Thoughtline may2010 - the banking & financial services e-newsletter from wipro technologies

MAY 2010MAY 2010

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ethe Banking & Financial Services -newsletter from Wipro Technologies

Volume VIII Edition XXX

the Banking & Financial Services -newsletter from Wipro Technologies e

Feedback & Suggestions aremost welcome. Please email to

[email protected]

Editorial Team

Suvendu Kumar ChandVibhav Singh

Volume VIII Edition XXX

Index

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2the Banking & Financial Services -newsletter from Wipro Technologiese

For Wipro internal circulation only

.......................................................................................................................3• Foreword

...................4• Regulatory Changes - US banks & financial institutions: 2010 & Beyond

..................................6• Payment Service Directive (PSD) – Impact on European Banks

................................................................................................................8• Too Big to Fail

..............................................................................10• Operational Risk 'A New Identity'

......................................................................13• The New Regulatory Mantra for Banks

• Domain Terms/Glossary..............................................................................................14

Fun Corner...................................................................................................................16•

• Warli Paintings..........................................................................................................17

- Nischala P Murthy

- Abhishek Gupta

- Suvendu Kumar and Vibhav Singh

- Venkatesh Balasubramaniam

- Uday Shankar

Foreword 3the Banking & Financial Services -newsletter from Wipro Technologiese

Over the past two years the world has witnessed the most severe financial crisis in living memory since the Great Depression. Nations around the world have struggled with unemployment, failing businesses, falling home prices, and declining savings. These challenges have forced the government to take extraordinary measures to revive their financial system so that people can access loans to buy a car or home, pay for a child's education, or finance a business. The financial crisis has send a grim reminder that at some of the most sophisticated financial firms, risk management systems did not keep pace with the complexity of new financial products. The lack of transparency and standards in markets for securitized weaken the very fundamentals of fundamentals Market discipline broke down as investors relied excessively on credit rating agencies. Compensation practices throughout the financial services industry rewarded short-term profits at the expense of long-term value. Lasting economic damage to ordinary families and businesses is a constant reminder of the urgent need to act to reform our financial regulatory system and put our economy on track to a sustainable recovery. It has thus become imperative that in order to build a new foundation for financial a strong regulatory regime and supervision is required which is simpler and more effectively enforced. This will protects consumers and investors, reward innovation and that is able to adapt and evolve with changes in the financial market

In this context we thought it would be interesting to throw light on the various regulations Banks and Financial intuitions have been adopting to cope up with the emerging regulatory challenges .Hence our theme for the May2010 Thoughtline is “Regulatory Changes around the world which are likely to impact banks in the year 2010".

In this edition we have Nischala Murthy providing interesting enumerations of some of the new regulations and changes to existing regulations that will affect US banks and financial institutions. Abhisek Gupta throws light on how PSD (Payment Services Directive) legal framework will have significant impact on all the entities across Europe which are involved with payment transactions which including bank customers, businesses and corporate as well as financial institutions, banks, governments and payment processors. Vibhav Singh and Suvendu Chand share interesting insights into the economic doctrine of” Too Big to Fail” and its impact on the current financial crisis . Venkatesh Bala brings in his perspective of Operational Risk impact and emphasizes the importance of operational risk and the business benefits which the banks can derive in identifying and managing these risks. Uday Shankar unveils the new regulatory mantra for the banks.

We have a separate section to provide knowledge to our readers on some key domain terminologies pertaining to risks and regulations.

Last but not the least, do take our quiz in the fun corner and send us your answers

We sincerely thank all the contributors of this month's edition

Hope you all will have a good read

Thoughtline Editorial Team Suvendu Kumar Chand

Vibhav Singhyldneirf oce

The views and opinions expressed in the articles/other contributions by individuals are strictly those of the authors and should not be viewed as professional advice with respect to your business.

Parts of the Images used in this Thought Line is from Reproductions of Warli Paintings


Regulatory Changes - US banks & financial institutions: 2010 & BeyondNischala P Murthy Lead Consultant

T

Wall Street Reform and Consumer Protection Act

Consumer Financial Protection Agency –

Financial Stability Council –

Dissolution Authority –

he near-collapse of the world financial system in the fall of 2008 triggered by the US banks and the global credit crisis that followed has affected all entities of the banking system – from the consumers to the banking institutions. The

ensuing effect on the economies of the world has been a wake-up call for governments and world-wide regulatory bodies to review and re-visit the fundamentals governing banking principles. One of the most important outcomes is the renewed focus on regulatory and compliance related mandates. While these are aimed to provide enhanced reporting and transparency of banking operations; there is also significant emphasis on protection of the consumer's rights and constraints on the quantum of fees / charges that are levied for banking services.

In this article, some of the new regulations and changes to existing regulations that will affect US banks and financial institutions have been enumerated.

The House Financial Services Committee has crafted a comprehensive set of measures in response to the financial crisis. These include:

A new Consumer Financial Protection Agency would be constituted as a new, independent federal agency solely devoted to protecting consumers from unfair and abusive financial products and services. The main charter is to regulate products like home mortgages, car loans, credit cards, regulate the over-the-counter derivatives market, etc.

This creates an inter-agency oversight council that will identify and regulate financial firms that are so large, interconnected, or risky that their collapse would put the entire financial system at risk. These systemically risky firms will be subject to heightened oversight, standards, and regulation.

Establishes an orderly process for dismantling large, failing financial institutions like AIG or Lehman Brothers in a way that protects taxpayer's money and prevents further impact to the rest of the financial system.

In addition, there are measures associated with transparency of Executive Compensation, Investor Protections, Regulation of OTC (Over the Counter)

Derivatives, Mortgage Reform and Anti-Predatory Lending which mandate institutions to ensure that borrowers can repay the loans they are sold, Creation of a Federal Insurance Office that will monitor all aspects of the insurance industry and Reform of Credit Rating Agencies which aims to reduce conflicts of interest, reduce market reliance on credit rating agencies, and impose a liability standard on the agencies.

The U.S. House of Representatives approved a Wall Street Reform Bill in December 2009. It is currently pending the Senate approval. Once approved, it will have to be merged with the House bill before a final package can be sent to the US president to be signed into law, possibly by mid-2010.

The chairwoman of the Senate Agriculture Committee, Blanche Lincoln of Arkansas, introduced a bill in April 2010 that would take a similar approach to clearinghouses and end-user exemptions. The bill would also require most derivatives to be traded on an open exchange.

Currently, the only way to trade many derivatives is to call up various dealers and ask for the price at which they are willing to buy or sell. The securities dealer profits from the difference between the prices at which it buys from one party and sells to another. Investors rarely, if ever, see details on the other side of the trade. Wall Street has signaled that it can live with a clearinghouse approach, but it is strongly opposed to exchange trading of derivatives, which would introduce price competition and lower the profits. Some aspects of this Bill may be modified as the Senate continues to work on finalizing the changes.

The Pay for Performance Act of 2009 would empower Treasury Secretary Timothy Geithner to define what constitutes reasonable compensation, as well as to ban bonuses not based on performance standards. Geithner's guidelines would apply to companies receiving assistance from the government's Troubled Asset Relief Program (TARP).

The Senate Banking Committee has approved the American Financial Stability Act of 2010. The act was introduced by Committee Chair Chris Dodd. The stated

The Wall Street Transparency and Accountability Act of 2010 / Lincoln Bill

The Pay for Performance Act of 2009

American Financial Stability Act of 2010


objective is to promote the financial stability of the United States. It seeks to achieve this goal through multiple measures designed to improve accountability, resiliency, and transparency in the financial system by establishing an early warning system to detect and address emerging threats to financial stability and the economy, enhancing consumer and investor protections, strengthening the supervision of large complex financial organizations and providing a mechanism to liquidate such companies should they fail without any losses to the taxpayer, and regulating the massive over-the-counter derivatives market. The provisions generally would affect U.S. publicly traded companies, but include more stringent restrictions for certain financial services organizations whose compensation programs might encourage risk taking that could harm the overall economy.

The Act proposes broad changes to the existing regulatory structure, such as: creating a host of new agencies like the Financial Stability Oversight Council, while merging and removing others in an effort to streamline the regulatory process, increasing oversight of specific institutions regarded as a systemic risk, promoting transparency, and additional changes. One of the most important points is related to executive compensation which requires companies to substantiate how executive compensation relates to the company's financial performance, taking into account changes in the value of stock, dividends and distributions. It also provides shareholders with a say on pay.

At its core, the regulation states that companies, including banks that handle the personal data of a Massachusetts resident must show they have in place a comprehensive, written information security program with heightened security procedures around how this information is handled. Furthermore, companies must comply with these rules even if they do not have a single office in the Bay State or if they are in an already heavily regulated industry, like financial services. As long as customers in businesses' databases reside in Massachusetts, those companies are affected by the rules. In addition to all this, companies will be obligated to limit the collection and use of personal information. They must identify the purposes for which they collect this kind of information and identify how long the wish to keep it and who can access it.

Another big component of the regulation is around the protection of data in transit and data on portable devices, like laptops, blackberry's and thumb drives. Companies will be required to encrypt data that is not only stored but also when it is being transmitted over networks or physically moved as when employees take a laptop home. Properly educating and handling employees will be key to

Massachusetts Data Security Regulations

compliance. The rules state, for example, that companies must be vigilant when dealing with terminated employees so that their access to data is "immediately" denied.

References- www.reuters.com - www.nytimes.com - www.banktech.com - www.shearman.com - www.whitehouse.gov - http://en.wikipedia.org/ - www.huffingtonpost.com - http://banking.senate.gov- http://financialservices.house.gov/Key_Issues/Financial_Regulatory_Reform/

FinancialRegulatoryReform/4173_summary.pdf


Payment Service Directive (PSD) – Impact on European BanksAbhishek Gupta Business Analyst

A

Scope of PSD

Faster Payments (Faster execution and faster availability of funds) –

s a step towards integrated payments market, is a new legal framework stipulated by the European Union EU which mandates all the EU members and three non EU – EEA (European Economic Area) members - Iceland,

Liechtenstein, and Norway for transposition of PSD into their respective national law by November 2009.

PSD is a pan European directive with main focus on Payment Service Users (PSUs) (customers) and their relationship with PSPs (Payment Service Providers). Only 15 of the 27 EU member states were able to meet the November 2009 deadline, hence the deadline has been extended by one year for all the Euro-zone banks in transposition of PSD into national law till November 2010.

PSD aims to reshape the payments landscape within EU / EEA member states as follows:

Unlike SEPA which primarily covers the efficient processing of Euro currency payments, PSD covers Euro and non-Euro currencies of all EU/EEA member states.

PSD has significant impact on all the entities which are involved with payment transactions which includes bank customers, businesses and corporate as well as financial institutions, banks, governments, payment processors as well as central banks etc. This article highlights some of the key impacts on banks.

PSD regulations primarily provide rules concerning following areas:

PSD has curtailed the scope for banks to earn float on back value dating for debits and forward value dating for credits. Under the new regulation, the debit value date should not be earlier than the time when the amount is debited from the payment account. Similarly the payment must be credited to the payer's account latest by the end of the next day.

PSD enforces faster execution time of D+1. However till January 1, 2012, the PSU and the PSP may agree for an execution period no longer than three business days. Only in special cases of paper based transactions, an additional day is allowed.

Restrictions on deducing charges and fees from payment amount -

Increased transparency in payments –

PSD has mandated that the charges and fees should be applied separately from payments and should be known in advance to the payer and payee. This implies that the payer's bank, PSP, payee's bank or any intermediary bank must transfer full payment amount. From Operations perspective, banks must be ready to face following challenges:

Customers must be provided increased transparency and information like maximum execution time, charges applicable with breakdown of charges and exchange rate (if applicable) both before and after the execution of the payment by banks or PSPs.

Banks must provide accurate information on all charges applicable including the charges at receiving bank or intermediary bank(s) (if any). Hence banks need to work hard on their SLA (Service Level Agreement) to obtain the necessary fees / information from partner banks as required by PSD.

Figure 1 below explains this PSD requirement:


Banks need to upgrade their front end portals to be capable of capturing as well as displaying detailed payment information.

In order to comply with new regulations, once bank accepts an instruction for a payment then they must fulfill the contract to deliver the payment as per the terms and conditions offered. Hence it is imperative that banks capture accurately (duly validated) all the required information (like beneficiary's account number, BIC and IBAN details, routing code etc.) at the front end. BIC and IBAN details usage is strictly encouraged by PSD for improving Straight Through Processing (STP).

Although PSD promotes consistent and harmonization of payments across Euro-zone, however some aspects of PSD are optional, resulting in slight difference in PSD implementation in some member states. Therefore Global banks with operations across EEA have additional challenge to implement PSD in a slightly different manner in different EEA countries to comply with that country's jurisdiction.

There is no doubt that Euro-zone banks are gearing up to tackle these challenges in order to stay competitive, at the same time other players in the payment industry are also upgrading their systems to be compliant with PSD. Payment processors across Euro-zone are upgrading their products and services to support faster execution time as well as fast availability of funds. Going forward, PSD aims to further the scope by expanding with regard to non EU/EEA currencies and to transactions where only one of the payment service providers involved is located in the EU/EEA.

Conclusion

References - http://www.gtnews.com/article/7580.cfm - http://www.qfinance.com


Too Big to Fail Suvendu Kumar and Vibhav Singh Business Analyst

Too Big to Fail: the Myth or Reality

ntroduction: I

Too big to Fail and the 2008 Credit Crisis

'Too Big to Fail' (TBTF) refers to the theory or doctrine in Economic Regulation that propounds that large banking organizations need to be protected from the normal discipline of the marketplace because of concerns

that such institutions are so important to markets and their positions so intertwined with those of other banks that their failure would cause unusually large disruptions financially and economically.

Although under intense scrutiny after the recent Credit Crisis, the 'Too big to fail' has been around for quite a time. Historically the theory began its regulatory existence in the Glass-Steagall Act of 1933 which created the Federal Deposit Insurance Corporation (FDIC) as a direct result of the Great Depression. Initially created to protect innocent citizen depositors who lost money due to the insolvency of their banks, which at that time was quite frequent (remember it was during the Great Depression).

The first test of the FDIC came in the late 1980's and early 1990's during the 'Savings and Loans' Crisis, which affected many Commercial and Savings banks. The brunt of the crisis was borne by a parallel institution Federal Savings and Loan Insurance Corporation (FSLIC) which as result of the crisis became insolvent and was merged with FDIC. This resulted in the current U.S. Regulatory Framework. Coming to the point 'TBTF' was thrust into the limelight after the failure of Continental Illinois National Bank and Trust Company in May 1984, which was one of the largest bank resolution in U.S. history. Regulators FDIC and the Federal Reserve fearing the Impact of the bank's failure on the US banking system, decided that the FDIC would infuse $4.5 billion to rescue the bank. This led to the popularizing of the phrase 'Too big to Fail' by Congressman Stewart McKinney in a 1984 Congressional hearing, discussing FDIC's intervention with Continental Illinois.

Post the Credit Crisis of 2008 (I use this time period not as description of its effects, but the time period of recognition of the crisis) the term and theory has come back into rage and is at the center of a huge and controversial debate in the US as well as

Europe. The detractors of the theory or doctrine include Alan Greenspan, Former Federal Reserve chairman, Mervyn King, head of the Bank of England, Simon Johnson, Professor of Economics at MIT professor and former IMF chief economist, Paul Volcker, Former Federal Chair and William K Black, Economics Professor and Senior Regulator during the Savings &Loans crisis are a few of the notable detractors of TBTF.

The positions of the detractors simplified, revolve around the following points: 1. Failure is an essential component of any market system. 2. Large banks today have become too powerful, economically and politically;

and therefore a menace to financial stability. 3. Larger banks do not necessarily mean more efficiency, a bank too big to fail is

a bank to big to regulate as well; necessitating a break-up into more manageable chunks.

As with any theory or doctrine with its detractors and debunkers there are those who support it as well. In this case this group includes Ben Bernanke, current Fed Chairman, Sheila Bair, FDIC Chair, Tim Geithner, Treasury Secretary and Paul Krugman, professor of Economics and International Affairs at Princeton University are a few of the noted proponents of TBTF albeit with minor differences in their application. Their positions revolving around the following arguments:

1. Not destroy the economic value of large banks by breaking them up, but bring in regulatory measures to govern such entities.

2. Increase the scope of regulations to include not only bank holding companies, but also non-banking firms or institutions such as insurance and hedge funds.

3. Regulators must be made able to impose tougher requirements like stronger capital rules and more stringent liquidity standards.

Though the debate goes on, I leave it up to the reader to form a judgement on TBTF. It is a debate, which will only be settled by going for an approach, be it pro-TBTF or anti-TBTF and then judging the effectiveness of the approach by future performance or non-performance of the approach in preventing another crisis.

Not withstanding the ongoing debate on TBTF, as an added effect of the Credit Crisis most legislators in US as well as Europe seem to have made up their minds on

Conclusions


TBTF. In Europe the European Commission is linking the break-up authority of large financial institutions with the 'Competition Law'. The break up of Dutch financial giant ING Group N.V. in October 2009 and the forming of a Cabinet Committee in U.K. to consider the break up of major U.K. banks like Barclays, Royal Bank of Scotland, Lloyds and HSBC in May, 2010 are also the result of an intense focus and pressure from the European Commission.

In the U.S. laws like Brown-Kaufman SAFE Act (which failed in the Senate in May 2010) and the American Financial Stability Act of 2010 and the Wall Street Reform and Consumer Protection Act of 2009, which allow the regulators to break up banks which exhibit excess of systemic risk, are steps in the direction of refuting TBTF.

References: - The Columbia Journal of European Law - http://www.cjel.net/online/16_1-

greene-kirova/- www.huffingtonpost.com- www.independent.co.uk- www.nytimes.com - www.financialservices.house.gov


Operational Risk 'A New Identity'Venkatesh Balasubramaniam Senior Consultant

ntroduction: I

Evolution of Operational Risk

De-regulation and globalization together with the expansion of the financial industry in terms of multitude of financial services, are making the banks risk profile more complex.These complex activities have created multiple operational risks and the

consequences are far greater than the credit, market and interest rate risks.Basel Committee on Banking Supervision (BCBS) had realized the growing

importance of operational risk among the banks and released various guidelines under BASEL II new capital accord treating operational risk separately for capital charge purpose, similar to credit and market risks under pillar 1.

Across the globe the banks have recognized the importance of managing and measuring the operational risk and can realize the tangible benefits in improved operating efficiency, reduction in earnings volatility, proper allocation of capital between the competing business lines.

Banks have understood the importance of having a strong risk infrastructure systems which addresses the benefits of capturing the operational risk data aligned to regulatory guidelines. Majority of the banks have their operational risk framework, policies, procedures in place and busy in creating awareness on operational risk subject across the business units and business lines.

The process of integrating the good risk management framework with the robust technology is in progress across the globe. Banks prefer to have an end-to-end operational risk analytics application, which has the capability to not only capture the data but also calculate / measure the capital against all the operational risks coupled with a strong reporting repository. The most important types of operational risks commonly exists in the banks, are failure in the internal controls and corporate governance.

This article discusses and emphasizes the importance of operational risk and the business benefits which the banks can derive in identifying and managing these risks.

Operational risk was prevalent from the time bank existed. Many big banks had lost large portion of their earnings due to the losses attributed to operational risk. In

spite of hit on the banks earnings, profitability and reputation, banks were to face challenges in order to manage and mitigate the same.

Banks were completely misguided and under the impression that if the high-impact / low- frequency operational risk events were identified and mitigated then these risks were totally managed.

In the last 5 years, banks have recognized and realized that possessing a strong operational risk framework and technology infrastructure will facilitate many tangible business benefits and a strong internal control environment with good corporate governance.

The important buy-in, among the banks / financial institutions, for the business units in the managing the operational risk is an urgent need to pro-actively manage the risks rather than retrospectively acting on the happened risks / losses.

Although there were many frameworks available like, 'Audit', 'Internal control', 'Corporate governance', all these were imposing mitigation steps in a silo approach. The de-centralized way of managing the operational risks were creating duplicate efforts, and not very cost-effective.

Operational risk is still an evolving subject unlike its rivals credit risk and market risk, and across the globe leading banks have converged in having a unified understanding on the overall framework, methodology and approach.

The success of the developments in the operational risk area so far, would be attributed to reasons like the following:

a) Basel II guidelines, a requirement to set aside a portion of the regulatory capital and,

b) To have good corporate governance and internal controls.

Operational risk department has emerged out as a separate identity in the organizational structure.

Basel Committee on Banking Supervision (BCBS), had recognized more than a decade ago the growing importance of operational risks, especially in the large financial institutions / banks, which would shape the risk profiles of those institutions. Larger institutions typically use highly sophisticated systems, market complex financial products for better efficiency and to capture large customer base with better profits.

Typical organizational model in the enterprise

Operational Risk – Basel II Perspective


These activities eventually have increased the operational risks and hence BCBS has included the operational risk as a separate identity under Pillar 1 of the Basel II guidelines along with credit and market risks. The expectation on the banks from the Basel committee was to apportion sufficient capital as a cushion for all the unexpected losses arising out of operational risks.

The new capital accord (Basel II) follow the three pillars structure which addresses; (a) the minimum capital apportionment, (b) supervisory review and (c) market disclosures. This three pillar structure helps the Basel II to achieve its overall objective in strengthening the security and soundness of the financial system.

The Basel Committee has outlined three methodologies in identifying capital charge for the operational risks.

1. Basic Indicator Approach (BIA)2. The Standardized Approach (TSA)3. Advanced Measurement Approach (AMA)

Simple to Sophisticated Approaches

The application of these approaches varies from banks to banks and completely depends on the sophistication of the banking business, and the complexities of the transactions involved.

Banks with a humble set-up involving traditional banking business may opt for basic indicator approach, while the banks with a broader strategic focus involving large financial transactions across different geographies may be pushed for a standardized and eventually to the advanced measurement approach by Basel committee.

# Approach Capital charge calculation Required Data Items

Loss-data

Key Risk Indicator

RCSA Scenario Analysis

External loss-data

Gross Income

1 Basic Indicator Approach (BIA)

1. Indicator = Three years of average of gross-income.

2. 15% multiplied with the above indicator

Bank wide

2 The Standardized Approach (TSA)

1. The business divided into 8 business lines.

2. Capital charge is calculated for each business line.

3. Allocate a proxy BETA for each business line which carries a fixed percentage

4. Sum of capital charge per business lines will be the total capital charge

X X X As per the LOB

3 Advanced Measurement Approach (AMA)

1. Using the risk measures generated internally by the bank, the capital charge is calculated.

X X X X X As per the LOB

Table 1: Summary of capital charge calculation

S no

Loss-Event Type / Line of Business

Internal Fraud (IF)

External Fraud (EF)

Employment Practices and Workplace Safety (EPWS)

Clients, Products & Business Practices (CPBP)

Damage to Physical Assets (DPA)

Business Disruption and System Failures (BDSF)

1 Corporate Finance

Execution Delivery Process Management

2 Trading & Sales

3 Retail Banking

4 Commercial Banking

5 Payment & Settlement

6 Agency Services

7 Asset Management

8 Retail Brokerage

Table 2: 8 Business Lines X 7 Loss-Event Types Matrix

Board of Directors

CRO ALM AUDIT

Management Team

Support Functions

HR Finance Admin IT

LOB 1 LOB 2 LOB 3 LOB 4

Credit RiskCommittee

Operational Risk

Committee

ALCO Team

AuditTeam

ExternalAudit

InternalAudit


Operational Risk FrameworkThe end objective of having a good operational risk framework in the organization is expected to address the following:-

a. Identify all the operational risks, both inherent and potentialb. Assess / measure the risks, the potential financial and non-financial impact

of the riskc. Mitigate / control, rate the controls & mitigate the risks through insuranced. Report the risks, internal and regulatory risk reportingImplementing the operational risk framework will aim to minimize the

potential for loss and inculcate a good risk-awareness culture among the users in the system.

The below diagram represents a typical operational risk management framework, that exists in the operational risk department.


The New Regulatory Mantra for BanksUday Shankar B Business Analyst

As the global economic crisis rumbles on, financial firms of all kinds anticipate an overhaul of risk management and regulatory frameworks. Financial institutions are finding it increasingly difficult to manage the risks

they face in a landscape of ever more sophisticated financial products, combined with the growing burden of regulation.

While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system. Gaps and weaknesses in the supervision and regulation of financial firms presented challenges to government's ability to monitor, prevent, or address risks as they built up in the system. No regulator saw its job as protecting the economy and financial system as a whole. Existing approaches to bank holding company regulation focused on protecting the subsidiary bank, not on comprehensive regulation of the whole firm. Investment banks were permitted to opt for a different regime under a different regulator, and in doing so, escaped adequate constraints on leverage. Other firms, such as AIG, owned insured depositories, but escaped the strictures of serious holding company regulation because the depositories that they owned were technicallynot “banks” under relevant law.

Alongside these external pressures, equally severe internal pressures are being felt as management require information that is faster, deeper and more accurate to help improve their decision making.

• Traditional group risk departments operating with periodic batch processes, requiring significant reconciliation and manual rework to provide external and internal reporting data, will find it increasingly difficult to succeed in a market where timely on-demand risk management is a competitive advantage.

• The ability to run efficient scenario analysis and simulation on reliable data, to the timescales demanded by the business, will become progressively challenging. Similarly, being able to present this data to senior management in an intuitive manner will become more important.

To meet these demands, risk systems and processes will have to evolve in five particular ways:

Forecast regulations and risk:

Robust IT infrastructure:

Data integration and transparency:

Superior risk analytics:

Enterprise Risk Management–

Planning and identifying the key risk areas in their day to day business which might fall under a regulatory and compliance monitoring.

Building up of robust IT infrastructure by incorporating new technologies and architecture helps to implement the solutions faster. Will also facilitate to plug in and plug out systems as and when required to comply with new regulations.

Integrating data across various system and making then available at all levels in the organizations will empower the employees to take proper decisions.

Designing and evolving advanced analytics based on the perceived risk situations will gear up the bank to mitigate and address them properly.

Organizations needs to integrate their individual risk management solutions into a centralized Enterprise Risk Management and ensure data is available at all the Organizational level. Having a single view point on the perceived risks will help various departments to be better gear up to new Challenges and risks

New risks and regulations are bound to emerge, but basing on the Strategy and execution enables the financial institutions to continuously update with new applications as regulatory and business demands evolve.


Domain Terms/GlossaryA brief description of the terms used in the articles in the ThoughtLine this month.

Advanced Measurement Approach (AMA)

BCBS –

Basic Indicator Approach (BIA) –

is a set of operational risk measurement techniques proposed under Basel II capital adequacy rules for banking institutions. Under this approach the banks are allowed to develop their own empirical model to quantify required capital for operational risk. Banks can use this approach only subject to approval from their local regulators.

the acronym for Basel Committee for Banking Supervision, the committee provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. At times, the Committee uses this common understanding to develop guidelines and supervisory standards in areas where they are considered desirable. In this regard, the Committee is best known for its international standards on capital adequacy; the Core Principles for Effective Banking Supervision; and the Concordat on cross-border banking supervision.

The most basic approach allocates operational risk capital using a single indicator as a proxy for an institutions overall operational risk exposure. Gross income5 is

proposed as the indicator, with each bank holding capital for operational risk equal to the amount of a fixed percentage, á, multiplied by its individual amount of gross income. The Basic Indicator Approach is easy to implement and universally applicable across banks to arrive at a charge for operational risk. Its simplicity, however, comes at the price of only limited responsiveness to firm-specific needs and characteristics.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s.The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

The Glass-Steagall act was a 1933 United States national law separating investment banking and commercial banking firms. The act also prohibited banks from owning corporate stock.

operational risk is the risk of loss resulting from inadequate or failed internal

FDIC -

The Glass-Steagall Act –

Operational Risk -

processes, people and systems, or from external events.

(PSD, 2007/64/EC) is a regulatory initiative from the European Commission (Directorate General Internal Market) which will regulate payment services and payment service providers (as defined in the Directive) throughout the European Union (EU) and European Economic Area (EEA).

Standardised Approach represents a further refinement along the evolutionary spectrum of approaches for operational risk capital. This approach differs from the Basic Indicator Approach in that banks activities are divided into a number of standardised business units and business lines. Thus, the Standardised Approach is better able to reflect the differing risk profiles across banks as reflected by their broad business activities. However, like the Basic Indicator Approach, the capital charge would continue to be standardised by the supervisor.

is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. It can be defined as " f inanc ia l system instabi l i ty, potent ia l ly catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries".

Payment Services Directive

The Standardized Approach (TSA) –

Systemic Risk –

Federal Savings and Loan Insurance Corporation (FSLIC) -

References:

- a former government corporation under the direction of the former Federal Home Loan Bank Board that insured deposits at savings institutions. Congress authorized the FSLIC in the National Housing Act of 1934. Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, FSLIC was abolished. Its deposit insurance function was assumed by a new insurance fund, the Savings Association Insurance Fund (SAIF), administered by the Federal Deposit Insurance Corporation (FDIC).

- www.fdic.gov- www.allbusiness.com- www.bis.org/bcbs


Fun CornerFun Cornerthe Banking & Financial Services -newsletter from Wipro Technologiese

For Wipro internal circulation only

Rush your responses to: [email protected]

16

Congratulations to the winner of the April, 2010 ThoughtLine Fun Corner Challenge

winner!

'Shalini Sachdev'

The correct answers to the questions of April month Funcorner:

1. Banca Monte dei Paschi di Siena of Siena Italy. It has been in operation since 1472.

2. "The Insurance Office" formed by Dr Barbon in 16673. The Royal bank of Scotland Group, Assets of $ 3.8 Trillion4. The first bank card, named "Charg-It," was introduced in 1946

by John Biggins, a banker in Brooklyn, 5. Early 1960's. London Transit Authority installed a magnetic

stripe system in the London Underground (UK).6. Coutts Bank7. Royal bank of Scotland.8. In Middle English (between the Norman invasion of 1066 and

the mid-to-late 15th century), "pygg" was the name of a type of clay used for making various household objects, such as jars, which people often used for saving money. Around the 18th Century, the spelling of "pygg" changed and the term "pygg jar" evolved to "pig bank." As the pig shape is a child-friendly and easy to model out of clay, the name soon caught on among children.

9. In 1728, the Royal Bank of Scotland became the first bank in the world to offer an overdraft facility

10. United Kingdom

Welcome to the ThoughtLine Fun Corner, keeping with this month's theme even the fun corner focuses on the space of Banking Regulations. This quiz will test your knowledge on some of the topics covered by this edition of the ThoughtLine.

Q1. Senator Chris Dodd currently is the chairman for which Senate Committee?

Q2. 'PSD' is mandated to become a law in which three Non-Euro countries?

Q3. Provide the names of the products offered by Banks and thrifts institutions in the U.S. that FDIC insures?

Q4. The Glass-Steagall Act is the commonly used name for which important banking law in the U.S.?

Q5. The full form of SAFE in the SAFE Banking Act of 2010 is:

Q6. FDIC has provided Deposit Insurance effective from which date in the past?

Q7. To a macroeconomist, what do the initials FOMC mean?

Q8. Regulation Z covers which regulation?

Q9. The Electronic Funds Transfer Act is covered by which Regulation?

Q10. The first anti-money laundering act was passed in 1970. Which act covers anti-money laundering?

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Warli paintingsBy Channakeshava

Warli folk paintings are the painting of Maharashtra. Warli is the name of the largest tribe found on the northern outskirts of Mumbai, in Western India. The word “ Warli” comes from “warla” which means a piece of land or a field Despite being in such close proximity of the largest metropolis in India, Warli tribesmen are still not urban. Warli Art was first discovered in the early seventies. While there are no records of the exact origins of this art, its roots may be traced to as early as the 10th century AD. Warli is the vivid expression of daily and social events of the Warli tribe of Maharashtra, used by them to decorate the walls of village houses. This was the only means of transmitting folklore to a others who are not acquainted with the written word.

These paintings do not depict mythological characters or images of deities, but depict social life. Images of human beings and animals, along with scenes from daily life are created in a loose rhythmic pattern. Painted white on mud walls, they are pretty close to pre-historic cave paintings in execution and usually depict scenes of human figures engaged in activities like hunting, dancing, sowing ,harvesting, going out, drawing water from well, drying clothes or even dancing.

Warli paintings on paper have become very popular and are now sold all over India. Today, small paintings are done on cloth and paper but they look best on the walls or in the form of huge murals that bring out the vast and magical world of the Warlis. For the Warlis, tradition is still adhered to but at the same time new ideas have been allowed to seep in which helps them face new challenges from the market.

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