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P a g e | 1 Internat i o n al As s o c ia t ion of R i s k a n d Co m p l ian ce Pr o f e s s iona l s ( I A RCP) 1200 G St r e et N W S u it e 8 0 0 Wa s h i n g t o n , D C 2000 5 - 6705 U S A T el: 202 - 44 9 - 9 750 w ww.ris k - c o m p l ia n c e - ass o c iat i on . c o m.

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  1. P age |1 InternationalAssociationofRiskandComplianceProfessionals(IARCP) 1200GStreetNWSuite800Washington,DC20005-6705USATel:202-449-9750www.risk-compliance-association.com Top10riskandcompliancemanagementrelatednewsstoriesandworldeventsthat(forbetterorforworse)shapedtheweek's agenda,andwhatisnext GeorgeLekatisPresidentoftheIARCP DearMember, Wehavesomeveryinterestingprinciplesforthesupervisionoffinancialconglomerates. WhatIreallyenjoyed: “Supervisorsshouldrequirethatfinancialconglomeratesnotmakeoverlyambitiousdiversificationassumptionsorimprudentcorrelationclaims,particularlyforcapitaladequacyandsolvencypurposes”. Also: “Whileitispossiblethatthespreadofactivitieswithinafinancialconglomeratemaycreatediversificationeffectsandreducecorrelation,itisalsotruethatmembershipofafinancialconglomerategroupmaycreate“grouprisks”intheformoffinancialcontagion,reputationalcontagion,ratingscontagion(whereasubsidiaryaccessescapitalthroughaparent’screditratingandthensuffersstressfollowingtheutilisationofthecapital),double/multiple-gearing(useofsamecapitalmorethanoncewithinagroup),excessiveleveraging(upgradeinthequalityofcapitalasitmovesthroughagroup),andregulatoryarbitrage. ReadmoreatNumber1 WelcometotheTop10list. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  2. P age |2 JointForum,Principlesforthesupervisionoffinancialconglomerates CorporateGovernance Broadly,corporategovernancedescribestheprocesses,policiesandlawsthatgovernhowacompanyorgroupisdirected,administeredor controlled. Itdefinesthesetofrelationshipsbetweenacompany’smanagement,itsboard,itsshareholders,andotherrecognisedstakeholders. FinalBaselIIIRulesinAustralia AustralianPrudentialRegulationAuthority(APRA) To:Alllocallyincorporatedauthoriseddeposit-takinginstitutionsBaselIIIcapital:interimarrangementsforAdditionalTier1andTier2capitalinstruments PublicHearingsonthedraftfactualReportoftheEU-USInsuranceRegulatoryDialogueProject InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  3. P age |3 FiveQuestionsabouttheFederalReserveandMonetaryPolicy ChairmanBenS.Bernanke,attheEconomicClubof AdoptionofUpdatedEDGARFilerManual TheSecuritiesand ExchangeCommission(theCommission)isadoptingrevisionstotheElectronicDataGathering,Analysis,andRetrievalSystem(EDGAR)FilerManualandrelatedrulestoreflectupdatestotheEDGARsystem. Dealingwithfinancialsystemicrisk:thecontributionofmacroprudentialpolicies PanelremarksbyJaimeCaruana, GeneralManageroftheBankforInternationalSettlements,CentralBankofTurkey/G20Conferenceon"Financialsystemicrisk",Istanbul InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  4. P age |4 EUtoGabrielBernardino(EIOPA) 2013workprogramme EuropeanSecuritiesandMarketsAuthority ESMA’skeyobjectivesandprioritiesin2013 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  5. P age |5 SolvencyII–monitoringtheongoing appropriatenessofinternalmodels JulianAdams,Director,Insurance InJune2012Iwrotetoallfirmsinourinternal modelapprovalprocesstoshareourthinkingonthewaywewillmonitortheongoingappropriatenessofinternalmodelsafterapproval. TheUKCorporateGovernanceCode Importantparts ThefirstversionoftheUKCorporateGovernanceCode(theCode)wasproducedin1992bytheCadburyCommittee. Itsparagraph2.5isstilltheclassicdefinitionofthecontextoftheCode: “Corporategovernanceisthesystembywhichcompaniesaredirectedandcontrolled.Boardsofdirectorsareresponsibleforthegovernanceoftheircompanies. Theshareholders’roleingovernanceistoappointthedirectorsandtheauditorsandtosatisfythemselvesthatanappropriate governancestructureisinplace. Theresponsibilitiesoftheboardincludesettingthecompany’sstrategic aims,providingtheleadershiptoputthemintoeffect,supervisingthemanagementofthebusinessandreportingtoshareholdersontheirstewardship. Theboard’sactionsaresubjecttolaws,regulationsandtheshareholdersingeneralmeeting.” InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  6. P age |6 NUMBER1 JointForum,Principlesforthesupervisionoffinancialconglomerates CorporateGovernance Broadly,corporategovernancedescribestheprocesses,policiesandlawsthatgovernhowacompanyorgroupisdirected,administeredor controlled. Itdefinesthesetofrelationshipsbetweenacompany’smanagement,itsboard,itsshareholders,andotherrecognisedstakeholders. Corporategovernancealsoprovidesthestructurethroughwhichtheobjectivesofthecompanyareset,andthemeansofattainingthoseobjectivesandmonitoringperformancearedetermined. Goodcorporategovernanceshouldprovideproperincentivesfortheboardandmanagementtopursueobjectivesthatareintheinterestsofthecompanyanditsshareholdersandshouldfacilitateeffectivemonitoring. Thepresenceofaneffectivecorporategovernancesystem,withinanindividualcompanyorgroupandacrossaneconomyasawhole,helpstoprovideadegreeofconfidencethatisnecessaryfortheproperfunctioningofamarketeconomy. Financialconglomeratesareoftencomplexgroupswithmultipleregulatedandunregulatedfinancialandotherentities. Giventhisinherentcomplexity,corporategovernancemustcarefullyconsiderandbalancethecombinationofinterestsofrecognisedstakeholdersoftheultimateparent,andtheregulatedfinancialandotherentitiesofthegroup. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  7. P age |7 Ensuringthatacommonstrategysupportsthedesiredbalanceandthatregulatedentitiesarecompliantwithregulationonanindividualandon anaggregatebasisshouldbeagoalofthegovernancesystem. Thisgovernancesystemisthefiduciaryresponsibilityoftheboardofdirectors. Whenassessingcorporategovernanceacrossafinancialconglomerate,supervisorsshouldapplytheseprinciplesinamannerthatisappropriatetotherelevantsectorsandthesupervisoryobjectivesofthosesectors. Thissectiondescribestheelementsofthegovernancesystemmost relevanttofinancialconglomerates,andhowtheyshouldbeassessedbysupervisors. Corporategovernanceinfinancialconglomerates 10.Supervisorsshouldseektoensurethatthefinancialconglomerateestablishesacomprehensiveandconsistentgovernanceframeworkacrossthegroupthataddressesthesoundgovernanceofthefinancialconglomerate,includingunregulatedentities,withoutprejudicetothegovernanceofindividualentitiesinthegroup. Implementationcriteria 10(a)Supervisorsshouldrequirethatthecorporategovernanceframeworkofthefinancialconglomeratehasminimumrequirementsforgoodgovernanceoftheentitiesofthefinancialconglomeratewhichallowfortheprudentialandlegalobligationsofitsconstituententitiestobeeffectivelymet. Theultimateresponsibilityforthesoundandprudentmanagementofafinancialconglomeraterestswiththeboardoftheheadofthefinancialconglomerate. 10(b)Supervisorsshouldrequirethatthefinancialconglomerateemphasisesahighdegreeofintegrityintheconductofitsaffairs. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  8. P age |8 • 10(c)Supervisorsshouldseektoensurethatthecorporategovernanceframeworkappropriatelybalancesthediverginginterestsofconstituententitiesandthefinancialconglomerateasawhole. • 10(d)Supervisorsshouldrequirethatthegovernanceframeworkrespectstheinterestsofpolicyholdersanddepositors(whererelevant),andshouldseektoensurethatitrespectstheinterestsofotherrecognisedstakeholdersofthefinancialconglomerateandthefinancialsoundnessof entitiesinthefinancialconglomerate. • 10(e)Supervisorsshouldrequirethatthegovernanceframeworkincludesadequatepoliciesandprocessesthatenablepotentialintra-groupconflictsofinteresttobeavoided,andactualconflictsofinteresttobeidentifiedandmanaged. • Explanatorycomments • 10.1Thecorporategovernanceframeworkshouldaddresswhereappropriate: • Alignmenttothestructureofthefinancialconglomerate; • Financialsoundnessofthesignificantowners; • Suitabilityofboardmembers,seniormanagementandkeypersonsincontrolfunctionsincludingtheirabilitytomakereasonableandimpartialbusinessjudgments; • Fiduciaryresponsibilitiesoftheboardsofdirectorsandseniormanagementoftheheadcompanyandmaterialsubsidiaries; • Managementofconflictsofinterest,inparticularattheintra-grouplevelandremunerationpoliciesandpracticeswithinthefinancialconglomerate;and • Internalcontrolandriskmanagementsystemsandinternalauditandcompliancefunctionsforthefinancialconglomerate. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  9. P age |9 • Thegroup’scorporategovernanceframeworkshouldnotablyincludeastrongriskmanagementframework(refertotheRiskManagementsection),arobustinternalcontrolsystem,effectiveinternalauditandcompliancefunctions,andensurethatthegroupconductsitsaffairswithappropriateindependenceandahighdegreeofintegrity. • Group-widegovernancenotonlyinvolvesthegovernanceoftheheadofthefinancialconglomerate,butalsoappliesgroup-widetoallmaterialactivitiesandentitiesofthefinancialconglomerate. • Intheeventthelocalcorporategovernancerequirementsapplicabletoanyparticularmaterialentityinthefinancialconglomeratearebelowthegroupstandards,themorestringentgroupcorporategovernancestandardsshouldapply,exceptwherethiswouldleadtoaviolationoflocallaw. • Supervisorsshouldrequirethatthecorporategovernanceframeworkofthefinancialconglomerateincludesacodeofethicalconduct. • Supervisorsshouldrequirethatthefinancialconglomeratehavein placepoliciesfocusedonidentifyingandmanagingpotentialintra-groupconflictsofinterest,includingthosethatmayresultfromintra-grouptransactions,charges,upstreamingdividends,andrisk-shifting. • Thepoliciesshouldbeapprovedbytheboardoftheheadofthefinancialconglomerateandbeeffectivelyimplementedthroughoutthegroup. • Thepoliciesshouldrecognisethelong-terminterestofthefinancialconglomerateasawhole,thelongterminterestofthesignificantentitiesofthefinancialconglomerate,thestakeholderswithinthefinancialconglomerate,andallapplicablelawsandregulations. • Structureofthefinancialconglomerate • 11.Supervisorsshouldseektoensurethatthefinancialconglomeratehasatransparentorganisationalandmanagerialstructure,whichisconsistentwithitsoverallstrategyandriskprofileandiswellunderstood bytheboardandseniormanagementoftheheadcompany. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  10. P age |10 Implementationcriteria 11(a)Supervisorsshouldunderstandthefinancialconglomerate’sgroupstructureandtheimpactofanyproposedchangestothisstructure. 11(b)Supervisorsshouldassesstheownershipstructureofthefinancialconglomerate,includingthefinancialsoundnessandintegrityofitssignificantowners. 11(c)Supervisorsshouldseektoensurethatthestructureofthefinancialconglomeratedoesnotimpedeeffectivesupervision.Supervisorsmayseekrestructuringunderappropriatecircumstancestoachievethis,ifnecessary. 11(d)Supervisorsshouldseektoensurethattheboardandseniormanagementoftheheadofthefinancialconglomeratearecapableofdescribingandunderstandingthepurpose,structure,strategy,materialoperations,andmaterialrisksofthefinancialconglomerate,includingthoseofunregulatedentitiesthatarepartofthefinancialconglomeratestructure. 11(e)Supervisorsshouldassessandmonitorthefinancialconglomerate'sprocessforapprovingandcontrollingstructuralchanges,includingthecreationofnewlegalentities. 11(f)Wherethefinancialconglomerateispartofawidergroup,supervisorsshouldrequirethattheboardandseniormanagementoftheheadofthefinancialconglomeratehavegovernancearrangementsthatenablematerialrisksstemmingfromthewidergroupstructuretobeidentifiedandappropriatelyassessedbyrelevantsupervisoryauthorities. 11(g)Supervisorsshouldseektoensurethatthereisaframeworkgoverninginformationflowswithinthefinancialconglomerateand betweenthefinancialconglomerateandentitiesofthewidergroup(egreportingprocedures). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  11. P age |11 • Explanatorycomments • Afinancialconglomeratemayfreelysetitsfunctional,hierarchical,businessand/orregionalorganisation,providedallentitieswithinthefinancialconglomeratecomplywiththeirrelevantsectoralandlegalframeworks. • Elementstobeconsideredforassessingthesignificantownershipstructureofthefinancialconglomeratemayincludetheidentificationofsignificantowners,includingtheultimatebeneficialowners,thetransparencyoftheirownershipstructure,theirfinancialinformation,andthesourcesoftheirinitialcapitalandallotherrequirementsofnational authorities. • Ataminimum,thenecessaryqualitiesofsignificantownersrelatetotheintegritydemonstratedinpersonalbehaviourandbusinessconduct,aswellastotheabilitytoprovideadditionalsupportwhenneeded. • Supervisorsshouldseektoensurethatafinancialconglomeratehasanorganisationalandmanagerialstructurethatpromotesandenablesprudentmanagement,andifnecessary,orderlyresolutionalignedwithcorrespondingsectoralrequirements. • Reportinglineswithinthefinancialconglomerateshouldbeclearandshouldfacilitateinformationflowswithinthefinancialconglomerate,bothbottom-upandtop-down. • Supervisorsshouldbesatisfiedthattheboardandseniormanagementoftheheadofthefinancialconglomerateunderstandandinfluencetheevolutionofanappropriategrouplegalstructureinalignmentwiththeapprovedbusinessstrategyandriskprofileofthefinancialconglomerate,andunderstandhowthevariouselementsofthestructurerelatetooneanother. • Whereafinancialconglomeratecreatesmanylegalentities,theirnumberand,particularly,theinterconnectionsandtransactionsbetweenthem,mayposechallengesforthedesignofeffectivecorporategovernance arrangements. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  12. P age |12 Thisriskshouldberecognisedandmanaged. Thisisparticularlythecasewheretheorganisationalandmanagerialstructureofthefinancialconglomeratedeviatesfromthelegalentitystructureofthefinancialconglomerate. 11.5Supervisorsshouldassesschangestothegroupstructureandhowthesechangesimpactitssoundness,especiallywheresuchchangescausethefinancialconglomeratetoengageinactivitiesand/oroperateinjurisdictionsthatimpedetransparencyordonotmeetinternationalstandardsstemmingfromsectoralregulation. Suitabilityofboardmembers,seniormanagersandkeypersonsincontrolfunctions 12.Supervisorsshouldseektoensurethattheboardmembers,seniormanagersandkeypersonsincontrolfunctionsinthevariousentitiesinafinancialconglomeratepossessintegrity,competence,experienceandqualificationstofulfiltheirroleandexercisesoundobjectivejudgment. Implementationcriteria 12(a)Supervisorsshouldbesatisfiedofthesuitabilityofboardmembers,seniormanagersandkeypersonsincontrolfunctions. 12(b)Supervisorsshouldrequirefinancialconglomeratestohave satisfactoryprocessesforperiodicallyassessingsuitability. 12(c)Supervisorsshouldrequirethatthemembersoftheboardsoftheheadofthefinancialconglomerateandofitssignificantsubsidiariesactindependentlyofpartiesandinterestsexternaltothewidergroup;andthattheboardoftheheadofthefinancialconglomerateincludeanumberofmembersactingindependentlyofthewidergroup(includingowners,boardmembers,executives,andstaffofthewidergroup). 12(d)Supervisorsshouldcommunicatewiththesupervisorsofotherregulatedentitieswithintheconglomeratewhenboardmembers,senior InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  13. P age |13 • managementandkeypersonsincontrolfunctionsaredeemednottomeettheirsuitabilitytests. • Explanatorycomments • Boardmembers,seniormanagersandkeypersonsincontrolfunctionsneedtohaveappropriateskills,experienceandknowledge,andactwithcare,honestyandintegrity,inordertotomakereasonableandimpartialbusinessjudgmentsandstrengthentheprotectionaffordedtorecognisedstakeholders. • Tothisend,institutionsneedtoprudentlymanagetheriskthatpersonsinpositionsofresponsibilitymaynotbesuitable. • Suitabilitycriteriamayvarydependingonthedegreeofinfluenceonortheresponsibilitiesforthefinancialconglomerate. • Supervisorsofregulatedentitiesofthefinancialconglomeratearesubjecttostatutoryandotherrequirementsinapplyingsuitabilityteststotheseentitiesintheirjurisdiction. • Theorganisationalandmanagerialstructureoffinancialconglomeratesaddselementsofcomplexityforsupervisorsseekingtoensurethesuitabilityofpersons. • Forinstance,themanagementofregulatedentitieswithinthefinancialconglomeratecanbeextensivelyinfluencedbypersonswhoarenotdirectlyresponsibleforsuchfunctions. • Agroup-wideperspectiveregardingsuitabilityofpersonsisintendedtocloseanyloopholesinthisrespect. • Supervisorsmayrelyonassessmentsmadebyotherrelevantsupervisorsinthisarearegardingsuitability. • Alternativelytheymaydecideonconcertedsupervisoryactionsregardingsuitabilityifrequired. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  14. P age |14 • Inordertomeetsuitabilityrequirements,boardmembers,seniormanagersandkeypersonsincontrolfunctions,bothindividuallyandcollectively,shouldhaveanddemonstratetheabilitytoperformthedutiesortocarryouttheresponsibilitiesrequiredintheirposition. • Competencecangenerallybejudgedfromthelevelofprofessionalism(egpertinentexperiencewithinfinancialindustriesorotherbusinesses)and/orformalqualifications. • Servingasaboardmemberorseniormanagerofacompany(fromthewidergroup)thatcompetesordoesbusinesswiththeregulatedentitiesinthefinancialconglomeratecancompromiseindependentjudgmentandcreateconflictsofinterest,ascancross-membershipon boards. • Aboard’sabilitytoexerciseobjectivejudgmentindependentoftheviewsofexecutivesandofinappropriatepoliticalorpersonalinterestscanbeenhancedbyrecruitingmembersfromasufficientlybroadpopulationof candidates. • Thekeycharacteristicofindependenceistheabilitytoexerciseobjective,independentjudgmentafterfairconsiderationofallrelevantinformationandviewswithoutundueinfluencefromexecutivesorfrominappropriateexternalpartiesandinterestsandwhiletakingintoaccounttherequirementsofapplicablelaw. • Responsibilityoftheboardoftheheadofthefinancialconglomerate • 13.Supervisorsshouldrequirethattheboardoftheheadofthefinancialconglomerateappropriatelydefinesthestrategyandriskappetiteofthefinancialconglomerate,andensuresthisstrategyisimplementedandexecutedinthevariousentities,bothregulatedandunregulated. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  15. P age |15 Implementationcriteria 13(a)Supervisorsshouldrequirethattheboardoftheheadofthefinancialconglomeratehasinplaceaframeworkformonitoringcompliancewiththestrategyandriskappetiteacrossthefinancialconglomerate. 13(b)Supervisorsshouldrequirethattheboardoftheheadofthefinancialconglomerateregularlyassessesthestrategyandriskappetiteofthefinancialconglomeratetoensureitremainsappropriateastheconglomerateevolved. 13(c)Wherethefinancialconglomerateispartofawidergroup,supervisorsshouldassesswhethertheheadismanagingitsrelationshipwiththewidergroupandultimateparentinamannerthatisconsistentwiththegovernanceframeworkofthefinancialconglomerate. 13(d)Supervisorsshouldrequirethataframeworkisinplacewhichseekstoensureresourcesareavailableacrossthefinancialconglomeratefor constituententitiestomeetboththegroupandtheirownentity’sgovernancestandards. Explanatorycomments 13.1Supervisorsshouldassessiftheboardofdirectorsexercisesadequate oversightoverthemanagementoftheheadofthefinancialconglomerate. Thisincludesassessingtheactionstakenbytheboardoftheheadtodefinethestrategyforthefinancialconglomerateandensuretheconsistencyoftheoperationsofthevariousentitiesinthefinancialconglomeratewithsuchstrategy. Tothisend,theheadcompanyshouldsetupanadequatecorporategovernanceframeworkinlinewiththestructure,businessandrisksofthefinancialconglomerateanditsentitiesandapplicablelaws. Thisframeworkshouldensurethatthestrategyisimplementedand monitoredthroughoutthefinancialconglomerateandreviewedona InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  16. P age |16 • regularbasisandfollowingmaterialchangeincludingduetogrowth,increasedcomplexity,geographicexpansion,etc. • Theheadcompanyshouldexerciseadequateoversightofsubsidiaries,bothregulatedandunregulated,whilerespectingindependentlegalandgovernanceresponsibilities. • Supervisorsshouldsatisfythemselvesthatentitieswithinafinancialconglomerateadheretothesamegroup-widecorporategovernanceprinciplesoratleastapplypoliciesthatremainconsistentwiththeseprinciples. • Theboardofaregulatedsubsidiaryofafinancialconglomeratewillretainandsetitsowncorporategovernanceresponsibilitiesandpracticesinlinewithitsownlegalrequirementsorinproportiontoitssizeorbusiness. • Theseshouldnot,however,conflictwiththebroaderfinancialconglomeratecorporategovernanceframework. • Appropriategovernancearrangementswilladdressarrangementssuchthatlegalorregulatoryprovisionsorprudentialrulesofregulatedsubsidiarieswillbeknownandtakenintoaccountbytheheadcompany. • Wherethefinancialconglomerateispartofawidergroupstructure,theheadofthefinancialconglomerateisresponsibleformanagingtherelationshipwithitswidergroup. • Thisincludesensuringthereareappropriatearrangementsforcapitalandliquiditymanagement,assessinganymaterialriskimpactthatmaycome fromdecisionsmadeatitsownershiplevel,servicelevelagreements,reportinglinesandregulartop-levelconsultationswithrelatedcompaniesinthewidergroupandtheultimateparent. • Forsmallerinstitutionswithinalargerconglomerate,itmaybeunnecessarytoduplicatesystemsandcontrols. • Suchsmallerinstitutionscanrelyonthesystemsandcontrolsoftheheadiftheyhaveassessedthatthisissuitabletoaddressgrouprisks. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  17. P age |17 13.5Supervisorsshouldbesatisfiedwiththeamountandqualityofinformationtheyreceivefromtheheadcompanyofthefinancialconglomerateonitsstrategy,riskappetiteandcorporategovernanceframework. Remunerationinafinancialconglomerate 14.Supervisorsshouldrequirethatthefinancialconglomeratehasandimplementsanappropriateremunerationpolicythatisconsistentwithitsriskprofile.Thepolicyshouldtakeintoaccountthematerialrisksthatorganisationisexposedto,includingthosefromitsemployees’activities. Implementationcriteria 14(a)Supervisorsshouldrequirethatanappropriateremunerationpolicyconsistentwithestablishedinternationalstandardsisinplaceandobservedatalllevelsandacrossjurisdictionsinthefinancialconglomerate. Anappropriatepolicyalignsrisk-takers’variableremunerationwithprudentrisktaking,promotessoundandeffectiveriskmanagement,andtakesintoaccountanyotherappropriatefactors. Theoverarchingobjectiveofthepolicyshouldbeconsistentacrossthegroupbutcanallowforreasonabledifferencesbasedonthenatureoftheconstituententities/unitsandlocallegalrequirements. 14(b)Supervisorsshouldrequirethatultimateoversightoftheremunerationpolicyrestwiththefinancialconglomerate’sheadcompany. 14(c)Supervisorsshouldrequirethattheremunerationofboardmembers, seniormanagersandkeypersonsincontrolfunctionsbedeterminedinamannerthatdoesnotincentivisethemtodisregardtheobligationstheyowetothefinancialconglomerateoranyofitsentities,nortootherwiseactinamannercontrarytoanylegalorregulatoryobligations. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  18. P age |18 • 14(d)Supervisorsshouldrequirethattherisksassociatedwithremunerationarereflectedinthefinancialconglomerate’sbroaderriskmanagementframework. • Forexample,staffengagedinfinancialandriskcontrolatthegroup-widelevelshouldbecompensatedinamannerthatisconsistentwiththeircontrolroleandshouldbeinvolvedindesigningincentivearrangements,andassessingwhethersucharrangementsencourageimprudent • risk-taking. • 14(e)Supervisorsshouldrequirethatthevariableremunerationreceived byriskmanagementandcontrolpersonnelisnotbasedsubstantiallyonthefinancialperformanceofthebusinessunitsthattheyreviewbutratherontheachievementoftheobjectivesoftheirfunctions(egadherencetointernalcontrols). • Explanatorycomments • Remunerationisakeyaspectofanygovernanceframeworkand needstobeproperlyconsideredinordertomitigatetherisksthatmayarisefrompoorlydesignedremunerationarrangements. • Therisksassociatedwithremunerationshouldbereflectedinthefinancialconglomerate’sbroaderriskmanagementframework. • Remunerationmayserveimportantobjectives,includingattractingskilledstaff,promotingbetterorganisation-wideandemployeeperformance,promotingretention,providingretirementsecurityandallowingpersonnelcoststovarywithrevenues. • Itisalsoclear,however,thatill-designedcompensationarrangementscanprovideincentivestotakerisksthatarenotconsistentwiththelongtermhealthoftheorganisation.Suchrisksandmisalignedincentivesareofparticularsupervisoryinterest. • Ultimatelyafinancialconglomerate’sremunerationpolicyshouldaimtoensureeffectivegovernanceofremuneration,alignmentof InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  19. P age |19 • remunerationwithprudentrisk-taking,andengagementofrecognisedstakeholders. • Supervisorsshouldensurethatthegovernancesystemidentifiesandclosesloopholesthatallowthecircumventionofconglomerate,sectoralorentity-levelremunerationrequirements. • Boardmembers,seniormanagersandkeypersonsincontrolfunctionsshouldbemeasuredagainstperformancecriteriatiednotonlytotheshort-term,butalsotothelong-terminterestofthefinancialconglomerateasawhole. • V.RiskManagement • Sincefinancialconglomeratesareinthebusinessofrisk-taking,goodriskmanagementisacrucialfocusofsupervision. • Thissectionprovidesprinciplesforthesoundandcomprehensivesupervisionofriskmanagementframeworksinfinancialconglomerates.Itcoversfactorsrangingfromriskcultureandtolerance,totheuseofstressandscenariotestingandthemonitoringofriskconcentrations. • Riskmanagementframework • 21.Supervisorsshouldrequirethatanindependent,comprehensiveandeffectiveriskmanagementframework,accompaniedbyarobustsystemofinternalcontrols,effectiveinternalauditandcompliancefunctions,isinplaceforthefinancialconglomerate. • Implementationcriteria • 21(a)Supervisorsshouldensurethattheriskmanagementframeworkiscomprehensive,consistentacrossentitiessupervisedinallsectorsandcoverstheriskmanagementfunction,riskmanagementprocessesandgovernance,andsystemsandcontrols. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  20. P age |20 Riskmanagementfunction 21(b)Supervisorsshouldrequirethattheriskmanagementfunctionisindependentfromthebusinessunitsandhasasufficientlevelofauthorityandadequatelyskilledresourcestocarryoutitsfunctions. 21(c)Supervisorsshouldrequirethattheriskmanagementfunctiongenerallyhasadirectreportinglinetotheboardandseniormanagementofthefinancialconglomerate. 21(d)Supervisorsshould,wheretheyconsideritappropriate,requirethataseparateriskmanagementcommitteeattheboardofdirectorslevelis establishedbythefinancialconglomerate. Riskmanagementgovernance 21(e)Supervisorsshouldrequirethattheboardoftheheadofthefinancialconglomeratehasoverallresponsibilityforthefinancialconglomerate’sgroup-wideriskmanagement,internalcontrolmechanism,internalauditandcompliancefunctionstoensurethatthegroupconductsitsaffairswithahighdegreeofintegrity. 21(f)Supervisorsshouldrequirethatthefinancialconglomeratehasanestablishedenterprise-wideriskmanagementprocessfor,amongothers,periodicallyreviewingtheeffectivenessofthegroup-wideriskmanagementframeworkandforensuringappropriateaggregationofrisks. 21(g)Supervisorsshouldrequirethattheriskmanagementprocesscoveridentification,measurement,monitoringandcontrollingofrisktypes(egcreditrisk,operationalrisk,strategicrisk,liquidityrisk)andthesebelinkedwhereappropriatetospecificcapitalrequirements. Systemsandcontrols 21(h)Supervisorsshouldrequirethatfinancialconglomerateshaveinplaceadequate,soundandeffectiveriskmanagementprocessesandinternalcontrolmechanismsatthelevelofthefinancialconglomerate, InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  21. P age |21 • includingsoundadministrativeandaccountingprocedures. • 21(i)Supervisorsshouldrequirethatriskmanagementprocessesandinternalcontrolmechanismsofafinancialconglomerateareappropriatelydocumentedand,ataminimum,takeintoaccountthe: • nature,scaleandcomplexityofitsbusiness; • diversityofitsoperations,includinggeographicalreach; • volume,frequencyandsizeofitstransactions; • degreeofriskassociatedwitheachareaofitsoperation; • interconnectednessoftheentitieswithinthefinancialconglomerate(usingintra-grouptransactionsandexposuresreportingasonemeasure);and • sophisticationandfunctionalityofinformationandreportingsystems. • Explanatorycomments • Financialconglomerates,irrespectiveoftheirparticularmixofbusinesslinesorfinancialsectors,areinthebusinessofrisktaking.Therefore,strongriskmanagementisofparamountimportance. • Thecomprehensiveriskmanagementframeworkandprocessshouldincludeboardandseniormanagementoversight. • Inidentifying,evaluating,monitoring,controllingandmitigatingmaterialrisks(fromregulatedandunregulatedactivities),financialconglomeratesshouldconsidertheprospectforthesetochangeovertimeandpreparethemselvesaccordingly. • Theriskmanagementprocessesandinternalcontrolmechanismsofafinancialconglomerateshouldincludecleararrangementsfordelegatingauthorityandresponsibility;segregationofthefunctionsthat involvecommittingthefinancialconglomerate’sfundsandaccounting InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  22. P age |22 • forassetsandliabilities;reconciliationoftheseprocesses;safeguardingofthefinancialconglomerate’sassets;andappropriateindependentinternalauditandcompliancefunctionstotestadherencetothesecontrolsaswellasapplicablelawsandregulations. • Risktolerancelevelsandriskappetitepolicy • Supervisorsshouldrequirethatthefinancialconglomerateestablishesappropriateboardapproved,group-widerisktolerancelevelsandariskappetitepolicy. • Implementationcriteria • 23(a)Supervisorsshouldrequirethatkeystaff,seniormanagementandtheboardoftheheadofthefinancialconglomeratebeawareofandunderstandthefinancialconglomerate’srisktolerancelevelsandriskappetitepolicy. • 23(b)Supervisorsshouldrequirethatthefinancialconglomerateidentifyandmeasureagainstrisktolerancelimits(andinlinewithitsriskappetitepolicy)theriskexposureofthefinancialconglomerateonanon-goingbasisinordertoidentifypotentialrisksasearlyaspossible. • Thismayincludelookingatrisksbyterritory,bylineofbusiness,orbyfinancialsector. • Explanatorycomments • Financialconglomeratesshouldestablishrisktolerancelevelsandariskappetitepolicywhichsetthetoneforacceptableandunacceptablerisktaking. • Thisshouldbealignedwiththefinancialconglomerate’sbusinessstrategy,riskprofileandcapitalplan. • Afinancialconglomerate’srisktoleranceshouldbekeptunderperiodicreviewsoastoensurethatitremainsrelevantandtakesaccountofthechangingdynamicsofthefinancialconglomerate. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  23. P age |23 • Thefinancialconglomerate’sriskappetitepolicyisre-assessedregularlywithrespecttonewbusinessopportunities,changesinriskcapacityandtolerance,andoperatingenvironment. • Newbusiness • Supervisorsshouldrequirethatthefinancialconglomeratecarriesoutarobustriskassessmentwhenenteringintonewbusinessareas. • Implementationcriteria • 24(a)Supervisorsshould,wheretheyconsideritappropriate,reviewtheriskassessmentcarriedoutbyafinancialconglomerateinthecontextof enteringintonewbusiness. • 24(b)Supervisorsshouldrequirethatfinancialconglomeratesnotexpandintonewproductsunlesstheyhaveputinplaceadequateprocesses,controlsandsystems(suchasIT)tomanagethem. • 24(c)Supervisorsshouldmakesurethatafinancialconglomeratecarriesouttheongoingriskassessmentafterenteringintonewbusinessareas. • Explanatorycomments • Atthetimeofassessingwhetherornottoenterintoanewbusinessareaorproductline,itisimperativethatfinancialconglomeratesundertakeriskassessmentsandanalysestoidentifypotentialrisksinherentinthenewactivity. • Theyshouldseektounderstandthepotentialinteractionbetweentherisksofthenewactivityandtheexistingriskprofileofthefinancialconglomerate. • Thisshouldincludeaconsiderationofwhetherthenewactivitycouldadverselyaffecttheriskappetiteorrisktoleranceofthefinancialconglomerate. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  24. P age |24 • Outsourcing • Supervisorsshouldrequirethat,whenconsideringwhethertooutsourceaparticularfunction,thefinancialconglomeratecarriesoutanassessmentoftherisksofoutsourcing,includingtheappropriatenessofoutsourcingaparticularfunction. • Implementationcriteria • 25(a)Supervisorsshouldrequirethatfinancialconglomerateshaveprocessesandcriteriainplacetoreviewdecisionstooutsourceafunctioninordertoensurethatsuchoutsourcingdoesnotimplydelegationofresponsibilityforthatfunction. • 25(b)Supervisorsshouldbesatisfiedthatthedecisiontooutsourceafunctiondoesnotimpedeeffectivegroup-widesupervisionofthefinancialconglomerate. • Explanatorycomments • Itisimportantthatsupervisorsbesatisfiedthat,whenconsideringwhethertooutsourceaparticularfunction,financialconglomerateshaveconsideredtherisksinvolvedandtheappropriatenessofoutsourcingaparticularfunction. • Thisincludesconsideringtheappropriatenessofoutsourcingtoaparticularproviderandthecumulativerisksofalloutsourcedfunctions. • Thesupervisorshouldrequirethefinancialconglomeratetoreviewtheproviderinadvancetoensureitisinapositiontoprovidetheservices,complywiththecontractualterms,andobserveallapplicablelawsandregulations. • Supervisorsshouldperiodicallyassesstheoutsourcedfunctionwithregardtopolicycompliance,riskmanagementmeasuresandcontrolprocedures. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  25. P age |25 25.3Outsourcingshouldneverresultinadelegationofresponsibilityforagivenfunction. Theremaybecertainfunctionswithinfinancialconglomerateswhichshouldnotbeoutsourcedunderanycircumstances,whiletheremaybesomethatmayonlybeoutsourcedifcertainsafeguardsareputinplace. Stressandscenariotesting 26.Supervisorsshouldrequire,whereappropriate,thatthefinancialconglomerateperiodicallycarriesoutgroup-widestresstestsandscenarioanalysesforitsmajorsourcesofrisk. Implementationcriteria 26(a)Supervisorsshouldrequirethatstresstestsaresufficientlysevere,forwardlookingandflexible. Theyshouldcoveranappropriatesetofbusinessactivitiesandincludeavarietyofdifferenttypesoftestssuchassensitivityanalyses,scenarioanalysesandreversestresstesting. 26(b)Supervisorsshouldrequirethefinancialconglomeratetodocumentitsstressandscenariotests,includingreversestresstests. Stresstestsshouldbeconductedunderarobustgovernanceframeworkthatencompassespolicies,procedures,andadequatedocumentationofproceduresaswellasvalidationofresults. 26(c)Supervisorsshouldrequirethatthegroup-widestresstestsandscenarioanalysesconductedbythefinancialconglomerateareappropriatetothenature,scaleandcomplexityofthosemajorsourcesofriskandtothenature,scaleandcomplexityofthefinancialconglomerate’sbusiness. 26(d)Supervisorsshouldrequirethatgroup-widestresstestsandscenario analysesincludeagroup-wideapproach(whichtakesaccountofthe InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  26. P age |26 • interactionbetweendifferentpartsofthegroupanddifferentrisktypes)andconsidertheresultsofsectoralstresstests. • 26(e)Supervisorsshouldrequirethat,whencarryingoutreversestresstests,afinancialconglomerateidentifiesarangeofadversecircumstanceswhichwouldcauseitsbusinesstofailandassessthelikelihoodofsucheventscrystallising. • Explanatorycomments • Afinancialconglomerateshouldhaveagoodunderstandingofcorrelationbetweenitsrespectivesectorsandtheheterogeneityofsuchriskswhenconductingitsstresstests. • Stresstestsshouldberobustandshouldconsidersufficientlyadversecircumstances. • Thegroup-widestresstestanalysisshouldmeasureandevaluatethepotentialimpactonindividualentities. • Attentionshouldbepaidtocoveringallrisks,includingoff-balancesheetitems. • Forexample,afinancialconglomerate’sstresstestsandscenarioanalysesshouldtakeintoaccounttheriskthatthefinancialconglomeratemayhavetobringbackontoitsconsolidatedbalancesheettheassetsandliabilitiesofoff-balancesheetentitiesasaresultofreputationalcontagion,notwithstandingtheappearanceoflegalrisktransfer. • Wherereversestresstestsrevealariskofbusinessfailurethatisunacceptablyhighrelativetothefinancialconglomerate’sriskappetiteorrisktolerance,thefinancialconglomerateshouldevaluateandadopt,whereappropriate,effectivearrangements,processes,systemsorothermeasurestopreventormitigatethatrisk. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  27. P age |27 • Riskaggregation • Supervisorsshouldrequirethatthefinancialconglomerateaggregatetheriskstowhichitisexposedinaprudentmanner. • Implementationcriteria • 27(a)Supervisorsshouldrequirethatfinancialconglomerates***notmakeoverlyambitiousdiversificationassumptions***orimprudentcorrelationclaims,particularlyforcapitaladequacyandsolvencypurposes. • 27(b)Supervisorsshouldrequirefinancialconglomeratestohaveadequateresourcesandsystems(includingIT)forthepurposeof aggregatingrisks. • Explanatorycomments • Riskaggregationshouldincludeaclearunderstandingofassumptionsandberobustenoughtosupportacomprehensiveassessmentofrisk. • Whileitispossiblethatthespreadofactivitieswithinafinancialconglomeratemaycreatediversificationeffectsandreducecorrelation,itisalsotruethatmembershipofafinancialconglomerategroupmaycreate“grouprisks”intheformoffinancialcontagion,reputationalcontagion,ratingscontagion(whereasubsidiaryaccessescapitalthroughaparent’screditratingandthensuffersstressfollowingtheutilisationofthecapital),double/multiple-gearing(useofsamecapitalmorethanoncewithinagroup),excessiveleveraging(upgradeinthequalityofcapitalasitmovesthroughagroup),andregulatoryarbitrage(itisimportantthatrisksareassessedatthefinancialconglomeratelevelaswellasatthelevelofitsconstituentparts). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  28. P age |28 • Riskconcentrationsandintra-grouptransactionsandexposures • Supervisorsshouldrequirethatthefinancialconglomeratehasin placeeffectivesystemsandprocessestomanageandreportgroup-wideriskconcentrationsandintra-grouptransactionsandexposures. • Implementationcriteria • 28(a)Supervisorsshouldrequirethatthefinancialconglomeratehasinplaceeffectivesystemsandprocessestoidentify,assessandreport • group-wideriskconcentrations(includingforthepurposesofmonitoring andcontrollingthoseconcentrations). • 28(b)Supervisorsshouldrequirethatthefinancialconglomeratehasinplaceeffectivesystemsandprocessestoidentify,assessandreportsignificantintra-grouptransactionsandexposures. • 28(c)Supervisorsshouldrequirethefinancialconglomeratetoreportsignificantriskconcentrationsandintra-grouptransactionsandexposuresatthelevelofthefinancialconglomerateonaregularbasis. • 28(d)Supervisorsshouldconsidersettingquantitativelimitsandadequatereportingrequirements. • Explanatorycomments • Supervisorsshouldensurethatfinancialconglomeratesaremanagingtheirriskconcentrationsandintra-grouptransactionsandexposuressatisfactorily. • Supervisorsshouldencourageadequatepublicdisclosureofriskconcentrationsandintra-grouptransactionsandexposures. • Supervisorsshouldliaisecloselywithoneanothertoascertaineachother’sconcernsandcoordinateasdeemedappropriateanysupervisoryactionrelativetoriskconcentrationsandintra-grouptransactionsandexposureswithinthefinancialconglomerate. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  29. P age |29 • 28.4Supervisorsshoulddealeffectivelywithmaterialriskconcentrationsandintra-grouptransactionsandexposuresthatareconsideredtohaveadetrimentaleffectontheregulatedentitiesorthefinancialconglomerateasawhole. • Off-balancesheetactivities • Supervisorsshouldrequirethatoff-balancesheetactivities,includingspecialpurposeentities,arebroughtwithinthescopeofgroup-widesupervisionofthefinancialconglomerate,whereappropriate. • Implementationcriteria • 29(a)Supervisorsshouldrequirethatthereisaprocessfordeterminingwhetherthenatureoftherelationshipbetweenthefinancialconglomerateandaspecialpurposeentity(SPE)requirestheSPEtobefullyorproportionallyconsolidatedintothefinancialconglomerateforregulatorypurposes. • 29(b)Supervisorsshouldrequirethatthefinancialconglomerate’sstresstestsandscenarioanalysestakeintoaccounttheriskassociatedwithoffbalancesheetactivities. • 29(c)Supervisorsshouldrequirethattheoverallnatureoftherelationship betweenthefinancialconglomerateandtheSPEisconsideredincludingtheriskofcontagionfromtheSPE.Thisassessmentshouldgobeyondtraditionalcontrolandinfluencerelationships. • Explanatorycomments • Afinancialconglomerate’sriskmanagementframeworkandprocessesshouldcoverthefullspectrumofriskstothefinancialconglomerate.Thisincludesrisksfromregulatedandunregulatedentities,includingSPEsandoff-balancesheetactivities. • Thefactthatafinancialconglomeratedoesnotownorcontrolthe SPEinthetraditionalsenseshouldnotmeanthatitshouldnotbeconsolidated. • Otherchannelsofcontagionshouldbeconsidered,suchastheprovisionof(actualorcontingent)liquiditysupport,reputationalrisk,andwhether InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  30. P age |30 • theassetsoftheSPEpreviouslybelongedtothefinancialconglomerateorwerethird-partyassets. • ItisimportantthatfinancialconglomeratesassessalleconomicrisksandbusinesspurposesofanSPEthroughoutthelifeofatransaction,distinguishingbetweenrisktransferandrisktransformation. • Financialconglomeratesshouldbeparticularlyawarethat,overtime,thenatureoftheseriskscanchange. • Supervisorsshouldrequiresuchassessmenttobeongoingandthatmanagementhassufficientunderstandingoftherisks. • Financialconglomeratesshouldhavethecapabilitytoaggregate,assessandreportalltheirSPEexposurerisksinconjunctionwithallotherfirm-widerisks. • SupervisorsshouldregularlyoverseeandmonitortheuseofallSPEactivityandassesstheimplicationsforthefinancialconglomerateoftheactivitiesofSPEs,inordertoidentifydevelopmentsthatcanleadtosystemicweaknessandcontagionorthatcanexacerbatepro-cyclicality. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  31. P age |31 NUMBER2 FinalBaselIIIRulesinAustralia AustralianPrudentialRegulationAuthority(APRA) To:Alllocallyincorporatedauthoriseddeposit-takinginstitutionsBaselIIIcapital:interimarrangementsforAdditionalTier1andTier2capitalinstruments APRAhasreleasedfinalprudentialstandardsimplementingtheBaselIIImeasurestoraisethequality,consistencyandtransparencyofthecapitalbase,includingPrudentialStandardAPS111CapitalAdequacy:MeasurementofCapital(APS111). ThislettersetsoutAPRA’streatmentofnewAdditionalTier1andTier2capitalinstrumentsissuedbeforethenewstandardcomesintoeffecton+ Tobeeligibleforinclusioninregulatorycapital,allcapitalinstrumentsthathavenotbeensubmittedtoAPRAforreviewbeforecloseofbusinesstodaymustcomplywiththefinalversionofAPS111issuedtoday. InstrumentsthathavebeensubmittedtoAPRAuptoandincludingtoday’sdateandthatwereintendedtobeissuedunderthecurrent transitionalarrangements(includingAPRA’sletterstoindustrydated27May2011and30March2012),willbeassessedagainstthesecriteria. Tobecountedaseligibleregulatorycapital,instrumentsapprovedbyAPRAunderthesecriteriamustbeissuedbeforecloseofbusinesson31December2012. AnyquestionsinrelationtothislettershouldinthefirstinstancebedirectedtoyourResponsibleSupervisor. YourssincerelyCharlesLittrell ExecutiveGeneralManager InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  32. P age |32 • Notes • InDecember2010,theBaselCommitteeonBankingSupervision(BaselCommittee)releasedapackageofreformstoraisethelevelandqualityof regulatorycapitalintheglobalbankingsystem(BaselIII). • APRAisamemberoftheBaselCommitteeandfullysupportstheimplementationofthesereforms. • InSeptember2011,APRAreleasedadiscussionpaperoutliningitsproposalstoimplementtheseBaselIIIcapitalreformsinAustralia. • APRAsubsequentlyreleased,inMarchandJune2012,draftprudentialandreportingstandardsonwhichsubmissionswereinvited. • InJune2012,APRAalsoinvitedsubmissionsonitsproposalthatcertaincapitalinstrumentsbesubjecttoAustralianlawandonitsproposed regulatorycapitaltreatmentofjointarrangements. • FifteensubmissionswerereceivedontheMarchandJune2012consultationpackages. • APRA’scapitaladequacyprudentialandreportingstandards • Submissionswerebroadlysupportiveofthecontentofthedraftprudentialandreportingstandardsandmostlysoughtclarificationofparticularprovisions. • Inresponse,APRAhas: • clarifieditsexpectationsforanADI’sInternalCapitalAdequacyAssessmentProcess(ICAAP),whichareincludedinthedraftPrudentialPracticeGuideCPG110InternalCapitalAdequacyAssessment • Processandsupervisoryreview(CPG110)recentlyreleasedforpublicconsultation; • reviseditsproposedtreatmentofanADI’sfundingofpurchasesofitsowncapitalinstruments,includingmarginloans; InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  33. P age |33 • removedthe‘profitstest’fromAdditionalTier1andTier2Capitalinstruments; • clarifiedtheoperationofthecountercyclicalcapitalbuffer; • simplifiedtransitionalarrangementsforcapitalissuedbyconsolidatedsubsidiariesandheldbythirdparties;and • mademinorchangestotheprudentialandreportingstandardstoimproveeaseofuse. • SubmissionsraisedconcernsaboutAPRA’sproposalthatcertaincapitalinstrumentsshouldbesubjecttoAustralianlaw. • APRAacknowledgestheseconcerns. • Inresponse,ithasclarifiedareasofuncertaintyaboutthelossabsorptionandnon-viabilityrequirementsandhasrefineditsapproachtothequestionofgoverninglawforcapitalinstruments,suchthatonlythoseprovisionsofcapitalinstrumentdocumentationdealingwithlossabsorptionandnon-viabilitymustbegovernedbyAustralianlaw. • InJune2012,theBaselCommitteefinaliseditsproposalstoimproveconsistencyandeaseofuseofdisclosuresoncapitalpositionsandcapitalcomposition. • Thesemeasures,whicharetocomeintoeffectforreportingperiodsendingonorafter30June2013,includeacommontemplateand disclosureprovisionsthat,ifimplemented,wouldfacilitatecomparison betweenthecapitalpositionofbankinginstitutionsacrossjurisdictions. • APRAwillconsultinearly2013ontheserequirements. • Consultationwithindustryandotherinterestedstakeholders InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  34. P age |34 • TheBaselIIIreformsalsoimplementmeasuresrelatingtoexternalcreditassessmentinstitutions(ECAIs)andtominimisecliffeffectsarisingfromguaranteesandderivatives. • ObjectivesandkeyrequirementsofthisPrudentialStandard • ThisPrudentialStandardrequiresanauthoriseddeposit-takinginstitution(ADI)tomaintainadequatecapital,onbothaLevel1andLevel2basis,toactasabufferagainsttheriskassociatedwithitsactivities. • TheultimateresponsibilityfortheprudentmanagementofcapitalofanADIrestswithitsBoardofdirectors. • TheBoardmustensuretheADImaintainsanappropriateleveland qualityofcapitalcommensuratewiththetype,amountandconcentrationofriskstowhichtheADIisexposed. • ThekeyrequirementsofthisPrudentialStandardarethatanADIandanyLevel2groupmust: • haveanInternalCapitalAdequacyAssessmentProcess; • maintainrequiredlevelsofregulatorycapital; • operateacapitalconservationbufferand,ifrequired,a • countercyclicalcapitalbuffer; • informAPRAofanyadversechangeinactualoranticipatedcapitaladequacy;and • -seekAPRA’sapprovalforanyplannedcapitalreductions. • Interesting: • AnADIthatispartofagroupmayrelyontheICAAPofthegroupprovidedthattheBoardoftheADIissatisfiedthatthegroupICAAPmeetsthecriteriainrespectoftheADI. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  35. P age |35 Groupriskmanagement Paragraphs9to13ofthisPrudentialStandardapplytoanADIthatheadsaconglomerategroup. WhereanADIispartofaconglomerategroupheadedbyanauthorisednon-operatingholdingcompany(authorisedNOHC),therequirementssetoutinparagraphs9to13ofthisPrudentialStandardapplytotheADIanditssubsidiaries. ForconglomerategroupsheadedbyanADI,theBoardoftheADIisresponsibleforensuringthatcomprehensivepoliciesandproceduresareinplacetomeasure,manage,monitorandreportoverallriskatagrouplevel. ToensurethatexistingBoard-approvedpoliciesandtherelevantcontrolsremainadequateandappropriateformanagingandmonitoringoverallgrouprisk,theBoardoraboardcommitteemustreviewthemregularly(atleastannually)totakeaccountofchangingriskprofilesofgroupentities. AnymaterialchangestogroupriskmanagementpoliciesmustbeapprovedbytheBoard. TheBoardofanADImustensurethattheADIestablishesappropriatepolicies,systemsandprocedurestomonitorcompliancewithAPRA’sprudentialrequirementsonagroupbasis. TofacilitateconglomerategroupsupervisionbyAPRA,anADImust: (a)provideAPRAwiththefollowinggroupinformation: (i)detailsofgroupmembers(e.g.name,placeofincorporation,boardcomposition,natureofbusinessandanyotheradditionalinformationrequiredbyAPRAforabetterunderstandingoftheriskprofilesofindividualgroupmembers); InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  36. P age |36 managementstructureofthegroup(includingkeyriskmanagementreportinglines); intra-groupsupportarrangements(e.g.aspecificguaranteeoftheobligationsofanentityinthegroup); intra-groupexposures;and otherinformationasrequiredbyAPRAfromtimetotimefortheeffectivesupervisionofthegroup; notifyAPRAinaccordancewithsection62AoftheBankingActofanybreachofarequirementinaprudentialstandardoraconditionofabankingauthority(whetherbyanADIinthegrouporbythegroup)andofanycircumstancesthatmightreasonablybeseenashavingamaterialimpactandpotentiallyadverseconsequencesforanADIinthegrouporfortheoverallgroup; adviseAPRAinadvanceofanyproposedchangestothecompositionoroperationsofthegroupwiththepotentialtomateriallyalterthegroup’soverallriskprofile(thismustincludeanyproposedchangestotheADI’sstand-aloneoperations);and obtainAPRA’spriorwrittenapprovalfortheestablishmentoracquisitionofaregulatedpresencedomesticallyoroverseas. AnADImustprovideAPRAwithdescriptionsofitsgroupriskmanagementpoliciesandtheproceduresusedtomeasureandcontroloverallgrouprisk(includinganymaterialchangesthereto). TheADIshould,asbestpractice,discloseinthegroup’sfullpublishedannualreporteachyearanoutlineofitsgroupriskmanagementpolicies,includingthepoliciesgoverningdealingsbetweentheADIandothergroupmembers. AnADImustsubmitadeclarationsignedbyitschiefexecutiveofficer,approvedbytheBoard,coveringtheLevel2group'sriskmanagementsystemswithinthreemonthsoftheADI'sannualbalancedatein InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  37. P age |37 accordancewiththedeclarationrequirementsinPrudentialStandardAPS310AuditandRelatedMatters(APS310). 13.IfanADIqualifiesthedeclarationinparagraph12,theADImustexplainthereasonsforthequalificationsinaccordancewiththerequirementsinAPS310andprovideplansforcorrectiveaction. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  38. P age |38 NUMBER3 16October2012-PublicHearingsonthedraftfactualReportoftheEU-USInsuranceRegulatoryDialogueProject TheEU-USInsuranceRegulatoryDialogueProjectorganisestwopublic hearingsonthedraftfactualReport basedontheresultsoftheProject’sseventechnicalcommittees(TC). Thepublichearingswilltakeplace: IntheUSA:on12October2012at14.00–17.00hrsEDTintheGrandHyatt,WashingtonDC; InBelgium:on16October2012at10.00–13.00hrsCETintheCentredeConférencesAlbertBorschette,Brussels. Requeststoprovideoralstatementsduringthepublichearingsshouldbesentby10October2012tothefollowingemailaddresses:tom.finnell{at}treasury.gov(WashingtonHearing)andManuela.Zweimueller{at}eiopa.europa.eu(BrusselsHearing). InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  39. P age |39 TheEU-USDialogueProject TheEU-USDialogueProjectstartedinearly2012,whentheEuropeanCommission(EC),EIOPA,theUSNationalAssociationofInsuranceCommissioners(NAIC)andtheFederalInsuranceOfficeoftheUSDepartmentoftheTreasury(FIO)agreedtoparticipateindialogueandarelatedproject(Project)tocontributetoanincreasedmutualunderstandingandenhancedcooperationbetweentheEuropeanUnionandtheUnitedStatestopromotebusinessopportunity,consumerprotectionandeffectivesupervision. TheobjectiveoftheProject,whichbuildsonmorethanadecadeofEU-USregulatorydialogue,istodeepeninsightintotheoveralldesign,functionandobjectivesofthekeyaspectsoftheinsurancesupervisory regimesintheEUandtheU.S,andtoidentifyimportantcharacteristicsofbothregimes. RequestfortheEU-U.S.DialogueProjectforPublicCommentontheTechnicalCommitteeReports ComparingCertainAspectsoftheInsuranceSupervisoryand RegulatoryRegimesintheEuropeanUnionandtheUnitedStates ToInterestedParties: TheSteeringCommitteeoftheEU-U.S.DialogueProjectinvitespubliccommentonthereportsofseventechnicalcommitteescomparingcertainaspectsoftheinsurancesupervisoryregimesintheEuropeanUnionandtheUnitedStates. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  40. P age |40 IntroductiontotheEU-U.S.DialogueProject IntheEU,theEuropeanParliament,theCounciloftheEuropeanUnionandtheEuropeanCommission(EC),technicallysupportedbytheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA),aremodernizingtheEU’sinsuranceregulatoryandsupervisoryregimethroughtheSolvencyIIDirective(Directive2009/138/EC),inplacesince 2009. Thisso-calledFrameworkDirectivewastheculminationofworkbeguninthe1990stoupdateexistingsolvencystandardsintheEU. CurrentworkaimstofurtherspecifytheFrameworkDirectivewithtechnicalrulesandguidelines,whicharenecessaryforaconsistentapplicationbyinsurersandsupervisorsoftheframework. IntheUnitedStates,thestatesaretheprimaryregulatorsoftheinsuranceindustry. StateinsuranceregulatorsaremembersoftheNationalAssociationofInsuranceCommissioners(NAIC),astandard-settingandregulatorysupportorganizationcreatedandgovernedbythechiefinsuranceregulatorsfromthe50states,theDistrictofColumbiaandfiveU.S.territories. Aspartofanevolutionaryprocess,throughtheNAIC,stateinsuranceregulatorsintheU.S.arecurrentlyintheprocessofenhancingtheirsolvencyframeworkthroughtheSolvencyModernizationInitiative(SMI). SMIisanassessmentoftheU.S.insurancesolvencyregulationframeworkandincludesareviewofinternationaldevelopmentsregardinginsurancesupervision,bankingsupervision,andinternationalaccountingstandardsandtheirpotentialuseinU.S.insuranceregulation. Inearly2012,theEC,EIOPA,theNAICandtheFederalInsuranceOfficeoftheU.S.DepartmentoftheTreasury(FIO)agreedtoparticipatein dialogueandarelatedproject(Project)tocontributetoanincreased InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  41. P age |41 • mutualunderstandingandenhancedcooperationbetweentheEUandtheU.S.topromotebusinessopportunity,consumerprotectionandeffectivesupervision. • Theprojectisconsideredtobepartofandbuildsontheon-goingEU-USDialoguewhichhasbeeninplaceforover10years. • TheworkiscarriedoutincollaborationwithEIOPAandcompetentauthoritiesintheEUMemberStates,andwithstateinsuranceregulatorsandtheNAICintheUnitedStates. • TheobjectiveoftheProjectistodeepeninsightintotheoveralldesign,functionandobjectivesofthekeyaspectsthetworegimes,andtoidentifyimportantcharacteristicsofbothregimes. • ProjectGovernanceandProcess:TheProjectisledbyasix-memberSteeringCommitteecomprisedofthreeEUandthreeU.S.officials,asfollows: • GabrielBernardino–ChairmanofEIOPA • EdwardForshaw–ManagerinthePrudentialPolicydivision,UKFinancialServicesAuthority,andEIOPAEquivalenceCommitteeChair • KarelVanHulle–HeadofUnitforInsuranceandPensions,Directorate-GeneralInternalMarketandServices,EC • KevinM.McCarty–Commissioner,OfficeofInsuranceRegulation,StateofFlorida,andcurrentPresidentoftheNAIC • MichaelMcRaith–Director,FIO,UnitedStatesDepartmentoftheTreasury • ThereseM.(Terri)Vaughan–ChiefExecutiveOfficer,NAICSincetheProjectbegan,theSteeringCommitteehasheldseveral • face-to-facemeetingsinBasel,WashingtonDCandFrankfurt,aswellas • numerousconferencecalls. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  42. P age |42 • Inafirststep,thetopicstobediscussedwereagreeduponandaprocessforinformationexchangeunderconfidentialityobligationswasestablished. • TheSteeringCommitteeagreeduponseventopicsfundamentallyimportanttoasoundregulatoryregimeandtotheprotectionofpolicyholdersandfinancialstability. • Theseventopicsare: • Professionalsecrecy/confidentiality; • Groupsupervision; • Solvencyandcapitalrequirements; • Reinsuranceandcollateralrequirements; • Supervisoryreporting,datacollectionandanalysis; • Supervisorypeerreviews;and • Independentthirdpartyreviewandsupervisoryon-siteinspections. • AseparateTechnicalCommittee(TC)wasassembledtoaddresseachtopic. • EachTCwascomprisedofexperiencedprofessionalsfromboththeEuropeanUnionaswellastheUnitedStates,specifically,fromFIO,theEC,theNAICandEIOPA,aswellasrepresentativesfromstateinsuranceregulatoryagenciesintheUnitedStatesandcompetentauthoritiesofEUMemberStates. • Thevariousprofessionalswhocomprisedthetechnicalcommitteeswereselectedbecauseoftheirqualificationsandexperiencewithrespecttothesubjectmatterofeachtopic,includinginsuranceregulatorsandsupervisors,attorneys,accountants,examiners,andotherspecialists. • Theteamsworkedjointlytodevelopobjective,fact-basedreportsintendedtosummarizethekeycommonalitiesanddifferencesbetweentheSolvencyIIregimeintheEU,andthestate-basedinsuranceregulatoryregimeintheUnitedStates. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  43. P age |43 Supportingdocumentation,e.g.,regulations,directives,andsupervisoryguidance,wasexchangedasrequestedbyeitherside. Theaccompanyingseventechnicalcommitteereportshavebeenjointlydraftedandreflecttheconsensusviewsofeachrespectivetechnicalcommittee’smembers. NoactionhasbeentakenbythegoverningbodiesoftheorganizationsrepresentedontheSteeringCommitteetoformallyadoptthedraftfactual reportsandthusthisdocumentshouldnotbeconsideredtoexpressofficialviewsorpositionsofanyorganization. ThereportsrepresenttheculminationoftheinitialworkfromthefirstphaseoftheProject. ThereportsarebeingexposedforinterestedpartyanalysisandcommentandwillinformdiscussionsandconclusionsreachedbytheSteeringCommitteeoneachtopicduringthesecondphaseoftheProject. ItisenvisagedthatthesecondphaseoftheProjectwillinvolvediscussionsoftheSteeringCommitteeaboutthekeycommonalitiesand differencesbetweenthetworegimesandwillleadtopolicydecisionsbytheirrespectiveorganizationsregardingwhetherandhowtoachievefurtherharmonizationinregulationandsupervision. TheprojectisscheduledtocometoaconclusionbyDecember31,2012. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  44. P age |44 InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  45. P age |45 TheContributingParties TheFederalInsuranceOffice,U.S.DepartmentoftheTreasury TheFederalInsuranceOffice(FIO)oftheU.S.DepartmentoftheTreasurywasestablishedbytheDodd-FrankWallStreetReformandConsumerProtectionAct. TheFIOmonitorsallaspectsoftheinsuranceindustry,includingidentifyingissuesorgapsintheregulationofinsurersthatcouldcontributetoasystemiccrisisintheinsuranceindustryortheUnitedStatesfinancialsystem. TheFIOservesontheU.S.FinancialStabilityOversightCouncil. TheFIOcoordinatesanddevelopsU.S.Federalpolicyonprudentialaspectsofinternationalinsurancematters,includingrepresentingtheUnitedStates,asappropriate,intheInternationalAssociationofInsuranceSupervisors. TheFIOassiststheSecretaryinnegotiatingcertaininternationalagreements,andservesastheprimarysourceforinsurancesectorexpertisewithintheFederalgovernment. TheFIOmonitorsaccesstoaffordableinsurancebytraditionallyunderservedcommunitiesandconsumers,minorities,andlow-andmoderate-incomepersons. TheFIOalsoassiststheSecretaryinadministeringtheTerrorismRiskInsuranceProgram. TheEuropeanCommission TheEuropeanCommission(EC)isoneofthemaininstitutionsoftheEuropeanUnion. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  46. P age |46 ItrepresentsandupholdstheinterestsoftheEUasawhole.TheECistheexecutivebranchoftheEUandisresponsibleforproposingnewEuropeanlawstoParliamentandtheCouncil. TheECoverseesandimplementsEUpoliciesbyenforcingEUlaw(togetherwiththeCourtofJustice),andrepresentstheEUinternationally,forexample,bynegotiatinginternationaltradeagreementsbetweentheEUandothercountries. ItalsomanagestheEU'sbudgetandallocatesfunding. The27Commissioners,onefromeachEUcountry,providetheCommission’spoliticalleadershipduringtheir5-yearterm. TheNationalAssociationofInsuranceCommissioners TheNationalAssociationofInsuranceCommissioners(NAIC)isthestandard-settingandregulatorysupportorganizationcreatedandgovernedbythechiefinsuranceregulatorsfromthe50states,theDistrictofColumbiaandfiveU.S.territories. ThroughtheNAIC,stateinsuranceregulatorsestablishstandardsand bestpractices,conductpeerreview,andcoordinatetheirregulatoryoversightthatisexercisedatthestatelevel. NAICstaffsupportstheseeffortsandrepresentsthecollectiveviewsofstateregulatorsdomesticallyandinternationally. NAICmembers,togetherwiththecentralresourcesoftheNAIC,formthenationalregimeofstate-basedinsuranceregulationintheUnitedStates. EuropeanInsuranceandOccupationalPensionsAuthority TheEuropeanInsuranceandOccupationalPensionsAuthority(EIOPA)wasestablishedasaresultofthereformstothestructureofsupervisionofthefinancialsectorintheEuropeanUnion. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  47. P age |47 ThereformwasinitiatedbytheEC,followingtherecommendationsofaCommitteeofWiseMen,chairedbyMr.deLarosière,andsupportedbytheEuropeanCouncilandParliament. EIOPAtechnicallysupportstheEC,amongstothers,inthemodernizationoftheEU’sinsuranceregulatoryandsupervisoryregime. CurrentworkaimstofurtherspecifytheSolvencyIIFrameworkDirectivewithtechnicalrulesandguidelines,whichisnecessaryforaconsistentapplicationbyinsurersandsupervisorsoftheframework.Incross-bordersituations,EIOPAalsohasalegallybindingmediationroletoresolvedisputesbetweencompetentauthoritiesandmaymakesupervisorydecisionsdirectlyapplicabletotheinstitutionconcerned. EIOPAispartoftheEuropeanSystemofFinancialSupervisionconsistingofthreeEuropeansupervisoryauthorities,theothersbeingthenationalsupervisoryauthoritiesandtheEuropeanSystemicRiskBoard.EIOPAisanindependentadvisorybodytotheEC,theEuropean ParliamentandtheCounciloftheEuropeanUnion. EIOPA’scoreresponsibilitiesaretosupportthestabilityofthefinancialsystem,transparencyofmarketsandfinancialproductsaswellastheprotectionofinsurancepolicyholders,pensionschememembersand beneficiaries. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  48. P age |48 NUMBER4 FiveQuestionsabouttheFederalReserveandMonetaryPolicy ChairmanBenS.Bernanke,attheEconomicClubofIndiana,Indianapolis,Indiana Goodafternoon.IampleasedtobeabletojointheEconomicClubofIndianaforlunchtoday. Inotethatthemissionoftheclubis"topromoteaninterestin,andenlightenitsmembershipon,importantgovernmental,economicandsocialissues."Ihopemyremarkstodaywillmeetthatstandard. Beforedivingin,I'dliketothankmyformercolleagueattheWhiteHouse,AlHubbard,forhelpingtomakethiseventpossible. AstheheadoftheNationalEconomicCouncilunderPresidentBush,AlhadthedifficulttaskofmakingsurethatdiverseperspectivesoneconomicpolicyissuesweregivenafairhearingbeforerecommendationswenttothePresident. Alhadtobeacombinationofeconomist,politicalguru,diplomat,andtrafficcop,andhehandleditwithgreatskill. Mytopictodayis"FiveQuestionsabouttheFederalReserveandMonetaryPolicy." Ihaveusedaquestion-and-answerformatintalksbefore,andIknowfrommuchexperiencethatpeopleareeagertoknowmoreabouttheFederalReserve,whatwedo,andwhywedoit. Andthatinterestisevenbroaderthanonemightthink. I'mabaseballfan,andIwasexcitedtobeinvitedtoarecentbattingpracticeoftheplayoff-boundWashingtonNationals. Iwasintroducedtooneoftheteam'sstarplayers,butbeforeIcouldpressmyquestionsonsomefinepointsofbaseballstrategy,heasked,"So,what'sthescooponquantitativeeasing?" InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  49. P age |49 So,forthatplayer,forclubmembersandguestsheretoday,andforanyoneelsecuriousabouttheFederalReserveandmonetarypolicy,Iwillaskandanswerthesefivequestions: WhataretheFed'sobjectives,andhowisittryingtomeetthem? What'stherelationshipbetweentheFed'smonetarypolicyandthefiscaldecisionsoftheAdministrationandtheCongress? WhatistheriskthattheFed'saccommodativemonetarypolicywillleadtoinflation? HowdoestheFed'smonetarypolicyaffectsaversandinvestors? HowistheFederalReserveheldaccountableinourdemocraticsociety? WhatAretheFed'sObjectives,andHowIsItTryingtoMeetThem? ThefirstquestiononmylistconcernstheFederalReserve'sobjectivesandthetoolsithastotrytomeetthem. Asthenation'scentralbank,theFederalReserveischargedwithpromotingahealthyeconomy--broadlyspeaking,aneconomywithlowunemployment,lowandstableinflation,andafinancialsystemthatmeetstheeconomy'sneedsforcreditandotherservicesandthatisnotitselfasourceofinstability. Wepursuethesegoalsthroughavarietyofmeans.Togetherwithotherfederalsupervisoryagencies,weoverseebanksandotherfinancialinstitutions. Wemonitorthefinancialsystemasawholeforpossibleriskstoitsstability. Weencouragefinancialandeconomicliteracy,promoteequalaccesstocredit,andadvancelocaleconomicdevelopmentbyworkingwithcommunities,nonprofitorganizations,andothersaroundthecountry. Wealsoprovidesomebasicservicestothefinancialsector--forexample,byprocessingpaymentsanddistributingcurrencyandcointobanks. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

  50. P age |50 ButtodayIwanttofocusonarolethatisparticularlyidentifiedwiththeFederalReserve--themakingofmonetarypolicy. Thegoalsofmonetarypolicy--maximumemploymentandpricestability--aregiventousbytheCongress. Thesegoalsmean,basically,thatwewouldliketoseeasmanyAmericansaspossiblewhowantjobstohavejobs,andthatweaimtokeeptherateofincreaseinconsumerpriceslowandstable. Innormalcircumstances,theFederalReserveimplementsmonetarypolicythroughitsinfluenceonshort-terminterestrates,whichinturnaffectotherinterestratesandassetprices. Generally,ifeconomicweaknessistheprimaryconcern,theFedactstoreduceinterestrates,whichsupportstheeconomybyinducingbusinessestoinvestmoreinnewcapitalgoodsandbyleadinghouseholdstospendmoreonhouses,autos,andothergoodsandservices. Likewise,iftheeconomyisoverheating,theFedcanraiseinterestratestohelpcooltotaldemandandconstraininflationarypressures. Followingthisstandardapproach,theFedcutshort-terminterestratesrapidlyduringthefinancialcrisis,reducingthemtonearlyzerobytheendof2008--atimewhentheeconomywascontractingsharply. Atthatpoint,however,wefacedarealchallenge:Onceatzero,theshort-terminterestratecouldnotbecutfurther,soourtraditionalpolicytoolfordealingwitheconomicweaknesswasnolongeravailable. Yet,withunemploymentsoaring,theeconomyandjobmarketclearlyneededmoresupport. Centralbanksaroundtheworldfoundthemselvesinasimilarpredicament. Weaskedourselves,"Whatdowedonow?" Toanswerthisquestion,wecoulddrawontheexperienceofJapan,whereshort-terminterestrateshavebeennearzeroformanyyears,aswellasagooddealofacademicwork. InternationalAssociationofRiskandComplianceProfessionals(IARCP) www.risk-compliance-association.com

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