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P a g e | 1 Inter n atio na l A s s oci a t ion of R isk a nd Co mpl i a n c e Pr o f e s s io na l s ( I A RCP) 12 0 0 G St re e t N W Su i t e 8 0 0 W a s h i ng t o n, D C 2 000 5 - 67 0 5 U SA T e l : 2 0 2 - 44 9 - 9750 www .ri s k - c ompl i ance-a ss o c i a tion . c om.

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P age |1

InternationalAssociationofRiskandComplianceProfessionals(IARCP)

1200GStreet NWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com

Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedthe week'sagenda,andwhatisnext

DearMember,

IwastravellingfromLondon to Dubai tochairtheMarcusEvansconference(Strategic Risk&Compliance2013).IhadaheadachewhenIread:

“Ifamedicinedoesnotworkasexpected,it'snotnecessarilybecausethedosagewastoolow.”

Wow.Ishetalkingtome?

Hewasnot.Hewasnotevenadoctor.

HewasJaimeCaruana,GeneralManageroftheBankforInternationalSettlements,speakingabout…

…“Hittingthelimitsof"outsidethebox"thinking?Monetarypolicy in

thecrisisandbeyond.”

Speecheslikethatarenotusuallygoodwhenyouhaveaheadache,butasIamaBaseliiiaddict,itworkedhandsomelyforme.

Mr.Caruanacontinued:

“Prolongedmonetaryaccommodationgivesborrowers,financialinstitutionsandpolicymakersanincentivetokeep"kickingthecandowntheroad",delayingnecessaryrepairandreform.”

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |2

IfIseesomeonekickingacandowntheroad,Ihavetorememberwhyhedoesit …

… itisduetoprolongedmonetaryaccommodation.

Ididnothaveaheadacheanymore.Ihadevenstartedunderstandingthenon-financialworldaroundme!

Mr.Caruanacontinued:

“Theglobalbondmarketcrashof1994isacautionarytaleoftherisksinvolvedin exitingfromaprolongedperiodoflow interestrates.”

Unbelievable!ThisisthestresstestIwaslookingfor.Agreatscenarioforamajor investmentbankIconsult.Whoisgoingto challengethat?Willsupervisoryauthoritiesdisagree?ItisMr.Caruana’sownidea!

ReadmoreatNumber1below.Timeforapuzzlenow…

…whichisyouropinionabouttheURLthatfollows?

http://www.cbrc.gov.cn/showWhist.doWhatisit about?

No,youdidnotfindit!Don’tlietome!

Ok,yousawitis*.cn– China

Ok,yousawitis*gov.cn– GovernmentofChinaButwhatistheshowWhist.do?

WhistisaclassicEnglishtrick-takingcardgamewhichwasplayedwidelyinthe18thand19thcenturies.

What?WebsitesbelongingtotheChinesegovernmentexploreEnglish

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |3

trick-takingcardgames?

Accordingto Merriam-Webster,Whistisacardgameforfourplayersintwopartnershipsthatisplayedwithapackof52cardsandthatscoresonepointforeachtrick inexcessofsix.

No,itisnotaboutWhist.Itis aboutWhistleblowers!

AChineseSarbanes-Oxley(like)approachfromthe…

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |4

ThemainfunctionsoftheCBRCinclude:Toformulatesupervisoryrulesandregulationsgoverningthebankinginstitutions,to authorizetheestablishment,changes,terminationandbusinessscopeofthebankinginstitutions,to conducton-siteexaminationandoff-sitesurveillanceofthebankinginstitutions,andtakeenforcementactionsagainst

rule-breakingbehaviors,to conductfit-and-propertestsontheseniormanagerialpersonnelofthebanking institutions.

Welcome totheTop10list.

BestRegards,

GeorgeLekatisPresidentoftheIARCP

GeneralManager,ComplianceLLC1200GStreetNWSuite800,WashingtonDC20005,USA

Tel:(202)449-9750

Email:[email protected]:www.risk-compliance-association.comHQ:1220N.MarketStreetSuite804,WilmingtonDE19801,USA

Tel:(302)342-8828

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |5

Hittingthelimitsof"outsidethebox"thinking?Monetarypolicyinthecrisisandbeyond

SpeechbyJaimeCaruana,GeneralManageroftheBankforInternationalSettlements,toOMFIF(GoldenSeriesLecture),London,16May2013

Centralbankshavehadto"thinkoutsidethebox"to

addressunprecedentedfinancialinstabilityandtoprovidemonetarystimulusintryingtimes.

NISTPostsInitialAnalysisofRFICommentsonCybersecurityFrameworkforCriticalInfrastructure

TheNationalInstituteofStandardsandTechnology(NIST)has postedaninitialanalysisofhundredsofcommentssubmittedbyindustryandthepublicrelatedtothePresident's"ImprovingCriticalInfrastructureCybersecurity"ExecutiveOrder,issuedFeb.12,2013.

OpeningRemarksatSECRoundtableonCreditRatings

ByChairmanMaryJoWhite

U.S. SecuritiesandExchangeCommission,Washington,D.C.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |6

Raisingthebarforthenext phaseofgrowthanddevelopment–sustainingtransformativemomentum

WelcomingaddressbyDrZetiAkhtarAziz,GovernoroftheCentralBankofMalaysia,atthe10thIFSB(IslamicFinancialServicesBoard)

Summit2013“ThefutureoftheIslamicfinancialservicesindustry– resilience,stabilityandinclusivegrowth”,SasanaKijang,KualaLumpur.

ChangesintheLargeExposureRegime

Thispapercontainsfulldetailsofthe

proposalstosubstantiallyaltertheLargeExposureprinciplesandguidancethatapplytolicenseddeposittakersthatareincorporatedinGuernsey.

GovernorSarahBloomRaskin

AttheSocietyofGovernmentEconomistsandthe NationalEconomistsClub,Washington,D.C.

ProspectsforaStrongerRecovery

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |7

OpeningSpeech

byYolandaBanksMcCoy,

Head– InvestmentsandSecuritiesDivision,

CaymanIslandsMonetaryAuthorityatthe100WHFCaymanEvent2013

APerspectiveontheU.S.EconomicOutlookandMonetaryPolicy

PresentedbyCharlesI.Plosser,PresidentandChiefExecutiveOfficer,FederalReserveBankofPhiladelphia

GlobalInterdependenceCenter'sCentralBankingSeries:Recovery2013—StrengthorStagnation,Milan,Italy

MichaelS.Gibson,Director,DivisionofBankingSupervisionandRegulation

Cross-BorderResolution

BeforetheSubcommitteeonNationalSecurityand

InternationalTradeandFinance,CommitteeonBanking,Housing,andUrbanAffair,U.S.Senate,Washington,D.C.

“In myremarks,Iwouldlike tofirstreflectontheimprovementsthathavebeenmadeinthelastfewyearsintheunderlyingstrengthand resiliencyofthelargestU.S.bankingfirms,andthenturn toadiscussion

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |8

ofwhathasbeen accomplishedandwhatremainstobeaccomplishedinfacilitatingacross-borderresolution.”

Adjustmentandgrowthintheeuroarea

SpeechbyMrPeterPraet,MemberoftheExecutiveBoardoftheEuropeanCentralBank,attheEuropeanBusinessSummit,Brussels,16May2013.

“Manyofyouwillhavecomeacrosscommentatorswhoclaimthatadjustmentisinfactinimicaltogrowth;andthatconsolidatinggovernmentbudgets

whileintroducingstructuralreformsisthemaincauseofourcurrent

difficulties.”

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |9

Hittingthelimitsof"outsidethebox"thinking?Monetarypolicyinthecrisisandbeyond

SpeechbyJaimeCaruana,GeneralManageroftheBankforInternationalSettlements,toOMFIF(GoldenSeriesLecture),London,16May2013

Centralbankshavehadto"thinkoutsidethe

box"toaddressunprecedentedfinancialinstabilityandtoprovidemonetarystimulusintryingtimes.

Monetaryaccommodationhasbeencriticaltostabilisethefinancialsystemandtheeconomy.

Butquestionsremain abouttheefficacyofsuchpoliciesaslongasbalancesheetsandstructuralheadwindsarenotmorefullyaddressed.

Monetaryaccommodation canonlybeashelpfulasthebalancesheet,fiscalandstructuralpoliciesthataccompanyit.

Lookingahead,centralbanks willcontinue to facedauntingchallengesastheynavigateinunchartedwaters,includinghowbesttointegratenewperspectivesonthefinancialcycleandglobalspilloversintotheirmonetarypolicy frameworks.

Fullspeech

Ladiesandgentlemen,

Itisagreatpleasure to behereatOMFIF.

Thecrisisanditsaftermathhaveposedformidablechallengesforcentralbanks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |10

Theyhavehadto"thinkoutsidethebox" to addressunprecedentedfinancialinstabilityandprovidemonetarystimulusinthefaceoftheconstraintimposedbythezerolowerboundofpolicyrates.

Lookingahead,thechallengesremaindaunting.Centralbanks have tonavigateunchartedwaters.

Inthenearterm,thequestionishowmonetarypolicycanbestcontributetowhathassofarbeenanunevenrecovery.

Can'tcentralbanksdomuchmore?

Perhapstherelevantquestioniswhethercentralbanks canmakeupforinsufficientactionelsewhere.

Whatmonetarypolicy cansubstituteforbalancesheetrepairbybanksandborrowers?

Whatmonetarypolicycanremoveimpedimentstoaworkermovingfromanoverbuiltsectortoamorepromisingone?

Thesekindsofquestionrequireamedium-termperspective,andinamedium-termperspectivemonetaryaccommodationwillproveonlyasgoodasthebalancesheet,fiscalandstructuralpoliciesthataccompanyit.

Fromalonger-termperspective,achallengeistobetter integratefinancialstabilityconsiderationsintomonetarypolicyframeworks.

Therecentcrisisbroughttheglobalfinancialsystemtothevergeofcollapseandhashaddiresocialandeconomicconsequences.

Thishasraisedfundamentalquestionsabouthow to integrateamodern understandingofthefinancialsystemintoourtraditionalmonetarypolicymodels.

Theseareallexceedinglydifficultquestions,thesituationisdifferentfromcountry to countryandnoone canclaimtohaveacrystalballthatprovidesdefiniteanswers.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |11

Yet,experiencedoesofferatleastsomepointersforthefuture.

In thefollowing,Iwillthereforestartbyreviewingthemaininsightssuggestedbymonetaryhistory,beforeturningtothecurrentchallenges.

Insightsfrommonetaryhistory

Thepastcenturysawconsiderablechangesintheconductofmonetarypolicy.

Thesechangeswereoftentheresultofbothhistoricaleventsandnewwaysofthinkingabouttheroleofcentralbanks.

Bytheendofthe20thcentury,therewasaclearconsensusthataremitofmonetarypolicy focusedonpricestabilityhadmanybenefits.

Thisviewreflectedlessonsfromthepainfulexperienceofdouble-digitinflationratesanderraticgrowththatprevailedinmanycountriesworldwideinthe1970s, andinsomeemergingmarketeconomieswellintothe1990s.

Themainreasonforthisdismalinflationandeconomicperformancewasthatmonetarypolicyneglectedpricestability.

Instead,centralbanks pursuedothergoals,whichturnedout to beinconsistentwithpricestability.

In manyadvancedeconomies,forexample,monetarypolicywastooaccommodativeduringthe1970s,andcentralbanks endeduppushingoutputbeyondsustainablelevels.

In emergingmarketeconomies,politicalpressures to generate seigniorageincomeandfinancepublicspendingprogrammesviatheprintingpresswerefrequentsourcesofhighinflation.

In alltheseexperiences,theneglectofpricestabilitydidnotimproveeconomicperformance.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |12

Overtime,welearned,quitepainfully,thatthereisnobeneficiallong-runtrade-offbetweeninflationandgrowth.

Indeed,welearnedthathighandvolatileinflationratesgohandinhandwitherraticgrowth,largeexchangerateswings,andeveneconomicand politicalcrises.

Chastenedbytheseexperiencesofthe1970sand1980s,centralbankshadtorethinktheirroles.

Atthattime,theresultwastoconsideranarrow mandateforpricestability.

Tobesure,thisrequiredaverypainfuladjustmentprocess.

Centralbankshadtosqueezeinflationoutoftheireconomiesatthecostofrecessions.Butthatcostwaswellworththeprice.

Thosewhohadthecouragetotrywerevilifiedthen,onlytoberecognisedashavingdonetherightthingyearslater.

Anotherlessonlearntduringthisperiodwasthatcentralbankautonomyiscriticalto achievepricestability.

Onemainunderlyingcauseofinflationinstabilitywasthefailuretoshieldmonetarypolicymakerssufficientlyfromshort-termpoliticalcycles.

Somecentralbanks,suchastheBundesbankandtheSwissNationalBank,hadledtheway.

Theyenjoyedahighdegreeofeffectiveindependenceand,onthisbasis,consistentlydeliveredlowerinflationthantheirpeersduringthe

post-BrettonWoodsera.

Thesearehard-earnedlessonsthatshouldnotbeforgotten.

Today,centralbanksareonceagain"thinkingoutsidethebox"asnewchallengeshavearisen.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |13

Evenbeforethecrisis,concernsamongcentralbankersweregrowingthat thepolicyenvironmentwaschanging inwaysthatcalledforafurtherevolutionofcentralbanking.

In particular,thenarrowfocusonnear-termdomesticpricestabilitydid notseemtobeenoughinanenvironmentinwhichthefinancialcycleandglobalspilloverswerebecomingmoreprominent.

Withrespect to thefinancialcycle,wenow seethatmonetarypolicyplayedanimportantpartinthebuild-upoffinancialimbalancesduringthe2000s.

Afterthebustofthedotcomboom,monetarypolicy intheadvancedeconomiesremainedaccommodativeformanyyears.Interestrateswerelow,andcreditandhousepricessoared.

Ofcourse,therelevanceofthefinancialcycleforcentralbanks isnotanentirelynewinsight.

Theforgingofmanycentralbanks,suchasthatoftheFederalReservein1913,wasthedirectresultofthebankingcrisesofthe19thandearly20thcentury.

ItbecamelessrelevantintheearlypostwarperiodagainstthebackgroundoftightlyregulatedfinancialsystemsputinplaceaftertheGreatDepressionandtheSecondWorldWar.

Butthefar-reachingfinancialderegulationpursuedsincethe1970sallowedthefinancialcycletore-emergeasamajormacroeconomicforcethatgreweverstronger.

Globalisation,too, has been changingthepolicy environmentinsignificantways.

In additiontothegrowinginfluenceofglobalfactorsondomesticinflationdynamics,globalisationappears to haveaddedfueltothemonetaryeasing in therun-uptotherecentcrisis.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |14

Theunusuallylow policy ratesprevailing in themajoradvancedeconomiesaffectedothersviaaresistancetocurrencyappreciationpressures.

Manyemergingmarketeconomieskeptinterestrateslowerthanwould havebeensuggestedbydomesticmacroeconomicconditionsalone.

In turn,theiraccumulationofforeignexchangereservesputadditionaldownwardpressureonyieldsintheadvancedeconomies.

Thenetresultwasunusuallyaccommodativeglobalmonetaryconditions.Real interestratesaveragedamere1.5%globallybetween2002and2007whileoutputgrewrobustlyatroughly4%.

Managingthepost-crisisrecovery

Whilethepre-crisisperiodalreadygavecentralbanksmuchfoodforthought,thecrisishasgiventhemstillmore to chewon.

Thefinancialcrisishastestedthecrisis-managementreadinessofcentralbanks,andthesubsequentphasetheirabilitytonursetheeconomybacktogrowth.

Centralbankshaverespondedinanunprecedentedwayinbothscaleandscope.

Theyhaveprovidedampleliquidityintheirlenderoflastresortfunctions,havecommittedtolow -ofteneffectivelyzero- interestrates,haveengagedinlarge-scalebalancesheetpolicies,haveaugmentedthiswithenhancedforwardguidancelinked to real-economyoutcomes,haveputinplacetargetedlendingschemes,havepurchasedriskyassetsandsoon.

Theresponseofcentralbankshashadimportantbenefits.

Thereisnoquestionthatinthemostacutephaseofthecrisisitpreventedthefinancialsystemfromimploding,whichwouldhavebroughttherealeconomydown.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |15

Lowpolicyratesandtheunprecedenteddeploymentofbalancesheetpoliciesboostedconfidenceandimprovedfinancialmarketconditions.

Andasdoubtsre-emergedin financialmarketsmorerecently,centralbankmeasureseffectivelyreducedperceivedfinancialtailrisks.

Andyet,despitetheseunprecedented actions,theglobalrecoveryhasbeenlacklustre.

Fiveyearsintotherecovery,economicperformanceislaggingpreviousonesatthesamestage.

Economicactivityiswell below itspre-crisistrendinthemajoradvancedeconomiesandunemploymentisstubbornlyhigh.

Thereis,understandably,frustrationaboutthisapparentlackoftraction.

Thisfrustrationhasledsome to callforevermoremonetarypolicyactivism.

Butisitreallyjustified?

Ifamedicinedoesnotworkasexpected,it'snotnecessarilybecausethedosagewastoolow.

Maybeinsteadtheoveralltreatment,andtheroleofthemedicinewithinit,shouldbereconsidered.

Mostlikelysomethingelseisneeded.

Balancesheetrecessionsarespecial:itislessclearthanoftenthought thatmonetarypolicycan fosteraquick androbustrecoveryinabalancesheetrecession.

Whenprivatesectorbalancesheetsneedrepair,accommodativemonetarypoliciesarelesseffective.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |16

Whentheproblemis toomuchdebtandagentsarein themoodtoretrench,itisunrealistictoexpectmonetarypolicytorevivestronggrowthbyloweringinterestrates.

Whenfinancialinstitutionsareweak,itisequallyunrealistictoexpectthemtoeffectivelytransmitmonetaryimpulses.

Moreover,itiswellknownbynowthatgrowthtendstobeweakerafterfinancialcrisesthanafterordinaryeconomicdownturns.

Thisisnotjust,orevenprimarily,aquestionofdeficientdemand.

Itreflectstheneedfortheeconomytoreabsorbtheaggregateandsectoralrealimbalancesthatbuiltupduringtheprecedingunsustainableexpansion, hiddenunderthefrothofthefinancialboom.

Suchboomstypicallyleaveintheirwakenotonlytoomuchdebt,butalsotoomuch capitalandlabour inthewrongsectors.

Therefore,thechallengeforcountriesinthenextfewyearswillbetoreallocatelabourand capitalamongsectorsbothwithinandacrossnationalborders.

Structuralreformtoremoverigidities,notmonetarypolicy,istheway tofacilitatethis.

True,monetarypolicy canbuytimetoimplementthenecessarybalancesheetrepairandstructuralreforms.

Butit cannotsubstituteforthem.Afterfiveyearsofbuyingtime,onehastoaskwhetherthattimehasbeen-orwillbe-usedwisely.

Refocusingthepolicymixto relymoreonrepairandreformandnottooverburdenmonetarypolicy iscrucialbecausethebalanceofrisksof prolongedverylow interestratesandunconventional policiesisshifting.

Thecostsaregrowinginrelationtothebenefits,foranumberofreasons:

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |17

First,prolongedmonetaryaccommodationgivesborrowers,financialinstitutionsandpolicymakersanincentivetokeep"kickingthecandowntheroad",delayingnecessaryrepairandreform.

Certainly,progresshasbeenmadeinaverytryingenvironment.Butmoreneedstobedone.

Indeed,theslowprogressintheimplementationofstructuralreformsandinthedeleveragingprocessmaysignalthatthisdelayingmechanismisatwork.

Persistenthighunemploymentratesinmanyadvancedeconomiesindicatethechallengesoflabourrigiditiesandsectoralrebalancingthatstillfaceus.

Atthesametime,althoughsomeprivatesectordeleveragingisoccurringinsomecountries,andthefinancialsystemisbettercapitalised,the totaldebtfiguresarenotreassuring.

Sincetheendof2007,totaldebtoftheG20non-financialsector,both privateandpublic,hasrisenbymorethan30trillionUSdollars,whichrunscountertodeleveraging,atleastasIunderstandthe term.

Itisnoteworthythatoverthesameperiodglobalcentralbankassetshaveincreasedbyroughly10trillionUSdollars.

Second,prolongedaccommodationcanproduceotherunintendedsideeffects.

In the1970s,thedesire to liftoutputandemploymentbacktopre-crisislevelsresultedinsurginginflation.

Onemightarguethatthesituation todayisquitedifferentfromthen.

Inflationhasremainedlowinmostjurisdictionsandclosetocentralbanktargets.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |18

However,monetarystimulusmayfinditswayintoassetpricesandleveragebeforeinfluencinggoodsandservicespriceinflation.

Moreover,prolongedverylowinterestrates candistortmarketsignals,maskunderlyingbalancesheetweaknessesandunderminetheearningscapacityofbanks,thebusinessmodelsoflife insurancecompaniesandthesolvencyofpensionfunds.

Thismayfurthermisallocatecredit,weakenfinancialinstitutions'balancesheetsandencourageexcessiveandunwelcomerisk-taking.

Anothersignificantsideeffectarisesfromglobalmonetarypolicyspillovers.

Persistentlylow interestratesinthemajoradvancedeconomiesgenerallyencourage capitalflowstofast-growingemergingmarketeconomiesand putupwardpressureonemergingmarketexchangerates.

This cancomplicatetheabilityofemergingmarketcentralbanks topursuetheirstabilisationgoals.

Ontheonehand,ifcentralbanksinemergingmarketskeeppolicy ratesverylow,capitalinflowswouldbediscouraged,butdomesticcreditgrowthwouldbeencouraged.

If,ontheotherhand,theyraisepolicyrates,therisksofdestabilisingcapitalflowswouldrise.

Sofar,wehavebeenseeingacombinationoftheseforcesatwork.

Despitesomeslowingofcapitalflowsoverthepastyear,privatesectorcreditandpropertypriceshavebeensurging in anumberoftheseeconomies,aswellasin someopenadvancedeconomies.

Finally,prolongedaccommodationraisesriskstocentralbanksthemselves.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |19

Ifeconomiesremainweakandstructuralproblemsunresolveddespiterepeatedroundsoffurthermonetarystimulus,thecredibilityofcentralbanksmaysuffer,andcredibilityisimportantforeffectiveness.

Letmeinsistherethatresultsintherealeconomywilldependontheextentthatneededrepairandreformsarecarriedout.

Resultswilldependtoalargeextentonfactorsthatarenotundercentralbanks'control.

Aviciouscirclecandevelop,withawideninggapbetweenwhatcentralbanksareexpectedtodeliverandwhatthey actually can deliver.

Thismayultimatelyunderminetheircredibilityand,withit,theirlegitimacyandeffectiveness.

Allthisunderscorestheimportanceofbeingpreparedfortheeventualexitfromtheextraordinarilyaccommodativemonetaryconditionsthathaveprevailedforthepastseveralyears.

Whilecentralbankssurelyhaveallthe toolsavailabletotechnicallyengineeranexit,itcannotbetakenforgrantedthatitwillbesmooth.

Theglobalbondmarketcrashof1994isacautionarytaleoftherisksinvolvedin exitingfromaprolongedperiodoflow interestrates.

Atthesametime,wealsohave to recognisethatthesituation todayisratherdifferentfrombackthenin atleastonecriticaldimension:centralbanksaremuchmoretransparentabouttheirpolicy intentionsnow andtheircommunicationismuchbetter.

Thisshouldreducetherisk ofmajorpolicysurprises.

Thatsaid,thepolicyenvironmentcentralbankshave to grapplewithtodayisalsomuchmorecomplexinsomeimportantdimensions.

Recordlevelsofdebthavebeenissuedatverylow interestrates.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |20

Centralbanks,atleastfornow,areplayinganimportant,ifnotdominant,rolein keyfinancialmarketsegments.

So,asinterestratesriseandcentralbanksparebackandeventuallyreverselarge-scaleassetpurchases,financialmarketswillhavemuch todigest.

Differentnationalconditionswillrequireunsynchronisedexits,whichmayraiseadditionalcomplexities.

Eveninthecurrentenvironmentofenhancedcentralbanktransparencyandcredibility,achoppyexitisamaterialrisk.

ItgoeswithoutsayingthatIwouldlovetobeprovenwrongaboutthis,andthatalotofworkisbeingdonetoreduceexitrisks.

Monetarypolicyandthefinancialcycle

Aswepeerfurtherintothefuture,onekeychallengecentralbanksfaceishowtobetter integratefinancialstabilityconsiderationsintotheirmonetarypolicy frameworks.

Theeconomicandsocialdamageoftherecentcrisishaspainfullyshownwhatisatstake.

Andcentralbanksmustreflectonhowtheycanforgeanewconsensusaboutthewayforward.

Thisisnotjustanarrowoperationalissue,forexample abouthow torespondtocreditandassetpriceboomsandbusts.

Itraisesthemuchbroaderconceptualquestionofhow toshiftour traditionalpurelymacroeconomicperspectivetowardsanew,fullyintegratedmacro-financialperspective.

AsIseeit,thecrisishas notdiscreditedthecoreelementsofpre-crisismonetarypolicy frameworks.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |21

Thecredibilityofcentralbanks asguarantorsofpricestabilityhasbeeninstrumental in anchoringinflationexpectations,onboththedownsideandtheupside,duringthecrisisanditsaftermath.

Astrong,credibleanchorhelps tocounteractthedestabilisingforceshittingtheeconomyandfinancialmarkets.

Atthesametime,thepre-crisismonetarypolicy frameworksdidnotpreventthecrisisfromhappening.

Theexperienceintherun-upsuggeststhatcentralbanksneed tobetterappreciatetheirroleininfluencingthefinancialcycle.

Forthispurpose,byfinancialcycleIrefertothecombinedendogenousbehaviourofcreditandassetprices,particularlyhouseprices.

Regulatoryreformobviouslyplaysakeyrolein mitigatingfinancialcycles,andwehavealreadyseensignificantprogressinthisarea:betterandhigherbuffers,theintroductionofcountercyclicalcapitalbuffersunderthenewBaselIIIframeworkandthedevelopmentofmacroprudentialframeworksand tools.

Tobesure,prudentialandmacroprudentialmeasuresareclearlynecessary.

Buttheyalonewillnotbeenoughandcanalsobecircumventedbyregulatoryarbitrage.

Thisiswhymonetarypolicyhasacomplementaryroletoplay.

Thepolicyraterepresentstheuniversalpriceofleveragein agiven currencyand cannotbebypassed easily.

In thisrespect,centralbanks willneedtoreflectonhowbestto respondtofinancialstabilityconcernsinthefuture.

Thecrisishasclearlyshownthatfinancialstabilityisessentialforlastingpricestability.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |22

Onelessonisthatmonetarypolicymayneed to respondmoresymmetricallytothefinancialcyclethanin thepast-tighteningmorestronglyinboomsandeasinglessaggressively,andpersistently,inbusts.

Inpractice,thismeanspayingmoreattentiontopolicychallengesbeyondtheconventionalpolicy horizonsoftwoorsoyears.

Whenfinancialstabilityconcernsgrow,policyhorizonsneedto belengthenedtotakeaccountofthefactthatthefinancialcycleisconsiderablylongerthanthebusinesscycle.

Analyticalframeworks alsoneedtobetterreflectthecharacteristicsoffinancialcyclesandtheir interactionswithfinancialandmacroeconomicstability.

Centralbanks'pre-crisisworkhorsemodelsgenerallyassignednomeaningfulrole tomacro-financiallinkages.

Thefinancialcrisishasdemonstratedthatsuchanalyticalperspectivesare woefullyinadequate.

Anotherdimensionalongwhichcentralbanksneedtoreflectisabetterappreciationofglobalmonetarypolicy spillovers.

Globalfeedbackeffectsamplifiedthepre-crisisfinancialboom,andwemightbeseeingthismechanismatworkagain.

In ahighlyglobalisedworld,keepingone'sownhousein ordersurelyisnotenough.

Whatdoesthismeaninpractice?

Itdoesnotrequirecentralbanks to coordinatetheirpoliciesclosely.

But,ataminimum,itdoescallforthemtoappreciatebettertheglobalsideeffectsandfeedbacksthatarisefromtheirmonetarypolicydecisions.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


P age |23

Thisisineachcentralbank'sowninterest,especiallyifthespillovershavethepotentialtofosterregionalfinancialinstabilitythatendsincrisis,withsignificantglobalrepercussionsthatswingbacktotheoriginatingcountries,like aboomerang.

Apreconditionforthisshiftinperspectiveisamoreglobalanalyticalapproachthatfactorsin interactionsandfeedbacksappropriately.

Finally,Idonotwanttoleaveyouwiththeimpressionthatfiscalpolicyisirrelevantinthisdiscussion.

Indeed,fiscalpolicyplaysanimportantrolein financialstability,too.Thefinancialcrisishasdemonstratedtheimportanceofhavingthefiscalcapacitytosupportthefinancialsectorthroughbankrescuepackagesandtherealeconomythroughfiscalbuffers.

Butthefinancialcrisishaspushedfiscalpolicy inmanyeconomiesontoanunsustainablepath.

Thisisalessonthatwehavetokeepinmindforthefuture.

Accumulatingbudgetsurplusesingoodtimesprovidesgovernmentswiththeability to respondflexibly to afinancialcrisiswithoutputtingfiscalsustainabilityatrisk.

In otherwords,governmentsneedtofactor inthefinancialcycleandtobuildupadditionalfiscalbuffersduringgoodtimesthat canbedrawndown toprovidesupportinbadtimes.

Summingup

Letmesumup.Thereislittledisagreementthatthepastfiveyearshavebeenunusuallychallenging.

Centralbankshaveplayedacriticalrolein managingthecrisisanditsaftermath.

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Theyarenow underhugepressuretopromoteasustainablerecoveryunderdifficultcircumstances.

And,lookingahead,theywillcontinue tofindthemselvesconfrontingmajorchallenges.

Ihavesuggestedthatmonetaryhistoryprovidesavaluablecompasstonavigatethesetrickywaters:aclearfocusonlastingpricestability,amoresymmetricalapproachtothefinancialcycle,andabetterappreciationofglobalspillovereffects-thesewouldappeartobethekeyelementsofstrongermonetarypolicy frameworks.

Atthecurrentjuncture,thereisalsoapremiumoncentralbankcommunication.

Centralbanksneedtoclearlycommunicatethelimitsofmonetarypolicy,both tothepublicandto otherpolicymakers.

Theprivatesectorandpolicymakers,whohavebeenfacingtheir ownsetofdauntingchallengesinextraordinarilydifficulttimes,willhave toplayalargerrolein thenextlegoftheglobalrecovery.

Crucially,thiswouldalsoallow centralbanks tonormalisemonetarypolicy inamannerconsistentwithareturn to sustainableandbalancedgrowth.

Thankyou.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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NISTPostsInitialAnalysisofRFI

CommentsonCybersecurityFrameworkforCriticalInfrastructure

TheNationalInstituteofStandardsandTechnology(NIST)has postedaninitialanalysisofhundredsofcommentssubmittedbyindustryandthepublicrelatedtothePresident's"ImprovingCriticalInfrastructureCybersecurity"ExecutiveOrder,issuedFeb.12,2013.

NISTismakingthisinitialanalysisavailableasastatusupdateand tohelpprovidebackgroundforaworkshoplaterthismonth todiscussthecybersecurityframework.

TheExecutiveOrdercallsforNISTtoworkwithindustrytodevelopavoluntaryframeworkto reducecybersecurityriskstothenation'scriticalinfrastructure,whichincludespower,water,communicationand othercriticalsystems.

Thefirststep towarddraftingtheframeworkwassolicitinginformationoncurrentrisk managementpolicies,existingstandardsandguidelines,andspecificindustrypracticesfromstakeholdersthroughaRequestforInformation(RFI).

ThesecommentsweredueApril8,2013.NISTreceivedmorethan200responsesandpostedthempublicly.

NIST'sapproachtoanalyzingtheinputfromthe RFI,aswellasidentificationofthecommoncybersecurityframeworkthemesthatemergedasaresultoftheanalysis,isdescribedinthepaper,InitialAnalysisofCybersecurityFrameworkRFIResponses.

In additiontoidentifyinganddescribingthecommonthemes,thispaperprovidesquestionsforstakeholders to consider.

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Thepapercanbefoundat

http://csrc.nist.gov/cyberframework/nist-initial-analysis-of-rfi-responses.pdf

andadditionalinformationaboutthecybersecuritycriticalinfrastructureframeworkprojectisavailableatwww.nist.gov/itl/cyberframework.cfm

Informationonthe2ndCybersecurityFrameworkWorkshop,May29-31,2013,atCarnegieMellonUniversityisatwww.nist.gov/itl/csd/cybersecurity-framework-workshop-may-29-31-2013.cfm

CybersecurityFramework

RecognizingthatthenationalandeconomicsecurityoftheUnitedStatesdependsonthereliablefunctioningofcriticalinfrastructure,thePresidentundertheExecutiveOrder“ImprovingCriticalInfrastructureCybersecurity”hasdirectedNISTtoworkwithstakeholdersto developavoluntaryframeworkforreducingcyberriskstocriticalinfrastructure.

TheFrameworkwillconsistofstandards,guidelines,andbestpracticestopromotetheprotectionofcriticalinfrastructure.

Theprioritized,flexible,repeatable,andcost-effectiveapproachoftheframeworkwillhelpownersandoperatorsofcriticalinfrastructure tomanagecybersecurity-relatedrisk whileprotectingbusinessconfidentiality,individualprivacyandcivilliberties.

Background-NISTResponsibilities

NISTwilldeveloptheFrameworkinamannerthatisconsistentwithitsmissiontopromoteU.S.innovationandindustrialcompetitiveness.

TheFrameworkwillbedevelopedbyongoingengagementwith,andinputfrom,stakeholdersingovernment,industry,andacademia,includinganopenpublicreviewandcommentprocess,workshopsandothermeansofengagement.

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TodeveloptheFramework,NISTwilluseaRequestforInformation(RFI)andongoingstakeholderengagementto:

identifyexistingcybersecuritystandards,guidelines,frameworks,and bestpracticesthatareapplicabletoincreasethesecurityofcriticalinfrastructuresectorsandother interestedentities;

specifyhigh-prioritygapsforwhichneworrevisedstandardsareneeded;and

collaborativelydevelopactionplansbywhichthesegapscanbeaddressed.

TheFrameworkwillseektopromotethewideadoptionofpracticestoincreasecybersecurityacrossallsectorsandindustrytypes.

Itwillseektoprovideownersandoperatorsaflexible,repeatableandcosteffectiverisk-basedapproachtoimplementingsecuritypracticeswhileallowingorganizations toexpressrequirementstomultipleauthoritiesandregulators.

ThebelowpresentationshowstheprocessbywhichNISTwillworkwithstakeholders todeveloptheInitialFramework.

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  • InitialAnalysisofCybersecurityFrameworkRFIResponsesIntroduction

  • OnFebruary26,2013,NISTissuedaRequestforInformation(RFI)onDevelopingaFrameworkToImproveCriticalInfrastructureCybersecurity.

  • Thepurposeofthispaperistodescribethemethodologyusedtoperformtheinitialanalysisofthesubmittedresponses,andtoidentifyand describetheCybersecurityFrameworkthemesthat emergedasapartoftheinitialanalysis.

  • Thisinitialanalysiswillserveasthebasisforadditional discussionandstudyattheCybersecurityFrameworkWorkshop#2tobehostedatCarnegieMellonUniversityinPittsburgh,PennsylvaniaonMay29-31,2013.

  • AnalysisMethodology

  • NISTimplementedaconsistentandrepeatablemethodology to conductitsinitialanalysisoftheRFIresponsestoFederalRegisterNotice78FR13024.

  • a.ReviewandCategorizeRFIResponses

  • EachsubmittedRFIresponse2wasreviewedandanalyzedbyNIST.3ThereviewofeachRFIresponseincluded:

  • Analysisofresponsecoverageacrosscriticalinfrastructuresectorsandorganizationtypes;

  • IdentificationofsectionsoftextrelevanttooneormoreoftheRFIquestions;

  • Categorizationofrelevanttext to category/sub-category,asshowninAppendixA;and

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  • Specificationoftermsandphrasesthatidentifykeypointsineachcategorizedsectionofrelevant text.

  • Theresultingcategorizationwasthenusedtoidentifycommonalitiesandrecurringthemes.

  • b. IdentificationofCommonalitiesandRecurringThemes

  • CommonlyusedtermsandphrasesidentifiedduringtheRFIresponsecategorizationhelpedidentifycommonalitiesandrecurringthemesamongresponses.

  • Due tothevarianceinterminologyandnomenclatureacrosssectors,NISTidentifiedandnormalizedtermsthatexpressedkeypoints.

  • Forexample,thetermssecurityrequirement,securitymeasure,andsecuritycontrolwereoftenusedinterchangeably.

  • Tocorrelatethese terms,NISTselectedthetermsecuritycontrolto labelthisconcept.

  • Theselectedtermallowsforconsistencyinnomenclature.

  • Examplesofcommonlyusedtermsandphrasesinclude,butarenotlimitedto:

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  • NISTusedthecommonlyusedtermsandphrasestogrouprelevant textfromRFIresponses.Thesegroupingsidentifiedrecurringandcommonthemes,whichwerethenseparatedintothree categories:

  • FrameworkPrinciples:CharacteristicsandconsiderationstheFrameworkmustencompass.

  • CommonPoints:Practicesidentifiedashavingwideutilityandadoption.

  • InitialGaps:ForthepurposesofRFIinputanalysis, initialgapsarethoseareaswhereRFIresponseswerenotsufficienttomeetthegoaloftheExecutiveOrder.

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TheresultsoftheinitialanalysisofRFIresponses,includingthedescriptionofeachCybersecurityFrameworktheme,identificationofassociatedkeytermsandphrases,summarystatistics,examplesofRFIresponses,andrepresentativequestionsare includedinthefollowingsections.

Thisinformationrepresentsaninitial,high-levelanalysisoftheinputsNISThasreceivedtoassistwiththedevelopmentoftheFramework.StakeholdersareaskedtoevaluatethethemesidentifiedbyNIST,determineifthesethemesarereflectiveofthecommentsreceived

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throughtheRFI,andassistinthoseareaswhereadditionalstakeholderengagementwillbeneeded todevelopasufficientlyrobustFramework.

Toassist,NISThasprovidedaseriesofrepresentativequestionstoencouragediscussiononthesekeythemes.

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OpeningRemarksatSECRoundtableonCreditRatings

ByChairmanMaryJoWhite

U.S. SecuritiesandExchangeCommission,Washington,D.C.

Goodmorningeveryone,andwelcometotheSecuritiesandExchangeCommission'sCreditRatingsRoundtable,whichIhavebeenverymuchlookingforwardtoandwhichwilladdressarangeofcriticalsubjects.

Iwouldlike first to extendaspecialwelcometoourdistinguishedMembersofCongresshere today:SenatorFranken,SenatorWicker,andChairmanGarrett.

Thankyoufortakingtimefromyourhecticschedulestospeaktoustoday.

Thankyoualsoinadvancetoourdistinguishedpanelistsforcontributingyourtimeandknowledgetothisroundtable.

Therearemanyquestionsabouttheappropriateroleofcreditratingsinourfinancialmarketplacegenerally.

Wetakeallthequestionsseriously.

Buttoday,ourdiscussionswillcenteronwhetherandhow tochangetheagencyassignmentsystemandalternativestothecompensationmodelsnow inuse.

WhenCongressenactedtheDodd-FrankAct,itnotedthecritical"gatekeeper"roleplayedinthedebtmarketbyNationally RecognizedStatisticalRatingOrganizations(NRSROs).

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Italsonotedthesystemicimportanceofcreditratingsandthatcreditratingagenciesarecentralto capitalformation, investorconfidence,andtheefficientperformanceoftheU.S.economy.

Congressalso citedtheadverseimpactontheeconomyofinaccurateratingsassignedtostructuredfinanceproductsduringthefinancialcrisis.

Anditnotedthatincertain activities—particularlyadvisingarrangersofstructuredfinancialproductsonpotentialratings—ratingagenciesfaceconflictsofinterestthatneed toberecognizedandcarefullymonitored.

Asaresult,theCommissionwaschargedwithstudyingthecreditratingprocessforstructuredproductsandtheconflictsofinterestassociatedwiththeissuerpayandsubscriberpayratingagencymodels.

WealsowereinstructedtoexaminethefeasibilityofestablishinganassignedratingssystemandalternatemeanstocompensateNRSROs.

Whenreportingto Congress,wewererequiredtosubmitrecommendationsforregulatoryorstatutory changesthatwouldbeneeded to implementourfindings.

TheCommissionrequestedpubliccommentand,inpreparingthereport,theCommission'sstaffcarefullyreviewedeachofthecommentlettersreceivedaswellasstudies,articles,andtestimonyregardingpotentialconflictsofinterestandalternatecompensationmodels.

WealsometwithseveralNRSROs,proponentsofalternativemodels,andothermarketparticipants.

Relyingontheinformationgatheredfromtheseefforts,thestaffreportdescribedpotentialbenefitsandconcernswiththesystemsproposed,andidentifiedpotentialregulatoryorstatutorychangesthatcouldbeundertakenwithrespect to eachproposal.

ThestaffreportwasfiledwithCongressinDecember2012.

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Giventhecomplexissuesthestudybrought to ourattentionandthevaryingandsometimesconflictingviewpointsexpressed,theCommission'sstaffrecommendedconveningaroundtablededicated tothesetopicsduringwhichallsidescoulddiscusstheissuesandthepotentialactionsthestudyaddressed.

Todayisthedayforthatdiscussion.

AsIsaid,Iamverymuchlookingforward to hearingtheexchangeofideasbytoday'sspeakersandpanelists,andusingwhatwelearntodayasweconsiderapproachesandappropriateresponses.

BeforeIturnthefloorbacktoTomButler(directoroftheSEC'sOfficeofCreditRatings),Iwouldlike tothankhimandallofthestafffromacrosstheCommissionwhoprovidedhelpandassistanceinorganizingthisroundtable.

Itwastheirtirelesseffortandcoordinatedactivitiesthatmadetoday'sextremelyimpressiveassemblageofspeakersandpanelistspossible.

Thankyouall.

InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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AddressingConflictsofInterestIntheCreditRatings Industry

By Commissioner LuisA.Aguilar

U.S. SecuritiesandExchangeCommissionRemarksattheCreditRatings RoundtableWashington,D.C.

Goodmorning.IamverypleasedtobehereattheRoundtableonCreditRatings.

IstronglysupporttheCommission’sefforttoevaluatewaystoimproveourcreditratingssystem.

EffectiveoversightofNationallyRecognizedStatisticalRatingOrganizations(“NRSROs”)iscriticaltoensuringaccurateratingsand promoting investorconfidence.

BeforeIbegin,however,letmeissuethestandarddisclaimerthattheviewsIexpresstodayaremyown,anddonotnecessarilyreflecttheviewsoftheU.S.SecuritiesandExchangeCommission(“SEC”or “Commission”),myfellowCommissioners,ormembersofthestaff.

AsanSECCommissioner,IhavefocusedsingularlyonhowtheSECcan bestservetheneedsofinvestors.

Itisclearthattheroleplayedbycreditratingagenciescanhaveanimpactontheintegrityofourmarketsandinvestorconfidence.

Today’sroundtableandtheCommission’sDecember2012ReporttoCongressonAssignedCreditRatingsaredirectoutgrowthsofindustrypracticesthatpermittedinaccurateratings to underminethesecuritiesmarketandtheintegrityofthecreditratingsindustry.

Anumberofstudieshaveconcludedthatinflatedcreditratings,amongotherfactors,contributed to thefinancialcrisisbymaskingthetrueriskofmanymortgage-relatedsecurities.

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Forexample,priortothefinancialcrisis,NRSROsissuedcreditratingsfortensofthousandsofU.S residentialmortgagebackedsecurities(“RMBS”)andcollateralizeddebtobligations(“CDO”).

AmajorityoftheproductsreceivedAAAandother investment-gradecreditratingsdespitetheirriskyfeatures.

AlthoughAAA-ratedsecuritieshavehistoricallyhadlessthan1%probabilityof incurringdefaults,over90%oftheAAAratingsgiven tosubprimeRMBSsecuritiesthatoriginatedin 2006and2007werelaterdowngradedbytheNRSROstojunkstatus.

Theselargenumbersofdowngradesresultedin greatharmandrequiresthatwemakesuretheydon’treflectafaultysystemicprocess.

Toothatend,oneofthekeyconcernsraisedbycommentatorsregardingthecurrentstructureofthecreditratingsprocessistheissueofconflictsofinterestassociatedwiththe“issuer-pays”model.

ThismodelallowsthepartyplanningonissuingafinancialinstrumenttopayanNRSROforassigningtherating.

Anumberofcommentatorshavearguedthatthisbusinessmodelencouragesratingsshoppingbytheissuersandinvestmentbankssellingthesecurities,andresultsinunduepressureforNRSROstogivefavorableratingstoattractbusiness.

Investorsusecreditratingstomakeinvestmentdecisions,generallyoptingfor“investment-grade”products– thoseratedasAAAtoBBB-

Productsthatcarryagreaterriskarelabeled“belowinvestmentgrade.”

Obviously,productsthatreceiveaninvestmentgraderatinghaveamuchbroadermarketinwhich to sell.

Asaresult,therecanbeagreatdealofincentivetohaveaproductratedatinvestmentgradelevel.

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Therefore,itisimportant to establishprocessestoensurethataproductreceivetheappropriateratinglevel.

Afaultysystemofassigningcreditratingscandevastatethebestfinancial planninganddestroyfinancialsecurity,particularlyfor investorsthatareretiredornearingretirement.

Giventheimportanceofcreditratings,itiscriticalthatcreditratingsbeissuedwithintegrityandtransparency.

Itisclearthatthepastcannotberepeated.ThefinancialcrisiscostAmericans$3.4trillionin retirementsavingsandittriggeredtheworstcrisissincetheGreatDepression.

The FinancialCrisisInquiryCommitteeconcludedthat“thefailuresofthecreditratingagencieswereessentialcogsinthewheeloffinancialdestruction…[and]werekeyenablersofthefinancialmeltdown.”

Iwanttothankallofthepanelistsforbeingheretoday toshareyourviews.

Allofyouhaveimportantinformationtosharewithusaboutthecreditratingssystem,andIappreciatethatyou’vetakenthetimetobewithus.

Astoday’sdiscussionunfolds,weshouldremembertheneedsofinvestors,whodeserveacreditratingssystemthatistransparent,orderly,andthatisnotderailedbyconflictsofinterest.

Thankyou.

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Raisingthebarforthenext phaseofgrowthanddevelopment–sustainingtransformativemomentum

WelcomingaddressbyDrZetiAkhtarAziz,GovernoroftheCentralBankofMalaysia,atthe10thIFSB(IslamicFinancialServicesBoard)Summit2013“ThefutureoftheIslamicfinancial servicesindustry– resilience,stabilityandinclusivegrowth”,SasanaKijang,KualaLumpur.

Itisagreatpleasureto welcomeyou tothis10thIFSBSummit,onthe“The FutureoftheIslamicFinancialServicesIndustry:Resilience,StabilityandInclusiveGrowth”.

BankNegaraMalaysiaismosthonoredtohostthisyear’ssummit,whichisheldin conjunctionwiththe10thanniversaryoftheIslamic FinancialServicesBoard(IFSB).

Itwasherein KualaLumpur10yearsagothatwewitnessedthemomentousoccasionoftheIFSBinauguration,thatwastheculminationofinternationalcollaborationamongthefoundingmembercountrieswiththesupportofseveralkeyinternationaland multilateralinstitutions.

Itslandmarkestablishmentin2002astheinternationalprudentialstandardsettingbodyfortheIslamicfinancemarkedamajormilestoneintheeffort to strengthentheinternationalinfrastructurefortheIslamicfinancialsystem,steeringthepathforitssuccessfulintegrationasaviablecomponentoftheglobalfinancialsystem.

Adecadeon,theworkoftheIFSBinensuringacohesivecross-borderregulatoryframeworkandtheinternationalbestpracticesthatareattunedtotheintrinsiccharacteristicsandpeculiaritiesofIslamicfinancialintermediation,haveserved tounderpinthedevelopmentofasoundand

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stableIslamicfinancialsystem,usheringinaphaseofrapidgrowthandgreater internationalizationoftheindustry.

Indeed,10yearssincethefoundingoftheIFSBhavebeenaperiodofsignificance,duringwhichtheIslamicfinancialservicesindustryhasgrownimpressivelywithitslandscapedramaticallyevolved.

Thisgrowth accelerationhasbeen accompaniedbythewideningofitsgeographicalreachtranscendingitstraditionalbordersinMuslimmajoritycountriestothemoreestablishedfinancialcentres.

In addition,Islamicfinancehasevolvedasacomprehensivesystemofintermediationservicingallsegmentsofsociety,includinggovernments,businessesandhouseholdsregardlessofscaleofbusinessesandincomelevels.

In thisdecade,Islamicfinancehasalsoevolvedfrombeingdomestic-centrictobecomeincreasinglyinternationalized,

intermediatingfundsacrossbordersandbecominganewvehiclethatbridgeseconomiesandfosteringcloserfinanciallinkages,particularlyamongemerginganddevelopingmarkets.

Asaformoffinancialintermediationthatiswellanchoredtoservetherealeconomy,Islamicfinanceoffersdistinctpotentialtoachievethegoalsofinclusivegrowthandfinancialstability.

ItsfoundationshavebeenstrengthenedwiththesettingupoftheIFSBandbeforethat,theAccountingandAuditingOrganisationforIslamicFinancialInstitutions(AAOIFI),havetakentheleadin settingtheprudentialand accountingstandardsfortheindustry.

Combinedwithcontinuous capacitybuildinginitiativesandinstitutionaldevelopment,ithasresultedintheopportunity to achievescaleandhasallowedtheIslamicfinancialservicesindustrytotransitionintoadynamic,fastgrowingandcompetitiveformoffinancialintermediationfortheglobalcommunity.

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TheIFSBtodayiscelebratingits tenthanniversary inaworldwhichischangingprofoundly.

Anewgrowthanddevelopmentagendaisunfoldingbeforeus.

Giventheseveredamageanddevastation causedbytheglobalfinancialcrisisandtheensuingeconomicdownturns,theroadtoanenduringrecoveryandlastingprosperitydemandsaglobal policy responsethatbringsaboutaneweconomictrajectorybuiltonastrong,moreinclusiveandmoresustainablegrowthpath.

Commonchallengesthathavealsocometo theforefront,suchaspoverty,increasinginequalityandtheimperativeforgreatersocialcohesion,havealsocalledfortheconstructionofpolicy objectivesandstrategiesthat canenhancestability,socialwellbeingandenvironmentalsustainability.

In thewakeoftheglobalfinancialcrisis,thereisconsensusontheneedforareturntofinancialsystemsthatservetherealeconomy,andthedemandsformoreresponsiblefinancialpracticesfromthefinancialsector,thatalsoincludesthecommitmentto achievesocio-economicgoals.

Inresponse,theinternationalcommunityisprioritizingfinancialstabilitybystrengtheningfinancialregulation.

Thisincludesfinancialreformsaimedatprotectingdepositorsfromexcessiverisk-taking,over-leveragingandunfetteredinnovation.

Thereforminitiativeshavealsofocusedonenhancingcapitalandliquiditystandards,reinforcedbymovestostrengthenthe

macro-prudentialorientationofregulation to complement

micro-prudentialsupervision tomanagetherisksarisingfromtheinterdependencieswithinthefinancialsystem.

Whilstthebreadthofregulatorychangesbeingconsideredcollectivelyendeavortostrengthenfinancialsystemresilience,thekeychallengefor

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policymakersandregulatorsgoingforwardisalsotoachieveinclusiveandmoresustainablegrowth,whilstensuringfinancialstability.

WhilstIslamicfinancehasbenefitedfromawell-developed,morecompetitiveandwellregulatedeco-system,itneeds tobuildonandreinforcethesolidfoundationsthathasbeen achievedinthisdecade.

Astheindustrytransitionsintoaneweraofgrowthanddevelopmentinthispost-crisisworld,thecompetitivefinanciallandscapeisbeingredrawnbytheevolving internationalregulatoryreforms,changingoperatingmodels,risingconsumerexpectationsandincreasedcompetition.

In thismorechallengingenvironment,thesuccessofsustainingthemomentumofIslamicfinanceasatransformativeagentfortheeconomy,willhingeontheability to keepraisingthebarinthepursuitofaneffectivefunctioningandsoundIslamicfinancialsystem.

Post-crisis,theincreasedemphasisforinclusiveandsustainableproductsaswellasresponsiblecorporatebehaviorprovidesclearpotentialforIslamicfinancialplayers todemonstrateleadershipby capitalizingoncorevaluepropositionsofIslamicfinancialintermediation.

Thereisalsoscopeforgreaterleverageontheadvancesoftechnologyand newinstitutionalarrangementsthatcanenhanceoperationalexcellence,particularly distributionchannelsforextendingoutreachtotherangeof usersfromhouseholds tomicroenterprisesandsmallandmediumscaleenterprises.

In addition,innovationsinIslamicfinancialsolutionswillneedtotakeintoaccountthehigherregulatoryexpectationsformoretransparency,andtheneedfortheeffectivemanagementofrisksand capital.

ThisinvolvesstrengtheningtheresilienceoftheIslamicfinancialsystemin alignmentwiththeevolvinginternationalregulatorydevelopmentsthusraisingthebarof industryperformance.

TheIFSBhasmadesignificantadvancementsinleadingtheefforts to

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reviewspecificmeasuresputforwardbytheBaselCommitteeforpossibleadoptioninIslamicfinance.

Furthertothisistheimperative tocultivateastrongrisk culturewithininstitutions.

Reinforcedbyarobustshariahgovernanceframework,itwillensurethatinnovationforfurtheringthedevelopmentofIslamicfinanceisharnessedwithintheboundariesoftheShariah,whichwouldavertoverzealousinnovative activitiesthatcouldunderminefinancialstability.

Letmeconcludemyremarks.

Muchhasbeenachieved,bothintermsoftheroleandcontributionoftheIFSB,andtheadvancementmadebyIslamicfinanceinthisrecentdecade.

Thishasbeenanoutcomeofcumulativeefforts to strengthenthefoundationsoftheIslamicfinancialsystem.

Astheindustrygearsitselfforthenextphaseofgrowthinthemorechallengingenvironment,ourcommitmentandstrategies tokeepraisingthebartobringIslamicfinancetoanewlevelwillenhanceitsprospecttocontribute to achievingoursharedvisionofinclusivegrowthin anenvironmentoffinancialstability.

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ChangesintheLargeExposureRegime

CONSULTATIONPAPERGUERNSEY FINANCIALSERVICESCOMMISSION

1:Executive Summary

1.1Overview

ThispapercontainsfulldetailsoftheproposalstosubstantiallyaltertheLargeExposureprinciplesandguidancethatapply to licenseddeposittakersthatareincorporatedinGuernsey.

Itisproposedthatthenewregimewouldtakeeffectfrom1January2014.

TheseproposalsincludechangestoenhancethequarterlyprudentialreportingtotheCommissionandthiswouldaffectnotonlylicensed deposittakersincorporatedintheBailiwick,butalsothoselicenseddeposittakerswhoseprincipal place ofbusinessisoutsidetheBailiwick.

ThecontextforthereviewisthattheexistingPrinciple1/1994/24“PrinciplesandGuidancetobefollowedbyalocallyincorporatedlicenseddeposittakinginstitutionenteringintoalargeexposure”paperpublishedbytheCommissionin1994nolongeradequatelyaddressestherisksassociatedwithlargeexposures,particularlythosearisingfromthesystemicandmarketrisksthatbecameevidentasaresultofthe2007/2008financialcrisis.

In respectoflargeexposures,theCommissionhas tendedtobea“pragmatic”supervisorratherthanarigidstandardbasedsupervisor,and,ithas fromtime to timeallowedsuitablycollateralisedlargeexposuresinexcessof25%ofnetcapitalbase.

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  • GiventhatanychangetoamorerestrictiveapproachmayhaveabusinessimpactonlicenseestheCommissionfeelsthatitisappropriatetoseektheviewsofindustry.

  • TheCommissionisproposingto retainseveralelementsofitspragmaticapproachandin seekingtheviewsofindustryitwillbeopen tobilateraldiscussionswithlicenseesaboutparticulartypesofexposures.

    • Whatisproposed?

  • Thesubstantivechangesbeingproposedinupdatedguidanceareasfollows:

    • Exposurestocentralgovernmentsandmarketloansoflessthan12months’maturity,whichareexemptfromthecurrentlargeexposureregime,willbedeemedtobelargeexposuresunderthenewregime.

    • Thecurrentupstreamingregimewillchange to expressagreed exposurelimitstoparent/groupbanksasaproportion(i.e.%)ofcapital baseratherthanaproportionofassets.Theupstreamingregimewillincludeonbalancesheetandoffbalancesheetexposures.

    • Exposurestothirdpartybankswillnormallybelimitedtoamaximumof100%ofnet capitalbaseandwillcomprisecashplacements,holdingofdebtinstrumentsandoffbalancesheetexposures.Themaximumproportion(%)ofexposurewillbedeterminedaccordingtotheratingofthethirdpartybank,althoughlimitedflexibilitywillbepermittedinthe caseofexceptionalshort-termexcesses.

    • In relation to exposures to sovereigns,theconceptofZoneAandZoneBcountrieswillbereplacedwithtwo differentOECD-basedgroupings -HighIncomeOECDcountriesandothercountries.

  • Exposureswillbe cappedatamaximumof1000%ofnetcapitalbaseandwillbedeterminedaccordingto theratingofthesovereign.

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    • Exposurestoclientsorgroupsofconnectedclientswillbecappedatamaximumof25%ofnetcapitalbase,unlesstheexposureissecured bycashand/orHighIncomeOECDgovernmentsecurities,ortheexposureissubjecttoaparentalguarantee(whichinitselfwouldneedtobeincludedinanyupstreaminglimit).

    • Sub-participationagreementsthattransfercreditrisk offthebalancesheetoftheGuernseybankwillalsobeconsidered.

    • Betterdefinitionofwhatconstitutes“connectedclients”willbeprovided.

    • Theprudentialreportingformswillbechangedtobettercapturelargeexposuresthathavenotpreviouslybeenreported;e.g. holdingsofdebtthatequatetomorethan10%ofabank’snet capitalbase.

    • In accordancewithexpectedinternationaldevelopments,theCommissionalsoproposesto capture thetoptwenty,ratherthanthecurrent topten,largestexposures.

    • Brancheswillbeaskedto reportsimilardetails,butintermsoftheirparentalcapital,sothatdataonanysignificantcreditconcentrationrisk inabranchin Guernseythatmayimpactonaheadofficeelsewherecanbecollected.

    • Breachesoflargeexposurelimitswillbeareportableevent.TheCommissionisproposingastagedapproachtodealingwithexposuresthat cannotberegularised.

    • The800%aggregatelimitonexposureswouldberetained,butexposurestoGroup,to thirdpartybanksandtosovereignswouldbeexcludedfromthisaggregate.

    • Largeexposuresexistingpriortotheintendedeffectivedateforthenewregimeof1January2014wouldbegrandfatheredin.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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    1.3Rationaleforchange

    Thelargeexposureregimeisallaboutcapturingconcentrationriskanditiscoveredbys24ofTheBankingSupervision(Bailiwick ofGuernsey)Law,1994.

    Conventionalwisdom,asdictatedbytheCapitalRequirementsDirectiveandtheBaselCorePrinciplesforEffectiveBankingSupervision,statesthatnoexposuretoaclientorconnectedgroupofclientsshouldequatetomorethan25%ofnet capital.

    Shortterminterbankexposureshavehistoricallybeenexemptfromthisrequirement.

    Ourcurrentenvironmentreflectstheseexemptionsandalsopermitsexposurestoclientstoexceedthe25%limit.

    Whilstpureconcentrationrisk to singleobligorcounterpartieswasnotseenasamajordirectcontributortothe2008financialcrisis,nonethelesselementsofconcentrationrisk wereseenasindirectcontributors.

    Interconnectednesswithinandbetweengroupswereseenasmagnifiersofsomeexposuresandconcentrationsthroughsectoralexposurestoparticulareconomicsectors(e.g.theIrishpropertydevelopmentsector)affectedcreditassessmentsofmanyorganisations.

    Thatsaid,theguidanceonlargeexposuresremainshistoricinnature;theBaselCommitteeguidanceonmeasuringandcontrollinglargeexposuresdatesback to 1991,andourownlocalregimehasnotbeensignificantlyupdatedsince1994.

    However,therehavebeensubstantialchangestotheEUlargeexposureregime.

    Thesesubstantialchangeshavetheiroriginin late2007andearly2008,whentheCommitteeofEuropeanBankingSupervisors(CEBS),which hassincebecometheEuropeanBankingAuthority,reportedtothe

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    EuropeanCommissionontheeffectivenessofthelargeexposureprovisionsoftheCapitalRequirementsDirective.

    Thereportconcludedthatmarketfailuresassociatedwithsystemicriskandmoralhazardappliedtointerbankexposuresregardlessofmaturity.

    Accordingly,thelargeexposureregimeforEUmemberstateswasrevisedwitheffectfromDecember2010totightenlargeexposurelimits,particularlyin relation to interbankandintra-grouplending,whichtheEuropeanCommissionagreedwasamajorsystemicrisk inthewakeofthefinancialcrisis.

    UndertherevisedEUregime,shorttermloanstobanks arenolongerexemptandwhilstlimitednationaldiscretionisavailabletomemberstatesinrelation tointra-grouplending,loanstothirdpartybanks arenow cappedat25%ofnetcapital,unlessthelendingbankisverysmall.

    In reality,bythetimethechangestotheEUregimecamealong,marketpracticehadalreadychangedtoreflectthismorecautiousapproach tointerbanklending.

    ItisworthnotingthattheCEBSconclusionswerealsoreflectedintheUKGovernment’sresponsetothereportonbankingreformbytheIndependentCommissiononBanking(“theVickersReport”).

    TheHMTreasurywhitepaper“BankingReform– deliveringstabilityandsupportingastableeconomy”publishedinJune2012envisagesthelimitingofaring-fencedbank’sexposuretofinancialinstitutionsinordertopreventsystemicshocks.

    ClearlyGuernseyisnotintheEU,butneverthelesswewouldnotwishtobeacompleteoutlierinrespectoflargeexposures.

    TheBaselCorePrinciplesforEffectiveBankingSupervisiondogivethesupervisorsomelatitudeinpermitting“minordeviations”fromthe25%limit,buttheeconomicclimatethathasprevailedforallbutthelastfewyearscombinedwiththeCommission’swishtobeapragmaticregulator hasmeantthatthese“minordeviations”havebeenpermittedmore

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    frequentlyinthepastthanisarguablynowprudentinthecurrenteconomicandregulatoryclimate.

    Theguidancehowever,remainsthesameandachangeisneeded tomanageexpectationsandformaliseaprudentapproach.

    IndevelopingproposalsforanewlargeexposureregimetheCommissionhashadregardtoanumberofotherregimes,includingthoseoperatingintheUKandthe otherCrownDependencies.

    Noneoftheseareagoodfitintheirentiretyforthetypeofbankingbusinessdonein andfromwithintheBailiwick.

    TheCommissionhasthereforetriedtobalancetherequirementsofotherregimesagainstthetypeofbankingbusinessthatexistsintheBailiwick,recognisingalsotheintra-groupfundingthatmanylicenseesprovide.

    1.4Whowouldbeaffected?

    LicenseddeposittakersthatareincorporatedinGuernseywouldbethoseprincipallyaffected,giventhatlimitsonexposuresarebeingproposedinrelationto capital.

    However,theproposedrevisions tothelargeexposureregimeincludeenhancedquarterlyprudentialreportingforalllicenseesandbrancheswouldthereforebeaffectedbythesechangestotheBSL/2reports.

    TheCommission

    TheGuernseyFinancialServicesCommissionistheregulatorybodyforthefinancesectorintheBailiwickofGuernsey.TheCommission’sprimaryobjectiveistoregulateandsupervisefinancialservicesinGuernsey,withintegrityandefficiency,andinsodoing helptoupholdtheinternationalreputationofGuernseyasafinancecentre.

    Tolearnmore:http://www.gfsc.gg/Banking/News/Documents/Consultation%20paper%20for%20Commission%20website.pdf

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    GovernorSarahBloomRaskin

    AttheSocietyofGovernmentEconomistsandtheNationalEconomistsClub,Washington,D.C.

    ProspectsforaStrongerRecovery

    Thankyou.

    Iamverypleased tobehere amonganaudienceof professionaleconomists,whichiscertainlypreferabletoappearingbeforeanaudienceofunprofessionaleconomists.

    Ilike yourkind!Yourtalentsareneedednowmorethaneveraswetrytoputthe toolsoftheeconomicprofessiontoworkforthecommongood.

    It'seasy tobeaneconomistwholooksbackoncrisesandcrashesandtriestoexplainwhytheyhappened,butmuchhardertobeaneconomistwhoseeffortsmanagetohelpstopthemfromhappeninginthefirstplace.

    Economicpolicymaking,atitsbest,reflectsacontinuousstruggle tomakesurethatdataandexplanationsofsuchdataareconsistentwithrealexperience.

    Ifwe'reto engageinthisstrugglehonestly,it'snoeasytask.Itinvolvesunderstandingnotjustthereliabilityandsignalinvariousdata,butalsoquestioningwhetherthedataaccordswithourunderstandingofactualexperience.

    So,to getthisrightrequiresmanydifferentperspectives,notjustonthedatabutontheunderlyingrealitiesthedataaretryingto capture.

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    Governmenteconomistsunderstandthatnon-economistsbringsomethingvaluabletothetableinpolicymaking--agroundedperspectiveinwhatishappening in theeconomy.

    Withthatsaid,whatisreallyhappening now intheAmericaneconomy?

    WhatdotheeconomicdataweseeattheFederalReservecurrentlyshow,andhowdowethinkthesedatalineupwiththeeconomicrealitiesofmostAmericanhouseholdsandbusinesses?

    In myremarkstodayIwilloffermyassessmentofrecenteconomicdevelopmentsandtheeconomicoutlook,andIwilldiscusstheactionsthattheFederalReservehasbeentaking,inlightofitsviewof developmentsandtheoutlook,tosupport theeconomicrecovery.

    BeforeIbegin,IshouldnotethattheviewsthatIwillbepresentingaremy ownandnotnecessarilythoseofmycolleaguesontheFederalOpenMarketCommittee(FOMC)ortheBoardofGovernors.

    RecentEconomicand FinancialDevelopments

    ForthepastthreeandahalfyearstheU.S.economyhasbeenin arecovery--albeitaveryweakone--fromaseverefinancialcrisisandthedeepestrecessionofthepost-WorldWarIIperiod.

    Theunemploymentrate,whichreachedahighof10percentinthefallof2009,hassincecomedown2-1/2percentagepoints,to7.5percentinApril.

    Theincreaseineconomic activityandthedeclineintheunemploymentrateare,ofcourse,welcome,butwestillhavealongwaytogo to reachwhatfeelslike ahealthyeconomy.

    In fact,thepaceofrecoveryhasbeenslowerthanmosthadexpected.

    Thegapbetween actualoutputandtheeconomy'spotentialremainsquitelarge,accordingtoestimatesfromtheCongressionalBudgetOffice,andtheunemploymentrate todayremainswellabovelevelsseenpriorto

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    therecession,andwellabovethelevelthattheCommitteethinks canbesustainedonceafullrecoveryhasbeenachieved.

    Inaddition,thenumberoflong-termunemployed--peoplewhohavebeen unemployedfor27weeks ormore--remainshistoricallyhigh.

    My interpretationoftheeconomicdatathatwehavereceivedoverthepastfewquartersisthattherecoveryhascontinued to gaintraction.

    TheBureauofEconomicAnalysisreportedlastmonththatrealgrossdomesticproduct(GDP)roseatanannualrateof2-1/2percentinthefirstquarterofthisyearafterbarelyexpandingatall in thefourthquarterof2012.

    Thestep-upingrowthinthefirstquarterpartlyreflectedareboundfromlastyear'sdroughtandHurricaneSandy.

    Smoothingthroughthesefactors,realGDP wasabout1-3/4percentaboveitsyear-earlierlevelinthefirstquarter,amodestgainthatis aboutinlinewiththepaceofgrowthduringmuchoftherecovery.

    Thestrengthoftherecovery amongthecomponentsofGDPhas beenmixedrecently.

    In termsofthehousingsector,thereisnoquestionthatmanycommunitiesandneighborhoodsweredevastatedbytheeffectsofthefinancialcrisis.

    Recently,weseethatoveralldemandhasbeenstrengthening,withboth homesalesandpricesrisingmarkedlyinmanyareas.

    Bothnewandexistinghomesaleshavemovedup,onnet,sincelate2011,andhousingstartsaveragedanannualrateofnearly1millionunitsinthefirstquarterofthisyear,upconsiderablyfromtheextremelylow levelsthatprevailedthrough2011.

    Inventoriesofnewhomesforsalehavebecomequitelean inmost

    marketsoverthepastyear,anotablechangefromearlierintherecovery.

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    Theincreasein activityinthehousingsectorhasbeendrivenbyhistoricallylow mortgagerates,growingoptimismaboutfuturehouseprices,continuedgainsinthejobmarket,andsizablepurchasesofhomesbyinvestors.

    Elsewhereinthehouseholdsector,consumerspending--about

    two-thirdsofoverallfinaldemand--hascontinuedgrowingatamoderatepace.

    Onthewhole,familieshavebenefitedfromthemodestimprovementinthelabormarket,andrisingstock pricesandreboundinghomevalueshavehelpedsomehouseholdsrecouppartofthewealththeylostduringtherecession.

    However,overallwagegrowthhasbeenanemic,andmanyhouseholdshavenotseentheircircumstancesimprovematerially.

    AsIdescribedinaspeechlastmonth,globalizationand technologicalchangehavecontinuedtoshifttheoccupationsandindustrialdistributionofnewjobsavailable.

    Thesecurrentsofglobalizationand technologicalchangecontinueontheirpath,makingitmorelikelythatworkerswhowerelaidoffduringtherecessionwouldbeunable to findreemploymentthatisofcomparablequality totheirpreviousjobs.

    Abouttwo-thirdsofalljoblossesintherecessionwereinmiddle-wageoccupations--suchasmanufacturing,skilledconstruction,andofficeadministrationjobs--buttheseoccupationshaveaccountedforlessthanone-fourthofthejobgrowthduringtherecovery.

    Bycontrast,lower-wageoccupations,suchasretailsales,foodservice,andotherlower-payingservicejobs,accountedforonlyone-fifthofjoblossesduringtherecessionbutmorethanone-halfoftotaljobgainsduringtherecovery.

    Asaresultofthesetrends in jobcreation,whichcouldwellhavebeenexacerbatedbytheseverenatureofthecrisis,theearningspotentialfor

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    manyhouseholdslikelyremainsbelowwhattheyhadanticipatedintheyearsbeforetherecession.

    Moreover,asyouallknow,thetemporarypayrolltaxcuthasnowexpired,andmanyhouseholdshaveseentheirdisposableincomesreducedforthisreasonaswell.

    Spendinginthebusinesssectorrecentlyhasincreasedonlymodestly,perhapsdueinparttotheeffectoftheserecenttaxchangesonconsumers.

    Realspendingonequipmentandsoftwareroseabout4percentoverthepast12months,accordingtothemostrecentGDP report,amodestgainforthiscategoryofspending.

    Indicatorsforcapitalinvestmentinthemonthsahead,includingnewordersfordurablecapitalgoodsandsurveymeasuresofbusinesssentiment,suggestthatgrowthinbusinessspendingonnewequipmentandsoftwareislikely to remainmodestinthecomingquarters.

    Turningtothegovernmentsector,thelegislatedreductioninspendingbythefederalgovernmentisexertingaclearandcontinuingdragoneconomicactivity.

    Evenpriortothebulkofthespendingcutsassociatedwithsequestration,realpurchasesbythefederalgovernmentwerereportedtohavedroppedatanannualrateofmorethan8percentinthefirstquarterofthisyear,followinganevenlargerdropinthefourthquarteroflastyear.

    Thesecutsin federalspendingarelikelytobeanimportantinfluenceonthenear-termprospectsforeconomicgrowth,andIwillsaymoreabout thisissueinamoment.

    In contrasttothefederalgovernment,thebudgetoutlookforstateandlocalgovernmentcontinuestoimprove,andthedragoneconomicactivityfromthissector'scutbacksinspendinghasdiminishedconsiderably.

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    Reflectingsomeofthesemixedinfluences,asIalreadynoted,realGDPhasbeenrisingataverymodestrate,andthelabormarkethasshownsimilarlymodestgainsoverthepastyear,withtheunemploymentratecomingdownabout1/2percentagepoint.

    Tomorefullyunderstandtheexperienceofthe11.7millionAmericanswho can'tfindwork,welook to broadermeasuresoflaborunderutilization,whichtakeinto accountjobseekerswhohavestoppedlookingforworkbecausetheyhavebecomediscouraged,andpeopleworkingparttimebutwhowouldprefertoworkfulltime.

    Recently,thesenumbersseemtobecomingdown.

    Thegainsinpayrollemploymentoverthisperiodhavebeenaboutinlinewiththedeclineintheunemploymentrate,although,asistypical,thepaceofjobgainshasbeensomewhaterraticinrecentmonths.

    Sincethebeginningoftheyear,theincreasesinpayrollemploymenthaveaveraged196,000permonth,alittle abovethe183,000averagemonthlygainsobservedduring2012.

    Other indicatorsfromthelabormarkethavealsoshownsomeimprovementrecently.Initialclaimsforunemploymentinsurancehavedeclinedsincelastsummer,andthenumberofjobopeningsappearstobeincreasing.

    IhopetheseindicatorsmeanweareturningthecorneronsomeofthepainfulcostsassociatedwithbeingunemployedorunderemployedinAmerica.

    Turningtoinflation,recentdatashowthatpricepressureshaveremainedsubdued.Bothtotalandcoreinflationwereonlyabout1percentoverthe12monthsending inMarch,belowtheFOMC'slong-runobjectiveof2percent.

    Inflationisbeingrestrainedbythecontinuedslackinlaborandproductmarkets,whilestableinflationexpectationshaveoffsetdisinflationarypressures to someextent.

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    Moreover,theincreaseingasolinepricesthatwesawearlierintheyearappears tohavefullyreversed,andthepathofoilfuturespricesisdownward-sloping,suggestingthatenergypricesarelikelytoholddown headlineinflationratesintheyears ahead.

    TheEconomicOutlook

    Letmenow turn totheoutlook.

    AsmyFederalReservecolleaguesandIhavenotedinthepast,thepaceoftheeconomicrecoveryhasbeenrestrainedbylingeringeffectsofthefinancialcrisis.

    Assessingthecurrentstrengthoftheheadwindsrelatedtotheselingeringeffectsisanimportantdeterminantoftheeconomicoutlookforthecomingyears.

    Unfortunately,currentfederalfiscalpolicy isoneheadwindtotherecoverythathasintensifiedthisyear.

    In fact,federalfiscalpolicyhasbeentighteningsince2011,afterhavingbeenquiteexpansionaryduringtherecessionandearlyintherecovery.

    Morerecently,actionsbytheAdministrationandtheCongresstoreducethebudgetdeficithaveledtofurthertighteningoffederalfiscal policy.

    AsIalreadymentioned,boththetaxlegislationsignedintolawinJanuaryandthesharpspendingcutsassociatedwithsequestrationwilllikelysignificantlyhinderGDP growththisyear.

    Indeed,theCongressionalBudgetOffice has estimatedthatthesechangesinfiscal policy wouldreduceGDP growthby1-1/2percentagepointsthisyearrelativetowhatweotherwisewouldhave achieved.

    Lookingfurtherahead,fiscal policyseemslikelytoremainrestrictiveatthefederallevel.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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    Theheadwindsfromthehousingsectorhave eased,andhousingmarketactivityislikelytocontinuetocontribute to GDP growthoverthenextfewyears.

    Theseheadwindshadbeensubstantial,as theaftermathofthefinancial crisisandhousingbubbleleftmanyhomeownersunderwaterontheirmortgages,alargeoverhangofvacanthomes,andmortgagecreditveryhardtoobtainforanyonewithoutanexcellentcreditrecordandasizabledownpayment.

    Theriseinhousepricesoverthepastyearorsohasliftedhouseholdnetworthandpushedsomehomeownersabovewaterontheirmortgages.

    Thesedevelopmentsmayhelptoeasecreditformanyhouseholdsaswell,althoughmortgagecreditremainsverytight.

    In aspeechlastmonth,Idescribedhowthenetdeclineinhousingwealthsincetherecessionhashadparticularly acuteeffectsonthebalancesheetsoflower-andmiddle-incomehouseholds,whichtend toholdarelativelyhighshareoftheirtotalwealthin theirhomes.

    Householdsatthebottomoftheincomedistributionhavealsohadahardertimethanothersfindingjobsduringtherecoveryandtheirwageshavecontinuedtostagnate.

    In myview,thelargeandincreasingamountofinequalityinincomeandwealth,whichhasbeenanongoingdevelopmentfordecades,mayhaveexacerbatedthecrisisandIthinkmoreresearchisrequiredtodeterminewhetheritmayalsoposeasignificantheadwind to therecoveryfromthecrisisforyears to come.

    So,whileIamhopefulthatpressureswilleasefurtherashomepricescontinuetorebound,Ialsobelievethatsomeoftherestraintsontherecoverymaybequitelong-lasting.

    Theheadwindfromthefinancialsectoralsohasdiminishedsomewhatoverthepastyearandshouldpresentlessofarestraintoneconomicgrowththanhasbeenthecaseintherecentpast.U.S.equitypricesareup

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    morethan10percentsofarthisyearfollowinglastyear's13percentincrease.

    Risk spreadsembeddedintheinterestratespaidbymanyAmerican businesses,althoughstillabovetheirpre-crisislevels,havealso moveddownsubstantially overthepastyeartolevelsthataremoderate,giventhestateofthebroadereconomy.

    Thesituationin Europe,althoughstilluncertain,appears tohaveimprovedsincelastsummer--aidedimportantlybythepoliciesoftheEuropeanCentralBank(ECB)--andthesedevelopmentshaveledto animprovementinfinancialconditionsglobally.

    Policyactionsandpromises,includingtheECB'sprogramtopurchasethesovereigndebtofvulnerableeuro-areacountriesanddiscussionsaboutcreatingabankingunion,appeartohavehelpedmarketparticipantsnegotiatepastsomerecenthurdles,includingthechallengesinformingagoverningcoalitioninItalyandtheseverebankingdifficultiesinCyprus.

    IfpolicymakersinEurope can follow throughontheircommitments tofinancialintegrationandstructuralreforms,amongotherthings,financialstressinEuropeshouldcontinue to lessen,andEuropeaneconomiesshouldgraduallyrecoverfromtheircurrentslump.

    IftheeconomyinEuropeweretobegintogrowagain,itcouldsupportglobaleconomicgrowthmorebroadly.

    ThefinancialconditionoftheU.S.bankingsectorhasalsocontinuedtoimprovefromtheperspectiveofregulatorycapital.

    Whilemuchworkremainsforregulatorsandbanksimplementingpendingcapitalrequirements,mostlarge,medium-sized,andcommunitybanks arein strongercapitalpositionstodaythantheywerepriortothefinancialcrisis.

    Althoughnotall,someconsumersatleast,areseeingthebenefitsofimprovementsinfinancialmarkets.

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    In combinationwithlow interestrates,theeasingoffinancialstresshasallowedsomehomeowners to refinancetheirmortgages to lowertheirmonthlypayments,andsometypesofloans,suchasthoseforpurchasinganeworusedcar,havebecomeavailable to morepeople.

    Thatsaid,weclearlystillhavealongwayto goin assuringthatAmericanshave accessto affordablecredit.

    AsInoted,anespeciallylargenumberofpeopleareunableto obtainmortgagecredit,andcreditcardborrowingisalsotight.

    Takentogether,theincomingdataandmy ownanalysisofrecentdevelopmentsinfiscal policy suggestthattherecoverywillcontinueatamoderatepace,andtheunemploymentratewillfallgradually.

    Accordingto theSummaryofEconomicProjectionsthatwasreleasedbyFederalReserveBoardmembersandReserveBankpresidentsaftertheMarchFOMCmeeting,mycolleaguesandIexpectedrealGDPgrowthtostepupmoderatelythisyear,risingroughly2-1/2percentafterhavingrisen1-3/4percentin2012.

    Intheprojection,participantsalsoexpectedtheunemploymentratetobeintherangeof7.3to7.5percentbytheendoftheyear.

    Lookingabitfurtherahead,FOMCparticipantslargelyexpectedtheunemploymentratetocontinuereceding,butitwasexpectedto remainaboveitslong-runsustainablelevelforseveralyears.

    Meanwhile,inflationwasexpected to remainclosetooralittlebelowtheCommittee'sobjectiveof2percent,consistentwithongoingslackinthelaborandproductmarketsandwell-anchoredinflationexpectations.

    MonetaryPolicyDevelopments

    In lightofthisoutlookandtherisksaroundtheoutlook,ithasbeenappropriatefortheFederalReserve to continue topursueahighlyaccommodativemonetarypolicy.

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    Asyouallknow,duringthefinancialcrisisandattheonsetoftherecession,theFederalReserve tookstrongeasingmeasures,cuttingthetargetforthefederalfundsrate--thetraditionaltoolofmonetarypolicy--tonearlyzerobytheendof2008.

    Duringtherecovery,wehaveprovidedadditionalaccommodationthroughtwo nontraditionalpolicytoolsaimedatputtingdownward pressureonlonger-terminterestratesevenwithshort-termratesstuck at zero:

    purchasesofTreasurysecuritiesandmortgagebackedsecuritiesand

    communicationaboutthefuturepathofthefederalfundsrate.

    Ourmostrecentpolicyactionshavesoughttostrengthentherecoveryinthefaceofonlyslowimprovementsinlabormarketconditionsandsubduedinflationarypressures.

    AfterlastSeptember'spolicymeeting,theFOMCannouncedthattheFederalReservewouldcontinueassetpurchasesuntiltheoutlookforthelabormarkethasimprovedsubstantiallyin thecontextofpricestability.

    Then,atthemeeting in December,theFOMCvoted to continuepurchasinglonger-termTreasurysecuritiesatapaceof$45billioneachmonth andagencymortgage-backedsecuritiesatapaceof$40billioneachmonth,andwehavemaintainedthatpaceofassetpurchasessofarthisyear.

    In consideringchangestothepaceofassetpurchasesinthefuture,wetakeintoaccountjudgmentsaboutboththeefficacyandpotentialcostsofthesepurchases,includingpotentialrisks to inflationandfinancialstability,aswellastheextentofprogresstowardoureconomicobjectives.

    AtitsDecembermeeting,theFOMCalsorecastitsforwardguidancetoclarifyhowthetargetforthefederalfundsrateisexpected todependonfutureeconomicdevelopments.

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    Specifically,wesaidthatweanticipatethatanexceptionallylow fundsrateislikelytobewarrantedatleastaslongastheunemploymentrateremainsabove6-1/2percent,inflationovertheperiodbetweenoneandtwo yearsahead isprojected tobenomorethan1/2percentagepointabove2percent,andlonger-terminflationexpectationsremainwellanchored.

    Thesethresholdsareintendedtomakemonetarypolicymoretransparentandpredictabletothepublic bymakingmoreexplicitour intentiontomaintainpolicy accommodationaslongasneeded topromoteastrongerrecoveryinthecontextofpricestability.

    Althoughitisstilltooearly to assessthefulleffectsofthemostrecentpolicy actions,availableresearchsuggeststhatourpreviousassetpurchaseshaveeasedfinancialconditionsandprovidedmeaningfulsupport totheeconomicrecovery.

    Givenitsstatutorymandate,theFOMC'spolicyactionsandcommunicationshavenaturallysoughttolowerinterestratesasameansofstrengtheningaggregatedemand,promotingthepaceofrecoveryinthelabormarket,andkeepinginflationfromfallingfurtherbelowtheratepreferredbytheCommitteeoverthelongerrun.

    Wewillcontinue tocalibratemonetarypolicy--includingboththeongoingpaceofassetpurchasesandcommunications aboutthelikelypathofthefederalfundsrate--inlightofourinterpretationsofthelatestdataandtheimplicationsofthoseinterpretationsfortheoutlookforeconomicactivity,labormarketconditions,andinflation.

    Conclusion

    In summary,theU.S.economyhascontinuedtorecoverfromtheeffectsofthefinancialcrisisanddeeprecession,thoughatapacethathasbeen disappointinglyslow.

    Therecoverydoesappeartohavepickedupsteaminsomesectors,mostnotablyinhousing,likelyreflectingtheeasingofsomeoftheheadwinds

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    thathadbeenholdingbackthepaceoftherecoveryinearlieryears.However,federalfiscalpolicy remainsanimportantsourceofrestraint.

    In lightofthesefactors,mostmembersoftheFOMCprojectamodestimprovementinthepaceoftherecoverythisyearandnext,and,accordingly,amodestdeclineintheunemploymentrate.

    TheFederalReservewillcontinue to conductmonetarypolicysoas topromoteastrongereconomicrecoveryinthecontextofpricestability.

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    OpeningSpeech

    byYolandaBanksMcCoy,

    Head– InvestmentsandSecuritiesDivision,

    CaymanIslandsMonetaryAuthorityatthe100WHFCaymanEvent2013

    Committeemembers,distinguishedguests,GAIMOpsdelegates,ladiesandgentlemen:GoodAfternoon.

    Itisanhonourtobeapartofthisafternoon’sEvent,andIthankthemembersoftheCaymanCommitteefortheirinvitationtospeakwithyoutoday.

    Theinvitation camewiththeremittoofferanupdateonthehedgefundindustryintheCaymanIslands,soIproposetodoexactlythatinthetimeallottedtome.

    TheCaymanIslands FundsIndustryhasperformedexceptionallywelldespitecontinuedvolatilityintheglobalfinancialmarkets.

    Asof31stMarch2013,theCaymanIslandsMonetaryAuthorityhad10,932regulatedfunds,whichcomprisedof8,282registeredfunds,399administeredfunds,120licensedfundsand2,131masterfunds.

    Thisisan9.4%increaseoverthesameperiodlastyear,wherewehad9,990fundsunderourdirectremit.

    Thenumberofnewfundsprocessedduringthequarterended31stMarch2013was572comparedto1,722asat31stMarch2012.

    Totalmasterfundscomprisedof66%ofthecumulativenumber(or376)comparedto81%ofthecumulativenumber(or1,125)forthequarterended31stMarch2012.Terminations totalled81,comparedto176forthesameperiod2012.

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    Growthinthefundadministrationarea remainsconservative,withnonewmutualfundadministrators’licenceapplicationsapprovedduringthe3rdQuarterofthefiscalyear.

    Asof31stMarch2013,therewere123licensed FundAdministratorscomparedto127forthesameperiod2012.

    Ofthe totallicensed,88wereFull,33 Restrictedand2Exempted.

    Thenumberisdownfromthesameperiod2012due to

    LicenseesrestructuringtheirbusinessaffairsandnolongerrequiringtheLicenceand

    byLicenseeswhowerenolongercarryingonlicensableactivitiesand,consequently,nolongerneedingtheLicence.

    Thesecuritiesinvestmentbusinessalsocontinuestogrowmodestly.Althoughnonewlicenceswereapprovedinthe3rdQuarterofthefiscalyear,twonewlicenceapplicationsarecurrentlybeingprocessed.

    Asof31stMarch2013,therewere34licensedSecuritiesInvestmentBusinessholderscomparedto31duringthesameperiod2012,and1,834SIBLExcludedPersons,comparedto1,860inthepreviousyear.

    ThehealthoftheglobalhedgefundsindustrycanbegleanedfromtheInvestmentStatisticalDigest;anannualpublicationoftheAuthoritythatoffersaggregatestatisticaldatacollatedfromthe FundsAnnualReturnsfiledbyallregulatedfunds.

    Weanticipatepublicationofthe2011InvestmentStatisticalDigestinMay.

    Preliminarydatashowsaslightincreaseinnetassetsvalue,increasingfromUS$1,727billionin 2010 to US$1,796billionin2011.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


    P age |65

    Analysisofthetop10InvestmentManagerlocationsindicatesthattherehasbeenashiftintheNetAssetsbythelocationoftheInvestmentManager.

    TheTop5locationsremainedconstantwithNewYork(US$520billion)inthetopspotfollowedbyUnitedKingdom(US$319billion),Connecticut(US$215billion),California(US$163billion)andMassachusetts(US$66billion).

    Thenext5sawsignificantmovementswithIllinois(US$48billion)andJapan(US$32billion)movingupto6thand8th,Switzerland(US$37billion)fallingto7thandLichtenstein(US$27billion)droppingoutofthetop10completely.

    Notableyear-on-yearmovementsincludeJapanincreasingbyUS$17billionor113%,BrazilincreasingbyUS$7billionor47%,UnitedKingdomdecliningbyUS$23billionor7%,LiechtensteindecliningbyUS$5billionor16%andSwitzerlanddecliningbyUS$12billionor24%.

    Thisdatadepictsthe tougheconomicconditionsthatexistedin Europeduringtheyear2011aswellasthelarger influenceandmarketshareBrazilandtheAsiancountriesareexertingandgaining intheHedgeFundIndustry.

    Aswelookahead,theCaymanIslandsMonetaryAuthorityremainscommittedandpoisedto remaintheleadingdomicileforhedgefundformations.

    ForCaymanIslandsregulatedfundswhowishtomarketintheEuropeanUnion,theAuthorityisprogressingtalks withtheEuropeanSecuritiesMarketsAuthority(ESMA)inlightoftherecentamendments to theMonetaryAuthorityLaw(2012 Revision)thatfacilitiestheAuthorityenteringintocooperationagreementswithourEUcounterparts.

    TheMonetaryAuthority(Amendment)Bill,2013waspassedbytheLegislativeAssemblyon15March2013,andcontainedamendments to:furtherprotecttheinterestofinvestorsandtomakefurtherprovisioninrespectoftheexchangeofinformation.

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    P age |66

    Otherareasoffocusaretaxinformationexchangeagreements;depositories;delegationandprivateequity/closed-endedfunds.

    WeareconfidentthatCIMAwillbeinapositioninthenearfuturetoenter intoMOUswithourEUcounterpartsbasedonthemodelMOUdevelopedbyESMA.

    Approximately23%ofCayman-regulatedfundassetsaremanagedbyaEuropeanManager.

    IntheareaofCorporateGovernance,theAuthority’sconsultationonCorporateGovernancestandardsintheCaymanIslandsfinancialservicessectorclosedon18thMarch2013.

    Thenumberofresponsesreceived totheconsultationwassizeable;considerablymorethatthenormforpublicconsultation.

    Responsescamefromboththedomesticindustryassociationsandindustrystakeholdersfromanumberofjurisdictions.

    In relation to thesurveyconductedbyGreenwichAssociates,theresponseratetothesurveywasexceptionalwiththeresponseratiotoinvitessentbeingapproximately5timesmorethanthenormforthistypeofsurvey.

    RespondentswerepredominantlyfromtheCaymanIslands,UnitedStatesandEuropewithafewfromAsia.

    ResultshaveprovedverybeneficialandwillbeincorporatedintoourCorporateGovernanceconsultationwork.

    Weare intheprocessofcollatingallofthedataandwethankeveryonewhotookthetime torespond.

    Itisourobjective topublishtheresultsoftheCorporateGovernancesurveyoncefinalized.

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    P age |67

    TurningourfocustotheUnitedStates,andmorespecificallyFATCA,anumberofupdatesandimplementingnoticeshavebeenissuedby theIRSsinceFATCAwasannounced.

    Mostrecently,on17January2013,theIRSandtheUSTreasuryDepartmentreleasedtheregulationsforimplementingtheFATCArequirements(Reference:RIN1545–BK68).

    Theseregulationshavethefollowingimpactonthefundsindustry:

    TheFundwouldhavetoregisterwiththeIRSviatheIRS'secureonlinewebportal;

    The Fundwouldhave to enter intoacomplianceagreement(theFFIAgreement)withtheIRSto conductduediligenceonaccountholdersorcomplywiththetermsofanapplicableintergovernmentalagreement(“IGA”);

    The Fundwouldhave to annuallydisclosecertaininformation about

    U.S.accountholdersandaccountholdersthatareforeignentitiesinwhichU.S.personsholdasubstantialownershipinterest;

    The Fundwouldhave to withholdonpaymentstocertainaccountholders(beginning1January,2014);and

    The Fundwouldhave toundertakeadditionalcomplianceobligationssetforthinthefinalRegulationsorsuchIGA.

    On15March2013,theMinisterforFinancialServicesannouncedtheGovernment’sintentiontooptforaModel1IGAwiththeUnitedStatesfortheimplementationofFATCAintheCaymanIslands.

    ThesuccessfulconclusionofaModel1agreementwouldmeanthatfundswillbeobligatedtoreportinformationrequiredunderFATCAtotheCaymanIslandsGovernment,whichwillthenautomaticallytransmittheinformation totheIRS.

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    P age |68

    Thefundswouldthereforenotberequired to enterintoseparateFFIagreementswiththeIRStobeFATCAcompliant.

    TheMinisterforFinancialServicesalsoannouncedon15March2013theGovernment’sintentiontoenterintoasimilararrangementfortheautomaticexchangeofinformationwiththeUnitedKingdom.

    TheGovernmentsofJersey,GuernseyandtheIsleofManhavesimilaragreementswiththeUKthatwerecommittedtoduringthe1stquarterof2013.

    Whiletoday’spresentationhasbeenbriefincontent,ItrustwecanallagreethattherehavebeenanumberofdevelopmentsaffectingtheCaymanIslands’hedgefundsectorinrecenttimes.

    Whileweallrecognizethattheregulatoryarchitecturehaschangedandwillcontinueto change,CIMAremainsengagedandcommittedingrowingthelocalfundsindustry,fosteringavibrantandcompetitiveindustryandpreservingthejurisdiction’sreputation.

    Ladiesandgentlemen,thankyouforyourattentionandIwishyouapleasantevening.

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    P age |69

    APerspectiveontheU.S.EconomicOutlookandMonetaryPolicy

    PresentedbyCharlesI.Plosser,PresidentandChiefExecutiveOfficer,FederalReserveBankofPhiladelphia

    GlobalInterdependenceCenter'sCentral

    BankingSeries:Recovery2013—StrengthorStagnation,Milan,Italy

    Note:PresidentPlosserpresentedsimilar

    remarksonMay14,2013beforetheSNS(CenterforBusinessandPolicyStudies)andtheSIFR(TheInstituteforFinancialResearch)inStockholm,Sweden.

    Introduction

    Itisapleasuretobeherewithmycolleague,EricRosengren,presidentoftheFederalReserveBankofBoston,tocontinuethisdistinguishedseriesofconferencesoncentralbankinghostedbytheGlobalInterdependenceCenter(GIC).

    DavidKotok,MichaelDrury,andBenCraighavegatheredanotherimpressivegroupofpolicymakers,academics,andeconomists to discussthestateofourrecovery.

    Youmayknow thattheGIChasbeenbasedinPhiladelphiaformorethan30years,andforthepastyear,ithasbeenatenantinourbuilding.

    Iamassuredthatfacthashadnoinfluenceontheorderofourspeakersthismorning.

    Aroundtheworld,centralbankersandpolicymakersmoregenerallyhavebeenchallengedoverthepastfiveyearsastheystruggledinthefaceoftheworstglobalrecessionsincetheGreatDepression.

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    P age |70

    Thankfully,manyeconomiesaroundtheworldarenowinmodestrecoveries.

    Yetnoone canbesatisfiedwiththepaceoftheserecoveries.

    Ihaveoftendescribedtheprogressofthisglobalrecoveryastwo stepsforwardandonestepbackagain.Europehasparticularlystruggled,andmanychallengesremain.

    Thismorning,Iamgoingto concentrateontheoutlookfortheU.S.economy,whichisnow nearingthefourthanniversaryofaneconomicrecoverythatofficiallybeganinmid-2009.

    BeforeIbegin,though,ImustnotethattheviewsIexpressherearemyownandnotnecessarilythoseoftheFederalReserveBoardofGovernorsormycolleaguesontheFederalOpenMarketCommittee(FOMC).

    EconomicConditions

    Iwillstartwithadiscussionofinflation,sinceinmyview,preservingpricestabilityisthemostimportantfunctionofacentralbank.

    In aworldoffiatmoney,monetarypolicyhastheultimateresponsibilityforpreservingthepurchasing powerofanation'scurrency.

    Thatisnottosaythatcentralbankershavealwaysliveduptothatresponsibility.

    Overthe100-yearhistoryoftheFederalReserve,forinstance,itspricestabilityrecordhasbeenmixed.

    Attimes,theFederalReservehasbeensuccessful,butat othertimes,ithasnot.

    FederalReservepolicycontributed to thedramaticdeflationofthe1930s,anditstokedtherapidinflationofthe1970s.

    However,economistsandcentralbankershavelearnedfromthepast.

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    P age |71

    TheU.S.hasseenbetter inflationoutcomesoverthepast20years.

    From1972to1992,theaverageinflationrateintheU.S.,asmeasuredbythepersonalconsumptionexpenditure,orPCE,priceindexwasabout5.5percent,largelyreflectingtheimpactoftheGreatInflationepisodeofthe1970sandthesubsequenttransition to lowerinflationduringthe1980s.

    Butinthetwo decadessince1992,inflationhasaveragedaround2percentperyear.

    Whiletheseaveragesmasksomevariability,IbelievethenumberssuggestthattheFed has doneabetterjobofachievingitsobjectiveofstableinflationinrecentdecades.

    In January2012,theFOMCannounced,forthefirsttime,anexplicitlong-runinflationtargetof2percentayearforthePCEpriceindex.

    BeingexplicitaboutourinflationobjectiveenhancesthecredibilityoftheFed'scommitmenttopricestability,whichhelpsanchor inflationexpectationsandfosterpricestabilityandmoderatelong-terminterestrates.

    Overthepastthreeyears,averagePCEinflationintheU.S.hasbeenrunningabout1.8percent,abitbelowour2percenttarget.

    Althoughinflationhasbeenrunningsomewhatlowerthanthisoverthepastfourquarters,Iexpectittoreturntoourgoaloverthenextyearortwo,asinflationexpectationsremainfairlywellanchorednearourgoal.

    Infact,theparticipantsintheSurveyofProfessionalForecastersreleased bythePhiladelphiaFedjustlastweekexpectedannual-average PCEinflationof2percentoverthenext10years.

    Shouldinflationexpectationsbegintofall,wemightneedtotake actiontodefendourinflationgoal,butatthispoint,Idonotseeinflationordeflationasaseriousthreatinthenearterm.

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    P age |72

    However,Idobelievethatourextraordinarylevelofmonetaryaccommodationwillhavetobescaledback,perhapsmoreaggressivelythansomethink,toensurethatinflationoverthemediumtermremainsconsistentwithourtarget.

    Letmeturnnow tootheraspectsoftheU.S.economy,includingtheprospectsforgrowthandemployment.

    AccordingtotheadvanceestimateofGDP forthefirstquarterofthisyear,U.S.economicgrowthreboundedtoanannualizedrateof2.5percentfollowingaweak0.4percentgrowthrateinthefourthquarterof2012,andthecompositionofthatgrowthwasencouraging.

    Consumerspending,whichaccountsforabout70percentoftheU.S.economy,madeasolidcontribution to growth,expandingatan annualizedrateof3.2percent.

    Thisisthefastestrateofgrowthfromconsumersintwo yearsandmarksthefourthconsecutivequarterofaccelerationin spendinggrowth.

    Someeconomistsworriedthatthehikeinthefederalpayrolltaxatthebeginningof2013wouldconstrainconsumerspending,butthathasyettomaterialize.

    However,uncertaintyoverfiscalpolicyanddoubtsaboutthestrengthoftherecoveryappeartobedampeninggrowthinbusinessinvestmentspending.

    Thisspendinggrewatlessthana4percentannualrateinthefirstquartercomparedwithover7percentlastyear.

    Homeconstructionhasbeenmoreencouraging.

    Privateresidential investmentregistereditsthirdconsecutivequarterofannualizeddouble-digitgrowth.

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    P age |73

    Thesegrowthratesmaysoundmoreimpressivethantheyare—wehavetorememberthathousingactivity,includinghomesalesandstarts,remainsrelativelylowbyhistoricalstandards.

    Nevertheless,housingdoesappeartobein asustainablerecovery,and housepricesarerising.

    In theU.S.,wefollow several indexesforhouseprices.

    In February,boththeCase-ShillerandFederalHousingFinanceAgencyhomepriceindexespostedtheirhighestyear-over-yeargainssince

    mid-2006.

    Higherhomepriceswillhelp strengthenthebalancesheetofconsumers,supportingconsumptionandnewhomeconstruction.

    However,Idonotbelievewearegoingtosee,norshouldweseekto see,areturn to theheadydaysofresidentialrealestate activitythatprecededthefinancialcrisis.

    Governmentspending,particularlyindefense,hasdeclinednotablyoverthepastthreeyears.Thesedeclinesreflectfiscalpolicy decisionsand budgetarytimelines,notbusinesscycles.

    Nettingoutthedeclineingovernmentspending,theprivatesectorportionsofGDP advancedatanannualrateof3.3percentinthefirstquarter.

    Overall,theU.S.economyisgrowingatapacethatisclosetotrend.

    MyforecastisthatthepaceofgrowthintheU.S.willpickup to slightlyabovetrendandaverageclose to 3percentthrough2014.

    BasedontheFederalOpenMarketCommittee'smostrecentSummaryofEconomicProjections,myoutlookfor2013isalittlehigherthanthecentraltendencyandonthelowerendofthecentraltendencyfor2014.

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    P age |74

    Myforecastof3percentgrowthshouldallow forcontinuedimprovementsinlabormarketconditions,includingagradualdeclineintheunemploymentrate,similarto thetrendwehaveseenoverthepastthreeyears,whichwasa0.7-to0.8-percentagepointdeclineperyear.

    Continuingatsuchapacewouldleadtoanunemploymentratecloseto7percentattheendof2013andaratebelow6.5percentbytheendof2014.

    Indeed,thisyearwehavealreadyseentheunemploymentratefallfrom

    7.9percentinJanuaryto7.5percentinApril.

    Employersadded165,000jobsinApril,butthemorepositivenewscameintherevisionsforFebruaryandMarch.

    Thereviseddataindicatethatfirmsadded332,000jobsinFebruaryand138,000inMarch.

    Theupwardrevisionsforthesetwo monthsadded114,000jobs.Letmenow turn totheimplicationsformonetarypolicy.

    MonetaryPolicy

    Overthepastfiveyears,theFederalReserveandmany othercentralbankshavetakenextraordinaryactionstosupporttheeconomicrecovery.

    TheFedhas lowereditspolicyrate—thefederalfundsrate—toessentiallyzero,whereithasstayedformorethanfouryears.Sincethepolicy rate cannotgolower,theFedhasattempted toprovideevenmoreaccommodationthroughlarge-scaleassetpurchases,orquantitativeeasing.

    ThesepurchaseshavegreatlyexpandedthesizeandlengthenedthematurityoftheassetsontheFed'sbalancesheet.

    Inaddition,theFedhasprovided"forwardguidance"onthefuturepath ofinterestrates.

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    P age |75

    Specifically,ithasindicatedthataslongastheoutlookfor inflationovertheone-totwo-yearhorizondoesnotmoveabove2.5percentandinflationexpectationsremainwellanchoredandaslongastheunemploymentrateisabove6.5percent,theCommitteeexpectstokeepthefederalfundsrateatessentiallyzero.

    TheCommitteehasalsoindicatedthatitanticipatesthatthehighlyaccommodativestanceofmonetarypolicywillremainappropriateforaconsiderabletimeaftertheeconomicrecoverystrengthens.

    Currently,theFedispurchasing$40billionofagencymortgage-backedsecuritiesand$45billionoflonger-termTreasurysecuritieseachmonth.

    TheFedisalsoreinvestingtheproceedsofmaturingorprepaidmortgage-backedsecuritiesandisrollingovermaturingTreasurysecuritiesatauction.

    Asaresult,theFed'sbalancesheet,whichincludesabout$3.3trillioninassets,isgrowingatapaceofabout$85billionamonth.

    Thesepurchasesoflonger-maturityassetsareintendedtoputdownward pressureonlonger-terminterestratesinthehopethathouseholdsand businesseswillchoosetospendtodayratherthansave.

    Whateverone'sviewsofthebenefits,thesechangesinthesizeandcompositionofthebalancesheetposechallengesfortheFed'seventualexitfromthisperiodofextraordinaryaccommodationandforthenormalizationofmonetarypolicy.

    Ofcourse,beforetheFed canbegintoimplementanysortofexitfromthemassivevolumeofaccommodationithasputinplace,itmuststopitsattemptstoincreaseaccommodationthroughitsongoingassetpurchaseprogram.

    Iwasnotin favoroftheSeptemberandDecemberdecisionsto furthergrowthebalancesheetbecauseIbelievedthatthecostsexceededtheexpectedbenefits.

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    P age |76

    Nevertheless,theCommitteechose to establishthecurrentopen-ended assetpurchaseprogramthatwouldadaptto changingeconomicconditions,withparticularattentiontothelabormarket.

    TheFOMChasprovidedforwardguidanceaboutitsassetpurchases.

    In particular,theCommitteehasindicatedthatitanticipatesitwillcontinuetopurchasetheseassetsuntilthereissubstantialimprovementinlabormarketsin acontextofpricestability.

    ButthemostrecentFOMCstatementalsomadeclearthattheCommitteeisprepared to increaseorreducethepaceofitspurchases tomaintainitsassessmentofappropriatepolicyaccommodationastheoutlookforthelabormarketorinflation changes.

    In addition,indeterminingthesize,pace,andcompositionofitsassetpurchases,theCommitteecontinuestoweighthelikelyefficacyandcostsofsuchpurchases,aswellas theextentofprogresstowarditseconomicobjectives.

    BasedonthestatedviewsoftheCommitteeregardingtheflexibilityinpaceofpurchases,Ibelievethatlabormarketconditionswarrantscalingbackthepaceofpurchasesassoonasournextmeeting.

    Moreover,unlessweseeasignificantreversal in currenttrendsthatjeopardizesmyforecastofnear7percentunemploymentratebytheend ofthisyear,thenIanticipatethatwecouldendtheprogrambefore

    year-end.Let'slookatsomeofthedata.

    In thesixmonthsthroughSeptember2012,whenthedecision to initiatethelatestopen-endedassetpurchaseprogramwasmade,nonfarmpayrollshadincreasedanaverageof130,000permonth,andtheunemploymentratehadaveraged8.1percent.

    In themostrecentsixmonths,fromNovember2012throughApril2013,nonfarmpayrollshaveincreasedonaverage208,000permonth—a60percentincrease—andtheunemploymentratehasaveraged7.7percent.

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    P age |77

    AsInotedearlier,April'sunemploymentratehasnow reached7.5percent.

    Moreover,theaveragedurationofunemploymenthasfallen,theshareoflong-termunemploymenthasdropped,andhoursworkedandearningshaverisen.

    Whilefurtherprogresswouldcertainlybedesirable,Ibelievetheevidenceisconsistentwithasignificantlyimprovinglabormarket.

    Thus,itisappropriate tobeginscalingbackthepaceofassetpurchases.

    Indeed,inmyview,weretheFOMCtorefrainfromreducingthepaceofitspurchasesinthefaceofthisevidenceofimprovinglabormarketconditions,itwouldundermine thecredibilityoftheCommittee'sstatementthatthepaceofpurchaseswillrespondtoeconomicconditions.

    Similarly,ifthereweresufficientevidencethatconditionsinlabormarketshaddeteriorated,IwouldexpecttheFOMCtoconsiderincreasingthepaceofpurchases.

    Afterall,thisisthemeaningofstate-contingentmonetarypolicymaking.

    Butifwereachthepointthatmarketsonlyexpectustomovein onedirection—thatis,towardmoreeasing—andwebecomereluctanttodialbackonpurchasesoverconcernsofdisappointingorsurprisingmarkets,thenwewillfindourselvesin averydifficultpositiongoingforward.

    Iwanttoemphasizethatinthisstate-contingentframework,reducingthepaceorevenendingassetpurchasesneednotbe thestartofanexitstrategyormoreaggressivetightening.

    Norwoulditindicatethatanincreaseinthepolicy ratewasimminent.

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    P age |78

    Instead,theseactionswouldslowandthenhaltefforts to continuouslyexpandthelevelofaccommodationbyincreasingthesizeofthebalancesheet.

    Giventheimprovingeconomy,dialingbackassetpurchasesisan appropriateresponse.

    Ithinkweshouldalsoconsiderrethinkingourreinvestmentstrategy.Therearenolongeranyshort-termTreasuriesintheFed'sportfolio.Ratherthanreinvestingmaturingandprepaidassetsintolonger-termassets,itmightbeprudenttoreinvestintoshorter-termassets.

    Thatwouldprovidemoreflexibilityinmanagingourbalancesheetaswemoveforward.

    Soletmeoffersomethoughtsaboutexit.ReconsideringtheExitStrategy

    Lastmonth,IrecountedsomeprinciplesthatIfirstsharedinMarch2011,whichIbelieveshouldguide theFed'seventualexitfromitshighlyaccommodativepolicies.

    MypreferenceisthattheFedshouldseektoreturnmonetarypolicytoanoperatingframework inwhichthefederalfundsrateistheprimarypolicy instrument.

    In mypreferredpolicyframework,thefederalfundsratetargetwouldbesetinacorridorabovetheinterestratepaidonexcessreservesandbelowthediscountrate(alsocalledtheprimarycreditrate).

    Thiscorridorsystemissimilarto thesystemthattheFedusedbeforethecrisisandissimilartocorridorsystemsusedby othercentralbanksaroundtheworld.

    Analternativeframework wouldhavetheFedusetheinterestrateonexcessreservesasitspolicy ratetoestablishafloorformarketrates.

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    P age |79

    In thisfloorsystem,monetarypolicycouldbeimplementedwithnolimitonthesizeoftheFed'sbalancesheet.

    Iamskepticalofsuchanapproachandpreferthecorridorsystem,inpartbecauseitconstrains thesizeofthebalancesheet,therebymakingitlesslikelythattheFed'sbalancesheetcouldbeusedforpurposesoutsidethepurviewofmonetarypolicy andbecausethefedfundsrateisamarketinterestrate.

    Toensurethatthefedfundsratetradesabovetheinterestrateonexcessreserves,normalizationwillrequireasignificantreductioninthevolumeofreservesinthebankingsystem,whichwillresultin amuchsmallerbalancesheetfortheFed.

    Theextentofthatreductionwilldependontheamountofreservesinthesystemwhenwebegintotightenpolicy.

    Currently,reservestotalmorethan$1.8trillionandaregrowing.Theywereonlyabout$25billionbeforethecrisis.

    IalsobelievethatnormalizationshouldincludereturningthecompositionoftheFed'sportfolio tomostlyshort-termU.S.Treasurysecurities,asitwaspriortothecrisis.

    Thismeansthatmortgage-backedsecuritiesontheFed'sbalancesheetwouldhave tobeeliminated.

    Theycouldbeallowedto runoffviamaturityorprepayment,ortheFedcouldselltheseassets.

    TheframeworkIfirstproposedinMarch2011islargelyconsistentwiththeexitstrategyprinciplesthattheCommitteeannouncedafewmonthslater inJune2011.

    Andwhilealothaschangedsincethen,Ibelievethesegeneralprinciplesstillapply.

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    P age |80

    In particular,weshouldseek to return tooperatinginacorridorsystem,wherethefedfundsrateistheprimarypolicy instrument.

    Thebalancesheetshouldshrinkinsizetoenablesuchasystem tooperate.

    AndthecompositionoftheFed'sbalancesheetshouldreturn to allU.S.Treasuries.

    Thespecifictimingandsequenceofthestepsdetailed intheFOMC'sexitstrategyannouncementmayrequiresomeadjustmentsinlightofthelarger,andstillgrowing,sizeofourbalancesheet.

    Ifassetpurchasescontinueatcurrentlevels,reservebalancescouldgrow to$2.25trillionormore.

    ThatmayrequiretheFedtosellassetsatasomewhatfasterpacethancontemplatedin2011.

    FastersalesofassetsalsowouldheightentheriskthattheFedwouldselllonger-termassetsataloss,whichwouldaffecttheFed'sremittancestotheTreasury.

    Theremightevenbenegativeremittances.

    WhilethatwouldnotimpairtheFed'sabilitytoimplementmonetarypolicy,itwouldcertainlybenoticed,especiallyatatimewhenthefederalgovernmentandthepublicarekeenlyfocusedontheneedtoreduce deficits.

    ThiswouldalsocomeatatimewhentheFedispayinghigher interesttobanksontheirreservebalancesattheFed.

    Thecomplexityofshrinkingthebalancesheetisnuanced.

    Itinvolvesinteractionsamongtheoverallsizeandcompositionofthebalancesheet,thepaceatwhichinterestratesmayhavetorise,theeffectivenessofinterestonreservesandotherreserve-drainingtools,and

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    P age |81

    thesensitivities totheprospectsofnegativeremittancestotheU.S.Treasury.

    Weare inunchartedterritoryin thisregardandshouldbeappropriatelycautiousinspecifyingtoodetailedapaththatwemaynotbeable tofollow.

    Conclusion

    In summary,theU.S.economycontinuestogrowatamoderatepace,andIbelievethatthefundamentalscontinue to graduallyimprove,thussupportingmyprojectionofannualgrowthofaround3percentin2013and2014.

    Prospectsforlabormarketswillcontinue to improvegradually,butIbelievewemayseeratesnear7percentbytheendofthisyearandaratebelow6.5percentbytheendof2014.

    Ibelieveinflationexpectationswillberelativelystableandinflationwillremainatmoderatelevelsinthenearterm.

    Eventually,economicconditionswillimprove tothepointatwhichtheFedwillneedtobegintoexitfromthisperiodofextraordinaryaccommodationandnormalizeitsframeworkformonetarypolicy.

    Althoughtherehavebeensignificantchangesinmonetarypolicy andthebalancesheetoverthepasttwoyears,IgenerallysubscribetotheexitstrategyprinciplesadoptedbytheFOMC inJune2011.

    Yetthetimingandpaceoftheexactstepsmayhavetobeadjusted,giventhechangesinourbalancesheetsinceJune2011.

    Butonethingiscertain:Aprecursorto anexitmustbe to slowandthenhaltthecontinuedexpansionofthebalancesheet.

    Thiswouldnotnecessarilyindicatethatincreasesinthepolicyratewereimminent.

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    P age |82

    Rather,itwouldindicatethateffortstoincreaseaccommodationwerecomingto aclose.

    TheFOMC'sforwardguidanceisthatassetpurchaseswillbeincreasedordecreasedbasedontheoutlookforlabormarketsandinflationandthatpurchaseswillendwhenwehaveseensubstantial improvementinthelabormarketconditionsinacontextofpricestability.

    In myview,labormarketconditionshaveimprovedsufficientlyfortheFedtoreducethepaceofitsassetpurchases.

    Shouldlabormarketconditionsandinflationcontinue to evolveasIproject,thenIwouldviewendingthepurchasesbyyear-endasappropriate.

    In fact,IbelievetheFOMC wouldunderminethecredibilityofits ownstatementifitfailstoadjustthepaceofassetpurchasesinresponsetoeconomicconditions.

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    P age |83

    MichaelS.Gibson,Director,DivisionofBankingSupervisionandRegulation

    Cross-BorderResolution

    BeforetheSubcommitteeonNationalSecurityandInternationalTradeandFinance,CommitteeonBanking,Housing,

    andUrbanAffair,U.S.Senate,Washington,D.C.

    ChairmanWarner,RankingMemberKirk,andothermembersoftheSubcommittee,Iappreciatetheopportunityto testifytodayonthechallengestoachievinganorderlycross-borderresolutionofafailedsystemicfinancialfirm.

    In myremarks,Iwouldlike to firstreflectontheimprovementsthathavebeenmadeinthelastfewyearsintheunderlyingstrengthandresiliencyofthe

    largestU.S.bankingfirms,andthenturntoadiscussionofwhathasbeen accomplishedandwhatremains tobe accomplishedinfacilitatinga

    cross-borderresolution.

    ALookBack

    Therecentfinancialcrisiswasunprecedentedinitsscopeandseverity.

    Someoftheworld'slargestfinancialfirmsnearlyorcompletelycollapsed,sendingshock wavesthroughthehighlyinterconnectedglobalfinancialsystem.

    Thecrisismadeclearthatourregulatoryframeworkforreducingtheprobabilityoffailureofsystemicfinancialfirmswasinsufficientandthatgovernmentseverywherehadinadequatetoolstomanagethefailureofasystemicfinancialfirm.

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    P age |84

    Since2008,theUnitedStatesandtheinternationalregulatorycommunityhavemademeaningfulprogressonpolicyreformsto reducethemoralhazardand otherrisks associatedwithfinancialfirmsperceivedtobetoobigtofail.

    In broadterms,thesereformsseek toeliminatetoo-big-to-failintwoways:

    byreducingtheprobabilityoffailureofsystemicfinancialfirmsthroughstrongercapitalandliquidityrequirementsandheightenedsupervision,and

    byreducingthecoststothebroadersystemintheeventofthefailureofsuchafirm.

    Mytestimony todayrelatesprincipally tothesecondofthesetwo aspectsofreform,butIwantto beginbyhighlightingsomeofthematerialachievementswehavemadetoreducethelikelihoodoffailureofsystemicfinancialfirms.

    TheBaselIIIcapitalandliquidityreformsarethefoundationoftheglobalefforts to improvetheresilienceoftheinternationalbankingsystem.

    ThesereformsarebeingimplementedintheUnitedStatesandelsewhere.

    In addition,theFederalReservehassignificantlystrengtheneditssupervisionofthelargest,mostcomplexfinancialfirmssincethefinancialcrisis.

    Forexample,theFederalReservenowconductsrigorousannualstresstestsofthe capitaladequacyofourlargestbankholdingcompanies.

    Asaresultoftheseefforts,theoverallstrengthofthelargestU.S.bankingfirmshassignificantlyimproved.

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    Theaggregatetier1commonequityratioofthe18largestU.S.bankingfirmshasmorethandoubled,from5.6percentofrisk-weightedassetsattheendof2008to11.3percentattheendof2012.

    Inabsoluteterms,thesefirmshaveincreasedtheiraggregatelevelsoftier1commonequityfromjustunder$400billionin late2008toalmost$800billionattheendof2012.

    Highercapitalputsthesefirmsinamuchbetterpositiontoabsorbfuturelossesandcontinuetofulfilltheirvitalrolein theeconomy.

    In addition,theU.S.bankingsystem'sliquiditypositionrelative topre-crisislevelshasmateriallyimproved.

    AccomplishmentstoDateonCross-BorderResolution

    CongressandU.S.regulatorshavemadesubstantialprogresssince thecrisisinimprovingtheprocessforresolvingsystemicfinancialfirms.

    Thecoreareasofprogressincludeadoptionandimplementationofstatutoryresolutionpowers,adoptionandimplementationofresolutionplanningrequirements,increasedinternationalcoordinationefforts,andtheFederalReserve'sforeignbankregulatoryproposal.

    TitleIIoftheDodd-FrankWallStreetReformandConsumerProtectionAct(Dodd-FrankAct)createdtheOrderlyLiquidationAuthority(OLA),astatutoryresolutionmechanismdesignedto improvetheprospectsforanorderlyresolutionofasystemicfinancialfirm.

    In manyways,OLAhasbecomeamodelresolutionregimefortheinternationalcommunity.

    TheFinancialStabilityBoard(FSB)in2011adoptedtheKeyAttributesofEffectiveResolutionRegimesforFinancialInstitutions,anewstandardforresolutionregimesforsystemicfirms.

    ThecorefeaturesofthisglobalstandardarealreadyembodiedinOLA.ByactingearlythroughthepassageoftheDodd-FrankAct,Congress

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    pavedthewayfortheUnitedStates tobealeader inshapingthedevelopmentofinternationalpolicy foreffectiveresolutionregimesforsystemicfinancialfirms.

    TheFederalReservesupportstheprogressmadebytheFederalDepositInsuranceCorporation(FDIC)in implementingOLA,including, inparticular,bydevelopingasingle-point-of-entry(SPOE)resolutionapproach.

    SPOEisdesigned tofocuslossesontheshareholdersandlong-termunsecureddebtholdersoftheparentholdingcompanyofthefailedfirm.

    Itaimstoproduceawell-capitalizedbridgeholdingcompanyin placeofthefailedparentbyconvertinglong-termdebtholdersoftheparentintoequityholdersofthebridge.

    Thecriticaloperatingsubsidiariesofthefailed firmwouldbe

    re-capitalized,totheextentnecessary,andwouldremainopenforbusiness.

    TheSPOEapproachshouldworktosignificantlyreduceincentivesforcreditorsandcustomersoftheoperatingsubsidiariestorunandforhost-countryregulators to engagein ring-fencingorothermeasuresdisruptive to anorderly,globalresolutionofthefailedfirm.

    TheDodd-FrankActrequiresalllargebankholdingcompaniestodevelop,andsubmitto supervisors,resolutionplans.

    ThelargestU.S.bankholdingcompaniesandforeignbankingorganizationssubmittedtheirfirstannualresolutionplanstotheFederalReserveandtheFDICin thethirdquarterof2012.

    These"first-wave"resolutionplanshaveyieldedvaluableinformationthatisbeingusedtoidentify,assess,andmitigatekeychallengestoresolvabilityundertheBankruptcyCodeandtosupporttheFDIC'sdevelopmentofbackupresolutionplansunderOLA.

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    TheseplansarealsoveryusefulsupervisorytoolsthathavehelpedtheFederalReserveandthefirmsfocusonopportunitiestosimplifycorporatestructuresandimprovemanagementsystemsin waysthatwillhelpthefirmsbemoreresilientandefficient,aswellaseasiertoresolve.

    Internationally,theFederalReservehasbeenanactiveparticipantintheFSB'sworktoaddressthechallengesofcross-borderresolutions.

    Forexample,theFederalReserve,togetherwiththeFDIC,participatedinthedevelopmentoftheKeyAttributes.

    Wearealsoanactiveparticipantinthe FSB'smanycommitteesandtechnicalworkinggroupschargedwithdevelopingpolicy guidanceonabroadrangeoftechnicalareasthataffectthefeasibilityofcross-borderresolution.

    Moreover,asthehome-countrysupervisorofeightofthe28globalsystemicallyimportantbanks(G-SIBs) identifiedbytheFSB,theFederalReservehastheresponsibilityofestablishingandroutinelyconveningforeachU.S.G-SIBacrisismanagementgroup.

    Thesefirm-specificcrisismanagementgroups,whicharecomprised primarilyofthefirm'sprudentialsupervisorsandresolutionauthoritiesintheUnitedStatesandkeyforeignjurisdictions,areworkingtomitigatepotentialcross-borderobstaclestoanorderlyresolutionofthefirms.

    Lastyear,theFederalReservealsosoughtpubliccommentonaproposalthatwouldgenerallyrequireforeignbanks withalargeU.S.presence toorganizetheirU.S.subsidiariesunderasingleintermediateholdingcompanythatwouldserveasaplatformforconsistentsupervisionandregulation.

    Justas othercountriesalreadyapplyBaselcapitalrequirementstoU.S.banksubsidiariesoperatingintheircountries,ourproposalwouldsubject theU.S.intermediateholdingcompaniesofforeignbankstothesamecapitalandliquidityrequirementsasU.S.bankholdingcompanies.

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    WebelievethattheproposalwouldsignificantlyimproveoursupervisionandregulationoftheU.S.operationsofforeignbanks,helpprotectU.S.financialstability,andpromotecompetitiveequityforalllargebankingfirmsoperating intheUnitedStates.

    Theproposal wouldenhancetheabilityoftheUnitedStates,asa

    host-countryregulator,tocooperatewithafirm-wide,globalresolutionofaforeignbankingorganizationledbyitshome-countryauthorities.

    ChallengesAheadonCross-BorderResolution

    DespitetheprogressthatisbeingmadewithintheFSBandinourdomesticeffortswiththeFDIC,developingfeasiblesolutions to theobstaclespresentedbycross-borderresolutionofasystemicfinancialfirmremainsnecessaryandworktowardthisendisunderway.

    Thekeyremainingobstaclesinclude:

    adoptingeffectivestatutoryresolutionregimesinothercountries;

    ensuringsystemicglobalbankingfirmshavesufficient"goneconcern"loss-absorption capacity;

    completingfirm-specificcooperationagreementswithforeignregulatorsthatprovidecredibleassurancestothosehost-countryregulatorstoforestalldisruptivering-fencing;and

    coordinatingconsistenttreatmentofcross-borderfinancialcontracts.

    First,althoughtheUnitedStateshashadOLAinplacesince2010,andtheFDIChasmadegoodprogressindevelopingtheframeworkforusingOLAoverthepastthreeyears,mostothermajorjurisdictionshavenotyetenactednationallegislationthatwouldcreateastatutoryresolutionregimewiththepowersandsafeguardsnecessarytomeettheFSB'sKeyAttributes.

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    Mitigatingtheobstacles to cross-borderresolutionwill,ataminimum,requirekeyforeignjurisdictions tohaveimplementednationalresolutionregimesconsistentwiththeKeyAttributes.

    Therefore,wewillcontinuetoencourageourfellow FSBmemberjurisdictions tomoveforwardwithsuchreformsasquicklyaspossible.

    Second,keytotheabilityoftheFDICtoexecuteitspreferredSPOEapproachinOLAistheavailabilityofsufficientamountsofdebtattheparentholdingcompanyofthefailedfirm.

    Accordingly,inconsultationwiththeFDIC,theFederalReserveisconsideringthemeritsofaregulatoryrequirementthatthelargest,mostcomplexU.S.bankingfirmsmaintainaminimumamountofoutstandinglong-termunsecureddebtontopofitsregulatorycapitalrequirements.

    Sucharequirementcouldhaveanumberofpublicpolicybenefits.

    Mostnotably,itwouldincreasetheprospectsforanorderlyresolutionunderOLAbyensuringthatshareholdersandlong-termdebtholdersofasystemicfinancialfirm canbearpotentialfuturelossesatthefirmandsufficiently capitalizeabridgeholdingcompanyinresolution.

    In addition,byincreasingthecredibilityofOLA,aminimumlong-termdebtrequirementcouldhelpcounteractthemoralhazardarisingfromtaxpayerbailoutsandimprovemarketdisciplineofsystemicfirms.

    Switzerland,theUnitedKingdom,andtheEuropeanCommissionaremovingforwardwithsimilarrequirements,anditmaybeusefultoworktowardaninternationalagreementonminimumtotallossabsorbencyrequirementsforgloballysystemicfirms.

    Third,weneed to take additionalactions to promoteregulatorycooperationamonghomeandhostsupervisorsintheeventofthefailureofaninternationallyactive,systemicfinancialfirm.Importantly,OLAonly canapply to U.S.-charteredentities.

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    ForeignsubsidiariesandbankbranchesofaU.S.-basedsystemicfinancialfirmcouldbering-fencedor wounddownseparatelyundertheinsolvencylawsoftheirhostcountriesifforeignauthoritiesdidnothavefullconfidencethatlocalinterestswouldbeprotected.

    Furtherprogressoncross-borderresolutionultimatelywillrequiresignificantbilateralandmultilateralagreements amongU.S.regulatorsandthekeyforeigncentralbanksandsupervisorsforthelargestglobalfinancialfirms.

    Italsomayrequirethathome-countryauthoritiesprovidecredibleassurancestohost-countrysupervisorstopreventdisruptiveformsofring-fencingofthehost-countryoperationsofafailedfirm.

    Theultimatestrengthoftheseagreementswilldependonwhetherthey have adequatelyaddressedthesharedobjectives,aswellasthe

    self-interests,oftherespectivehomeandhostauthorities.

    Thegroundworkfortheseagreementsisbeinglaid,butmanyofthemost criticalissues canbeaddressedonlyafterotherjurisdictionshaveeffectiveresolutionframeworksinplace.

    Fourth,wemusthelpensurethatahome-countryresolutionofaglobalsystemicfinancialfirmdoesnotcausekeycreditorsandcounterpartiesofthefirm'sforeignoperationstorununnecessarily.

    Oneofthekeychallengestotheorderlyresolutionofaninternationallyactive,U.S.-basedfinancialfirmisthatcertainOLAstabilizationmechanismsauthorizedundertitleIIoftheDodd-FrankAct,includingtheone-daystayprovisionwithrespectto over-the-counterderivativesandcertain otherfinancialcontracts,maynotapplyoutsidetheUnitedStates.

    Accordingly,counterparties to financialcontractswiththeforeignsubsidiariesandbranchesofaU.S.firmmayhavecontractualrightsandsubstantialeconomicincentivestoterminatetheirtransactionsassoonastheU.S.parententersintoresolution.

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    Regulatorsandtheindustryarefocusedonthepotentialforaddressingthisconcernthroughmodificationstocontractualcross-defaultand nettingpracticesandthrough othermeans.

    TheFederalReservewillcontinue tosupporttheseefforts.

    Conclusion

    Thefinancialregulatoryarchitectureisstrongertodaythanitwasintheyearsleadingup tothecrisis,butconsiderableworkremainsto completeimplementationoftheDodd-FrankActandthepost-crisisglobalfinancialreformprogram.

    AkeyprongofthatprogramismakingsurethatgovernmentauthoritiesintheUnitedStatesandaroundtheworldcaneffectanorderlyresolution ofa systemicallyimportant,internationallyactivefinancialfirm.

    Muchhasbeenaccomplishedinthisarea,butmuchremainsto bedone.

    In thecomingyears,theFederalReservewillbeworkingwithotherU.S.financialregulatoryagencies,andwithforeigncentralbanksandregulators,tomakeanorderlyresolutionofaglobalsystemicfinancialfirmasfeasibleaspossible.

    Thankyouforyourattention.Iamhappy to answeranyquestionsyoumighthave.

    InternationalAssociationofRiskandComplianceProfessionals(IARCP)www.risk-compliance-association.com


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    Adjustmentandgrowthintheeuroarea

    SpeechbyMrPeterPraet,MemberoftheExecutiveBoardoftheEuropean CentralBank,attheEuropeanBusinessSummit,Brussels,16May2013.

    Introduction

    Thankyouverymuchfor invitingmeto

    speakatthisconferenceoftheEuropeanBusinessSummit.

    Thethemeofmyaddresstodayis“AdjustmentandGrowthintheEuroArea”.

    Thisisatitlethat,tosome,maysoundcontradictory.

    Manyofyouwillhavecomeacrosscommentatorswhoclaimthatadjustmentisinfact inimicaltogrowth;andthatconsolidatinggovernmentbudgetswhileintroducingstructuralreformsisthemaincauseofourcurrentdifficulties.

    Yet,inmyview,thisisashort-sightedassessment.

    Whileitisclearthatfiscalconsolidationhasaffectedeconomicactivityintheeuroareaintheshort-term,itdoesnotfollow fromthisthatadjustmentandgrowthareincompatible.

    Restoringthesustainabilityofpublicfinancesandimplementingwell-designedstructuralreformsarekeytorestoringconfidence.

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    Measuresthatarenow beingundertakenhelp to laythefoundationsforfuturegrowthandbringbackaclimateofconfidencealreadyintheshort-term.

    First,byprioritisingfiscalconsolidation,euroarea countriescan anchormedium-termexpectationsaboutpublicdebtsustainability,whichisessentialtosupportconfidenceamonginvestorsandtaxpayers.

    Asmanyeuroareacountriesalreadyhavehighpublicdebtlevels,andsomehaveseentheirmarketaccessthreatened,crediblefiscal

    consolidationensuresthatdebt canberefinancedataffordableratesinthefuture,andfiscalcrisesavoided.

    Moreover,ifconsolidationisfocused tothegreatestextentpossibleonunproductiveexpenditureitemsratherthanthose,like investment,thatareconducivetolong-termgrowth,thenegativeeffectsongrowth canbecontained.

    Second,byimplementingstructuralreforms,euroareacountriesshouldraisetheirfuturegrowthpotential.

    Researchhasshownthatacomprehensivepackageofproductandlabourmarketreformscouldsignificantlyincreaseeuroarea output– bymorethan4.5%over5years,accordingto arecentIMFstudy.

    Thisimprovedoutlook,whenincorporatedintomedium-termexpectations,shouldencourageforward-lookingfirms to increaseinvestment,andcouldhenceleadtohighergrowthalsointheshort-term.

    Suchreformsshouldbeundertakenwithdueprotectionofthemostvulnerablemembersofsociety.

    Thekeypointisthatforadjustmentandgrowthtobe mutuallysupportive,thecommitmenttoreformhas to becredible.

    Investors,firmsandhouseholdshave tobeconvincedbeyonddoubtthatgovernmentswillstaythecourse.

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    Iftheyfearpolicycommitmentsmaybedelayedorreversedinthefuture, theywillneitherbesufficientlyconfidentinthesustainabilityofpublicfinancesnor infuturegrowthpotentialtoaltertheirbehaviourtoday.

    “Wait-and-see”willremaintherationalresponseandshort-termgrowthwilllagbehindpotential.

    In otherwords,proposingtoreversecourseonfiscalandstructuralreformsdoesnotsupportgrowth.

    In fact,itonlyweakenscredibilityandhenceunderminesthehardworkthathasalreadybeendonetoputtheeuroareaonasurerfooting.

    Fortheremainderofmyremarks,Iwouldlike to firstreviewtheongoingprocessofadjustmentacrosstheeuroareaandwhathasbeendonebynationalauthorities,andtheECBactingwithinitspricestabilitymandate,tofacilitatethatprocess.

    Thereafter,Iwillputforwardsomesuggestionsforwhatremainstobedonebyeuroareagovernmentstoensureareturntogrowthasspeedilyaspossible.

    1.Restoringgrowthandemploymentintheeuroarea

    Letmebeginbyreviewingtheeconomicsituation.

    EuroarearealGDPstillremainsaboutthreepercentagepointsbelowitspre-crisispeak,althoughthisaggregatefigurehidessomedivergence.

    Forthegroupofcountrieswhicharestillundersomefinancialstress(Greece,Spain,Ireland,Italy,Portugal,CyprusandSlovenia),realGDPremainsnearthetroughofthecrisisreachedin2009.

    Othereuroareacountries,however,hadby2011alreadyrecoveredthepreviousmaximumlevelofrealGDP.

    Thesameistrueoflabourmarkets.

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    Theemploymentratein theeuroareaasawholeisstillmorethantwopercentagepointsbelowitspeak,accordingtoOECDfigures.

    However,Germanyhasincreaseditsemploymentratebymorethanthreepercentagepoints(to73.1%)while,attheotherextreme,Greecehasseenitsemploymentratedroppingbymorethan tenpercentagepoints(to50.1%).

    Youthunemploymentratesin anumberofstressedcountriesalsoremainunacceptablyhigh.

    Lookingforward,weexpecttheeuroareaeconomytoresumegrowthatamodestpacelaterin2013,althoughitwilltakemoretimeforthis to feedthroughintohigheremployment.

    Whyisgrowthnotreboundingmorequicklyandevenlyacrosstheeuro area?

    Akeyexplanationisthattheadjustmentprocesshasbeenhinderedbyadversefeedbackloopsresultingfromtheinteractionofaccumulatedfiscalandmacroeconomicimbalances,weakbankbalancesheetsandthelackofagenuinelyEuropeanapproachtobankresolutionandrecapitalisation.

    Togivejustoneexampleofsuchinteractions,largefiscalimbalancesinaMemberState canleadfinancialmarketsto driveupyieldsonitssovereigndebt.

    Thisinturncreateshigherfundingcostsforitsdomesticbanks andreducestheirprofitability,therebyhamperingcreditgrowthtotherealeconomy.

    Lowercreditgrowththencontributes tolowernominalGDP,whichnotonlyfurtherweakensbanks’balancesheetsbyincreasingnon-performingloans,butalsoincreasesconcernsaboutthesustainabilityofsovereigndebtthroughthedenominatoreffect;andthus,thefeedbacklooprestartsagain.

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    WithoutaEuropeanapproachtobankingsectorrepair,ifthesovereignintervenes to breakthefeedback loopbyrecapitalisingorresolvingbanks,itmayonlyheightenmarketconcernsaboutitsdebtsustainabilityandaggravatethesituation.

    a.Actionsbygovernments

    Addressingsuchadversefeedback loopsbetweengovernmentfinances,creditandgrowthimpliesatriplepolicyresponsefromgovernments:

    First,fiscalconsolidationandcurrentaccountrebalancingtosecurepublicdebtsustainabilityandlowerexternalfinancingneeds.

    Second,structuralreformsto increasepotentialgrowthandoffsetthepotentialnegativeeffectsoffiscalconsolidation.

    Third,comprehensivebankingsectorrepairtoacknowledgeimpaired assetsandstrengthenbankbalancesheets.

    Fortunately,in allthreeareastheeuroarea isheading intherightdirection.

    First,fiscalandmacroeconomicimbalanceshaveimprovedsignificantly:fiscaldeficitshavedeclinedfromtheir2009peaksthroughouttheeuroareabasedonsizeableconsolidationeffortsanddespitestrongeconomicheadwinds,whiletherehasbeenapronouncedreductionofcurrentaccountdeficits.

    However,thesesizeableflow adjustmentshavenotyetfullytranslatedintoimprovementsintheaccumulatedstockofimbalances–publicdebtratiosonthefiscalside,netinternationalinvestmentpositionsonthemacroeconomicside– becauseofdepressednominalGDP growth.

    MostEUcountriesmadesignificantprogresstowardsfurtherreducingbudgetaryimbalancesin2012,inanenvironmentofweakerthanexpectedoutputgrowth.

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    Theeuroareagovernmentdeficithasdecreased to 3.7%ofGDP (3.1%ofGDP excludingone-offgovernmentsupportforfinancialinstitutions).

    In 2013,theCommissionexpectstheeuroareadeficittoreach2.9%ofGDP– i.e.belowtheMaastrichtreferencevalue.

    Thislevelwouldbelessthanhalfthepeakreachedin2009(6.4%ofGDP),anditputstheeuroareaasawholeontracktocomplywiththecommitmentmadebyG-20leadersinTorontoin 2010 tohalvefiscaldeficitsby2013.

    Ithas tobestressedthatcorrectingfortheeffectsoftheweakcyclethefiscaladjustmenthasbeenevenlargerthansuggestedbythesefigures.

    Progresswithfiscalconsolidationhasbeenparticularlystrong incountriessubject toaneconomicadjustmentprogramme.

    Theprimarystructuraldeficit(cyclically-adjusteddeficitnetofinterestpaymentsandnetofone-offfactorsandtemporarymeasures)asaratioofGDP overtheperiod2009–2012hasfallenbyaround14percentagepointsinGreece,6percentagepointsinPortugaland4percentagepointsinIreland.

    Thetrueadjustmenteffortislikelytohavebeenevenlargerthanthesenumberssuggestdue to significantrevenueshortfallsin acontextofrebalancingfrom(tax-rich)domesticdemand towards(taxpoor)exports.

    Thisrebalancinghasalsobeenassociatedwithsignificantimprovementsin currentaccountpositions.

    Currentaccountdeficitsfellonaverageby10percentagepointsofGDP in Greece,IrelandandPortugalfrom2008–2012,andby8percentagepointsofGDP inSpainoverthesameperiod.

    Second,theeuroareawitnessedarenewedmomentumtoimplementstructuralreforms.

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    Ithasbeenwell-understoodbyeuroareacountriesthatrestoringfiscalsustainabilitymust restnotonlyonfiscaladjustment to achievesizeableprimarysurpluses,butalsoonmeasurestorevivegrowthtoavoidadversesnowballeffectsundoingthedebt-stabilisingimpactofprimarysurpluses.

    Thisrequiresstructuralreformsthatimprovelabourmarketandproductmarketfunctioningandhenceincreasepotentialgrowth.

    Therearenumerousstudies,for instancebytheOECDandtheIMF,showingthesignificantbenefitsintermsofemploymentandgrowththatcouldaccrue to theeuroareafromsuchmeasures– andnotonlyinthemedium-term.

    Acrediblecommitmentbyeuroareagovernments toimplementstructuralreformscouldalreadycreateapermanentupwardshiftinexpectationsoffuturegrowth,improvelabourmarketperformance,andasawelcomeside-effect,improve thehealthofpublicfinancesoverthemedium-term.

    And to acertainextent,thisiswhatweareseeing in theeuroareatoday.

    Asregardslabourmarketreforms,severaleuroareacountrieshavemovedtowardsanegotiatingframeworkforwagesandworkingconditionsbasedmoreonfirm-levelagreements.

    Thisshouldenhancecompetitivenessbypromotingacloserlinkbetweenwagesandproductivityand,atthesametime,allow firmstorapidlyadjusttheirinternalorganisationoflabourandproductioninresponsetochangingeconomicconditions.

    In addition,labourmarketfunctioning has beenstrengthenedbyaddressing distortionsrelatedtothe“two-tier”systemsthatcharacteriseanumberofeuroarea economies– inparticularSpainandItaly.

    Thesemeasuresshouldsupportsocialfairnessbybringingtoanendthesituationwherevulnerabletemporaryworkers,mainlyyoungpeople,defactobearthefullburdenoftheadjustment.

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    Moreover,theyshouldincreasepotentialgrowthbyimprovingtheemploymentconditionsofyoungworkersandtheirrelativelyloweropportunitiesforon-thejobtraining,whichsignificantlyhampershumancapitalformation;andbyreducinginefficientlabourturnover,sincefirmswouldbelessreluctanttotransformtemporaryjobsintopermanentones.

    Atthesametime,toreduceunemploymenttrapsandcreateincentivesforjob-seeking,welfaresystemsarebeingreformedsoastoshiftfromasystemprovidingsecurity“onthejob”tooneprovidingincomesupport“inthemarket”,whilesettingupstricteligibilitycriteriaanda systemofactivelabourmarketpolicies.

    Togetherwiththeselabourmarketmeasures,reformeffortshavefocusedonincreasingcompetitioninanumberofsectors,includingretailandwholesale,transport,energy,andprofessionalservices;reducingtheadministrativerequirementstosetuporexpandbusinesses;andimprovingtheefficiencyofciviljusticeandpublicadministration.

    Third,euroarea countrieshavetakenaseriesofmeasurestoaddressbalancesheetweaknessesinthebankingsector.

    Capitalrequirementsare intheprocessofbeingstrengthenedfollowingtheconclusionoftheCapitalRequirementsIVDirective,whichtransposestheBaselIIIagreementintoEUlaw.

    Atthesametime,anumberofbanksraisednewcapitalto addressbalancesheetweaknesses.

    Thegreatestprogressin financialsectorrepairhasofcoursetakenplace inthecountriesunderEU-IMF programmes,wheretherehasbeenacomprehensiverestructuringandrecapitalisationofthedomesticbankingsectors.

    SpainhasalsotakendecisivemeasurestoaddresstheimbalancesofthepastviaitsESMindirectbankrecapitalisationprogramme.

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    b.ActionsbytheECB

    WhatistheroleoftheECBinthisprocess?

    WhiletheECBhasconsistentlyplayeditspartandmaintainedpricestabilityintheeuroarea,itisimportanttokeepinmindthattherolethat thecentralbankcanplay intermsofcrisisresolutionislimited.

    TheECB’smonetarypolicycanonlyplayacrisismitigationrole.

    Hence,ourmonetarypolicy approachhasfocusedonprovidingliquiditysupport, intended torelievebanksofliquidityandfundingstressbygivingthemunlimitedaccesstocentralbankmoneyatafixedpriceagainst adequatecollateral.

    Tofacilitatethissupport,weexpandedthesetofeligibleassetsthat canbeusedascollateralandextendedthematurityofourlending.

    Itiswidelyrecognisedthatthesemeasureshavebeeneffectiveinavertingadisorderlyspiralofdeleveraging inthebankingsystem,whichwould havetakenplaceinanenvironmentofsevereliquidityconstraintsandfiresales.

    Thiswasnecessaryinordertoavoiddeflationarydownwardpressuresthatwouldhavepreventedusfromdeliveringonourmandateof preservingpricestabilityintheeuroarea.

    However,to mitigatethecrisiswehavealsohadtogobeyondliquiditysupport,inparticulartocounterfinancialfragmentationintheeuroarea– createdbytheadversefeedbackloopsIdescribedabove– thatwasdisruptingthetransmissionofmonetarypolicy acrosstheeuroarea.

    Divergingcreditconditionsbycountries,bysectorsandbysizeofcompanieshavepreventedtheECB’sveryaccommodativemonetarypolicy stancefrombeingpassedonevenlyin thefinancingconditionsfacedbyeuroarea firmsandhouseholds.

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    Astheeuroareaeconomyreliesheavilyonbankcredit,thishasseriousimplicationsforgrowthandultimatelyforourabilitytomaintainpricestability.

    In particular,inthefirsthalfoflastyearweperceivedasituationlastyearwheresevereupwardpressureonsovereignyieldswasbeingdrivenbyunfoundedfearsaboutthefutureoftheeuroarea.

    Thesefearswerecausing investorstochargerisk premia to lendtosomeMemberStatesthatcouldnotbejustifiedbyeconomicfundamentals.

    WethereforedecidedtoopenthepossibilityofundertakingOutrightMonetaryTransactions(OMTs),entailingexanteunlimitedinterventionsinshort-tomedium-termsecuritiesissuedbygovernmentswhichhavesubmitted to strictandeffectiveconditionality,inorder toeliminatethepricingofun-warrantedtailrisks in thebondmarkets.

    Thishasplayedanimportantroleinreducingfinancialmarketfragmentation,asfinancialmarketsunderstood OMTsasacrediblebackstopforcounteringredenominationrisk.

    2.Whatremainstobedone

    ThesemeasuresbytheECB,however,canonlybuytime;they cannotsubstitutefortheresponsibilitiesofnationalgovernments toaddresstheunsoundfiscal,economicandfinancialpoliciesthataretherootcausesofthecrisis.

    Andwhileagreatdeal has alreadybeendonebyeuroareaauthoritiestoaddresstheserootcauses,therearethreeareasinwhichmoreprogressstillneedstobemade.

    First,theeuroareaneedstocontinue todeepenstructuralreformsaimedatenhancingcompetition,flexibility,efficiency,andproductivity.

    Thereformprocesstakestime,andsoamedium-term,comprehensiveapproachiscrucialto anchorexpectationsandmaximisethepositiveeffectsofadjustmentin theshort-term.

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    Thegreatestchallenge todayis tomaintainreformmomentumandimplementfullythosechangeswhichhavealreadybeenannouncedorevenenactedintolaw.

    Concretely,thismeans,forthelabourmarkets,addressingtheremaininginsider-outsiderdualitiesandenhancinglabourmobility,includingacrossborders.

    Forproductmarkets,thekeychallengeis to openupregulatedprofessionsandnetworkindustriesthatareshelteredfromcompetitionbygovernmentregulations.

    Thisrequiresasimplificationandstreamliningofregulations,areduction ofbarriers toentryandlimitstocompetition,aresolutedeepeningoftheSingleMarketinEurope.

    Goingforward,structuralreformsalsoneedto gointothegovernmentsectoritself.

    In severaleuroareacountries,modernisationofpublicadministrationisessentialtoincreaseefficiencyintheprovisionofpublicgoods,like infrastructure,andessentialservices,like civiljustice.

    Thiswillalsosupportfiscalconsolidation,byreducingthesizeofthegovernmentsector.

    Second,theeuroareaneedstopersevereinfiscalconsolidationeffortsandreducesteadilythegovernmentdebtratio.

    Despitetheimportantprogressonfiscalconsolidation,debtratioshaveyetfailed to stabilisein mosteuroareacountries,asimprovementsin primarybalanceswereoutweighedbythedebt-risingimpactof unfavourabledevelopmentsininterest-growthdifferentialsand

    deficit-debtadjustments.

    Theeuroareagovernmentdebtratioisprojectedtorisefurthertoabove95%ofGDP in2013– farabovethe60%Maastrichtreferencevalue

    – withdebtratiosdisplayinglargedifferencesacrosscountries.

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    P age |103

    Furtheradjustmentis thusinevitable,andunfortunatelyitmusttakeplaceinanenvironmentofrisingconsolidationfatigue.

    Fiveyearsintothecrisisthisriseinconsolidationfatigueisunderstandable.

    Goingforward,itwillbeimportantforpolicymakers to communicateeffectivelybothontheneedforfurtheradjustmentandhowthisadjustmentwillbedistributedinanequitablewayacrossdifferentgroupsofthepopulation.

    Inthiscontext,itisnecessarytoreviewconsolidationstrategiesthathavereliedpredominantlyontaxrateincreases,exacerbatingtheburdenonalreadycomplianttaxpayers,withoutmuchbroadeningofthetaxbases.

    Suchanapproachhashadsubstantialnegativeeffectsondisposableincomeanddemand,atthesametimeraisingresistanceandnegativereactionsintheelectorate,basedoninter-temporaluncertaintyandfairnessconsiderations.

    Dueprotectionofthemostvulnerableisneededhere.

    Ontheexpenditureside,adjustmenthasrelieddisproportionallyoncutsingovernmentinvestment,therebyweakeningtheprospectsfor

    long-termgrowth.

    Goingforward,thereisaneedtofocusadjustmentonunproductiveexpenditurewhileasfaraspossiblesafeguardinggovernmentexpenditurethatisconducivetolong-termgrowth.

    Third,theeuroareaneedstopressaheadwithconstructingagenuineBankingUnion.

    AfirstandimportantstephasbeenmadewiththedecisiontocreatetheSingleSupervisoryMechanism(SSM),theresponsibilityforwhichwasassignedtotheECB.

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    P age |104

    PoliticalagreementbytheECOFINCouncilandtheEuropeanParliamentwasreachedonalegislativepackageinMarch,andtechnicalagreementisexpectedverysoon,sothatnationalparliamentaryproceedings canstart,whichshouldbeconcludedby thesummer.

    TheexistenceoftheSSM,byreducingregulatorycaptureandincreasingsupervisoryconsistencyandcoherence,shouldplayanimportantrolein increasingconfidenceintheoveralleuroarea bankingsystem,andasaresult,reducefragmentationofinterbankandotherfinancialmarkets.

    However,fortheBankingUniontobefullyeffective,aSingleResolution Mechanism(SRM)toaccompanytheSSMisessential.

    Thisisthecaseforanumberofreasons.

    First,anSRMwouldallow fortheeuroarea to completetheprocessof bankingsectorrepairwithoutaggravatingmarketconcernsoverpublicdebtsustainability,whichwouldhelpbreaktheadversefeedbackloopIdescribedaboveandrestorethefunctioningofthecreditchannel.

    Second,thisconfidenceinEUlevelresolutioncapacitywouldensurethat theSSMcanbeacrediblesupervisor,asitwouldbeabletopush

    non-viablebanks towardswindingdownwithoutendangeringfinancialstability.

    Third,anSRMwouldfacilitatespeedyandeffectiveresolutionoflargeandcomplexcross-borderbanks,removingtheneedfordrawn-outandinefficientcooperationbetweenmultiplenationalauthorities.

    Togeneratethesebenefits,inourviewtheSRMmustbebuiltaroundaSingleResolutionAuthorityandaEuropean Resolution Fund.

    Conclusion

    Letmenow conclude.

    Theongoingprocessofadjustmentintheeuroarea,ifperseveredwith,willcreateapathoutofthecrisis.

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    P age |105

    Thereisnodoubtthatthispathisachallengingone,asitdependson deeprootedreformstothestructureoftheeuroarea’seconomies,andtheserequirecourage toimplementandawillingnesstoconfrontvestedinterests.

    Butitiscriticalthatgovernmentsstay thecourse,asthiswillallow theconfidenceeffectsofabrighteroutlooktostartbeingfeltalreadyintheshort-term.

    Foritspart,theECBwillcontinue to fulfilitsmandate tomaintainpricestability,andtouseitsstandardandnon-standardmeasurestosupport theflow ofcredit totherealeconomy.

    Butonemustalsorecognisethelimitstowhatweasthecentralbankcanachieve.

    We cannotremovebarriers tobanklendingthatstemfrominsufficientcapitalorlackofbankrepair:these canonlybeaddressedbygovernments.

    ThisiswhyestablishingaBankingUnionwithastrongSingleResolutionMechanismisapriority.

    IamgladthattheelementsofaBankingUnionarebeginningto fallintoplace.

    Aswiftimplementationoftheremainingelementsisneeded.

    Significantprogresshasbeenmadeonfiscalconsolidationandstructuralreform.

    Lookingahead,credibilityiscrucial.

    Therefore,Iwelcomethestrongerrulesforfiscalandmacroeconomicpolicieslike theFiscalCompact.

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    P age |106

    Alltheseongoingimportantadjustmenteffortsintheeuroareashouldrestoreconfidenceintheshort-termandlead steadilybacktosustainablegrowth.

    Thankyouforyourattention.

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    P age |107

    Disclaimer

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    Ourgoalis tokeepthisinformationtimelyandaccurate.Iferrorsarebroughttoourattention, we willtry tocorrectthem.

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    CertifiedRiskandComplianceManagementProfessional (CRCMP)distancelearningandonlinecertificationprogram.

    CompanieslikeIBM, Accentureetc.consider the CRCMPapreferredcertificate.Youmayfindmoreifyousearch(CRCMPpreferred certificate) usinganysearchengine.

    Theall-inclusivecostis $297.Whatisincludedintheprice:

    Theofficialpresentationsweuse

    inourinstructor-ledclasses(3285slides)

    The2309slidesareneeded for theexam,asallthequestionsare basedon theseslides.Theremaining976slidesareforreference.

    Youcanfindthecoursesynopsisat:

    www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htm

    Upto3OnlineExams

    Youhaveto passoneexam.

    Ifyoufail, youmuststudytheofficial

    presentationsandtryagain,but youdonotneedto spendmoney.Upto 3examsareincludedintheprice.

    To learnmoreyoumayvisit:

    www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf

    www.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf

    PersonalizedCertificateprintedinfullcolor

    Processing,printing,packingandpostingto yourofficeorhome.

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    D.TheDoddFrankActandthenewRiskManagementStandards(976slides,includedinthe3285slides)

    TheUSDodd-Frank WallStreet Reform andConsumerProtectionAct isthe mostsignificant pieceoflegislation concerning thefinancialservicesindustryinabout80years.

    What doesitmeanforriskandcompliancemanagementprofessionals?Itmeansnewchallenges,newjobs,newcareers,andnewopportunities.

    Thebillestablishesnewrisk managementandcorporategovernance principles,setsupanearly warning

    systemto protect theeconomyfrom futurethreats,andbringsmore

    transparencyandaccountability.

    ItalsoamendsimportantsectionsoftheSarbanesOxley Act.Forexample,itsignificantlyexpandswhistleblowerprotectionsunder the SarbanesOxleyActandcreatesadditionalanti-retaliationrequirements.

    Youwill findmoreinformation at:

    www.risk-compliance-association.com/Distance_Learning_and_Certification.htm

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