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P a g e | 1 Bas e l iii C om p l i a n c e Pr o fe s s iona l s Ass o c i a t i on ( B ii i CPA) 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 e b : w w w.ba s e l - iii - a s soc i a t i o n . com. D ear Mem b er,

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  1. P age |1 BaseliiiComplianceProfessionalsAssociation(BiiiCPA)1200GStreetNWSuite800Washington,DC20005-6705USATel:202-449-9750Web:www.basel-iii-association.com DearMember, TodaywewillstartfromsomeamazingBaselIIIjobs. Amazing:TheaveragesalaryandthedemandforBaselIIIskillsinITjobsadvertisedacrosstheUK ThefirsttablebelowlooksatthedemandforBaselIIIskillsinITjobsadvertisedacrosstheUK. IncludedisaguidetotheaveragesalariesofferedinITjobsthathavecitedBaselIIIoverthe3monthsto6March2013withacomparisontothesameperiodintheprevious2years. ThesecondtableisforcomparisonandprovidesaggregatesforalloftheQualityAssurance&Compliancecategory. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  2. P age |2 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  3. P age |3 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  4. P age |4 Source:ITJobsWatch,thatprovidesauniqueperspectiveontoday'sinformationtechnologyjobmarket(noaffiliation). Tolearnmore: http://www.itjobswatch.co.uk/jobs/uk/basel%20iii.do BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  5. P age |5 Wheretonext? PrioritiesandthemesfortheBaselCommittee KeynoteaddressbyMrStefanIngves,GovernoroftheSverigesRiksbankandChairmanoftheBaselCommitteeonBankingSupervisiontotheThirdBCBS-FSIHigh-LevelMeetingfor CentralandEasternEuropeon“StrengtheningFinancialSectorSupervisionandCurrentRegulatoryPriorities” Goodmorning.Itismygreatpleasuretobewithyouagaintoday. IwouldliketobeginbyextendingmyappreciationtotheFinancialStabilityInstituteandtheBankingSupervisorsfromCentralandEasternEuropefortheireffortsinbringingustogetheragainforanotheroftheseHigh-LevelMeetings. Lastyear,IwaspleasedtohavebeenabletobeapartofwhatwasaveryinterestingandenjoyablemeetinginWarsawhostedbyourPolishcolleagues. IhopewecanreplicatethesuccessofthateventthisyearhereinBasel.Iwouldliketotaketheopportunitytodaytoreflectalittleonwhatthe BaselCommitteehasbeendoingsincewelastmet. ThenIwilloutlineworkcurrentlyintrainaswellasourlongertermstrategicpriorities. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  6. P age |6 • TheCommitteemeetsinthisbuildingtomorrow,andcontinuestohaveaveryfullagenda. • Indeed,thekeymessageIwouldliketoleaveyouwithisthatourwork,althoughchanginginnature,showsnosignsofeasingoff. • Whathavewedone? • BeforeIdiscusswhat’slefttodo,letmerecapwhathasbeendoneoverthepastyear. • ThekeyinitiativescompletedbytheCommitteeinthepastyearinclude: • reachingagreementonapackageofrevisionstofinaliseBaselIII’s • LiquidityCoverageRatio(LCR); • revisingtheCorePrinciplesforEffectiveBankingSupervision; • developingapolicyframeworkfordealingwithdomesticsystemicallyimportantbanks; • establishingdisclosurerequirementsforthenewBaselIIIdefinitionof capital;and • updatingthesupervisoryguidanceforassessingtheeffectivenessofabank’sinternalauditfunction. • Inaddition,theCommitteeestablishedasoundoperatingframeworkwithinwhichtoassessitsmembers’implementationofBaselIII. • Asaresult,theCommitteeproduced: • tworegularsemiannualreportsonBaselIIIimplementationinallmembercountries(alongwithtwospecialreportstotheG20onimplementation); BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  7. P age |7 • assessmentsofBaselIIIimplementationintheEuropeanUnion,JapanandtheUnitedStates;and • areportanalysingthevariabilityofrisk-weightedassetcalculationsformarketriskinindividualbanks. • Furtherdowntheagenda,mycolleaguesfromtheBaselCommittee • Secretariatwillprovideadditionalinsightsonourimplementationwork. • Iwouldliketomakethepointnow,however,thattheseeffortsarecriticaltodeliveringonthebenefitsthatBaselIIIoffers. • Ruleswrittenhavenoeffectifnotimplemented:wecannotfailonthisfront,andIwillsaymoreaboutoureffortsshortly. • Whatarewedoing? • ThereisstillagreatdealofworkbeingdonetofinishtheBaselIIIframework. • Thecapitalstandardsarenowlargelysettled,withtheexceptionofsometechnicalworkonissueslikeexposurestocentralcounterparties(CCPs). • AsInotedearlier,theLCRhasalsobeenfinalised–albeitagainwith • somefinaltechnicaldetailstoberesolved. • ButthereareotherpartsoftheBaselframeworkwhichwearecurrentlyworkingtofleshoutandmakeoperational. • Majorprojectscurrentlyunderwayinclude: • finalisingthespecificationoftheleverageratio,andassociateddisclosurerequirements; • reviewingtheNetStableFundingRatio(NSFR),whichaddressesthelonger-termstructureofbankdebtandcomplementstheshort-termfocusoftheLCR; BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  8. P age |8 • completingthereviewofthetradingbookcapitalrequirements. • Thisentailsanevaluationofthedesignofthemarketriskregulatoryregimeaswellasweaknessesinriskmeasurementundertheframework’sinternalmodels-basedandstandardizedapproaches; • enhancingthetreatmentofsecuritisationstomakecapitalrequirementsmoreprudentandrisk-sensitive. • Wearealsoreviewingwaystoreducemechanisticrelianceonexternalcreditratingsandtoreducecurrentcliffeffectsincapitalrequirements; • strengtheningstandardstolimitexcessiveandopaquerisk-takingthroughover-the-counter(OTC)derivativesandtoreducesystemicriskposedbyOTCderivativestransactions,marketsandpractices. • Workonmarginingrequirements,counterpartycreditriskandcapitalforbanks’exposurestocentralcounterpartiesareexamplesofoureffortsrelatedtoderivatives;and • revisingthesupervisoryframeworkforlargeexposurestocomplementtheCommittee’srisk-basedcapitalstandardandtohelpimprovebanks’measurementandcontroloflargeexposures. • Alloftheseprojectsarenecessarytoensurethattheregulatoryframeworkadequatelyfactorsinthelessonsfromthefinancialcrisis. • Thechallenge,almostfiveyearsonfromtheheightofthecrisis,istoensurethatwebringclosuretotheseprojectsandthattheyareinplacebeforethenextstageofthefinancialcyclebegins. • UnderpinningtheCommittee’spolicyinitiativesisanextensiveframeworkforthecollectionandanalysisofdatatohelpusassessthequantitativeimpactofaparticularpolicy. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  9. P age |9 • Quantitativeimpactstudies(QIS)havebecomeacentralelementoftheCommittee’swork,andwehaveafullslateofQISexercisesplannedforthisyear. • AlongsidethesemiannualBaselIIImonitoringreports,almostallofthepolicyinitiativesIhavejustmentionedhaveoneormoredatacollectionsorimpactstudiesplanned. • Whilethiscanbeaburdenforbanksandsupervisors,thishopefullymakesforwellinformedpolicymaking–soiswellworththeeffort. • Inadditiontoallofthepolicyandanalyticalwork,theCommitteeintendsto: • continuetomonitormembers’commitmentstothetimelyimplementationofagreedreforms. • Todate,thishasfocusedoncapital,butwillbeexpandedoverthenextyeartoencapsulatelocalimplementationoftheLCR,aswellastheframeworksforglobalanddomesticsystemicallyimportantbanks • (G-SIBsandD-SIBs),sincethesecomeintoeffectoverthenextcoupleofyears; • undertakeafullsetofimplementationassessmentsfor2013.WewillconductreviewsofSingapore,Switzerland,China,Australia,BrazilandCanada. • Follow-upreviewsoftheEuropeanUnionandtheUnitedStatesarealsoplannedoncetheirBaselIIIregulationsarefinalised;and • publishareportontheinitial,detailedreviewofrisk-weightedassetcalculationsforthebankingbook;wehopetopublishthefullresultsbythesummer. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  10. P age |10 Togetherwiththerecentlypublishedresultsonthetradingbook,thisanalysisidentifiesthespecificdriversthatleadtovariationsinriskweightsforsimilarexposures. TheCommittee’snextstepwillthenbetoconsiderpolicyresponsestoreduceanyunwarrantedvariabilityandtothereforeimprovethecomparabilityofbanks’ratios. AthemeIwillbereturningtoistheimportanceofthisimplementationmonitoringworkfortheCommittee. WhileitisarelativelynewcomponentoftheCommittee’smandate,itshouldnotbeseenasanadjuncttotheCommittee’sstandard-setting role. Rather,itisabsolutelycriticaltosuccessfullydeliveringdesiredpolicyoutcomes. Wheretonext? Asyoucansee,theCommitteeisengagedinavarietyofprojectsthatrequireustocombinetheeffortsandinputofregulatorsandsupervisorsacrossalargenumberofcountries. Thisisachallengingtask. Anevengreaterchallenge,however,isprioritisingamongcompetingprojectstoachieveourmostpressingobjectives. TheCommittee’sresponsetothefinancialcrisishasbeenstrong,but thereisstillmuchtoaccomplish. Sowehaverecentlyspentsometimeidentifyingourkeystrategicpriorities,tomakesurewehaveagoodmeansofdecidingwhatwereallymustdo. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  11. P age |11 Asyoumayhaveseen,theseprioritieswereendorsedbytheGroupofGovernorsandHeadsofSupervision(GHOS)atthesametimetheyendorsedandannouncedtherevisionstotheLCR. TheCommittee’sprimaryfocusintheshortandmediumtermiscompletingandembeddingthefullsuiteofresponsestoissuesthatemergedfromthefinancialcrisis. Withthatinmind,foremostconsiderationwillbegiventofivepriorityareas: completingthecrisis-initiatedreformsofthepolicyframework; monitoringandreinforcingtheimplementationofBaselregulatorystandards; assessingtheimpactof,andindustryresponseto,implementationoftheregulatoryreforms; examiningthecomparabilityofmodel-basedinternalriskweightingsandconsideringtheappropriatebalancebetweenthesimplicity,comparabilityandrisksensitivityoftheregulatoryframework;and enhancingtheeffectivenessofbothmicro-andmacroprudentialsupervision. Completionofthecrisis-initiatedreformsofthepolicyframework AsIhavealreadyhighlighted,thepolicyreformsinitiatedinresponsetothefinancialcrisisarenotyetcomplete. Whilethebasicframeworksforrisk-basedcapitaland,morerecently,liquidityarenowlargelysettled,manyoftheotherreformsInotedearlierremainverymuchaworkinprogress. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  12. P age |12 • Toensurethattheweaknessesintheregulatoryframeworkbroughttolightbythefinancialcrisisdonotpersistforanylongerthannecessary,theCommitteeisaimingtohavemuchofthisworkcompletedbytheendof2014. • Thisisanambitioustarget,butgiventheimportanceofthesereforms,thereisnobasisforunnecessarydelay. • Ourplanisfortheleverageratiowork–whichislargelydevotedtothedetailedspecificationoftheexposuremeasure(iethedenominator)oftheratio–tobelargelycompletedthisyear,whiletheNSFR,tradingbook,securitisationandlargeexposurespolicyworkwillbefinalizedin2014. • TheCommitteealsohastwoothermajorpolicyinitiativesthatitplanstolaunchsoon. • Whilenotobviouslythoughtofasimmediateandessentialresponsestothefinancialcrisis,theyareneverthelessquiteimportantforensuringthat theoverallprudentialframeworkremainsrobust,andexistingreformsareeffective. • Theseprojectsare: • areviewofthestandardised(creditandoperationalrisk)approachestocapitaladequacy,whichneedtobere-examinedinlightofcallsforgreatersimplicityandcomparabilityintheregulatoryframeworkaswellasthedesiretoreducetherelianceoncreditratingagenciesifpossible;and • anexaminationoftheneedforacapitalframeworkforinterestrateriskinthebankingbook,particularlygiventhedesiretolimitarbitrageopportunitiesbetweenthetradingandbankingbooks. • Theselasttwoprojectsarestillatanembryonicstage,soIcannotsaytoomuchaboutwhattheymightentailatthispointintime,buttheywillbe BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  13. P age |13 thelastpiecesinwhathasessentiallybeenacompleteoverhauloftheregulatoryframeworksincethefinancialcrisis. MonitoringandreinforcingimplementationofBaselregulatorystandards AsIhavealreadysaid,theestablishmentoftheimplementationmonitoringprogrammehasbeenahighpriorityfortheCommittee;itiscriticaltothesuccessfuldeliveryofthebenefitsoftheagreedreforms. Startingfromscratchatthebeginningof2012,acomprehensiveassessmentframeworkhasbeendevelopedthatisgrowinginitsacceptanceandcredibility,andIampleasedtoreportthattheCommitteenowhasdedicatedcapacityintheareaofimplementationwork. Theimplementationframeworkisbeingcontinuouslystrengthenedthroughalessonslearnedprocess. Ourgoalistotakeamoreholisticviewontheimplementationprocessbyfocusingnotonlyontheexistenceofaregulatoryframeworkbutalsoonitsfunctioning. Theimplementationprocessisalsoenvisagedtobecloselylinkedtotheongoingpolicydevelopmentprocess,creatingapositivefeedbackloopthatcanhelpstrengthentheregulatoryregime. Thereisnodoubtthatthisnewmonitoringandassessmentinitiativehasalreadyhadapositiveimpact. Asaresultoftheregularmonitoringofhowcountriesaretrackingagainstagreeddeadlines,aswellastheforthcomingcountryassessments,memberjurisdictionsregularlyapproachtheCommitteeaboutspecificaspectsoftheBaselframework,activelyseekingtoensurethattheirlocaladoptionoftheBaselruleswouldnotbeinadvertentlyoutoflinewiththespiritoftheagreement. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  14. P age |14 JurisdictionshavealsobroughtforwardthereleaseoftheirrulestoensurethattheirprogresswascapturedintheperiodicupdatesthattheCommitteehasprovidedtotheG20andmadepublic. Theself-assessmentresponsesundertakenfortheassessmentprocessarealsobenefitingtheimplementationprocess. Inaddition,theassessmentsofdriversthatleadtovariationofbanking andtradingbookrisk-weightedassetsarecontinuingandaretolikelyleadtobothmoreconsistentimplementationofexistingrules,andthedevelopmentofpolicyoptionstoaddressidentifiedareasofweakness. ThepriorityfortheCommitteenowistobuildontheseachievementsinmonitoringregulatorycompliancewithBaselstandardsandtocontinuetoenhancetherigourofallaspectsoftheimplementationmonitoringandassessmentprocess. Thereisaveryfullagendaplannedfor2013andbeyondwhichwilldeliverquiteanumberofnewmonitoringrequirements(suchasrulesrelatingtoliquidity,theleverageratioandG-SIBs),aswellascountryandthematicassessmentreports. Itisacredittomemberjurisdictions,andevidenceoftheircommitment totheprocess,thatthisworkcanbeundertaken:first,itrequiresthewillingnessofeachmembertobesubjecttoreviewbytheirpeers,andthenacontinuingstrongcommitment,includingsubstantialresourcingofexpertstaff,fromallinvolved. Nevertheless,theeffortwillbewellworthitifweachieveourobjectiveofconsistentimplementationoftheBaselstandards. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  15. P age |15 Assessingtheimpactof,andindustryresponseto,theimplementationoftheregulatoryreforms ThemajorreformsthathavebeendevelopedbytheCommittee,coupledwiththosebeingintroducedatthedomesticlevel,aredesignedtofundamentallyreshapebanking. Thereformsareintendedtogenerateamoreresilientfinancialsystem,inwhichhigherlevelsofcapitalandliquidityareheld,andinwhichriskisappropriatelymanagedandpriced. Thiswillobviouslyhaveconsequencesforthecostsoffinancialintermediation,althoughstudiesundertakensuggestthatthiscostisbothrelativelysmall,andconsiderablyoutweighedbythebenefitsofincreased financialstability. Nevertheless,thisisnotacaseof“setandforget”. TheCommitteeismindfuloftwopotentialconsequencesfromtheprogrammeofreforms. Whileadegreeofdeleveragingandincreasedriskpremiaareintendedconsequencesofthereforms,thereisalwaysadangerthatsomeunintendedconsequencesmayarise. TheCommitteeneedstocontinuetoundertakemonitoringexercisestoensurethatitrespondswhentrulyunintendedconsequencesmaterialise;weunderstandfullythat,ifleftunattended,theywillservetounderminesupportforthereformagenda. However,wealsoneedtoavoidusingthisasanexcusetodelaynecessaryreforms;totheextentthereareunintendedconsequences,weneedtoseehowtheycanbeaddressedwithoutlosingthereformbenefits. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  16. P age |16 Asecondpotentialconsequencerelatestotheincentivesthatmayariseasthebankingsectoradaptstothereformsbymovingintothosebusinesseswhererisk-adjusted(regulatory)returnsaregreatest. Thisreshapingofbanking(eitherwithinbankbalancesheetsoroutsidetheregulatedbankingsystem)needstobemonitoredonanongoingbasisfortheCommitteetomaintainarobustregulatoryframeworkinlightoftheevolvingnatureofthebankingindustry. Thatdoesnotmeanthattheregulatoryframeworkshouldbeina constantstateofflux,asthereareconsiderablebenefitsforfinancialfirmsbeingabletoplaninastableenvironment. But,equally,wecannothavearegulatoryregimethatissetinstone,andcompletelyunresponsivetochangesintheenvironmentthatitistaskedwithregulating. Creatinggreatersimplicityandcomparabilityintheregulatoryframework AvigorouspublicdebatehasdevelopedrecentlyastowhethertheBasel regulatoryframeworkstrikesanappropriatebalanceamongdifferentdesirablecharacteristics:simplicity,comparabilityandrisksensitivity. Thepolicydevelopmentprocessmusttaketheseandseveralother–oftencompeting–factorsintoaccount,andfindingtherightbalanceofteninvolvesadifficultsetoftrade-offs. Nevertheless,itisimportanttokeepthisissueunderreview,andsotheCommitteeestablishedahigh-leveltaskforcelastyearwithaviewtolookingatthisconcernfromabroader,strategicperspective. TheCommitteehasalreadyhadsomediscussionsonthetaskforce’sfindings,andwillhavemoreinthecomingmonths(includingatourmeetingthatbeginstomorrow). BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  17. P age |17 ThewayforwardwillalsobeguidedbythefindingsofthereviewsofriskweightedassetsthatImentionedearlier,sinceattheheartofthatworkisaconcernaboutcomparability. Itistooearlytosayhowwewilltakethisworkforward. Someissues,suchasthoseinrelationtomarketriskmodelling,canbetakenupviaourexistingtradingbookreview. Othersmightrequiretweakstotheframework,orsupervisoryguidance,whichcanbeimplementedinthenearterm. Andothersmightnecessitateadeeper,longer-termreviewbeforewecan decideonanysolution. Wewillpublishadiscussionpaperinthecomingmonthsthatdealswith discussessomeofthecomplextrade-offsthatneedtobemade. ButonepointIwouldstressisthatwhateverwedecideupon,itwillbedesignedtostrengthenthecurrentframework,andthereisnothingthatisbeingproposedthatshouldgivereasontoholdoffontheimplementationofBaselIIIandotherrecentlyagreedreforms. Enhancingtheeffectivenessofbothmicro-andmacroprudentialsupervision Notsurprisingly,theCommittee’sagendainthepastfewyearshasbeen dominatedbypolicymaking. In2012,implementationalsocametothefore. Butitisperhapsstatingtheobviousthateffectivesupervisionisthekeytoensuringthatregulation,onceimplemented,continuestoworkasintended. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  18. P age |18 Onlyifsupervisorsaregiventhetoolstheyneedtoactcantheyeffectivelyperformtheirrole. Asthepolicyreformagendamovestowardscompletion,andthenewrulesarerolledoutbynationalregulators,theCommitteewillincreasinglyturnitsattentiontoenhancingsupervisorypractices. Enhancingmicroprudentialsupervision TheCommitteehasagreatdealofguidanceonsupervisorymattersalreadyonissue. However,muchofthiswasdevelopedbeforethefinancialcrisisandwillbenefitfrombeingupdatedtoreflectlessonslearnedinrecentyears. Giventhegeneralapplicabilityofmuchofthismaterial,thebenefitsofthisworkwillalsoextendwellbeyondBaselCommitteemember countries. Aswithallmulti-yearprojects,thiswillrequireprioritisation. Near-termattentionislikelytobegiventooperationalrisks(internalcontrolsandinformationtechnology),governance,supervisorycolleges,stresstestinganddealingwithweakbanks. Enhancingthepracticalimplementationofmacroprudentialsupervision Thesystemicallyimportantbank–“SIB”–regimeswillcontinuetobeapriorityareafortheCommitteeoverthecomingyears. AlthoughtheregimesforglobalSIBsanddomesticSIBshavenowbeen published,bothwillrequireacertainamountofongoingmaintenanceandmonitoring. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  19. P age |19 • Furthermore,asnotedintheG-SIBstandard,themethodology,includingtheindicator-basedmeasurementapproachitselfandthecutoff/thresholdscores,willbesubjecttoperiodicreviewandrefinementeverythreeyears. • Beyondthiswork,theCommitteewillnowturnitsattentiontothepracticalimplementationoftoolsandtechniquestodealwithsystemicrisks. • Thiswillincludetwocomplementaryareasofwork: • RegulatoryconsequencesofSIBclassification:BeingaSIBmeansmorethanjusthighercapital. • Inlightoftheriskstheyimposeonthefinancialsystem,SIBsmustbeheldtoahigherstandardwithrespecttosupervisoryexpectationsforriskmanagementfunctions,dataaggregationcapabilities,riskgovernanceandinternalcontrols,allofwhicharetopicsthatfeatureprominentlyintheCommittee’sworkplan. • Inaddition,giventheprinciples-basednatureoftheD-SIBframework,theCommitteewillmonitoremergingpracticeasbankingsupervisorsmovetowardsimplementationsoastofacilitatecross-bordercooperationandmutualunderstanding. • Useofmicroprudentialtoolsformacroprudentialpurposes:TheCommitteewilloverseepreparationsforthecountercyclicalbuffer,aswellasexchangeinformationonthewiderrangeofmicroprudentialtoolsthathavebeenusedformacroprudentialpurposes(egsectoraladjustmentstoriskweights,stresstestingrequirements,loan-to-valuelimitsorvaryingmarginrequirements). • Concludingremarks • Sincethefinancialcrisis,theBaselCommitteehasaccomplishedagreatdeal. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  20. P age |20 Butwestillhaveworktodotocompletetheoverhauloftheregulatoryframeworkandfullyfactorinallofthelessonslearned. Wealsoneedtoseewhetherwehavethebalancerightwhenitcomestosimplicityandrisksensitivity. ThatworkisgoingtokeeptheCommitteebusyforatleastthenexttwoyears. Butthatisfarfromtheendofit,because,asIhavenotedanumberoftimestoday,ourpolicyworkwillnotgenerateitsfullbenefitsifnotimplementedinafull,timelyandconsistentmanner. Soourimplementationmonitoringworkisequallyimportant. Andthenevenwhenthenewstandardsareimplemented,wewillneedeffectivesupervisorstoensurethattheyareadheredto. ThisisanareawheretheCommitteehasthepotentialtodomuchmore,particularlyoncethepolicypipelinebeginstoslow. Inotherwords,theBaselCommitteewillcontinuetoprovideyouwithmuchtotalkabout–atthismeetingandthoseinthefuture! BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  21. P age |21 • FinancialStabilityBoardreportstoG20onprogressoffinancialregulatoryreforms • TheChairmanoftheFinancialStabilityBoard(FSB)reportedtotheG20FinanceMinistersandCentralBankGovernorsonprogressinthefinancialregulatoryreformprogramme. • Inconnectionwiththis,theFSBispublishing: • aletterbytheFSBChairtotheG20,sentaheadoftheirmeeting,reportingonthegoodprogressbeingmadeinfinancialreforms,includinginthefollowingpriorityareas:ocreatingcontinuouscoremarketsbycompletingOTCderivativesandrelatedreforms; • ostrengtheningtheoversightandregulationofshadowbanking;obuildingresilientfinancialinstitutions;and • oending“toobigtofail”. • TheletteralsosummarisestheFSB’srecentworkandplanstomonitortheimplementationofreforms. • AnassessmentoftheeffectoftheG20financialreformprogrammeontheavailabilityoflong-termfinance. • ThisassessmenthasbeencontributedbytheFSBaspartofabroaderdiagnosticreportpreparedbyinternationalorganisationstoassessfactorsaffectinglong-termfinancing. • TheFSBassessmentconcludesthat,whiletheremaybeshort-termadjustmenteffects,themostimportantcontributionofthefinancialreformprogrammetolong-terminvestmentfinanceistorebuildconfidenceandresilienceintheglobalfinancialsystem. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  22. P age |22 • ajointupdatebytheInternationalAccountingStandardsBoard(IASB)andtheFinancialAccountingStandardsBoardonthestatusandtimelineoftheirremainingprojectsonconvergingtheirstandards. • Attoday’smeetingtheG20FinanceMinistersandCentralBankGovernorsreaffirmedtheircommitmenttothefull,timelyandconsistentimplementationofinternationallyagreedfinancialsectorreforms,andlookedforwardtoacomprehensivereportonprogressinimplementing allreformsattheStPetersburgG20SummitinSeptember. • G20MinistersandGovernorsalsowelcomedtheestablishmentoftheFSBinJanuaryasalegalentitywithgreaterfinancialautonomyandenhancedcapacitytocoordinatethedevelopmentandimplementationoffinancialregulatorypolicies,whilemaintainingstronglinkswiththeBankforInternationalSettlements. • ProgressofFinancialRegulatoryReforms • Financialmarketconditionshaveimprovedoverrecentmonths.Nonetheless,medium-termdownsiderisksremain,givenweakgrowth • prospectsandhighlevelsofpublicandprivatesectordebtinmany • economies. • Therecentimprovementinfinancialmarketconditionsowesmuchto centralbankactions,inparticular,theaccommodativemonetarypolicyaimedatstimulatingtheeconomicrecovery. • Asaconsequence,marketparticipants’appetiteforriskhasincreased,butthishasnotyettranslatedintoarobustrecoveryinrealinvestment. • Thebeginningofthereturnofriskappetitetofinancialmarkets–whileintendedandwelcome–raisesanumberofissues. • First,marketparticipantsandauthoritiesneedtobeonguardagainstmispricingofriskandvaluationsofassets. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  23. P age |23 • Second,theimportanceoftimelycompletionofthereformsto • over-the-counter(OTC)derivativesmarketsandtheshadowbankingsystemhasincreased. • Third,historicallylowinterestratesinmanycountriesposechallengesforinstitutionalinvestorswithlong-datedliabilitiesandmayleavemarketparticipantsmorevulnerabletounanticipatedmovementsintheyieldcurve. • Financialinstitutionsandsupervisorsshouldcontinuetoassesstheresilienceofthefinancialsystemthroughregularstresstesting,notablyof creditandinterestraterisk,andcompletetheprocessofbalance-sheetrepair. • Reportssubmittedforthismeeting • Regulatoryfactorsaffectingtheavailabilityoflong-termfinance • Aspartofthediagnosticworkyourequestedoftheinternationalorganisations,theFSBhaspreparedanassessmentoftheeffectoftheG20financialreformprogrammeontheavailabilityoflong-terminvestmentfinance. • ThereformsincludeBaselIII,OTCderivativesmarketreforms,andchangesaffectingtheregulatoryandaccountingframeworkforinstitutionalinvestors. • Thegeneralconclusionisthat,whiletheremaybesomeshort-termadjustmenteffects,themostimportantcontributionofthefinancialreformprogrammetolong-terminvestmentfinanceistorebuildconfidenceandresilienceintheglobalfinancialsystem. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  24. P age |24 Asaresult,thesereformsshouldsubstantiallyenhancethefinancialsystem’scapacitytointermediateinvestmentflowsthroughthecycleatallinvestmenthorizons. Hence,theG20regulatoryreformsareunambiguouslysupportiveoflong-terminvestmentandeconomicgrowth. ThesubmissionsofFSBmembersfoundlittleevidencethattheregulatoryreformshavehadanotableimpactonlong-termfinancingtothispoint. Thisisnotsurprisinggiventhefactthatthereformprocessisstillatanearlystage. Severalfeaturesofthereformsaredesignedtoavoidmajorunintendedconsequences:thelongphase-inperiodforreforms;theongoingimplementationmonitoring;and,incertaincases,theflexibilitytoadjustrulesduringtheobservationperiod. Thefinancialreformprogrammeisnotspecifictotheregulationoflong-termfinance. Nevertheless,thereformswillchangetheincentivesofsomefinancialinstitutionsandthecostsofcertaintransactions,whichmayaffectthecompositionoflong-termfinance. Inparticular,institutionalandotherlong-horizoninvestorsareexpectedtoassumeagreaterroleinfundinglong-termassetsandmoreofthisinvestmentmaybeintermediatedviacapitalmarketsratherthanthebankingsystem. Therearethreeareasforspecificfollow-upbytheFSB. First,thereshouldbeongoingmonitoringtoidentifyanyregulatoryfactorsthatmaydisproportionatelyaffecttheprovisionoflong-term financesothattheycanbeaddressed. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  25. P age |25 Second,theFSBcouldworkwithotherstoexaminewhetherregulatoryfactorsmayconstraintheabilityofnon-bankstoexpandtheirprovisionoflong-termfinance. Third,theFSBcancontributetotheworkofotherinternationalorganisationstohelppromotethedevelopmentoflonger-termdomesticsavingsandthecapacityofdomesticfinancialsystemstointermediatethem,particularlyinemergingmarketanddevelopingeconomies(EMDEs). b.Updateonaccountingconvergence TheChairsoftheInternationalAccountingStandardsBoardandtheUSFinancialAccountingStandardsBoardhavewrittenyouontheirworkonconvergenceofaccountingstandards. ThetwoBoardsexpecttomakeprogressonthetwokeyoutstandingissuesofimpairmentofloans,wheretheyexpecttocompletetheirdeliberationsin2013,andinsurancecontracts,wherebothBoardswillbeholdingpublicconsultationsthisyear. Ofthesetwooutstandingissues,theneedforconvergenceonanewforward-lookingexpectedlossapproachtoprovisioningisofmostimmediateconcernforend-usersandfromafinancialstabilityperspective. Wenotewithconcernthedelaysinconvergencetodate. WethereforerecommendthattheG20asktheIASBandFASBtopreparebyend-2013aroadmapforconvergingtoacommonapproachforimpairmentandforachievingtheG20objectiveofasinglesetofhigh qualityaccountingstandards. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  26. P age |26 • Prioritiesandworkplans • Creatingcontinuousmarkets • TheFSBremainsfullycommittedtotherapidcompletionoftheG20’sagreedreformstoOTCderivativesmarkets. • Asyouareaware,thesecomplexreformsaretakingsomewhatlongerthanoriginallyplanned. • TheFSBwillsubmitforyourAprilmeetingitslatestprogressreportonimplementation,includingacomprehensivestock-takeofreformsasof end-2012,estimatesoftheextenttowhichtransactionsarebeingcentrallyclearedandreportedtotraderepositories,andanoverviewoftheremainingissuestoberesolved. • Itisimportantthatalljurisdictionspromptlycompletethenecessarychangestolegislativeandregulatoryframeworkstoputthesereformsintopractice. • Tomaintainmomentum,IhaveaskedFSBmemberjurisdictionstoconfirmbeforetheSeptemberSummitthatthelegislationandregulationforreportingtotraderepositoriesareinplace,andalsothestepstheyaretakingtocompletetheimplementationofotherOTCderivativesreforms. • Ministersmaywishtotakeaparticularinterestinprogressintheirjurisdictionstoensuretimelycompliancewiththeseimportantreforms. • TheFSBhaspreviouslyidentifiedregulatoryuncertaintyasthemostsignificantimpedimenttofullandtimelyimplementationoftheOTCderivativesreforms. • Toreducethisuncertainty,regulatorsareworkingtogethertoidentifyandaddressconflicts,duplicationandgapsinthecross-borderapplicationofrules. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  27. P age |27 TheywillprovideanupdateinAprilontheirprogressandnextsteps,andareporttotheSummitonhowtheidentifiedcross-borderissueshavebeenresolved. Internationalpoliciesinremainingimportantareaswillalsobepublished bytheSummit. Theseincludecapitalrequirementsforexposurestocentralcounterparties,marginingstandardsfornon-centrallyclearedtransactionsandguidanceonresolutionofcentralcounterparties. Standardsettersareundertakinganassessmentoftheincentivestocentrallycleartransactionsthatthesestandardscreateandwilladjustthemasnecessarytoensurearobustsystem. TheFSBwillalsoreportattheSummitthefindingsofanewmacroeconomicimpactassessmentoftheOTCderivativesregulatoryreforms. Standardsettersarealsodevelopinginternationalguidanceonauthorities’accesstotraderepositorydata,includinginsuchawaythatitcanbeaggregatedacrosstraderepositories. Thisguidance,whichwillbeissuedforconsultationshortlyandfinalised bytheSummit,willbeimportantforensuringthatauthoritiescanuseinformationfromtraderepositoriesintheiroversightofOTCderivativesmarketsandassessmentofsystemicrisk. MinistersandGovernorswillwishtoensurethereiseffectivecross-borderaccesstothisinformation,whichisvitaltothemonitoringofemergingfinancialvulnerabilities. TheglobalLegalEntityIdentifier(LEI)systemwillenhancetheusabilityofthedata;theRegulatoryOversightCommitteeasthegovernancebodyoftheglobalLEIsystemwasestablishedinJanuary2013. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  28. P age |28 EstablishingtheGlobalLEIFoundationisthekeynextsteptolaunchthesysteminMarch2013. TheFSBcontinuestoofferstrongsupporttotheLEIinitiativeandtheFSBSecretariatwillserveasROCLEISecretariatfortheinitialperiod. b.Strengtheningtheoversightandregulationofshadowbanking Asyouwillrecall,theFSBdeliveredtoyoulastNovemberaninitialsetofrecommendationstostrengthentheoversightandregulationofshadowbanking. Wehavereceivedusefulfeedbackthroughapublicconsultationontheinitialrecommendations. TheFSBisrefiningtherecommendationsrelatingtosecuritieslending andrepos,andthoserelatingtothepolicymeasuresforshadowbankingentitiesotherthanmoneymarketfunds. Therecommendationswilladdressbank-likeriskstofinancialstabilityemergingfromoutsidetheregularbankingsystemwhilenotinhibitingsustainablenon-bankfinancingmodelsthatdonotposesuchrisks. Theapproachisdesignedtobeproportionatetofinancialstabilityrisksbyfocusingonthoseactivitiesthatarematerialtothesystem,usingasastartingpointthosethatwereasourceofsystemicriskduringthecrisis. WewilldelivercertainrecommendationstotheStPetersburgSummit.Thesemeasuresshouldbeviewedasthestartofabroaderprocesssince theyaddressthespecificrisksthataroseduringthecrisisandweall recognisetheabilityoftheshadowbankingsectortoinnovate. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  29. P age |29 Buildingresilientfinancialinstitutions InJanuary,agreementwasreachedbytheGroupofGovernorsandHeadsofSupervisionontheLiquidityCoverageRatio(LCR)tobeappliedtobanks. Theagreementexpandstherangeofhigh-qualityliquidassetsthatcanbeincludedintheLCRandincorporatesevidence-basedassumptionsaboutliquidityoutflowsintimesofstress. TheLCRwillbeintroducedin2015asplanned,withtheminimumrequirementsbeginningat60%andreaching100%by2019toallowtheglobalbankingsystemsufficienttimetoadjust. Ending“too-big-to-fail” ProgressisbeingmadebytheIAISindevelopingandtestingamethodologyforidentificationofglobalsystemicallyimportantinsurers(G-SIIs),andindevelopingappropriatepolicymeasures. Thisworkshouldbecompletedinthesecondquarterof2013. Anidentificationmethodologyfornon-bankG-SIFIswillbeissuedfor consultationinthesecondhalfof2013. AlthoughimplementationoftheG-SIFIframeworkhasmuchfarthertogo,wewilldeliveranassessmenttotheSt.PetersburgSummitoftheprogressmadeindevelopingcrediblepoliciesforendingtoo-big-to-fail(TBTF). 3.ImplementationofreformsBaselIII ConsistentimplementationofBaselIIIisfundamentaltostrengtheningtheresilienceoftheglobalbankingsystem,maintainingmarket BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  30. P age |30 confidenceintheregulatoryreformsandprovidingalevelplayingfieldforinternationallyactivebanks. The27memberjurisdictionsoftheBaselCommitteeonBankingSupervision(BCBS)continuetomakeprogresstowardimplementation; 11hadissuedfinalregulationsby12February2013andtheremaining16jurisdictionshavetableddraftregulations. TheEuropeanUnionandtheUnitedStatespublisheddraftregulationsin2012andintendtofinalisethemoverthecourseof2013. TheFSBandBCBSwillprepareafullupdateoncountries’adoptionofBaselIIIindomesticregulationforyourAprilmeeting. ThecountriesthathavemissedtheJanuary2013startdateareworkingtofinalisetheirregulationsandareexpectedtomeetthe2019timelineforfullimplementation. SeveralmorememberswillundergoaconsistencyassessmentoftheirfinalregulationsbytheBCBSin2013. Byend-2013,alljurisdictionsthatarethehomeregulatortoglobalsystemicallyimportantbanks(G-SIBs)willhavebeensubjecttoanassessmentoftheirBaselIIIimplementation. Otherjurisdictionswillbesubjecttoregulatoryconsistencyassessmentsshortlythereafter. TheBCBShasconcludedaninitialexaminationoftheinternationalconsistencyintheapplicationoftheBaselIIIriskweightingschemefortradingbookassets. Asimilarreviewisunderwayregardingthebankingbook. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  31. P age |31 Theanalysisforbanks’tradingbooksindicatesthatsupervisorydecisionsandvariationsinbanks’modelscontributetothesubstantialdifferencesinbanks’calculationsofmarketrisk. (Theaverageriskweightingoftradingassetsformostbanksinthestudyvariedbetween15%and45%.) Thestudyalsoshowsthatbanks’publicdisclosuresareinsufficientforunderstandinghowmuchofthesevariationsinbanks’reportedriskweightingsofassetsareowingtodifferinglevelsofactualriskversusthatowingtootherfactors. Thissituationisunacceptable,andthestudyhighlightsthreepolicyoptionswhicharebeingaddressedintheBaselCommittee’songoingwork: Improvingbanks’publicdisclosures,buildingontherecommendationsoftheEnhancedDisclosureTaskForce; Narrowingdownmodellingchoicesforbanks;and Furtherharmonisingsupervisorypracticesoverapprovalofmodels. ResolutionregimesandG-SIFIresolutionplans AneffectiveandcredibleresolutionregimeforSIFIsisacritical componentofthepolicyframeworkforendingTBTF. FullimplementationoftheFSBKeyAttributesofEffectiveResolutionRegimeswillprovideauthoritieswiththepowersandtoolsnecessaryforthispurpose. WewillshortlyconcludethefirstpeerreviewofFSBmembers’implementationoftheKeyAttributes. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  32. P age |32 TheworkunderthereviewconfirmsthatreformsareunderwayinmanyjurisdictionstoalignnationalstatutoryregimeswiththeFSBKeyAttributes,butthatsignificantworkremains. Wearedevelopinganassessmentmethodologytoassistcountrieswiththeirimplementation,andtoprovideabasisforfuturepeerreviewsandIMFandWorldBankassessments. ThemethodologywillbetestedinpilotassessmentsbytheIMFandWorldBanklaterthisyearandpublishedinthesecondhalfof2013. TheFSBanditsmemberswillalsothisyearaddressthespecificaspectsofresolutionofinsurersandfinancialmarketinfrastructuresandtheprotectionofclientassetsinresolution. ByJune2013,resolutionstrategiesandplansshouldbeinplaceforallG-SIFIsdesignatedinNovember2011. ToassistthisprocesstheFSBhaspubliclyconsultedonspecificaspectsofrecoveryandresolutionplanningandisnowfinalisingitsguidance. ProgressinendingTBTFiscontingentonthefeasibilityandcredibilityofputtingtheseresolutionplansintooperation. Wewilllaunchinthesecondhalfof2013afirstroundofassessmentsundertheG-SIFIResolvabilityAssessmentProcesstoevaluatetheprogressmade. ReducingtherelianceonCreditRatingAgency(CRA)ratings TheFSBhasrecentlylaunchedathematicpeerreviewtoassistitsmemberstofulfiltheircommitmentsundertheroadmapforimplementingtheFSBprinciplesforreducingrelianceonCRAratings. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  33. P age |33 Thiswillincludeastock-takeofreferencestoCRAratingsinnational authorities’lawsandregulationsandofactionsbeingtakentoremoveorreplacethesereferences. ThefindingswillfeedintotheprogressreportonCRAsfortheSummit,whilethepeerreviewwillbecompletedbyearly2014. MonitoringtheimpactofreformsonEMDEs TheFSBwillorganiseaworkshopforEMDEsinthefirsthalfof2013tosharelessonsandexperiencesonimplementingagreedfinancialreformsandonundertakingexanteassessmentsoftheirimpact. FSBmemberswithsignificantexperienceinundertakingsuchassessmentswillbeaskedtopresenttheirmethodologies. TheFSBwillreportthefindingsoftheworkshopandotherrelevantmonitoringprocessesattheSt.PetersburgSummit. 4.FSBresources,capacityandgovernance Finally,IampleasedtoreportthattheFSBhasnowbeenestablishedwithalegalpersonality. Alongsidethis,arollingfive-yearagreementunderwhichtheBISwillhostandprovideresourcesfortheFSBhasbeenactivated,andaninstitutionalmechanismfortheFSB’sfinancialandresourcegovernanceestablished. TheFSBhasalsoadoptedProceduralGuidelinesforitsoperationalandadministrativeactivitiesandpractices. TheseareimportantstepstowardsimplementationoftheG20recommendationsatCannesandLosCabostoplacetheFSBonanenduringorganisationalfooting,withstrengthenedgovernance,greater BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  34. P age |34 autonomyinresourceuseandenhancedcapacitytocoordinatethedevelopmentandimplementationoffinancialregulatorypolicies,whilemaintainingstronglinkswiththeBIS. TheFSBwillnextelectnewchairsforthreeofitsStandingCommitteesandbeginareviewofthecompositionoftheirmemberships. FollowingtheSt.PetersburgSummit,theFSBwillsetintrainareviewofthestructureofitsrepresentation,whichweenvisagetobecompletedundertheAustralianPresidencyoftheG20. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  35. P age |35 Dodd-FrankActStressTest2013 TheDodd-FrankActrequiresallfinancialcompaniesthathavemorethan$10billionintotalconsolidatedassetsandareregulatedbyaFederalfinancialregulatoryagencytoconductcapitalstresstestsatleastannually. TheFederalReservefinalizedthoserequirementsforBHCswithbetween $10billionand$50billioninassetsandstatememberbanksandsavingsandloanholdingcompanieswithover$10billioninassetsonOctober9,2012. TheFederalReserveexpectslarge,complexbankholdingcompanies(BHCs)toholdsufficientcapitaltocontinuelendingtosupportrealeconomicactivity,evenunderadverseeconomicconditions. StresstestingisonetoolthathelpsbanksupervisorsmeasurewhetheraBHChasenoughcapitaltosupportitsoperationsthroughoutperiodsofstress. TheFederalReservepreviouslyhighlightedtheuseofstresstestsasameansofassessingcapitalsufficiencyunderstressduringthe2009SupervisoryCapitalAssessmentProgram(SCAP)andthe2011and2012ComprehensiveCapitalAnalysisandReview(CCAR)exercises. Inthewakeofthefinancialcrisis,theCongressenactedtheDodd-FrankWallStreetReformandConsumerProtectionAct(Dodd-FrankAct),whichrequirestheFederalReservetoconductanannualstresstestoflargeBHCsandallnonbankfinancialcompaniesdesignatedbytheFinancialStabilityOversightCouncil(FSOC)forFederalReserve BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  36. P age |36 supervisiontoevaluatewhethertheyhavesufficientcapitaltoabsorblossesresultingfromadverseeconomicconditions. TheDodd-FrankActalsorequiresBHCsandotherfinancialcompaniessupervisedbytheFederalReservetoconducttheirownstresstests. TheFederalReserveadoptedrulesimplementingtheserequirementsinOctober2012. Undertherules,18BHCsarepartoftheDodd-FrankActsupervisorystressteststhisyear(DFAST2013). Thisreportdescribesthehypothetical,severelyadversescenariodesignedbytheFederalReserve;providesanoverviewoftheanalytical frameworkandmethodsusedtogeneratetheprojectionsofrevenues,expenses,losses,andtheresultingpost-stresscapitalratiosforeachofthe18BHCs;anddisclosestheresultsofthe2013Dodd-FrankActsupervisorystresstest. TheFederalReservebelievesthatdisclosureofstresstestresultsprovidesvaluableinformationtomarketparticipantsandthepublic,enhancestransparency,andpromotesmarketdiscipline. TheprojectionsprovideauniqueperspectiveontherobustnessofthecapitalpositionsofthesefirmsbecausetheyincorporatedetailedinformationabouttheriskcharacteristicsandbusinessactivitiesofeachBHCandbecausetheyareestimatedusingaconsistentapproachacrossalltheBHCs,providingcomparableresultsacrossfirms. TheFederalReservealsobelievesthatprovidinginformationaboutthemethodologyusedtoproducetheresultswillofferusefulcontexttointerpretthoseresults. Theprojectionswerecalculatedusinginputdataprovidedbythe18BHCsandasetofmodelsdevelopedorselectedbytheFederalReserve,basedonahypothetical,severelyadversemacroeconomicandfinancial BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  37. P age |37 marketscenariodevelopedbytheFederalReserve. TheseverelyadversescenariofeaturesadeeprecessionintheUnitedStates,Europe,andJapan,significantdeclinesinassetpricesandincreasesinriskpremia,andamarkedeconomicslowdownindevelopingAsia. TheFederalReservealsoappliedaseparateglobalmarketshocktosixBHCswithlargetrading,privateequity,andcounterpartyexposuresfromderivativesandfinancingtransactions. Themodelsprojectrevenues,expenses,losses,andtheresultingpost-stresscapitalratiosforeachBHCoveranine-quarterplanninghorizonextendingthroughtheendof2014. TheFederalReserve’sprojectionsshouldnotbeinterpretedasexpectedorlikelyoutcomesforthesefirms,butratheraspossibleresultsunderhypothetical,severelyadverseconditions. Theseprojectionsincorporateanumberofconservativemodelingassumptions,butdonotmakeexplicitbehavioralassumptionsaboutthepossibleactionsofaBHC’screditorsandcounterpartiesinthescenario,exceptthroughtheseverelyadversescenario’scharacterizationsoffinancialassetpricesandeconomicactivity. Tomaketheprojectionsofpost-stresscapitalratiosmorecomparableacrossBHCs,theprojectionsreflectassumptionsaboutcapitaldistributionsprescribedintheDodd-FrankActstresstestrule. Overthenine-quarterplanninghorizon,eachBHCmaintainsitscommonstockdividendpaymentsatthesamelevelasthepreviousyear,butrepurchasesandissuanceofcommonstockisassumedtobezero exceptforcommonstockissuanceassociatedwithexpensedemployeecompensation. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  38. P age |38 Theresultsoftheseprojectionssuggestthat,intheaggregate,the18BHCswouldexperiencesubstantiallossesundertheseverelyadversescenario. Overtheninequartersoftheplanninghorizon,lossesatthe18BHCsundertheseverelyadversescenarioareprojectedtobe$462billion,includinglossesacrossloanportfolios,lossesonsecuritiesheldintheBHCs’investmentportfolios,tradingandcounterpartycreditlossesfromtheglobalmarketshock,andotherlosses. Projectednetrevenuebeforeprovisionsforloanandleaselosses(pre-provisionnetrevenue,orPPNR)atthe18BHCsovertheninequartersoftheplanninghorizonundertheseverelyadversescenario is$268billion,whichisnetoflossesrelatedtooperational-riskeventsand mortgagerepurchases,aswellasexpensesrelatedtodispositionofownedrealestateof$101billion. Takentogether,thehighprojectedlossesandlowprojectedPPNRatthe18BHCsresultsinprojectednetincomebeforetaxesof-$194billion. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  39. P age |39 ThesenetincomeprojectionsresultinsubstantialprojecteddeclinesinregulatorycapitalratiosfornearlyalloftheBHCsundertheseverelyadversescenario. Asillustratedinfigure1,theaggregatetier1commonratiowouldfallfromanactual11.1percentinthethirdquarterof2012toapost-stresslevel BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  40. P age |40 of7.7percentinthefourthquarterof2014,includingassumedcapitalactionsforthe18BHCs. TheDodd-FrankActrequirestheFederalReservetoconductanannualsupervisorystresstestofBHCswith$50billionormoreintotalconsolidatedassetsandnonbankfinancialcompaniesdesignatedbytheFSOCforFederalReservesupervision(collectively,“coveredcompanies”). TheDodd-FrankActalsorequirescoveredcompaniestoconducttheirownstresstests(company-runstresstests)semiannually. Together,theDodd-FrankActsupervisorystresstestsandthe company-runstresstestsareintendedtoprovideBHCmanagementand boardsofdirectors,thepublic,andsupervisorswithforward-looking informationtohelpidentifydownsiderisksandthepotentialeffectof adverseconditionsoncapitaladequacyoftheselargebankingorganizations. TheFederalReserveadoptedrulesimplementingtheserequirementsinOctober2012. Undertheimplementationphase-inprovisionsoftheFederalReserve’sDodd-Frankstresstestrules,onlythe18BHCsthatpreviouslyparticipatedintheSCAParerequiredtoconductcompany-runstresstestsduringthecurrentstresstestcyclethatbeganinOctober2012. Similarly,theFederalReservehasconductedsupervisorystresstestson onlythese18BHCsforDFAST2013. BothsetsofstresstestsarealsointegratedintotheFederalReserve’sassessmentofcapitaladequacyunderCCAR. ImportantdifferencesbetweentheDodd-FrankActsupervisorystresstestsandtheCCARpost-stresscapitalanalysisareoutlinedinbox1. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  41. P age |41 ToprovidecontexttotheFederalReserve’sDodd-FrankActsupervisorystresstestresults,thefollowingsectionscontainanoverviewoftheFederalReserve’sDodd-FrankActstresstestrules,focusingontheprocessforthesupervisorystresstestsandtherequirementsforcompany-runstresstestsforcoveredcompanies. SupervisoryStressTests UndertheDodd-FrankActstresstestrules,theFederalReserveconductsannualsupervisorystressteststoevaluatewhetheracoveredcompanyhasthecapital,onatotalconsolidatedbasis,necessarytoabsorblossesandcontinueitsoperationsbymaintainingreadyaccesstofunding,meetingitsobligationstocreditorsandothercounterparties,andcontinuingtoserveasacreditintermediaryunderadverseeconomicand financialconditions. Aspartofthissupervisorystresstestforeachcoveredcompany,theFederalReserveprojectsrevenue,expenses,losses,andresulting post-stresscapitallevels,regulatorycapitalratios,andthetier1commonratiounderthreescenarios(baseline,adverse,andseverelyadverse), usingdataasofSeptember30. TheFederalReservegenerallyusesacommonsetofscenariosforallcoveredcompaniesinthesupervisorystresstest. However,theFederalReservemayuseadditionalscenariosorcomponentsofscenariosforallorasubsetofthecoveredcompaniestocapturesalientsourcesofrisk,andthesescenariosmayusedatafromdatesotherthantheendofthethirdquarter. InDFAST2013,large,complexBHCswithsignificanttradingactivitiesaresubjecttoaglobalmarketshockthatreflectsgeneralmarketstressandheighteneduncertainty,whichaffectstradingpositionsandelevatescounterpartycreditrisk. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  42. P age |42 TheDodd-FrankActcodifiedtheFederalReserve’spracticeofdisclosingasummaryoftheresultsofitssupervisorystresstest. Inthispaper,theFederalReserveisdisclosingtheresultsofthe2013Dodd-FrankActsupervisorystresstestsconductedundertheseverelyadversescenario,includingfirm-specificresultsbasedontheprojectionsmadebytheFederalReserveofeachBHC’srevenues,expenses,losses,andpost-stresscapitalratiosovertheplanninghorizon. Box1.Dodd-FrankActSupervisoryStressTestsandtheCCARPost-StressCapitalAnalysis Whilecloselyrelated,therearesomeimportantdifferencesbetweentheDodd-FrankActsupervisorystresstestsandtheCCARpost-stresscapital analysis. Theprojectionsofpre-taxnetincomefromtheDodd-FrankActsupervisorystresstestsaredirectinputstotheCCARpost-stresscapital analysis. TheprimarydifferencebetweentheDodd-FrankActsupervisorystresstestsandtheCCARpost-stresscapitalanalysisisthecapitalactionassumptionsthatarecombinedwiththeseprojectionstoestimate post-stresscapitallevelsandratios. CapitalActionAssumptionsfortheDodd-FrankActSupervisoryStressTests Toprojectpost-stresscapitalratiosfortheDodd-FrankActsupervisorystresstests,theFederalReserveusesastandardizedsetofcapitalactionassumptionsthatarespecifiedintheDodd-FrankActstresstestrules. Commonstockdividendpaymentsareassumedtocontinueatthesamelevelasthepreviousyear. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  43. P age |43 Scheduleddividend,interest,orprincipalpaymentsonanyothercapitalinstrumenteligibleforinclusioninthenumeratorofaregulatorycapitalratioareassumedtobepaid. Theassumptionsarethatrepurchasesofcommonstockarezero. Thecapitalactionassumptionsdonotincludeissuanceofnewcommonstock,preferredstock,orotherinstrumentthatwouldbeincludedinregulatorycapital,exceptforcommonstockissuanceassociatedwithexpensedemployeecompensation. CapitalActionsforCCAR Incontrast,fortheCCARpost-stresscapitalanalysis,theFederalReserveusesBHCs’plannedcapitalactions,andassesseswhetheraBHCwouldbecapableofmeetingsupervisoryexpectationsforminimumcapitalratiosevenifstressfulconditionsemergedandtheBHCdidnotreduceplannedcapitaldistributions. Asaresult,post-stresscapitalratiosprojectedfortheDodd-FrankActsupervisorystresstestsshouldbeexpectedtodiffersignificantlyfromthosefortheCCARpost-stresscapitalanalysis. Forexample,ifaBHCincludesadividendcutinitsplannedcapitalactions,itspost-stresscapitalratiosprojectedfortheCCARcapital analysiscouldbehigherthanthoseprojectedfortheDodd-FrankActsupervisorystresstests. Conversely,ifaBHCincludessignificantdividendincreases,repurchases,orotheractionsthatdepletecapitalinitsplannedcapitalactions,thepost-stresscapitalratiosfortheCCARcouldbelower. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  44. P age |44 Company-RunStressTests AsrequiredbytheDodd-FrankAct,theFederalReserve’sstresstestrulesrequirecoveredcompaniestoconducttwocompany-runstresstestseachyear. Inconductingthe“annual”test,acoveredcompanyusesdataasofSeptember30andreportsitsstresstestresultstotheFederalReservebyJanuary5. Inaddition,acoveredcompanymustconducta“midcycle”testandreporttheresultstotheFederalReservebyJuly5. TheDodd-FrankActstresstestrulesalignthetimingofannualcompany-runstresstestswiththeannualsupervisorystresstestsofcoveredcompanies. Intheirannualstresstests,coveredcompaniessubjecttotheDodd-FrankActstresstestrulesmustusethescenariosprovidedbytheFederalReserve. Eachyear,theFederalReservewillprovideatleastthreescenarios—baseline,adverse,andseverelyadverse—thatareidenticaltothescenariostheFederalReserveusesintheannualsupervisorystresstestsofcoveredcompaniesByprovidingacommonsetofscenariostoallfirms,theresultsofcompany-runandsupervisorystresstestsforall18BHCswillbebasedoncomparableunderlyingassumptions. Tofurtherenhancecomparability,thesupervisorystresstestsandcompany-runstresstestsconductedundertheDodd-Frankstresstestrulesusethesamesetofcapitalactionassumptions. Accordingtotheseassumptions,overthenine-quarterplanninghorizon,eachBHCmaintainsitscommonstockdividendpaymentsatthesamelevelasthepreviousyear;scheduleddividend,interestorprincipalpaymentsonanyothercapitalinstrumenteligibleforinclusioninthe BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  45. P age |45 numeratorofaregulatorycapitalratioareassumedtobepaid;butrepurchasesofsuchcapitalinstrumentsandissuanceofstockisassumedtobezero. Finally,eachcoveredcompanymustpubliclydiscloseasummaryofthe resultsofitscompany-runstresstestundertheseverelyadversescenarioprovidedbytheFederalReserve. BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  46. P age |46 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  47. P age |47 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  48. P age |48 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  49. P age |49 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

  50. P age |50 BaseliiiComplianceProfessionalsAssociation(BiiiCPA) www.basel-iii-association.com

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