits and losses.
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On 20 November 2012 trader X was found guilty on charges of fraud by abuse of position and not guilty on charges of false accounting at the end of his trial in London.
Unclear monitoring responsibilities

Responsibility for monitoring and controlling the ETF desk was split between the line managers in the front office and three separate control functions. The Operations unit was responsible, among other things, for ensuring that the ETF desk's trades were correctly recorded and processed. Product Control, part of the Finance department, was responsible for ensuring correct reporting and plausibility checking of profits and losses, while Risk Control was tasked with monitoring and evaluating the risks from trading activities. Line managers were uncertain of what their functions and responsibilities were as regards monitoring the ETF desk. One aggravating factor was that, following a reorganisation in April 2011, the direct line manager was located in N ew York. No specific arrangements were made for transferring responsibility for monitoring. Warnings did not get as far as the new direct line manager in New York and ended up instead with the previous line manager in London. He received and acknowledged them, even though this was no longer his responsibility. Between June and July 2011, it became clear on at least four occasions that trader X had exceeded his limits. In one of these cases, he revealed to his manager in New York that he had made a profit of USD 6 million by taking a position of more than USD 200 million, far in excess of his approved risk limit.
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The line manager first congratulated trader X on the profit and only later reminded him that he needed permission to exceed his limit.
The inadequacy of the controls was also made clear by an incident in August 2011 in which fictitious ETF trades with deferred settlement dates generated irregularities amounting to half a billion dollars. These warning signals were accepted without further investigation.
Control functions too weak

The three control functions also failed to properly investigate the many warnings triggered by transactions from the ETF desk. For example, the unusually large profits generated by the ETF desk starting in the first quarter of 2011 were not critically examined. It was common knowledge in the London trading room that the ETF desk caused many reconciliation errors, often as a result of late or incorrectly booked transactions. These concerns were discussed neither with the Product Control unit nor with senior management. Starting in June 2011, the reconciliation errors became substantial, with the unexplained amounts sometimes exceeding USD 1 billion. Operations saw its role as providing services to trader X and raised no serious questions about his activities. Although reconciliation errors remained unresolved over several weeks, explanations provided were implausible, and inconsistencies were occasionally escalated, trader X's managers and controllers were too quick to accept his explanations. Even at a meeting held on 24 August 2011, managers came to the conclusion that no large amounts of money were at risk. In August 2011, trader X once again persuaded Product Control that losses of one billion dollars shown in the trading systems were incorrect.
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His assurance that he would correct these "booking errors" in the near future was accepted without objection.
In fact, trader X's aim was to remove the bank's losses, at least temporarily, from the books. In addition, an important control report was not produced at all for a period of several months without anyone noticing this fact.
FINMA's main findings

On the basis of these findings, FINM A has reached the following conclusions:
The direct line managers failed to properly monitor the ETF desk in London. Trader X's relationship with his line manager and the internal control functions was based too much on trust and too little on control. The front office monitoring instruments deployed by the line manager responsible for the ETF desk had major shortcomings and were not used properly. The control functions had too little understanding of the trading activities in question and were therefore unable to challenge the ETF desk's actions. UBS's various control functions did not collate their information to produce an overall picture. Operational risks were evaluated to a large extent on the basis of a self-assessment process, which was carried out just once a year by traders and internal controllers. Improvements to this process had been in train since January 2011, but were completed too late. Reporting channels and responsibilities were unclear and led to confusion.
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The relocation of direct supervision of the ETF desk from London to New York was badly managed and led to a situation in which the London desk was not adequately monitored from April 2011 onwards. UBS sent out misleading signals by awarding pay increases and bonuses to a trader who had clearly and repeatedly breached compliance rules, and by accepting him onto a junior management programme.
Immediate measures implemented by FINM A

As soon as the trading losses were discovered, FINMA imposed until further notice a range of preventive measures on UBS:
Any new business initiatives which UBS intends to take in its investment bank and which are likely to lead to increased operational complexity require prior approval from FINM A. The risk-weighted assets of UBS's I nvestment Bank are subject to an upper limit which reduces gradually over the period 2012 to 2015. The risk-weighted assets of the London branch are also subject to an upper limit which reduces over time. UBS's I nvestment Bank is prohibited from making new acquisitions.
UBS's corrective measures

Since the trading losses, UBS has introduced a large number of organisational measures to strengthen its risk management and control capabilities. Action has been taken on the personnel front, core processes in the front and back offices have been modified, and deficiencies in the processing of trades have been addressed. These, along with other measures, are currently being implemented.
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Further measures taken by FINM A

In a newsletter to market participants published on 13 December 2011 (FINMA Newsletter), FINMA specified its expectations regarding controls to prevent unauthorised trading. As part of its supervisory remit, FINM A is checking the extent to which the most important supervised institutions meet these expectations. FINMA is closely supervising the implementation of the corrective measures at UBS and has now decided on the following additional actions:
FINMA is appointing an independent investigator to control the implementation and completion of the corrective measures at UBS. Once the project is completed, FINMA will engage an audit firm to review whether the measures implemented by UBS have proved effective. FINMA is further examining whether UBS must increase capital backing for its operational risks.
The ruling dated 21 November 2012 and the report published today mark the end of the formal enforcement proceedings initiated by FINM A against UBS on 16 December 2011. In coordination with FINMA, the Financial Services Authority (FSA) in the UK is also closing its enforcement proceedings and is imposing a fine of GBP 29.7 million on UBS.
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Certified Risk and Compliance Management Professional (CRCMP) distance learning and online certification program.
Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:
A. The official presentations we use in our instructor-led classes (3285 slides)

The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_ Training.htm
B. Up to 3 Online Exams
You have to pass one exam.
If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certif ication_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_ 1.pdf
C. Personalized Certificate printed in full color

Processing, printing, packing and posting to your office or home.
P a g e | 119
D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides)
The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements. You will find more information at: www.risk-compliance-association.com/Distance_Learning_and_Cert ification.htm

Risk Management Presentation December 10 2012

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International Association of Risk and Compliance Professionals (IARCP)

Who said that?

What is better, to be a risk manager, or a risk manager with Basel I II skills?

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Basel I I I Jobs, Salary Trend in UK

Risk Management Jobs, Salary Trend in UK

Read more at N umber 1 below.

Welcome to the Top 10 list.

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Basel I I I Risk Experts vs. Risk Management Experts

SEC Chairman Mary Schapiro to Step Down Next Month

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On learning from history truths and eternal truths

Micro-macro schizophrenia Banking Union and the European capital dilemma

Deleveraging and monetary policy

EMIR: The bigger picture and looking forward

The Governor of the Bank of England

UBS trading losses in London: FINMA finds major control failures

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Basel I I I Experts vs. Risk Management Experts

Basel I I I Top 30 Related I T Skills in UK

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Basel I I I Jobs, Salary Trend in UK

Risk Management Jobs, Salary Trend in UK

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Basel I I I Salary H istogram in UK

Risk Management Salary Histogram in UK

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Basel I I I , Top 9 Job Locations in UK

Risk Management, Top Job Locations in UK

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

provisions, in many cases to levels that are inadequate to cover charge-offs.

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

SEC Chairman Mary Schapiro to Step Down N ext Month

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

The SEC -- Revitalized, Reformed and Protecting Investors

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

- Established a new whistleblower program already paying dividends

Achieved Record Results in Enforcement and Inspections

- Brought a record number of enforcement actions against investment advisers

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Addressed the Structure of the Market

Reforming and Revitalizing the SEC

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Overseeing a Successful Enforcement and Exam Program

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Engaging in One of the Busiest Rulemaking Periods

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Improving the Structure of the Market

to reconstruct broad-based market events in an accurate and timely manner.

ADDITIONAL I NVESTOR PROTECTI ON MEASURES

I nternational Association of Risk and Compliance Professionals (I ARCP) www.risk-compliance-association.com

Theology also relies on truths, even eternal truths.