1.Page |1 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com

2. Page |2International Association of Risk and ComplianceProfessionals (IARCP)1200 G Street NW Suite 800 Washington, DC 20005-6705 USATel: 202-449-9750 www.risk-compliance-association.com Top 120 risk and compliance management related news storiesand world events that (for better or for worse) shaped the weeksagenda, and what is next George Lekatis President of the IARCPDear Member,If you plan to continue to work as a risk and compliance managementexpert, officer or director throughout the rest of your career, it makesperfect sense to become a Life Member of the Association, and continueyour journey without interruption and without renewal worries.You will get a lifetime of benefits as well. You can check the amazingbenefits that include:1. 50% discount for the CRCMP and CISRCP distance learning andonline certification programs2. Two of our web pages dedicated to you(www.risk-compliance-association.com/Your_Name.htm)To learn more:www.risk-compliance-association.com/Lifetime_Membership.htmEnjoy the convenience of making a single payment for your entire tenureas a member, and get all the benefits.Welcome to the Top 120 list._____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 3. Page |3In the States, President Obama signed the Jumpstart Our BusinessStartups (JOBS) Act, a bipartisan bill that encourages startups andsupport small businesses.In the world, we will have interesting changes in risk management andcorporate governance, as the Financial Stability Board finds that theglobal financial crisis highlighted a number of corporate governancefailures and weaknesses in financial institutions, including inappropriateBoard structures and processes, weak risk governance systems, andunduly complex or opaque firm organisational structures and activities.In Europe, we have a very important development. The impact of the newBasel III framework is monitored semi-annually by both the BaselCommittee at a global level and the European Banking Authority (EBA,formerly CEBS) at the European level, using data provided byparticipating banks on a voluntary and confidential basis.Well, in Europe, the aggregate Group 1 and Group 2 shortfall of liquidassets is at approx. 1.2 trillion which represents 3.7% of the approx. 31trillion total assets of the aggregate sample.[Group 1 banks are those with Tier 1 capital in excess of 3 bn andinternationally active. All other banks are categorized as Group 2 banks]A total of 158 banks submitted data for this exercise, consisting of 48Group 1 banks and 110 Group 2 banks.For the banks in the sample, monitoring results show a shortfall of liquidassets of 1.15 trillion (which represents 3.7% of the 31 trillion total assetsof the aggregate sample) as of 30 June 2011, if banks were to make nochanges whatsoever to their liquidity risk profile._____________________________________________________________ International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 4. Page |4 Table of ContentsMonday, April 2, 2012Page 5Monday, April 9, 2012Page 99Monday, April 16, 2012 Page 209Monday, April 23, 2012 Page 377Monday, April 30, 2012 Page 471Monday, May 7, 2012Page 636Monday, May 14, 2012 Page 789Monday, May 21, 2012 Page 903Monday, May 28, 2012 Page 1069Monday, June 4, 2012 Page 1182Monday, June 11, 2012Page 1302Monday, June 18, 2012Page 1416Monday, June 25, 2012Page 1747 _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 5. Page |1 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 2, 2012 - Top 10 risk and compliancemanagement related news stories and world events that (forbetter or for worse) shaped the weeks agenda, and what is next George Lekatis President of the IARCPDear Members,I want to thank you very much. We have received some emails with sopolite words! I am really moved.We have also received some suggestions, how to make this weeklynewsletter better. Some of you asked for page numbers (how in the worldcould we forget it?) and a table of contents (how in the world could weforget it too?). Fixed!This week we have made this newsletterbetter, because of yourrecommendations.Thank you very much.Have you downloaded the 120Developments in Risk Management andCompliance (in January, February,March 2012 - 691 pages)?It is a great reference e-book. Downloadit now:http://www.risk-compliance-association.com/120_Developments_Risk_Management_Compliance_January_to_March_2012.html _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 6. Page |2Welcome to the Top 10 list.Number 1 (Page 4)Surprise, surprise The Cayman Islands MonetaryAuthority (CIMA) and the United States Securitiesand Exchange Commission (SEC) have entered intoa memorandum of understanding (MOU)Number 2 (Page 7)Very interesting speeches by Mario Draghi, President ofthe European Central Bank, Charles I Plosser, Presidentand Chief Executive Officer of the Federal Reserve Bankof Philadelphia and Christian Noyer, Governor of theBank of France and Chairman of the Board of Directorsof the BISNumber 3 (Page 35)More Solvency II and Occupational Retirement Provisionheadaches we will understand better where we are, in theinterview with Gabriel Bernardino, Chairman of EIOPAconducted by Anke Dembowski, Institutional Money(Germany)Number 4 (Page 45)We have such interesting risks like bribery and corruptionrisk (is the risk of the firm or anyone acting on the firmsbehalf, engaging in bribery and corruption).FSA review into anti-bribery and corruption systems and controls ininvestment banks and proposed new guidance for all firmsNumber 5 (Page 51)Financial risk management - Opening remarks by Ewart SWilliams, Governor of the Central Bank of Trinidad andTobago, at the Caribbean Centre for Money and FinanceConference, Port-of-Spain._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 7. Page |3Number 6 (Page 58)The Dodd-Frank Act requires the CFPB to shareconsumer complaint information with the Federal Trade Commission(FTC) and other state and federal agencies. Consumer response nowsharing complaints with FTC Consumer Sentinel.Number 7 (Page 60)What about short selling in Europe? You mustread Regulation (EU) No 236/2012 of theEuropean Parliament and of the Council on shortselling and certain aspects of credit default swapsNumber 8 (Page 74)Atomic clocks are the most accuratefrequency standard and timing devices inthe world. Their range of uses includebeing the international standard fortimekeeping, managing broadcasts andsatellite positioning, navigation andtiming (PNT).DARPA Chip-Scale Atomic Clocks Aboard InternationalSpace StationNumber 9 (Page 77)Unlike in banking, there is no common global capitalstandard for insurance companies.Address by Mr Lee Boon Ngiap, Assistant Managing Director, MonetaryAuthority of SingaporeNumber 10 (Page 85)Oil and Gas it is quite a challenge toregulate the sector. Remarks by the USPresident on Oil and Gas Subsidies_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 8. Page |4NUMBER 1The Cayman Islands Monetary Authority (CIMA) and theUnited States Securities and Exchange Commission (SEC) haveentered into a memorandum of understanding (MOU)The agreement concerns consultation, cooperation and informationexchange related to the supervision and oversight of regulated entitiesthat operate on a cross-border basis in the USA and the Cayman Islands.The MOU supplements the International Organisation of SecuritiesCommissions (IOSCO) multilateral MOU on cooperation in securitiesregulation, to which both the SEC and CIMA are signatories and whichfocuses more on cooperation on enforcement matters between the parties.The Cayman Islands Premier and Minister responsible for Finance, theHon. McKeeva Bush, OBE, JP, congratulated CIMA on the agreement.He commented:Through this MOU, CIMA has demonstrated its commitment tocontinuing to work with the SEC to fulfill their respective regulatorymandates._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 9. Page |5It shows, too, the commitment of the Cayman Islands to providing thehighest quality domicile for financial services.The signing of this MOU adds to the growing list of internationalregulatory and supervisory bodies with which the Cayman Islands hasentered agreements and is a key endorsement of our financial servicesregime.We are convinced that this is not only good for ensuring stability andintegrity of the global financial system, but is good for business for thisjurisdiction.Mrs. Scotland explained that the process of negotiating the latestagreement was enhanced by the solid ties that the two authorities haveestablished over time:CIMA and the SEC have had a strong working relationship for manyyears. This has enabled us to collaborate on several levels.For example, we have been able to obtain information from, and provideinformation to, the SEC that has been valuable in both regulators routinesupervisory activities as well as, on occasion, in criminal investigationsthat have resulted in convictions.We have conducted joint on-site inspections of Cayman-regulated fundsand securities entities, and have worked together to provide training forCayman and regional regulators. The CIMA-SEC MOU is the 23rd cooperation and information exchangeagreement that CIMA has effected with overseas regulatory authoritiessince 1998.CIMAs Chairman, Mr. George McCarthy, OBE, JP, said: the MonetaryAuthority is committed to collaboration and cooperation with financialservices authorities in all the jurisdictions with which Cayman-regulatedentities do business.In addition to the agreements that CIMA already has in place, we actively_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 10. Page |6seek to formalise cooperation with other regulators. This MOU with theSEC is particularly important as Cayman is a major domicile for hedgefunds and securities in which US institutions and persons of high networth invest. It will enable more effective supervision on both sides.The MOU details the scope of consultation, cooperation and informationexchange between CIMA and the SEC; the procedures for carrying outon-site inspections and for the execution of requests for assistance; thepermissible uses of information provided; the confidentiality ofinformation, and the process for onward sharing of information in certaincircumstances._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 11. Page |7NUMBER 2Mario Draghi:Remarks at the Annual Reception of theAssociation of German BanksSpeech by Mr Mario Draghi, President of theEuropean Central Bank, at the AnnualReception of the Association of German Banks,Berlin, 26 March 2012Ladies and Gentlemen,I would like to take this opportunity to provide you with my assessment ofthe current situation in the euro area and shed light on recent signs ofimprovements in the overall outlook.I would particularly like to draw your attention to the effectiveness of thepolicy measures implemented by the Eurosystem, the EU institutionsand national authorities.And to remind you of the measures that we all must continue to pursueover the coming months and years with great diligence in order tocontinue on this path of stabilisation.The current economic situationAs this audience knows very well, in November last year, the prospects forthe euro area financial sector were very bleak.Banks were experiencing a period of heightened stress.The inter-bank market was closed except to the strongest institutions inthe safest countries, and funding markets were impaired.Unable to raise funds beyond short maturities, many banks were reducingmedium term lending to the real economy._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 12. Page |8At the same time came the requirement to increase capital ratios to 9%.This increased the risks of substantial deleveraging, including the risk ofbanks cutting back on loans, notably those to small and medium-sizedenterprises.We could see the intensity of the deleveraging pressures in bank lendingsurveys and other data.In the fourth quarter of 2011, there was a significant tightening of creditstandards on loans to both companies and households.There was no doubt that the euro area was on the brink of a major creditcrunch, with potentially adverse consequences for the economy andemployment.At that time, many observers had little confidence in the capacity of theeuro area to reverse the situation.Yet today, only four months on, the picture looks different.There are signs of stabilisation in both financial markets and overalleconomic activity albeit still at low levels.Conditions in bank funding markets have improved.For example, euro area banks have already issued about 70 billion euro insenior unsecured debt so far this year, which is well above the amountthey issued in the whole second half of 2011.Banks are meeting their new capital requirements. The capital planssubmitted to the European Banking Authority (EBA) indicate anintention to exceed the benchmarks by more than 20%.EBA has also confirmed that there will be no stress test this year.Bank lending is also stabilising. Banks are starting to assess theirfinancial situation more positively and in many cases their willingness tomake loans is increasing. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 13. Page |9How has the picture changed so clearly in only four months? There aretwo parts to the answer.First, the doomsday predictions were always exaggerated. Not becausethe situation last November was not very serious.But because the willingness of euro area authorities to take the measuresnecessary to restore stability was greater than many commentatorsrealised.Second, euro area authorities have proved their commitment tosafeguarding financial stability through a number of important policymeasures.The Eurosystem, the EU institutions and national authorities have allplayed a role in constructing a comprehensive and coherent response tothe economic, financial and fiscal challenges that we face.Let me now explain the key elements of this response in more detail.The policy response of the EurosystemThe primary explanation for the improvement in sentiment over the lastfew months has been the measures taken by the Eurosystem that is, weat the European Central Bank (ECB) and our colleagues at the nationalcentral banks of the 17 countries that share the euro.As you know, since December last year the Eurosystem has launched twolong-term refinancing operations LTROs with a maturity of threeyears.While the total liquidity requested by banks in these operations amountedto around 1 trillion euro, the net liquidity injection by the Eurosystem hasbeen around half a trillion euro because the other half has been shiftedover from other operations.Let me be clear about why we implemented the three-year LTROs. It wasnot to support sovereign debt markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 14. P a g e | 10It was also not to bolster bank profits.The LTROs were specifically designed to prevent a credit crunch thatcould compromise the maintenance of price stability in the euro area.With funding markets closed, banks needed liquidity assurance over themedium term to avoid pre-emptive deleveraging and to continue lending.To understand why these operations were necessary requires a euro areawide perspective.It would be misleading to judge the urgency for action or the necessaryresponses based on the situation in any one country or groups ofcountries.The Eurosystem acts in the interests of the euro area as a whole with 330million citizens. This is the perspective that always informs our decisions.Some observers have raised questions about these operations.The questions tend to fall into three categories and since they touch onfundamental issues, I would like to spend a moment responding to them.First, some wonder whether there is really any transmission from theLTROs to the real economy.The argument goes that banks are simply taking cheap liquidity andsetting up carry trades or putting the liquidity back into our depositfacility.The facts show that this is an incomplete view.Over 800 banks participated in the February LTRO, compared witharound 500 in December. This number included 460 banks fromGermany, most of them literally hundreds being smaller banks.I cannot tell you names of the towns and villages in which these banks arelocated because often they are the only bank in town and could be easily _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 15. P a g e | 11identified. But I can tell you this: that the money is now closer to smalland medium-sized enterprises than it was before.We cannot say that this money will necessarily go to these smallerenterprises but it is certainly very close to them.We have this in mind because nearly three quarters of corporateemployment in the euro area is in the small and medium-sized businesssector.The banks I am talking about are ones whose main business is lending tothe Mittelstand and thereby supporting the real economy.It is also not accurate to claim that banks are returning the liquiditystraight back to the Eurosystem.We know that banks using the deposit facility are not identical to thoseborrowing from the Eurosystem.This implies that even though the bulk of the liquidity is returnedeventually, it is being directed within the banking system as intended.The second category of question involves concerns that some haveexpressed that the Eurosystem is exposing itself to excessive risks.Critics point in particular to the differentiated collateral frameworkadopted by some national central banks to allow banks to participate inthe three-year LTROs.Let me underscore that high haircuts are applied to the additional creditclaims so as to ensure risk equivalence between this collateral and theregular framework.Moreover, the main elements of the risk management framework appliedare common: the eligibility criteria and risk control measures wereapproved by the Governing Council, and the Council will monitor theeffectiveness of the risk control framework on an ongoing basis. Hence,there is only limited national discretion. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 16. P a g e | 12I should also emphasise that the Eurosystem has a long experience in theacceptance of credit claims in its collateral framework.Moreover, the Eurosystem is being very careful to manage any risks thatmay ensue from our current operations.We employ a conservative risk management framework.On the additional collateral presented so far, the average haircut is 53%.This means that on a nominal value of 100 euro we provide 47 euro ofliquidity.This shows you how prudently such collateral is accepted.If over time the market value or quality of the collateral posted were todecline, counterparties would have to provide additional collateral orreturn part of the liquidity.This too serves to protect the financial soundness of the Eurosystem as awhole.The third kind of question comes from some observers who worry that theliquidity created by the LTRO will lead to inflation or asset pricedistortions.Here it is important to distinguish between different concepts of liquidity.We would expect an impact on inflation and asset prices only following asustained and strong increase in money and credit not following anincrease in central bank liquidity per se.The tentative signs we are seeing of a stabilisation in money and creditgrowth do not signal increasing inflationary pressures over the mediumterm.For example, growth in monetary aggregates remains at low levels, withM3 increasing by 2.5% in January 2012, well below the average growthrate of M3 in monetary union so far, which was 5.9%. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP)www.risk-compliance-association.com 17. P a g e | 13The same is true of the counterparts of M3 loans to the euro area privatesector increased by only 1.5% in January, compared with an average of6.8% since the start of the euro.Market indicators of inflation expectations overall show no signs ofinflation above our medium-term objective.Investors overall assume a break-even inflation rate in five years of around1.7%.Looking further out at the inflation expectations between five years andten years also shows that, adjusted for the usual risk premia, marketexpectations of long-term inflation are fully consistent with our definitionof medium-term price stability.Moreover, the Eurosystem has a range of tools at its disposal to absorbexcess liquidity if that is deemed necessary in the future.Available tools include increases in reserve requirements and the conductof liquidity absorbing operations including not only short-term but alsolonger-term deposits.Hence, there are tools and the Governing Council can use them asneeded.Moreover, our balance sheet has grown and shrunk in the past withoutcreating inflation for example, this was evident over the course of both2009 and 2010.In other words, we are constantly alert to threats to medium-term pricestability.Euro area citizens can be certain that our objective is delivering pricestability over the medium term and that we have all the necessary toolsto achieve it.The consistent strong anchoring of inflation expectations confirms thatour commitment is credible._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 18. P a g e | 14Let me address one final issue, and this concerns the debate in thiscountry about Target2 balances.It is important that this debate is framed correctly in particular, bydistinguishing between symptoms and causes.Target2 is a payment system that reflects the flow of funds within the euroarea.Imbalances within Target2 are a symptom of real and financialimbalances between euro area countries.Restoring normality within Target2 requires not that we address thesymptom the payment system but that we address the cause: theunderlying imbalances.This is not the task of monetary policy. It is the task of the nationalauthorities and EU institutions that are responsible for fiscal, economicand financial policies.Important progress has been made in recent months to strengthen thecredibility of these policies and this has been recognised by financialmarkets.This is the second explanation for the overall stabilisation we havewitnessed since November and it is something to which I will now turnbriefly.Policy responses at the national and EU levelThe signature at the last European Council of the International Treaty,including the fiscal compact, is an important signal of commitment toreducing deficit and debt levels.Enshrining balanced budget rules in national legislation creates a newfirst line of defence against fiscal imbalances._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 19. P a g e | 15Like the Schuldenbremse in this country, this legislation shifts the onusfor enforcement away from Brussels and onto national institutions.Prevention is better than cure and that is the spirit of the compact.Member States have also taken important steps to strengthen euro areaand global firewalls.The entry into force of the European Stability Mechanism has beenadvanced and the paying-in of capital will be accelerated to reach fulllending capacity sooner than originally planned.On top of this, euro area countries have committed to providing anadditional 150 billion euro to the IMF.Seen together, these measures represent a coherent strategy to strengtheneuro area economic governance.The focus is not, as some commentators claim, skewed towards fiscalconsolidation.Stronger fiscal rules are one albeit essential element in a largerpackage that addresses real and financial imbalances and provides asafety net for countries in financial difficulties.But stronger governance cannot be effective without individual MemberStates also fulfilling their responsibilities.Here too we have witnessed a number of positive developments in recentmonths.The new governments in Spain and Italy have shown determination toaddress their twin challenges of fiscal and macroeconomic imbalances.The government of Spain remains committed to bringing its deficit below3% by 2013 and taking the necessary measures to ensure a rapid andsecure transition to this target from the high deficit in 2011._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 20. P a g e | 16The latest review missions confirm that the Irish and Portugueseprogrammes are on track with authorities in both countries stronglycommitted to meeting their targets and with a solid track record.It is important that observers recognise that these reforms at the nationallevel will take time.They are addressing deep-rooted obstacles to competitiveness andgrowth, and the positive effects may not be visible immediately.But once realised, they will put employment and growth on a new andmore sustainable track.The example of Germany shows the need for patience. The structuralreforms passed many years ago did not immediately feed through intohigher growth and employment.But now they have, and Germany is reaping the benefits and leading theway in Europe.With a new governance framework in place and strong commitmentsfrom national governments, there are solid grounds for trusting thatreforms will be implemented across the euro area as a whole.ConclusionLet me conclude. The turnaround we have witnessed since November isthe result of every institution of the euro area fulfilling its responsibilities.No single institution can carry the burden of addressing a set ofchallenges that are simultaneously economic, financial and fiscal.Everyone has played their part.But let me emphasise that the current stabilisation should not make uspause in our responses to these challenges.Indeed, this is a time for continued action._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 21. P a g e | 17The present situation provides a window of opportunity for governmentsto accelerate efforts to consolidate budgets, to boost employment and toenhance competitiveness and to do so with confidence.It also creates a benign environment for banks to strengthen theirresilience further including by retaining earnings and cutting dividendsand bonuses.Decisive policy measures brought about the stabilisation since lastNovember.Now, further decisive policy measures are required to strengthen fiscalpositions and competitiveness.These measures will lay the foundations for future sustainable andbalanced growth in the euro area.Thank you._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 22. P a g e | 18Charles I Plosser: Restoringcentral banks after the crisisSpeech by Mr Charles I Plosser,President and Chief Executive Officerof the Federal Reserve Bank ofPhiladelphia, at the conference of theGlobal Interdependence Center /Bank of France, Paris, 26 March 2012.***The views expressed today are myown and not necessarily those of theFederal Reserve System or theFOMC.IntroductionI am delighted to be here today in this beautiful city and to have the honorto serve on such a distinguished panel with friends and colleagues.David Kotok has been the guiding force behind the GIC conferences overthe past several years. He and his team at the GIC never fail to gather aninteresting and knowledgeable group of people to discuss importanttopics on truly global issues. So, I want to thank him and the GIC for theirefforts and contributions. I also want to thank our hosts, Christian Noyerand the Banque de France.I am going to take a little different tack on the subject matter of thisgathering.Rather than focus on what new orthodoxy we should take away from thefinancial crisis, I want to argue that we need to restore some of the oldorthodoxy.David did suggest that he wanted to have a conversation on importantissues, so I intend to be somewhat provocative in an effort to stimulatesuch conversation. _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 23. P a g e | 19As usual, I want to stress that my views are my own and not necessarilythose of my colleagues in the Federal Reserve System.I will focus my remarks on two related topics that have emerged as aconsequence of the crisis.The first is the relation between monetary policy and fiscal policy.The second topic involves the role of a central banks balance sheet as apolicy tool.These are issues that I believe are of fundamental importance to the roleof central banks in our economies.The relationship between monetary and fiscal policiesLet me begin by sharing some thoughts on the appropriate relationshipbetween monetary and fiscal policies.In the wake of the financial crisis and the ensuing recession, manycountries around the world responded with a significant increase ingovernment spending.Some of this increase came about through what economists callautomatic stabilizers.But there has also been a dramatic expansion in budget deficitsattributable to deliberate efforts to apply fiscal stimulus to improveeconomic outcomes.This expansion in government spending has been very significant in theU.S., but it has also occurred in other countries.So what does this have to do with monetary policy?Well, it turns out, a great deal._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 24. P a g e | 20It is widely understood that governments can finance expendituresthrough taxation, debt that is, future taxes or printing money.In this sense, monetary policy and fiscal policy are intertwined throughthe government budget constraint.For good reasons, though, societies have converged toward arrangementsthat provide a fair degree of separation between the functions of centralbanks and those of their fiscal authorities.For example, in a world of fiat currency, central banks are generallyassigned the responsibility for establishing and maintaining the value orpurchasing power of the nations unit of account.Yet, that task can be undermined, or completely subverted, if fiscalauthorities set their budgets in a manner that ultimately requires thecentral bank to finance government expenditures with significantamounts of seigniorage in lieu of current or future tax revenue.The ability of a central bank to maintain price stability can also beundermined when the central bank itself ventures into the realm of fiscalpolicy.History teaches us that unless governments are constrainedinstitutionally or constitutionally, they often resort to the printing press totry to escape what appear to be intractable budget problems.And the budget problems faced by many governments today are, indeed,challenging.But history also teaches us that resorting to the printing press in lieu ofmaking tough fiscal choices is a recipe for creating substantial inflationand, in some cases, hyperinflation.Awareness of these long-term consequences of excessive money creationis the reason that over the past 60 years, country after country has movedto establish and maintain independent central banks that is, central_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 25. P a g e | 21banks that have the ability to make monetary policy decisions free fromshort-run political interference.Without the protections afforded by independence, the temptation ofgovernments to exploit the printing press to avoid fiscal discipline is oftenjust too great.Thus, it is simply good governance and wise economic policy to maintaina healthy separation between those responsible for tax and spendingpolicy and those responsible for money creation.It is equally important for central banks that have been grantedindependence to be constrained from using their own authority to engagein activities that more appropriately belong to the fiscal authorities or theprivate sector.In other words, with independence comes responsibility andaccountability.Central banks that breach their boundaries risk their legitimacy,credibility, and ultimately, their independence.Given the benefits of central bank independence, that could prove costlyto society in the long run.There are a number of approaches to placing limits on independentcentral banks so that the boundaries between monetary policy and fiscalpolicy remain clear.First, the central bank can be given a narrow mandate, such as pricestability. In fact, this has been a prominent trend during the last 25 years.Many major central banks now have price stability as their sole or primarymandate.Second, the central bank can be restricted as to the type of assets it canhold on its balance sheet._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 26. P a g e | 22This limits its ability to engage in credit policies or resource allocationsthat rightfully belong under the purview of the fiscal authorities or theprivate marketplace.And third, the central bank can conduct monetary policy in a systematicor rule-like manner, which limits the scope of discretionary actions thatmight cross the boundaries between monetary and fiscal policies.Milton Friedmans famous k-percent money growth rule is one example,as are Taylor-type rules for the setting of the interest rate instrument.Unfortunately, over the past few years, the combination of a financialcrisis and sustained fiscal imbalances has led to a breakdown in theinstitutional framework and the previously accepted barriers betweenmonetary and fiscal policies.The pressure has come from both sides. Governments are pushing centralbanks to exceed their monetary boundaries, and central banks arestepping into areas not previously viewed as appropriate for anindependent central bank.Let me offer a couple of examples to illustrate these pressures.First, despite the well-known benefits of price stability, there are calls inmany countries to abandon this commitment and create higher inflationto devalue outstanding nominal government and private debt.That is, some suggest that we should attempt to use inflation to solve thedebt overhang problem.Such policies are intended to redistribute losses on nominal debt from theborrowers to the lenders.Using inflation as a backdoor to such fiscal choices is bad policy, in myview.Pressure on central banks is also showing up through other channels. Insome circles, it has become fashionable to invoke lender-of-last-resort_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 27. P a g e | 23arguments as a rationale for central banks to lend to insolventorganizations, either failing businesses or, in some cases, failinggovernments.Such arguments go beyond the well-accepted principles established byWalter Bagehot, who wrote in his 1873 classic Lombard Street that centralbankers could limit systemic risk in a banking crisis by lending freely ata penalty rate against good collateral.Central bankers have abandoned this basic Bagehot principle in the lastfew years but have not replaced it with a clear alternative.Indeed, actions were often confusing and unpredictable and lacked acoherent framework.I believe that central banks need to think hard about how and when theyexercise this important role.We need to have a well-articulated and systematic approach to suchactions.Otherwise, our actions will exacerbate moral hazard and encourageexcessive risk-taking, thus sowing the seeds for the next crisis.Unfortunately, neither financial reform nor central banks have adequatelyaddressed this dilemma.Breaching the boundaries is not confined to the fiscal authorities askingcentral banks to do their heavy lifting.The Fed and other central banks have undertaken other actions that haveblurred the distinction between monetary policy and fiscal policy, such asadopting credit policies that favor some industries or asset classes relativeto others.Such steps were taken with the sincere belief that they were absolutelynecessary to address the challenges posed by the financial crisis._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 28. P a g e | 24The clearest examples can be seen when the Federal Reserve establishedcredit facilities to support markets for commercial paper andasset-backed securities.Most notable has been the effort by the Fed to support the housingmarket through its purchases of mortgage backed securities.These credit allocations have not only breached the traditionalboundaries between fiscal and monetary policy, they have generatedpointed public criticisms of the Fed.Once a central bank ventures into fiscal policy, it is likely to find itselfunder increasing pressure from the private sector, financial markets, orthe government to use its balance sheet to substitute for other fiscaldecisions.Such actions by a central bank can create their own form of moral hazard,as markets and governments come to see central banks as instruments offiscal policy, thus undermining incentives for fiscal discipline.This pressure can threaten the central banks independence inconducting monetary policy and thereby undermine monetary policyseffectiveness in achieving its mandate.In my view, this blurring of the boundaries between monetary and fiscalpolicies is fraught with risks.As I said, these boundaries arose for good reason, and we ignore theirbreach at our peril. I believe we must seek ways to restore the boundaries.The central banks balance-sheet policyAnother related issue facing central banks arises from the degree to whichcentral banks have expanded their balance sheets.There are two dimensions to this issue._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 29. P a g e | 25One is the composition of the balance sheet.In the U.S., for example, the balance sheet of the Federal Reserve haschanged from one made up almost entirely of short-term U.S. Treasurysecurities to one that is mostly long-term Treasuries, plus significantquantities of long-term mortgage-backed securities.This concentration of housing-related securities is problematic because itis a form of credit allocation and thus violates the monetary/fiscal policyboundaries I just mentioned.The second aspect is the overall size of the balance sheet.Many central banks expanded their balance sheets in an effort to easemonetary policy after their usual policy instrument an interest rate hadreached the zero lower bound.Do central bankers anticipate that their balance sheets will shrink to morenormal levels as they move away from the zero lower bound?Is it desirable to do so? Or should monetary policy now be seen as havinganother tool, even in normal times?Some have suggested that central banks adopt a regime in which themonetary policy rate is the interest rate on reserves rather than a marketinterest rate, such as the federal funds rate.This would then permit the central bank to manage its balance sheetseparately from its monetary instrument, freeing it to respond to liquiditydemands of the financial system without altering the stance of monetarypolicy.In principle, this would take pressure off central banks to shrink theirbalance sheets from the current high levels and simply rely on raising theinterest rate on reserves to tighten monetary policy._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 30. P a g e | 26The alternative is to return to a more traditional operating regime inwhich the central bank sets a target for a market interest rate, such as thefederal funds rate in the U.S., above the interest rate on reserves.Implementing this regime would require a smaller balance sheet.I am very skeptical of an operating regime that gives central banks a newtool without boundaries or constraints.Without an understanding, or even a theory, as to how the balance sheetshould or can be manipulated, we open the door to giving vast newdiscretionary abilities to our central banks.This violates the principle of drawing clear boundaries between monetarypolicy and fiscal policy.When markets or governments come to believe that a central bank canfreely expand its balance sheet without directly impacting the stance ofmonetary policy, I believe that various political and private interests willcome forward with a long list of good causes, or rescues, for which suchfunds could or should be used.Economic theory and practice teach us that monetary policy works bestwhen it is clear about its objectives and systematic in its approach toachieving those objectives.Granting vast amounts of discretion to our central banks in theexpectation that they can cure our economic ills or substitute for our lackof fiscal discipline is a dangerous road to follow.In June, the Federal Reserves Open Market Committee outlined someprinciples that would guide its exit from this period of extraordinarymonetary accommodation.In my view, those principles represented an important first step in theFOMCs attempt to restore the boundaries between monetary and fiscalpolicies._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 31. P a g e | 27In particular, the FOMC clearly stated its desire to return to an operatingenvironment in which the federal funds rate is the primary instrument ofmonetary policy.To achieve that objective, the Fed will have to shrink its balance sheet to amore normal level.I interpret this as saying that our balance sheet should not be viewed as anew independent instrument of monetary policy in normal times.The exit principles also indicated the Committees desire to return theFeds balance sheet to an all-Treasuries portfolio.This re-establishes the idea that the Fed should not use its balance sheetto actively engage in credit allocations.In other speeches, I have outlined a framework that I have termed a newaccord between the Federal Reserve and the Treasury.It would enable the central bank to act in emergencies when requested bythe Treasury or the fiscal authorities, but it would be clear up front thatany non-Treasury assets that accrued on the central banks balance sheetwould be swapped for government securities within a specified period oftime.This would ensure that fiscal policy decisions remain under the purviewof the fiscal authorities, not the central bank.SummaryTo summarize, it is important for governments to maintain independentcentral banks so that they are better able to achieve their mandates.It is also sound policy to limit the discretionary ability of central banks toengage in policies that fundamentally belong to fiscal authorities orprivate markets._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 32. P a g e | 28Establishing and maintaining clear boundaries between monetary andfiscal policies protects the independence of the central bank and its abilityto carry out its core mandate maintaining price stability.Clear boundaries and resisting the use of the balance sheet as a newpolicy tool would also improve fiscal discipline by making it moredifficult for the fiscal authorities to resort to the printing press as asolution to unsustainable budget policies._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 33. P a g e | 29Christian Noyer: Re-examiningcentral bank orthodoxy forun-orthodox timesSpeech by Mr Christian Noyer, Governorof the Bank of France and Chairman ofthe Board of Directors of the Bank for International Settlements, at theconference of the Global Interdependence Center/Bank of France, Paris,26 March 2012.The unconventional policies implemented during the crisis havetransformed the face of central banking.But will these changes prove permanent and will the unconventionalbecome the new normal?There is not yet definitive answer to this question.We may not, as easily as we would like, be able to revert exactly to thestatus quo ante.However, I strongly believe we must make sure that the gains from thepre-crisis period, in terms of monetary and price stability, are notcompromised in the process.Prior to the crisis, a description of central banks would have centred onfour characteristics:- They were focused with price stability being their primary or keyobjective, and no responsibility was sought or given for financialstability;- They were of limited size with very small balance sheets and interestrates as their only policy instrument;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 34. P a g e | 30- They were independent, a condition recognised as necessary toanchor inflation expectations, and embodied in very stronginstitutional frameworks;- And they were successful: the Great moderation, a period ofexceptional low volatility in output and inflation, was widely seen as aproduct of efficient and wise monetary policies.There was a happy feeling that, at last, a perennial monetary regime hadbeen found, well-tailored to the characteristics of a modern marketeconomy.Financial markets were efficient and the zero lower bound and liquiditytrap appeared to be no more than historical curiosities.With hindsight, of course, we can see now that this ideal economy maynever have existed.The Great Moderation was as much a product of good luck (brought bydisinflationary effects of globalisation) than good policy.Monetary stability is a necessary but not a sufficient condition of financialstability, because capital markets are not always and necessarily efficient.And downward financial spirals may quickly bring our economies to thepoint where interest rates can no longer be used as effective tools.Therefore, as the crisis unfolded, central banks responded by takingunprecedented measures and, in the process, underwent three majorchangesA diversification of their interventions.In order to both:- Unclog financial markets (both private and public). This involvedexceptional liquidity provision to banks as well as temporarypurchases of assets, both private and public._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 35. P a g e | 31- Circumvent the zero lower bound and bring down real long-terminterest rates through purchases of government bonds, and/ orinterest rate guidance.As a consequence, central banks balance sheets expanded by a factor ofthree, dramatically increasing their role in financial intermediation andsometimes raising concerns, at least in some quarters, about the possibleinflationary impactTogether, this diversification and the increase in size have created morecomplex interactions with fiscal policies.Specifically, asset purchases are sometimes seen as quasi fiscal policiesboth on the asset side (due to the potential risks attached) and the liabilityside (when they contribute significantly to meeting the funding needs ofthe sovereigns).At the time they were decided, those exceptional interventions wereabsolutely necessary.Although it had been forgotten, central banks were initially created toprotect the economy from excessive financial disturbances.This was, historically, their raison dtre.As ultimate and unique providers of liquidity, they cannot escape thisresponsibility and let the financial system and the economy collapse.At the same time, by doing so, central banks have exposed themselves toa number of risksFirst, there are risks linked to balance sheet expansion. They cannot beignored, although all central banks have been extremely careful in valuingthe assets purchased or taken as collateral.Second, they run the risk of blurring the lines between fiscal andmonetary responsibilities. A dynamic use of their balance sheets by_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 36. P a g e | 32central banks has effects on the allocation and distribution of resources inthe economy.They may favour or penalise some types of collateral or certain borrowers.If central banks take on additional responsibilities in the area of financialstability, they will have to do so in close cooperation with fiscalauthorities, thus exposing themselves to possible interferences withmonetary policy.The major risk, however, is the risk of confusion. A multiplicity ofinterventions could be interpreted as a relative dilution of objectives.There is a tendency by market participants and some policymakers toconsider central banks to be universal problem solvers whose balancesheets can be used, without cost, for all purposes.There is also a doubt, at least an ambiguity, in the minds of someanalysts, about the true purpose of government bond purchases.Central banks activism may create doubts as to their ability to stick totheir core mandate price stability in the face of increasing pressuresand constraints.Overall, the euro area is well protected against all of these risks thanks tothe robustness of its institutional frameworkPrice stability is unambiguously the priority objective of monetary policyMonetary financing of governments is strictly prohibitedThe Eurosystem (the ECB and National Central Banks) is extremely wellcapitalised, which protects its independence.This has allowed the Eurosystem to implement nonstandard measures ona large scale without endangering its credibility._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 37. P a g e | 33Of course, we do not control fiscal policy. We will never accept a situationwhere fiscalimbalances could constrain monetary policy.It is very important, therefore, that credible fiscal consolidation takesplace across the euro area.This will make it easier for the Eurosystem to be active in protectingfinancial stability.On the contrary, doubts over governments resolve to ensure thesustainability of public finances would make us powerless to fightinstability and expose the euro area to great dangers.Now for the more normative aspects. We may have to live withnonstandard measures for a long time.Indeed, some central banks have adopted interest rate guidanceannouncements covering the next two years.It is likely that monetary policy will, for some time, make use of a diversityof instruments.Macro-prudential measures will interact with monetary policies in acomplex way.In that context, it is therefore all the more important to keep clarity ofpurpose and stick to two crucial features inherited from the pre-crisisconsensus: the focus on price stability and, its corollary, central bankindependence.There should be no ambiguity about what central banks are trying toachieve.The more non-conventional their actions, the less obscurity there shouldbe as to their ultimate purpose._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 38. P a g e | 34Non-conventional measures, like any others, can only achieve theirobjectives if inflation expectations are solidly and clearly anchored.From that point of view, calls by some economists and marketparticipants for a temporary relaxation of price stability objectives are, inmy view, totally misguided.I find it significant, on the contrary, that two major central banks haverecently decided to quantify their price stability objectives and enhancetheir communication accordingly._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 39. P a g e | 35NUMBER 3March 29Interview with Gabriel Bernardino,Chairman of EIOPAconducted by Anke Dembowski,Institutional Money (Germany)1. Insurance companies vs.Occupational Retirement Provision(IORPs)EIOPA has submitted its advice for theOccupational RetirementProvision (IORP)directive on 15th ofFebruary 2012.What is EIOPAs standpoint in thisadvice?The intention is not to have a copy - pasteexercise between Solvency II and thepensions directive.The intention is to find out the elements that in terms of risk are similarbetween those two.If risks are similar, you should treat them in a consistent way.And if risks are different, you should treat them in a different way. Thatswhat we advocate in this advice.Which are the main differences between pensions and the insurancesystem?One of the differences is the type of involvement the sponsor company,i.e. the employer has in the pension fund._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 40. P a g e | 36If there is a need for more capital within an insurance company, theshareholders are often subject to a limited liability regime.This is different in the pension fund area.Here, you dont have a transfer of the risk to the pension fund.The fund is only a vehicle to finance the responsibilities of the employer.Consequently, if there is a need for capital, the employer may be requiredby social and labour law to put the money in.You want to introduce a holistic balance sheet. How does that look like?At the regulation level, we need to take these differences into account.Thats why we are trying to develop the concept of a holistic balancesheet, where we integrate not only the market value of the assets, but alsothe economic value of the liabilities.In addition, we are integrating other elements that take account of thespecificities of the pension area.And there are different elements in each country.For example, the Dutch system, where you have the possibility to cutback the pension benefits retroactively.Or take the systems where you can reduce the indexations of the pensionsfor the future, et cetera.These specifications have an effect on the value of the liabilities, and youneed to take it into account for the holistic balance sheet.And which similarities do you see between pensions and insurancecompanies?For example, all the elements about governance, risk management andtransparency._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 41. P a g e | 37We firmly believe that the sound principles of Solvency II can also beapplied in a context of pension funds - provided of course, that you takeinto account the necessary proportionality.We are aware that there are many pension schemes that are quite smalland that we cannot fully apply in a mechanistic way all the goodprinciples of governance, risk management and control to them.What is the timeframe for the Solvency II and the pension directive?Solvency II has already been discussed for many years and we are now inthe last phases of implementing measures.We intend to have the Solvency II framework implemented in 2014.On the IORP side, the process is still at an early stage.As you have mentioned in the beginning, the European Commission hasasked us a long list of questions in a call for advice and we have answeredthem, on 15th of February.We believe that several tests need to be made, especially on thecalculation of the technical provisions and of the solvency requirements.So we want to run the first quantitative impact study (QIS) on the pensionside soon.Will those QISstudies be similar to the ones that you have done on theinsurance side?Again, there are some elements that are common, but some differentelements will be coming from the holistic balance sheet approach.And also the process in itself is going to be different.In the insurance QIS we tried to capture most of the insurance market inEurope._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 42. P a g e | 38But it is not the case for pensions, because the pensions market is sodiverse across the 27 EU member countries.Therefore, we are going to conduct the first QIS study only in those sevencountries where defined benefit plans are more relevant: Germany, UK,Ireland, the Netherlands, Portugal, Sweden, and Belgium.We are working on the common technical specifications to be applied inthe test and will discuss the timeline with the European Commission.The Commission intends to have a first schedule for proposal on therevised IORP Directive by the end of this year.And what qualitative measures are necessary for pension funds?Also pension funds need to have a liquidity assessment and amanagement of their liquidity needs.This is part of the qualitative pillar II requirements.But making an analysis of ones liquidity needs is part of common goodmanagement rules anyway.Of course, a pension fund needs to know the pensions it has to pay in theyears to come and what its revenues from the assets will be.Only then the fund can try to match those two and try to avoid surprises.2. Investment issues for insurance companiesInsurance companies have been refinancing banks in the past, and wecannot see banks isolated from insurance companies. Basel III regulationis now forcing banks to hold higher equity ratios. Will insurancecompanies under Solvency II be able to refinance banks as they used to inthe past?Well, it is not the purpose of insurance companies to finance banks._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 43. P a g e | 39The purpose of insurance companies is to have good products for theircustomers and to provide long term security for their customers.Solvency II will not force insurance companies to only buy one type ofassets.But it is clear: The more stability you have in the banking sector, thebetter it will be from the risk perspective to invest into banks.It is normal that when banks are in a stress situation, or when there aredoubts about their capital capacity, investors - not only insurancecompanies - refrain from investing long term into banks.With the elements that have been introduced about recapitalizing thebanking sector, I believe that in the future, insurers will come back tofinance banks.So EIOPAs intention is not to disconnect the insurance and the bankingsector in order to reduce cyclical ties?No, with Solvency II or any kind of regulatory regime we are not trying tointervene in that sense.But what we want to do is to introduce a risk based system.We say that the more risk an insurance company has, the bettercapitalized it must be.We do not say dont invest into risky assets or only invest into sovereignbonds - that is not up to the supervisors.We only say that the capital has to commensurate with the risk.An insurance company can have a bigger risk appetite, but then on theother side, it needs to provide more capital.That is a fundamental element in the whole financial system._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 44. P a g e | 40Will Solvency II have an effect on the products that insurance companieswill offer?I believe that with Solvency II consumers will continue to have choicebetween different products, with different types of guarantees andliquidity characteristics.If an insurance company creates liabilities which attract more risk - forexample if it wants to offer products with a guaranteed interest rate for 20,30 or 40 years, it can do that, because consumers value those products.But the risk involved needs to be priced correctly.We must not bring risk into the system without pricing it well. I think thatthis is the lesson we clearly learned from the financial crisis.What exactly was the lesson the insurance sector learned from thefinancial crisis?In the banking sector we have seen that there was poor underwriting onthe subprime business, where risks were brought into the system withoutbeing priced correctly.We have also seen that if you bring risk into the system, it will neverdisappear, no matter how much packaging and re-selling you do with it.The risk remains there and you need to manage it.If it is not well priced, someone will pay in the end, either the companies,the consumers or the taxpayer.Does the regulation intend to reduce the risk to a minimum?No!When the financial system is risk averse, the economy will not work._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 45. P a g e | 41Look what the insurers are doing for us as individuals: We transfer ourrisks to them.Insurers by definition cannot be risk averse, because dealing with riskand managing is their core business.As regulators, our duty for the society is to have a good balance betweensecurity and growth.If you want to have a system with 100 Percent security, it will beunaffordable.So I am not advocating that we have capital requirements that arebulletproof.In Solvency II, we are building a system based on a with a 99.5 percentconfidence level.But in an extreme situation, an insurance company can become insolvent.What we want to assure is that insurers will have excellent riskmanagement systems that will help them to manage prudently their risks.Looking at the low interest environment: Do you think that life insurancecompanies will need to change their business models, for example toavoid the long guarantees that stretch over the lifetime of a man?Yes, we will probably see some changes in the products.But it is not because we are applying Solvency II, that long lastingguarantees are problematic - the products exist already.What Solvency II brings, is more market consistent pricing of risk, so thatwe can see clearer where the difficulties could lie when going forward.Some of the risks of long lasting guarantees need to be better assessed,and probably some of these products will cost a bit more in the future._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 46. P a g e | 42What happens if an insurance company falls below the solvency capitalrequirement?Then the supervisor and the insurance company will need to maintain aclose dialogue, and together they analyze the reasons behind it.The company will have to present a plan how it intends to recover itscapital or reduce its risk.So this approach is anti-cyclical.The company does not immediately need to reinforce capital, as thiswould have a procyclical effect on the market.However, if things continue to go wrong and the capital falls below theminimum capital requirement, the supervisor has the duty to close thebusiness and in drastic situations even to close the company, becausethen the policy holders rights are at stake.The system is designed in a way that it is not a safe heaven, its not a zerofailure system, but it has different levels of protection.How does transparency help investors?From the investors perspective, Solvency II is a system that gives farbetter information to decide on an investment.That is the biggest added value a regulatory regime can have.The worst thing would be to give an incentive to hide the risk.In the current system, the solvency figures in the insurance sector arecompletely stable, as they are not based on the market value of the assets.But we all know that markets are volatile, so investors feel that somethingis wrong. Under Solvency II, the solvency capital requirements will bemore volatile._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 47. P a g e | 43You can have a situation where in one quarter you have 160 percent ofyour capital requirements, and in the next quarter only 120 percent.Is more transparency always better?Under the Solvency II regime, insurance companies will be disclosingmore information, and the information given will be much more linked tothe reality of the risks and the markets.At first sight, it will seem that figures are more volatile, but this is due tothe higher transparency we will have, not because the insurance companyhas intrinsically a more volatile business.We as supervisors know this, and we hope that analysts and investors willunderstand this as well and will not penalize insurance companies byhigher cost of capital.Under the current Solvency IIregime, government bonds from OECDcountries do not have any capital requirements at all.This seems a bit odd, considering the problems that some Europeancountries are currently facing.What is the reason why capital requirements for government bonds arenot pegged to their rating, like it is the case for corporate bonds? And arethere plans that this policy will be changed in the future or is that a verypolitical issue?Before the euro area debt crisis government bonds were widelyconsidered as risk free instruments that is why there was no need to pegcapital requirements for government bonds to their rating.Naturally in this area as in others the perception of risk is constantlyevolving and so I believe that in the future we need to explore ways to dealmore properly with the risks of sovereign exposures and find a suitableway to integrate them in the overall risk-based framework._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 48. P a g e | 44Should the insurance supervision be directive or preemptive?We want to have a supervisory system where we capture things inadvance.We do not want to be like firemen that arrive when there is already a fire.We want to see things in advance and to avoid the fires. This is preventivesupervision.What gives you sleepless nights at the moment?I think that the overall market situation certainly worries all of us becauseit definitely has an impact on the whole financial system.Insurers basically need two things: Stability of the markets and a wellfunctioning economy.This also includes a certain level of interest rates, so that insurancecompanies can fulfil their role of providing long term guarantees.Having the low interest rates we are seeing now, is of course a difficultsituation for insurance companies.But I am still sleeping well._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 49. P a g e | 45NUMBER 4FSA review into anti-bribery and corruption systems andcontrols in investment banks and proposed new guidance for allfirms29 Mar 2012The Financial Services Authority (FSA) published the findings of itsthematic review into anti-bribery and corruption (ABC) systems andcontrols in investment banks.In response to those findings, the FSA will consult on proposedamendments to the FSAs regulatory guidance, Financial crime: a guidefor firms.This proposed new guidance applies to all firms within scope of ourfinancial crime rules, not just investment banks.From August 2011, the FSA visited 15 firms, including eight major globalinvestment banks and a number of smaller operations, to examine howfirms mitigate bribery and corruption risk.Bribery and corruption risk is the risk of the firm, or anyone acting on thefirms behalf, engaging in bribery and corruption.The FSA found that, despite a long-standing regulatory requirement tomitigate financial crime risk, the majority of firms in our sample had morework to do to implement effective anti-bribery and corruption systemsand controls.In particular, we found the following common weaknesses:- Most firms had not properly taken account of our rules coveringbribery and corruption, either before the implementation of theBribery Act 2010 or after;_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 50. P a g e | 46- Nearly half the firms in our sample did not have an adequate ABC riskassessment;- Management information on ABC was poor, making it difficult for usto see how firms senior management could provide effectiveoversight;- Only two firms had either started or carried out specific ABC internalaudits;- There were significant issues in firms dealings with third parties usedto win or retain business;- Though many firms had recently tightened up their gifts, hospitalityand expenses policies, few had processes to ensure gifts and expensesin relation to particular clients/projects were reasonable on acumulative basis.Although firms in our sample had been slow and reactive in managingbribery and corruption risk, our visits and the introduction of the BriberyAct had acted as a trigger for firms to focus on ABC issues.The FSA is considering whether further regulatory action is required inrelation to certain firms in its review.Tracey McDermott, acting director of enforcement and financial crime,said:It is imperative that firms have adequate arrangements to control therisks of financial crime.We have seen examples of good practice and some examples of poorpractice.Overall, despite the high profile of the issue, the investment bankingsector has been too slow and too reactive in managing bribery andcorruption risks.Firms across all sectors must have appropriate controls to manage theirfinancial crime risks, whether related to bribery and corruption orotherwise._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 51. P a g e | 47The FSA and, from next year, the Financial Conduct Authority willcontinue to focus on financial crime risks in this sector and beyond toensure firms are meeting their legal and regulatory obligations.Notes for editorsThe FSA requires firms to establish and maintain effective systems andcontrols to mitigate financial crime risk.Financial crime risk includes the risk of bribery and corruption.In addition to these regulatory requirements, bribery, whether committedin the UK or abroad, is a criminal offence under the Bribery Act 2010,which has consolidated and replaced previous anti-bribery and corruptionlegislation in the UK.The FSA does not enforce, or give guidance on, the Bribery Act.FSA Principles require FSMA authorised firms to conduct their businesswith integrity and with due skill, care and diligence; and to takereasonable care to organise and control their affairs responsibly andeffectively with adequate risk management systems.The FSA regulates the financial services industry and has four objectivesunder the Financial Services and Markets Act 2000:1. Maintaining market confidence;2. Securing the appropriate degree of protection for consumers;3. Fighting financial crime; and4. Contributing to the protection and enhancement of the stability of theUK financial system._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 52. P a g e | 48SEC Charges Medical Device Company Biometwith Foreign BriberyWashington, D.C., March 26, 2012 The Securitiesand Exchange Commission today charged Warsaw,Ind.-based medical device company Biomet Inc. withviolating the Foreign Corrupt Practices Act (FCPA) when its subsidiariesand agents bribed public doctors in Argentina, Brazil, and China fornearly a decade to win business.Biomet, which primarily sells products used by orthopedic surgeons,agreed to pay more than $22 million to settle the SECs charges as well asparallel criminal charges announced by the U.S. Department of Justicetoday.The charges arise from the SEC and DOJs ongoing proactive globalinvestigation into medical device companies bribing publicly-employedphysicians.The SEC alleges that Biomet and its four subsidiaries paid bribes from2000 to August 2008, and employees and managers at all levels of theparent company and the subsidiaries were involved along with thedistributors who sold Biomets products.Biomets compliance and internal audit functions failed to stop thepayments to doctors even after learning about the illegal practices.Biomets misconduct came to light because of the governmentsproactive investigation of bribery within the medical device industry,said Kara Novaco Brockmeyer, Chief of the Enforcement DivisionsForeign Corrupt Practices Act Unit. A companys compliance andinternal audit should be the first line of defense against corruption, notpart of the problem.According to the SECs complaint filed in federal court in WashingtonD.C., employees of Biomet Argentina SA paid kickbacks as high as 15 to20 percent of each sale to publicly-employed doctors in Argentina._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 53. P a g e | 49Phony invoices were used to justify the payments, and the bribes werefalsely recorded as consulting fees or commissions in Biomets booksand records.Executives and internal auditors at Biomets Indiana headquarters wereaware of the payments as early as 2000, but failed to stop it.The SEC alleges that Biomets U.S. subsidiary Biomet International useda distributor to bribe publicly-employed doctors in Brazil by paying themas much as 10 to 20 percent of the value of their medical device purchases.Payments were openly discussed in communications between thedistributor, Biomet International employees, and Biomets executivesand internal auditors in the U.S. For example, a February 2002 internalBiomet memorandum about a limited audit of the distributors booksstated:Brazilian Distributor makes payments to surgeons that may beconsidered as a kickback.These payments are made in cash that allows the surgeon to receiveincome tax free. The accounting entry is to increase a prepaid expenseaccount.In the consolidated financials sent to Biomet, these payments werereclassified to expense in the income statement.According to the SECs complaint, two additional subsidiaries BiometChina and Scandimed AB sold medical devices through a distributor inChina who provided publicly-employed doctors with money and travel inexchange for their purchases of Biomet products.Beginning as early as 2001, the distributor exchanged e-mails withBiomet employees that explicitly described the bribes he was arrangingon the companys behalf.For example, one e-mail stated:[Doctor] is the department head of [public hospital]. [Doctor] uses about10 hips and knees a month and its on an uptrend, as he told us overdinner a week ago. Many key surgeons in Shanghai are buddies of his._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 54. P a g e | 50A kind word on Biomet from him goes a long way for us. Dinner has beenset for the evening of the 24th. It will be nice. But dinner aside, Ive got tosend him to Switzerland to visit his daughter.The SEC alleges that some e-mails described the way that vendors woulddeliver cash to surgeons upon completion of surgery, and othersdiscussed the amount of payments.The distributor explained in one e-mail that 25 percent in cash would bedelivered to a surgeon upon completion of surgery.Biomet sponsored travel for 20 Chinese surgeons in 2007 to Spain, where asubstantial part of the trip was devoted to sightseeing and otherentertainment.Biomet consented to the entry of a court order requiring payment of$4,432,998 in disgorgement and $1,142,733 in prejudgment interest.Biomet also is ordered to retain an independent compliance consultantfor 18 months to review its FCPA compliance program, and ispermanently enjoined from future violations of Sections 30A, 13(b)(2)(A),and 13(b)(2)(B) of the Securities Exchange Act of 1934.Biomet agreed to pay a $17.28 million fine to settle the criminal charges.The SECs investigation was conducted by Brent S. Mitchell with TracyL. Price of the Enforcement Divisions FCPA Unit and Reid A. Muoio.The SEC acknowledges the assistance of the U.S. Department of JusticesFraud Section and the Federal Bureau of Investigation. The investigationinto bribery in the medical device industry is continuing._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 55. P a g e | 51NUMBER 5Financial risk managementOpening remarks by Mr Ewart S Williams, Governor of the Central Bankof Trinidad and Tobago, at the Caribbean Centre for Money and FinanceConference, Port-of-Spain, 26 March 2012.Good Morning Ladies and GentlemenLet me add my own words of welcome to all our participants of this verytimely seminar on Financial Risk Management.As you know, the seminar forms part of a wider project involvingthecentral banks in the Caribbean/CARICOM region.The project is being funded mainly by the Inter-American DevelopmentBank (IDB) that has partnered with the University of the West Indies(UWI) and Caribbean Centre for Money and Finance (CCMF) to makethis initiative possible.I would like to say a special word of welcome to former President of theCaribbean Development Bank and now acting Executive Director of theCCMF, Dr. Compton Bourne and Mrs. Michelle Cross-Fenty, CountryRepresentative of the IADB, which is a major sponsor of this Project.Welcome also to all our distinguished participants from our regionalCentral Banks and regulatory bodies and from the international andregional financial institutions._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 56. P a g e | 52I also thank the media for their presence.It is no secret, ladies and gentlemen, that our financial systems have beenseverely tested in the last few years by the outbreak of the global financialcrisis whose powerful shock waves have not only rattled financial marketsthe world over, but also triggered a deep recession with which manycountries are still grappling.For the most part, regional financial systems displayed remarkableresilience to the global financial crisis, even though our economies werebuffeted by the global recession that ensued.Regional financial systems, however, faced their own challenges arisingfrom the collapse of the Stanford Bank and more notably, from the demiseof the largest regional conglomerate, CL Financial.The stresses faced by CLs financial subsidiaries (Clico Insurance, ClicoInvestment Bank (CIB), British American and BAICO) tested thefoundations of the regional financial system, which even so, proved to beresilient.Two aspects of what has become to be known as the Clico crisis areworth mentioning.The first is its regional reach: it entrapped in its net, not only Trinidadand Tobago, but also Barbados, Guyana and Suriname (that had Clicosubsidiaries) as well as the OECS and the Bahamas, which housedBAICO insurance companies, all CLF subsidiaries.The second aspect that stands out is its tremendous cost.The bill is still accumulating but for the region as a whole, the cost couldbe somewhere in the vicinity of 1015 per cent of regional GDP.For all its negatives, the Clico crisis served as an important wake-up callto the region._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 57. P a g e | 53Coming on the heels of the global financial turmoil, it was a clearreminder of the need to strengthen our financial and regulatory systems,so that they could withstand exogenous shocks and it underscored theidea that a co-ordinated regional approach was needed.It was against this background that the CARICOM Heads ofGovernment, at their July 2009 meeting requested regional central banksand other stakeholders to put in place a framework for regional financialstability to increase our resilience both to exogenous shocks and tointra-regional stresses.It is worth noting, ladies and gentlemen, that the objective characteristicsof our region make a strong case for the regional approach to financialstability.We are small economies, with extensive economic links, with highvulnerability indices, compared with other regional groups (like, forexample, the EU).Moreover our islands are dominated by a short list of over-lappingfinancial institutions.On the downside, however, we currently have no regional regulatoryinstitutions.Specifically, we have nothing like the European Systemic Risk Boardwhich has some regulatory authority.The closest we come to a regional regulatory authority is the ECCB,which covers only the OECS.Whats more, given the current state of the regional movement, I am notsure of the chances for a pan-caribbean regulatory authority.Putting aside this issue for the time being, I would like to address thequestion, What should be the main elements of a new regional financialstability infra-structure for the Caribbean region?_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 58. P a g e | 54And, I would like to propose the following:- First the region needs strengthened financial sector legislation, inthe first round covering the banking system, the insurance and thecredit union sectors;- Second we need to substantially upgrade financial sectorsupervision;- Third all countries should have deposit insurance;- Fourth all countries should have national crisis management plans;and- Fifth building on these national plans, we need to formulate aregional crisis management plan.Permit me to say a few words about each of these elements.In many countries in the region, including my own, financial sectorlegislation is grossly deficient when compared to what obtains inadvanced or emerging market countries.We, in Trinidad and Tobago, recently introduced a modern FinancialInstitutions Act to cover the banking system and new insurancelegislation is currently in Parliament.Some countries in the region have been upgrading their bankinglegislation but the situation is not as promising with regard to insurancelegislation, which remains woefully outdated in the entire region.This must be seen against the background that both the Jamaicanfinancial crisis of the late 1990s and the Clico/BAICO regional crisisoriginated in the insurance sector.In principle, strengthened, harmonized legislation would be the ideal toforestall regulatory arbitrage. However, the obstacles faced by theCARICOM Model Financial Institutions Bill clearly demonstrated the _____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 59. P a g e | 55potential challenges likely to face any kind of harmonized financiallegislation.Countries in the region also need to upgrade financial sector supervision,including the introduction of consolidated supervision.I am told that a first attempt is currently underway to conduct asupervisory exercise on a systemically important institution, withcross-border operations, involving supervisory teams from differentjurisdictions.This is an important initiative and I hope that over time these kinds ofexercises could become routine examples of regional regulatorycooperation.More and more countries are adding stress-testing and the use offinancial stability reports to their supervisory tool kit.Properly used, these could provide early warning signals and improve theassessment of threats to the financial system.I know that the preparation of financial stability reports is an importantcomponent of the IDB-financed project, and I would like to return to thistopic later.Deposit insurance schemes could contribute significantly to themaintenance of regional financial stability, as they protect lower-incomedepositors and prevent bank-runs.A harmonized regional deposit insurance scheme would be ideal but theobstacles would be formidable.National schemes should still be regarded as an important part of theregional stability infrastructure.Because financial instability can sometimes arise without adequatewarning, all countries should have a national crisis management plan, to_____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 60. P a g e | 56be able to move quickly and to contain the potential cost of a nationalfinancial crisis.Such a plan invariably requires close coordination between the variousnational regulatory bodies, the Government and other stakeholders, andshould constitute a kind of road map to the process of crisis-resolution.The element of certainty that such plans bring, bolsters consumerconfidence and facilitates quick crisis resolution.A regional crisis management plan is another indispensable part of aregional financial stability, but it is the element that is likely to present thegreatest challenges.The critical pre-requisites to such regional plan are:(i) Agreement on what constitutes a systemic threat to the regionalfinancial system;(ii) The existence of information sharing protocols among regionaljurisdictions;(iii) Agreement on the strategies to be considered in the resolutionprocess and on the guiding principles for cost-sharing in the event thatpublic intervention is deemed necessary.A crisis management plan for our region is likely to face severalchallenges, among which are differences in legislation or supervisoryapproaches across the region; competing national priorities or differencesin resource availability among the regional governments.The implementation of a regional crisis management plan requires a highlevel regional council with the authority to make binding decisions as tothe use of resources.This could be another challenge in our current circumstances._____________________________________________________________International Association of Risk and Compliance Professionals (IARCP) www.risk-compliance-association.com 61. P a g e | 57I would like to make a few comments on one of the critical components ofthe IDB-financed project the preparation of comparable regionalFinancial Stability Reports (FSR).We need to remember that these reports are designed to serve as earlywarning signals by pointi