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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

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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

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trick-takingcardgames?

Accordingto Merriam-Webster,Whistisacardgameforfourplayersintwopartnershipsthatisplayedwithapackof52cardsandthatscoresonepointforeachtrick inexcessofsix.

No,itisnotaboutWhist.Itis aboutWhistleblowers!

AChineseSarbanes-Oxley(like)approachfromthe…

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

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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

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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

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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

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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

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ofwhathasbeen accomplishedandwhatremainstobeaccomplishedinfacilitatingacross-borderresolution.”

Adjustmentandgrowthintheeuroarea

SpeechbyMrPeterPraet,MemberoftheExecutiveBoardoftheEuropeanCentralBank,attheEuropeanBusinessSummit,Brussels,16May2013.

“Manyofyouwillhavecomeacrosscommentatorswhoclaimthatadjustmentisinfactinimicaltogrowth;andthatconsolidatinggovernmentbudgets

whileintroducingstructuralreformsisthemaincauseofourcurrent

difficulties.”

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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

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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.

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

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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.

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

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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:

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

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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

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

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throughtheRFI,andassistinthoseareaswhereadditionalstakeholderengagementwillbeneeded todevelopasufficientlyrobustFramework.

Toassist,NISThasprovidedaseriesofrepresentativequestionstoencouragediscussiononthesekeythemes.

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

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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.

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

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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.

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

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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.

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

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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.

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

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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

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

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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.

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

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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.

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

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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.

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

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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

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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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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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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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Thefundswouldthereforenotberequired to enterintoseparateFFIagreementswiththeIRStobeFATCAcompliant.

TheMinisterforFinancialServicesalsoannouncedon15March2013theGovernment’sintentiontoenterintoasimilararrangementfortheautomaticexchangeofinformationwiththeUnitedKingdom.

TheGovernmentsofJersey,GuernseyandtheIsleofManhavesimilaragreementswiththeUKthatwerecommittedtoduringthe1stquarterof2013.

Whiletoday’spresentationhasbeenbriefincontent,ItrustwecanallagreethattherehavebeenanumberofdevelopmentsaffectingtheCaymanIslands’hedgefundsectorinrecenttimes.

Whileweallrecognizethattheregulatoryarchitecturehaschangedandwillcontinueto change,CIMAremainsengagedandcommittedingrowingthelocalfundsindustry,fosteringavibrantandcompetitiveindustryandpreservingthejurisdiction’sreputation.

Ladiesandgentlemen,thankyouforyourattentionandIwishyouapleasantevening.

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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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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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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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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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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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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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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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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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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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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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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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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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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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Rather,itwouldindicatethateffortstoincreaseaccommodationwerecomingto aclose.

TheFOMC'sforwardguidanceisthatassetpurchaseswillbeincreasedordecreasedbasedontheoutlookforlabormarketsandinflationandthatpurchaseswillendwhenwehaveseensubstantial improvementinthelabormarketconditionsinacontextofpricestability.

In myview,labormarketconditionshaveimprovedsufficientlyfortheFedtoreducethepaceofitsassetpurchases.

Shouldlabormarketconditionsandinflationcontinue to evolveasIproject,thenIwouldviewendingthepurchasesbyyear-endasappropriate.

In fact,IbelievetheFOMC wouldunderminethecredibilityofits ownstatementifitfailstoadjustthepaceofassetpurchasesinresponsetoeconomicconditions.

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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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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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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.

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

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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.

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

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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.

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

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Alltheseongoingimportantadjustmenteffortsintheeuroareashouldrestoreconfidenceintheshort-termandlead steadilybacktosustainablegrowth.

Thankyouforyourattention.

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

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Disclaimer

TheAssociationtries toenhancepublic access toinformationaboutrisk andcompliancemanagement.

Ourgoalis tokeepthisinformationtimelyandaccurate.Iferrorsarebroughttoourattention, we willtry tocorrectthem.

Thisinformation:

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isofageneralnatureonlyandisnotintendedtoaddress thespecific

circumstancesofanyparticularindividualorentity;

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shouldnotbereliedonintheparticularcontextofenforcementorsimilar

regulatory action;

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isnotnecessarilycomprehensive,complete,oruptodate;

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issometimeslinkedtoexternalsitesoverwhich theAssociationhasnocontrol

andfor whichtheAssociationassumesnoresponsibility;

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isnotprofessionalorlegaladvice(ifyouneedspecificadvice,youshould

alwaysconsultasuitablyqualifiedprofessional);

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isinnowayconstitutiveofaninterpretativedocument;

- doesnotprejudgethepositionthattherelevantauthoritiesmightdecide totakeonthesame mattersifdevelopments, includingCourtrulings,were toleadittorevisesomeoftheviewsexpressedhere;

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doesnotprejudgetheinterpretationthattheCourtsmightplaceonthematters

atissue.

Pleasenotethatit cannotbeguaranteedthattheseinformationanddocumentsexactlyreproduceofficiallyadoptedtexts.

Itisourgoaltominimizedisruptioncausedbytechnicalerrors.

Howeversomedataorinformationmayhavebeencreatedorstructuredinfilesorformatsthatarenoterror-freeand we cannotguaranteethatourservicewillnotbeinterruptedorotherwiseaffectedbysuchproblems.

TheAssociationacceptsnoresponsibilitywithregardtosuchproblemsincurredas aresultofusingthissiteoranylinkedexternalsites.

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

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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.

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

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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

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

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