Monday April 9 2012 - Top 10 risk and compliance management related news stories and world events

International Association of Risk and Compliance Professionals (IARCP)

1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 www.risk-compliance-association.com

Monday, April 9, 2012 - Top 10 risk and compliance management related news stories and world events that (for

better or for worse) shaped the week's agenda, and what is next

George Lekatis President of the IARCP

Dear Member, In the States, President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that encourages startups and support small businesses. In the world, we will have interesting changes in risk management and corporate governance, as the Financial Stability Board finds that the global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities. In Europe, we have a very important development. The impact of the new Basel III framework is monitored semi-annually by both the Basel Committee at a global level and the European Banking Authority (EBA, formerly CEBS) at the European level, using data provided by participating banks on a voluntary and confidential basis. Well, in Europe, the aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion total assets of the aggregate sample. [Group 1 banks are those with Tier 1 capital in excess of €3 bn and internationally active. All other banks are categorized as Group 2 banks] A total of 158 banks submitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2 banks. For the banks in the sample, monitoring results show a shortfall of liquid assets of €1.15 trillion (which represents 3.7% of the €31 trillion total assets of the aggregate sample) as of 30 June 2011, if banks were to make no changes whatsoever to their liquidity risk profile. Welcome to the Top 10 list.

http://www.risk-compliance-association.com/

Number 1 (Page 4) April 2012 - Results of the Basel III monitoring exercise as of 30 June 2011. Since the beginning of 2011, the impact of the new requirements related to the Basel iii reforms is monitored and evaluated by the Basel Committee on Banking Supervision on a semi-annual basis for its member jurisdictions. At European level, this analysis is conducted by the European Banking Authority (EBA), also based on the Basel III reform package as the CRD IV, the European equivalent to the Basel III framework, has not yet been finalised. Number 2 (Page 33)

The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called It Pays to Understand Your Brokerage Account Statements and Trade Confirmations to help guide investors through the key elements of their account statements and trade confirmations.

Number 3 (Page 43)

President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that enacts many of the President’s proposals to encourage startups and support small businesses. Number 4 (Page 48)

Learning more about Supervisory Agencies: BaFin

Since it was established in May 2002, the Federal

Financial Supervisory Authority (Bundesanstalt für

Finanzdienstleistungsaufsicht - known as BaFin for short) has brought

the supervision of banks and financial services providers, insurance

undertakings and securities trading under one roof.

Number 5 (Page 56)

Federal Reserve Policy Statement on Rental of Residential Other Real Estate Owned Properties

In light of the large volume of distressed residential properties and the indications of higher demand for rental housing in many markets, some banking organizations may choose to make greater use of rental activities in their disposition strategies than in the past.

Number 6 (Page 64)

We have access to the minutes of the Federal Open Market Committee. Developments in Financial Markets and the Federal Reserve's Balance Sheet - Staff Review of the Economic Situation Number 7 (Page 88)

Final rule and interpretive guidance. Section 113 of the Dodd-Frank Act authorizes the Financial Stability Oversight Council to determine that a nonbank financial company shall be supervised by the Board of Governors of the Federal Reserve System and shall be subject to prudential standards Number 8 (Page 91)

The Alternative Investment Management Association (AIMA), the global hedge fund trade association, has expressed concern about the European Commission’s new draft text for the implementation of the Alternative Investment Fund Managers Directive (AIFMD). Number 9 (Page 94)

Thematic review on risk governance Questionnaire for national authorities

The global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities.

Number 10 (Page 105)

The White House Blog How Your Tax Dollars Are Spent On Wednesday, the updated Federal Taxpayer Receipt was released, which lets you enter a few pieces of information about the taxes you paid last year and calculates how much of your money went toward different national priorities like education, defense, and health care.

NUMBER 1

April 2012 Results of the Basel III monitoring exercise as of 30 June 2011 To assess the impact of the new capital and liquidity requirements set out in the consultative documents of June and December 2009, both the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors (CEBS) conducted a so-called comprehensive quantitative impact study (C-QIS) for their member jurisdictions based on data as of 31 December 2009. The main results of both impact studies have been published in December 2010. After finalisation of the regulatory framework (referred to as “Basel III”) in December 2010, the impact of this new framework is monitored semi-annually by both the Basel Committee at a global level and the European Banking Authority (EBA, formerly CEBS) at the European level, using data provided by participating banks on a voluntary and confidential basis. This report summarises the results of the latest monitoring exercise using consolidated data of European banks as of 30 June 2011. A total of 158 banks submitted data for this exercise, consisting of 48 Group 1 banks and 110 Group 2 banks. [Group 1 banks are those with Tier 1 capital in excess of €3 bn and internationally active. All other banks are categorised as Group 2 banks]

Member countries’ coverage of their banking system was very high for Group 1 banks, reaching 100% coverage for many jurisdictions (aggregate coverage in terms of Basel II risk-weighted assets: 98.5%), while for Group 2 banks it was lower with a larger variation across jurisdictions (aggregate coverage: 35.8%). Furthermore, Group 2 bank results are driven by a relatively small number of large but non-internationally active banks, ie the results presented in this report may not be as representative as it is the case for Group 1 banks. [There are 19 Group 2 banks that have Tier 1 capital in excess of €3 billion. These banks account for 64.3% of total Group 2 RWA.]

Since the new EU directive and regulation are not finalised yet, no EU specific rules are analysed in this report. Accordingly, this monitoring exercise is carried out assuming full implementation of the Basel III framework, ie transitional arrangements such as phase-in of deductions and grandfathering arrangements are not taken into account. The results are compared with the respective current national implementation of the Basel II framework. In addition, it is important to note that the monitoring exercise is based on static balance sheet assumptions, ie capital elements are only included if the eligibility criteria have been fulfilled at the reporting date. Planned management actions to increase capital or decrease risk-weighted assets are not taken into account (“static balance sheet assumption”). This allows for identifying effective changes in banks’ capital base instead of identifying changes which are solely based on changes in underlying modelling assumptions. As a consequence, monitoring results are not comparable to industry estimates as the latter usually include assumptions on banks’ future profitability, planned capital and/or further management actions that mitigate the impact of Basel III. In addition, monitoring results are not comparable to C-QIS results, which assessed the impact of policy proposals published in 2009 that differed significantly from the final Basel III framework. The actual capital and liquidity shortfalls related to the new requirements by the time Basel III is fully implemented will differ from those shown in this report as the banking sector reacts to the changing economic and regulatory environment. The monitoring exercise provides an impact assessment of the following aspects: - Changes to banks’ capital ratios under Basel III, and estimates of any capital

shortfalls. In addition, estimates of capital surcharges for global systemically important banks (G-SIBs) are included, where applicable;

- Changes to the definition of capital that result from the new capital standard, referred to as common equity Tier 1 (CET1), including modified rules on capital deductions, and changes to the eligibility criteria for Tier 1 and total capital;

- Changes in the calculation of risk-weighted assets (RWA) resulting from changes to the definition of capital, securitisation, trading book and counterparty credit risk requirements;

- The capital conservation buffer;

- The leverage ratio; and

- Two liquidity standards – the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR).

Key results - Impact on regulatory capital ratios and estimated capital shortfall Assuming full implementation of the Basel III framework as of 30 June 2011 (i.e. without taking into account transitional arrangements), the CET1 capital ratios of Group 1 banks would have declined from an average CET1 ratio of 10.2% (with all country averages above the 7.0% target level) to an average CET1 ratio of 6.5%. 80% of Group 1 banks would be at or above the 4.5% minimum while 44% would be at or above 7.0% target level. The CET1 capital shortfall for Group 1 banks is €18 bn at a minimum requirement of 4.5% and €242 bn at a target level of 7.0% (including the G-SIB surcharge). As a point of reference, the sum of profits after tax prior to distributions across the Group 1 sample in the second half of 2010 and the first half of 2011 was €102 bn. With respect to the average Tier 1 and total capital ratio, monitoring results show a decline from 11.9% to 6.7% and from 14.4% to 7.8%, respectively. Capital shortfalls comparing to the minimum ratios (excl. the capital conservation buffer) amount for €51 bn (Tier 1 capital) and €128 bn (total capital). Taking into account the capital conservation buffer and the surcharge for systemically important banks, the Group 1 banks’ capital shortfall rises to €361 bn (Tier 1 capital) and €485 bn (total capital). For Group 2 banks, the average CET1 ratio declines from 9.8% to 6.8% under Basel III, where 87% of the banks would be at or above the 4.5% minimum and 72% would be at or above the 7.0% target level. The respective CET1 shortfall is approx. €11 bn at a minimum requirement of 4.5% and €35 bn at a target level of 7.0%. The sum of profits after tax prior to distributions across the Group 2 sample in the second half of 2010 and the first half of 2011 was €17 bn.

Main drivers of changes in banks’ capital ratios For Group 1 banks, the overall impact on the CET1 ratio can be attributed in almost equal parts to changes in the definition of capital and to changes related to the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWA increase by 21.2%, on average. For Group 2 banks, while the change in the definition of capital results in a decline in CET1 of 25.9%, the new rules on RWA affect Group 2 banks far less (+6.9%), which may be explained by the fact that these banks´ business models are less reliant on exposures to counterparty and market risks (which are the main drivers of the RWA increase under the new framework). Reductions in Group 1 and Group 2 banks’ CET1 are mainly driven by goodwill (-17.3% and -14.8%, respectively), followed by deductions for holdings of capital of other financial companies (-4.4% and -7.0%, respectively). As to the denominator of regulatory capital ratios, the main driver is the introduction of CVA capital charges which result in an average RWA increase of 8.0% and of 2.9% for Group 1 and Group 2 banks, respectively. In addition to CVA capital charges, trading book exposures and the transition from Basel II 50/50 deductions to a 1250% risk weight treatment are the main contributors to the increase in Group 1 banks’ RWA. As Group 2 banks are in general less affected by the revised counterparty credit risk rules, these banks show a much lower increase in overall RWA (+6.9%). However, even within this group, the RWA increase is driven by CVA capital charges, followed by changes related to the transition from Basel II 50/50 capital deductions to a 1250% risk weight treatment, and to the items that fall below the 10/15% thresholds.

Leverage ratio Monitoring results indicate a positive correlation between bank size and the level of leverage, since the average LR is significantly lower for Group 1 banks. Assuming full implementation of Basel III, Group 1 banks show an average Basel III Tier 1 leverage ratio (LR) of 2.7%, while Group 2 banks’ leverage ratio is 3.4%. 41% of participating Group 1 and 72% Group 2 banks would meet the 3% target level as of June 2011. If a hypothetical current leverage ratio was already in place, Group 1 and Group 2 banks’ LR would be 4.0% and 4.7%, respectively.

Liquidity standards A total of 156 Group 1 and Group 2 banks participated in the liquidity monitoring exercise for the end-June 2011 reporting period. Group 1 banks have reported an average LCR of 71% while the average LCR for Group 2 banks is 70%. The aggregate Group 1 and Group 2 shortfall of liquid assets is at approx. €1.2 trillion which represents 3.7% of the approx. €31 trillion total assets of the aggregate sample. Group 1 banks reported an average NSFR of 89% (Group 2 banks: 90%). To fullfil the minimum standard of 100% on a total basis, banks need stable funding of approx. €1.9 trillion. Both liquidity standards are currently subject to an observation period which includes a review clause to address any unintended consequences prior to their respective implementation dates.

1. General remarks In September 2010, the Group of Governors and Heads of Supervision (GHOS), the Basel Committee on Banking Supervision’s oversight body, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements reached on 26 July 2010. Since the beginning of 2011, the impact of the new requirements related to these capital reforms and the introduction of two international liquidity standards is monitored and evaluated by the Basel Committee on Banking Supervision on a semi-annual basis for its member jurisdictions. At European level, this analysis is conducted by the European Banking Authority (EBA), also based on the Basel III reform package as the CRD IV, the European equivalent to the Basel III framework, has not yet been finalised. This report presents the results of the latest monitoring exercise based on consolidated data of European banks as of 30 June 2011. The monitoring exercise provides an impact assessment of the following aspects: - Changes to banks’ capital ratios under Basel III, and estimates of any capital

shortfalls. In addition, estimates of capital surcharges for global systemically important banks (G-SIBs) are included, where applicable;

- Changes to the definition of capital that result in a new capital standard, referred to as common equity Tier 1 (CET1), a reallocation of regulatory adjustments to CET1 and changes to the eligibility criteria for Tier 1 and total capital,

- Changes in the calculation of risk-weighted assets due to changes to the

definition of capital, trading book, securitisation and counterparty credit risk requirements,

- The capital conservation buffer of 2.5%,

- The introduction of a leverage ratio and

- The introduction of two international liquidity standards – the Liquidity

Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) The related policy documents are: - Revisions to the Basel II market risk framework9 and Guidelines for

computing capital for incremental risk in the trading book; - Enhancements to the Basel II framework11 which include the revised risk

weights for re-securitisations held in the banking book;

- Basel III: A global framework for more resilient banks and the banking system as well as the Committee’s 13 January press release on loss absorbency at the point of non-viability;

- International framework for liquidity risk measurement, standards and

monitoring; and

- Global systemically important banks: Assessment methodology and the additional loss absorbency requirement.

1.1. Sample of participating banks The report includes an analysis of data submitted by 48 Group 1 banks from 16 countries and 110 Group 2 banks from 18 countries. Table 1 shows the distribution of participation by jurisdiction.

Coverage of the banking sector is high, reaching 100% of Group 1 banks in some countries (aggregate coverage in terms of Basel II risk-weighted assets: 98.5%). Coverage of Group 2 banks is lower and varies across countries (aggregate coverage: 35.8%). Group 2 results are driven by a relatively small number of banks sufficiently large to be classified as Group 1 banks, but that have been classified as Group 2 banks by their supervisor because they are not internationally active.

1.2. Methodology “Composite bank” weighting scheme Average amounts in this document have been calculated by creating a composite bank at a total sample level, which implies that the total sample averages are weighted. For example, the average common equity Tier 1 capital ratio is the sum of all banks’ common equity Tier 1 capital for the total sample divided by the sum of all banks’ risk-weighted assets for the total sample.

Box plots illustrate the distribution of results To ensure data confidentiality, most charts show box plots which give an indication of the distribution of the results among participating banks. The box plots are defined as follows:

1.3. Interpretation of results The impact assessment was carried out by comparing banks’ capital positions under Basel III to the current regulatory framework. With the exception of transitional arrangements for non-correlation trading securitisation positions in the trading book, results are calculated assuming full implementation of Basel III ie without considering transitional arrangements related to the phase-in of deductions and grandfathering arrangements. This implies that the Basel III capital amounts shown in this report assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out. As such, these amounts underestimate the amount of Tier 1 capital and total capital held by a bank as they do not give any recognition for non-qualifying instruments that are actually phased out over a 10 year horizon. The treatment of deductions and non-qualifying capital instruments under the assumption of full implementation of Basel III also affects figures reported in the leverage ratio section. The potential underestimation of Tier 1 capital will become less of an issue as the implementation date of the leverage ratio approaches. In particular, in 2013, the capital amounts based on the capital requirements in place on the Basel III implementation monitoring reporting date will reflect the amount of non-qualifying capital instruments included in capital at that time. These amounts will therefore be more representative of the capital held by

banks at the implementation date of the leverage ratio (for more detail see section 5). In addition, it is important to note that the monitoring exercise is based on static balance sheet assumptions, ie capital elements are only included if the eligibility criteria have been fulfilled at the reporting date. Planned bank measures to increase capital or decrease risk-weighted assets are not taken into account. This allows for identifying effective changes in bank capital instead of identifying changes which are simply based on changes in underlying modelling assumptions. As a consequence, monitoring results are not comparable to industry estimates as the latter usually include assumptions on banks’ future profitability, planned capital and/or management actions that mitigate the impact of Basel III. In addition, monitoring results are not comparable to prior C-QIS results, which assessed the impact of policy proposals published in 2009 that differed significantly from the final Basel III framework. As one example, the C-QIS did not consider the impact of capital surcharges for G-SIBs based on the initial list of G-SIBs announced by the Financial Stability Board in November 2011. To enable comparisons between the current regulatory regime and Basel III, common equity Tier 1 elements according to the current regulatory framework are defined as those elements of current Tier 1 capital which are not subject to a limit under the respective national implementation of Basel II.

1.4. Data quality For this monitoring exercise, participating banks submitted comprehensive and detailed non-public data on a voluntary and best-efforts basis. National supervisors worked extensively with banks to ensure data quality, completeness and consistency with the published reporting instructions. Banks are included in the various analyses that follow only to the extent they were able to provide data of sufficient quality to complete the analyses.

2. Overall impact on regulatory capital ratios and estimated capital shortfall One of the core intentions of the Basel III framework is to increase the resilience of the banking sector by strengthening both the quantity and quality of regulatory capital. Therefore, higher minimum requirements have to be met and stricter rules for the definition of capital and the calculation of risk weighted assets apply. As the Basel III monitoring exercise assumes full implementation of Basel III (without taking into account any transitional arrangements), it compares capital ratios under current rules with capital ratios that banks would show if Basel III were already fully in force at the reporting date. In this context, it is important to elaborate on the implications the assumption of full implementation of Basel III has on the monitoring results. The Basel III capital amounts reported in this exercise assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out. Thus, these amounts may underestimate the amount of Tier 1 capital and total capital under current rules held by banks as they do not give any recognition for non-qualifying instruments which are actually phased out over a 10 year horizon. Table 2 shows the overall change in common equity Tier 1 (CET1), Tier 1 and total capital if Basel III were fully implemented, as of 30 June 2011.

For Group 1 banks, the impact on the average CET1 ratio is a reduction from 10.2% to 6.5% (a decline of 3.7 percentage points) while the average Tier 1 and total capital ratio would decline from 11.9% to 6.7% and from 14.4% to 7.8% respectively. Contrary to the current framework, for Group 2 banks average capital ratios are higher than for Group 1. The following chart gives an indication of the distribution of results among participating banks.

It includes the respective regulatory minimum requirement (thick red line), the weighted average (depicted as “x”) and the median (thin red line), ie the value separating the higher half of a sample from the lower half (that means that 50% of all observations are below this value, 50% are above).

80% of Group 1 banks would be at or above the 4.5% minimum requirement while 44% would be at or above the 7.0% target level, ie it is expected that in the next years banks will put in place several measures to increase high quality capital. With respect to Group 2 banks, 87% reported CET1 ratios at or above 4.5% while 72% would be at or above the 7.0% target level. The reduction in CET1 ratios is driven both by a new definition of capital deductions (numerator) and by increases in risk-weighted assets (denominator). Banks engaged heavily in trading or in activities subject to counterparty credit risk tend to show the largest denominator effects as these activities attract substantially higher capital charges under the new framework. For Group 1 banks, the aggregate impact on the CET1 ratio can be attributed in almost equal parts to changes in the definition of capital and to changes related to the calculation of risk-weighted assets: while CET1 declines by 22.7%, RWA increase by 21.2%, on average.

For Group 2 banks, while the change in the definition of capital results in a decline in CET1 of 25.9%, the new rules on RWA affect Group 2 banks far less (+6.9%), which may be explained by the fact that these banks´ business models are less reliant on exposures subject to counterparty credit risk and market risk (which are the main drivers of the RWA increase under the new framework). The Basel III framework includes the following phase-in arrangements for capital ratios: - For CET1, the highest form of loss absorbing capital, the minimum

requirement will be raised to 4.5% and will be phased in by 1 January 2015. Deductions from CET1 will be fully phased in by 1 January 2018;

- For Tier 1 capital, the minimum requirement will be raised to 6.0%

and will be phased in by 1 January 2015; - An additional 2.5% capital conservation buffer above the regulatory

minimum capital ratios, which must be met with common equity, after the application of deductions, will be phased in by 1 January 2019; and

- The additional loss absorbency requirement for G-SIBs, which

ranges from 1.0% to 2.5% and must be met with common equity, after the application of deductions and as an extension of the capital conservation buffer, will be phased in by 1 January 2019.

Table 3 and Chart 2 provide estimates of the additional amount of capital that Group 1 and Group 2 banks would need between 30 June 2011 and 1 January 2022 to meet the target CET1, Tier 1 and total capital ratios under Basel III assuming fully phased-in target requirements and deductions as of 30 June 2011. For Group 1 banks, the CET1 capital shortfall is €18 bn at a minimum requirement of 4.5% and €242 bn at a target level of 7.0%. With respect to the Tier 1 and total capital ratios, the capital shortfall comparing to the minimum ratios amount for €51 bn and €128 bn respectively. For Group 2 banks, the CET1 capital shortfall is €11 bn at a minimum requirement of 4.5% and €35 bn at a target level of 7.0%. The Tier 1 and total capital shortfall calculated relative to the 4.5% minimum amount for €18 and €22 bn, respectively. The surcharges for G-SIBs are a binding constraint for 12 of the 13 G-SIBs included in this monitoring exercise. It should be mentioned, that the shortfall figures are not comparable to those of

the EBA recapitalisation exercise since the capital definitions and the calculation of the risk-weighted assets differ. Given these results, a significant effort by banks to fulfil the risk-based capital requirements is expected.

3. Impact of the new definition of capital on Common Equity Tier 1 As noted above, reductions in capital ratios under the Basel III framework are attributed in part to capital deductions previously not applied at the common equity level of Tier 1 capital. Table 4 shows the impact of various deduction categories on the gross CET1 capital (i.e. CET1 before applying deductions) of Group 1 and Group 2 banks.

In the aggregate, deductions reduce gross CET1 of Group 1 banks by 37.2% with goodwill being the most important driver, followed by holdings of capital of other financial companies. Deductions for defined benefit pension obligations and provisioning shortfalls relative to expected losses tend to be the largest contributors to other deductions across most countries. For Group 2 banks, average results are similar: CET1 deductions reduce gross CET1 by 37.4% due in particular to goodwill, and again followed by holdings of capital of other financial companies as the second most important driver. However, it should be noted that these results are driven by large Group 2 banks (defined as those with Tier1 capital in excess of €3 billion). Without considering these banks, the overall decline of gross CET1 due to deductions would be 22.6%. Mortgage servicing rights related deductions have no impact, for both groups.

4. Changes in risk-weighted assets Reductions in capital ratios under Basel III are also attributed to increases in risk-weighted assets as shown in Table 5 for the following four categories:

Definition of capital: Here we distinguish three effects: The column heading “50/50” measures the increase in risk-weighted assets applied to securitisation exposures currently deducted under the Basel II framework that are risk-weighted at 1250% under Basel III. The negative sign in column “other” indicates that this effect reduces the RWA. This relief in RWA is mainly technical since it is compensated by deductions from capital. The column heading “threshold” measures the increase in risk-weighted assets for exposures that fall below the 10% and 15% limits for CET1 deduction;

Counterparty credit risk (CCR): This column measures the increased capital charge for counterparty credit risk and the higher capital charge that results from applying a higher asset correlation parameter against exposures to financial institutions under the IRB approaches to credit risk. The effects of capital charges for exposures to central counterparties (CCPs) or any impact of incorporating stressed parameters for effective expected positive exposure (EEPE) are not included;

Securitisation in the banking book: This column measures the increase in the capital charges for certain types of securitisations (e.g. resecuritisations) in the banking book; and

Trading book: This column measures the increased capital charges for exposures held in the trading book to include capital requirements against stressed value-at-risk, incremental risk capital charge, and securitisation exposures in the trading book (see section 4.2 for more details).

4.1. Overall results Risk-weighted assets for Group 1 banks increase overall by 21.2% which can be mainly attributed to higher risk-weighted assets for counterparty credit risk exposures (+8.0%), followed by changes due to the new RWA treatment of

current Basel II 50/50 capital deductions (+5.9%) and the new trading book rules (+4.2%). The main driver behind the capital charges for counterparty credit risk is the charge for credit valulation adjustments (CVA) while the higher asset correlation parameter results in an increase in overall risk-weighted assets of only 1.2%. For Group 2 banks, aggregate RWA increase overall by 6.9%. The smaller increase relative to Group 1 banks is as expected since Group 2 banks tend to have less exposure to market risk and counterparty exposures. However, even for Group 2 banks, CCR capital charges (2.9%) are the main contributor to the change in RWA for Group 2 banks. Moving Basel II 50/50 deductions to a 1250% risk weight treatment and increases in RWA attributable to items that fall below the 10/15% thresholds affect RWA by 2.2% each.

Chart 3 gives an indication of the distribution of the results across participating banks and illustrates that the dispersion is much higher within the Group 1 bank sample as compared to Group 2 banks.

4.2. Market risk-related capital charges Table 6 presents details on the impact of the revised trading book capital charges on overall risk-weighted assets for Group 1 banks. Group 2 banks are not presented separately because the market risk requirements have a very minor influence on overall Group 2 bank risk-weighted assets. Some of these banks do not have any trading books at all and are therefore not subject to any related capital charges. Stressed VaR (2.1%), the incremental risk capital charge or “IRC” (1.2%), and the capital charge for non-correlation trading securitisation exposures under the standardised measurement method or “SMM non-CTP” (0.7%) are the three most relevant drivers behind the increase. Increases in risk-weighted assets are partially offset by effects related to previous capital charges (resulting from the event risk surcharge and previous standardised or VaR-based charges for the specific risk capital requirements of securitisations), and the changes to positions treated with standardised measurement methods (column “SMM”).

4.3. Impact of the rules on counterparty credit risk (CVA only) Credit valuation adjustment (CVA) risk capital charges lead to a 7.8% increase in total RWA for the subsample of 36 banks which provided the relevant data (6.8% for the full Group 1 sample). A larger fraction of the total effect is attributable to the application of the standardised method than to the advanced method. The impacts on Group 2 banks are smaller but still significant, adding up to an overall 3.5% increase in RWA over a subsample of 57 banks (2.3% for the full Group 2 sample), totally attributable to the standardised method. Further details are provided in Table 7.

5. Leverage Ratio A simple, transparent, non-risk based leverage ratio has been introduced in the Basel III framework in order to act as a credible supplementary measure to the risk based capital requirements. It is intended to constrain the build-up of leverage in the banking sector and to complement the risk based capital requirements with a non-risk based “backstop” measure. For the interpretation of the results of the leverage ratio section it is important to understand the terminology used to describe a bank’s leverage.

Generally, when a bank is referred to as having more leverage, or being more leveraged, this refers to a multiple of exposures to capital (i.e. 50 times) as opposed to a ratio (i.e. 2.0%). Therefore, a bank with a high level of leverage will have a low leverage ratio. 155 Group 1 and Group 2 banks provided sufficient data to calculate the leverage ratio according to the Basel III framework. In total, aggregate Tier 1 capital according to Basel III (numerator of the leverage ratio) is €0.76 trillion for Group 1 banks while the total aggregate exposure according to the definition of the denominator of the leverage ratio is €27.69 trillion. For Group 2 banks, the corresponding figures are €0.16 trillion (Tier 1 capital) and €4.59 trillion (total exposure). To illustrate the impact of the new capital framework, a hypothetical current leverage ratio is shown assuming the leverage ratio was already in place. This hypothetical ratio is based on the current definition of Tier 1 capital. It is important to recognize that the monitoring results may underestimate the amount of capital that will actually be held by the bank over the next few years. The reason is as follows. The Basel III capital amounts reported in this monitoring exercise assume that all common equity deductions are fully phased in and all non-qualifying capital instruments are fully phased out. Thus, these amounts ceteris paribus underestimate the amount of Tier 1 capital and total capital under current rules held by banks as they do not give any recognition for non-qualifying instruments which are actually phased out over a nine year horizon. In this exercise, Common Equity Tier 1, Tier 1 capital and total capital could be very similar if all (or most) of the banks’ Additional Tier 1 and Tier 2 instruments are considered non-qualifying under Basel III. As the implementation date of the leverage ratio approaches, this will become less of an issue. With respect to the total sample of banks, the average Basel III Tier 1 leverage ratio is 2.8%. Group 1 banks’ average Basel III LR is 2.7% while for Group 2 banks the leverage ratio is significantly higher at 3.4%. Assuming full implementation of Basel III at 30 June 2011, 41.3% of Group 1 banks would meet the calibration target of 3% for the leverage ratio while 80%

would be at or above the 4.5% minimum requirement for the risk-based CET1 ratio. Regarding Group 2 banks, 71.6% show a leverage ratio at or above the target level while 87% reported CET1 ratios at or above the CET1 minimum requirement of 4.5%. Using Tier 1 capital according to current rules in the numerator, the leverage ratio is 4.1% for the total sample. For Group 1 banks it is 4.0% (Group 2: 4.7%). Comparing the average results for Group 1 and Group 2 banks, monitoring results indicate a positive correlation between bank size and the level of leverage, since the average LR is significantly lower for Group 1 banks. Chart 4 gives an indication of the distribution of the results across participating banks. The thick red lines show the calibration target of 3% while the thin red lines represent the 50th percentile19 (the “median”), ie the value separating the higher half of a sample from the lower half (it means that 50% of all observations fall below this value, 50% are above this value). The weighted average is shown as “x”. For further information on the methodology see section 1.2.

Table 8 shows the average Basel III leverage ratios and the capital shortfall under the assumption that banks already fulfill the risk-based capital requirements for the Tier 1 ratio of 6% and 8.5%, respectively.

The shortfall is the additional amount of Tier 1 capital that banks would need to raise in order to meet the target level of 3% for the leverage ratio (i.e. after the risk-based minimum requirements have been met).

Assuming that banks with a risk-based Tier 1 ratio below 6% would have raised capital to fulfill the minimum requirement of 6%, 52% of Group 1 banks and 21% of Group 2 banks would not meet the calibration target of 3% for the leverage ratio. The additional shortfall related to the leverage ratio requirement would be €95 bn (Group 1) and €12 bn (Group 2), respectively. Assuming that banks with a risk-based Tier 1 ratio below 8.5% would have raised capital to meet the minimum requirement of 8.5%, 17% of both Group 1 and Group 2 banks would show a leverage ratio below the 3% target level. The additional shortfall would be €17 bn and €10 bn for Group 1 and Group 2 banks, respectively.

6. Liquidity 6.1. Liquidity Coverage Ratio One of the new minimum standards is a 30-day liquidity coverage ratio (LCR) which is intended to promote short-term resilience to potential liquidity disruptions. The LCR has been designed to require banks to have sufficient high-quality liquid assets to withstand a stressed 30-day funding scenario specified by supervisors. The LCR numerator consists of a stock of unencumbered, high quality liquid assets that must be available to cover any net outflow, while the denominator is comprised of cash outflows less cash inflows (subject to a cap at 75% of total outflows) that are expected to occur in a severe stress scenario. 157 Group 1 and Group 2 banks provided sufficient data in the mid-2011 Basel III implementation monitoring exercise to calculate the LCR according to the Basel III liquidity framework. The average LCR is 71% for Group 1 banks and 70% for Group 2 banks.

These aggregate numbers do not speak of the range of results across the banks. Chart 5 below gives an indication of the distribution of bank results; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group while the mean value is shown as “x”. 34% of the banks in the sample already meet or exceed the minimum LCR requirement and 39% have LCRs that are at or above 85%.

For the banks in the sample, monitoring results show a shortfall of liquid assets of €1.15 trillion (which represents 3.7% of the €31 trillion total assets of the aggregate sample) as of 30 June 2011, if banks were to make no changes whatsoever to their liquidity risk profile. This number is only reflective of the aggregate shortfall for banks that are below the 100% requirement and does not reflect surplus liquid assets at banks above the 100% requirement.

Banks that are below the 100% required minimum have until 2015 to meet the minimum standard by scaling back business activities which are most vulnerable to a significant short-term liquidity shock or by lengthening the term of their funding beyond 30 days. Banks may also increase their holdings of liquid assets. The key components of outflows and inflows are presented in Table 9. Group 1 banks show a notably larger percentage of total outflows, when compared to balance sheet liabilities, than Group 2 banks. This can be explained by the relatively greater contribution of wholesale funding activities and commitments within the Group 1 sample, whereas, for Group 2 banks, retail activities, which attract much lower stress factors, comprise a greater share of funding activities.

Cap on inflows Two Group 1 and 21 Group 2 banks reported inflows that exceeded the cap. Of these, 7 fail to meet the LCR, so the cap is binding on them.

Composition of highly liquid assets The composition of high quality liquid assets currently held at banks is depicted in Chart 6. The majority of Group 1 and Group 2 banks’ holdings, in aggregate, are comprised of Level 1 assets; however the sample, on the whole, shows diversity in their holdings of eligible liquid assets. Within Level 1 assets, 0% risk-weighted securities issued or guaranteed by sovereigns, central banks and PSEs, and cash and central bank reserves comprise significant portions of the qualifying pool. Comparatively, within the Level 2 asset class, the majority of holdings is comprised of 20% risk-weighted securities issued or guaranteed by sovereigns, central banks or PSEs, and qualifying covered bonds.

Cap on Level 2 assets €53 billion of Level 2 liquid assets were excluded because reported Level 2 assets were in excess of the 40% cap. 40 banks currently reported assets excluded, of which 80.0% (20.4% of the total sample) had LCRs below 100%.

Chart 7 combines the above LCR components by comparing liquidity resources (buffer assets and inflows) to outflows. Note that the €900 billion difference between the amount of liquid assets and inflows and the amount of outflows and impact of the cap displayed in the chart is smaller than the €1.15 trillion gross shortfall noted above as it is assumed here that surpluses at one bank can offset shortfalls at other banks. In practice the aggregate shortfall in the industry is likely to lie somewhere between these two numbers depending on how efficiently banks redistribute liquidity around the system.

6.2. Net Stable Funding Ratio The second standard is the net stable funding ratio (NSFR), a longer-term structural ratio to address liquidity mismatches and to provide incentives for banks to use stable sources to fund their activities. 156 Group 1 and Group 2 banks provided sufficient data in the mid-2011 Basel III implementation monitoring exercise to calculate the NSFR according to the Basel III liquidity framework. 37% of these banks already meet or exceed the minimum NSFR requirement, with 70% at an NSFR of 85% or higher.

The average NSFR for each of the Group 1 bank and Group 2 samples is 89% and 90%, respectively. Chart 8 shows the distribution of results for Group 1 and Group 2 banks; the thick red line indicates the 100% minimum requirement, the thin red horizontal lines indicate the median for the respective bank group.

The results show that banks in the sample had a shortfall of stable funding of €1.93 trillion at the end of June 2011, if banks were to make no changes whatsoever to their funding structure. [The shortfall in stable funding measures the difference between balance sheet positions after the application of available stable funding factors and the application of required stable funding factors for banks where the former is less than the latter. ] This number is only reflective of the aggregate shortfall for banks that are below the 100% NSFR requirement and does not reflect any surplus stable funding at banks above the 100% requirement.

Banks that are below the 100% required minimum have until 2018 to meet the standard and can take a number of measures to do so, including by lengthening the term of their funding or reducing maturity mismatch. It should be noted that the shortfalls in the LCR and the NSFR are not necessarily additive, as decreasing the shortfall in one standard may result in a similar decrease in the shortfall of the other standard, depending on the steps taken to decrease the shortfall

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_____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)

www.risk-compliance-association.com

Abbreviations

C-QIS

CCPs

CCR

CET1

CRD

CRM

CTP

CVA

DTA

EBA

EEPE

GHOS

G-SIB

ISG

IRC

LCR

LR

MSR

NSFR

OBS

PFE

quantitative impact study

central counterparties

counterparty credit risk

common equity tier 1

capital requirements directive

comprehensive risk model

correlation trading portfolio

credit value adjustment

deffered tax assets

European Banking Authority

effective expected positive exposure

Group of Governors and Heads of Supervision

global systemically important banks

Impact Study Group

incremental risk charge

liquidity coverage ratio

leverage ratio

mortgage servicing rights

net stable funding ratio

off-balance sheet

potential future exposure

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PSE

RWA

SMM

VaR

public sector entities

risk-weighted assets

standardised measurement-method

value at risk

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NUMBER 2

FINRA Issues New Investor Alert to Help Investors Understand Their Brokerage Account Statements

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) issued a new Investor Alert called It Pays to Understand Your Brokerage Account Statements and Trade Confirmations to help guide investors through the key elements of their account statements and trade confirmations.

FINRA is reminding investors that reviewing their account statements not only helps them stay on top of their holdings, but also alerts them to errors or broker or firm misconduct, such as unauthorized trading or overcharging customers for handling transactions.

"Investors whose portfolios have taken a hit might not be keen to open their account statements, but investors should review their statements carefully—and immediately call the firm that issued the statement about any fee they do not understand or transaction they did not authorize," said Gerri Walsh, FINRA's Vice President for Investor Education.

"Investors should also review trade confirmations as soon as they receive them because a single keystroke can make the difference between 100 and 1,000 shares."

In most cases, brokerage firms are required to provide customers with quarterly account statements and written notification of trade confirmations at or before completion of a transaction.

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It Pays to Understand Your Brokerage Account Statements details in plain language the key elements of account statements and "red flags" that can help investors spot and avert problems.

Many account statements include an investment objective that characterizes an investor's strategy, such as "growth" or "conservative."

Investors should ensure that this description, as well as the account activity, accurately reflects their goals.

Consolidated account statements, which provide customers with a single document that combines information on most or all of their financial holdings regardless of where those assets are held, are growing in popularity.

Investors should understand that these consolidated statements supplement, but do not replace, the required brokerage account statement.

Investors who receive both kinds of statements should keep in mind that the official brokerage statement is used in case of a dispute with the broker or firm.

It Pays to Understand Your Brokerage Account Statements explains that trade confirmations disclose whether your broker acted as an agent for you or whether the firm acted as a principal for its own account.

In equity transactions, if the firm acts as an agent, then the firm must disclose the commission you were charged either on the confirmation or upon request by you.

If the firm acts as principal, it is acting for its own benefit, and any markup or markdown or commission-equivalent must be disclosed on the confirmation.

Investors who find inaccuracies or discrepancies on any of their statements should contact their broker or firm as soon as possible, and if the problem is not resolved, FINRA urges investors to file a complaint using FINRA's online Complaint Center.

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FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States.

FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.

FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms.

It Pays to Understand Your Brokerage Account Statements and Trade Confirmations

FINRA often reminds investors to review their brokerage account statements and trade confirmations—with good reason.

Not only do these documents help you stay on top of your investment holdings, but they also provide valuable information that can alert you to errors, or even misconduct by your broker or brokerage firm such as unauthorized trading or overcharging customers for handling transactions.

The accuracy of statements and trade confirmations is something securities regulators take very seriously.

FINRA is issuing this alert to guide investors through the key elements of their brokerage account statements and trade confirmations and to provide tips that can help avoid problems.

Investors should review their statements carefully—and immediately call the firm that issued the statement or confirmation about any transaction or entry they do not understand or did not authorize, and re-confirm any oral communication in writing with the firm.

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In most cases, brokerage firms are required to provide customers with quarterly account statements and written notification of trade confirmations at or before completion of a transaction.

Be aware that the brokerage firm you opened an account with may not be the one that sends you your account statements and trade confirmations.

Introducing firms generally make recommendations, take orders and have an arrangement with clearing and carrying firms, which are the ones that finalize ("settle" or "clear") trades and hold the funds or securities. If you work with an introducing firm, your statements most likely come from the clearing firm.

Spotting Fraud: Appearance Counts

Keep an eye peeled for statements that look unprofessional, crooked or altered in any way.

This may signal fraud. Check graphic elements such as logos—if a logo has poor resolution or is inconsistent with other statements or communications from the firm, it is a red flag.

In some cases, fraudsters simply cut and paste the logo of a legitimate firm onto their own bogus statement.

Many account statements include an investment objective that characterizes your investment strategy—for example "growth," "speculative" or "conservative." Make sure this description accurately describes your financial goals, and that the activity in your account reflects these goals. Keep in mind that your financial objectives may change over time and should be updated accordingly.

Consolidated Account Statements Consolidated account statements are growing in popularity as a way to provide customers with a single document that combines information

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regarding most or all of the customer’s financial holdings, regardless of where those assets are held. These consolidated reports offer a broad view of customers’ investments, and may provide not only account balances and valuations, but also performance data. In many cases, these consolidated reports are prepared at the request of the customer, who may also direct which of his or her accounts to include and provide access to data for accounts not held by their brokerage firm. Investors should understand that these communications supplement, but do not replace, the required brokerage account statement. If you receive consolidated statements—read them carefully. Many of the red flags cited above also apply to consolidated statements. But you shouldn’t substitute the reading of your brokerage statement with reading only the consolidated one. If you get both—read, compare and understand both—but keep in mind that it is the official brokerage statement which is used in case of a dispute with your broker or brokerage firm.

Carefully Review Your Trade Confirmations Trade confirmations contain key trade details. These include the date and time of the transaction, price at which you bought or sold a security and the quantity of shares bought or sold. When a single keystroke can make the difference between 100 and 1,000 shares, it is important to review this information carefully—and as soon as you receive a confirmation. Confirmations also inform you of whether your broker acted as an agent for you or another customer, or whether the broker or brokerage firm acted as a principal for its own account.

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In equity transactions, if the firm acts as agent, that means the firm acts on your behalf to buy or sell a security. In this capacity, the firm must disclose the amount of the commission you were charged either on the confirmation, or upon request by you. If the firm acts as principal, it is acting for its own benefit, and any markup, markdown or commission-equivalent must be disclosed on the confirmation. In bond transactions, if the firm acts as agent, it must disclose the amount of the commission you were charged either on the confirmation, or upon request by you, just as with equity transactions. However, where the firm acts as principal and executes trades from its own account at net prices the price you pay (or receive) for the bond includes the firm’s markup or markdown. The firm is not required to disclose this amount to you.

Don’t Be Shy Don’t hesitate to ask your broker to provide the details about mark-up, mark-downs or any fees or commissions associated with your investment. These costs ultimately impact the overall return on your investment and you have a right to know this information. If you feel that these costs are excessive, you may file a complaint using FINRA’s online Complaint Center. As with account statements, trade confirmations also include the clearing firm and its contact information, which may be extremely helpful should you have trouble tracking down your investments, or in the event your brokerage firm closes its doors.

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Many of the tips and red flags associated with account statements also apply to trade confirmations. In addition, the following checklist can help you avoid problems: Check your trade confirmation against the information in your brokerage statement for the period in which the trade took place. Confirm the date and transaction amount. Contact the firm about any trade you did not authorize, and re-confirm any oral communication in writing with the firm. Confirmations might indicate whether trades are unsolicited or solicited. Check to be sure trades are properly categorized. Treat as a red flag an investment that was the broker’s idea, but reflected on the confirmation as an unsolicited trade. Scrutinize any fees that might have been added—for example, handling fees or mailing charges—and be sure to ask for an explanation for any fees you had not expected or that seem unreasonable. For example, FINRA recently took enforcement actions against five brokerage firms that mischaracterized commissions on trade confirmations and fee schedules to look like handling services and postage charges.

Bottom Line Always check to see if there are inaccuracies or discrepancies in any of your statements—and, if so, contact your broker or firm as soon as possible. If the problem is not resolved, file a complaint using FINRA's online Complaint Center.

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NUMBER 3

President Obama signed the JOBS Act - April 5, 2012.

Will Announce New Steps to Promote Access to Capital for Entrepreneurs and Protections for Investors WASHINGTON, DC – President Obama signed the Jumpstart Our Business Startups (JOBS) Act, a bipartisan bill that enacts many of the President’s proposals to encourage startups and support our nation’s small businesses. The President believes that our small businesses and startups are driving the recovery and job creation. That’s why he put forward a number of specific ways to encourage small business and startup investment in the American Jobs Act last fall, and worked with members on both sides of the aisle to sign these common-sense measures into law today. The JOBS Act will allow Main Street small businesses and high-growth enterprises to raise capital from investors more efficiently, allowing small and young firms across the country to grow and hire faster. “America’s high-growth entrepreneurs and small businesses play a vital role in creating jobs and growing the economy,” said President Obama.

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“I’m pleased Congress took bipartisan action to pass this bill. These proposals will help entrepreneurs raise the capital they need to put Americans back to work and create an economy that’s built to last.” Throughout this effort, the President has maintained a strong focus on ensuring that we expand access to capital for young firms in a way that is consistent with sound investor protections. To that end, the President today will call on the Treasury, Small Business Administration and Department of Justice to closely monitor this legislation and report regularly to him with its findings. In addition, major crowfunding organizations sent a letter to the President today committing to core investor protections, including a new code of conduct for crowdfunding platforms. In March of last year, the President directed his Administration to host a conference titled “Access to Capital: Fostering Growth and Innovation for Small Companies.” The conference brought together policymakers and key stakeholders whose ideas directly led to many of the proposals contained in the JOBS Act. A primary takeaway from the conference was that capital from public and private investors helps entrepreneurs achieve their dreams and turn ideas into startups that create jobs and fuel sustainable economic growth.

Key Elements of the JOBS Act The JOBS Act includes all three of the capital formation priorities that the President first raised in his September 2011 address to a Joint Session of Congress, and outlined in more detail in his Startup America Legislative Agenda to Congress in January 2012: allowing “crowdfunding,” expanding “mini-public offerings,” and creating an “IPO on-ramp” consistent with investor protections.

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The JOBS Act is a product of bipartisan cooperation, with the President and Congress working together to promote American entrepreneurship and innovation while maintaining important protections for American investors. It will help growing businesses access financing while maintaining investor protections, in several ways: • Allowing Small Businesses to Harness “Crowdfunding”: The Internet already has been a tool for fundraising from many thousands of donors. Subject to rulemaking by the U.S. Securities and Exchange Commission (SEC), startups and small businesses will be allowed to raise up to $1 million annually from many small-dollar investors through web-based platforms, democratizing access to capital. Because the Senate acted on a bipartisan amendment, the bill includes key investor protections the President called for, including a requirement that all crowdfunding must occur through platforms that are registered with a self-regulatory organization and regulated by the SEC. In addition, investors’ annual combined investments in crowdfunded securities will be limited based on an income and net worth test. • Expanding “Mini Public Offerings”: Prior to this legislation, the existing “Regulation A” exemption from certain SEC requirements for small businesses seeking to raise less than $5 million in a public offering was seldom used. The JOBS Act will raise this threshold to $50 million, streamlining the process for smaller innovative companies to raise capital consistent with investor protections.

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• Creating an “IPO On-Ramp”: The JOBS Act makes it easier for young, high-growth firms to go public by providing an incubator period for a new class of “Emerging Growth Companies.” During this period, qualifying companies will have time to reach compliance with certain public company disclosure and auditing requirements after their initial public offering (IPO). Any firm that goes public already has up to two years after its IPO to comply with certain Sarbanes-Oxley auditing requirements. The JOBS Act extends that period to a maximum of five years, or less if during the on-ramp period a company achieves $1 billion in gross revenue, $700 million in public float, or issues more than $1 billion in non-convertible debt in the previous three years. Additionally, the JOBS Act changes some existing limitations on how companies can solicit private investments from “accredited investors,” tasks the SEC with ensuring that companies take reasonable steps to verify that such investors are accredited, and gives companies more flexibility to plan their access to public markets and incentivize employees. Additional Initiatives Announced Today to Promote Capital Access and Investor Protection • Monitoring of JOBS Act Implementation: The President is directing the Treasury Department, Small Business Administration and Department of Justice to closely monitor the implementation of this legislation to ensure that it is achieving its goals of enhancing access capital while maintaining appropriate investor protections.

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These agencies, consulting closely with the SEC and key non-governmental stakeholders, will report their findings to the President on a biannual basis, and will include recommendations for additional necessary steps to ensure that the legislation achieves its goals. • Crowdfunding Platforms Commit to Investor Protections: In a letter to President Obama, a consortium of crowdfunding companies are committing to work with the SEC to develop appropriate regulation of the industry, as required by the JOBS Act. Members of this leadership group are committing to establish core investor protections, including an enforceable code of conduct for crowdfunding platforms, standardized methods to ensure that investors do not exceed statutory limits, thorough vetting of companies raising funds through crowdfunding, and an industry standard “Investors’ Bill of Rights.”

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NUMBER 4

Learning more about Supervisory Agencies

BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht Bundesrepublik Deutschland (Federal Republic of Germany)

Since it was established in May 2002, the Federal Financial Supervisory

Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - known

as BaFin for short) has brought the supervision of banks and financial

services providers, insurance undertakings and securities trading under

one roof.

BaFin is an independent public-law institution and is subject to the legal

and technical oversight of the Federal Ministry of Finance.

It is funded by fees and contributions from the institutions and

undertakings that it supervises.

It is therefore independent of the Federal Budget.

Organisation

Banking Supervision, Insurance Supervision and Securities

Supervision/Asset Management are three different organisational units

within BaFin – the so-called Directorates.

http://www.bafin.de/cln_228/nn_720492/EN/BaFin/EN/BaFin/Organisation/organisation__node.html?__nnn=true

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International

The large number of players operating on the global financial markets has

been increasing steadily for many years now.

Even though there is no legal framework that is binding internationally,

markets are still expanding across borders.

Financial supervision, however, is still largely inward-looking, since

sovereign powers usually end at the national border.

Functions

BaFin operates in the public interest. Its primary objective is to ensure the

proper functioning, stability and integrity of the German financial system.

Bank customers, insurance policyholders and investors ought to be able

to trust the financial system.

BaFin has over 1,900 employees working in Bonn and Frankfurt am Main.

They supervise around 1,900 banks, 717 financial services institutions,

approximately 600 insurance undertakings and 30 pension funds as well

as around 6,000 domestic investment funds and 73 asset management

companies (as of March 2011).

Under its solvency supervision, BaFin ensures the ability of banks,

financial services institutions and insurance undertakings to meet their

payment obligations.

Through its market supervision, BaFin also enforces standards of

professional conduct which preserve investors' trust in the financial

markets.

http://www.bafin.de/cln_228/nn_720492/EN/BaFin/EN/BaFin/International/international__node.html?__nnn=true

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As part of its investor protection, BaFin also seeks to prevent

unauthorised financial business.

Legal basis

BaFin’s By-Laws represent a major set of precepts for how it acts.

They contain regulations governing its structure and organisation and its

rights and obligations.

They also govern the functions and powers of BaFin’s supervisory body,

its Administrative Council (Verwaltungsrat), and details of its budget.

BaFin also bases the way in which it carries out its supervisory activities

on the Mission Statement it gave itself shortly after it was established.

According to this Mission Statement, BaFin’s function is to limit risks to

the German financial system at both the national and international level

and to ensure that Germany as a financial centre continues to function

properly and that its integrity is preserved.

As part of the Federal administration, BaFin is subject to the legal and

technical oversight of the Federal Ministry of Finance, with the

framework of which the legality and fitness for purpose of BaFin's

administrative actions are monitored.

BaFin Text Solvency II

Among other things, Solvency II – the project to reform the European

legal framework for insurance supervision – harmonises the solvency

capital requirements for insurance firms and groups.

Following the adoption of the Solvency II Directive in November 2009,

the focus in 2010 was on developing the implementing measures that are

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to be adopted and on performing the fifth quantitative impact study

(QIS5).

It is currently planned to make the initial amendments to the Solvency II

Directive at the end of 2011 by way of the Omnibus II Directive, for which

the European Commission presented a proposal on 19 January 2011.

This contains amendments to two key areas of legislation.

Firstly, it amends directives governing insurance and securities

prospectuses to reflect the new EU rules on financial market supervision

and in particular the new EU financial supervisory authorities that began

work on 1 January 2011.

For example, EIOPA is incorporated into the Solvency II Directive as the

successor to CEIOPS.

Provision is also made for the binding settlement of disputes by EIOPA.

Secondly, the proposal contains amendments to the Solvency II Directive.

For example, the Directive provides for the implementation of Solvency II

to be postponed by two months until 1 January 2013.

The Omnibus II Directive also enables the European Commission to

specify transitional requirements for individual elements of the

Framework Directive, with different maximum transition periods being

set for each area.

The Omnibus II Directive is of considerable significance for the

continuing evolution of Solvency II.

For technical reasons, the European Commission cannot present the

official draft of the Solvency II implementing measures until after the

Omnibus II Directive has been adopted.

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The Omnibus II Directive will therefore have a significant influence on

the ongoing work on the implementing measures.

Implementing measures

The Solvency II Directive gives the European Commission the authority

to adopt implementing measures for particular areas.

These are intended to add detail to the Directive and hence improve the

harmonisation and consistency of supervision in Europe.

In spring 2010, CEIOPS submitted its proposals in this area to the

Commission, which at the end of 2010 presented an initial informal full

draft of the implementing measures based on the proposals.

In 2011, this draft will be discussed further with the member states, with

specific consideration being given to the findings of QIS5.

The official draft of the Solvency II implementing measures will not be

presented by the Commission and discussed with the Council and the

Parliament until after the Omnibus II Directive has been adopted.

Impact studies

The QIS5 study conducted by the Commission in the year under review is

based on the Solvency II Directive and reflects the implementing

measures developed up until that time.

The objective was to test the quantitative impact of Solvency II in detail.

European insurance firms and groups were asked to take part in the study

between July and November 2010.

The results received from solo firms were initially evaluated by the

national supervisory authorities, while the data received from groups were

analysed by CEIOPS or EIOPA.

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All results and findings were incorporated into a European report, which

EIOPA presented to the Commission in March 2011.

In addition, BaFin published a national report.

The results of the study will have a major influence on the discussion

regarding the Solvency II implementing measures

Guidelines for supervisors

In future, the provisions of the Directive and the implementing measures

adopted by the European Council and the European Parliament will be

complemented by guidelines for supervisors adopted by EIPOA, with the

aim being to further harmonise supervisory practice in Europe.

The four existing CEIOPS and EIOPA working groups began work on

these guidelines in the year under review.

In addition, EIOPA will develop binding standards (on the design of the

yield curve, for example).

One of the working groups, the Financial Requirements Expert Group

(FinReq), has three areas of work: capital requirements (SCR/MCR), the

statement of technical provisions and own funds.

Among other things, it has drawn up initial proposals for guidelines

related to the procedure to be followed for the approval of

undertaking-specific parameters for use in calculating the solvency

capital requirement and the recognition of ancillary own funds.

In cooperation with the Groupe Consultatif, a forum of European

actuarial associations, it is also developing actuarial standards for

calculating technical provisions.

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The Internal Governance, Supervisory Review and Reporting Expert

Group (IGSRR) is responsible for the requirements for public disclosure

and supervisory reporting by undertakings, capital addons and the

valuation of assets and liabilities, and is developing guidance for

supervisors on what the supervisory process may look like under Solvency

II.

In doing so, it is focusing specifically on the evaluation of the own risk

and solvency assessment (ORSA) and the templates for future reporting

to supervisors.

On a closely related topic, consideration is being given to how and which

data may in future be exchanged electronically between national

supervisory authorities and with EIOPA.

In 2010, the Internal Models Expert Group (IntMod) developed guidance

on the use test and on calibration, showing supervisors and the insurance

industry how they can fulfil the future requirements.

The Group also drew up general guidelines on hitherto less-discussed

topics, such as the inclusion of profit and loss attribution in the internal

model.

The fourth CEIOPS/EIOPA working group, the Insurance Groups

Supervision Committee (IGSC), is drawing up guidance on practical

cooperation in the colleges and in coordinating measures.

The working group is also developing harmonised approaches for

identifying, reporting and assessing risk concentrations and intragroup

transactions.

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NUMBER 5

Federal Reserve Policy Statement on Rental of Residential Other Real Estate Owned Properties

April 5, 2012

In light of the large volume of distressed residential properties and the indications of higher demand for rental housing in many markets, some banking organizations may choose to make greater use of rental activities in their disposition strategies than in the past.

This policy statement reminds banking organizations and examiners that the Federal Reserve’s regulations and policies permit the rental of residential other real estate owned (OREO) properties to third party tenants as part of an orderly disposition strategy within statutory and regulatory limits.

[The term “residential properties” in this policy statement encompasses all one-to-four family properties and does not include multi-family residential or commercial properties.]

This policy statement applies to state member banks, bank holding companies, nonbank subsidiaries of bank holding companies, savings and loan holding companies, non-thrift subsidiaries of savings and loan holding companies, and U.S. branches and agencies of foreign banking organizations (collectively, banking organizations).

The general policy of the Federal Reserve is that banking organizations should make good-faith efforts to dispose of OREO properties at the earliest practicable date. Consistent with this policy, in light of the extraordinary market conditions that currently prevail, banking organizations may rent residential OREO properties (within statutory and regulatory holding

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period limits) without having to demonstrate continuous active marketing of the property, provided that suitable policies and procedures are followed. Under these conditions and circumstances, banking organizations would not contravene supervisory expectations that they show “good-faith efforts” to dispose of OREO by renting the property within the applicable holding period. Moreover, to the extent that OREO rental properties meet the definition of community development under the Community Reinvestment Act (CRA) regulations, they would receive favorable CRA consideration. In all respects, banking organizations that rent OREO properties are expected to comply with all applicable federal, state, and local statutes and regulations.

Background

Home prices have been under considerable downward pressure since the financial crisis began, in part due to the large volume of houses for sale by creditors, whether acquired through foreclosure or voluntary surrender of the property by a seriously delinquent borrower (distressed sales). Creditors, in turn, often seek to liquidate their inventories of such properties quickly. Since 2008, it is estimated that millions of residential properties have passed through lender inventories. These distressed sales represent a significant proportion of all home sales transactions, despite some ebb and flow, and thus are a contributing element to the downward pressure on home prices. With mortgage delinquency rates remaining stubbornly high, the continued inflow of new real estate owned properties to the market

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--expected to be millions more over the coming years-- will continue to weigh on house prices for some time. Banking organizations include their holdings of such properties in OREO on regulatory reports and other financial statements. Existing federal and state laws and regulations limit the amount of time banking organizations may hold OREO property. In addition, there are established supervisory expectations for management of OREO properties and the nature of the efforts banking organizations should make to dispose of these properties during that period.

Risk Management Considerations for Residential OREO Property Rentals In all circumstances, the Federal Reserve expects a banking organization considering such rentals to evaluate the overall costs, benefits, and risks of renting. The banking organization’s decision to rent OREO might depend significantly on the condition of individual properties, local market conditions for rental and owner-occupied housing, and its capacity to engage in rental activity in a safe and sound manner and consistent with applicable laws and regulations. Banking organizations should have an operational framework for their residential OREO rental activities that is appropriate to the extent to which they rent OREO properties. In general, banking organizations with relatively small holdings of residential OREO properties--fewer than 50 individual properties rented or available for rent--should use a framework that appropriately records the organizations’ rental decisions and transactions as they take place,

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preserves key documents, and is otherwise sufficient to safeguard and manage the individual OREO assets. In contrast, banking organizations with large inventories of residential OREO properties-- 50 or more individual properties available for rent or rented--should utilize a framework that systematically documents how they meet the supervisory expectations described in the next section. All banking organizations that rent OREO properties, irrespective of the size of their holdings, should adhere to the guidance set forth in this section.

Compliance with maximum OREO holding-period requirements Banking organizations should pursue a clear and credible approach for ultimate sale of the rental OREO property within the applicable holding-period limitations. Exit strategies in some cases may include special transaction features to facilitate the sale of OREO, potentially including prudent use of seller-assisted financing or rent-to-own arrangements with tenants.

Compliance with landlord-tenant and other associated requirements Banking organizations’ residential property rental activities are expected to comply with all applicable federal, state, and local laws and regulations, including: - landlord-tenant laws;

- landlord licensing or registration requirements; property maintenance

standards;

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- eviction protections (such as under the Protecting Tenants at Foreclosure Act);

- protections under the Servicemembers Civil Relief Act; and

- anti-discrimination laws, including the applicable provisions of the

Fair Housing Act and the Americans with Disabilities Act. Prior to undertaking the rental of OREO properties, banking organizations should determine whether such activities are legally permissible under applicable laws, including state laws. When applicable, banking organizations should review homeowner and condominium association bylaws and local zoning laws for prohibitions on renting a property. Banking organizations may use third-party vendors to manage properties but should provide necessary oversight to ensure that property managers fully understand and comply with these federal, state, and local requirements.

Other considerations Banking organizations should account for OREO assets in accordance with generally accepted accounting principles and applicable regulatory reporting instructions. Banking organizations should also provide the appropriate classification treatment for their residential OREO holdings. Residential OREO is typically treated as a substandard asset, as defined by the interagency classification guidelines. However, residential properties with leases in place and demonstrated cash flow from rental operations sufficient to generate a reasonable rate of return should generally not be classified.

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Specific Expectations for Large-Scale Residential OREO Rentals

Banking organizations with large inventories of residential OREO properties that decide to engage in rental activities should have in place a documented rental strategy, including formal policies and procedures for OREO rental activities, and a documented operational framework. Policies and procedures should clearly describe how the banking organization will comply with all applicable laws and regulations. Policies and procedures should include processes for determining whether the properties meet local building code requirements and are otherwise habitable, and whether improvements to the properties are needed in order to market them for rent. In addition, policies and procedures should establish operational standards for the banking organization’s rental activities, including that adequate insurance policies are in place, that property and other tax obligations are met on a timely basis, and that expenditures on improvements are appropriate to the value of the property and to prevailing norms in the local market. Policies and procedures should also require plans for rental of residential OREO properties, down to the individual property level, that cover the full holding period from the time the bank received title to ultimate sale by the bank. Plans should identify which properties would be eligible for rental. Plans also should establish criteria by which properties are chosen for marketing as rental properties, and the process by which rental decisions should be made and implemented. Plans should describe the general conditions under which the organization believes a rental approach is likely to be successful,

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including appropriate consideration of rental market and economic conditions in respective local markets. Finally, policies and procedures should address all risk management issues that arise in renting residential OREO properties. Some risk elements parallel those found in other banking activities, for example, the credit risk associated with tenants’ potential failure to make timely rent payments, or potential conflict of interest issues such as the use of a firm by a banking organization to both provide information on a property’s value and list that property for sale on behalf of the banking organization. Other risks unique to such rental include:

Dealing with vacancy, marketing, and re-rental of previously occupied

properties;

Liability risk arising from rental activities, along with the use and

management of liability insurance or other approaches to mitigate that liability and risk; and

Legal requirements arising from the potential need to take action against tenants for rent delinquency, potentially including eviction. Such requirements may include notice periods. Banking organizations may need to develop new policies and risk management processes to address properly these categories of risk. In many cases, banking organizations will use third-party vendors (for example, real estate agents or professional property managers) to manage their OREO properties. Policies and procedures should provide that such individuals or organizations have appropriate expertise in property management, be in sound financial condition, and have a good track record in managing

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similar properties. Policies and procedures should also call for contracts with such vendors to carry appropriate terms and provide, among other key elements, for adequate management information systems and reporting to the banking organization, including rent rolls (along with actual lease agreements), maintenance logs, and security deposits and charges to these deposits. Banking organizations should provide for adequate oversight of vendors.

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NUMBER 6

We have access to the minutes of the Federal Open Market Committee

Developments in Financial Markets and the Federal Reserve's Balance Sheet

Staff Review of the Economic Situation The information reviewed at the March 13 meeting suggested that economic activity was expanding moderately. Labor market conditions continued to improve and the unemployment rate declined further, although it remained elevated. Overall consumer price inflation was relatively subdued in recent months. More recently, prices of crude oil and gasoline increased substantially. Measures of long-run inflation expectations remained stable. Private nonfarm employment rose at an appreciably faster average pace in January and February than in the fourth quarter of last year, and declines in total government employment slowed in recent months. The unemployment rate decreased to 8.3 percent in January and stayed at that level in February. Both the rate of long-duration unemployment and the share of workers employed part time for economic reasons continued to be high.

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Initial claims for unemployment insurance trended lower over the intermeeting period and were at a level consistent with further moderate job gains. Manufacturing production increased considerably in January, and the rate of manufacturing capacity utilization stepped up. Factory output was boosted by a sizable expansion in the production of motor vehicles, but there also were solid and widespread gains in other industries. In February, motor vehicle assemblies remained near the strong pace recorded in January; they were scheduled to edge up, on net, through the second quarter. Broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels suggesting moderate increases in factory production in the coming months. Households' real disposable income increased, on balance, in December and January as labor earnings rose solidly. Moreover, households' net worth grew in the fourth quarter of last year and likely was boosted further by gains in equity values thus far this year. Nevertheless, real personal consumption expenditures (PCE) were reported to have been flat in December and January. Although households' purchases of motor vehicles rose briskly, spending for other consumer goods and services was weak. In February, nominal retail sales excluding purchases at motor vehicle and parts outlets increased moderately, while motor vehicle sales continued to climb. Consumer sentiment was little changed in February, and households

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remained downbeat about both the economic outlook and their own income and finances. Housing market activity improved somewhat in recent months but continued to be restrained by the substantial inventory of foreclosed and distressed properties, tight credit conditions for mortgage loans, and uncertainty about the economic outlook and future home prices. After increasing in December, starts of new single-family homes remained at that higher level in January, likely boosted in part by unseasonably warm weather; in both months, starts ran above permit issuance. Sales of new and existing homes stepped up further in recent months, though they still remained at quite low levels. Home prices were flat, on balance, in December and January. Real business expenditures on equipment and software rose at a notably slower pace in the fourth quarter of last year than earlier in the year. Moreover, nominal orders and shipments of nondefense capital goods declined in January. However, a number of forward-looking indicators of firms' equipment spending improved, including some survey measures of business conditions and capital spending plans. Nominal business spending for nonresidential construction firmed, on net, in December and January, but the level of spending was still subdued, in part reflecting high vacancy rates and tight credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales in recent months, although stocks of motor vehicles continued to be lean.

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Data for federal government spending in January and February indicated that real defense expenditures continued to step down after decreasing significantly in the fourth quarter. Real state and local government purchases looked to be declining at a slower pace than last year, as those governments' payrolls edged up in January and February and their nominal construction spending rose a little in January. The U.S. international trade deficit widened in December and January, as imports increased more than exports. The expansion of imports was spread across most categories, with petroleum products and automotive products posting strong gains in January. The rise in exports was supported by shipments of capital goods and automotive products, while exports of consumer goods and industrial supplies declined on average. Data through December indicated that net exports made a moderate negative contribution to the rate of growth in real gross domestic product (GDP) in the fourth quarter of last year. Overall U.S. consumer prices, as measured by the PCE price index, increased at a modest rate in December and January. Consumer energy prices rose in January after decreasing markedly in December, and survey data indicated that gasoline prices moved up considerably in February and early March. Meanwhile, increases in consumer food prices slowed in recent months. Consumer prices excluding food and energy also rose modestly in December and January. Near-term inflation expectations from the Thomson Reuters/University

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of Michigan Surveys of Consumers were unchanged in February, and longer-term inflation expectations in the survey remained in their recent range. Measures of labor compensation generally indicated that nominal wage gains continued to be subdued. Increases in compensation per hour in the nonfarm business sector picked up somewhat over the four quarters of 2011. However, the employment cost index increased at a more modest pace than the compensation per hour measure over the past year, and the 12-month change in average hourly earnings for all employees remained muted in January and February. Recent indicators suggested some improvement in foreign economic activity early this year after a significant slowing in the fourth quarter of last year. Aggregate output in the euro area contracted in the fourth quarter, but manufacturing purchasing managers indexes (PMIs) improved in January and February relative to their low fourth-quarter readings, and consumer and business confidence edged up. Floods caused steep production declines in the fourth quarter in Thailand and also had negative effects on output in other countries linked through Thai supply chains. However, economic activity in Thailand recovered sharply around year-end, and manufacturing PMIs moved up across Asia through February. Higher prices for energy and food put upward pressure on headline inflation in foreign economies, but measures of core inflation remained subdued.

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Staff Review of the Financial Situation On balance, U.S. financial conditions became somewhat more supportive of growth over the intermeeting period, and strains in global financial markets eased, as domestic and foreign economic data were generally better than market participants had expected and investors appeared to see diminished downside risks associated with the situation in Europe. Measures of the expected path for the federal funds rate derived from overnight index swap (OIS) rates suggested that the near-term portion of the expected policy rate path was about unchanged, on balance, since the January FOMC meeting, but the path beyond the middle of 2014 shifted down a bit, reportedly reflecting in part the change in the forward rate guidance in the Committee's January statement. On balance, yields on Treasury securities were little changed over the intermeeting period. Indicators of inflation compensation over the next five years edged up, while changes in measures of longer-term inflation compensation were mixed. Conditions in unsecured short-term dollar funding markets improved over the period, especially for financial institutions with European parents. The spread of the three-month London interbank offered rate (LIBOR) over the OIS rate narrowed. In addition, spreads of rates on asset-backed commercial paper over those on AA-rated nonfinancial paper decreased significantly, and the amounts outstanding from programs with European sponsors remained stable. Moreover, the average maturity of unsecured U.S. commercial paper issued by European banks lengthened somewhat over the intermeeting period.

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Responses to the March 2012 Senior Credit Officer Opinion Survey on Dealer Financing Terms indicated little change, on balance, over the past three months in credit terms for important classes of counterparties. Demand for securities financing was reported to have risen somewhat across asset types, but dealers indicated that the risk appetite of most clients had changed relatively little over the previous three months. Broad U.S. equity price indexes rose significantly over the intermeeting period; equity prices of large banking organizations increased about in line with the broader market. Aggregate earnings per share for firms in the Standard & Poor's 500 index declined in the fourth quarter, but profit margins for large corporations remained wide by historical standards. Reflecting a narrowing of spreads over yields on comparable-maturity Treasury securities, yields on investment- and speculative-grade corporate bonds continued to decline over the period, moving toward the low end of their historical ranges. Prices in the secondary market for syndicated leveraged loans moved up further, supported by continued strong demand from institutional investors. The spreads of yields on A2/P2-rated unsecured commercial paper issued by nonfinancial firms over yields on A1/P1-rated issues narrowed slightly on balance. Bond issuance by financial firms was strong in January and February, likely reflecting in part the refinancing of maturing debt that had been issued during the financial crisis under the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program. The issuance of bonds by domestic nonfinancial firms was solid in recent months, and indicators of credit quality remained firm.

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Growth of commercial and industrial (C&I) loans continued to be substantial and was widespread across domestic banks, though holdings of such loans at U.S. branches and agencies of European banks decreased further. Financing conditions in the commercial real estate sector continued to be tight, and issuance of commercial mortgage-backed securities remained low in the fourth quarter of last year. Gross public equity issuance by nonfinancial firms was still solid in January and February, boosted by continued strength in initial public offerings. Share repurchases and cash-financed mergers by nonfinancial firms maintained their strength in the fourth quarter, leading to a sharp decline in net equity issuance. Although mortgage rates remained near their historical lows, conditions in residential mortgage markets generally remained depressed. Consumer credit rose in recent months, with the growth in nonrevolving credit led by continued rapid expansion of government-originated student loans. Issuance of consumer credit asset-backed securities remained at moderate levels in the fourth quarter of 2011 and in early 2012. Gross long-term issuance of municipal bonds was subdued in the first two months of this year. Meanwhile, spreads on credit default swaps for debt issued by states were roughly flat over the intermeeting period. Bank credit rose at a modest pace, on average, in January and February, mainly reflecting strong increases in securities holdings and C&I loans. Commercial real estate loans held by banks continued to decline, while

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noncore loans--a category that includes lending to nonbank financial institutions--grew at a slower pace than in previous months. The aggregate credit quality of loans on banks' books continued to improve across most asset classes in the fourth quarter. M2 advanced at a rapid pace in January, apparently reflecting year-end effects, but its growth slowed in February. The rise in M2 was mainly attributable to continued strength in liquid deposits, reflecting investors' preferences for safe and liquid assets as well as very low yields on short-term instruments outside M2. Currency expanded robustly, and the monetary base also grew significantly over January and February. Foreign equity markets ended the period higher, particularly in Japan, and benchmark sovereign bond yields declined. Spreads of yields on euro-area peripheral sovereign debt over those on German bunds generally continued to narrow, and foreign corporate credit spreads also declined further. The staff's broad nominal index of the foreign exchange value of the dollar moved down modestly over the intermeeting period. Funding conditions for euro-area banks eased over the period, as the European Central Bank (ECB) conducted its second three-year refinancing operation and widened the pool of eligible collateral for refinancing operations. Spreads of three-month euro LIBOR over the OIS rate narrowed, on balance, and European banks' issuance of unsecured senior debt and covered bonds increased. Dollar funding pressures continued to diminish, and the implied cost of dollar funding through the foreign exchange swap market fell moderately

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further. Reflecting the improved conditions in funding markets, demand for dollars at ECB lending operations declined and the outstanding amounts drawn under the Federal Reserve's dollar liquidity swap lines with other foreign central banks remained small. Several other central banks in advanced and emerging market economies eased policy further. In particular, the Bank of England increased the size of its existing gilt purchase program in February, and the Bank of Japan scaled up its Asset Purchase Program. The Bank of Japan also introduced a 1 percent inflation goal.

Staff Economic Outlook In the economic projection prepared for the March FOMC meeting, the staff revised up its near-term forecast for real GDP growth a little. Although the recent data on aggregate spending were, on balance, about in line with the staff's expectations at the time of the previous forecast, indicators of labor market conditions and production improved somewhat more than the staff had anticipated. In addition, the decline in the unemployment rate over the past year was larger than what seemed consistent with the modest reported rate of real GDP growth. Against this backdrop, the staff reduced its estimate of the level of potential output, yielding a measure of the current output gap that was a little narrower and better aligned with the staff's estimate of labor market slack. In its March forecast, the staff's projection for real GDP growth over the medium term was somewhat higher than the one presented in January,

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mostly reflecting an improved outlook for economic activity abroad, a lower foreign exchange value for the dollar, and a higher projected path of equity prices. Nevertheless, the staff continued to forecast that real GDP growth would pick up only gradually in 2012 and 2013, supported by accommodative monetary policy, easing credit conditions, and improvements in consumer and business sentiment. The wide margin of slack in product and labor markets was expected to decrease gradually over the projection period, but the unemployment rate was expected to remain elevated at the end of 2013. The staff also revised up its forecast for inflation a bit compared with the projection prepared for the January FOMC meeting, reflecting recent data indicating higher paths for the prices of oil, other commodities, and imports, along with a somewhat narrower margin of economic slack in the March forecast. However, with energy prices expected to level out in the second half of this year, substantial resource slack persisting over the forecast period, and stable long-run inflation expectations, the staff continued to project that inflation would be subdued in 2012 and 2013. Participants' Views on Current Conditions and the Economic Outlook In their discussion of the economic situation and outlook, meeting participants agreed that the information received since the Committee's previous meeting, while mixed, had been positive, on balance, and suggested that the economy had been expanding moderately. Labor market conditions had improved further: Payroll employment had continued to expand, and the unemployment rate had declined notably in recent months. Still, unemployment remained elevated. Household spending and business fixed investment had continued to

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advance. Despite signs of improvement or stabilization in some local housing markets, most participants agreed that the housing sector remained depressed. Inflation had been subdued in recent months, although prices of crude oil and gasoline had increased of late. Longer-term inflation expectations had remained stable, and most meeting participants saw little evidence of cost pressures. With respect to the economic outlook, participants generally saw the intermeeting news as suggesting that economic growth over coming quarters would continue to be moderate and that the unemployment rate would decline gradually toward levels that the Committee judges to be consistent with its dual mandate. While a few participants indicated that their expectations for real GDP growth for 2012 had risen somewhat, most participants did not interpret the recent economic and financial information as pointing to a material revision to the outlook for 2013 and 2014. Financial conditions had improved notably since the January meeting: Equity prices were higher and risk spreads had declined. Nonetheless, a number of factors continued to be seen as likely to restrain the pace of economic expansion; these included slower growth in some foreign economies, prospective fiscal tightening in the United States, the weak housing market, further household deleveraging, and high levels of uncertainty among households and businesses. Participants continued to expect most of the factors restraining economic expansion to ease over time and so anticipated that the recovery would gradually gain strength. In addition, participants noted that recent policy actions in the euro area

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had helped reduce financial stresses and lower downside risks in the short term; however, increased volatility in financial markets remained a possibility if measures to address the longer-term fiscal and banking issues in the euro area were not put in place in a timely fashion. Inflation had been subdued of late, although the recent increase in crude oil and gasoline prices would push up inflation temporarily. With unemployment expected to remain elevated, and with longer-term inflation expectations stable, most participants expected that inflation subsequently would run at or below the 2 percent rate that the Committee judges most consistent with its statutory mandate over the longer run. In discussing the household sector, meeting participants generally commented that consumer spending had increased moderately of late. While a few participants suggested that recent improvements in labor market conditions and the easing in financial conditions could help lay the groundwork for a strengthening in the pace of household spending, several other participants pointed to factors that would likely restrain consumption: Growth in real disposable income was still sluggish, and consumer sentiment, despite some improvement since last summer, remained weak. A number of participants viewed the recent run-up in petroleum prices as likely to limit gains in consumer spending on non-energy items for a time; a couple of participants noted, however, that the unseasonably warm weather and the declining price of natural gas had helped cushion the effect of higher oil and gasoline prices on consumers' overall energy bills. Most participants agreed that, while recent housing-sector data had shown some tentative indications of upward movement, the level of activity in that sector remained depressed and was likely to recover only slowly over time.

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One participant, while agreeing that the housing market had not yet turned the corner, was more optimistic about the potential for a stronger recovery in the market in light of signs of reduced inventory overhang and stronger demand in some regions. Reports from business contacts indicated that activity in the manufacturing, energy, and agriculture sectors continued to advance in recent months. In the retail sector, sales of new autos had strengthened, but reports from other retailers were mixed. A number of businesses had indicated that they were seeing some improvement in demand and that they had become somewhat more optimistic of late, with some reporting that they were adding to capacity. But most firms reportedly remained fairly cautious--particularly on hiring decisions--and continued to be uncertain about the strength of the recovery. Participants touched on the outlook for fiscal policy and the export sector. Assessments of the outlook for government revenues and expenditures were mixed. State and local government spending had recently shown modest growth, following a lengthy period of contraction, and declines in public-sector employment appeared to have abated of late. However, it was noted that if agreement was not reached on a longer-term plan for the federal budget, an abrupt and sharp fiscal tightening would occur at the start of 2013. A number of participants observed that exports continued to be a positive factor for U.S. growth, while noting risks to the export picture from economic weakness in Europe or a greater than expected slowdown in China and emerging Asia.

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Participants generally observed the continued improvement in labor market conditions since the January meeting. A couple of participants stated that the progress suggested by the payroll numbers was also apparent in a broad array of labor market indicators, and others noted survey measures suggesting further solid gains in employment going forward. One participant pointed to inflation readings and a high rate of long-duration unemployment as signs that the current level of output may be much closer to potential than had been thought, and a few others cited a weaker path of potential output as a characteristic of the present expansion. However, a number of participants judged that the labor market currently featured substantial slack. In support of that view, various indicators were cited, including aggregate hours, which during the recession had exhibited a decline that was particularly severe by historical standards and remained well below the series' pre-recession peak; the high number of persons working part time for economic reasons; and low ratios of job openings to unemployment and of employment to population. Most participants noted that the incoming information on components of final spending had exhibited less strength than the indicators of employment and production. Some participants expressed the view that the recent increases in payrolls likely reflected, in part, a reversal of the sharp cuts in employment during the recession, a scenario consistent with the weak readings on productivity growth of late. In this view, the recent pace of employment gains might not be sustained if the growth rate of spending did not pick up. Several participants noted that the unseasonably warm weather of recent

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months added one more element of uncertainty to the interpretation of incoming data, and that this factor might account for a portion of the recent improvement in indicators of employment and housing. In a contrasting view, the improvements registered in labor market indicators could be seen as raising the likelihood that GDP data for the recent period would undergo a significant upward revision. Many participants noted that strains in global financial markets had eased somewhat, and that financial conditions were more supportive of economic growth than at the time of the January meeting. Among the evidence cited were higher equity prices and better conditions in corporate credit markets, especially the markets for high-yield bonds and leveraged loans. Banking contacts were reporting steady, though modest, growth in C&I loans. Many meeting participants believed that policy actions in the euro area, notably the Greek debt swap and the ECB's longer-term refinancing operations, had helped to ease strains in financial markets and reduced the downside risks to the U.S. and global economic outlook. Nonetheless, a number of participants noted that a longer-term solution to the banking and fiscal problems in the euro area would require substantial further adjustment in the banking and public sectors. Participants saw the possibility of disruptions in global financial markets as continuing to pose a risk to growth. While the recent readings on consumer price inflation had been subdued, participants agreed that inflation in the near term would be pushed up by rising oil and gasoline prices. A few participants noted that the crude oil price increases in the latter half of 2010 and the early part of 2011 had been part of a broad-based rise in commodity prices; in contrast, non-energy commodity prices had been more stable of late, which suggested that the recent upward pressure on

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oil prices was principally due to geopolitical concerns rather than global economic growth. A couple of participants noted that recent readings on unit labor costs had shown a larger increase than earlier, but other participants pointed to other measures of labor compensation that continued to show modest increases. With longer-run inflation expectations still well anchored, most participants anticipated that after the temporary effect of the rise in oil and gasoline prices had run its course, inflation would be at or below the 2 percent rate that they judge most consistent with the Committee's dual mandate. Indeed, a few participants were concerned that, with the persistence of considerable resource slack, inflation might be below the mandate-consistent rate for some time. Other participants, however, were worried that inflation pressures could increase as the expansion continued; these participants argued that, particularly in light of the recent rise in oil and gasoline prices, maintaining the current highly accommodative stance of monetary policy over the medium run could erode the stability of inflation expectations and risk higher inflation.

Committee Policy Action Members viewed the information on U.S. economic activity received over the intermeeting period as suggesting that the economy had been expanding moderately and generally agreed that the economic outlook, while a bit stronger overall, was broadly similar to that at the time of their January meeting. Labor market conditions had continued to improve and unemployment had declined in recent months, but almost all members saw the unemployment rate as still elevated relative to levels that they viewed as consistent with the Committee's mandate over the longer run.

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With the economy facing continuing headwinds, members generally expected a moderate pace of economic growth over coming quarters, with gradual further declines in the unemployment rate. Strains in global financial markets, while having eased since January, continued to pose significant downside risks to economic activity. Recent monthly readings on inflation had been subdued, and longer-term inflation expectations remained stable. Against that backdrop, members generally anticipated that the recent increase in oil and gasoline prices would push up inflation temporarily, but that subsequently inflation would run at or below the rate that the Committee judges most consistent with its mandate. In their discussion of monetary policy for the period ahead, members agreed that it would be appropriate to maintain the existing highly accommodative stance of monetary policy. In particular, they agreed to keep the target range for the federal funds rate at 0 to 1/4 percent, to continue the program of extending the average maturity of the Federal Reserve's holdings of securities as announced in September, and to retain the existing policies regarding the reinvestment of principal payments from Federal Reserve holdings of securities. With respect to the statement to be released following the meeting, members agreed that only relatively small modifications to the first two paragraphs were needed to reflect the incoming economic data, the improvement in financial conditions, and the modest changes to the economic outlook. With the economic outlook over the medium term not greatly changed, almost all members again agreed to indicate that the Committee expects to maintain a highly accommodative stance for monetary policy and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate

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at least through late 2014. Several members continued to anticipate, as in January, that the unemployment rate would still be well above their estimates of its longer-term normal level, and inflation would be at or below the Committee's longer-run objective, in late 2014. It was noted that the Committee's forward guidance is conditional on economic developments, and members concurred that the date given in the statement would be subject to revision in response to significant changes in the economic outlook. While recent employment data had been encouraging, a number of members perceived a nonnegligible risk that improvements in employment could diminish as the year progressed, as had occurred in 2010 and 2011, and saw this risk as reinforcing the case for leaving the forward guidance unchanged at this meeting. In contrast, one member judged that maintaining the current degree of policy accommodation much beyond this year would likely be inappropriate; that member anticipated that a tightening of monetary policy would be necessary well before the end of 2014 in order to keep inflation close to the Committee's 2 percent objective. The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run. At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:

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"The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to continue the maturity extension program it began in September to purchase, by the end of June 2012, Treasury securities with remaining maturities of approximately 6 years to 30 years with a total face value of $400 billion, and to sell Treasury securities with remaining maturities of 3 years or less with a total face value of $400 billion. The Committee also directs the Desk to maintain its existing policies of rolling over maturing Treasury securities into new issues and of reinvesting principal payments on all agency debt and agency mortgage-backed securities in the System Open Market Account in agency mortgage-backed securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. The Committee directs the Desk to engage in dollar roll transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions. The System Open Market Account Manager and the Secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability." The vote encompassed approval of the statement below to be released at 2:15 p.m.: "Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately.

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Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable. Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate. To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. The Committee also decided to continue its program to extend the

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average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability." Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Dennis P. Lockhart, Sandra Pianalto, Sarah Bloom Raskin, Daniel K. Tarullo, John C. Williams, and Janet L. Yellen. Voting against this action: Jeffrey M. Lacker. Mr. Lacker dissented because he did not agree that economic conditions were likely to warrant exceptionally low levels of the federal funds rate at least through late 2014. In his view, with inflation close to the Committee's objective of 2 percent, the economy expanding at a moderate pace, and downside risks somewhat diminished, the federal funds rate will most likely need to rise considerably sooner to prevent the emergence of inflationary pressures. Mr. Lacker continues to prefer to provide forward guidance regarding future Committee policy actions through the inclusion of FOMC participants' projections of the federal funds rate in the Summary of Economic Projections (SEP).

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Monetary Policy Communications As it noted in its statement of principles regarding longer-run goals and monetary policy strategy released in January, the Committee seeks to explain its monetary policy decisions to the public as clearly as possible. With that goal in mind, participants discussed a range of additional steps that the Committee might take to help the public better understand the linkages between the evolving economic outlook and the Federal Reserve's monetary policy decisions, and thus the conditionality in the Committee's forward guidance. The purpose of the discussion was to explore potentially promising approaches for further enhancing FOMC communications; no decisions on this topic were planned for this meeting and none were taken. Participants discussed ways in which the Committee might include, in its postmeeting statements, additional qualitative or quantitative information that could convey a sense of how the Committee might adjust policy in response to changes in the economic outlook. Participants also discussed whether modifications to the SEP that the Committee releases four times per year could be helpful in clarifying the linkages between the economic outlook and the Committee's monetary policy decisions. In addition, several participants suggested that it could be helpful to discuss at a future meeting some alternative economic scenarios and the monetary policy responses that might be seen as appropriate under each one, in order to clarify the Committee's likely behavior in different contingencies. Finally, participants observed that the Committee introduced several important enhancements to its policy communications over the past year or so; these included the Chairman's postmeeting press conferences as well as changes to the FOMC statement and the SEP.

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Against this backdrop, some participants noted that additional experience with the changes implemented to date could be helpful in evaluating potential further enhancements. It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 24-25, 2012. The meeting adjourned at 4:10 p.m. on March 13, 2012.

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NUMBER 7

FINANCIAL STABILITY OVERSIGHT COUNCIL Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies ACTION: Final rule and interpretive guidance. Section 113 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) authorizes the Financial Stability Oversight Council (the “Council”) to determine that a nonbank financial company shall be supervised by the Board of Governors of the Federal Reserve System (the “Board of Governors”) and shall be subject to prudential standards, in accordance with Title I of the Dodd-Frank Act, if the Council determines that material financial distress at the nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company, could pose a threat to the financial stability of the United States. Section 111 of the Dodd-Frank Act (12 U.S.C. 5321) established the Financial Stability Oversight Council. Among the purposes of the Council under section 112 of the Dodd-Frank Act (12 U.S.C. 5322) are “(A) To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing

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activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) To promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) To respond to emerging threats to the stability of the United States financial system.” In the recent financial crisis, financial distress at certain nonbank financial companies contributed to a broad seizing up of financial markets and stress at other financial firms. Many of these nonbank financial companies were not subject to the type of regulation and consolidated supervision applied to bank holding companies, nor were there effective mechanisms in place to resolve the largest and most interconnected of these nonbank financial companies without causing further instability. To address any potential risks to U.S. financial stability posed by these companies, the Dodd-Frank Act authorizes the Council to determine that certain nonbank financial companies will be subject to supervision by the Board of Governors and prudential standards. The Board of Governors is responsible for establishing the prudential standards that will be applicable, under section 165 of the Dodd-Frank Act, to nonbank financial companies subject to a Council determination. Title I of the Dodd-Frank Act defines a “nonbank financial company” as a domestic or foreign company that is “predominantly engaged in financial activities,” other than bank holding companies and certain other types of firms. The Dodd-Frank Act provides that a company is “predominantly engaged” in financial activities if either

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(i) The annual gross revenues derived by the company and all of its subsidiaries from financial activities, as well as from the ownership or control of insured depository institutions, represent 85 percent or more of the consolidated annual gross revenues of the company; or (ii) The consolidated assets of the company and all of its subsidiaries related to financial activities, as well as related to the ownership or control of insured depository institutions, represent 85 percent or more of the consolidated assets of the company. The Dodd-Frank Act requires the Board of Governors to establish the requirements for determining whether a company is “predominantly engaged in financial activities” for this purpose.

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NUMBER 8

AIMA EXPRESSES CONCERN ABOUT NEW EUROPEAN

COMMISSION AIFMD IMPLEMENTATION TEXT London – 2nd April 2012: The Alternative Investment Management Association (AIMA), the global hedge fund trade association, has expressed concern about the European Commission’s new draft text for the implementation of the Alternative Investment Fund Managers Directive (AIFMD). The European Commission proposed the new text in response to advice received on implementation of AIFMD by the European Securities and Markets Authority (ESMA). It is seeking to implement AIFMD swiftly through the format of a “Regulation” which enters effect more quickly than a “Directive”, which is transposed into national law and offers member states more flexibility of implementation. The Commission has given EU member states and the European Parliament only two weeks to respond to this new text. Andrew Baker, AIMA CEO, said: “We are concerned that this draft Regulation appears to significantly and substantially diverge from the ESMA advice in a number of key areas, including third country provisions, depositaries, delegation, leverage, own funds, professional indemnity insurance, appointment of prime brokers and calculation of assets under management.

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“We fully respect the Commission’s right not to follow ESMA advice when producing secondary legislation. However, there should be more transparency and better consultation if the Commission has decided to depart from the advice in such crucial areas for the global asset management industry.” As a global trade association AIMA is particularly concerned about the international ramifications of the third country provisions. These relate to non-EU jurisdictions (such as the United States, Canada, Hong Kong, Singapore, Japan, Australia and Brazil) and how managers operating in those jurisdictions may access EU investors. Andrew Baker, AIMA CEO, said: “The proposed third country provisions do not appear to reflect advice the European Commission received from ESMA on implementing AIFMD. The Commission is contemplating a requirement that EU and non-EU regulators sign co-operation agreements which are legally binding on both parties. These would be extremely problematic if not impossible to conclude if the Regulation prescribes that the cooperation agreements ensure that third country regulators enforce EU law in their territories. It could be extremely difficult for many regulators to be able to sign up to that. We urge the Commission to clarify this issue in their final text. “Without cooperation agreements, asset managers outside the EU will not be able to access investors in the EU except through reverse solicitation.

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This would close the door to national private placement regimes in the EU, which would have a major impact on asset managers globally. It would also prevent delegation of portfolio management outside of the EU, which would be of great concern for global asset managers. “ESMA has made it clear in its advice that cooperation agreements are to be signed on a best-efforts basis and are meant to reflect international norms such as the IOSCO Multilateral Memorandum of Understanding. We hope the Commission follows this advice.”

About AIMA As the global hedge fund association, the Alternative Investment Management Association (AIMA) has over 1,300 corporate members (with over 6,000 individual contacts) worldwide, based in over 40 countries. Members include hedge fund managers, fund of hedge funds managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors. They all benefit from AIMA’s active influence in policy development, its leadership in industry initiatives, including education and sound practice manuals and its excellent reputation with regulators worldwide. AIMA is a dynamic organisation that reflects its members’ interests and provides them with a vibrant global network. AIMA is committed to developing industry skills and education standards and is a co-founder of the Chartered Alternative Investment Analyst designation (CAIA) – the industry’s first and only specialised educational standard for alternative investment specialists.

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NUMBER 9

Thematic review on risk governance

Questionnaire for national authorities

The global financial crisis highlighted a number of corporate governance failures and weaknesses in financial institutions, including inappropriate Board structures and processes, weak risk governance systems, and unduly complex or opaque firm organisational structures and activities.

Many of these shortcomings have been highlighted and documented in various reports that have been issued since 2008.

The October 2011 FSB Supervisory Intensity and Effectiveness (SIE) progress report to the G20 notes that much progress has been made in corporate governance at both the supervisory and firm levels, particularly for SIFIs.

However, effective risk appetite frameworks that are actionable and measurable by both firms and supervisors have not yet been widely adopted.

The SIE report concludes that more intense supervisory oversight is needed to evaluate the effectiveness of improved governance, particularly risk governance that is critical to ensuring a strong risk management culture in firms.

The report recommends that the FSB conduct a thematic review on risk governance to assess practices at firms, focusing on the risk committees of executive Boards, as well as the risk management functions (e.g. the Chief Risk Officer organisation) and independent assessment functions (e.g. the Chief Auditor function), and on how supervisors assess their effectiveness.

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In light of the recommendation of the SIE report, and the importance and cross-sectoral nature of the topic, the FSB Standing Committee on Standards Implementation (SCSI) agreed, in its conference call on 10 November 2011, to undertake a peer review on risk governance in early 2012.

SCSI members also agreed that the peer review would only cover banks and broker-dealers; insurers and other non-bank financial institutions would not be covered.

There is currently no single comprehensive set of principles and standards that fully address and integrate corporate and risk governance requirements. The review therefore will not assess compliance with any specific standard, but will use existing standards and recommendations (as appropriate) in order to evaluate progress as well as identify good practices and remaining gaps in firms’ risk governance frameworks, and in the assessment of those frameworks by supervisory authorities. The primary source of information for the peer review will be the responses provided to this questionnaire, and a questionnaire for firms to be developed in March.

The peer review will focus on the roles and interplay between the firm’s Board members that oversee risk management, the enterprise risk management function and relevant aspects of the process for assessing the risk governance framework, processes and practices, either by internal audit or by third parties (e.g. external auditors, consultants).

In particular, the peer review will focus on:

Board responsibilities and practices

The Board is responsible for ensuring that the firm has an appropriate risk governance framework given the firm’s business model, complexity and size. How Boards assume such responsibilities varies across jurisdictions and for the purposes of this report, the risk committee refers to a specialised

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Board committee responsible for advising the Board on the firm’s overall current and future risk appetite and strategy, and for overseeing senior management’s implementation of that strategy.

Risk management function The independent risk management function is responsible for the firm’s risk management framework across the entire organisation, ensuring that the firm’s risk meets the desired risk profile as approved by the Board. The risk management function is responsible for identifying, measuring, monitoring, recommending strategies to control or mitigate risks, and reporting on risk exposures.

Independent assessment of the risk governance framework by internal audit and third parties

The independent (e.g. from the business unit and risk management function) assessment of the firm’s risk framework plays a crucial role in the ongoing maintenance of a firm’s internal control, risk management and risk governance. It helps a firm accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. This may include internal processes, such as internal audit, or external processes such as third party reviews (e.g. external auditors, consultants). FSB member jurisdictions are requested to provide a consolidated national response to the questionnaire, which should include descriptions of differences where these exist in oversight of risk governance within the jurisdiction (e.g. for banks vs. broker dealers, based on the size, business model, complexity of the firm), with a particular emphasis on any framework or behavioural changes that have occurred since the crisis.

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In order to limit the burden on FSB members and to avoid unnecessary duplication of information collection efforts, authorities can attach links to relevant documents (where available in English).

Feedback should be submitted by 11 May 2012 to [email protected] under the subject heading “FSB Thematic Peer Review on Risk Governance.” Individual submissions will not be made public.

National authorities’ approach toward risk governance oversight

Please describe your jurisdiction’s overall approach to assessing firms’ risk governance frameworks (e.g. legislation, regulation or supervisory guidance)? Please provide links to relevant documents. Has your jurisdiction evaluated whether such guidance is consistent with the BCBS or OECD principles on corporate governance or other recommendations provided by the industry? How does your jurisdiction assess alignment or implementation of any legislation, regulation or supervisory guidance in the area of risk governance? How does your jurisdiction determine that your significant financial institutions have effective risk governance frameworks, policies and practices? Please briefly describe whether firms in your jurisdiction have made changes in response to increased supervisory and regulatory oversight of risk governance. In addition, please provide examples of any material changes in the effectiveness of firms’ risk governance practices over the last few years (e.g. decisions regarding whether to reduce/increase certain business activities based on the Board’s risk strategy).

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During the global financial crisis, were there weaknesses in your oversight of risk governance that became apparent? Please summarise any initiatives planned to strengthen your jurisdiction’s oversight of firms’ risk governance practices. Does your jurisdiction regularly review whether your supervisory, regulatory and enforcement authorities are sufficiently resourced, independent and empowered to deal with risk governance weaknesses that have been identified? Does this review include an assessment of inter-agency as well as internal communication and decision-making processes? Does your jurisdiction have dedicated teams of qualified personnel to assess firms’ risk governance frameworks, or is oversight of risk governance embedded within other risk oversight functions (e.g. operational, market or credit risk)? What regulatory and supervisory tools are available in your jurisdiction to incentivise firms to remediate deficiencies within the risk governance framework (e.g. restrictions on activities, capital charges, fines)? Please describe any regulatory or supervisory actions taken to incentivise firms to remediate weaknesses and the firm’s responses (if possible in a way that respects national confidentiality rules). How are relevant internal control weaknesses and other significant internal control deficiencies factored into the assessment of risk governance frameworks (e.g. a control deficiency that allows significant unauthorised trading activities)?

Please describe any bilateral efforts initiated by supervisors in other jurisdictions regarding the supervision of risk management policies and practices. Please indicate instances where supervisory work plans have been impacted as a result of those meetings.

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Board responsibilities and practices Risk committee refers to a specialised Board committee responsible for advising the Board on the firm’s overall current and future risk appetite and strategy, and for overseeing senior management’s implementation of that strategy. Risk committees comprising management members that reside below the Board level (e.g. within business units, management committees) do not fall in this definition. Do supervisory requirements or expectations exist concerning the role and responsibilities of the Board for risk governance? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)? Do supervisory requirements or expectations exist concerning the role and responsibilities of the risk committee? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)? Do supervisory requirements or expectations exist concerning the governance of the Board’s own practices (and where they exist, the practices of any relevant sub-committees)? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)? Do supervisory requirements or expectations exist concerning the information that Boards (or any relevant sub-committees) are supposed to receive, or able to request, from the firm (e.g. CRO, risk management function) and/or third parties (e.g. external auditors, consultants)? If so, how have these requirements or expectations been established (e.g. legislation, regulation, supervisory guidance)?

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How does your jurisdiction assess whether supervisory expectations or requirements concerning the Board’s responsibilities and practices (including the Board’s use of sub-committees) are achieving desired outcomes?

Risk management function Does your jurisdiction require firms to have an independent senior executive (e.g. a Chief Risk Officer or equivalent) with distinct responsibility for the risk management function and the firm’s comprehensive risk management framework across the entire organisation? How does your jurisdiction assess the stature, authority and independence of the CRO (or equivalent) and the risk management function? Please outline what criteria are considered in your jurisdiction when assessing the stature, authority and independence. How does your jurisdiction evaluate the qualifications of the CRO and risk management personnel? How does your jurisdiction evaluate the hiring and performance evaluation process of the CRO? What is your jurisdiction’s approach to regularly assessing firms’ overall risk management policies and practices? How does your jurisdiction assess firms’ implementation of effective risk appetite frameworks? Are risk measures clearly defined, actionable and effective in enabling the firm to pursue its strategic objectives and maintain the risk profile as set out in the risk appetite framework?

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Is the risk appetite assessed globally, or for each type of risk (e.g. credit, market, liquidity, operational)? How does your jurisdiction regularly assess the adequacy of firms’ risk management resources (e.g. number, quality, effectiveness)? Does your jurisdiction review the “ownership” and accountability of risk management resources? How does your jurisdiction assess the role and effectiveness of firms’ risk management process for (i) Approval of new products and material modifications to existing ones; (ii) Strategic planning; (iii) Changes in systems, processes, business models; and (iv) Major acquisitions? What work has been undertaken in your jurisdiction to assess the adequacy, timeliness, and independence of information prepared by risk management and provided to senior management and the Board (or any relevant sub-committee)? How does your jurisdiction evaluate the type and nature of risk reporting to the Board (or any relevant sub-committee)? Does it include (i) the manner in which information is compiled; (ii) what the decision-making process is for information to be included in the Board reporting; and (iii) who/what part of the firm is responsible for compiling this material?

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Does your jurisdiction collect standardised information from firms on certain risk areas to (i) Compare firms’ across risk dimensions; (ii) Identify the need to initiate possible supervisory reviews; or (iii) Update supervisory risk management expectations? Does your jurisdiction assess the effectiveness of firms’ forward-looking stress tests, scenario analysis, contingency arrangements, recovery plans (e.g. raising capital or reducing exposures) and resolution plans (if any). If so, what criteria are used in this assessment? How does your jurisdiction incorporate market and macroeconomic conditions, cross-sectoral developments as well as changes in firms’ business and risk profile into your evaluation of the adequacy of risk management and its ability to respond to changing circumstances? To what extent are the requirements for the risk management function adapted to firm characteristics, such as size, complexity, business model and systemic importance?

Assessment of the risk governance framework Does your jurisdiction require internal audit functions at firms to assess the firm’s risk governance framework at the enterprise level, legal entity level, and/or for the largest revenue-generating business units? If so, are the requirements specified in legislation, regulation or supervisory guidance? What aspects of the risk governance framework are internal auditors or other internal functions (if independent) expected to assess?

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Are supervisory requirements and expectations specified in legislation, regulation or supervisory guidance? Does your jurisdiction allow the use of third parties (e.g. external auditors or other experts) to provide an independent assessment of firms’ risk governance frameworks? If so, does your jurisdiction impose any limitations on certain aspects of internal audit’s responsibilities that can be directed toward third parties (e.g. outsourced)? Are supervisory requirements and expectations specified in legislation, regulation or supervisory guidance? What aspects of the risk governance framework are external experts expected to assess? Are supervisory requirements and expectations specified in legislation, regulation or supervisory guidance? Are internal audit reports, prudential reports, and/or external expert reports monitored as part of the supervision of a firm’s risk governance assessment process? If so, please describe the types of reports and frequency of review. How does your jurisdiction evaluate the qualifications of the internal auditor and internal audit personnel? How does it evaluate the hiring and performance evaluation process of the chief auditor (or equivalent)? Where relevant, is this evaluation process also applied to third parties? How does your jurisdiction conduct assessments of the governance of firms’ risk management at the enterprise level (e.g. through on-site inspections, off-site monitoring, standard reporting mechanisms, supervisory colleges)?

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Are escalation processes in place to facilitate the communication of specific situations/behaviours by individuals within a firm to the supervisor (escalation process and/or whistle-blowing)? Does your jurisdiction monitor firms’ remediation of weaknesses identified by the independent assessment of risk governance functions? If so, is the monitoring embedded in the supervisory process or based on firms’ progress reports?

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NUMBER 10

The White House Blog President Obama Wants You to Know How Your Tax Dollars Are Spent On Wednesday, we released the updated Federal Taxpayer Receipt, which lets you enter a few pieces of information about the taxes you paid last year and calculates how much of your money went toward different national priorities like education, defense, and health care. President Obama spoke about the receipt earlier this week as a “terrific way for people to be able to get information about where their tax dollars are actually going.” The breakdown below shows the different categories of spending in the 2011 Federal Budget.

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Certified Risk and Compliance Management Professional (CRCMP) Distance learning and online certification program. Companies like IBM, Accenture etc. consider the CRCMP a preferred certificate. You may find more if you search (CRCMP preferred certificate) using any search engine. The all-inclusive cost is $297. What is included in the price:

A. The official presentations we use in our instructor-led classes (3285 slides) The 2309 slides are needed for the exam, as all the questions are based on these slides. The remaining 976 slides are for reference. You can find the course synopsis at: www.risk-compliance-association.com/Certified_Risk_Compliance_Training.htm

B. Up to 3 Online Exams You have to pass one exam. If you fail, you must study the official presentations and try again, but you do not need to spend money. Up to 3 exams are included in the price. To learn more you may visit: www.risk-compliance-association.com/Questions_About_The_Certification_And_The_Exams_1.pdf www.risk-compliance-association.com/CRCMP_Certification_Steps_1.pdf

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D. The Dodd Frank Act and the new Risk Management Standards (976 slides, included in the 3285 slides) The US Dodd-Frank Wall Street Reform and Consumer Protection Act is the most significant piece of legislation concerning the financial services industry in about 80 years. What does it mean for risk and compliance management professionals? It means new challenges, new jobs, new careers, and new opportunities. The bill establishes new risk management and corporate governance principles, sets up an early warning system to protect the economy from future threats, and brings more transparency and accountability. It also amends important sections of the Sarbanes Oxley Act. For example, it significantly expands whistleblower protections under the Sarbanes Oxley Act and creates additional anti-retaliation requirements.

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Visit our Risk and Compliance Management Speakers Bureau The International Association of Risk and Compliance Professionals (IARCP) has established the Speakers Bureau for firms and organizations that want to access the expertise of Certified Risk and Compliance Management Professionals (CRCPMs) and Certified Information Systems Risk and Compliance Professionals (CISRCPs). The IARCP will be the liaison between our certified professionals and these organizations, at no cost. We strongly believe that this can be a great opportunity for both, our certified professionals and the organizers. To learn more: http://www.risk-compliance-association.com/Risk_Management_Compliance_Speakers_Bureau.html

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