Weekly Risk & Compliance News Recap | Stay Informed with IARCP

P age |1 InternationalAssociationofRiskandComplianceProfessionals(IARCP) 1200GStreetNWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedtheweek's agenda,andwhatisnext GeorgeLekatisPresidentoftheIARCP DearMember, “TheEuroislikeabumblebee” (…amemberofthebeegenusBombus,inthefamilyApidae). What?Whosaidthat? AccordingtoMrMarioDraghi,PresidentoftheEuropeanCentralBank,attheGlobalInvestmentConferenceinLondon: “Andthefirstthingthatcametomindwassomethingthatpeoplesaidmanyyearsagoandthenstoppedsayingit:Theeuroislikeabumblebee. Thisisamysteryofnaturebecauseitshouldn’tflybutinsteaditdoes. Sotheeurowasabumblebeethatflewverywellforseveralyears. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |2 Andnow–andIthinkpeopleask“howcome?”–probablytherewassomethingintheatmosphere,intheair,thatmadethebumblebeefly. Nowsomethingmusthavechangedintheair,andweknowwhatafterthefinancialcrisis. Thebumblebeewouldhavetograduatetoarealbee.Andthat’swhatit’sdoing. ThefirstmessageIwouldliketosend,isthattheeuroismuch,muchstronger,theeuroareaismuch,muchstrongerthanpeopleacknowledgetoday.” Ok.Ihavetolearnmoreaboutthebumblebee.IcouldaddittotheBaseliiiclass(somethinglike…fromtheMarketRiskunderBasel2totheBumblebeeMarketRiskunderBasel3…) Bumblebeesaresocialinsectsthatarecharacterisedbyblackandyellowbodyhairs,ofteninbands. Liketheirrelativesthehoneybees,bumblebeesfeedonnectarandgatherpollentofeedtheiryoung(beeshavenotdiscoveredbonusesyet). Readmore(aboutwhatMrMarioDraghisaid,notaboutbumblebees)atNumber10ofourlist. WelcometotheTop10list. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |3 NISTUpdatesGuidanceonNetworkAttacksandMalware Detectingandstoppingmaliciousattacksoncomputernetworksisacentralfocusofcomputersecuritythesedays. TheNationalInstituteofStandardsandTechnology(NIST)isaskingforcommentsontwoupdatedguidesonmaliciouscomputerattacks:oneon preventing,detecting,andrespondingtoattacksandoneonpreventing andmitigatingtheeffectsofmalware,apotenttoolinanattacker'sarsenal. GlennStevens:Theluckycountry AddressbyMrGlennStevens,GovernoroftheReserve BankofAustralia,toTheAnikaFoundationLuncheon,supportedbyAustralianBusinessEconomistsandMacquarieBank,Sydney. KiyohikoGNishimura:Inter-regionalfinancialcooperation–anotherlayeroffinancialcooperationtowardsfinancialstability RemarksbyMrKiyohikoGNishimura,DeputyGovernoroftheBankofJapan,atCEMLA’s60thAnniversaryCommemorativeConference“CentralBankCooperationattheBeginningofthe21stCentury”,MexicoCity. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |4 RegisterofInsuranceUndertakings Thecompilationofregisteredfinancialinstitutions publishedhereinisintendedtoprovideeasilyaccessibleinformationinaccordancetoArticle8ofEIOPARegulation. IsleofManFinancialSupervisionCommission Financesectorprofitsriseoverall,despitechallengingtimes TheFinancialSupervisionCommissionhaspublisheditsAnnualReportfor2011/12. DEPARTMENTOFLABOR OccupationalSafetyandHealthAdministration ProceduresfortheHandlingofRetaliationComplaintsUndertheEmployeeProtectionProvisionoftheSurfaceTransportationAssistanceActof1982(STAA),asAmended ACTION:Finalrule. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |5 ThethreatofillegalexportsfromtheFBI’sperspectiveRobertS.Mueller,III Director,FederalBureauofInvestigation U.S.DepartmentofCommerce,BureauofIndustryandSecurityAnnualUpdateConferenceonExportControlsandPolicy,Washington,D.C. DARPAMakes10MillionStridesintheRacetoContainahypotheticalPandemic FASBIssuesAccounting StandardsUpdatetoSimplifyTestingofIndefinite-LivedIntangible AssetsForImpairment TheFinancialAccountingStandardsBoard(FASB)hasissuedAccountingStandardsUpdateNo.2012-02,Intangibles—GoodwillandOther(Topic350):TestingIndefinite-LivedIntangibleAssetsforImpairment. MarioDraghi:VerbatimoftheremarksattheGlobalInvestment SpeechbyMrMarioDraghi,Presidentofthe EuropeanCentralBank,attheGlobalInvestmentConference,London InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |6 NUMBER1 NISTUpdatesGuidanceonNetworkAttacksandMalware Detectingandstoppingmaliciousattacksoncomputernetworksisacentralfocusofcomputersecuritythesedays. TheNationalInstituteofStandardsandTechnology(NIST)isaskingforcommentsontwoupdatedguidesonmaliciouscomputerattacks:oneon preventing,detecting,andrespondingtoattacksandoneonpreventing andmitigatingtheeffectsofmalware,apotenttoolinanattacker'sarsenal. Thepublicationsarebeingrevisedtoreflectthechangesinthreatsandincidents. Malware,alsoknownasmaliciouscode,isacommontoolthatattackersusetobreachcomputernetworkstoday,causingdamageanddisruption,andoftenrequiringextensiverecoveryefforts. "Malwarethreatsinthepasttendedtospreadquicklyandwereeasytodiscover,"explainsco-authorKarenScarfone,"buttoday'smalwarethreatsarestealthier,specificallydesignedtoquietly,slowlyspread,gatheringinformationoverextendedtimeframesandeventuallyleadingtolossofsensitivedataandotherproblems." TheupdatedGuidetoIntrusionDetectionandPreventionSystemsdescribessoftwarethathasbecomeanecessaryadditiontothesecurityinfrastructureofmanyorganizations. Intrusiondetectionandpreventionsystems(IDPSs)recordinformationaboutobservedsecurity-relatedevents,notifysecurityadministratorsoftheeventsthatshouldbeanalyzedfurtherandproducereportsforevaluation.ManyIDPSsrespondtoandtrytostopdetectedthreatsbyusingavarietyoftechniques. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |7 TheguidancedescribesthecharacteristicsofIDPStechnologiesand providesrecommendationsfordesigning,implementing,configuring,securing,monitoringandmaintainingthem. ThepublicationdiscussesfourtypesofIDPStechnologies: network-based,wireless,networkbehavioranalysisandhost-based. "IDPSforwirelessisanimportanttypeforallorganizationstohavebecauseofthegrowthofmobiledevicesandemployees'desiretousetheirownwirelessdeviceforwork,"saysScarfone. Whilemanyagenciesandcompaniesaregoingmobile,itisstillcriticaltoprotectdesktopsandlaptops. TheGuidetoMalwareIncidentPreventionandHandlingforDesktopsandLaptopsisasupplementtoanotherdraftdocument,ComputerSecurityIncidentHandlingGuide(SP800-61). Itgivesbackgroundinformationonthemajorcategoriesofmalwarethatafflictdesktopandlaptopcomputersandprovidespracticalguidanceon howtopreventmalwareincidentsandonwhattodowhenasystemisinfected. TherevisedversionofSP800-61isexpectedtobepublishedlaterthis summer. Recommendedmeasuresincludedevelopingpreventionplansbasedontheattacksthataremostlikelytobeusednowandinthenearfuture,usingdefensivearchitecturemethodstoreducetheimpactofmalwareincidents,andincludingmalwareincidentpreventioninemployeeawarenessandtrainingprograms. TheGuidetoIntrusionDetectionandPreventionSystems(SpecialPublication800-94,Rev.1)canbefoundat:http://csrc.nist.gov/publications/drafts/800-94-rev1/draft_sp800-94-rev1.pdf TheGuidetoMalwareIncidentPreventionandHandlingforDesktopsandLaptops(SpecialPublications800-83,Rev.1)canbefoundat:http://csrc.nist.gov/publications/drafts/800-83-rev1/draft_sp800-83-rev1.pdf InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |8 Note Intrusiondetectionistheprocessofmonitoringtheeventsoccurringinacomputersystemornetworkandanalyzingthemforsignsofpossibleincidents,whichareviolationsorimminentthreatsofviolationofcomputersecuritypolicies,acceptableusepolicies,orstandardsecuritypractices. Incidentshavemanycauses,suchasmalware(e.g.,worms,viruses),attackersgainingunauthorizedaccesstosystemsfromtheInternet,andauthorizedusersofsystemswhomisusetheirprivilegesorattempttogainadditionalprivilegesforwhichtheyarenotauthorized. Althoughmanyincidentsaremaliciousinnature,manyothersarenot;for example,apersonmightmistypetheaddressofacomputerandaccidentallyattempttoconnecttoadifferentsystemwithoutauthorization. Anintrusiondetectionsystem(IDS)issoftwarethatautomatestheintrusiondetectionprocess. Anintrusionpreventionsystem(IPS)issoftwarethathasallthecapabilitiesofanintrusiondetectionsystemandcanalsoattempttostop possibleincidents. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |9 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |10 Note: InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |11 AboutNIST-NationalInstituteofStandardsandTechnology Foundedin1901andnowpartoftheU.S.DepartmentofCommerce,NISTisoneofthenation'soldestphysicalsciencelaboratories. CongressestablishedtheagencytoremoveamajorhandicaptoU.S.industrialcompetitivenessatthetime—asecond-ratemeasurement infrastructurethatlaggedbehindthecapabilitiesofEngland,Germany,andothereconomicrivals. Today,NISTmeasurementssupportthesmallestoftechnologies—nanoscaledevicessotinythattensofthousandscanfitontheendofa singlehumanhair—tothelargestandmostcomplexofhuman-madecreations,fromearthquake-resistantskyscraperstowide-bodyjetlinerstoglobalcommunicationnetworks. NUMBER2 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |12 GlennStevens:Theluckycountry AddressbyMrGlennStevens,GovernoroftheReserveBankofAustralia,toTheAnikaFoundationLuncheon,supportedbyAustralianBusinessEconomistsandMacquarieBank,Sydney. ThankyouforcomingtodaytosupporttheAnikaFoundation. BeforeIproceedIwantalsotothankMacquarieBankfortheirsupport,onceagain,inprovidingtoday’svenueandsustenance,andtheAustralianBusinessEconomistsfortheircontinuingorganisationalsupportfortheseannualfunctions. ItisslowlybecomingbetterrecognisedthattheAustralianeconomy’srelativeperformance,againstaveryturbulentinternationalbackground,hasbeenremarkablygood. ManyforeignvisitorstoAustraliacommentonthisrelativesuccessandIhavenoticedanincreaseinthenumberofforeigncompaniesinterestedininvestinginAustraliaasaresult,notwithstandingourdomestictendencytowardsthe“glasshalfempty”view. Butsomeobservers–admittedlynotthemajority–stillharbourconcernsaboutthefoundationsofrecenteconomicperformanceandquestionthebasisforconfidenceaboutthefuture. Thereareseveralthemestothesedoubts,butthecommonelementisthatrecentrelativesuccessowesacertainamounttothingsthatwillnotcontinue–toluck–andthatourluckmaybeabouttoturn. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |13 RapidgrowthinChinesedemandforresources,forexample,hasbeenofgreatbenefittodate,butwhatiftheChineseeconomysuffersaseriousdownturn? Anotherpotentialconcernisdwellingprices. Australiasawalargerunupindwellingpricesandhouseholdborrowinguntilafewyearsago. Someothercountriesthatsawthissubsequentlysufferedpainfulcorrectionsanddeeprecessions,associatedwithverystressedbankingsystems. CanAustraliaescapethesameoutcome? AfurtherthemeisthefocusonthefundingpositionofAustralianfinancialinstitutions,insofarastheyraisesignificantamountsofmoney offshore. Couldthisbeaweakness,intheeventthatmarketsentimentturns? Actually,thisisanotherversionoftheoldconcernaboutthecurrentaccountdeficit:whatwillhappenifmarketssuddenlydonotwanttofundourdeficit? IthaslongbeenavisceralfearamongAustralianofficialsandeconomiststhatglobalinvestorswillsuddenlytakeadimviewofus. ThesamesortsofconcernsoforganisationssuchastheInternationalMonetaryFundandtheratingsagenciesseemtoliebehindaperpetualquestionmarkaboutAustraliaanditsfinancialinstitutions. Itisunlikelywewilleverbeabletochangedefinitivelytheviewsofallthesceptics. And–letusbeclear–weshouldwelcomethesceptics.Perhapssomeoftheirconcernsarevalid. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |14 • TheReserveBankgivesalotofthoughttotheseissues;wecertainlydonotdismissthem. • Weshouldalwaysbewaryoftheconventionalwisdombeingtooeasilyaccepted. • Weshouldnever,ever,assumethat“itcouldn’thappenhere”. • ItisinthatveinthatIwishtoposeasetofquestionsthatarethrownup bythesescepticalviews.Inparticular: • Howmuchoftherecentrelativelygoodperformancewasduetoluck? • Towhatextentdidweimproveourluckbysensiblepolicies,acrossarangeofeconomicandfinancialfronts? • Aretheresignsofanyofthethingsgoingwrongthatpeopletypicallyworryabout? • Andifthereare,orweretobe,suchsigns,couldwedoanythingaboutit? • Tobegin,Ishallre-statesomekeymetrics. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |16 Thesechartsreallyrequirenoexposition(Graph1,2and3). Themessageisclear.Itisfairtoconcludethat,giventhecircumstancesinternationally,theAustralianeconomyhasexhibitedmorethanacceptableperformanceoverrecentyears. Thisconclusionwouldstandwhethercomparisonsweremadeeitheragainstmostothercountries,oragainstourownhistoricalexperience. WhywasitthatAustraliadidnothaveadeepdownturnin2009whensomanyothercountriesdid? Andwhywasitthatwehavereturnedtoreasonablegrowth,whenothershavestruggledtodoso? Thisquestionhasbeenansweredonnumerousoccasions.Thereareseveralelements. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |17 First,theAustralianbankingsystemwentintothecrisisinreasonableshape. Tobesure,thereweresomepoorlendingdecisionsduringtheprecedingperiodofeasycreditandtherewas,inhindsight,toomuchrelianceonwholesalefunding. Butamongmajorinstitutions,creditqualityissueshaveturnedouttobemanageable. Assetqualitywasnotasgoodamongsomeoftheregionalbanks,andevenlesssoamongsomeforeignbanksoperatinginAustralia,buttheproblemshavenotbeeninsurmountable. Someobserversmightcounterthatthebanksreceivedassistancewithwholesalefundraisingintheformofthegovernmentguarantee. Butthebankspaidforthat,anditwasanappropriateresponseatatimeofmassivemarketdislocationwhenalltheirpeerswerereceivinglikeassistance–andmuchmore. Moreoverthebankshaveneitherhad,norneeded,accesstothisforsometimenowandthestockofguaranteedliabilitiesoutstandinghasfallenbyabouthalffromitspeaklevel,asissuesmatureorarerepurchased Soourbankingsystem,whilenotentirelyfreefromblemishes,wasnonethelessinprettygoodshapeoverall. Bankswereabletoraisecapitalprivatelyinthedepthsofthecrisis.Thelowestrateofreturnamonganyofthemajorbanksoverayearduringthe crisisperiodwasabout10percent. TheAustralianGovernmenthasnotneededtotakeanownershipstakeinafinancialinstitution. Second,Australiahadscopeformacroeconomicpolicystimulus,whichwasusedpromptlyanddecisively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |18 Interestrateswereloweredaggressively,fromahighstartingpoint,loweringdebtservicingburdensatarapidrate. Thefiscalstimuluswasoneofthelargerones,asapercentageofGDP,amongthevariouscountrieswithwhichwecanmakecomparisons. Theevidencesuggeststhatthesemacroeconomicmeasureswereeffectiveinsustaininggrowth. Thirdly,therapidreturntogrowthoftheChineseeconomysawdemandforenergyandresourcesstrengthenagainafterabriefdownturninlate2008andthefirstcoupleofmonthsof2009. ThisreversedthefallinAustralia’stermsoftrade,andinfactpushedthemtonewhighs,whichledtoaresumptionofthehistoricinvestmentbuild-upthathadalreadybegun. ItbenefitedthewholeofAsia,whichstagedaverypronouncedV-shapedrecoveryonthebackbothoftheChinesemeasuresandthingsother countriesdidthemselves. Afourthelementthatmanypeopleaddisthattheexchangeratefellsharply,whichwasanexpansionaryimpetusfortheeconomy. Butofcoursetheexchangeratewasrespondingendogenouslytothevariousshocksandpolicyresponses,andhassincereversedthefall.Itwasdoingwhatitwassupposedtodo. Perhapstherealpointisthattherightexchangeratesystemwasimplementednearly30yearsago,andthatitwasallowedtowork. SoAustraliahadthesethingsgoingforit. Wasthisalljustluck? Wecouldnotdenythatourgeography–thoughtformuchofourhistorytobeahandicapbecauseofthedistancefromEuropeanandAmericanmarkets–combinedwithournaturalresourceendowmenthasprovideda InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |19 basisforthecountrytoridetheboominAsianresourcedemand.Wedid notcreatethat,thoughwestillhavetomusterthecapabilitytotakesustainedadvantageofit. Butawell-managedandwell-supervisedbankingsystemisnotan accident. YearsofcarefulworkbothbybanksandAPRAwentintothatoutcome.Norwastheabilitytorespondforcefully,butcredibly,with macroeconomicpolicyjustluck. Youdon’tsuddenlyacquirethecredibilityneededtoeasemonetarypolicyaggressivelywhiletheexchangerateisheadingdownrapidly.Authoritiesinlotsofcountrieswouldnotfeeltheycoulddothat. Atanearlierpointintimeweprobablywouldnothavefeltwecouldhavedoneiteither. Thecredibilityneededtodoitcomesfromhavinginvestedina well-structuredframework,andhavingbuiltatrackrecordofsuccessincontaininginflation,overalongperiod. Thefloatingexchangerateisanintegralpartofthatframework.Likewise,youcan’thaveamajorfiscaleasingandexpectittobeeffective ifthereareconcernsaboutlong-runpublicdebtdynamics,asrecent debateelsewhereintheworldshows. Youneedtohaverunadisciplinedbudgetoveralongperiodbeforehand,sothattheamountofdebtyouhavetoissueinacrisisdoesnotraisequestionsaboutsustainability. Inboththemonetaryandfiscalareas,ofcourse,havingusedthescopewehadsoaggressively,itwasalsonecessary,asIarguedin2009,tore-invest inbuildingfurtherscope,byreturningsettingstonormaloncetheemergencyhadpassed. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |20 So,yes,Australiahashaditsshareofluck.Buttoexplaintheoutcomes,weneedalsotoappealtofactorsthatdidn’tjusthappenbyaccident. Ofcourse,thatdoesn’tmeanwestillcouldn’thaveproblems. Evenifsuccesstodatehasn’tbeenduetoluckalone,perhapsourluckcouldturnsobadthatalloureffortsatgoodpolicymakingcouldbe overwhelmed. Letusthentakealookatsomeofthepotentialpressurepointsthatpeoplesometimesworryabout. ThefirstistheChineseeconomy. OneofthedataseriespeoplepayalotofattentiontoistheChineseversionoftheso-called“PurchasingManagers’Index”. Theusualcommentarysurroundingsuchindexesinvariablyreferstothe“50”levelasthethresholdbetweengrowthandcontractioninthesectoroftheeconomybeingexamined. ButwhathavethesePMIsactuallybeensayingabouttheChineseeconomy? Properlycalibrated,asinthischart,theysuggestthatgrowthinChina’sindustrialproductionhasbeenrunningatabout5percentagepointsbelowaverage,whichmeansitisjustunder10percent(Graph4). Butitisalongwayfromacontraction. WedidactuallyseeChineseIPcontractforseveralmonthsin2008;wearenotseeingthatatpresent. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |21 TheconclusionIdrawisthattheChineseeconomyhasindeedslowedoverthepastyearorso. Itwasintendedthataslowingoccur. Buttherecentdatasuggestthat,sofar,thisisanormalcyclicalslowing,notasuddenslumpofthekindthatoccurredinlate2008. ThedataarequiteconsistentwithChinesegrowthinindustrialoutputofsomethinglike10percent,andGDPgrowthinthe7to8percentrange. Tobesure,thatisasignificantmoderationfromthegrowthinGDPof10percentormorethatwehaveoftenseeninChinainthepastfivetosevenyears. ButnotevenChinacangrowthatfastindefinitelyandtherewereclearlyproblemsbuildingfromthatearlierbreakneckpaceofgrowth. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |22 Inflationrose,therewasoverheatinginpropertymarketsandnodoubtagooddealofpoorlending. Itisfarbetter,infact,thatthemoderationoccur,ifthatincreasesthesustainabilityoffutureexpansion. Moreover,theChineseauthoritieshavebeentakingwell-calibratedstepsinthedirectionofeasingmacroeconomicpolicies,astheirobjectivesforinflationlooklikebeingachievedandasthelikelihoodofslowerglobalgrowthaffectingChinahasincreased. Pricesforkeycommoditiesarelowerthantheirpeaks,butareactuallystillhigh. Sofar,then,the“Chinastory”seemstoberoughlyoncourse. ItiscertainlytruethatwewillfeeltheeffectsoftheChinesebusinesscyclemoreinthefuturethanwehavebeenaccustomedtointhepast. Thatpresentssomechallengesofeconomicanalysisandmanagement.Butevenso,itmaybebettertobeexposedtoaChineseeconomywitha highaverage,evenifvariable,growthrate,than,say,toaEuropewitha verylowaveragegrowthratethatisapparentlyalsostillrathervariable. NextIturntodwellingprices. Aseveryoneknows,dwellingpricesroseagreatdealoverthedecadeormorefrom1995,andnotjustinAustralia. Thisoccurredglobally. Thefactthatitwasawidespreadphenomenonisahintthatweshouldbewaryofexplanationsthataresolelydomesticintheirfocus. Itsuggeststhattheglobaldwellingpricedynamichadalottodowithfinancialfactors–andthereislittledoubtthatfinanceforhousingbecamemorereadilyavailable. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |23 Invariouscountriespriceshavesubsequentlyfallen. IntheUnitedStates,forexample,pricesaredownbyabout30percentfromtheirpeak,thoughtheylookliketheyhavenowreachedbottom. IntheUnitedKingdomthefallwassmaller–atabout15–20percent.InAustralia,thedeclinesincethepeakhasbeenabout5to10percent, dependingontheregion. Thereareofcourseprominentexamplesofparticularlocalitiesorevenindividualdwellingswherepricefallshavebeenmuchlarger. Scaledtomeasuresofincome,Australiandwellingpricesonanationalbasishaveinfactdeclinedandarenowaboutwheretheywerein2002(Graph5). Thatis,housinghasbecomemore“affordable”. Fourorfiveyearsagowesupposedlyhadahousingaffordability“crisis”.Nowitseemsthattheproblemsomepeoplefearisthatofhousing becomingevenmoreaffordable. Aredwellingpricesovervalued? It’sveryhardtobedefinitiveonthatquestion. Therearetwoaspectstotheclaimthattheymightbe. Thefirstisthatpricesrelativetoincomearehigherthantheywere15or20yearsago. Ifthisratioissomehowmean-reverting,theneitherincomesmustrisealotorpricesmustfall. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |24 Itcouldbethatthisanalysisiscorrect,buttheproblemisthatthereisnoparticularbasistothinkthatthepricetoincomeratio20yearsagowas“correct”. Therearereasonsthatmightbeadvancedforwhytheratiomightbe expectedtobehighernowthanthen–thatthemeanhasshifted–thoughagainthereislittlesciencetoanyquantificationforsuchashift. Inanyevent,argumentsthatappealtohistoricalaveragesforsuchratioslosepotencythelongertheratiostayshigh. InAustralia’scasetheratioofpricestoincomeonanationalbasishasbeenapparentlyatahighermeanlevel–about4to4½–foraboutadecadenow. Thesecondsupportfortheclaimthatdwellingpricesareovervaluedistheobservationthattheyseemhighincomparisonwithothercountries. Inseekingtomakesuchcomparisons,though,thereareseriousmethodologicalchallenges. Thekeydifficultyisinsourcingcomparabledataonthelevelofpricesacrosscountries.Suchdataare,atbest,prettysketchy. Withthatcaveatveryclearlyinmind,considerthefollowingtwocharts.SimplycomparingAustraliaandtheUnitedStates,itishardtoavoidthe impressionthatgravitywillinevitablyexertitsinfluenceonAustralian dwellingprices. Butifweputthesetwolinesonachartwithanumberofothercountrieswithwhichwemightwanttomakecomparisons,thepictureismuchlessclear(Graph6) Totheextentthatwecanmakeanymeaningfulstatementsabout internationalrelativities,themainconclusionwouldbethatAustraliandwellingprices,relativetoincome,areinthepackofcomparablecountries.Inthiscomparison,theUnitedStatesseemstheoutlier. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |26 NoneofthiscanbetakentosaydefinitivelythatAustraliandwellingpricesare“appropriate”,orthatthereisnopossibilitytheywillfall. Itisaverydangerousideatothinkthatdwellingpricescannotfall. Theycan,andtheyhave. Thepointissimplythathistoricalorinternationalcomparisons,totheextenttheycanbemade,donotconstitutedefinitiveevidenceofanimminentslump. Attheveryleast,thecomplexityofmakingthesecomparisonssuggestsweoughttolookatsomeothermetricsinthinkingaboutthehousingmarket. Onewouldbetheperformanceoftheassociatedmortgages.Here,themainstoryisthatnotmuchhaschanged. Arrearsremainlowandifanythinghavebeenedgingdownoverthepastyear.Thatinturnisnotaltogethersurprisinggiventhatdebtservicingburdenshavedeclined(Graph7). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |27 Asaresultoflowerhousepricesandthereforelowerloansizes,somewhatlowerinterestratesandagooddealofincomegrowth,therepaymentonanewloanonamedian-pricedhouseasashareofaverageincomeisnowatitslowestforadecade(exceptforthe“emergency”interestrateperiodin2009). Itistruethatalowunemploymentrateisakeyfactorhelpinghere,butitisalsotruethattheproportionofhouseholdsthatareaheadontheirmortgagepaymentsisalsohigh–withsomeevidencepointingtooverhalf–whichwouldprovideabufferofsomemonthsforthosehouseholdsintheeventaperiodoflowerincomewasexperienced. Ifwelookatapplicationsforpossessionsofdwellings,theyhavebeen runningatabout0.15percentofdwellingsonanannualisedbasis. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |28 SuchapplicationshaveactuallydeclinedsincetheirpeakinbothNSWandVictoria,thoughtheyhaverisenoverthepastcoupleofyearsinWAandQueensland. IntheUnitedStatesthemostcomparablefigureforrepossessions–“foreclosuresstarted”–peakedatover2percentofdwellings. Theconclusion?Weshouldneversayacrashcouldn’thappenhere,andtheReserveBankcontinuestomonitorpropertymarketsandtheperformanceofmortgagesquiteclosely,aswehaveformanyyears. Butithastobesaidthatthehousingmarketbubble,ifthat’swhatitis,seemstobetakingquitealongtimetopop–ifthat’swhatitisgoingtodo. Theingredientswewouldlookforassignallinganimminentcrashseem,ifanything,lessinevidencenowthanfiveyearsago. Whatthenaboutfundingvulnerabilities? Thepre-crisisperiodsawtoomuch“borrowingshorttolendlong”,andtoomuchrelianceontheassumedavailabilityofmarketfunding. Bankseverywherehavebeenadjustingawayfromthatmodeloverrecentyears,Australianbanksamongthem. Theshareofoffshorefundinghasfallen,anditsmaturityhasbeenlengthened(Graph8). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |29 Theflipsideofthisisofcoursetheriseindomesticdepositfunding,whichhasoccasionedsuchcompetitivebehaviourinthemarketfordeposits. Interestinglyenough,whilewehavebeentoldovertheyearshowAustralianbanksweredoingthecountryafavourbyarrangingthefundingofthecurrentaccount,theyhavestoppeddoingthisoverthepastyearwithout,apparently,anydramaticeffects. Asmeasuredinthecapitalaccountstatistics,therehasbeenanetoutflowofprivatedebtfundingoverthepasttwoyears,offsetroughlybyincreasedinflowofforeigncapitalintogovernmentobligations(Graph9). Thishasoccurredwithanetdeclineingovernmentdebtyieldsandanetriseintheexchangerate. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |30 Thecurrentaccountdeficithas,inotherwords,beeneasily“funded”withouttheassistanceofbanksborrowingabroad–infact,whiletheyhavebeennetre-payersoffundsborrowedearlier. Areasonableconclusionisthatthedegreeofvulnerabilitytoaglobalpanicofanygivenmagnitudeappearstohavediminished,ratherthangrown,overthepastfewyears. Ithasn’tcompletelydisappeared,anditwouldnotbesensibletoexpectitwould,unlesswewerepursuingapolicyoffinancialautarky.ButthereislittlereasontoassumethatAustralianinstitutionsaresomehowunusuallyexposedtotheseriskscomparedwithmostoftheircounterpartsoverseas. Intheend,ofcourse,anybank’sabilitytomaintaintheconfidenceofitscreditorsismainlyaboutitsassetquality. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |31 Thatbringsusbacktolendingstandards,themacroeconomicenvironment,andsoon. Onewouldthinkthat,overall,thingslookrelativelygoodinAustralia,comparedtotheworld’stroublespots. Thinkforjustamomentabouttheholdingsofgovernmentdebtonthebooksofbanksinanynumberofothercountries,andaboutthestateofpublicfinancesofmanyofthosecountries. TheargumentsIhavepresentedamounttosayingthatsomenecessaryadjustmentshavebeenoccurringgraduallyandreasonablysmoothly.China’sgrowthhadtomoderate. Ithasslowed,butithasn’tcollapsed.HousingvaluesandleverageinAustraliacouldn’tkeeprising.Theyhaven’t. Dwellingpriceshavealreadydeclined,relativetoincome,anditisinfactnotobviousthattheyareparticularlyhighcomparedwithmostcountries. Housing“affordability”hasimprovedsignificantly;over99percentofbank-heldmortgagesarebeingservicedfully. Bankshavereducedtheirneedforthesortoffundingthatmightbedifficulttoobtaininacrisissituation. Thecurrentaccountdeficitisbeingfundedbyacombinationofdirectequityinvestment,andflowsintohigh-qualityAustralian dollar-denominatedassets,thelatteratcoststhathavebeenfalling. Infact,theCommonwealthofAustralia,anditsconstituentStates,areatpresentabletoborrowataboutthelowestratessinceFederation. Marketsdonot,then,seemtobesignallingseriousconcernsaboutAustralia’ssolvencyorsustainability. Butmarketscanbewrongsometimes. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |32 Theycansometimesbetoooptimistic(andothertimestoopessimistic).Soeventhoughwedon’tfaceimmediateproblems,weshouldask:whatifsomethingwentwrong? BelowIconsiderafewpossibilities. IfthethingthatgoeswrongisamajorfinancialeventemanatingfromEurope,themostdamagingpotentialtransmissionchannelwouldbeiftherewereacompleteretreatfromrisk,capitalmarketclosureand fundingshortfallsforfinancialinstitutions. Letmeemphasise,importantly,thatthisisnotoccurringatpresentandifitdidoccuritwouldbeaproblemforagreatmanycountries,notjustAustralia. Butinthatevent,theAustraliandollarmightdecline,perhaps significantly. Wemightfindthat,inanextremecase,theReserveBank–alongwithothercentralbanks–wouldneedtostepinwithdomesticcurrencyliquidity,inlieuofmarketfunding. Thevulnerabilitytothispossibilityislessthanitwasfouryearsago;ourcapacitytorespondisundiminishedand,ifnotactuallyunlimited,isnotsubjecttoanylimitthatseemslikelytobind. Analternativeversionofthisscenario,ifitinvolvedthesortofeurobreak-upaboutwhichsomepeoplespeculate,couldbeaflowoffundsintoAustralianassets. Inthatcaseourproblemmightbenotbeingabletoabsorbthatcapital.Butthenthebankswouldbeunlikelytohaveseriousfundingproblems. IfthethingthatgoeswrongisaseriousslumpinChina’seconomy,theAustraliandollarwouldprobablyfall,whichwouldprovideexpansionaryimpetustotheAustralianeconomy. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |33 Butmoreimportantly,wecouldexpecttheChineseauthoritiestorespondwithstimulatorypolicymeasures. EvenifoneisconcernedabouttheextentofproblemsthatmaylurkbeneaththesurfaceinChina–sayinthefinancialsector–itisnotclearwhyweshouldassumethatthecapacityoftheChineseauthoritiestorespondtothemisseriouslyimpaired. Andinthefinalanalysis,aseriousdeteriorationininternationaleconomicconditionswouldstillseeAustraliawithscopetousemacroeconomicpolicy,ifneeded,aslongasinflationdidnotbecomeaconcern,whichwouldbeunlikelyinthescenarioinquestion. IfdwellingpricesinAustraliadidslump,thentherewouldbeobviousquestionsabouthowthatdynamiccouldplayout. Insuchcircumstancespeopletypicallyworryabouttwoconsequences. Thefirstisalongperiodofveryweakconstructionactivity,usuallybecauseanexcessofstockresultingfrompreviousover-constructionneedstobeworkedoff. Butwehavealreadyhadafairlyprotractedperiodofweakresidentialconstruction;it’shardtobelieveitwillgetmuchweaker,actually,atanationallevel. Thesecondpotentialconcernisthebalancesheetsoflenders.ThisscenarioisamongthoseroutinelyenvisagedbyAPRA’sstresstestsoverrecentyears. Theresultsofsuchexercisesalwaysshowthatevenwithsubstantialfallsindwellingprices,muchhigherunemploymentandassociatedhigherlevelsofdefaults,keyfinancialinstitutionsremainwellandtrulysolvent. Ofcourse,itcanbearguedthatthefullextentofreal-lifestressescannotbeanticipatedinsuchexercises. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |34 That’sareasonablepoint.Butweactuallyhadareallifestresseventin2008and2009.Thefinancialsystemshowsafewbruisesfromthatperiod,butitsfundamentalstabilitywasmaintained Conclusion MostAustraliansIencounterwhoreturnfromoverseasremarkhowgooditistobelivingandworkinghere. Weareindeed“lucky”insomanyways,relativeeconomicstabilitybeingonlyoneofthem. Butwhatmattersmoreiswhatwedowithwhatwehave.Noteverygoodaspectaboutrecentperformanceisdowntoluck. Bythesametokentherearethingswecandotoimproveourprospects–or,ifyouwill,tomakeabitofourownfutureluck. Someoftheadjustmentswehavebeenseeing,asawkwardastheymightseem,areactuallystrengtheningresiliencetopossiblefutureshocks. Higher–morenormal–ratesofhouseholdsaving,amoresoberattitudetowardsdebt,are-orientationofbanks’funding,andaperiodofdwellingpricesnotmovingmuch,comeintothiscategory. Theyearsaheadwillnodoubtchallengeusinvariousways,includinginwayswecannotpredict. Butwhat’snewaboutthat? Evenifthepessimiststurnouttoberightononeormorecounts,itdoesn’tfollowthatwewouldbeunabletocope. Actingsensibly,withalong-termfocus,hasasgoodachanceaseverofseeingusthroughwhatevercomesourway. Mostofall,andtoreturntothewholepointoftoday’sevent,wehavemuchtolivefor. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |35 WewanttodoeverythingwecantoensurethenextgenerationcansharethepositiveoutlookthatmostAustralianshave(almost)alwayshad. ThatiswhytheAnikaFoundation’sworkissoimportant,andwhyyourpresenceheretodayissovaluable. Thankyouagainforyoursupport. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |36 NUMBER3 KiyohikoGNishimura:Inter-regionalfinancialcooperation–anotherlayeroffinancialcooperationtowardsfinancialstability RemarksbyMrKiyohikoGNishimura,DeputyGovernoroftheBankofJapan,atCEMLA’s60th AnniversaryCommemorativeConference“CentralBankCooperationattheBeginningofthe21stCentury”,MexicoCity. 1.Introduction Firstofall,Iamgratefultotheorganizersforinvitingmetothe60th AnniversaryCommemorativeConferenceofCEMLA,asymboloffinancialcooperationbetweencentralbanksinLatinAmerica. Iamespeciallythrilled,becausethisistheidealopportunitytodiscussinternationalmonetarystabilityandcentralbankcooperationfromtheintegratedperspectivethatspansLatinAmericaandAsia. LatinAmericaandAsiaareamongthemostdevelopedregionsinterms offinancialcooperation. Today,Iwouldliketotaketheconceptoffinancialcooperationonestepfurtherbyconsideringthetopicofinter-regionalfinancialcooperation. Althoughthethemeoffinancialcooperationattheglobal,intra-regional,andbilaterallevelhasbeendiscussedatavarietyofinternationalforumssuchasG20,Ibelieveinter-regionalfinancialcooperation,especiallybetweenLatinAmericaandAsia,representsanotherimportantlayerbetweentheglobalandtheintra-regionalorbilaterallevels. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |37 2.LatinAmericaandAsiainthe21stCentury:fromlowtohighcorrelation LetmebeginbygivingabriefsummaryofthelinkagebetweenLatinAmericaandAsiawithrespecttorealeconomicandfinancialactivities,focusingparticularlyontheperiodsince2000. Bothregionshaveexperiencedseverallarge-scalefinancialcrisessincethe1980s,namelytheMexicanDebtCrisisin1982,followedbythe so-calledTequilaCrisisin1994,theAsianFinancialCrisisin1997accompaniedbytheRussianCrisis,andtheArgentineCrisisin2000. However,roughlyspeaking,thisperiodinourhistoryalsohighlightsthefactthat,untilthecollapseofLehmanBrothersin2008,wehadneverfacedalarge-scalefinancialcrisissimultaneously. Infact,thecross-countrycorrelationofrealGDPgrowthbetweenLatinAmericaandAsiashowsrelativelysmallcoefficientsintheearly2000s(Slide1). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |38 Thereasoncouldbethattheregionsaregeographicallydistant,andthusrelativelylessinfluencedbyeachother,particularlyintermsoftrade activity. However,thisrelationshiphadalreadybeguntochangeduringtheeraoftheso-calledGreatModeration,andhaschangeddramaticallysincetheLehmanshockandtherecentEuropeansovereigndebtcrisis. Infact,theabove-mentionedcross-countrycorrelationshowsasignificantincreasesince2008inthecorrelationcoefficientsofallmajorAsianeconomies,followingagradualincreaseinChinaandJapanafewyearsearlier. Althoughgeographicaldistancehasnotchanged,ourmutualdependencyintradehasdramaticallyincreasedsincethemid-2000s,drivenlargelybyChina,andowingtosignificantimprovementsintransportationtechnologyandadeclineinvarioustrade-relatedcosts(Slide2). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |39 Thelinkageoftrade,andthuseconomicandfinancialactivities,betweenLatinAmericaandAsiaisexpectedtobestrengthenedfurtherinthefuture. Tradevolumeisdeterminedbythesizeofpopulationandthedegreeofcomplementarinessofgoodsandservices,iftransactioncostsaresufficientlysmall. ThecombinedpopulationsofLatinAmericaandAsiaareforecasttoremainatmorethan60percentoftheglobalpopulation.Asincomelevelsincrease,thetworegionscombinedareexpectedtobecomeoneofthelargestconsumermarketsintheworld(Slide3). Moreover,thetworegionshaveawell-balancedsupply-and-demandrelationship,rangingfromagriculturalgoodsandrawmaterialstocapitalgoods. ThisimpliesthatfuturetradeactivityinacombinedLatinAmericaandAsiacanbeself-sustainedwithouthavingtorelysubstantiallyon InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |40 advancedcountries. Asmutuallinkageofeconomyisenhancedthroughtrade,eventuallysoisfinanciallinkagebetweenthetworegions,includinganincreaseinforeignexchangetransactionsforthepurposeofrealdemandandhedging,aswellasanincreaseinstockpricecorrelationreflectingactivecross-bordercorporatetransactions. Thisheightenedinter-dependencyofeconomyandfinancialmarketsimpliesthatafinancialcrisisinoneregionhasadirectimpactontheother. Moreover,astheimportanceofacombinedLatinAmericaandAsiaincreases,sotoodoesthechancethattheyhappentobecometheepicenterofaglobalfinancialcrisis. Inthisregard,policymakersofthetworegionsaremutuallyresponsibleforthestabilityoftheglobaleconomyandfinancialmarket. Tofulfillsuchresponsibility,financialcooperationshouldnotbeconfinedtooneregion. LatinAmericaandAsiahavemanyissuesincommon.Addressingcapitalflowsisonesuchissue. Avarietyofregulationsandmacroprudentialmeasureshasalreadybeenintroduced,andhasbeentoacertainextenteffectiveineachofthejurisdictionsorregions. However,morestructuralissuesassociatedwithfinancialstabilityshould bediscussed,notonlyattheintra-regionallevel,butalsoatthe inter-regionallevelbetweenLatinAmericaandAsia. Thesestructuralissuesincludethedevelopmentofliquidanddeep capitalmarkets,andimprovementsinfinancialinfrastructure,includingderegulationandharmonizationofregulations. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |41 Moreover,fromalonger-termperspective,issuesrelatedtopopulationaging,andcorrespondingarrangementsofsocialsecurityandtaxsystems,alsoneedtobeconsideredcomprehensivelywithan inter-regionalviewinmind. 3.Asianexperienceonfinancialcooperation LetmenowturntotheAsianexperienceonfinancialcooperation,anticipatingsimilardiscussionoftheLatinAmericanexperiencelaterfromotherparticipants. (VulnerabilitiesinAsia) AlthoughoveralleconomicandfinancialstabilityhasbeenimprovedremarkablyinAsiasincetheAsianFinancialCrisis,therearestillvulnerabilitiesintheregion. First,thereremainsthedouble-mismatchofcurrencyandmaturityinthebankingsector. SuchvulnerabilitiesmaterializedinsomeAsianeconomieswhenU.S.dollarliquiditydriedupafterthecollapseofLehmanBrothers. WehaveseensimilarimpactsrecentlywiththedeleveragingbyEuropean banks. Second,inAsia,includingJapantosomeextent,thefinancialintermediationfunctionhasstillbeenservedlargelybyindirectfinancing,mostlythroughbanks. Giventhisfinancingstructure,alargenegativeshockhittingfinancialinstitutionsmakesitdifficultfornon-financialcorporationstogainsmoothaccesstodebtfinancingfromtheseinstitutions,almostregardlessoftheirfinancialsoundness. Third,thereisstilltheissueofscantinvestmentopportunitiesinAsianlocalcurrencies. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |42 AbundantsavingsinAsiahavenotbeeninvestedsufficientlywithintheregion,andhavethuseventuallybeeninvestedoutsidetheregion,suchasinbondsintheUnitedStatesanddevelopedEurope. Toputitinadifferentperspective,theAsianfinancialsectorremainshighlydependentonbanks,indicatingtheunderdevelopmentofregionalbondandothercapitalmarkets. Owingtosuchanunbalancedmarketstructure,Asianeconomiesareexposedtotheriskthatdomesticassetpricesbecomevolatilebecauseofrapidglobalcapitalflows,resultinginasharpincreaseinthevolatilityof foreignexchangerates. Also,theimmaturelocalderivativesmarketmakesappropriate risk-takingtransactionsdifficult,asrisk-hedginginstrumentsarelimited(Slide4). Moreover,owingtotheirless-developedsecuritizationmarkets,Asianeconomiesdonotsufficientlyenjoythemeritsofthesecuritization InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |43 schemesthatattractavarietyofinvestorsdependingontheirrisk-takingcapacities(Slide5). (Authorities’effortstoaddressvulnerabilities) HowhavetheAsianauthoritiesrespondedtothesevulnerabilities?Iwouldliketoexplaintheireffortsinthreeaspects. Todeveloplocalcurrency-denominatedbondmarkets. Thefirstisaprojectaimedatdevelopingliquidbondmarketstoprovideabridgebetweenabundantlocalsavingsandlocalinvestments:theABFofEMEAP,andtheABMIofASEAN+3. TheExecutives’MeetingofEastAsia-PacificCentralBanks(EMEAP)establishedtheAsianBondFund(ABF)investmenttrustin2003,and becametheinitialbuyersbyinvestinginsovereignandquasi-sovereignbondsintheeightmemberjurisdictions. Whenitwaslaunched,theFundwaslimitedtoinvestmentonlyinU.S. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |44 dollar-denominatedbonds. However,since2005,theFundhasbeguntoincludethosedenominatedinthelocalcurrenciesoftheeightmembers. Inaddition,EMEAPlaunchedanexchange-tradedfund(ETF)calledthePanAsianIndexFund(PAIF). ThePAIFwasfirstlistedontheHongKongStockExchangein2005,andlatercross-listedontheTokyoStockExchangein2009. AspartoftheASEAN+3process,theauthoritieshavelaunchedtheAsian BondMarketsInitiative(ABMI),aimedatpromotingbondmarkets. ThemostnotablerecentachievementistheestablishmentinNovember2010ofatrustfundintheADBcalledtheCreditGuaranteeandInvestmentFacility(CGIF). TheCGIFplanstostartitscreditguaranteeoperationsforlocalcurrency-denominatedcorporatebondsissuedintheASEAN+3jurisdictionsinthethirdquarterof2012attheearliest. AttheFinanceMinisters’andCentralBankGovernors’MeetinginMaythisyear,anothernewroadmapfortheABMIwasproposedandendorsedtofurtherpromoteresilientcapitalmarketsintheregion,forexample,byimprovingtheregionalcreditratingsystem,developingsmallandmedium-sizedenterprises’financeandsecuritizationmarkets,andraisingtheleveloffinancialeducation. Toestablishandenhanceacurrencyswapnetwork ThesecondresponsebyAsianauthoritiestotheregion’svulnerabilitiesisaprojecttoestablishanddevelopamutualframeworkofU.S.dollarliquidityprovision,calledtheChiangMaiInitiative(CMI). Aimedatimprovingtheregion’sresilienceagainstexternalshocks,theCMIstartedbuildingabilateralcurrencyswapnetworkintheregion,whichinvolvesacontingentclaimonforeigncurrencyreservesheldby InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |45 eachASEAN+3authority. TheCMIhassinceenhanceditseffectivenessbyincreasingitssizeandthenumberofparticipants. Infact,inMarch2010,theauthoritiesevolvedtheCMIframeworkfromitsoriginalbilateralswaparrangementstothemultilateralChiangMaiInitiativeMultilateralization(CMIM),whichisacollective decision-makingframeworksignedbyallmemberjurisdictionsina singlecontract. Toensuretheeffectiveimplementationofcrisispreventionandactual U.S.dollarliquiditysupport,itisessentialfortheauthoritiestomonitorcloselytheregionaleconomyandfinancialmarkets,andexchangeviews ontheirrespectivemacroeconomicpolicies. TheASEAN+3authoritiesthusestablishedtheirownbutindependentsurveillanceunit,calledtheASEAN+3MacroeconomicResearchOffice(AMRO),inSingaporeinApril2011. Recenteffortstoenhancefinancialstability Inadditiontotheabove-mentionedtwoprojects,momentumisbuildingamongAsiancentralbankstomakecross-bordercollateralarrangements(CBCAs),aimedatfurtherenhancingfinancialstabilityintheregion. CBCAsarearrangementswherebyacentralbankprovideslocalcurrencyliquiditybyacceptingforeigncurrencyassets,suchassovereignbondsinforeigncountries,aseligiblecollateral. Sucharrangementsalreadyexistinsomeadvancedcountries. CBCAsarethoughttobeaneffectiveframeworkparticularlyintimesofshort-termmoneymarketstress. Foreignfinancialinstitutions’branchesandsubsidiariesoftenlackstablelocalfundingsources,suchasretaildeposits. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |46 However,underaCBCA,theycanstillcontinuetoprovidecredittotheircustomers,whoareinmostcasesbranchesandsubsidiariesof non-financialcorporationsdomiciledintheirhomecountries. Infact,aCBCAwasestablishedinNovemberlastyearbetweentheBankofJapanandtheBankofThailand,astherearemanyJapanese non-financialcorporationsoperatinginThailand. Atalmostthesametime,aCBCAwasannouncedbetweenBankNegaraMalaysiaandtheMonetaryAuthorityofSingapore,andearlythisyearbetweenBankNegaraMalaysiaandtheBankofThailand. Meanwhile,EMEAPhasformedanactiongroupandmadeaCBCAreferencetemplatefortheirfutureexpansionintheregion.Sofar,theyarebilateralnegotiationsbetweentwojurisdictions,dependingontheirnecessity. Moreover,JapanandChinaaremakingeffortstoenhancemutualcooperationtowardsthedevelopmentoffinancialmarketsinthetwolargestAsianeconomies. Owingtocooperationbetweentheauthoritiesandprivatemarketparticipants,manytangibleoutcomeshavealreadybeenachieved,includingthepurchaseofChinesegovernmentbondsbytheJapan’sForeignExchangeFundSpecialAccountandthestartofdirectexchangebetweenJapaneseyenandChineserenminbiontheTokyoandShanghaimarkets. 4.Towardsinter-regionalfinancialcooperation Aseconomicandfinanciallinkagesdeepen,Ibelievethatthe above-mentionedeffortsandissuesaddressedinAsiacanbesharedmoreorlesswithLatinAmerica.Bothregionsalsohavecommonstructural problems. Ibelievethatitisfruitfulforregionsbearingsimilarproblemstoresolvethemcollaboratively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |47 First,letmeraisetheissueofdemographicchangeandeconomicpotential. Slides6,7,8,and9showtheratioofworking-agepopulationtotherest,thatis,howmanypeopleofworkingagehavetoprovideforonedependentperson,forJapan,theUnitedStates,Asia,andLatinAmerica,respectively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

P age |49 LowfertilityratesandpopulationaginghavebeenthemaincauseofprolongedloweconomicgrowthinJapansince1990. ThisisalsolikelytobecomeabigissueevenforKoreaandChinainthenot-so-distantfuture. SomeLatinAmericancountriesmayalsohavesimilarconcerns,althoughthedegreevariesacrossjurisdictions. Havingthisfuturevisionwellinmind,wehavetobepreparedevennowtoimplementthenecessarysocialreforms,includingtherestructuringofsocialsecuritysystems,taxreforms,andrevisionofemploymentsystems. Second,letusconsiderthedevelopmentofassetpricesandcreditexpansion. InSlides10,11,12,and13,thedevelopmentofpropertypricesandloansinrealtermsisaddedtothechartoftheworking-agepopulationratio(inversedependencyratio)inthepreviousSlides6,7,8,and9,respectively. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

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