D ear Mem b er,

1. 1 BaseliiiComplianceProfessionalsAssociation(BiiiCPA)1200GStreetNWSuite800Washington,DC20005-6705USATel:202-449-9750Web:www.basel-iii-association.com • DearMember, • Todaywewillstartfromtheassessmentmethodologyforglobalsystemicallyimportantbanks(G-SIBs)fromtheBaselCommitteeonBankingSupervision. • BIS,Aframeworkfordealingwithdomesticsystemicallyimportantbanks • Introduction • TheBaselCommitteeonBankingSupervision(theCommittee)issuedtherulestextontheassessmentmethodologyforglobalsystemicallyimportantbanks(G-SIBs)andtheiradditionallossabsorbencyrequirementsinNovember2011. • TheG-SIBrulestextwasendorsedbytheG20LeadersattheirNovember2011meeting. • TheG20LeadersalsoaskedtheCommitteeandtheFinancialStabilityBoardtoworkonmodalitiestoextendexpeditiouslytheG-SIFIframeworktodomesticsystemicallyimportantbanks(D-SIBs). • TherationaleforadoptingadditionalpolicymeasuresforG-SIBswasbasedonthe“negativeexternalities”(ieadversesideeffects)createdby BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

2. 2 systemicallyimportantbankswhichcurrentregulatorypoliciesdonotfullyaddress. Inmaximisingtheirprivatebenefits,individualfinancialinstitutionsmayrationallychooseoutcomesthat,fromasystem-widelevel,are sub-optimalbecausetheydonottakeintoaccounttheseexternalities. Thesenegativeexternalitiesincludetheimpactofthefailureorimpairmentoflarge,interconnectedglobalfinancialinstitutionsthatcansendshocksthroughthefinancialsystemwhich,inturn,canharmtherealeconomy. Moreover,themoralhazardcostsassociatedwithdirectsupportandimplicitgovernmentguaranteesmayamplifyrisk-taking,reducemarketdiscipline,createcompetitivedistortions,andfurtherincreasetheprobabilityofdistressinthefuture. Asaresult,thecostsassociatedwithmoralhazardaddtoanydirectcostsofsupportthatmaybebornebytaxpayers. 3.TheadditionalrequirementappliedtoG-SIBs,whichappliesoverandabovetheBaselIIIrequirementsthatarebeingintroducedforallinternationally-activebanks,isintendedtolimitthesecross-bordernegativeexternalitiesontheglobalfinancialsystemandeconomyassociatedwiththemostgloballysystemicbankinginstitutions. Butsimilarexternalitiescanapplyatadomesticlevel. Therearemanybanksthatarenotsignificantfromaninternationalperspective,butneverthelesscouldhaveanimportantimpactontheirdomesticfinancialsystemandeconomycomparedtonon-systemicinstitutions. Someofthesebanksmayhavecross-borderexternalities,eveniftheeffectsarenotglobalinnature.SimilartothecaseofG-SIBs,itwas BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

3. 3 consideredappropriatetoreviewwaystoaddresstheexternalitiesposedbyD-SIBs. AD-SIBframeworkisbestunderstoodastakingthecomplementaryperspectivetotheG-SIBregimebyfocusingontheimpactthatthedistressorfailureofbanks(includingbyinternationalbanks)willhaveonthedomesticeconomy. Assuch,itisbasedontheassessmentconductedbythelocalauthorities,whoarebestplacedtoevaluatetheimpactoffailureonthelocalfinancialsystemandthelocaleconomy. Thispointhastwoimplications. Thefirstisthatinordertoaccommodatethestructuralcharacteristicsofindividualjurisdictions,theassessmentandapplicationofpolicytoolsshouldallowforanappropriatedegreeofnationaldiscretion. ThiscontrastswiththeprescriptiveapproachintheG-SIBframework. ThesecondimplicationisthatbecauseaD-SIBframeworkisstillrelevantforreducingcross-borderexternalitiesduetospilloversatregionalorbilaterallevel,theeffectivenessoflocalauthoritiesinaddressingrisksposedbyindividualbanksisofinteresttoawidergroupofcountries. Aframework,therefore,shouldestablishaminimumsetofprinciples,whichensuresthatitiscomplementarywiththeG-SIBframework,addressesadequatelycross-borderexternalitiesandpromotesa level-playingfield. TheprinciplesdevelopedbytheCommitteeforD-SIBswouldallowforappropriatenationaldiscretiontoaccommodatestructuralcharacteristicsofthedomesticfinancialsystem,includingthepossibilityforcountriestogobeyondtheminimumD-SIBframeworkandimposeadditional BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

4. 4 requirementsbasedonthespecificfeaturesofthecountryanditsdomesticbankingsector. Theprinciplessetoutinthedocumentfocusonthehigherlossabsorbency(HLA)requirementforD-SIBs.TheCommitteewouldliketoemphasisethatotherpolicytools,particularlymoreintensivesupervision,canalsoplayanimportantroleindealingwithD-SIBs. Theprinciplesweredevelopedtobeappliedtoconsolidatedgroupsandsubsidiaries. However,nationalauthoritiesmayapplythemtobranchesintheirjurisdictionsinaccordancewiththeirlegalandregulatoryframeworks. TheimplementationoftheprincipleswillbecombinedwithastrongpeerreviewprocessintroducedbytheCommittee. TheCommitteeintendstoaddtheD-SIBframeworktothescopeoftheBaselIIIregulatoryconsistencyassessmentprogramme. ThiswillhelpensurethatappropriateandeffectiveframeworksforD-SIBsareinplaceacrossdifferentjurisdictions. GiventhattheD-SIBframeworkcomplementstheG-SIBframework,theCommitteeconsidersthatitwouldbeappropriateifbanksidentifiedasD-SIBsbytheirnationalauthoritiesarerequiredbythoseauthoritiestocomplywiththeprinciplesinlinewiththephase-inarrangementsfortheG-SIBframework,iefromJanuary2016. II.Theprinciples 11.TheCommitteehasdevelopedasetofprinciplesthatconstitutestheD-SIBframework. The12principlescanbebroadlycategorisedintotwogroups: BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

5. 5 Thefirstgroup(Principles1to7)focusesmainlyontheassessmentmethodologyforD-SIBswhilethesecondgroup(Principles8to12)focusesonHLAforD-SIBs. 12.The12principlesaresetoutbelow:AssessmentmethodologyPrinciple1: Nationalauthoritiesshouldestablishamethodologyforassessingthedegreetowhichbanksaresystemicallyimportantinadomesticcontext. Principle2: TheassessmentmethodologyforaD-SIBshouldreflectthepotentialimpactof,orexternalityimposedby,abank’sfailure. Principle3: ThereferencesystemforassessingtheimpactoffailureofaD-SIBshould bethedomesticeconomy. Principle4: Homeauthoritiesshouldassessbanksfortheirdegreeofsystemicimportanceattheconsolidatedgrouplevel,whilehostauthoritiesshouldassesssubsidiariesintheirjurisdictions,consolidatedtoincludeanyoftheirowndownstreamsubsidiaries,fortheirdegreeofsystemicimportance. Principle5: TheimpactofaD-SIB’sfailureonthedomesticeconomyshould,inprinciple,beassessedhavingregardtobank-specificfactors: (a)Size BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

6. 6 Interconnectedness Substitutability/financialinstitutioninfrastructure(includingconsiderationsrelatedtotheconcentratednatureofthebankingsector) Complexity(includingtheadditionalcomplexitiesfromcross-border activity). Inaddition,nationalauthoritiescanconsiderothermeasures/datathat wouldinformthesebank-specificindicatorswithineachoftheabovefactors,suchassizeofthedomesticeconomy. Principle6: NationalauthoritiesshouldundertakeregularassessmentsofthesystemicimportanceofthebanksintheirjurisdictionstoensurethattheirassessmentreflectsthecurrentstateoftherelevantfinancialsystemsandthattheintervalbetweenD-SIBassessmentsnotbesignificantlylongerthantheG-SIBassessmentfrequency. Principle7: Nationalauthoritiesshouldpubliclydiscloseinformationthatprovidesanoutlineofthemethodologyemployedtoassessthesystemicimportanceofbanksintheirdomesticeconomy. Higherlossabsorbency Principle8: NationalauthoritiesshoulddocumentthemethodologiesandconsiderationsusedtocalibratethelevelofHLAthattheframeworkwouldrequireforD-SIBsintheirjurisdiction. ThelevelofHLAcalibratedforD-SIBsshouldbeinformedbyquantitativemethodologies(whereavailable)andcountry-specificfactorswithoutprejudicetotheuseofsupervisoryjudgement. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

7. 7 Principle9: TheHLArequirementimposedonabankshouldbecommensuratewiththedegreeofsystemicimportance,asidentifiedunderPrinciple5. Principle10: NationalauthoritiesshouldensurethattheapplicationoftheG-SIBandD-SIBframeworksiscompatiblewithintheirjurisdictions. HomeauthoritiesshouldimposeHLArequirementsthattheycalibrateattheparentand/orconsolidatedlevel,andhostauthoritiesshouldimposeHLArequirementsthattheycalibrateatthesub-consolidated/subsidiarylevel. Thehomeauthorityshouldtestthattheparentbankisadequatelycapitalisedonastand-alonebasis,includingcasesinwhichaD-SIBHLArequirementisappliedatthesubsidiarylevel. HomeauthoritiesshouldimposethehigherofeithertheD-SIBorG-SIBHLArequirementsinthecasewherethebankinggrouphasbeenidentifiedasaD-SIBinthehomejurisdictionaswellasaG-SIB. Principle11: IncaseswherethesubsidiaryofabankisconsideredtobeaD-SIBbyahostauthority,homeandhostauthoritiesshouldmakearrangementstocoordinateandcooperateontheappropriateHLArequirement,withintheconstraintsimposedbyrelevantlawsinthehostjurisdiction. Principle12: TheHLArequirementshouldbemetfullybyCommonEquityTier1(CET1).Inaddition,nationalauthoritiesshouldputinplaceanyadditionalrequirementsandotherpolicymeasurestheyconsidertobeappropriatetoaddresstherisksposedbyaD-SIB. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

8. 8 Assessmentmethodology Principle1:Nationalauthoritiesshouldestablishamethodologyforassessingthedegreetowhichbanksaresystemicallyimportantinadomesticcontext. Principle2:TheassessmentmethodologyforaD-SIBshouldreflectthepotentialimpactof,orexternalityimposedby,abank’sfailure. AstartingpointforthedevelopmentofprinciplesfortheassessmentofD-SIBsisarequirementthatallnationalauthoritiesshouldundertakeanassessmentofthedegreetowhichbanksaresystemicallyimportantinadomesticcontext. Therationaleforfocusingonthedomesticcontextisoutlinedinparagraph17below. Paragraph14oftheG-SIBrulestextstatesthat“globalsystemicimportanceshouldbemeasuredintermsoftheimpactthatafailureofabankcanhaveontheglobalfinancialsystemandwidereconomyratherthantheriskthatafailurecanoccur. Thiscanbethoughtofasaglobal,system-wide,loss-given-default(LGD)conceptratherthanaprobabilityofdefault(PD)concept.” ConsistentwiththeG-SIBmethodology,theCommitteeisoftheviewthatD-SIBsshouldalsobeassessedintermsofthepotentialimpactoftheirfailureontherelevantreferencesystem. OneimplicationofthisisthattotheextentthatD-SIBindicatorsareincludedinanymethodology,theyshouldprimarilyrelateto“impactoffailure”measuresandnot“riskoffailure”measures. Principle3:Thereferencesystemforassessingtheimpactoffailure ofaD-SIBshouldbethedomesticeconomy. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

9. 9 • Principle4:Homeauthoritiesshouldassessbanksfortheirdegreeofsystemicimportanceattheconsolidatedgrouplevel,whilehostauthoritiesshouldassesssubsidiariesintheirjurisdictions, consolidatedtoincludeanyoftheirowndownstreamsubsidiaries,fortheirdegreeofsystemicimportance. • 15.TwokeyaspectsthatshapetheD-SIBframeworkanddefineitsrelationshiptotheG-SIBframeworkrelatetohowitdealswithtwoconceptualissueswithimportantpracticalimplications: • Whatisthereferencesystemfortheassessmentofsystemicimpact • Whatistheappropriateunitofanalysis(ietheentitywhichisbeingassessed)? • FortheG-SIBframework,theappropriatereferencesystemistheglobaleconomy,giventhefocusoncross-borderspilloversandthenegativeglobalexternalitiesthatarisefromthefailureofagloballyactivebank. • Assuchthisallowedforanassessmentofthebanksthataresystemicallyimportantinaglobalcontext. • Theunitofanalysiswasnaturallysetatthegloballyconsolidatedlevelofabankinggroup(paragraph89oftheG-SIBrulestextstatesthat“(t)heassessmentofthesystemicimportanceofG-SIBsismadeusingdatathatrelatetotheconsolidatedgroup”). • Correspondingly,aprocessforassessingsystemicimportanceinadomesticcontextshouldfocusonaddressingtheexternalitiesthatabank’sfailuregeneratesatadomesticlevel. • Thus,theCommitteeisoftheviewthattheappropriatereferencesystemshouldbethedomesticeconomy,iethatbankswouldbeassessedbythenationalauthoritiesfortheirsystemicimportancetothatspecificjurisdiction. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

10. 10 Theoutcomewouldbeanassessmentofbanksactiveinthedomesticeconomyintermsoftheirsystemicimportance. Intermsoftheunitofanalysis,theCommitteeisoftheviewthathomeauthoritiesshouldconsiderbanksfroma(globally)consolidated perspective. Thisisbecausetheactivitiesofabankoutsidethehomejurisdictioncan,whenthebankfails,havepotentialsignificantspilloverstothedomestic(home)economy. Jurisdictionsthatarehometobankinggroupsthatengageincross-borderactivitycouldbeimpactedbythefailureofthewholebankinggroupandnotjustthepartofthegroupthatundertakesdomesticactivityinthehomeeconomy. Thisisparticularlyimportantgiventhepossibilitythatthehomegovernmentmayhavetofund/resolvetheforeignoperationsintheabsenceofrelevantcross-borderagreements. ThisisinlinewiththeconceptoftheG-SIBframework. Whenitcomestothehostauthorities,theCommitteeisoftheviewthattheyshouldassessforeignsubsidiariesintheirjurisdictions,alsoconsolidatedtoincludeanyoftheirowndownstreamsubsidiaries,someofwhichmaybeinotherjurisdictions. Forexample,foracross-borderfinancialgroupheadquarteredincountryX,theauthoritiesincountryYwouldonlyconsidersubsidiariesofthegroupincountryYplusthedownstreamsubsidiaries,someofwhichmaybeincountryZ,andtheirimpactontheeconomyY. Thus,subsidiariesofforeignbankinggroupswouldbeconsideredfromalocalorsub-consolidatedbasisfromthelevelstartingincountryY. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

11. 11 ThescopeshouldbebasedonregulatoryconsolidationasinthecaseoftheG-SIBframework. Therefore,forthepurposesofassessingD-SIBs,insuranceorothernon-bankingactivitiesshouldonlybeincludedinsofarastheyareincludedintheregulatoryconsolidation. 20.Theassessmentofforeignsubsidiariesatthelocalconsolidatedlevelalsoacknowledgesthefactthatthefailureofglobalbankinggroupscouldimposeoutsizedexternalitiesatthelocal(host)levelwhenthesesubsidiariesaresignificantelementsinthelocal(host)bankingsystem. Thisisimportantsincethereexistseveraljurisdictionsthataredominatedbyforeignsubsidiariesofinternationallyactivebankinggroups. Principle5:TheimpactofaD-SIB’sfailureonthedomesticeconomyshould,inprinciple,beassessedhavingregardtobank-specificfactors: Size; Interconnectedness; Substitutability/financialinstitutioninfrastructure(includingconsiderationsrelatedtotheconcentratednatureofthebankingsector);and Complexity(includingtheadditionalcomplexitiesfrom cross-borderactivity). Inaddition,nationalauthoritiescanconsiderothermeasures/datathatwouldinformthesebank-specificindicatorswithineachoftheabovefactors,suchassizeofthedomesticeconomy. 21.TheG-SIBmethodologyidentifiesfivebroadcategoriesoffactorsthat influenceglobalsystemicimportance:size,cross-jurisdictionalactivity,interconnectedness,substitutability/financialinstitutioninfrastructureandcomplexity. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

12. 12 Theindicator-basedapproachandweightingsystemintheG-SIBmethodologywasdevelopedtoensureaconsistentinternationalrankingofG-SIBs. TheCommitteeisoftheviewthatthisdegreeofdetailisnotwarranted forD-SIBs,giventhefocusisonthedomesticimpactoffailureofabankandthewiderangingdifferencesineachjurisdiction’sfinancialstructurehindersuchinternationalcomparisonsbeingmade. ThisisoneofthereasonswhytheD-SIBframeworkhasbeendevelopedasaprinciples-basedapproach. Consistentwiththisview,itisappropriatetolist,atahighlevel,thebroadcategoryoffactors(egsize)thatjurisdictionsshouldhaveregardtoinassessingtheimpactofaD-SIB’sfailure. AmongthefivecategoriesintheG-SIBframework,size,interconnectedness,substitutability/financialinstitutioninfrastructureandcomplexityareallrelevantforD-SIBsaswell. Cross-jurisdictionalactivity,theremainingcategory,maynotbeasdirectlyrelevant,sinceitmeasuresthedegreeofglobal (cross-jurisdictional)activityofabankwhichisnotthefocusoftheD-SIBframework. Inaddition,nationalauthoritiesmaychoosetoalsoincludesomecountry-specificfactors. AgoodexampleisthesizeofabankrelativetodomesticGDP. IfthesizeofabankisrelativelylargecomparedtothedomesticGDP,itwouldmakesenseforthenationalauthorityofthejurisdictiontoidentify itasaD-SIBwhereasasame-sizedbankinanotherjurisdiction,whichissmallerrelativetotheGDPofthatjurisdiction,maynotbeidentifiedasaD-SIB. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

13. 13 Nationalauthoritiesshouldhavenationaldiscretionastotheappropriaterelativeweightstheyplaceonthesefactorsdependingonnationalcircumstances. Principle6:NationalauthoritiesshouldundertakeregularassessmentsofthesystemicimportanceofthebanksintheirjurisdictionstoensurethattheirassessmentreflectsthecurrentstateoftherelevantfinancialsystemsandthattheintervalbetweenD-SIBassessmentsnotbesignificantlylongerthantheG-SIBassessmentfrequency. ThelistofG-SIBs(includingtheirscores)isassessedannually,basedonupdateddatasubmittedbyeachparticipatingbank,butmeasuredagainstaglobalsamplethatislargelyunchangedforthreeyears. ItisexpectedthatthenamesandbucketsofG-SIBsandthedatausedtoproducethescoreswillbedisclosed. TheCommitteebelievesitisgoodpracticefornationalauthoritiestoundertakearegularassessmentastothesystemicimportanceofthebanksintheirfinancialsystems. Theassessmentshouldalsobeconductedifthereareimportantstructuralchangestothebankingsystemsuchas,forexample,amergerofmajorbanks. Anationalauthority’sassessmentprocessandmethodologywillbe reviewedbytheCommittee’simplementationmonitoringprocess. ItisalsodesirablethattheintervaloftheassessmentsnotbesignificantlylongerthanthatforG-SIBs(ieoneyear). Forexample,aSIBcouldbeidentifiedasaG-SIBbutalsoaD-SIBinthe samejurisdictionorinotherhostjurisdictions. Alternatively,aG-SIBcoulddropfromtheG-SIBlistand become/continuetobeaD-SIB. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

14. 14 Inordertokeepaconsistentapproachinthesecases,itwouldbesensibletohaveasimilarfrequencyofassessmentsforthetwoframeworks. Principle7:Nationalauthoritiesshouldpubliclydiscloseinformationthatprovidesanoutlineofthemethodologyemployedtoassessthesystemicimportanceofbanksintheirdomesticeconomy. 28.Theassessmentprocessusedneedstobeclearlyarticulatedandmadepublicsoastosetuptheappropriateincentivesforbankstoseektoreducethesystemicrisktheyposetothereferencesystem. ThiswasthekeyaspectoftheG-SIBframeworkwheretheassessmentmethodologyandthedisclosurerequirementsoftheCommitteeandthebanksweresetoutintheG-SIBrulestext. Bytakingthesemeasures,theCommitteesoughttoensurethatbanks,regulatorsandmarketparticipantswouldbeabletounderstandhowtheactionsofbankscouldaffecttheirsystemicimportancescoreandtherebytherequiredmagnitudeofadditionallossabsorbency. TheCommitteebelievesthattransparencyoftheassessmentprocessfortheD-SIBframeworkisalsoimportant,evenifitislikelytovaryacrossjurisdictionsgivendifferencesinframeworksandpolicytoolsusedto addressthesystemicimportanceofbanks. Higherlossabsorbency Principle8:NationalauthoritiesshoulddocumentthemethodologiesandconsiderationsusedtocalibratethelevelofHLA thattheframeworkwouldrequireforD-SIBsintheirjurisdiction.ThelevelofHLAcalibratedforD-SIBsshouldbeinformedbyquantitativemethodologies(whereavailable)andcountry-specificfactorswithoutprejudicetotheuseofsupervisoryjudgement. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

15. 15 ThepurposeofanHLArequirementforD-SIBsistoreducefurthertheprobabilityoffailurecomparedtonon-systemicinstitutions,reflectingthegreaterimpactaD-SIBfailureisexpectedtohaveonthedomesticfinancialsystemandeconomy. TheCommitteeintendstoassesstheimplementationoftheframeworkbythehomeandhostauthoritiesforitsdegreeof cross-jurisdictionalconsistency,havingregardtothedifferencesin nationalcircumstances. InordertoincreasetheconsistencyintheimplementationoftheD-SIBframeworkandtoavoidsituationswherebankssimilarintermsofthelevelofdomesticsystemicimportancetheyposeinthesameordifferentjurisdictionshavesubstantiallydifferentD-SIBframeworksappliedtothem,itisimportantthatthereissufficientdocumentationprovidedbyhomeandhostauthoritiesfortheCommitteetoconductaneffectiveimplementationreviewassessment. ItisimportantfortheapplicationofaD-SIBHLA,atboththeparentandsubsidiarylevel,tobebasedonatransparentandwellarticulatedassessmentframeworktoensuretheimplicationsoftherequirementsarewellunderstoodbyboththehomeandthehostauthorities. ThelevelofHLAforD-SIBsshouldbesubjecttopolicyjudgementbynationalauthorities. Thatsaid,thereneedstobesomeformofanalyticalframeworkthatwouldinformpolicyjudgements. ThiswasthecaseforthepolicyjudgementmadebytheCommitteeontheleveloftheadditionallossabsorbencyrequirementforG-SIBs. ThepolicyjudgementonthelevelofHLArequirementsshouldalsobeguidedbycountry-specificfactorswhichcouldincludethedegreeofconcentrationinthebankingsectororthesizeofthebankingsectorrelativetoGDP. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

16. 16 Specifically,countriesthathavealargerbankingsectorrelativetoGDParemorelikelytosufferlargerdirecteconomicimpactsofthefailureofaD-SIBthanthosewithsmallerbankingsectors. Whilesize-to-GDPiseasytocalculate,theconcentrationofthebankingsectorcouldalsobeconsidered(asafailureinamedium-sizedhighlyconcentratedbankingsectorwouldlikelycreatemoreofanimpactonthedomesticeconomythanifitweretooccurinalarger,morewidelydispersedbankingsector). TheuseofthesefactorsincalibratingtheHLArequirementwould providejustificationfordifferentintensitiesofpolicyresponsesacrosscountriesforbanksthatareotherwisesimilaracrossthefourkey bank-specificfactorsoutlinedinPrinciple5. Principle9:TheHLArequirementimposedonabankshouldbecommensuratewiththedegreeofsystemicimportance,asidentifiedunderPrinciple5. IntheG-SIBframework,G-SIBsaregroupedintodifferentcategoriesofsystemicimportancebasedonthescoreproducedbythe indicator-basedmeasurementapproach. Differentadditionallossabsorbencyrequirementsareappliedtothedifferentbuckets(G-SIBrulestextparagraphs52and73). AlthoughtheD-SIBframeworkdoesnotproducescoresbasedonaprescribedmethodologyasinthecaseoftheG-SIBframework,theCommitteeisoftheviewthattheHLArequirementsforD-SIBsshouldalsobedecidedbasedonthedegreeofdomesticsystemicimportance. ThisistoprovidetheappropriateincentivestobankswhicharesubjecttotheHLArequirementstoreduce(oratleastnotincrease)theirsystemicimportanceovertime.InthecasewheretherearemultipleD-SIBbucketsinajurisdiction,thiscouldimplydifferentiatedlevelsofHLAbetween D-SIBbuckets. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

17. 17 Principle10:NationalauthoritiesshouldensurethattheapplicationoftheG-SIBandD-SIBframeworksiscompatiblewithintheirjurisdictions.HomeauthoritiesshouldimposeHLArequirementsthattheycalibrateattheparentand/orconsolidatedlevel,andhostauthoritiesshouldimposeHLArequirementsthattheycalibrateatthesub-consolidated/subsidiarylevel.Thehomeauthorityshouldtestthattheparentbankisadequatelycapitalisedonastand-alonebasis,includingcasesinwhichaD-SIBHLArequirementisappliedatthesubsidiarylevel.HomeauthoritiesshouldimposethehigherofeithertheD-SIBorG-SIBHLArequirementsinthecasewherethebankinggrouphasbeenidentifiedasaD-SIBinthehomejurisdictionaswellasaG-SIB. Nationalauthorities,includinghostauthorities,currentlyhavethecapacitytosetandimposecapitalrequirementstheyconsiderappropriatetobankswithintheirjurisdictions. TheG-SIBrulestextstatesthathostauthoritiesofG-SIBsubsidiariesmayapplyanadditionallossabsorbencyrequirementattheindividuallegalentityorconsolidatedlevelwithintheirjurisdiction. TheCommitteehasnointentiontochangethisaspectofthestatusquowhenintroducingtheD-SIBframework. AnimpositionofaD-SIBHLAbyahostauthorityisnodifferent(exceptforadditionaltransparency)fromtheircurrentcapacitytoimposeaPillar1or2capitalcharge. Therefore,theabilityofthehostauthoritiestoimplementaD-SIBHLAonlocalsubsidiariesdoesnotraiseanynewhome-hostissues. Nationalauthoritiesshouldensurethatbankswiththesamedegreeofsystemicimportanceintheirjurisdiction,regardlessofwhethertheyaredomesticbanks,subsidiariesofforeignbankinggroups,orsubsidiariesof BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

18. 18 G-SIBs,aresubjecttothesameHLArequirements,ceterisparibus.Banksinajurisdictionshouldbesubjecttoaconsistent,coherentand non-discriminatorytreatmentregardlessoftheownership. Theobjectiveofthehostauthorities’powertoimposeHLAonsubsidiariesistobolstercapitaltomitigatethepotentialheightenedimpactofthesubsidiaries’failureonthedomesticeconomyduetotheirsystemicnature. Thisshouldbemaintainedincaseswhereabankmightnotbe(ormightbeless)systemicathome,butitssubsidiaryis(more)systemicinthehostjurisdiction. 38.AnactionbythehostauthoritiestoimposeaD-SIBHLArequirementleadstoincreasesincapitalatthesubsidiarylevelwhichcanbeviewedasashiftincapitalfromtheparentbanktothesubsidiary,unlessitalreadyholdsanadequatecapitalbufferinthehostjurisdictionortheadditionalcapitalraisedbythesubsidiaryisfromoutsideinvestors. Thiscould,inthecaseofsubstantialorlargesubsidiaries,materiallydecreasethelevelofcapitalprotectingtheparentbank. Undersuchcases,itisimportantthatthehomeauthoritycontinuestoensuretherearesufficientfinancialresourcesattheparentlevel,forexamplethroughasolocapitalrequirement. Indeed,paragraph23oftheBaselIIrulestextstates“(f)urther,asoneoftheprincipalobjectivesofsupervisionistheprotectionofdepositors,itisessentialtoensurethatcapitalrecognisedincapitaladequacymeasuresisreadilyavailableforthosedepositors. Accordingly,supervisorsshouldtestthatindividualbanksareadequatelycapitalisedonastand-alonebasis.” BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

19. 19 Withinajurisdiction,applyingtheD-SIBframeworktobothG-SIBsandnon-G-SIBswillhelpensurealevelplayingfieldwithinthenationalcontext. Forexample,inajurisdictionwithtwobanksthatareroughlyidenticalin termsoftheirassessedsystemicnatureatthedomesticlevel,butwhereoneisaG-SIBandtheotherisnot,nationalauthoritieswouldhavethecapacitytoapplythesameD-SIBHLArequirementtoboth. Insuchcases,thehomeauthoritiescouldfaceasituationwheretheHLArequirementontheconsolidatedgroupwillbethehigherofthoseprescribedbytheG-SIBandD-SIBframeworks(iethehigherofeithertheD-SIBorG-SIBrequirement). ThisapproachisalsoconsistentwiththeCommittee’sstandards,whichareminimaratherthanmaxima. ItisalsoconsistentwiththeG-SIBrulestextthatisexplicitinstatingthathomeauthoritiescanimposehigherrequirementsthantheG-SIBadditionallossabsorbencyrequirement(G-SIBrulestextparagraph74). TheCommitteeisoftheviewthatanyformofdouble-countingshould beavoidedandthattheHLArequirementsderivedfromtheG-SIBandD-SIBframeworksshouldnotbeadditive. ThiswillensuretheoverallconsistencybetweenthetwoframeworksandallowstheD-SIBframeworktotakethecomplementaryperspectivetotheG-SIBframework. Principle11:IncaseswherethesubsidiaryofabankisconsideredtobeaD-SIBbyahostauthority,homeandhostauthoritiesshouldmakearrangementstocoordinateandcooperateontheappropriateHLArequirement,withintheconstraintsimposedbyrelevantlawsinthehostjurisdiction. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

20. 20 TheCommitteerecognisesthattherecouldbesomeconcernthathostauthoritiestendnottohaveagroup-wideperspectivewhenapplyingHLArequirementstosubsidiariesofforeignbankinggroupsintheirjurisdiction. Thehomeauthorities,ontheotherhand,clearlyneedtoknowD-SIBHLArequirementsonsignificantsubsidiariessincetherecouldbeimplicationsfortheallocationoffinancialresourceswithinthebankinggroup. Inthesecircumstances,itisimportantthatarrangementstocoordinateandcooperateontheappropriateHLArequirementbetween homeandhostauthoritiesareestablishedandmaintained,withintheconstraintsimposedbyrelevantlawsinthehostjurisdiction,whenformulatingHLArequirements. Thisisparticularlyimportanttomakeitpossibleforthehomeauthoritytotestthecapitalpositionofaparentonastand-alonebasisasmentionedinparagraph38andtopreventasituationwherethehomeauthoritiesaresurprisedbytheactionofthehostauthorities. HomeandhostauthoritiesshouldcoordinateandcooperatewitheachotheronanyplantoimposeanHLArequirementonasubsidiarybank,andtheamountoftherequirement,beforetakinganyaction. Thehostauthorityshouldprovidearationalefortheirdecision,andanindicationofthestepsthebankwouldneedtotaketoavoid/reducesucharequirement. Thehomeandhostauthoritiesshouldalsodiscuss Theresolutionregimes(includingrecoveryandresolutionplans)inbothjurisdictions, Availableresolutionstrategiesandanyspecificresolutionplanin placeforthefirm,and BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

21. 21 (iii)TheextenttowhichsucharrangementsshouldinfluenceHLArequirements. Principle12:TheHLArequirementshouldbemetfullybyCommonEquityTier1(CET1).Inaddition,nationalauthoritiesshouldputinplaceanyadditionalrequirementsandotherpolicymeasurestheyconsidertobeappropriatetoaddresstherisksposedbyaD-SIB. TheadditionallossabsorbencyrequirementforG-SIBsistobemetbyCET1,asstatedintheG-SIBsrulestext(paragraph87). TheCommitteeconsideredtheuseofCET1tobethesimplestandmosteffectivewaytoincreasethegoingconcernloss-absorbingcapacityofabank. HLArequirementsforD-SIBsshouldalsobefullymetwithCET1toensureamaximumdegreeofconsistencyintermsofeffectivelossabsorbingcapacity. Thishasthebenefitoffacilitatingdirectandtransparentcomparabilityoftheapplicationofrequirementsacrossjurisdictions,anelementthatisconsidereddesirablegiventhefactthatmostofthesebankswillhavecross-borderoperationsbeingindirectcompetitionwitheachother. Inaddition,nationalauthoritiesshouldputinplaceanyadditionalrequirementsandotherpolicymeasurestheyconsidertobeappropriatetoaddresstherisksposedbyaD-SIB. NationalauthoritiesshouldimplementtheHLArequirementthroughanextensionofthecapitalconservationbuffer,maintainingthedivisionofthebufferintofourbandsofequalsize(asdescribedinparagraph147oftheBaselIIIrulestext). ThisisinlinewiththetreatmentoftheadditionallossabsorbencyrequirementforG-SIBs. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

22. 22 TheHLArequirementforD-SIBsisessentiallyarequirementthatsitsontopofthecapitalbuffersandminimumcapitalrequirement,witha pre-determinedsetofconsequencesforbanksthatdonotmeetthisrequirement. 46.Insomejurisdictions,itispossiblethatPillar2mayneedtoadapttoaccommodatetheexistenceoftheHLArequirementsforD-SIBs. Specifically,itwouldmakesenseforauthoritiestoensurethatabank’sPillar2requirementsdonotrequirecapitaltobeheldtwiceforissuesthatrelatetotheexternalitiesassociatedwithdistressorfailureofD-SIBsiftheyarecapturedbytheHLArequirement. However,Pillar2willnormallycaptureotherrisksthatarenotdirectlyrelatedtotheseexternalitiesofD-SIBs(eginterestrateandconcentrationrisks)andsocapitalmeetingtheHLArequirementshouldnotbepermittedtobesimultaneouslyusedtomeetPillar2requirementthatrelatetotheseotherrisks. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

23. 23 MarioDraghi:OpeningstatementatDeutscherBundestag SpeechbyMrMarioDraghi,PresidentoftheEuropeanCentral Bank,atthediscussiononECBpolicieswithMembersofParliament,Berlin *** DearPresidentLammert,HonourableCommitteeChairs, HonourableMembersoftheBundestag, Iamdeeplyhonouredtobeheretoday. AsPresidentoftheEuropeanCentralBank(ECB),itisaprivilegeformetocometotheheartofGermandemocracytopresentourpolicyresponsestothechallengesfacingtheeuroareaeconomy. Iknowthatcentralbankactionsareoftenatopicofdebateamongpoliticians,themediaandthegeneralpublicinGermany. SoIwouldliketothankPresidentLammertandallCommitteeChairsmostwarmlyforthiskindinvitation–andtheopportunityitgivesmetoparticipateinthatdiscussion. ItisrarefortheECBPresidenttospeakinanationalparliament.TheECBisaccountabletotheEuropeanParliament,wherewehave scheduledhearingseverythreemonthsandoccasionalhearingson topicalmatters. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

24. 24 WetakethesedutiesofaccountabilitytothecitizensofEuropeandtheirelectedrepresentativesveryseriously. ButIamheretodaynotonlytoexplaintheECB’spolicies.Iamalsoheretolisten. IamheretolistentoyourviewsontheECB,ontheeuroareaeconomyandonthelonger-termvisionforEurope. Tolaythegroundforourdiscussion,Iwouldliketoexplainourviewofthecurrentsituationandtherationaleforourrecentmonetarypolicydecisions. IwillfocusinparticularontheOutrightMonetaryTransactions(OMTs)thatweformallyannouncedinSeptember. Financialmarketsandthedisruptionsofmonetarypolicytransmission Letmebeginwiththechallengesfacingtheeuroarea. Weexpecttheeconomytoremainweakinthenearterm,alsoreflectingtheadjustmentthatmanycountriesareundergoinginordertolaythefoundationsforsustainablefutureprosperity. Fornextyear,weexpectaverygradualrecovery. Euroareaunemploymentremainsdeplorablyhigh. Inthisenvironment,theECBhasrespondedbyloweringitskeyinterestrates. Innormaltimes,suchreductionswouldbepassedonrelativelyevenlytofirmsandhouseholdsacrosstheeuroarea. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

25. 25 Butthisisnotwhatwehaveseen. Insomecountries,thereductionswerefullypassedon. Inothers,therateschargedonbankloanstotherealeconomydeclinedonlyalittle,ifatall. Andinafewcountries,somelendingrateshaveactuallyrisen. Whydidthisdivergencehappen? Letmeexplainthisindetailbecauseitissoimportantforunderstanding ourpolicies. Afundamentalconceptincentralbankingiswhatisknownas“monetarypolicytransmission”. Thisisthewaythatchangesinacentralbank’smaininterestrateare passedviathefinancialsystemtotherealeconomy. Inawell-functioningfinancialsystem,thereisastablerelationshipbetweenchangestocentralbankratesandthecostofbankloanstofirmsandhouseholds. Thisallowscentralbankstoinfluenceoveralleconomicconditionsandmaintainpricestability. Buttheeuroareafinancialsystemhasbecomeincreasinglydisturbed.Therehasbeenaseverefragmentationinthesinglefinancialmarket. Bankfundingcostshavedivergedsignificantlyacrosscountries. Theeuroareainterbankmarkethasbeeneffectivelyclosedtoalargenumberofbanksandsomecountries’entirebankingsystems. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

26. 26 Interestratesongovernmentbondsinsomecountrieshaverisensteeply,hurtingthefundingcostsofdomesticbanksandlimitingtheiraccesstofundingmarkets. Thishasbeenakeyfactorwhybankshavepassedoninterestratesverydifferentlytofirmsandhouseholdsacrosstheeuroarea. Interestratesdonothavetobeidenticalacrosstheeuroarea,butitisunacceptableifmajordifferencesarisefrombrokencapitalmarketsortheperceptionofaeuroareabreak-up. Thefragmentationofthesinglefinancialmarkethasledtoafragmentationofthesinglemonetarypolicy. Andinaneconomyliketheeuroareawhereaboutthreequartersoffirms’financingcomesfrombanks,thishasverysevereconsequencesfortherealeconomy,investmentandemployment. Itmeantthatcountriesineconomicdifficultiescouldnotbenefitfromourlowinterestratesandreturntohealth. Instead,theywereexperiencingaviciouscircle. Economicgrowthwasfalling.Publicfinancesweredeteriorating.Banksandgovernmentswerebeingforcedtopayevenhigherinterest rates. Andcreditandeconomicgrowthwerefallingfurther,leadingtorisingunemploymentandreducedconsumptionandinvestment. Anumberofeconomiescouldhaveseenrisksofdeflation. Allofthismeantthattheoutlookfortheeuroareaeconomyasawholewasincreasinglyfragile. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

27. 27 TherewerepotentiallynegativeconsequencesforEurope’ssinglemarket,asaccesstofinancewasincreasinglyinfluencedbylocationratherthancreditworthinessandthequalityoftheproject. Thedisruptionofthemonetarypolicytransmissionissomethingdeeplyprofound. ItthreatensthesinglemonetarypolicyandtheECB’sabilitytoensurepricestability. ThiswaswhytheECBdecidedthatactionwasessential. Restoringthepropertransmissionofmonetarypolicy Soletmenowturndirectlytoourrecentpolicyannouncements. Todecidewhattypeofactionwasappropriate,wehadtomaketwokeyassessments. First,wehadtodiagnosepreciselywhythetransmissionwasdisrupted.Andsecond,wehadtoidentifythemosteffectivepolicytooltorepair thosedisruptions,whileremainingwithinourmandatetopreserveprice stability. Inouranalysis,amaincauseofdisruptionsinthetransmissionwasunfoundedfearsaboutthefutureoftheeuroarea. Someinvestorshadbecomeexcessivelyinfluencedbyimaginedscenariosofdisaster. Theywerethereforecharginginterestratestocountriestheyperceivedtobemostvulnerablethatwentbeyondlevelswarrantedbyeconomic fundamentalsandjustifiableriskpremia. Clearly,itwasnotbychancethatsomecountriesfoundthemselvesinamoredifficultsituationthanothers. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

28. 28 Itwasmainlythosecountriesthathadimplementedinappropriateeconomicpoliciesinthepast. Thisisalsowhythefirstresponsibilityinthissituationisforcountriestomakedeterminedreformsandconvincemarketsthattheyarecredible. Butmanywerealreadydoingthis,onlyforinterestratestoriseevenhigher. Therewasanelementoffearinmarkets’assessmentsthatgovernments,actingalone,couldnotremove. Marketswerenotpreparedtowaitforthepositiveeffectsofreformstoemerge. Inourview,torestorethepropertransmissionofmonetarypolicy,thoseunfoundedfearsaboutthefutureoftheeuroareahadtoberemoved. Andtheonlywaytodosowastoestablishafullycrediblebackstopagainstdisasterscenarios. WedesignedtheOMTsexactlytofulfilthisroleandrestoremonetarypolicytransmissionintwokeyways. First,itprovidesforexanteunlimitedinterventionsingovernmentbondmarkets,focusingonbondswitharemainingmaturityofuptothreeyears. Alotofcommentshavebeenmadeaboutthiscommitment.Butwehavetounderstandhowmarketswork. Interventionsaredesignedtosendaclearsignaltoinvestorsthattheirfearsabouttheeuroareaarebaseless. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

29. 29 Second,asapre-requisiteforOMTs,countriesmusthavenegotiatedwiththeothereuroareagovernmentsaEuropeanStabilityMechanism(ESM)programmewithstrictandeffectiveconditionality. ThisensuresthatgovernmentscontinuetocorrecteconomicweaknesseswhiletheECBisactive. TheinvolvementoftheIMF,withitsunparalleledtrackrecordinmonitoringadjustmentprogrammeswouldbeanadditionalsafeguard. TheconsequencesoftheECB’sactions SowhatarethelikelyconsequencesoftheECB’sactions? BeforeannouncingtheOMTprogramme,weconsideredverycarefullythepossiblerisks–andwedesignedouroperationstominimisethem. ButIamawarethatsomeobserversinthiscountryremainconcernedaboutthepotentialimpactofthispolicy. Iwouldthereforeliketousethisopportunitytogothroughthoseconcerns–onebyone–andexplainourviews. First,OMTswillnotleadtodisguisedfinancingofgovernments.Wehavespecificallydesignedourinterventionstoavoidthis. Theywilltakeplacesolelyonsecondarymarkets,wherebondsthathavealreadybeenissuedaretraded. Ifinterventionstakeplace,theywillinvolvebuyinggovernmentdebtfrominvestors,notfromgovernments. AllthisisfullyconsistentwiththeTreaty’sprohibitiononmonetaryfinancing. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

30. 30 Moreover,theywillfocusonshortermaturitiesandleaveroomformarketdiscipline. Second,OMTswillnotcompromisetheindependenceoftheECB.TheECBwillcontinuetotakealldecisionsrelatedtoOMTsinfull independence. Itwilldecidewhethertointervenebasedonitsownassessmentofmonetarypolicytransmissionandwiththeaimofsafeguardingpricestability. Thefactthatgovernmentshavetocomplywithconditionalitywillactuallyprotectourindependence. TheECBwillnotbeforcedtostepinforalackofpolicyimplementation. Third,OMTswillnotcreateexcessiverisksforeuroareataxpayers.Suchriskswouldonlymaterialiseifacountryweretorununsound policies. ThisisexplicitlypreventedbytheESMprogramme. Andwehavebeenveryclearthateachtimeaprogrammestartsbeingreviewed,wewillroutinelysuspendoperationsandresumethemonlyifthereviewhasbeenconcludedpositively. ThiswillensurethattheECBintervenesonlyincountrieswheretheeconomyandpublicfinancesareonasustainablepath. Fourth,OMTswillnotleadtoinflation. Wehavedesignedouroperationssothattheireffectonmonetaryconditionswillbeneutral. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

31. 31 Foreveryeuroweinject,wewillwithdrawaeuro. Inourassessment,thegreaterrisktopricestabilityiscurrentlyfallingpricesinsomeeuroareacountries. Inthissense,OMTsarenotincontradictiontoourmandate:infact,theyareessentialforensuringwecancontinuetoachieveit. Moreover,weseenosignsthatourannouncementhasaffectedinflationexpectations. Theycontinuetobefirmlyanchored. Thisistestamenttoourtrackrecordonpricestabilityoverthelastdecadeandourcrediblecommitmenttomaintainingpricestability. Thecitizensoftheeuroareacanbeconfidentthatwewillremainpermanentlyalerttoriskstopricestability. Wehaveallthenecessarytoolsatourdisposaltomaintainitandtowithdrawanyexcessliquidityincaseofupwardriskstopricestability. Conclusion Letmeconcludetheseopeningremarks. ThreeelementsareessentialforunderstandingthepoliciesoftheECB:immutablefocusonpricestability;actingwithinourmandate;andbeingfullyindependent. TheECB’snewmeasureshelptoensurepricestabilityacrosstheeuroarea. Theyalsocontributetoimprovingtheeconomicenvironment. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

32. 32 Butcompletingthattaskofeconomicrenewaldemandscontinuingactionbythegovernmentsoftheeuroarea. Itisgovernmentsthatmustsetrighttheirpublicfinances.Itisgovernmentsthatmustreformtheireconomies. Anditisgovernmentsthatmustworktogethereffectivelytoestablishaninstitutionalarchitecturefortheeuroareathatbestservesitscitizens. Wearealreadymovingintherightdirection.Acrosstheeuroarea,deficitsarebeingcut. Competitivenessisbeingimproved.Imbalancesareclosing. Andgovernmentsareworkingseriouslytocompleteeconomicandmonetaryunion. ItisimportantthatEurope’sleadersstayoncourse. Indoingso,theywillbeabletounlockfullytheenormouspotentialoftheeurotoimprovelivingstandardsandcarryforwardtheprojectofEuropeanintegration. Thankyouforyourattention–andIlookforwardtoourdiscussion. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

33. 33 AndreasDombret:AsgoesIreland,sogoesEurope? SpeechbyDrAndreasDombret,MemberoftheExecutiveBoardoftheDeutscheBundesbank,attheInstituteofInternationalandEuropeanAffairs,Dublin *** 1.Introduction LadiesandGentlemen, Manythanksforinvitingmetospeaktoyou.IamdelightedtohavetheopportunitytobewithyouhereinDublintoday. OneoftheissueswhichtheInstituteofInternationalandEuropeanAffairsfeaturesonitswebsiteis“TheFutureofEurope”.And,indeed,thefutureofEuropeisatthecentreofthecurrentpublicdebate. Afternearlytenverysuccessfulyears,theEuropeanMonetaryUnionhasencounteredaseriouscrisis. Overthepastfewmonths,wehaveseensomeprogressinthisregard:a fiscalcompacthasbeenagreed,theESMhascometolife,thereispreliminaryagreementonaEuropeanSingleSupervisoryMechanism,and–mostimportantly–morememberstatesoftheeuroareahaveembarkedonbroadereconomicreforms. Butthecrisisisstillnotover,andprogressisstilltoooftenpainfullyslow.Whentalkingabouttheeuro,thesuccesses,thesetbacksandtheway forward,Irelandplaysanimportantrole. Asanopenandflexibleeconomywithahighlyskilledworkforce,Ireland BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

34. 34 hasseizedtheopportunitiespresentedbyglobalandespeciallybyEuropeaneconomicintegration. WhenIrelandjoinedtheEUin1973,itwasoneofthepoorermemberstates. Sincethen,yourrealpercapitaincomehasincreasedmorethantwofoldandistodayamongthehighestintheeuroarea. Irelandhasbenefitedfromseveralfactors:lowbarriersintermsoflanguageandculturevisàvistheUSandtheUKhavecertainlyhelped,butIrelandalsohasdonealottoraiseitsgrowthpotentialbyimprovingtheskillsofitslabourforce,loweringcorporatetaxesandmaintainingflexiblelabourandproductmarkets. Asaresult,youattractedalotofForeignDirectInvestmentandbecamearemarkablyopeneconomy. Asweallknow,thisremarkablesuccessstoryhassufferedanumberofsetbacks. Inthelightofthecrisis,someeconomicdevelopmentshaveprovedunsustainable. TheIrishrealestateboom–assomanyothers–providedatemporaryboostatthetime,butraisedprivatedebttoworryinglevels–to215%ofGDPin2007–anddivertedcapitalawayfrompotentiallymoreproductiveuses. ExplodingunitlabourcostshaveerodedthecompetitivenessoftheIrisheconomy,underminingtheverycoreofitsgrowthmodelsofar. Buteventhoughthelastfewyearshavebeenchallenging,manysignspointtoasilverlining. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

35. 35 Therehasbeensignificantprogressinreformswiththeresultstoshowforit:on-trackdeficitreduction,fallingunitlabourcosts,apositivecurrentaccountandlastbutnotleastareturntopositivegrowth. Tosumitup:IamverymuchconfidentwithregardtotheIrishcase. AndIammoreandmoreconvincedthatwearewitnessingaresurgencethatisinstructivefortheeuroareaasawhole. TheproblemsexperiencedbyIrelandarebynomeansconfinedtothe“GreenIsland”,butaretypicalofwhatwentwrongintherun-uptothe crisis. Thus,thereformsundertakeninIrelandholdvaluablelessonsforthewidermonetaryunion. ButwhatexactlydidgowrongattheonsetofEMU? 2.Theoriginsofthecrisis Formanyeuro-areamemberstates,theintroductionoftheeurousheredinaneweraofabundantcapital. InthecaseofIreland,forinstance,capitalinflowsamountedtoabouttwotrillioneurobetween1999and2008. Inprinciple,thisisexactlywhatstandardeconomicreasoningpredicts:capitalwasflowingfromcapital-richtocapital-pooreconomies,wherereturnsshouldbehigher. Suchflowscomplementedlimiteddomesticsavingincapital-poor countriesandreducedtheircostofcapital,boostinginvestmentandgrowth. Asweallknow,itdidnotalwaysworkthatway. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

36. 36 Overblownfinancialsectorschanneledthecapitalflowsintounproductiveinvestments. Irelandiscertainlyacaseinpointaslight-touchregulationandtaxincentivesencouragedthefinancialsectortoballoon. Overinvestmentinrealestateaswellasinpublicandprivateconsumptionfailedtoboostproductivity. Unitlabourcostssoared,competitivenessdeclined,andrigidlabourand productmarketsmeantthatthisprocessgainedadditionalmomentum. Whenthefinancialcrisisbrokeoutin2007,thevulnerabilitiesbecameapparentinIreland. Growthimploded,deficits–whichwereoftenalreadytoohighbeforethe crisis–exploded,andcracksintheIrishbankingsystemstartedtoshow. Asanaside,youmayrecallthatthesecracksextendedrightintoGermany,whereIrishsubsidiariesorspecialinvestmentvehiclesgottheirGermanparentcompaniesintotrouble. Notsurprisingly,investorsentimentbegantoshift,andalsointerestratesinyourcountrystartedtorisesharply,triggeringamajorcrisisthatisstillfarfrombeingresolved. Howcoulditallgosowrong? Keytounderstandingthecrisisistheeuroarea’suniqueinstitutional set-up,aset-upthateasilyleadstosimple,butfaultyanalogieswithothereconomies. Asyouarewellawaretheeuroareapairsacommonmonetarypolicywith17nationalfiscalpolicies. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

37. 37 Firstly,thiscombinationgivesrisetoadeficitbias,asitallowscoststobeshiftedpartiallyontoothers. Ifaworseningfiscalpositioninonecountryhasrepercussionsforour monetaryunionasawhole,othersmaystepinandbailout. And,secondly,centralbanks’balancesheetscanserveasaconduitforshiftingrisksamongnationaltaxpayers,eveniftherearenoexplicitfiscaltransfers. Thefoundingfathersoftheeuroforesawthisrisk. Precautionsweretakenintheformoftheprohibitionofmonetaryfinancingofgovernmentdeficits,pricestabilityastheprimaryobjective,theno-bail-outclauseandtheStabilityandGrowthPactthatwastogiveteethtotherulesonsoundpublicfinancesenshrinedintheMaastrichtTreaty. However,thefiscalruleswerebreachednumeroustimes,notleastbyGermanyandFrance. Inaddition,investorsmadehardlyanydistinctionbetweenthebondsofindividualmemberstates–Ileaveittoyoutodecidewhetherthiswasbecausetheyneglectedthegrowingdifferencesintheeconomicfundamentalsorbecausetheyneverreallybelievedthattheno-bail-outclausewouldholdoncethegoinggottough. Whiletheprovisionsagainstunstablefiscalpositionsprovedtobeinsufficient,theinstitutionalframeworktooknoaccountofothermacroeconomicimbalances. Risksstemmingfromdivergencesincompetitivenessorexaggerationsin nationalrealestatesectorswerenotconsideredinthedesignoftheEuropeanMonetaryUnion. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

38. 38 Hence,evencountriesthathadimpressivefiscaldatabeforethecrisisranintodeeptroubleoncetheenormousimplicitliabilitiesintheirbankingsectorsbecameapparent. Ireland,unfortunately,wasoneofthosecountries. AssessingtheIrisheconomyin2007theIMF–whichIquotefor convenience,nottoblameit–wrote:“Fiscalpolicyhasbeenprudent,withamedium-termfiscalobjectiveofclosetobalanceorsurplus,inlinewithFundadvice. Inthepastcouple[of]years,windfallproperty-relatedrevenuesweresavedandthefiscalstancewasnotprocyclical,inlinewithFundadvice”. However,oncetherisksinthefinancialsectormaterialisedandthegovernmenthadtostepin,Irelandsfiscalpositiondeterioratedveryquickly. 3.Thewayforward Toovercomethecurrentcrisis,andtopreventfuturecrises,wehavetoaddresstheseproblemsIhavejustdescribed. AndthishastohappenbothnationallyandattheEuropeanlevel.Sofar,anumberofstepshavebeentaken. AtthebeginningofmyspeechImentionedtheESM,towhichImightaddthefiscalcompactandthenewexcessiveimbalanceprocedurethathasbeenestablishedtopreventmacroeconomicdevelopmentsfrom divergingtoomuchinthefuture. Nevertheless,thepainfultaskofcorrectingpastmistakesliesmainlywiththememberstates. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

39. 39 InthiscontextIwishtopointtoIrelandasagoodexampleofwhathastobedoneandwhatcanbeachieved. InthisregardIviewIrelandasa“rolemodeloftheperiphery”. Ihavealreadymentionedthedeclineincompetitivenessthatoccurred priortothecrisis. InthisrespectIrelandcertainlyhadasteepmountaintoclimb. In2008,Irishunitlabourcosts,asanindicatorofcompetitiveness,weremorethan40%higherthanatthelaunchofEMU. Still,notleastthankstoflexiblelabourmarkets,thenecessaryadjustmenthasbeenswifterinIrelandthaninothermemberstates. TherewasasimilarexperiencewiththebubbleintheIrishrealestatemarket. Yourproblemsbecameapparentearlierthaninothermemberstates,with propertypricesstartingtofallinthelastquarterof2007. Hence,Irelandrespondedearlierthanothercountries,andinadeterminedmanner,toashockwhich,asoftoday,hascutpropertypricesinhalf. Asaresult,therestructuringofthebankingsectorismoreadvancedandcostsforbankloanstofirmsarenowlowerthanincountriessuchasItalyorSpain. Thishighlightsthefactthatitissometimesbettertotakeabigbathratherthanjustashower. Anditisbettertotakeitassoonaspossiblebecausethewatertypicallygetscolderastimepassesby. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

40. 40 Butthesituationinyourcountryalsohighlightssomethingelse:thedangerouslinkbetweenbanksandsovereigns. Lookingtothefuture,thislinkhastobebroken,oratleasttobeweakenedconsiderably,topreventhistoryfromrepeatingitself. Letmefirststepbackandtakealookatwhythecloselinkbetweenbanksandsovereignshasproventobesoproblematicandsodangerousinthiscrisis. Ifmanybanksrunintotroubleatthesametime,possiblyonaccountofalargeassetbubblebursting,financialstabilityasawholeisthreatened.Thegovernmentthenoftenhasnooptionbuttostepinifitwantstopreventameltdownoftherealeconomy. Butsucharescuecanplaceahugeburdenongovernmentfinances–and nocountryknowsthatbetterthanIreland,wheresupportforthefinancialsectorwasamajorfactorwhythedebtratiosoaredfrom25%ofGDPin2007to108%in2011. Conversely,weakgovernmentfinancescandestabilisebanks–directlythroughtheirexposuretosovereignbonds,and,indirectly,throughworseningmacroeconomicconditions. Thatiswhatwearealsowitnessingatthisverymoment. Thus,breakingthelinkbetweenbanksandsovereignsisvitalformakingtheeuroareamorestable. Abankingunioncanverywellbeamajorstepinthatdirection–butbyharnessingthedisciplinaryforcesofthemarket,notbydoingawaywiththem. Coreelementsofabankingunionthereforehavetobe: BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

41. 41 First,acomprehensivebail-inofbankcreditors,andsecond,an appropriaterisk-weightingofsovereignbonds. Inordertominimisetheriskthatbankrescuesposetogovernmentfinances,creditorshavetobethefirstinlinewhenitcomestobearingbanks’losses. Implicitguaranteeshavetoberemovedastaxpayers’moneycanonlybethelastresort. Bythesametoken,sovereignbondsneedtoberisk-weightedappropriatelywhenitcomestotheadequacyofcapitalbuffers. Riskierbondshavetobecomemoreexpensiveintermsoftheamountof equitythattheytiedown,asisalreadythecasefornon-sovereignbonds.Thisservestwopurposes:Ontheonehand,surchargesofthiskindshouldtranslateintolowerdemandand,hence,intolargerspreads,whichgivesadiscipliningsignaltotherespectivesovereign. And,ontheotherhand,bankswouldbecomemoreresilientintheeventofmarketturmoil. Adequaterisk-weightingofsovereignbondshelpstopreventfiscaldifficultiesfromtranslatingdirectlyintofinancialinstability. Iffiscalautonomyremainswithnationalmemberstates,whichisstillthestatusquointheEUTreaties,thisiscrucial. Bankshavetointernalisethefiscalpositionofsovereignsinasimilarmannerastheytakeintoaccounttheriskofcorporatebondsorloans. Otherwise,theenvisagedrecapitalisationofbanksviaEuropeanfundscouldturnouttobeabackdoorformutualisingsovereignsolvencyrisks. Ithereforebelievethatthesetworegulatoryreforms–acomprehensivebail-inofcreditorsaswellasanadequaterisk-weightingofsovereign BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

42. 42 bonds–needtocomplementtheenvisagedEuropeansupervisorymechanism. Inprinciple,thissingleEuropeansupervisorcanhelppreventfuturecrisesbyenforcingthesamehighstandardsirrespectiveofthebanks’countryoforiginandbytakingtransnationalinterdependenciesintoaccount. Atthemoment,itlooksasthoughthistaskshallbecarriedoutbytheEuropeanCentralBank. Thisis,firstofall,anexpressionofconfidenceinthecompetenceofcentralbanksingeneralandintheECBinparticular. Butconductingmonetarypolicyandfinancialsupervisiondoesnotcomewithoutrisks. Iftheinstitutionresponsibleforensuringthefinancialsoundnessofbankssimultaneouslyinfluencesbanks’financingconditionsviaitsmonetarypolicy,conflictsofinterestmayarise. Besides,theresolutionofbanksimpliesinterveninginpropertyrights,whichrequiresdemocraticaccountability. IftheECBistobetaskedwithsupervisingEuropeanbanks,therewillhavetobeastrictseparationofmonetarypolicyandsupervision. Suchaseparationwillbedifficultfrombothalegalandanorganisationalpointofview. Inthisrespect,therestillarequestionsthatneedtoberesolved. Abankingunionwillcontributetofinancialstability,ifitsdesignpreservessoundincentivesforallactorsinvolved. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

43. 43 Thisholdstruenotonlyforfuturerisks,butalsoforrisksthathavealreadymaterialised. Economicallyspeaking,abankingunionisbasicallyaninsurancemechanism. And,aswithanyinsurance,onlyfuturelossesordamagesthatareunknownexantecanbecovered. Nodoubt,thebankingunionisanimportantbuildingblockforamorestablemonetaryunion. But,assuch,itismeanttomitigatefuturerisksandnottocoverpastsins. Inthiscontext,IfullyunderstandthatIrelandiscloselyfollowingtheconditionsunderwhicheuro-areamemberstateswillprovidefinancialassistancetoSpainfortherecapitalisationofitsfinancialinstitutions. Onespecificpointisthedegreeofbondholders’participationintheSpanishrestructuringprocess. TheEurogroupstatedinJulywithrespecttoIreland:“Similarcaseswillbetreatedequally,takingintoaccountchangedcircumstances.” However,asthisissueiscurrentlyunderdiscussionIpreferabstainingfrompubliccomments. InsteadIliketosharemyviewwithyouontheissueoflegacyassetsingeneral. Legacyassetsarethoseriskswhichevolvedundertheresponsibilityofnationalsupervisors. FromwhatIhavealreadysaid,itfollowsthattheseassetshavetobedealtwithbytherespectivememberstates. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

44. 44 Anythingelsewouldamounttoafiscaltransfer. Itmaybethatsuchfiscaltransfersaredesiredorevendeemednecessary.Butthen,theyshouldbeconductedvianationalbudgetsandsubjectto approvalofnationalparliaments,ratherthanundertheguiseofabankingunion,whichwouldthenhavetostartunderaheavyburden. And,intheeventofsuchtransfersthepropersequencingofeventsisthekey. Weshouldnotendupinaworldwhererisksfrombankbalancesheetsarerapidlymutualised,whileaneffectivesinglesupervisorymechanismwouldbeslowincoming. Abankingunionwillthereforenotbeaquickfix. Butitcanbeanimportantmilestonetowardsamorestableandprospermonetaryunionandhenceinstrumentalinregainingconfidencein theeuroarea. Irelandhasalreadycomealongwayinthisregard,asyoursuccessfulreturntothecapitalmarketsinJulyhasshown. TrusthasbeenregainedbecauseIrelandhaswalkedthetalk. AndIamsureyouagree:Anydeviationfromthisclimbwhenthemountaintopisalreadyinsightwouldbebothshort-sightedandcostly. Moreprecisely,whenlisteningtothediscussiononmoreleniencyforGreece,IcanunderstandthatdemandingsimilaradjustmentstotheIrishprogrammeseemtemptingatfirstglance. Butaswehavelearnedthehardwayoverthelastyears,trustisaseasilylostasitishardtoregain. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

45. 45 Irelandhasmadeenormousprogressintheprocessofregainingtrustandconfidence. Importantfinancialmarketindicatorsareanexpressionofthisfact.CDSpremiafortheIrishsovereignhavefallencontinuouslyin2012. InthemeantimeIrishCDSpremiaarebelowthoseofSpainandevenItaly. ThesamedevelopmentcanbeobservedforthespreadoverGermanbunds. Allofthesedevelopmentsaretheresultof“leadingbyexample”withstructuralreforms. Hence,IseenoreasonforIrishCDSchangingthecourse,andIdoubtthatthiswouldtrulybeinIreland’sbestinterest. Isuggestnottojeopardisewhathasbeenachievedsofar. 4.Conclusion Ladiesandgentlemen, WhenwetalkaboutEurope,Irelandissuchaninterestingexampleforanumberofreasons. First,ithighlightsthebenefitsofaunifiedEuropewhichstillleavesitsmemberstatesenoughroomtoestablishtheirownmodelofsuccess–Irelandhascertainlyseizedthatopportunity. ButtheIrishexperienceatthesametimealsoillustratessomeofthethingsthathavegonewronginEuropeoverthepastdecade,andIhavementionedmanyoftheminmyspeech. Nevertheless,andevenmoreimportantly,theIrishexperienceholdsvaluablelessonsonhowtoovercomethecurrentcrisis. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

46. 46 Ofcourse,Irelandhasnotyetovercomeallofitsproblems–everycountryisdifferentandchallengesareneverexactlythesame. ButIbelieveweallcanlearnagreatdealfromtheIrishwayofhandlingthecrisis:AsgoesIreland,sogoesEurope. LetmeconcludemyspeechwiththesinglemostimportantandmostencouraginglessonwecandrawfromtheIrishexperience:“Yes,itcanbedone”. Thankyouforyourattention. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

47. 47 GoldmanSachsGroup InterestingnumbersbeforetheBaselIIIdeadlines TheGoldmanSachsGroup,Inc.(NYSE:GS)reportednetrevenuesof$8.35billionandnet earningsof$1.51billionforthethirdquarterendedSeptember30,2012. Dilutedearningspercommonsharewere$2.85comparedwithadilutedlosspercommonshareof$0.84forthethirdquarterof2011anddilutedearningspercommonshareof$1.78forthesecondquarterof2012. Annualizedreturnonaveragecommonshareholders’equity(ROE)was8.6%forthethirdquarterof2012and8.8%forthefirstninemonthsof2012. Thefirm’sglobalcoreexcessliquiditywas$170billionasofSeptember30,2012. Inaddition,thefirm’sTier1capitalratiounderBasel1was15.0%andthefirm’sTier1commonratiounderBasel1was13.1%asofSeptember30,2012. Capital AsofSeptember30,2012,totalcapitalwas$241.57billion,consistingof $73.69billionintotalshareholders’equity(commonshareholders’equityof$68.34billionandpreferredstockof$5.35billion)and$167.88billionin unsecuredlong-termborrowings. Bookvaluepercommonsharewas$140.58andtangiblebookvaluepercommonsharewas$129.69,bothapproximately3%highercomparedwiththeendofthesecondquarterof2012. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

48. 48 Bookvalueandtangiblebookvaluepercommonsharearebasedoncommonsharesoutstanding,includingrestrictedstockunitsgrantedtoemployeeswithnofutureservicerequirements,of486.1millionatperiodend. OnSeptember4,2012,TheGoldmanSachsGroup,Inc.(GroupInc.)issued5,000sharesofPerpetualNon-CumulativePreferredStock,SeriesF(SeriesFPreferredStock),foraggregateproceedsof$500million. Duringthequarter,thefirmrepurchased11.8millionsharesofitscommonstockatanaveragecostpershareof$106.17,foratotalcostof $1.25billion. Theremainingshareauthorizationunderthefirm’sexistingrepurchaseprogramis34.2millionshares. Undertheregulatorycapitalguidelinescurrentlyapplicabletobankholdingcompanies(Basel1),thefirm’sTier1capitalratiowas15.0%andthefirm’sTier1commonratiowas13.1%asofSeptember30,2012,both unchangedcomparedwithJune30,2012. OtherBalanceSheetandLiquidityMetrics Thefirm’sglobalcoreexcessliquiditywas$170billionasofSeptember30,2012andaveraged$175billionforthethirdquarterof2012,comparedwithanaverageof$174billionforthesecondquarterof2012. Totalassetswere$949billionasofSeptember30,2012,unchangedcomparedwithJune30,2012. Level3assetswere$48billionasofSeptember30,2012,comparedwith $47billionasofJune30,2012andrepresented5.0%oftotalassets. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

49. 49 Basel3 Inaddition,theU.S.federalbankregulatoryagenciesissuedrevisedproposalstomodifytheirmarketriskregulatorycapitalrequirementsforbankingorganizationsintheUnitedStatesthathavesignificanttradingactivities. ThemodificationsaredesignedtoaddresstheadjustmentstothemarketriskframeworkthatwereannouncedbytheBaselCommitteeinJune2010(Basel2.5),aswellastheprohibitionontheuseofcreditratings,asrequiredbytheDodd-FrankAct. WeexpectthefederalbankingagenciestoproposefurthermodificationstotheircapitaladequacyregulationstoaddressbothBasel3andotheraspectsoftheDodd-FrankAct,includingrequirementsforglobalsystemicallyimportantbanks. Onceimplemented,itislikelythatthesechangeswillresultinincreasedcapitalrequirements,althoughtheirfullimpactwillnotbeknownuntiltheU.S.federalbankregulatoryagenciespublishtheirfinalrules. TheDodd-FrankActalsoestablishesaBureauofConsumerFinancialProtectionhavingbroadauthoritytoregulateprovidersofcredit,paymentandotherconsumerfinancialproductsandservices,andthisBureauhasoversightovercertainofourproductsandservices. Management’sDiscussionandAnalysis WearecurrentlyworkingtoimplementtherequirementssetoutintheFederalReserveBoard’sRisk-BasedCapitalStandards:AdvancedCapitalAdequacyFramework—Basel2,asapplicabletousasabankholdingcompany(Basel2),whicharebasedontheadvancedapproachesundertheRevisedFrameworkfortheInternationalConvergenceofCapitalMeasurementandCapitalStandardsissuedbytheBaselCommittee. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

50. 50 U.S.bankingregulatorshaveincorporatedtheBasel2frameworkintotheexistingrisk-basedcapitalrequirementsbyrequiringthatinternationallyactivebankingorganizations,suchasus,adoptBasel2,onceapprovedtodosobyregulators. AsrequiredbytheDodd-FrankAct,U.S.bankingregulatorshaveadoptedarulethatrequireslargebankingorganizations,uponadoptionofBasel2,tocontinuetocalculaterisk-basedcapitalratiosunderbothBasel1andBasel2. ForeachoftheTier1andTotalcapitalratios,theloweroftheBasel1andBasel2ratioscalculatedwillbeusedtodeterminewhetherthebankmeetsitsminimumrisk-basedcapitalrequirements. TheU.S.federalbankregulatoryagencieshaveissuedrevisedproposalstomodifytheirmarketriskregulatorycapitalrequirementsforbankingorganizationsintheUnitedStatesthathavesignificanttradingactivities. ThesemodificationsaredesignedtoaddresstheadjustmentstoBasel2.5,aswellastheprohibitionontheuseofcreditratings,asrequiredbytheDodd-FrankAct. Onceimplemented,itislikelythatthesechangeswillresultinincreasedcapitalrequirementsformarketrisk. Additionally,theguidelinesissuedbytheBaselCommitteeinDecember2010(Basel3)revisethedefinitionofTier1capital,introduceTier1commonequityasaregulatorymetric,setnewminimumcapitalratios(includinganew“capitalconservationbuffer,”whichmustbecomposedexclusivelyofTier1commonequityandwillbeinadditiontotheminimumcapitalratios),introduceaTier1leverageratiowithin internationalguidelinesforthefirsttime,andmakesubstantialrevisionstothecomputationofRWAsforcreditexposures. Implementationofthenewrequirementsisexpectedtotakeplaceoverthenextseveralyears. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com